<PAGE>
[GRAPHIC]
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 BACKROUND
BEHIND PILLARS.
SEMI- SMITH BARNEY
ANNUAL TAX-EXEMPT
REPORT INCOME
FUND
.......................................
JANUARY 31, 1995
[LOGO]
<PAGE>
Tax-Exempt Income Fund
DEAR SHAREHOLDER:
The fixed-income markets, both tax exempt and taxable, continued
to be extremely volatile in late 1994 amid concerns about the
Federal Reserve's tighter monetary policy and the potential for
higher short-term interest rates to control inflation, tax selling by
investors and, in early December, the bankruptcy filing by Orange
County, California. These three events rattled the tax-exempt market
and resulted in a negative total return on most longer-term,
tax-exempt investments for the first time since 1987. This was in
sharp contrast to most investors' expectations for 1994 as a whole. It
was widely anticipated that the higher tax rates that became effective
in 1994 would result in higher demand for tax-exempt securities, while
the issuance of these securities was likely to be $40 billion less
than it was in 1993. These factors should have resulted in strong
performance for the municipal market. However, the market pressures
outweighed these positive characteristics and resulted in a decline in prices
for most municipal bonds.
The Fund's net asset value per share also declined during the past six-month
period as a result of these market pressures to $16.71 as of January 31, 1995
from $17.26 as of July 31, 1994. The Fund's tax-exempt income distributions
offset this decline in net asset value, resulting in a flat total return for
the
first half of this fiscal year. More specific information about the performance
and distributions of each available class of shares is found in the "Financial
Highlights" pages of this report.
MARKET OUTLOOK
Concern has now abated that the Federal Reserve will continue to significantly
increase short-term interest rates. It has been successful in slowing the rate
of economic growth and controlling the potential for higher inflation. Although
most market watchers expect some slight increase in the Federal funds rate (the
rate banks charge each other for overnight loans and a sensitive indicator of
the
direction of short-term interest rates), long-term interest rates are likely
to be less volatile than they were in 1994.
The supply/demand characteristics that should have supported the municipal
market
in 1994 are still intact, and we anticipate that they will have a greater
impact on the performance of the market in 1995. In fact, we believe that
municipal securities have the potential this year to be one of the best-
performing sectors of the fixed-income market. While the call for lower taxes
1
<PAGE>
is certainly a loud and popular one, it appears unlikely that taxes will be
lowered so swiftly or drastically so as to make tax-exempt income obsolete. We
are optimistic that progress will be made to lower the budget deficit, control
unfunded mandates on state government, and lower taxes, and that the fixed
income markets will contribute lower interest rates to this equation.
PORTFOLIO STRATEGY
When we last reported to you, we were in the process of extending the average
maturity of the Fund's portfolio after having shortened it earlier in 1994 when
interest rates rose dramatically. The average maturity of the Fund's portfolio
is
now approximately 22 years, because we believe that interest rates are likely
to become more stable in the months ahead and could possibly even decline. This
strategy should maximize the tax-exempt income earned by the Fund. We used the
market decline as an opportunity to invest in high-quality issues at very
attractive prices.
We appreciate your continued confidence during the difficult investment
environment of the past six months, and join you in looking forward to a better
investment environment in the months ahead. Should you have any questions about
your
investment in the Fund or how other Smith Barney mutual funds may be useful
in helping you reach your financial goals, please speak with your Smith Barney
Financial Consultant.
Sincerely,
Heath B. McLendon Lawrence T. McDermott
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
INVESTMENT OFFICER
MARCH 20, 1995
2
<PAGE>
Smith Barney
Tax-Exempt Income Fund
---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED)
JANUARY 31, 1995
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Income Funds - Tax-Exempt Income
Fund's investment securities held at January 31, 1995 by industry
classification. The pie is broken in pieces representing industries in the
following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Industry Control 4.3%
Transportation 8.7%
Hospitals 13.2%
Housing 9.5%
Pollution Control 18.3%
Education 4.9%
Short-Term Tax-Exempt Investments
and Net Other Assets and Liabilities 1.8%
Other Municipal Bonds 12.1%
General Obligation 13.7%
Utility 13.5%
</TABLE>
TOP FIVE STATES REPRESENTED
<TABLE>
<CAPTION>
Percentage of
States Net Assets
<S> <C>
------------------------------------------------------------------
TEXAS 9.6%
PENNSYLVANIA 9.3
GEORGIA 6.3
NEW YORK 5.9
NEW JERSEY 5.8
</TABLE>
3
<PAGE>
Smith Barney
Tax-Exempt Income Fund
------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) JANUARY 31,
1995
-------------------------------------------------------------
<TABLE>
<S> <C>
KEY TO INSURANCE ABBREVIATIONS
AMBAC -- American Municipal Bond Assurance Corporation
BIGI -- Bond Investors Guaranty Insurance
CO LEE -- College Construction Loan Association
FGIC -- Federal Guaranty Insurance Corporation
FHA -- Federal Housing Administration
FSA -- Federal Security Assurance
MBIA -- Municipal Bond Investors Assurance
</TABLE>
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
<C> <S> <C> <C> <C>
-----------------------------------------------------------------------------
MUNICIPAL BONDS AND NOTES -- 98.2%
ALABAMA -- 0.9%
Alabama Special Care
Facilities Finance
Authority, (Daughters of
Charity Health Systems),
Hospital Revenue:
$ 500,000 Mobile, Alabama,
(Providence Hospital),
10.125% due 6/15/15 Aa NR $ 517,500
500,000 Montgomery, Alabama, (St.
Margaret's Hospital),
10.125% due 11/1/15 Aa NR 527,500
3,000,000 Birmingham, Alabama,
Waterworks & Sewer,
5.500% due 1/1/20 Aa AA 2,643,750
3,000,000 Huntsville, Alabama, Health
Care Facilities Authority,
Series A, (MBIA Insured),
6.375% due 6/1/12 Aaa AAA 2,996,250
2,500,000 Morgan County - Decatur,
Alabama, Healthcare
Facilities, Decatur General
Hospital, (Co Lee Insured),
6.250% due 3/1/13 NR AAA 2,465,625
ALASKA -- 0.6%
Alaska State Housing
Finance Corporation:
2,250,000 Series A,
6.000% due 12/1/22 Aa A+ 2,368,125
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
ALASKA -- (CONTINUED)
Alaska State Housing
Finance Corporation
(continued):
$ 915,000 Series B, Veteran's
Mortgage Purchase,
5.875% due 12/1/35 Aaa AAA $ 773,175
3,000,000 Valdez, Alaska, Marine
Terminal Revenue,
(Pipelines, Inc. Project),
Series A,
5.800% due 8/1/25 A1 AA- 2,625,000
ARIZONA -- 2.1%
1,000,000 Arizona Educational Loan
Marketing Corporation,
6.375% due 9/1/05 Aa NR 998,750
850,000 Arizona Health Facilities
Authority, Hospital
Revenue, (St. Luke's
Hospital), Series A,
10.125% due 11/1/15 Ba NR 885,063
Arizona State, Certificates
of Participation,
(FSA Insured):
1,000,000 6.500% due 3/1/08 Aaa AAA 1,025,000
1,170,000 6.625% due 9/1/08 Aaa AAA 1,208,025
70,000 Arizona State Municipal
Financing, Certificates of
Participation, Series 10,
(BIGI Insured),
7.900% due 8/1/17
(prerefunded 8/1/97) Aaa AAA 75,075
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 1,083,750
1,860,000 Maricopa County, Arizona,
Industrial Development,
Mortgage Loan, Multi-Family
Housing Revenue, Series A,
(FHA Insured),
5.900% due 7/1/24 NR AAA 1,676,325
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
ARIZONA -- (CONTINUED)
$5,000,000 Maricopa County, Arizona,
Pollution Control, (Public
Service Company), Palo
Verde, Series A,
6.375% due 8/15/23 Ba2 BB $ 4,312,500
1,300,000 Maricopa County, Arizona,
School District, Fountain
Hills, No. 98, (FGIC
Insured),
6.625% due 7/1/10 Aaa AAA 1,347,125
1,085,000 Mohave County, Arizona,
Hospital Systems Revenue,
(Medical Environments Inc.
Project),
8.800% due 1/1/06 Baa NR 1,167,731
6,500,000 Navajo County, Arizona,
Pollution Control, Arizona
Public Service Company,
Series A,
5.875% due 8/15/28 Baa2 BBB 5,508,750
364,000 Peoria, Arizona, Industrial
Development Revenue,
(Sierra Winds Life Care),
6.500% due 11/1/17 NR NR 364,000
655,000 Pinal County, Arizona,
Industrial Development
Revenue, (Casa Grande
Regional Medical Center),
9.000% due 12/1/13 NR NR 679,563
CALIFORNIA -- 4.4%
4,000,000 Burbank, California,
Redevelopment Agency,
Series A, (Golden State
Redevelopment Project),
6.250% due 12/1/24 Baa1 A- 3,570,000
5,000,000 California Health
Facilities Finance
Authority, Kaiser
Permanente,
5.550% due 8/15/25 Aa2 AA 4,206,250
1,500,000 California Housing Finance
Agency Revenue, Multi-Unit
Rental Housing, Series
B-II,
6.700% due 8/1/15 A1 A+ 1,485,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
CALIFORNIA -- (CONTINUED)
$2,250,000 California Public Works
Board, Lease Revenue,
(University of California
Project), Series A,
5.500% due 6/1/21 A1 A- $ 1,859,063
5,000,000 California State, (FGIC
Insured),
6.000% due 5/1/20 Aaa AAA 4,737,500
2,500,000 California Statewide
Community Development
Authority Revenue,
Certificates of
Participation, (Sutter
Health), (AMBAC Insured),
6.125% due 8/15/22 Aaa AAA 2,371,875
2,000,000 Central Coast Water
Project, (California State
Water Project), (AMBAC
Insured),
6.600% due 10/1/22 Aaa AAA 2,030,000
2,600,000 Central Valley Finance
Authority, California,
(Cogeneration/Carson Ice
Project),
6.200% due 7/1/20 NR BBB- 2,330,250
3,000,000 Duarte, California, Hope
Medical Center,
6.250% due 4/1/23 Baa1 NR 2,617,500
4,000,000 Los Angeles, California,
Corporate Lease Revenue,
(Los Angeles International
Airport),
6.800% due 1/1/27 NR A- 3,795,000
700,000 Mojave, California, Water
Agency Improvement
District, (Morongo Basin),
Series M,
6.600% due 9/1/22 Baa BBB+ 668,500
1,000,000 Norwalk, California,
Redevelopment Agency, Tax
Allocation, Area 1,
9.100% due 12/1/15 NR NR 1,048,750
5,000,000 San Diego County,
California, Water
Authority, Water Revenue,
Series B,
(MBIA Insured),
6.300% due 4/8/21 Aaa AAA 5,000,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
CALIFORNIA -- (CONTINUED)
$9,150,000 San Joaquin Hills,
California, Transportation
Authority, (Transcorridor
Agency Project), Toll Road,
Sr. Lien,
6.750% due 1/1/32 NR NR $ 8,166,375
COLORADO -- 1.8%
1,560,000 Arapahoe, Colorado, Water
and Sanitation District
Revenue, Series B,
9.250% due 12/1/13 NR NR 1,569,750
Arvada, Colorado, Urban
Renewal Authority, (Arvada
City Center):
855,000 Series B1, (prerefunded
2/1/95),
12.500% due 2/1/05 Aaa NR 880,838
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 4,755,938
1,000,000 Denver, Colorado, City and
County Airport Revenue,
8.000% due 11/15/17 Ba BB 1,006,250
250,000 Denver, Colorado, City and
County Revenue, Series A,
8.000% due 11/15/17 Ba BBB- 247,188
1,000,000 Dove Valley, Arapahoe
County, Colorado,
Metropolitan District,
Improvement Authority,
9.500% due 12/1/08 NR NR 1,006,250
2,250,000 Jefferson County, Colorado,
Certificates of
Participation, (MBIA
Insured),
6.650% due 12/1/08 Aaa AAA 2,351,250
440,000 Jefferson County, Colorado,
Single Family Mortgage,
Series A, (MBIA Insured),
8.875% due 10/1/13 Aaa AAA 429,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
COLORADO -- (CONTINUED)
$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 $ 1,541,250
500,000 Meridian, Colorado,
Metropolitian District,
7.000% due 12/1/98 A3 NR 525,625
250,000 Poudre Valley, Colorado,
Hospital District, (AMBAC
Insured),
6.625% due 12/1/11 Aaa AAA 266,875
2,340,000 Pueblo County, Colorado,
Single Family Housing
Authority, Series A, (FNMA/
GNMA Mortgage Backed),
6.850% due 12/1/25 NR AAA 2,375,100
CONNECTICUT -- 1.7%
495,000 Connecticut Development
Authority, Industrial
Development, (Nutmeg
Partnership Project),
Series B,
12.750% due 5/15/15 NR NR 498,094
1,930,000 Connecticut Development
Authority, Resource
Recovery Authority,
(Bridgeport Project),
Series B,
8.500% due 1/1/00 A A 2,009,613
Connecticut Development
Authority, Solid Waste and
Electric Revenue, (Ogden
Martin System, Bristol,
Inc.):
1,670,000 9.900% due 7/1/99 NR BBB+ 1,747,238
3,000,000 10.000% due 7/1/14 NR BBB+ 3,138,750
2,000,000 Connecticut State, Airport
Revenue, (Bradley
International Airport),
(FGIC Insured),
7.650% due 10/1/12 Aaa AAA 2,210,000
Connecticut State Health
and Educational Facilities:
1,200,000 (Quinipiac College), Series
D,
6.000% due 7/1/23 NR BBB- 997,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
CONNECTICUT -- (CONTINUED)
Connecticut State Health
and Educational Facilities
-- (continued):
(University of Hartford),
Series D,
$1,655,000 6.750% due 7/1/12 Baa BBB $ 1,526,738
1,450,000 6.800% due 7/1/22 Baa BBB 1,308,625
3,260,000 Connecticut State, Housing
Finance Authority, Series
A,
6.750% due 11/23/23 Aa AA 3,300,750
DELAWARE -- 0.3%
2,500,000 Delaware State Economic
Development Authority,
Pollution Control Revenue,
Series B, (AMBAC Insured),
6.750% due 5/1/19 Aaa AAA 2,575,000
DISTRICT OF COLUMBIA --
1.1%
6,500,000 District of Columbia,
Certificates of
Participation,
7.300% due 1/1/13 NR BBB 6,028,750
1,000,000 District of Columbia,
(Georgetown University),
5.375% due 4/1/23 A1 A+ 818,750
4,350,000 District of Columbia,
Series A, General
Obligation,
6.000% due 6/1/07 Baa A- 3,920,438
FLORIDA -- 3.8%
Alachua County, Florida,
Health Facilities
Authority, Health
Facilities Revenue,
(Santa Fe Healthcare
Facilities Project):
425,000 6.875% due 11/15/02 Baa1 BBB+ 434,563
500,000 7.600% due 11/15/13 Baa1 BBB+ 515,000
1,100,000 Brevard County, Florida,
School Board, Certificates
of Participation, Series A,
(AMBAC Insured),
6.500% due 7/1/12 Aaa AAA 1,122,000
Broward County, Florida,
Resource Recovery:
590,000 Waste Energy, (North),
7.950% due 12/1/08 A A 640,888
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
FLORIDA -- (CONTINUED)
Broward County, Florida,
Resource Recovery
(continued):
$2,705,000 Waste Energy, (South),
7.950% due 12/1/08 A A $ 2,938,306
825,000 Dade County, Florida,
Aviation Revenue, Series B,
(MBIA Insured),
6.600% due 10/1/22 Aaa AAA 832,219
500,000 Escambia, Florida,
Pollution Control Revenue,
(Champion International
Corporation Project),
6.950% due 11/1/07 Baa1 BBB 505,000
500,000 Florida State Housing
Finance Agency, General
Mortgage, Series A, (FHA
Insured),
6.400% due 6/1/24
(unrefunded) NR AAA 493,125
2,840,000 Florida State Turnpike
Authority, Turnpike
Revenue,
6.350% due 7/1/22 Aaa AAA 2,843,550
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 Authority
Revenue, (U.S. Airlines
Project),
8.600% due 1/15/22 Ba2 B+ 699,000
Hillsborough County,
Florida, Utility Revenue,
Series A:
2,800,000 7.000% due 8/1/14
(refunded) Baa1 BBB+ 2,859,500
580,000 7.000% due 8/1/14
(prerefunded 8/1/01) Baa1 BBB+ 631,475
Jacksonville, Florida,
Health Facilities Revenue:
2,000,000 (Children's Hospital -
Baptist Medical Center),
(MBIA Insured),
7.000% due 6/1/11 Aaa AAA 2,100,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
FLORIDA -- (CONTINUED)
Jacksonville, Florida,
Health Facilities Revenue
(continued):
$3,440,000 (University Medical
Center), (Co Lee Insured),
6.600% due 2/1/21 NR AAA $ 3,461,500
1,000,000 Orange County, Florida,
Tourist Development Tax
Revenue, Series B, (AMBAC
Insured),
6.500% due 10/1/19 Aaa AAA 1,013,750
3,750,000 Orange County, Florida,
Waste and Water Revenue
Refunding, (AMBAC Insured),
6.250% due 10/1/17 Aaa AAA 3,750,000
300,000 Pace Property Finance
Authority, Florida Utility
Revenue,
6.250% due 9/1/13 NR BBB 280,875
1,120,000 Palm Beach County, Florida,
Health Facilities Authority
Revenue, (J.F.K. Medical
Center),
8.875% due 12/1/18
(prerefunded 12/1/98) NR NR 1,209,600
3,000,000 Putnam County, Florida,
Development Authority,
Pollution Control Revenue,
(Georgia Pacific),
7.000% due 12/1/05 A3 BBB- 3,135,000
1,900,000 Tampa, Florida, Utility Tax
and Special Revenue, (AMBAC
Insured),
6.900% due 10/1/09 Aaa AAA 2,023,500
1,850,000 Tampa, Florida, Water
System Revenue, (Aquarium
Project),
7.750% due 5/1/27 NR NR 1,877,750
1,500,000 Volusia County, Florida,
Educational Facilities
Authority Revenue, (Embery-
Riddle Aeronautical
University), (Co Lee
Insured),
6.500% due 10/15/22 NR AAA 1,511,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
FLORIDA -- (CONTINUED)
$2,000,000 Volusia County, Florida,
School Board, (Master Lease
Program), Certificates of
Participation, (FSA
Insured),
6.625% due 8/1/06 Aaa AAA $ 2,090,000
GEORGIA -- 6.3%
2,425,000 Appling County, Georgia,
Development Authority,
Pollution Control Revenue,
(Georgia Power Company),
(Hatch Project),
10.600% due 10/1/15 A3 A- 2,552,313
4,000,000 Atlanta, Georgia, Airport
Facilities Revenue,
7.250% due 1/1/17 A A 4,245,000
Burke County, Georgia,
Development Authority,
Pollution Control Revenue,
(Georgia Power Company),
(Vogtle Project):
3,495,000 10.600% due 10/1/15 A3 A- 3,682,856
1st Series:
1,475,000 10.125% due 6/1/15 A3 A- 1,526,625
8,000,000 6.350% due 5/1/19 A2 NR 7,730,000
6,310,000 3rd Series,
10.500% due 11/1/15 A3 A- 6,672,825
3,000,000 Fulton County, Georgia,
Development Authority,
Special Facilities Revenue,
(Delta Airlines Inc.
Project),
6.950% due 11/1/12 Ba1 BB 2,846,250
4,750,000 George L. Smith, Georgia
World Congress Center
Authority Revenue, (Domed
Stadium Project),
7.875% due 7/1/20 Aa3 A+ 5,046,875
7,000,000 Georgia Municipal Electric
Authority Power Revenue,
Series EE, (AMBAC Insured),
6.400% due 1/1/23 Aaa AAA 6,956,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
GEORGIA -- (CONTINUED)
$5,000,000 Medical Center Hospital
Authority, Georgia,
Columbus Healthcare, Series
C, (MBIA Insured),
6.400% due 8/1/06 Aaa AAA $ 5,256,250
5,000,000 Metropolitan Atlanta,
Georgia, Rapid Transit
Authority, Sales Tax
Revenue, Series O,
6.550% due 7/1/20 A AA- 4,993,750
7,000,000 Monroe County, Georgia,
Development Authority,
Pollution Control Revenue,
(Georgia Power Company,
Scherer Project),
10.500% due 9/1/15 A3 A- 7,350,000
3,000,000 Municipal Electric
Authority, Georgia, Fifth
Crossover Series, Project
One,
6.400% due 1/1/13 Aaa AAA 3,015,000
GUAM -- 0.2%
1,500,000 Government of Guam, Limited
Obligation Revenue, Series
A,
7.000% due 11/15/04 A1 A+ 1,558,125
HAWAII -- 0.2%
2,000,000 Hawaii, State Department of
Budget and Finance, Special
Purpose Mortgage Revenue,
(Kapiolani Health Care
Systems),
6.400% due 7/1/13 A A 1,892,500
IDAHO -- 0.3%
2,375,000 Idaho Housing Agency,
Single Family Mortgage,
Series C,
7.875% due 1/1/21 Aa AA 2,472,969
ILLINOIS -- 3.9%
1,905,000 Chicago, Illinois,
Metropolitan Housing
Development Corporation,
(Section 8), Series A, (FHA
Insured),
6.700% due 7/1/12 NR AA 1,914,525
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
ILLINOIS -- (CONTINUED)
Chicago, Illinois, O'Hare
International Airport,
Special Facilities Revenue:
$1,800,000 (Delta Airlines),
6.450% due 5/1/18 Ba3 BB $ 1,593,000
1,800,000 (Lufthansa Airlines),
7.125% due 5/1/18 Aaa AAA 1,842,750
3,000,000 (United Airlines),
8.250% due 5/1/99 Baa2 BB 3,168,750
3,343,000 (United Airlines), Series
B,
8.950% due 5/1/18 Baa2 BB 3,606,261
3,970,000 (United Airlines), Series
C,
8.200% due 5/1/18 Baa2 BB 4,148,650
4,000,000 Cook County, Illinois,
Series A, (MBIA Insured),
6.600% due 11/15/22 Aaa AAA 3,995,000
East Chicago, Illinois,
Industrial Pollution
Control Revenue, (Inland
Steel Company):
250,000 Series B,
10.750% due 12/1/12 NR BB- 262,500
3,000,000 (Project 10),
6.800% due 6/1/13 Ba3 BB- 2,771,250
1,500,000 Illinois Education
Facilities Authority
Revenue, (Chicago
Osteopathic College),
9.625% due 7/1/05 NR BBB+ 1,543,125
Illinois Health Facilities
Authority Revenue:
1,300,000 (Northern Illinois Medical
Center),
6.000% due 9/1/19 NR A- 1,095,250
1,500,000 (OSF Healthcare),
6.000% due 11/15/23 A1 A+ 1,327,500
2,715,000 (St. Elizabeth's Hospital),
10.125% due 7/1/16 NR NR 2,856,560
1,500,000 Illinois, Housing and
Development Authority,
Multi-Family Housing,
Series A,
6.125% due 7/1/25 A1 A+ 1,381,875
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
ILLINOIS -- (CONTINUED)
$2,750,000 Illinois State Toll Highway
Authority, Series A, (FGIC
Insured),
6.200% due 1/1/16 Aaa AAA $ 2,615,938
3,600,000 Metropolitan Pier and
Exposition Authority,
(McCormick Place Expansion
Project), Series A, (AMBAC
Insured),
6.500% due 6/15/27 A A+ 3,555,000
900,000 Sauget, Illinois, Special
Service Area No. 1,
10.250% due 1/1/00 NR NR 938,250
INDIANA -- 1.0%
Hamilton County, Indiana,
Hospital Building Revenue,
(Hospital Association):
275,000 7.500% due 2/1/08 Aa NR 286,688
285,000 7.500% due 8/1/08 Aa NR 297,113
110,000 7.600% due 8/1/09 Aa NR 114,538
320,000 7.600% due 2/1/10 Aa NR 333,200
3,500,000 Indianapolis, Indiana,
Airport Facilities Revenue,
7.100% due 1/15/17 Baa2 BBB 3,495,625
250,000 Indianapolis, Indiana,
Local Public Improvement,
Series A,
6.000% due 1/10/18 Aaa AA+ 235,313
Indianapolis, Indiana,
Resource Recovery Revenue,
(Ogden Martin Systems,
Incorporated):
500,000 Series A,
7.900% due 12/1/08 A A 524,375
1,240,000 Series B,
7.900% due 12/1/08 A A 1,300,450
2,500,000 Lawrenceburg, Indiana,
Pollution Control Revenue,
(Indiana Power Company),
Series E,
5.900% due 11/1/19 Baa2 BBB 2,125,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
INDIANA -- (CONTINUED)
$ 500,000 Marion County, Indiana,
Daughters of Charity,
Hospital Facility Revenue,
(St. Vincent's Hospital),
10.125% due 11/1/15 Aa NR $ 527,500
745,000 North Warrick County,
Indiana School Building
Authority, 1st Mortgage,
10.000% due 1/1/04
(prerefunded 11/1/96) NR AAA 791,563
IOWA -- 0.2%
1,000,000 Dubuque County, Iowa,
Hospital Revenue, (Sisters
of Mercy Hospital), Series
L, (FSA Insured),
7.000% due 8/15/21 Aaa AAA 1,031,250
Iowa City, Iowa, Parking
Facilities Revenue:
150,000 10.000% due 7/1/02 A NR 152,063
415,000 10.000% due 7/1/03 A NR 420,706
KENTUCKY -- 1.9%
5,000,000 Jefferson County, Kentucky,
Hospital Revenue, (MBIA
Insured),
6.520% due 10/23/14 Aaa AAA 5,062,500
Kenton County, Kentucky,
Airport Board Revenue,
Series A:
270,000 8.250% due 3/1/15
(prerefunded) A A 294,638
1,230,000 8.250% due 3/1/15
(unrefunded) A A 1,333,013
4,250,000 7.500% due 2/1/20 A A 4,165,000
590,000 Kentucky Multi-County
Residential Mortgage,
10.500% due 10/1/00 NR NR 613,600
4,000,000 Pendleton County, Kentucky,
Multi-County Lease Revenue,
Series A,
6.500% 3/1/19 NR A 3,975,000
Trimble County, Kentucky,
Pollution Control Revenue:
2,605,000 Series B,
6.550% due 11/1/20
(unrefunded) Aa2 AA 2,585,463
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
KENTUCKY -- (CONTINUED)
Trimble County, Kentucky,
Pollution Control Revenue
-- (continued):
$ 395,000 Series B,
6.550% due 11/1/20
(prerefunded 9/16/02) Aaa NR $ 416,725
LOUISIANA -- 2.7%
5,000,000 Hodge, Louisiana, Utility
Revenue,
9.000% due 3/1/10 NR NR 5,212,500
5,000,000 Jefferson Parish, Drain
Sales Tax Revenue, (AMBAC
Insured),
6.500% due 11/1/06 Aaa AAA 5,156,250
2,800,000 Lake Charles, Louisiana,
(Harbor and Terminal
Project), (Trunkline Liquid
Natural Gas Company
Project),
7.750% due 8/15/22 Ba1 NR 2,894,500
2,500,000 Louisiana Public
Facilities, Association of
Independent Colleges and
Universities,
7.000% due 12/1/17 Baa NR 2,446,875
2,000,000 Port of New Orleans,
Louisiana, Industrial
Development Revenue,
(Continental Grain Company
Project),
7.500% due 7/1/13 NR BB- 1,937,500
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 3,233,750
1,750,000 Series A,
7.000% due 12/1/22 Baa2 BBB 1,730,313
1,210,000 St. Tammany Parish,
Louisiana, Hospital
Revenue, District 2, (Co
Lee Insured),
6.250% due 10/1/14 NR AAA 1,172,188
3,000,000 West Feliciana Parish,
Pollution Control Revenue,
(Gulf State Utilities),
7.700% due 12/1/14 Baa3 BBB- 3,116,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MARYLAND -- 2.0%
$3,000,000 Baltimore County, Maryland,
Mortgage Revenue, (Dunfield
Townhouses), Series A, (FHA
Insured),
6.900% due 8/1/28 NR AAA $ 3,026,250
2,000,000 Baltimore County, Maryland,
Mortgage Revenue, (Liberty
Crossing Project), Series
A,
6.000% due 8/20/20 NR AAA 1,835,000
2,500,000 Howard County, Maryland,
Mortgage Revenue, (Howard
Hills Townhouses), Series
A, (MBIA Insured),
6.400% due 7/1/24 Aaa AAA 2,406,250
Maryland State, Community
Development:
1,000,000 6.450% due 4/1/14 Aa NR 990,000
2,000,000 6.625% due 5/15/23 Aa NR 1,982,500
1,110,000 Series D,
6.050% due 5/15/24 Aa NR 1,019,813
Northeast Maryland Waste
Disposal Authority,
Recovery Revenue,
(Southwest Resource
Recovery), (MBIA Insured):
3,000,000 7.200% due 1/1/06 Aaa AAA 3,292,500
3,000,000 7.200% due 1/1/07 Aaa AAA 3,273,750
1,600,000 Prince Georges County,
Maryland, (Greater
Southeast Healthcare
System),
6.375% due 1/1/23 Baa NR 1,346,000
1,000,000 Prince Georges County,
Maryland, Housing
Authority, (Stevenson
Apartments Project), Series
A,
6.350% due 7/20/20 NR AAA 962,500
MASSACHUSETTS -- 4.5%
Boston, Massachusetts,
Hospital Revenue, (Boston
City Hospital), Series B,
(FHA Insured):
2,000,000 5.750% due 2/15/13 Aa AA- 1,807,500
5,850,000 5.750% due 2/15/23 Aa AA- 5,118,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MASSACHUSETTS --
(CONTINUED)
$ 530,000 Haverhill, Massachusetts,
Revenue Bonds, Series A,
(AMBAC Insured),
6.700% due 9/1/10 Aaa AAA $ 548,550
2,575,000 Lowell, Massachusetts,
Series B,
(FSA Insured),
5.600% due 11/1/12 Aaa AAA 2,343,250
Massachusetts Bay
Transportation Authority,
General Transportation
System:
750,000 Series A,
7.000% due 3/1/22
(prerefunded 3/1/01) Aaa A- 818,438
1,000,000 Series B,
6.200% due 3/1/16 A A- 990,000
2,000,000 Series C,
6.100% due 3/1/23 A A- 1,915,000
Massachusetts Health and
Educational Facilities
Authority Revenue, Series
A,
1,500,000 (St. Memorial Medical
Center),
6.000% due 10/1/23 B NR 961,875
Massachusetts Health and
Educational Finance
Authority, (Suffolk
University), Series B, (Co
Lee Insured):
2,700,000 6.250% due 7/1/12 Baa AAA 2,575,125
775,000 6.350% due 7/1/22 Baa AAA 727,531
2,650,000 (University of
Massachusetts Medical
Project), (Co Lee Insured),
6.000% due 7/1/23 NR AAA 2,467,813
1,300,000 Massachusetts Municipal
Wholesale Company, Power
Supply System,
Series D,
6.125% due 7/1/19 A BBB+ 1,226,875
Massachusetts State
Construction Loan:
700,000 Series C,
7.000% due 8/1/12 A A+ 742,875
2,000,000 Series D, General
Obligation Bonds,
7.000% due 7/1/07 A A+ 2,142,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MASSACHUSETTS --
(CONTINUED)
Massachusetts State Health
and Educational Facilities
Authority:
$ 735,000 (Community College), Series
A, (Co Lee Insured),
6.600% due 10/1/22 NR AAA $ 731,325
3,500,000 (New England Medical
Center), Series F, (FGIC
Insured),
6.625% due 7/1/25 Aaa AAA 3,530,625
Massachusetts State Housing
Finance Agency, Residential
Development Authority:
2,000,000 Series C, (FNMA),
6.875% due 11/15/11 Aaa AAA 2,055,000
3,000,000 Series D, (FNMA),
6.800% due 11/15/12 Aaa AAA 3,056,250
2,500,000 Massachusetts State Housing
Finance Agency - Housing
Projects, Series A,
6.375% due 4/1/21 A1 A+ 2,400,000
Massachusetts State
Industrial Financial
Agency, Resource Recovery,
(S.E. Mass Project):
2,700,000 Series A,
9.000% due 7/1/15 NR NR 2,953,125
4,335,000 Series B,
9.250% due 7/1/15 NR NR 4,763,081
1,000,000 Quincy, Massachusetts,
(Quincy Hospital),
5.500% due 1/15/13 Aaa AAA 902,500
MICHIGAN -- 4.4%
Detroit, Michigan, Economic
Development, Resource
Recovery, Series A, (FSA
Insured):
3,680,000 6.450% due 5/1/01 Aaa AAA 3,905,400
7,500,000 6.875% due 5/1/09 Aaa AAA 7,650,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MICHIGAN -- (CONTINUED)
Detroit, Michigan, Water
Supply System, (FGIC
Insured):
$3,500,000 6.500% due 7/1/15 Aaa AAA $ 3,622,500
3,000,000 6.375% due 7/1/22 Aaa AAA 2,962,500
Greater Detroit, Michigan,
(Resource Recovery
Project):
6,350,000 Series B,
9.250% due 12/13/08 NR BBB- 6,635,750
1,000,000 Series G,
9.250% due 12/13/08 NR BBB- 1,045,000
1,815,000 Series H
9.250% due 12/13/08 NR BBB- 1,896,675
5,000,000 Michigan State Hospital
Finance Authority Revenue
Bonds, (FSA Insured),
6.300% due 2/15/22 Aaa AAA 4,862,500
495,000 (St. Mary's Hospital),
Daughters of Charity - St.
Mary's Hospital,
10.000% due 11/1/15 Aa NR 518,788
Monroe County, Michigan,
Pollution Control Revenue,
(Detroit Edison Company):
4,500,000 Series 1, (MBIA Insured),
6.875% due 9/1/22 Aaa AAA 4,595,625
2,360,000 Series A,
10.500% due 12/1/16 Baa1 BBB 2,525,200
3,750,000 Western Townships,
Michigan, Utilities
Authority, Sewer Disposal
Systems, (FGIC Insured),
6.750% due 1/1/15 Aaa AAA 3,801,563
MINNESOTA -- 0.5%
1,200,000 Minneapolis, Minnesota,
Commercial Development
Revenue, (Holiday Inn
Metrodome Project),
10.500% due 6/1/03 NR NR 1,212,000
4,000,000 St. Paul, Minnesota,
Housing and Redevelopment
Authority, (Health East
Project), Series A,
6.625% due 11/1/17 Baa BBB 3,535,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
MISSISSIPPI -- 0.8%
$3,500,000 Gulfport, Mississippi,
Hospital Facilities
Authority,
6.200% due 7/1/18 Baa1 BBB $ 3,377,500
Mississippi, Hospital
Equipment and Facilities:
1,500,000 (Methodist Health Systems),
(MBIA Insured),
5.500% due 8/15/13 Aaa AAA 1,348,125
3,000,000 (North Mississippi Health
Service), (AMBAC Insured),
5.750% due 5/15/16 Aaa AAA 2,730,000
MISSOURI -- 0.4%
3,500,000 Missouri State, Health &
Educational Facilities,
(St. Lukes Health System),
(MBIA Insured),
6.250% due 2/15/22 Aaa AAA 3,430,000
St. Louis County, Missouri,
Industrial Development
Authority, Multi-Family
Housing Revenue:
395,000 (Pine Tree Apartment
Project),
Series 1989 B,
10.000% due 6/15/09 NR NR 194,044
(Westbrook Village
Apartments):
135,000 Series E,
10.000% due 12/15/03 NR NR 67,838
50,000 Series H,
10.000% due 12/15/15 NR NR 24,438
NEVADA -- 0.2%
2,000,000 Humboldt County, Nevada,
Pollution Control Revenue,
(Sierra Pacific Project),
(AMBAC Insured),
6.500% due 10/1/13 Aaa AAA 2,055,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW HAMPSHIRE -- 0.7%
$1,500,000 New Hampshire Higher
Education and Health
Facilities Authority
Revenue, (Concord
Hospital), (FGIC Insured),
7.000% due 10/1/12 Aaa AAA $ 1,586,250
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- 2,031,250
1,000,000 State of New Hampshire,
Industrial Development
Authority, Resource
Recovery Revenue Series,
(Concord Project),
8.500% due 1/1/09 NR AA- 1,066,250
2,000,000 State of New Hampshire,
Turnpike System Revenue,
6.000% due 4/1/13 A A 1,905,000
NEW JERSEY -- 5.8%
775,000 Atlantic County, New
Jersey, Utilities
Authority, Solid Waste
Revenue,
7.125% due 3/1/16 Baa NR 768,219
2,500,000 Hoboken, Union City,
Weehawken, New Jersey,
Sewer Authority Revenue,
(MBIA Insured),
6.200% due 8/1/19 Aaa AAA 2,509,375
2,500,000 Hudson County, New Jersey,
Improvement Authority,
Solid Waste Revenue, (MBIA
Insured),
7.100% due 1/1/20 NR BBB- 2,362,500
1,710,000 Keansburg, New Jersey,
Board of Education,
Certificates of
Participation,
8.000% due 11/1/14 NR BBB- 1,900,238
6,300,000 Mercer County, New Jersey,
Improvement Authority,
(Solid Waste Site Project),
Series A, (FGIC Insured),
6.700% due 4/1/12 Aaa AAA 6,520,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW JERSEY -- (CONTINUED)
$1,000,000 New Jersey Building
Authority, State Building
Revenue,
5.000% due 6/15/17 Aa AA- $ 831,250
New Jersey Economic
Development Authority:
2,500,000 6.500% due 7/1/24 Aaa AAA 2,503,125
First Mortgage Gross
Revenue:
(Dayton Manor Residential
Health Care),
495,000 13.000% due 9/1/15 (in
default) NR NR 336,600
760,000 Series A,
6.250% due 12/1/01 Aaa NR 767,600
1,000,000 Pollution Control Revenue,
(MBIA Insured),
6.400% due 5/1/32 Aaa AAA 978,750
New Jersey Health Care
Facilities Finance
Authority:
2,500,000 (Irvington General
Hospital), (FHA Insured),
6.375% due 8/1/04 NR AAA 2,493,750
2,950,000 (Kennedy Memorial
University Medical Center),
Series D,
7.875% due 7/1/09 A A- 3,112,250
2,000,000 (Newark Beth Israel Medical
Center), (FSA Insured),
6.000% due 7/1/24 Aaa AAA 1,890,000
(Raritan Bay Medical
Center),
1,000,000 7.250% due 7/1/27 NR NR 897,500
2,400,000 (Zurbrugg Memorial
Hospital), Series C,
8.500% due 7/1/12 Baa1 BBB+ 2,481,000
New Jersey State
Educational Facilities
Authority:
1,790,000 (Farleigh Dickinson),
Series C,
7.750% due 7/1/01 NR NR 1,993,613
6,500,000 (New Jersey Institute of
Technology), (MBIA
Insured),
6.000% due 7/1/24 Aaa AAA 3,769,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW JERSEY -- (CONTINUED)
New Jersey State
Educational Facilities
Authority -- (continued):
$1,000,000 Series C,
6.625% due 7/1/23 NR NR $ 837,500
4,000,000 New Jersey State Housing
and Mortgage Finance
Authority, Series K,
6.375% due 10/1/26 NR AAA 3,855,000
2,150,000 New Jersey State,
Transportation Corporation,
Certificates of
Participation, (FSA
Insured),
6.500% due 10/1/16 Aaa AAA 2,211,813
2,500,000 Perth Amboy, New Jersey,
Board of Education,
Certificates of
Participation, (FSA
Insured),
6.125% due 12/15/17 Aaa AAA 2,456,250
3,300,000 Port Authority New York &
New Jersey, Seventy Seventh
Series,
6.250% due 1/15/27 A1 AA- 3,163,875
2,000,000 Salem County, New Jersey,
Pollution Control, Fingauth
Waste Revenue,
6.500% due 11/15/21 Aa2 AA 1,977,500
Union County, New Jersey,
Utility Authority, Solid
Waste Revenue:
4,600,000 Series A,
7.200% due 6/15/14 NR A- 4,634,500
2,000,000 Series D,
6.850% due 6/15/14 Aaa AA+ 2,035,000
NEW MEXICO -- 0.5%
5,000,000 Lordsburg, New Mexico,
Pollution Control Revenue,
(Phelps Dodge Corporation
Project),
6.500% due 4/1/13 A3 A 4,862,500
129,164 Santa Fe, New Mexico,
Single Family Mortgage
Revenue,
8.450% due 12/1/11 Aa NR 138,934
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- 5.9%
$ 930,000 Babylon, New York,
Industrial Development
Authority, Recycling
Facility Revenue, Babylon
Recycling Center, Series A,
8.875% due 3/1/11 (in
default) NR NR $ 372,000
City of New York, General
Obligation Bonds:
4,175,000 Series B,
7.000% due 10/1/12 Baa1 A- 4,101,938
Series C:
3,190,000 7.750% due 9/1/05 Baa1 A- 3,297,663
3,000,000 5.500% due 10/1/16 A- A- 2,400,000
1,000,000 Series C, (AMBAC Insured),
7.750% due 9/1/05 Aaa AAA 1,047,500
55,000 Series C, Subseries C-1,
(MBIA Insured),
6.000% due 8/1/01
(unrefunded) Aaa AAA 56,306
20,000 (AMBAC Insured),
6.625% due 8/1/15
(unrefunded) Aaa AAA 20,450
Series D, (AMBAC Insured),
45,000 8.500% due 8/1/13
(unrefunded) Baa1 A- 46,688
10,000 8.500% due 8/1/13
(prerefunded) Baa1 A- 10,662
1,000,000 Series D, (FSA Insured),
8.500% due 8/1/13 Aaa AAA 1,062,500
3,000,000 Series H, Subseries H-1,
6.125% due 8/1/10 Baa1 A- 2,681,250
Metropolitan Transportation
Authority:
2,650,000 New York Commuter
Facilities Revenue, Series
A,
6.500% due 7/1/24 Baa1 BBB+ 2,530,750
1,000,000 New York Transit Facilities
Revenue, Series J, (FGIC
Insured),
6.500% due 7/1/18 Aaa AAA 1,011,250
5,000,000 New York City General
Obligation,
6.666% due 8/1/09 Baa1 A- 4,837,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NEW YORK -- (CONTINUED)
$3,085,000 New York State,
Certificates of
Participation, (Hanson
Redevelopment Project),
8.375% due 5/1/08 NR BBB $ 3,362,650
New York State, Dormitory
Authority Revenue:
7,000,000 City University System,
6.00% due 7/1/14 Baa1 BBB 6,378,750
500,000 (Upstate Community
Colleges), Series A, (Co
Lee Insured),
5.750% due 7/1/22 NR AAA 450,625
New York State, Energy,
Research and Development
Authority, (Long Island
Lighting Company):
1,250,000 7.150% due 6/1/20 Ba1 BB+ 1,154,687
1,150,000 7.150% due 12/1/20 Ba1 BB+ 1,060,875
4,000,000 New York State, Housing
Finance Agency,
6.350% due 8/15/23 Aaa AAA 3,870,000
New York State, Medical
Care Facilities Finance
Agency:
3,100,000 6.400% due 11/1/14 Aaa AAA 3,092,250
4,500,000 6.500% due 2/15/19
(unrefunded) Baa1 BBB+ 4,275,000
1,540,000 Mental Health Services,
7.750% due 2/15/20 Baa1 AAA 1,626,625
5,500,000 New York State Power
Authority Revenue, Series
Z,
6.500% due 1/1/19 Aa AA- 5,534,375
1,850,000 New York State, Refunding
Bonds,
7.000% due 11/15/02 A A- 2,011,875
State of New York,
Municipal Bond Banking
Agency, Special Program,
Series A,
575,000 6.500% due 3/15/00 NR BBB+ 587,937
1,610,000 6.600% due 3/15/01 NR BBB+ 1,648,237
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
NORTH CAROLINA -- 2.1%
$3,000,000 Charlotte, North Carolina,
Special Facilities Revenue,
(Piedmont Aviation Inc.
Project),
9.000% due 7/1/17 B2 B+ $ 2,782,500
North Carolina Eastern
Municipal Power Agency,
Power System Revenue:
Series B,
8,700,000 7.000% due 1/1/08 A A- 8,852,250
280,000 8.000% due 1/1/21
(prerefunded 1/1/98) Aaa A- 304,850
North Carolina Municipal
Power Agency Systems:
2,300,000 (Catawba Electric),
6.250% due 1/1/17 A A 2,173,500
6,000,000 (MBIA Insured),
5.600% due 1/1/20 Aaa AAA 5,460,000
1,000,000 Pitt County, North
Carolina, Certificates of
Participation, (FGIC
Insured),
6.900% due 4/1/08 Aaa AAA 1,063,750
NORTH DAKOTA -- 0.8%
Mercer County, North
Dakota, Pollution Control
Revenue, (Basin Electric
Power):
4,860,000 Series E,
7.000% due 1/1/19 A2 A 4,938,975
2,795,000 Series 1984D,
8.125% due 1/1/19 A2 A 2,917,280
OHIO -- 2.7%
4,000,000 Cleveland, Ohio, Airport
Special Revenue,
(Continental Airlines
Incorporated),
9.000% due 12/1/19 NR NR 4,070,000
2,900,000 Cleveland, Ohio, Public
Power System Revenue,
7.000% due 11/15/24 Aaa AAA 3,048,625
1,250,000 Cuyahoga County, Ohio,
Hospital Revenue,
(Brentwood Hospital
Project):
9.625% due 11/1/14 Baa1 NR 1,310,937
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
OHIO -- (CONTINUED)
$2,500,000 Dublin, Ohio, City School
District,
6.200% due 12/15/99 Aaa AAA $ 2,465,625
1,000,000 Lorain, Ohio, Sewer System,
Mortgage Revenue,
8.750% due 4/1/11 NR BBB- 1,092,500
Maumee, Ohio, Hospital
Revenue:
4,000,000 (Columbus and South),
Series A, (FGIC Insured),
6.375% due 12/1/20 Aaa AAA 3,995,000
5,000,000 (Pollution Control - Toledo
Edison),
6.875% due 7/1/23 Ba2 BB 4,518,750
Ohio State Housing Finance
Agency, Single Family
Mortgage:
150,000 6.100% due 9/1/14 NR AAA 144,000
150,000 6.000% due 2/1/19 NR AAA 151,125
150,000 6.125% due 9/1/24 NR AAA 142,875
Ohio State Water
Development Authority:
Pollution Control Revenue,
Series A,
4,975,000 8.000% due 10/1/23 Ba2 BB 5,018,530
870,000 (Ohio Edison Project),
10.625% due 7/1/15 Baa2 BBB 915,675
210,000 Series B, (Pennsylvania
Power Project),
8.100% due 9/1/18 Baa3 BB+ 220,500
OKLAHOMA -- 1.4%
Cleveland County, Oklahoma,
Home Loan Authority, Single
Family Mortgage Revenue:
165,000 6.250% due 2/1/98 A NR 166,650
200,000 6.250% due 8/1/98 A NR 202,000
4,740,000 Oklahoma Housing Finance
Agency, Single Family
Mortgage, Series B,
7.997% due 8/1/18 NR AAA 4,751,850
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
OKLAHOMA -- (CONTINUED)
Tulsa, Oklahoma, Municipal
Airport Revenue, (American
Airlines):
$2,895,000 9.375% due 6/1/04 Baa2 BB+ $ 3,025,275
2,400,000 7.350% due 12/1/11 Baa2 BB+ 2,409,000
3,480,000 9.500% due 6/1/20 Baa2 BB+ 3,636,600
PENNSYLVANIA -- 9.3%
4,000,000 Allegheny County,
Pennsylvania, Airport
Revenue, (Greater Pittsburg
International Airport),
Series B, (FSA Insured),
6.625% due 1/1/22 Aaa AAA 3,995,000
2,500,000 Allegheny County,
Pennsylvania, Series A,
6.700% due 12/1/20 Baa3 BB+ 2,375,000
4,500,000 Allentown, Pennsylvania,
Hospital Authority Revenue,
(Sacred Heart Hospital of
Allentown), Series B,
6.750% due 11/15/15 NR BBB 3,881,250
1,250,000 Beaver County,
Pennsylvania, Hospital
Authority, (Beaver Medical
Center), Series A, (AMBAC
Insured),
6.250% due 7/1/22 Aaa AAA 1,214,062
Beaver County,
Pennsylvania, Industrial
Development Authority,
Pollution Control Revenue:
Beaver Valley, (Toledo
Edison Company):
Series B:
250,000 10.750% due 9/15/95 Ba3 NR 254,375
340,000 12.250% due 9/15/15 Ba3 NR 355,300
2,955,000 Series C, 10.750% due
11/15/15 NR NR 3,073,200
1,500,000 (Cleveland Electric),
10.500% due 9/1/15 NR BB 1,550,625
4,500,000 (Ohio Edison Company),
Series A,
10.500% due 10/1/15 NR BBB- 4,798,125
3,000,000 Berks County, Pennsylvania,
Solid Waste Authority,
(FGIC Insured),
6.000% due 4/1/11 Aaa AAA 2,943,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
PENNSYLVANIA -- (CONTINUED)
$2,750,000 Commonwealth of
Pennsylvania, Industrial
Development Authority
Revenue, (AMBAC Insured),
6.000% due 1/1/12 Aaa AAA $ 2,633,125
5,000,000 Commonwealth of
Pennsylvania, Higher
Education, Student Loan
Revenue, Series D, (AMBAC
Insured),
6.050% due 1/1/19 Aaa AAA 4,656,250
2,000,000 Delaware County,
Pennsylvania, Hospital
Authority, (Crozer -
Chester Medical Center),
(MBIA Insured),
5.300% due 12/15/20 Aaa AAA 1,695,000
2,000,000 Delaware County,
Pennsylvania, Industrial
Development Authority,
Resource Recovery, Series
A,
8.100% due 12/1/13 Aa3 A+ 2,115,000
130,000 Falls Township,
Pennsylvania, Hospital
Authority Revenue,
(Delaware Valley Medical
Center), (FHA Insured),
6.000% due 8/1/01 NR AAA 132,762
3,675,000 Fayette County,
Pennsylvania, Hospital
Authority Revenue,
(Uniontown Hospital
Project),
9.750% due 7/1/15 Baa BBB 3,803,625
3,000,000 Franklin, Pennsylvania,
Industrial Development
Authority, (Chambersburg
Hospital Project), (FGIC
Insured),
6.250% due 7/1/12 Aaa AAA 2,977,500
1,465,000 Grove City, Pennsylvania,
Area Hospital Authority
Revenue, (United Community
Hospital),
8.125% due 7/1/12 NR BBB- 1,461,337
5,000,000 Harrisburg, Pennsylvania,
Authority Lease Revenue,
(FGIC Insured),
6.625% due 6/1/13 Aaa AAA 5,231,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
PENNSYLVANIA -- (CONTINUED)
Lehigh County,
Pennsylvania, Industrial
Development Authority,
Pollution Control Revenue:
$7,500,000 6.400% due 9/1/29 Aaa AAA $ 7,443,750
1,750,000 Series A, (MBIA Insured),
6.400% due 11/1/21 Aaa AAA 1,750,000
Luzerne County,
Pennsylvania, Industrial
Development Authority,
(Pennsylvania Gas and Water
Company), Series A,
2,500,000 7.200% due 10/1/17 Baa3 BBB- 2,443,750
2,250,000 6.050% due 1/1/19 Baa3 BBB- 1,957,500
Montgomery County,
Pennsylvania, Industrial
Development Authority:
Pollution Control Revenue:
Series A, (Philadelphia
Electric Company),
1,350,000 8.875% due 6/1/16 Baa1 BBB 1,429,311
3,380,000 Series B, (MBIA Insured),
6.700% due 12/1/21 Aaa AAA 3,426,475
Montgomery County,
Pennsylvania, Redevelopment
Authority,
2,500,000 Series A,
6.500% due 7/1/25 NR NR 2,246,875
Northampton County,
Pennsylvania, Industrial
Development Authority,
Pollution Control Revenue:
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+ 516,250
350,000 North Huntington Township,
Pennsylvania, Municipal
Guaranteed Sewer Revenue,
(MBIA Insured),
6.875% due 4/1/14 Aaa AAA 357,875
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
33
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
PENNSYLVANIA -- (CONTINUED)
Pennsylvania Economic
Development Authority:
$4,500,000 7.125% due 12/1/15 NR BBB- $ 4,320,000
4,000,000 7.600% due 12/1/24 Baa1 BBB+ 4,110,000
Philadelphia, Pennsylvania,
Municipal Authority:
2,500,000 Gas Works Lease Revenue,
7.625% due 5/1/14 Baa BBB- 2,643,750
2,750,000 14th Series,
6.375% due 7/1/26 Baa1 BBB 2,588,437
1,500,000 Series A, (Justice Lease),
(FGIC Insured),
7.125% due 11/15/18 Aaa AAA 1,657,500
995,000 Series B,
6.400% due 11/15/16 Ba BB 874,355
2,500,000 Scranton-Lackawanna,
Pennsylvania, Health and
Welfare Authority Revenue,
Series B, (Moses Taylor
Hospital),
8.500% due 7/1/20 NR BB+ 2,559,375
2,000,000 Schuylkill County,
Pennsylvania, Industrial
Development Revenue,
(Schuylkill Energy
Resources, Inc.),
6.500% due 1/1/10 NR NR 1,711,531
PUERTO RICO -- 0.9%
170,000 Commonwealth of Puerto
Rico, Electric Power
Authority, Series L,
8.375% due 7/1/07 Baa1 AAA 185,512
Commonwealth of Puerto
Rico, General Obligation
Bonds:
330,000 7.750% due 7/1/13 Baa1 AAA 361,350
455,000 8.000% due 7/1/08 Baa1 A 494,243
1,100,000 Commonwealth of Puerto
Rico, Municipal Finance
Agency, Series A,
8.250% due 7/1/08 Baa1 A- 1,200,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
34
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
PUERTO RICO -- (CONTINUED)
$5,760,000 Commonwealth of Puerto
Rico, Urban Renewal and
Housing Corporation,
7.875% due 10/1/04
(refunded) Baa BBB $ 6,328,800
RHODE ISLAND -- 1.4%
2,650,000 Rhode Island Depositors
Economic Protection
Corporation, Series B,
(MBIA Insured),
6.000% due 8/1/17 Aaa AAA 2,451,250
Rhode Island Housing and
Mortgage Finance Authority:
2,000,000 7.350% due 4/1/17 Aa AA+ 2,102,500
9,500,000 7.100% due 4/1/24 Aa AA 9,808,750
SOUTH CAROLINA -- 1.6%
2,400,000 Fairfield County, South
Carolina, Industrial
Development Revenue, (Rite
Aid Corporation),
7.900% due 12/1/16 A3 NR 2,496,000
1,500,000 Greenville County, South
Carolina, Industrial
Development Revenue,
(Lockheed Aeromod Center
Project),
7.200% due 11/1/21 NR A- 1,528,125
Lexington County, South
Carolina, Health Services
District, Hospital Revenue,
(FSA Insured):
500,000 6.750% due 10/1/18 Aaa AAA 511,875
3,750,000 (Urban County),
6.375% due 7/1/21 Aaa AAA 3,848,437
4,000,000 Richland County, South
Carolina, Pollution Control
Revenue, (Union Camp
Corporation Project),
6.625% due 5/1/22 A1 A- 3,990,000
3,750,000 South Carolina State,
Public Service Authority
Revenue, Series A, (AMBAC
Insured),
6.375% due 7/1/21 Aaa AAA 3,759,375
125,000 Sumter County, South
Carolina, Hospital
Facilities Revenue,
10.000% due 10/1/04
(prerefunded 10/1/95) NR AAA 129,218
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
35
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
SOUTH DAKOTA -- 0.4%
Oglala Sioux, South Dakota,
Tribal Revenue Bond:
$ 290,000 7.000% due 7/1/99 Aaa NR $ 286,737
1,865,000 7.500% due 7/1/13 Aaa NR 1,811,380
1,830,000 10.000% due 7/1/13
(prerefunded 7/1/95) Aaa NR 1,925,910
TENNESSEE -- 2.1%
7,000,000 Humphreys County,
Tennessee, Industrial
Development Board,
6.700% due 5/1/24 Aa2 AA 6,991,250
1,200,000 Knox-Chapman, Tenessee,
Utilities District, Water
and Sewer Revenue, (MBIA
Insured),
6.100% due 1/1/19 Aaa AAA 1,152,000
1,400,000 Knoxville, Tennessee,
Community Development
Corporation, (GNMA
Morningside Gardens),
6.100% due 7/20/20 NR AAA 1,305,500
3,400,000 Memphis-Shelby County,
Tennessee, Airport
Authority, (Federal Express
Corporation),
6.750% due 9/1/12 Baa3 BBB 3,366,000
1,000,000 Metropolitan Nashville &
Davidson County, Tennessee,
Industrial Development
Board Revenue, (Volunteer
Health Care), Series A,
10.750% due 6/1/18 NR NR 300,000
Metropolitan Nashville
Airport Authority,
Tennessee Airport Revenue,
Special Facilities:
2,500,000 (American Airlines
Project),
9.875% due 10/1/05 Baa2 BB+ 2,609,375
5,000,000 Series C, (FGIC Insured),
6.600% due 7/1/15 Aaa AAA 5,087,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
36
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
TEXAS -- 9.6%
$2,325,000 Austin, Texas, Utility
System Revenue, (AMBAC
Insured),
7.000% due 5/15/16 Aaa AAA $ 2,418,000
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
Brazos River Authority,
Texas, Pollution Control
Revenue, (Houston Lighting
and Power Company):
3,000,000 8.250% due 12/1/16 Baa BBB 3,142,500
3,000,000 7.875% due 3/1/17 Baa BBB 3,093,750
Series A,
750,000 7.875% due 11/1/18 A2 A 774,375
2,000,000 Series A, (AMBAC Insured),
6.700% due 3/1/17 Aaa AAA 2,027,500
1,900,000 Series B, (FGIC Insured),
7.200% due 12/1/18 Aaa AAA 1,999,750
Dallas-Fort Worth, Texas,
International Airport
Facilities,
4,000,000 (UPS Services, Inc.),
6.600% due 5/1/32 Aaa AAA 4,050,000
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, Revenue Refunding,
(Bay Port Area System),
Series A, (FSA Insured):
1,395,000 6.700% due 10/1/10 Aaa AAA 1,436,850
990,000 6.700% due 10/1/11 Aaa AAA 1,019,700
970,000 Harris County, Texas,
Refunding Toll Road
Authority, Series A, (AMBAC
Insured),
6.500% due 8/15/17 Aaa AAA 983,338
175,000 Heart Of Texas, Housing
Finance Authority, Single
Family Mortgage Revenue,
Series 1984,
11.000% due 1/1/11 NR BBB- 180,905
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
37
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
TEXAS -- (CONTINUED)
$5,125,000 Houston, Texas, Water and
Sewer Systems, Series A,
Jr. Lien, (MBIA Insured),
6.375% due 12/1/22 Aaa AAA $ 5,099,375
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- 1,590,000
1,475,000 9.750% due 7/1/15 A2 A 1,539,530
3,250,000 7.875% due 12/1/16 A3 A- 3,420,625
1,300,000 (Houston Light and Power
Company Project):
7.875% due 11/1/26 A2 A 1,361,750
7,200,000 (AMBAC Insured),
6.700% due 3/1/27 Aaa AAA 7,263,000
1,695,000 Series A,
10.000% due 10/15/15 A3 A- 1,779,750
Series B,
500,000 7.700% due 2/1/19 A2 A 526,250
Series E, (FGIC Insured),
2,100,000 7.200% due 12/1/18 Aaa AAA 2,202,375
3,000,000 North Texas, Higher
Education
Authority Inc.,
6.300% due 4/1/09 A NR 2,868,750
Port Corpus Christi, Texas,
Industrial Development
Revenue:
4,000,000 (Hoechst Celanese
Corporation Project),
6.875% due 4/1/17 A2 AA- 4,030,000
2,000,000 (Valero Refining and
Manufacturing), Series A,
10.250% due 6/1/17 Baa3 BBB- 2,207,500
4,000,000 Red River Authority, Texas,
Pollution Control Revenue,
(Hoechst Celanese
Corporation Project),
6.875% due 4/1/17 A2 AA- 4,030,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
38
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
TEXAS -- (CONTINUED)
Sabine River Authority,
Texas, Pollution Control
Revenue:
$3,500,000 (Texas Electric Project),
(FSA Insured),
5.550% due 5/1/22 Aaa AAA $ 3,018,750
4,750,000 (Southwestern Electric
Power Company Project),
8.200% due 7/1/14 Aa3 NR 5,023,125
Sam Rayburn, Texas,
Municipal Power Agency,
Power Supply System
Revenue:
2,200,000 Series A,
6.750% due 10/1/14 Baa BB 1,938,750
2,500,000 Series B,
6.125% due 10/1/13 Baa BB 2,037,500
San Antonio, Texas, Airport
System Revenue, (AMBAC
Insured):
3,000,000 7.125% due 7/1/06 Aaa AAA 3,266,250
1,000,000 7.125% due 7/1/08 Aaa AAA 1,082,500
2,000,000 7.375% due 7/1/13 Aaa AAA 2,190,000
2,000,000 Terrel Hills, Texas, Higher
Education, (Incarnate World
College Project), (Co Lee
Insured),
5.750% due 3/15/13 Aaa AAA 1,852,500
3,010,000 Texas Municipal Power
Agency, Revenue Bonds,
Series A, (AMBAC Insured),
6.750% due 9/1/12 Aaa AAA 3,168,025
2,150,000 Texas State Department,
Housing and Community
Affairs, Home Mortgage
Revenue, Series A,
6.950% due 7/1/23 NR AAA 2,184,938
2,000,000 Texas State Public Property
Finance Corporation
Revenue, (Mental Health and
Retardation), (FGIC
Insured),
5.500% due 9/1/13 Aaa AAA 1,782,500
2,900,000 Texas State Veterans
Housing Assistance, Single
Family Mortgage Revenue,
6.800% due 12/1/23 Aa AA 2,896,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
39
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
TEXAS -- (CONTINUED)
$ 500,000 Travis County, Texas,
Hospital Revenue,
(Daughters of Charity
Health System), (Seton
Medical Center),
10.125% due 11/1/15 Aa NR $ 526,875
965,000 Tyler, Texas, Health
Facilities Revenue, (Park
Place Limited Project),
12.500% due 12/1/18 NR NR 1,002,393
1,250,000 Westside Calhoun County,
Tax District, Solid Waste
Disposal Revenue, (Union
Carbide Chemicals
Corporation),
6.400% due 5/1/23 Baa2 BBB 1,104,687
UTAH -- 0.5%
Utah State Housing Finance
Agency,
Single Family Mortgage:
740,000 Series D,
8.625% due 1/1/19 NR AA 749,250
435,000 Series D1,
6.200% due 7/1/16 Aa NR 415,425
4,000,000 Utah Municipal Power System
Revenue, (Sordan Project),
(MBIA Insured),
6.375% due 6/1/22 Aaa AAA 3,885,000
VIRGIN ISLANDS -- 0.1%
1,160,000 Virgin Islands Port
Authority, Marine Division
Revenue, Series A,
10.125% due 11/1/05 NR BBB- 1,204,950
Virgin Islands Public
Finance Authority, Series
A:
15,000 7.300% due 10/1/18
(escrowed to maturity) Aaa AAA 16,630
110,000 7.300% due 10/1/18
(prerefunded 10/1/00) Aaa AAA 121,138
VIRGINIA -- 1.9%
500,000 Chesapeake Bay, Bridge and
Tunnel General Resolution,
(MBIA Insured),
6.375% due 7/1/22 Aaa AAA 499,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
40
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
VIRGINIA -- (CONTINUED)
$2,435,000 Fairfax County, Virginia,
Redevelopment and Housing
Authority Revenue,
Multifamily Housing, Series
A, (Kingsley), (FHA
Insured),
7.000% due 5/1/26 NR AAA $ 2,495,875
1,820,000 Henrico County, Virginia,
Industrial Development
Authority, (Maryview
Hospital), Series B,
7.500% due 9/1/11 A1 A+ 2,011,100
8,000,000 Isle Wight County,
Virginia, Industrial
Development Authority,
Solid Waste Disposal
Revenue,
6.550% due 4/1/24 A1 A- 7,670,000
4,750,000 Richmond, Virginia,
Metropolitan Expressway
Authority, Series B, (FGIC
Insured),
6.250% due 7/15/22 Aaa AAA 4,643,125
1,400,000 Southern Public Service
Authority, Solid Waste
System Revenue,
6.000% due 7/1/17 A A- 1,279,250
WASHINGTON -- 2.3%
1,500,000 King County, Washington,
Public Hospital District 1,
(Valley Medical Center),
(AMBAC Insured),
7.250% due 9/15/15 Aaa AAA 1,618,125
500,000 Pierce County, Washington,
Economic Development
Corporation, Industrial
Revenue Authority, (Pioneer
Business Forms Inc.
Project),
10.125% due 10/1/00 NR AA- 502,500
2,000,000 Port of Moses Lake,
Washington, Pollution
Control Revenue, (Union
Carbide),
7.875% due 8/1/06 Baa2 BBB 2,095,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
41
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
WASHINGTON -- (CONTINUED)
$2,000,000 Port of Seattle,
Washington, Subordinated
Lien, (MBIA Insured),
6.625% due 8/1/17 Aaa AAA $ 2,052,500
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 2,835,000
Tacoma, Washington,
Electric Systems Revenue,
(AMBAC Insured),
3,500,000 Series B,
6.150% due 1/1/08 Aaa AAA 3,508,750
2,750,000 Washington State Health
Care Facilities Authority
Revenue, (Franciscan
Health, St. Joseph), (MBIA
Insured),
6.700% due 7/1/21 Aaa AAA 2,791,250
Washington State Public
Power Supply System,
(Nuclear Project No. 1),
3,000,000 7.500% due 7/1/07 Aa AA 3,195,000
500,000 Series A, (MBIA Insured),
6.250% due 7/1/17 Aaa AAA 476,250
4,000,000 Washington State, 14th
Series,
6.000% due 9/1/19 Aa AA 3,835,000
WEST VIRGINIA -- 1.7%
2,000,000 Beckley, West Virginia,
Industrial Development
Revenue (Water Commission
Project),
7.000% due 10/1/17 NR A 2,022,500
500,000 Commonwealth of West
Virginia Water Development
Authority, Series A,
7.000% due 11/1/25 Aaa AAA 517,500
1,000,000 Harrison County, West
Virginia, Solid Waste
Disposal Revenue, (West
Virginia Power Company),
Series B,
6.300% due 5/1/23 A1 A 911,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
42
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- (CONTINUED)
WEST VIRGINIA --
(CONTINUED)
Marion County, West
Virginia, Solid Waste
Disposal Revenue, (American
Power, Paper Recycling):
$2,500,000 7.750% due 12/1/11 NR NR $ 2,278,125
5,000,000 9.000% due 12/1/11 NR NR 5,025,000
4,000,000 Mason County, West
Virginia, Pollution Control
Revenue, (Ohio Power
Company), Series B, (AMBAC
Insured),
5.450% due 12/1/16 Aaa AAA 3,575,000
2,300,000 West Virginia School
Building Authority Revenue,
Series A, (MBIA Insured),
7.000% due 7/1/11 Aaa AAA 2,423,625
WISCONSIN -- 0.2%
2,000,000 Racine County, Wisconsin,
Health Center Revenue,
8.125% due 8/1/21 Baa1 BBB 2,087,500
WYOMING -- 0.1%
1,250,000 Wyoming Community
Development Authority,
Housing Revenue,
7.100% due 6/1/17 Aa AA 1,289,062
-----------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS AND NOTES
(Cost $978,887,774) $971,418,459
-----------------------------------------------------------------------------
SHORT-TERM TAX-EXEMPT INVESTMENTS --0.1%
ARIZONA -- 0.0%
100,000 Coconino County, Arizona,
Pollution Control Revenue,
Series A,
4.400% due 10/1/29+ VMIG1 NR 100,000
FLORIDA -- 0.1%
600,000 Hillsborough County,
Florida, Industrial
Development Authority,
Pollution Control Revenue,
4.250% due 6/1/21+ VMIG1 A-1+ 600,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
43
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
RATINGS MARKET VALUE
FACE VALUE MOODY'S S&P (NOTE 1)
-----------------------------------------------------------------------------
<C> <S> <C> <C> <C>
SHORT-TERM TAX-EXEMPT INVESTMENTS -- (CONTINUED)
OHIO -- 0.0%
$ 500,000 Ohio State Air Quality
Development Authority:
3.850% due 10/1/01+ NR A-1+ $ 500,000
PUERTO RICO -- 0.0%
100,000 Commonwealth of Puerto
Rico, Government
Development Bank,
2.950% due 12/1/15++ VMIG1 A-1 100,000
-----------------------------------------------------------------------------
TOTAL SHORT-TERM TAX-EXEMPT
INVESTMENTS
(Cost $1,300,000)
1,300,000
-----------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $980,187,774*) 98.3% 972,718,459
OTHER ASSETS AND LIABILITIES (Net) 1.7 16,704,475
-----------------------------------------------------------------------------
NET ASSETS 100.0% $989,422,934
-----------------------------------------------------------------------------
<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 calendar days'
notice.
</TABLE>
SUMMARY OF MUNICIPAL BONDS AND SHORT-TERM TAX-EXEMPT
INVESTMENTS BY COMBINED RATINGS.
<TABLE>
<CAPTION>
Percent
Standard & of
Moody's Poor's Value
<S> <C> <C> <C>
-------------------------------------------
AAA OR AAA 39%
AA AA 11
A A 19
BAA BBB 20
BA BB 4
B B 1
NR NR 6
---------
100%
---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
44
<PAGE>
Smith Barney
Tax-Exempt Income Fund
---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JANUARY 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$980,187,774) (Note 1)
See accompanying schedule $ 972,718,459
Cash 791,336
Interest receivable 15,935,494
Receivable for investment securities
sold 7,892,413
Receivable for Fund shares sold 1,289,032
-----------------------------------------------------------------------------
TOTAL ASSETS 998,626,734
-----------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities
purchased $6,996,680
Dividends payable 682,461
Payable for Fund shares redeemed 371,865
Investment advisory fee payable (Note
2) 332,203
Distribution fee payable (Note 3) 312,868
Administration fee payable (Note 2) 166,102
Service fee payable (Note 3) 124,575
Transfer agent fees payable (Note 2) 41,005
Custodian fees payable (Note 2) 27,000
Accrued expenses and other payables 149,041
-----------------------------------------------------------------------------
TOTAL LIABILITIES 9,203,800
-----------------------------------------------------------------------------
NET ASSETS $ 989,422,934
-----------------------------------------------------------------------------
NET ASSETS consist of:
Distributions in excess of net
investment income earned to date $ (2,462,607)
Accumulated net realized loss on
investments sold (6,892,075)
Unrealized depreciation of investments (7,469,315)
Par value 59,198
Paid-in capital in excess of par value 1,006,187,733
-----------------------------------------------------------------------------
TOTAL NET ASSETS $ 989,422,934
-----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
45
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (CONTINUED)
--------------------------------------------------------- JANUARY 31, 1995
<TABLE>
<S> <C> <C>
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($243,165,403 DIVIDED BY 14,552,095 shares of
beneficial interest outstanding) $16.71
-----------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($16.71 DIVIDED BY
0.960)
(based on sales charge of 4.00% of the offering price
on January 31, 1995) $17.41
-----------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($746,188,753 DIVIDED BY 44,641,943 shares of
beneficial interest outstanding) $16.71
-----------------------------------------------------------------------------
CLASS C SHARES:
NET ASSET VALUE and offering price per share+
($68,778 DIVIDED BY 4,116 shares of beneficial
interest outstanding) $16.71
-----------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
46
<PAGE>
Smith Barney
Tax-Exempt Income Fund
---------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
-------------------------------------------------------------
FOR THE SIX MONTHS ENDED JANUARY 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 36,246,361
-----------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $2,080,296
Investment advisory fee (Note 2) 2,054,815
Administration fee (Note 2) 1,027,142
Service fee (Note 3) 770,556
Transfer agent fees (Notes 2 and 4) 230,573
Custodian fees (Note 2) 74,446
Legal and audit fees 26,367
Trustees' fees and expenses (Note 2) 7,396
Other 150,504
-----------------------------------------------------------------------------------
TOTAL EXPENSES 6,422,095
-----------------------------------------------------------------------------------
NET INVESTMENT INCOME 29,824,266
-----------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 5):
Net realized loss on investments sold during the
period (8,071,636)
Net unrealized depreciation of investments
during the period (27,560,616)
-----------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(35,632,252)
-----------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(5,807,986)
-----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
47
<PAGE>
Smith Barney
Tax-Exempt Income Fund
---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
1/31/95 ENDED
(UNAUDITED) 7/31/94
<S> <C> <C>
Net investment income $ 29,824,266 $ 60,953,980
Net realized gain/(loss) on investments sold during the
period (8,071,636) 1,179,561
Net unrealized depreciation of investments during the
period (27,560,616) (56,414,234)
-------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
operations (5,807,986) 5,719,307
Distributions to shareholders from net investment
income:
Class A (6,166,975) (998,289)
Class B (23,747,055) (57,766,814)
Class C (599) --
Distributions to shareholders in excess of net
investment income:
Class A -- (40,212)
Class B -- (2,332,032)
Distributions to shareholders from net realized gain on
investments:
Class A -- (149,909)
Class B -- (8,232,090)
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A 232,418,267 5,328,509
Class B (294,597,673) 24,129,260
Class C 66,094 --
-------------------------------------------------------------------------------------
Net decrease in net assets (97,835,927) (34,342,270)
NET ASSETS:
Beginning of period 1,087,258,861 1,121,601,131
-------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of $2,462,607 and $2,372,244,
respectively) $ 989,422,934 $1,087,258,861
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
48
<PAGE>
Smith Barney
Tax-Exempt Income Fund
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
1/31/95 ENDED ENDED
(UNAUDITED) 7/31/94
7/31/93*++
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 17.26 $ 18.24 $
17.45
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.51 1.06 0.78
Net realized and unrealized gain/(loss) on investments (0.53) (0.85)
1.00
-------------------------------------------------------------------------------------
Total from investment operations (0.02) 0.21
1.78
-------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.53) (1.02)
(0.80)
Distributions in excess of net investment income -- (0.04)
(0.03)
Distributions from net realized gains -- (0.13)
(0.16)
-------------------------------------------------------------------------------------
Total distributions (0.53) (1.19) (0.99)
-------------------------------------------------------------------------------------
Net Asset Value, end of period $ 16.71 $ 17.26 $
18.24
-------------------------------------------------------------------------------------
Total return+ (0.08)% 1.14% 10.24%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 243,118 $ 17,792 $
13,508
Ratio of operating expenses to average net assets 0.85%** 0.84%
0.86%**
Ratio of net investment income to average net assets 6.20%** 5.83%
6.03%**
Portfolio turnover rate 9% 39% 34%
-------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return for the periods 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 net investment income method does not
accord with results of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
49
<PAGE>
Smith Barney
Tax-Exempt Income Fund
--------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
1/31/95 ENDED
(UNAUDITED) 7/31/94
<S> <C> <C>
Net Asset Value, beginning of period $ 17.26 $ 18.24
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.46 0.96
Net realized and unrealized gain/(loss) on
investments (0.53) (0.85)
--------------------------------------------------------------------------------
Total from investment operations (0.07) 0.11
Less distributions:
Distributions from net investment income (0.48) (0.92)
Distributions in excess of net investment income -- (0.04)
Distributions from net realized gains -- (0.13)
--------------------------------------------------------------------------------
Total distributions (0.48) (1.09)
--------------------------------------------------------------------------------
Net Asset Value, end of period $ 16.71 $ 17.26
--------------------------------------------------------------------------------
Total return+ (0.35)% 0.60%
--------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 746,236 $1,069,466
Ratio of operating expenses to average net assets 1.34%** 1.33%
Ratio of net investment income to average net assets 5.71%** 5.34%
Portfolio turnover rate 9% 39%
--------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on September 16, 1985. Those shares in
existence prior to November 6, 1992 were designated as Class B shares.
** 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 net investment income method does not
accord with results of operations.
+++ Annualized expense ratio before waiver of fees by investment adviser,
sub-investment adviser and administrator and distributor for the period ended
July 31, 1986 was 1.58%.
# Annualized operating expense ratio excludes interest expense. The annualized
ratio including interest expense for the year ended July 31, 1992 was 1.46%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
50
<PAGE>
Smith Barney
Tax-Exempt Income Fund
------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
ENDED ENDED
7/31/93++ 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> <C>
$ 18.00 $ 16.97 $ 16.98 $ 17.31 $ 16.44 $ 16.48 $ 16.30 $
15.00
-------------------------------------------------------------------------------------
0.98 1.04 1.10 1.12 1.13 1.13 1.10 1.04
0.45 1.17 0.10 (0.30) 0.88 0.02 0.18 1.30
-------------------------------------------------------------------------------------
1.43 2.21 1.20 0.82 2.01 1.15 1.28 2.34
(0.98) (1.04) (1.10) (1.12) (1.13) (1.13) (1.10)
(1.04)
(0.04) -- -- -- -- -- -- --
(0.17) (0.14) (0.11) (0.03) (0.01) (0.06) -- --
-------------------------------------------------------------------------------------
(1.19) (1.18) (1.21) (1.15) (1.14) (1.19) (1.10)
(1.04)
-------------------------------------------------------------------------------------
$ 18.24 $ 18.00 $ 16.97 $ 16.98 $ 17.31 $ 16.44 $ 16.48 $
16.30
-------------------------------------------------------------------------------------
8.28% 13.50% 7.40% 4.95% 12.68% 7.32% 7.90%
15.89%
-------------------------------------------------------------------------------------
$ 1,108,093 $ 871,339 $ 639,340 $ 573,930 $ 557,518 $ 451,262 $
453,158 $ 349,527
1.38% 1.45%# 1.45% 1.47% 1.44% 1.43% 1.57%
1.53%**+++
5.52% 5.96% 6.48% 6.57% 6.70% 6.99% 6.43%
6.88%**
34% 61% 44% 29% 21% 12% 16%
6%
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
51
<PAGE>
Smith Barney
Tax-Exempt Income Fund
--------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
1/31/95*
(UNAUDITED)
<S> <C>
Net Asset Value, beginning of period $ 15.83
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.20
Net realized and unrealized gain on investments 0.87#
--------------------------------------------------------------------------------
Total from investment operations 1.07
Less distributions:
Dividends from net investment income (0.19)
--------------------------------------------------------------------------------
Total distributions (0.19)
--------------------------------------------------------------------------------
Net Asset Value, end of period $ 16.71
--------------------------------------------------------------------------------
Total return+ 6.80%
--------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 69
Ratio of operating expenses to average net assets 1.39%**
Ratio of net investment income to average net assets 5.67%**
Portfolio turnover rate 9%
--------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares on November 17, 1994.
** Annualized.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
# The amount shown may not accord with the change in aggregate gains and losses
of portfolio securities due to the timing of sales and the redemptions of
Fund shares.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
52
<PAGE>
Smith Barney
Tax-Exempt Income Fund
---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Income Funds (formerly 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 Premium Total Return, Smith Barney Convertible Fund, Smith Barney Global
Bond Fund, Smith Barney High Income Fund, Smith Barney Tax-Exempt Income Fund
(the "Fund"), Smith Barney Exchange Reserve Fund, Smith Barney Diversified
Strategic Income Fund and Smith Barney Utilities Fund. Effective November 7,
1994, the Fund began offering Class C and Class Y shares and continued to offer
Class A and Class B shares. As of January 31, 1995, no Class Y shares had been
sold.
Class A shares are sold with a front-end sales charge. Class B and Class C
shares may be subject to a contingent deferred sales charge ("CDSC") upon
redemption. Class B shares will convert automatically to Class A shares eight
years after the date of original purchase. Class Y shares are available to
investors making an initial investment of at least $5 million and are not
subject to any sales charges, distribution or service fees. 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: 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 Service,
there are no readily obtainable market quotations are carried at fair value as
determined by the Pricing Service, based on methods which
53
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
include consideration of yields or prices of municipal securities 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 securities sold
are recorded on the identified cost basis. 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.
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
investment
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
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 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 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 regulated
investment company, if such qualification is in the best interest of its
shareholders, by complying with the requirements of the Internal Revenue
54
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 AGREEMENT, ADMINISTRATION
AGREEMENT AND OTHER PARTY TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, formerly a division of Mutual
Management Corporation, which was transferred effective November 7, 1994 to
Smith Barney Mutual Funds Management Inc. ("SBMFM") (formerly known as "Smith,
Barney
Advisers, Inc."). Mutual Management Corporation and SBMFM are both wholly
owned subsidiaries of 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 0.40% of the value of its average
daily net assets.
The Fund is also party to an administration agreement (the "Administration
Agreement") with SBMFM. Under the Administration Agreement, the Fund pays a
monthly fee at the annual rate of 0.20% of the value of its average daily net
assets.
The Fund and SBMFM have also entered into a sub-administration agreement (the
"Sub-Administration Agreement") with Boston Advisors, an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Sub-Administration
Agreement, SBMFM pays Boston Advisors a portion of its administration fee at a
rate agreed upon from time to time between SBMFM and Boston Advisors.
For the six months ended January 31, 1995, Smith Barney received $42,794 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 certain Class A, Class B and Class C shares. In circumstances in which the
CDSC is imposed, the amount of the charge will vary depending on the number of
years since the date of purchase. For the six
55
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
months ended January 31, 1995, Smith Barney received from shareholders
$1,051,382 and $0 in CDSCs on the redemption of Class B and Class C shares,
respectively.
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 $15,000 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 C
shareholders, and covers expenses incurred in distributing Class B and Class C
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class C shares of the Fund at the annual rate of 0.15% 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 C
shares at the annual rate of 0.50% and 0.55%, respectively, of the value of the
average daily net assets of each respective class of shares. For the six months
ended January 31, 1995, the service fee for Class A, Class B and Class C shares
was $146,469, $624,070 and $17, respectively. For the six months ended January
31,
1995, the distribution fee for Class B and Class C shares was $2,080,239 and
$57, respectively.
56
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Under its terms, the Plan shall remain in effect from year to year, provided
that such continuance is approved annually by vote of the Fund's Trustees,
including a majority of those Trustees who are not "interested persons" of the
Fund and who have no direct or indirect financial interest in the operation of
the Plan.
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 six
months ended January 31, 1995, transfer agent fees for Class A, Class B and
Class C shares were $51,615, $178,947 and $11, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
investments and U.S. government securities, aggregated $94,805,875 and
$170,990,623, respectively, for the six months ended January 31, 1995.
At January 31, 1995, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $20,354,546 and
aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $27,823,861.
57
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 Y) were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 14,978,252 $ 256,251,795 2,396,372 $ 42,651,712
Issued as reinvestment of dividends 222,147 3,650,111 46,307 833,218
Redeemed (1,679,373) (27,483,639) (2,152,168) (38,156,421 )
-------------------------------------------------------------------------------------
Net increase 13,521,026 $ 232,418,267 290,511 $ 5,328,509
-------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 1,943,530 $ 32,207,892 8,179,538 $148,163,875
Issued as reinvestment of dividends 782,865 13,004,874 2,238,768
40,284,476
Redeemed (20,045,403) (339,810,439) (9,208,861) (164,319,091
)
-------------------------------------------------------------------------------------
Net increase/(decrease) (17,319,008) $(294,597,673) 1,209,445 $
24,129,260
-------------------------------------------------------------------------------------
<CAPTION>
PERIOD ENDED
1/31/95*
CLASS C SHARES: Shares Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 5,445 $ 87,826
Issued as reinvestment of dividends 33 529
Redeemed (1,362) (22,261)
-------------------------------------------------------------------------------------
Net increase 4,116 $ 66,094
-------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares on November 17, 1994.
</TABLE>
As of January 31, 1995, no Class Y shares had been sold.
58
<PAGE>
Smith Barney
Tax-Exempt Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Bank of America (formerly known as 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 the terms of the
Agreement, as amended, the Fund may borrow up to the lesser of $25 million or
25% of its net assets. However, pursuant to the Fund's prospectus, the Fund may
only borrow up to 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. 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 six months ended January 31,
1995, the Fund had an average outstanding daily balance of $748,087 with
interest rates ranging from 5.125% to 6.500%. Interest expense totalled $34,067
for the six months ended January 31, 1995 and is offset against interest income
on
the Fund's Statement of Operations for the six months ended January 31, 1995.
At January 31, 1995, the Fund had no outstanding borrowings under this
Agreement.
59
<PAGE>
Smith Barney
Tax-Exempt Income Fund
---------------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
COUNSEL
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services
Group, Inc.
Exchange Place
Boston, Massachusetts 02109
60
<PAGE>
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
Jessica M. Bibliowicz
PRESIDENT
Lawrence T. McDermott
VICE PRESIDENT AND
INVESTMENT OFFICER
Lewis E. Daidone
SENIOR VICE PRESIDENT
AND TREASURER
Christina T. Sydor
SECRETARY
[LOGO]
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE
SHAREHOLDERS OF
SMITH BARNEY 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 SHEARSON
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 18, 187, 470, 488
[[LOGO]]
FD2173 C5
SEMI-ANNUAL REPORT
SMITH BARNEY
EXCHANGE RESERVE FUND
JANUARY 31, 1995
DEAR SHAREHOLDER:
Money market interest rates rose substantially throughout 1994, propelled
by the Federal Reserve Board's six increases in the target for the Federal
funds rate -- the rate banks charge each other for overnight loans. The
Fed, concerned that inflationary pressures were building, moved toward
this more restrictive monetary policy in an effort to stem inflation be-
fore it became an issue. By early February, the Fed had increased the Fed-
eral funds rate a seventh time to 6.0%.
In our view, the economic slowdown that was expected by Wall Street econo-
mists as a result of the Fed's rate increases never materialized during
the second half of 1994. However, numerous signs of an emerging slowdown
have appeared in the early 1995 data: fewer jobs in January and a jump in
the unemployment rate, weak housing activity with declines in home sales,
some slackening in consumption spending from weak retail sales and in-
creased risk to U.S. exports because of the devaluation of the peso and
the potential for a recession in Mexico. Finally, signs of a slight easing
in the economic pace of manufacturing activity were evident in the latest
Purchasing Manager's survey.
PORTFOLIO PERFORMANCE AND STRATEGY
The Federal Reserve's interest rate hikes in 1994 were positive for money
market investors. As short-term interest rates rose, so did the yield on
the Fund. In order to take advantage of rising short-term interest rates,
we kept the portfolio's average maturity at approximately 34 days during
most of this fiscal period. We continue to invest in high-quality, conser-
vative securities -- primarily issued by large domestic and international
money center banks and well-known multinational corporations -- which we
believe pose little credit risk because they derive their earnings from
diverse sources.
OUTLOOK
In his most recent Humphrey Hawkins testimony to Congress, Fed Chairman
Alan Greenspan pointed to "a slowdown from the torrid pace of 1994;" how-
ever, he stated that he was unsure as to whether the increases in short-
term rates from 3% to 6% over the past year would be enough to slow growth
and inflation to levels that are acceptable to the Federal Reserve. While
it appears that most of the increase in short-term interest rates has al-
ready occurred and the Federal Reserve may take a wait-and- see attitude,
there still remains a strong possibility that the Fed will remain vigilant
and raise the Fed funds rate to 7% during the course of the year. GDP
(gross domestic product, which is the broadest available measure of aggre-
gate economic activity) is expected to be above 3%, with inflation in-
creasing from 2.7% to 3.5% in 1995. In response to the Chairman's com-
ments, the short-term yield curve has flattened as many market partici-
pants believe the Fed's tightening is coming to an end.
We appreciate the opportunity to help you reach your investment goals.
Should you have any questions about your investment in the Fund, or how
other mutual funds managed by Smith Barney may be useful in helping you
achieve your financial goals, please call your Smith Barney Financial
Consultant.
Sincerely,
Heath B. McLendon Phyllis M. Zahorodny
Chairman of the Board Vice President and
and Investment Officer Investment Officer
Evelyn R. Robertson
Investment Officer
March 20, 1995
PORTFOLIO OF INVESTMENTS (UNAUDITED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
ANNUALIZED
YIELD AT
DATE OF MATURITY MARKET VALUE
FACE VALUE PURCHASE DATE (NOTE 1)
<S> <C> <C> <C> <C>
EURODOLLAR TIME DEPOSITS -- 41.9%
$ 8,000,000 Bank Nova Scotia, Toronto 5.875% 2/1/95 $
8,000,000
8,000,000 Banque Paribas 5.875 2/1/95 8,000,000
8,000,000 Chemical Bank 5.875 2/1/95 8,000,000
8,000,000 Credit Suisse 5.813 2/1/95 8,000,000
8,000,000 Mitsubishi Bank Limited 5.875 2/1/95 8,000,000
8,000,000 NationsBank Corporation 5.875 2/1/95 8,000,000
8,000,000 Postipankki 5.875 2/1/95 8,000,000
8,000,000 Republic National Bank of New York 5.750 2/1/95
8,000,000
8,000,000 Union Bank of Switzerland Financial 5.875 2/1/95
8,000,000
8,000,000 Z-Landerbank 5.875 2/1/95 8,000,000
TOTAL EURODOLLAR TIME DEPOSITS
(Cost $80,000,000) 80,000,000
COMMERCIAL PAPER -- 29.8%
5,000,000 American Home Products 6.454 4/4/95 4,945,319
4,000,000 American Home Products 6.349 4/5/95 3,956,250
5,000,000 Banque Indosuez 6.195 4/12/95 4,940,695
5,000,000 Compagnie Bancaire 6.215 4/12/95 4,940,500
5,000,000 Corporate Asset Funding Company 6.247 4/10/95
4,941,917
4,000,000 Ford Motor Credit Company 6.165 2/6/95
3,996,611
4,000,000 Ford Motor Credit Company 6.061 3/28/95
3,963,333
4,000,000 General Electric Capital Corporation 6.061 3/28/95
3,963,333
4,000,000 General Electric Capital Corporation 6.571 5/4/95
3,934,271
7,000,000 Goldman Sachs 6.106 2/1/95 7,000,000
4,000,000 Morgan Stanley 6.354 3/1/95 3,980,525
2,450,000 Siemens Corporation 6.221 3/9/95 2,434,994
4,000,000 Siemens Corporation 6.316 4/12/95 3,951,700
TOTAL COMMERCIAL PAPER
(Cost $56,949,448) 56,949,448
DISCOUNT NOTES -- 10.9%
5,000,000 Federal Home Loan Bank 5.609 3/31/95 4,955,856
15,000,000 Federal National Mortgage Association 5.571 3/31/95
14,868,775
1,000,000 Federal National Mortgage Association 5.755 4/18/95
988,178
TOTAL DISCOUNT NOTES
(Cost $20,812,809) 20,812,809
CERTIFICATES OF DEPOSIT -- 6.8%
$ 3,000,000 ABN Amro Bank 6.290% 4/21/95 $ 2,998,346
5,000,000 National Westminster Bank 6.260 4/17/95 5,002,769
5,000,000 West Deutsche Landesbank 6.320 4/5/95 5,000,000
TOTAL CERTIFICATES OF DEPOSIT
(Cost $13,001,115) 13,001,115
BANK NOTES -- 5.3%
5,000,000 Harris Trust & Savings Bank 6.270 4/10/95 5,000,000
5,000,000 NBD Bank 6.260 4/10/95 5,000,093
TOTAL BANK NOTES
(Cost $10,000,093) 10,000,093
EURODOLLAR CERTIFICATES OF DEPOSIT -- 2.6%
(Cost $5,000,087)
5,000,000 Abbey National 6.380 4/6/95 5,000,087
U.S. TREASURY BILL -- 2.6% (Cost $4,953,600)
5,000,000 U.S.Treasury Bill 5.362 4/6/95 4,953,600
REPURCHASE AGREEMENT -- 1.5% (Cost $2,825,000)
Agreement with Citibank, N.Y., 5.800% dated
1/31/95, to be repurchased at $2,825,455
on 2/1/95, collateralized by $2,870,000
2,825,000 U.S. Treasury Notes, 7.750% due 1/31/00 2,825,000
TOTAL INVESTMENTS (Cost $193,542,152*) 101.4%
193,542,152
OTHER ASSETS AND LIABILITIES (Net) (1.4)
(2,597,738)
NET ASSETS 100.0% $190,944,414
<FN>
* Aggregate cost for Federal tax purposes.
</TABLE>
See Notes to Financial Statements
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JANUARY 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$193,542,152) (Note 1)
See accompanying schedule $193,542,152
Receivable for investment securities
sold 5,023,749
Receivable for Fund shares sold 860,924
Interest receivable 45,794
TOTAL ASSETS 199,472,619
LIABILITIES:
Due to custodian $5,026,991
Payable for Fund shares redeemed 2,845,469
Dividends payable 397,178
Distribution fee payable (Note 3) 86,222
Investment advisory fee payable (Note 2) 51,770
Administration fee payable (Note 2) 34,513
Custodian fees payable (Note 2) 22,000
Transfer agent fees payable (Note 2) 14,500
Accrued expenses and other payables 49,562
TOTAL LIABILITIES 8,528,205
NET ASSETS $190,944,414
NET ASSETS CONSIST OF:
Accumulated net realized loss on invest-
ments sold $(79,213)
Par value 191,024
Paid-in capital in excess of par value 190,832,603
TOTAL NET ASSETS $190,944,414
NET ASSET VALUE
CLASS B SHARES:
Net asset value and offering price per
share+ ($186,354,109 / 186,433,463
shares of beneficial interest out-
standing) $1.00
CLASS C SHARES:
Net asset value and offering price per
share+ ($4,590,305 / 4,590,164 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 (UNAUDITED)
FOR THE SIX MONTHS ENDED JANUARY 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $5,056,999
EXPENSES:
Distribution fee (Note 3) $ 497,108
Investment advisory fee (Note 2) 298,265
Administration fee (Note 2) 198,843
Transfer agent fees (Notes 2 and 4) 89,109
Custodian fees (Note 2) 47,442
Legal and audit fees 12,041
Directors' fees and expenses (Note 2) 6,894
Other 23,175
TOTAL EXPENSES 1,172,877
NET INVESTMENT INCOME 3,884,122
NET REALIZED GAIN ON INVESTMENTS (NOTE 1) 28,463
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$3,912,585
</TABLE>
See Notes to Financial Statements
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
1/31/95 7/31/94
(UNAUDITED)
<S> <C> <C>
Net investment income $3,884,122 $4,649,064
Net realized gain on investments sold during
the period 28,463 49,072
Net increase in net assets resulting from op-
erations 3,912,585 4,698,136
Distributions to shareholders from net income:
Class B (3,852,998) (4,649,064)
Class C (31,124) --
Net increase/(decrease) in net assets from
Fund share
transactions (Note 5):
Class B (65,920,253) 85,935,185
Class C 4,590,164 --
Net increase/(decrease) in net assets (61,301,626) 85,984,257
NET ASSETS:
Beginning of period 252,246,040 166,261,783
End of period $190,944,414 $252,246,040
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED ENDED ENDED
1/31/95 7/31/94 7/31/93
(UNAUDITED)
<S> <C> <C> <C>
Net asset value, beginning of year $1.00 $1.00 $1.00
Income from investment operations:
Net investment income 0.0197 0.0216 0.0212
Less distributions:
Distributions from net investment income (0.0197) (0.0216) (0.0212)
Net realized gain on investments 0.0001 0.0002 0.0000
Net asset value, end of year $1.00 $1.00 $1.00
Total return+ 2.00% 2.18% 2.15%
Ratios to average net assets/Supplemen-
tal data:
Net assets, end of year (in 000's) $186,354 $252,246 $166,262
Ratio of operating expenses to average
net assets 1.18%** 1.26% 1.25%
Ratio of net investment income to aver-
age net assets 3.91%** 2.24% 2.16%
<FN>
* The Fund commenced operations on July 8, 1986. Shares in existence
prior to November 7, 1994 were designated as Class B shares.
** Annualized.
+ Total return represents aggregate total return for the periods indi-
cated 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*
<C> <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
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
1/31/95*
(UNAUDITED)
<S> <C>
Net asset value, beginning of period $1.00
Income from investment operations:
Net investment income 0.0104
Less distributions:
Distributions from net investment income (0.0104)
Net realized gain on investments 0.0001
Net asset value, end of period $1.00
Total return+ 1.04%
Ratios to average net assets/Supplemental data:
Net assets, end of period (in 000's) $4,590
Ratio of operating expenses to average net assets 1.23%**
Ratio of net investment income to average net assets 3.86%**
<FN>
* The Fund began offering Class C shares on November 7, 1994.
** 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
NOTES TO FINANCIAL STATEMENT (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Income Funds (formerly known as 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 Premium Total
Return Fund, Smith Barney Convertible Fund, Smith Barney Global Bond Fund,
Smith Barney High Income Fund, Smith Barney Tax-Exempt Income Fund, Smith
Barney Exchange Reserve Fund (the "Fund"), Smith Barney Diversified
Strategic Income Fund and Smith Barney Utilities Fund. Effective November
6, 1992, existing shares of the Fund became known as Class B shares and on
November 7, 1994 the Fund began offering Class C shares. Shares of the
Fund may be acquired by the general public only through the exchange of
Class B or Class C shares of other Smith Barney Mutual Funds. Class B or
Class C shares of the Fund acquired through exchange are subject to the
contingent deferred sales charge ("CDSC"), if any, of the shares with
which the exchange is made, when those shares are redeemed. Eight years
after the date of their original purchase, Class B shares will be automat-
ically redeemed at net asset value and the redemption proceeds will be re-
invested, at net asset value, in Class A shares of Smith Barney Money
Funds Inc. -- Cash Portfolio. Both classes of shares have identical rights
and privileges, except with respect to the effect of the respective sales
charges, the distribution fees borne by each class, expenses allocable ex-
clusively 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: Securities are valued at amortized cost. Amortized
cost involves valuing a fund instrument at its cost initially and, there-
after, 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 or 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. 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.
Dividends and distributions to shareholders: Dividends from net invest-
ment income, if any, of the Fund are determined on a class level and will
be 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 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 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 4.00% nondeduct-
ible excise tax on certain undistributed amounts of ordinary income and
capital gains. Income distributions and capital gain distributions are de-
termined 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 se-
curities held by the Fund, timing differences and differing characteriza-
tion 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 compa-
nies, 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, formerly a division of Mutual
Management Corp., which has been transferred effective November 7, 1994 to
Smith Barney Mutual Funds Management Inc. ("SBMFM"). Mutual Management
Corp. and SBMFM are both wholly owned subsidiaries of Smith Barney Hold-
ings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of The Trav-
elers 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.
The Fund is also party to an administration agreement (the "Administration
Agreement") with SBMFM (formerly known as Smith, Barney Advisers, Inc.).
Under the Administration Agreement, the Fund pays a monthly fee at the
annual rate of 0.20% of the value of its average daily net assets.
The Fund and SBMFM entered into a sub-administration agreement (the "Sub-
Administration Agreement") with The Boston Company Advisors, Inc. ("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under the Sub-Administration Agreement, SBMFM pays Boston Ad-
visors a portion of its administration fee at a rate agreed upon from time
to time between SBMFM and Boston Advisors.
A CDSC is generally payable by a shareholder in connection with the re-
demption of certain Class B and Class C shares. In circumstances in which
the CDSC is imposed, the amount of the charge will vary depending on the
number of years since the date of purchase. For the period ended January
31, 1995, Smith Barney received from shareholders $763,852 and $1,113 in
CDSCs on the redemption of Class B and Class C shares, respectively.
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 $15,000 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.
The Fund has adopted a plan of distribution (the "Plan") under Rule 12b-1
of the 1940 Act. Under the Plan, the Fund compensates Smith Barney for ac-
tivities primarily intended to result in the sale of its Class B and Class
C shares. Smith Barney is paid an annual distribution fee with respect to
Class B and Class C shares of the Fund at the annual rate of 0.50% of the
value of the average daily net assets of each respective class of shares.
For the period ended January 31, 1995, the Fund incurred $494,017 and
$3,091 in distribution fees for Class B and Class C shares, respectively.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated between 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 distribution fees, class specific operating expenses include trans-
fer agent fees of $88,270 and $839 for Class B and Class C shares, respec-
tively.
5. 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. Because the
Fund has sold shares, issued shares as reinvestments of dividends and re-
deemed 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 shares of beneficial interest of the Fund which is divided into
two classes (Class B and Class C) were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
CLASS B SHARES: 1/31/95 7/31/94
<S> <C> <C>
Sold $220,975,633 $ 631,604,784
Issued as reinvestment of dividends 3,462,709 4,011,153
Redeemed (290,358,595)+ (549,680,752)
Net increase/(decrease) $(65,920,253) $ 85,935,185
</TABLE>
<TABLE>
<CAPTION>
PERIOD ENDED
CLASS C SHARES: 1/31/95*
<S> <C> <C>
Sold $10,449,591
Issued as reinvestment of dividends 20,948
Redeemed (5,880,375)
Net increase $4,590,164
<FN>
* The Fund began offering Class C shares on November 7, 1994.
+ Eight years after the date of their original purchase, shares of the
Fund will be automatically redeemed at net asset value and the redemp-
tion proceeds will be reinvested, at net asset value, in Class A shares
of Smith Barney Money Funds, Inc. -- Cash Portfolio. The first of these
conversions occurred on September 8, 1994, and 86,057,543 shares of the
Fund were converted.
</TABLE>
6. 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.
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
COUNSEL
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
EXCHANGE RESERVE 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
Jessica M. Bibliowicz
President
Phyllis M. Zahorodny
Vice President and
Investment Officer
Evelyn R. Robertson
Investment Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Christina T. Sydor
Secretary
This report is submitted for the general information of the shareholders
of Smith Barney Exchange Reserve Fund. It is not authorized for distribu-
tion to prospective investors unless accompanied or preceded by an effec-
tive Prospectus for the Fund, which contains information concerning the
Fund's investment policies, fees and expenses as well as other pertinent
information.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 26, 489
FD2176 C5
<PAGE>
--------------------
[PHOTO APPEARS HERE]
--------------------
SMITH BARNEY
SEMI- Premium
ANNUAL Total Return
REPORT Fund
....................
JANUARY 31, 1995
[LOGO OF SMITH BARNEY MUTUAL FUNDS APPEARS HERE]
<PAGE>
Premium Total Return Fund
Dear Shareholder:
For the six months ended January 31, 1995, Smith Barney Premium
Total Return Fund delivered total returns for Class A, Class B
and Class C shares of 1.58%, 1.32%, and 1.32%, respectively. The
Fund opened on July 31, 1994 at $15.69 and closed on January 31,
1995 at $15.29. Income distributions per share for the six
months ended January 31, 1995 were $0.64, $0.60, and $0.60 for
Class A, Class B and Class C shares, respectively. The Fund con-
tinues to be defensively postured with cash and cash equivalents
now exceeding 15% of net assets. Additionally, the Fund contin-
ues to employ Standard & Poor's index options to lower portfolio
volatility.
During the past six months, the Fund's performance was helped by
low exposure to both basic industry companies and energy compa-
nies as compared to the Standard & Poor's 500 Daily Price Index
of 500 Common Stocks ("S&P 500"). Both of these sectors per-
formed relatively poorly during the period. The Fund also benefited from good
stock selection in the financial services sector, where the Fund continues to
be overweighted. Appropriate stock selection in the public utilities sector
also benefited the Fund's total return during the six month period. However,
the Fund's low exposure to the technology and health care sectors coupled with
an overweight position in consumer durables had an adverse impact on its per-
formance. During the six month period, the health care sector was up over 24%
and the technology sector was up 15%, while the consumer durables sector was
down in excess of 10%. As a result, the S&P 500 outpaced the Fund with a total
return of 4.20%.
During the last six months, investor appetite for interest rate sensitive
stocks dissipated coincidentally with the increase in interest rates throughout
the period. Despite the recent decline of stock prices in the interest rate
sensitive sectors such as financial services and consumer durables, the Fund
continues to overweight stocks of fundamentally sound companies within these
sectors that sell at low valuations.
The health care and technology sectors were far and away the best performing
groups during the six months ended January 31, 1995. Stocks within these sec-
tors clearly benefited from the lack of investor enthusiasm for economically
sensitive stocks. In both the healthcare and technology groups, returns were
enhanced by the strong performance of a number of large capitalization "growth"
stocks which typically sell at premium price-to-earnings and price-to-book ra-
tios reflecting perceived superior growth prospects.
The market environment for stocks continues to look difficult with the contin-
ued prospect of further tightening of monetary policy by the Federal Reserve
and a market that trades at the high end of fair value based on dividend yield,
price-to-
1
<PAGE>
book and price-to-earnings ratios. Despite these potential negatives, we are
confident that the Fund is well positioned to meet its investment objectives
and that we will continue to implement our disciplined value style, focusing on
buying companies combining low valuations, sound business fundamentals and fa-
vorable business momentum.
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 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 Smith Barney Financial Consultant if you have any questions about your
investment.
/s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
and Investment Officer
March 20, 1995
2
<PAGE>
Smith Barney
Premium Total Return Fund
Financial Highlights
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
Industry Breakdown Percentage
<S> <C>
Consumer Services 19.2%
Banking & Financial Services 16.1%
Insurance 7.9%
Energy 6.2%
Health Care 4.8%
Consumer Durables 3.9%
Other Common Stocks 16.4%
Preferred Stocks 8.5%
Corporate Bonds 2.7%
Convertible Bonds
Convertible Bonds, Commercial Paper
Repurchase Agreements, Call Options
Written and Net Other Assets and
Liabilities 14.3%
</TABLE>
3
<PAGE>
Smith Barney
Premium Total Return Fund
Portfolio of Investments (unaudited) January 31, 1995
<TABLE>
<CAPTION>
Market Value
Shares (Note 1)
------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 74.5%
Consumer Services -- 19.2%
210,000 Alberto Culver Company, Class A $ 5,040,000
25,000 American Greetings Corporation, Class A 690,625
202,300 Bob Evans Farm Inc. 4,121,862
87,900 Brown Forman, Class B 2,680,950
111,300 Dean Foods Company 3,213,788
718,600 Dillard Department Stores Inc., Class A 18,863,250
200,000 Emerson Electric Company 12,600,000
514,000 Federated Department Stores Inc. 9,701,750
138,800 General Electric Company 7,148,200
456,500 Hormel (Geo A) & Company 11,469,562
315,700 King World Productions Inc.+ 10,852,187
133,300 Knight Ridder Inc. 6,931,600
1,186,900 Limited Inc. 20,028,938
204,000 Lilly (Eli) & Company 13,438,500
503,200 Loews Corporation 46,483,100
268,312 Luby's Cafeterias Inc. 6,037,020
732,600 May Department Stores Company 25,732,575
825,300 MCI Communications 15,164,888
100,000 Melville Corporation 3,075,000
202,700 Mercantile Stores Inc. 8,918,800
456,800 Nestle, S.A., Sponsored ADR 20,898,600
18,260 Nestle S.A., Sponsored ADR, Represents One Regular
Share,144A** 835,395
88,500 Nike Inc., Class B 6,283,500
150,000 Penney (J.C.) Company, Inc. 6,225,000
1,361,900 Philips NV+ 42,899,850
394,200 Pitney Bowes Inc. 12,170,925
793,000 Rite Aid Corporation 19,924,125
165,600 Sherwin Williams 5,547,600
230,800 United States Shoe Corporation 4,644,850
26,000 Venture Stores Inc. 318,500
192,700 V.F. Corporation 9,273,688
------------------------------------------------------------------------------
361,214,628
------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
Smith Barney
Premium Total Return Fund
Portfolio of Investments (unaudited) (continued) January 31, 1995
<TABLE>
<CAPTION>
Market Value
Shares (Note 1)
------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (continued)
Banking & Financial Services -- 16.1%
290,000 American Express Company $ 9,135,000
811,700 American General Corporation 24,046,613
775,412 Bank of Boston Corporation 21,711,536
355,005 Bear Stearns Companies, Inc. 5,901,958
522,500 Chase Manhattan Corporation 17,307,813
142,900 Federal Home Loan Mortgage Corporation 8,002,400
225,900 Federal National Mortgage Association 16,151,850
373,000 First Chicago Corporation 17,531,000
70,200 Fleet Financial Group, Inc. 2,202,525
113,100 Golden West Financial Corporation 4,184,700
323,800 Great Western Financial Corporation 5,666,500
143,700 JSB Financial, Inc. 3,736,200
630,700 Morgan (J.P.) & Company, Inc. 39,734,100
64,600 Morgan Stanley Group, Inc. 3,884,075
70,200 PHH Corporation 2,588,625
632,000 Pinnacle West Capital Corporation 13,114,000
656,000 PNC Bank Corporation 15,416,000
1,054,300 Republic of New York Corporation 50,211,037
227,900 SAFECO Corporation 12,021,725
102,200 Security-Connecticut Corporation 2,337,825
634,300 Student Loan Marketing Association 23,706,963
109,550 Torchmark Corporation 4,272,450
------------------------------------------------------------------------
302,864,895
------------------------------------------------------------------------
Insurance -- 7.9%
300,900 ACE Ltd. 7,409,663
139,400 Aetna Life & Casualty Company 6,900,300
182,100 Allmerica Property & Casualty Companies Inc. 3,573,712
108,600 Allstate Corporation 2,619,975
403,200 American International Group Inc. 41,983,200
350,450 Aon Corporation 11,521,044
156,000 CIGNA Corporation 10,549,500
200 Enhance Financial Services Group Inc. 3,500
231,100 EXEL Limited 9,070,675
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
Smith Barney
Premium Total Return Fund
Portfolio of Investments (unaudited) (continued) January 31, 1995
<TABLE>
<CAPTION>
Market Value
Shares (Note 1)
---------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (continued)
Insurance -- (continued)
74,000 Merchants Group Inc. $ 1,073,000
117,000 Mid Ocean Ltd.+ 3,276,000
83,300 MMI Companies Inc. 1,270,325
108,100 Paul Revere Corporation 1,837,700
350,600 Providian Corporation 12,008,050
522,500 St. Paul Companies Inc. 24,949,375
122,600 Transatlantic Holdings, Inc. 6,743,000
85,200 Trenwik Group Inc. 3,684,900
63,200 Western National Corporation 750,500
---------------------------------------------------------------------
149,224,419
---------------------------------------------------------------------
Energy -- 6.2%
117,700 Amoco Corporation 6,826,600
140,500 British Petroleum PLC, ADR 10,906,312
119,100 Brooklyn Gas Company 2,888,175
745,800 CMS Energy Corporation 17,526,300
125,500 Exxon Corporation 7,843,750
273,500 Mobil Corporation 23,623,562
467,800 Pacific Enterprises 10,642,450
531,000 Repsol S.A., Sponsored ADR 14,868,000
165,300 Royal Dutch Petroleum Company of New York 18,492,938
74,900 Tenneco Inc. 3,295,600
---------------------------------------------------------------------
116,913,687
---------------------------------------------------------------------
Health Care -- 4.8%
253,700 Abbott Labs 8,974,637
325,100 Bristol-Myers Squibb Company 19,993,650
706,700 Healthtrust--The Hospital Company+ 24,734,500
227,600 National Medical Enterprises Inc+ 3,328,650
263,200 Smithkline Beecham PLC, ADR 9,179,100
307,900 Warner-Lambert Company 24,016,200
---------------------------------------------------------------------
90,226,737
---------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
Smith Barney
Premium Total Return Fund
Portfolio of Investments (unaudited) (continued) January 31, 1995
<TABLE>
<CAPTION>
Market Value
Shares (Note 1)
------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (continued)
Consumer Durables -- 3.9%
262,800 Capco Automotive Products $ 2,693,700
23 Consorcio G Groupo Dina, Series L, ADR 80
350,000 Ford Motor Company 8,837,500
221,200 General Motors Corporation 8,571,500
485,400 Genuine Parts Company 17,777,775
39,050 Rayonier Inc. 1,122,687
46,800 Stanley Works 1,772,550
386,900 Volkswagen AG, Sponsored ADR 19,731,900
727,900 Volvo Aktie Bolget 13,648,125
------------------------------------------------------------------
74,155,817
------------------------------------------------------------------
Tobacco -- 3.6%
822,900 Philip Morris Companies Inc. 49,065,413
3,095,000 RJR Nabisco Holdings Corporation+ 18,183,125
------------------------------------------------------------------
67,248,538
------------------------------------------------------------------
Basic Industries -- 3.2%
517,700 Astra AB, Class A , ADR 13,136,637
300,000 Duke Power Company 12,112,500
300,000 Hanson PLC, ADR 5,512,500
618,400 Illinova Corporation 13,836,700
174,600 Lubrizol Corporation 5,892,750
77,400 McGraw-Hill Inc. 5,031,000
35,400 NCH Corporation 2,234,625
39,400 Temple-Inland Inc. 1,792,700
------------------------------------------------------------------
59,549,412
------------------------------------------------------------------
Technology -- 2.8%
138,200 Apple Computer Inc 5,579,825
87,100 Honeywell, Inc. 3,004,950
324,000 IBM Corporation 23,368,500
210,600 Martin Marietta Corporation 9,398,025
230,800 National Service Industries Inc. 5,971,950
141,000 Tandy Corporation 6,239,250
------------------------------------------------------------------
53,562,500
------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
Smith Barney
Premium Total Return Fund
Portfolio of Investments (unaudited) (continued) January 31, 1995
<TABLE>
<CAPTION>
Market Value
Shares (Note 1)
-----------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (continued)
Real Estate -- 2.4%
87,900 Associated Estates Realty Corporation $ 1,812,938
120,700 Avalon Properties Inc. 2,308,387
141,333 Camden Properties Trust 3,303,659
50,000 Carr Realty Corporation 900,000
60,000 Chateau Properties Inc. 1,252,500
335,000 Crown American Realty Trust 4,564,375
325,900 Equity Inns Inc. 3,462,688
242,200 General Growth Properties Inc. 4,995,375
149,600 Liberty Property Trust 2,954,600
285,000 Mid-America Apartment Communities 7,196,250
200,000 Prime Residential Inc. 3,075,000
154,800 Smith, Charles E., Residential Realty, Inc. 3,908,700
200,000 Storage Trust Realty 3,575,000
160,000 Summit Properties Inc. 2,720,000
-----------------------------------------------------------------------
46,029,472
-----------------------------------------------------------------------
Transportation -- 1.3%
850,200 Canadian Pacific Limited 11,583,975
68,900 Conrail 3,686,150
379,700 KLM Royal Dutch Airlines+ 10,204,438
-----------------------------------------------------------------------
25,474,563
-----------------------------------------------------------------------
Consumer Non-Durables -- 1.3%
325,000 American Brands, Inc. 12,350,000
99,084 Avon Products, Inc. 5,660,173
368,000 Liz Claiborne 6,118,000
-----------------------------------------------------------------------
24,128,173
-----------------------------------------------------------------------
Utilities -- 0.9%
300,000 Entergy Corporation 7,312,500
234,800 U.S. West, Inc. 9,186,550
-----------------------------------------------------------------------
16,499,050
-----------------------------------------------------------------------
Capital Goods -- 0.8%
200,000 Raytheon Company 13,350,000
-----------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Smith Barney
Premium Total Return Fund
Portfolio of Investments (unaudited) (continued) January 31, 1995
<TABLE>
<CAPTION>
Market Value
Shares (Note 1)
-------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (continued)
Shipping -- 0.1%
108,500 Alexander & Baldwin Inc. $ 2,332,750
-------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $1,305,496,228) 1,402,774,641
-------------------------------------------------------------------------------
PREFERRED STOCKS -- 8.5%
40,000 Bowater Inc., Depositary Shares, Pfd. Conv.,
Series B, Exch. 7.000% 1,010,000
1,900,000 Citicorp, Depositary Shares,
Represents 1/10 Share Pfd., Exch. 15.000% 37,050,000
5,500,000 Dime Savings Bank NV, Pfd, Exch. 10.50% 5,472,500
First Washington Realty Inc., Conv. Pfd., Series
200,000 A, 144A** 4,100,000
390,400 Ford Motor Company, Depositary Shares,
Represents 1/1000 Share Pfd., Series A, Exch.
$51.68 32,061,600
760,000 Glendale Federal Bank, Federal Savings Bank of
California,Conv. Pfd., Series E 20,425,000
200,000 Prime Retail Inc., Series A, Exch. 10.500% 4,100,000
76,700 Property Trust American, Pfd., Series A 1,725,750
71,800 Reynolds Metals Company, Pfd., Increased Dividend
Equity Securities, Conv. Pfd., Exch. 7.00% 3,518,200
304,767 Riggs National Corporation, Washington DC, Pfd.,
Series B, Exch. 10.75% 7,619,175
403,100 Sears Roebuck & Company, Depositary Shares,
Represents 1/4 Share Pfd., Series A 22,573,600
561,400 Tandy Corporation, Depositary Shares,
Represents 1/100 Share Pfd., Series C, Exch.
$30.87 19,719,175
-------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (Cost $147,034,575) 159,375,000
-------------------------------------------------------------------------------
<CAPTION>
Face Value
-------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- 2.7%
$ 7,000,000 Chevy Chase Savings Bank, Sub. Cap. Note,
9.250% due 12/1/05 6,125,000
Columbia Gas Systems Inc., Deb.
3,750,000 9.000% due 11/1/13 (in bankruptcy) 4,448,438
2,039,000 10.150% due 11/1/13 (in bankruptcy) 2,485,031
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Smith Barney
Premium Total Return Fund
Portfolio of Investments (unaudited) (continued) January 31, 1995
<TABLE>
<CAPTION>
Market Value
Face Value (Note 1)
--------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS -- (continued)
$ 8,500,000 Gentra Inc., Sub. Deb.,
11.800% due 5/29/98 $ 6,001,419
5,100,000 Lomas Mortgage USA Inc., Sr. Note,
9.750% due 10/1/97 4,704,750
13,225,000 MDC Holdings Inc., Sr. Note,
11.125% due 12/15/03 10,712,250
6,000,000 Pacific Concord Financial, Conv., 144A,
4.750% due 12/10/98** 3,645,000
3,000,000 Riviera Holdings Corporation, First Mortgage,
11.000% due 12/31/02 2,460,000
7,500,000 Saul, B.F. Real Estate Investment Trust,
11.625% due 4/1/02 6,581,250
3,000,000 WSFS Financial Corporation Inc., Sr. Note,
11.000% due 12/31/05 2,820,000
--------------------------------------------------------------------------------
TOTAL CORPORATE BONDS (Cost $56,108,347) 49,983,138
--------------------------------------------------------------------------------
CONVERTIBLE BONDS -- 0.1% (Cost $4,627,791)
5,952,000 Consorcio G Groupo Dina, 8.000% due 2/8/04 2,380,800
--------------------------------------------------------------------------------
COMMERCIAL PAPER -- 3.0% (Cost $56,955,000)
56,955,000 General Electric Capital Corporation,
5.800% due 2/1/95 56,955,000
--------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 13.2%
76,522,000 Agreement with Morgan Stanley & Company, 5.700% dated
1/31/95, to be repurchased at $76,534,116 on 2/1/95,
collateralized by:
$50,000,000 U.S. Treasury Note, 5.625%due 1/31/98
$31,965,000 U.S. Treasury Note, 5.125% due 3/31/98 76,522,000
86,306,000 Agreement with Salomon Brothers Inc, 5.750% dated
1/31/95, to be repurchased at $86,319,785 on 2/1/95,
collateralized by:
$50,000,000 U.S. Treasury Note, 5.125% due 3/31/98
$32,000,000 U.S. Treasury Note, 10.750% due 8/15/05 86,306,000
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Smith Barney
Premium Total Return Fund
Portfolio of Investments (unaudited) (continued) January 31, 1995
<TABLE>
<CAPTION>
Market Value
Face Value (Note 1)
----------------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENTS -- (continued)
$86,307,000 Agreement with
Union Bank of Switzerland, 5.750% dated 1/31/95,
to be repurchased at $86,320,785 on 2/1/95,
collateralized by:
$37,605,000 U.S. Treasury Note, 4.375% due 11/15/96
$31,980,000 U.S. Treasury Note, 4.625% due 2/29/96
$13,675,000 U.S. Treasury Note, 13.750% due 8/15/04 $ 86,307,000
----------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS (Cost $249,135,000)
249,135,000
----------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $1,819,356,941*) 102.0% $1,920,603,579
----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Number Market
of Expiration Strike Value
Contracts Month/Year Price (Note 1)
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALL OPTIONS WRITTEN -- (2.0)%
5,000 S & P 500 Index March 1995 $475.00 $ (2,937,500)
5,000 S & P 500 Index June 1995 $460.00 (11,375,000)
4,000 S & P 500 Index June 1995 $465.00 (7,575,000)
8,000 S & P 500 Index September 1995 $475.00 (16,600,000)
----------------------------------------------------------------------------------
TOTAL CALL OPTIONS WRITTEN
(Premiums received $50,187,265) (2.0) (38,487,500)
----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (Net) 0.0 (288,873)
----------------------------------------------------------------------------------
NET ASSETS 100.0% $1,881,827,206
----------------------------------------------------------------------------------
</TABLE>
* Aggregate cost for Federal tax purposes.
** 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 to qualified institutional buyers.
+ Non-income producing security.
See Notes to Financial Statements.
11
<PAGE>
Smith Barney
Premium Total Return Fund
Statement of Assets and Liabilities (unaudited) January 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $1,819,356,941) (Note 1)
See accompanying schedule:
Securities $1,671,468,579
Repurchase agreements 249,135,000 $1,920,603,579
--------------
Cash and foreign currency (cost $355,863) 338,058
Receivable for investment securities sold 8,918,536
Receivable for Fund shares sold 6,915,796
Dividends receivable 3,760,582
Interest receivable 1,024,038
---------------------------------------------------------------------------
Total Assets 1,941,560,589
---------------------------------------------------------------------------
LIABILITIES:
Call option written, at value (Premiums
received $50,187,265)(Note 1)
See accompanying schedule $ 38,487,500
Payable for investment securities purchased 17,859,451
Investment advisory fee payable (Note 2) 869,486
Payable for Fund shares redeemed 660,048
Distribution fee payable (Note 3) 604,711
Service fee payable (Note 3) 395,221
Administration fee payable (Note 2) 316,177
Transfer agent fees payable (Note 2) 217,436
Custodian fees payable (Note 2) 50,000
Accrued expenses and other payables 273,353
---------------------------------------------------------------------------
Total Liabilities 59,733,383
---------------------------------------------------------------------------
NET ASSETS $1,881,827,206
---------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Smith Barney
Premium Total Return Fund
Statement of Assets and Liabilities (unaudited) (continued)
January 31, 1995
<TABLE>
<S> <C> <C>
NET ASSETS consist of:
Distributions in excess of net investment income earned
to date $ (52,703,976)
Accumulated net realized gain on securities, written
options and foreign currencies 36,294,101
Net unrealized appreciation of securities, written
options transactions and foreign currency transactions 112,942,151
Par value 123,068
Paid-in capital in excess of par value 1,785,171,862
------------------------------------------------------------------------------
Total Net Assets $1,881,827,206
------------------------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($439,781,136 / 28,759,824 shares of beneficial interest
outstanding) $15.29
------------------------------------------------------------------------------
Maximum Offering Price per share ($15.29 / 0.95)
(based on sales charge of 5.00% of the offering price on
January 31, 1995) $16.09
------------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($1,436,059,978 / 93,916,830 shares of beneficial interest
outstanding) $15.29
------------------------------------------------------------------------------
CLASS C SHARES:
NET ASSET VALUE and offering price per share+
($5,986,092 / 391,496 shares of beneficial interest
outstanding) $15.29
------------------------------------------------------------------------------
</TABLE>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See Notes to Financial Statements.
13
<PAGE>
Smith Barney
Premium Total Return Fund
Statement of Operations (unaudited)
For the six months ended January 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of
$147,597) $ 25,554,051
Interest 11,042,859
------------------------------------------------------------------------------
Total Investment Income 36,596,910
------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) $5,070,141
Distribution fee (Note 3) 3,773,197
Service fee (Note 3) 2,304,612
Administration fee (Note 2) 1,843,688
Transfer agent fees (Notes 2 and 4) 1,121,937
Custodian fees (Note 2) 123,943
Legal and audit fees 40,913
Trustees' fees and expenses (Note 2) 5,395
Other 296,617
------------------------------------------------------------------------------
Total Expenses 14,580,443
------------------------------------------------------------------------------
NET INVESTMENT INCOME 22,016,467
------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(Notes 1 and 5):
Net realized gain/(loss) on:
Securities transactions 33,307,850
Written options 18,686,692
Foreign currencies (108,249)
------------------------------------------------------------------------------
Net realized gain on investments during the period 51,886,293
------------------------------------------------------------------------------
Net change in unrealized depreciation of:
Securities (45,293,600)
Written options (3,892,427)
Currencies and net other assets (3,609)
------------------------------------------------------------------------------
Net unrealized depreciation of investments during
the period (49,189,636)
------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
2,696,657
------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $
24,713,124
------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
Smith Barney
Premium Total Return Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months
Ended Year
1/31/95 Ended
(Unaudited) 7/31/94
<S> <C> <C>
Net investment income $ 22,016,467 $ 24,757,776
Net realized gain on investments sold, written
option transactions and foreign currency
transactions during
the period 51,886,293 61,129,346
Net unrealized appreciation/(depreciation) on
investments, written options, foreign
currency holdings and net other assets during
the period (49,189,636) 29,779,501
-------------------------------------------------------------------------------
Net increase in net assets resulting from
operations 24,713,124 115,666,623
Distributions to shareholders from net
investment income:
Class A (15,526,421) (930,452)
Class B (56,735,733) (22,018,429)
Class C (formerly Class D) (119,470) (6,325)
Distributions to shareholders in excess of net
investment income:
Class A -- (845,336)
Class B -- (21,078,335)
Class C (formerly Class D) -- (15,467)
Distributions to shareholders from net
realized gain on investments:
Class A -- (2,004,047)
Class B -- (51,798,627)
Class C (formerly Class D) -- (46,183)
Distributions from capital (tax basis):
Class A -- (743,880)
Class B -- (18,548,545)
Class C (formerly Class D) -- (13,610)
Net increase/(decrease) in net assets from
Fund share transactions (Note 6):
Class A 380,571,512 28,296,387
Class B (222,175,383) 468,756,798
Class C (formerly Class D) 4,129,151 1,529,301
-------------------------------------------------------------------------------
Net increase in net assets 114,856,780 496,199,873
NET ASSETS:
Beginning of period 1,766,970,426 1,270,770,553
-------------------------------------------------------------------------------
End of period (including distributions in
excess of net investment income of
$52,703,976 and $2,338,819, respectively) $1,881,827,206 $1,766,970,426
-------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Smith Barney
Premium Total Return Fund
Financial Highlights
For a Class A share outstanding throughout each period.
<TABLE>
<CAPTION>
Six Months Year Period
Ended Ended Ended
1/31/95+++ 7/31/94#+++ 7/31/93*+++
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 15.69 $ 15.65 $ 15.15
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.22 0.33 0.19
Net realized and unrealized gain on
investments 0.02 0.99 1.33
-------------------------------------------------------------------------------
Total from investment operations 0.24 1.32 1.52
-------------------------------------------------------------------------------
Distributions to shareholders:
Distributions from net investment
income (0.64) (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 (0.64) (1.28) (1.02)
-------------------------------------------------------------------------------
Net Asset Value, end of period $ 15.29 $ 15.69 $ 15.65
-------------------------------------------------------------------------------
Total return+ 1.58% 8.65% 10.31%
-------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of period (in 000's) $439,781 $67,699 $39,677
Ratio of operating expenses to average
net assets 1.19%** 1.19% 1.20%**
Ratio of net investment income to
average net assets 2.78%** 2.05% 1.64%**
Portfolio turnover rate 19% 34% 55%
-------------------------------------------------------------------------------
</TABLE>
* 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 net investment income 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-in-vestment adviser to the Fund.
See Notes to Financial Statements.
16
<PAGE>
(This page intentionally left blank)
17
<PAGE>
Smith Barney
Premium Total Return Fund
Financial Highlights
For a Class B share outstanding throughout each period.
<TABLE>
<CAPTION>
Six Months Year Year
Ended Ended Ended
1/31/95+++ 7/31/94#+++ 7/31/93+++
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 15.69 $ 15.65 $ 15.21
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.18 0.25 0.23
Net realized and unrealized
gain/(loss) on investments 0.02 1.00 1.47
-------------------------------------------------------------------------------
Total from investment operations 0.20 1.25 1.70
-------------------------------------------------------------------------------
Distributions to shareholders:
Distributions from net investment
income (0.60) (0.27) (0.16)
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) -- -- --
Distributions from capital++ (tax
basis) -- (0.20) (0.44)
-------------------------------------------------------------------------------
Total distributions (0.60) (1.21) (1.26)
-------------------------------------------------------------------------------
Net Asset Value, end of period $ 15.29 $ 15.69 $ 15.65
-------------------------------------------------------------------------------
Total return+ 1.32% 8.12% 11.68%
-------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of period (in 000's) $1,436,060 $1,697,394 $1,230,737
Ratio of operating expenses to average
net assets 1.67%** 1.66% 1.69%
Ratio of net investment income to
average net assets 2.30%** 1.58% 1.16%
Portfolio turnover rate 19% 34% 55%
-------------------------------------------------------------------------------
</TABLE>
* 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 net investment income 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-in-vestment adviser to the Fund.
See Notes to Financial Statements.
18
<PAGE>
Smith Barney
Premium Total Return Fund
<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>
$ 14.26 $ 13.30 $ 13.98 $ 12.90 $ 14.47 $ 14.52 $ 13.00
------------------------------------------------------------------------------
0.22 0.24 0.22 0.56 0.51 0.28 0.43
1.93 1.92 0.38 2.00 (0.62) 1.37 2.27
------------------------------------------------------------------------------
2.15 2.16 0.60 2.56 (0.11) 1.65 2.70
------------------------------------------------------------------------------
(0.22) (0.24) (0.22) (0.89) (0.18) (0.28) (0.42)
-- -- -- -- -- -- --
-- -- -- (0.26) (1.28) (1.42) (0.76)
-- -- -- -- -- -- --
(0.98) (0.96) (1.06) (0.33) -- -- --
-- -- -- -- -- -- --
------------------------------------------------------------------------------
(1.20) (1.20) (1.28) (1.48) (1.46) (1.70) (1.18)
------------------------------------------------------------------------------
$ 15.21 $ 14.26 $ 13.30 $ 13.98 $ 12.90 $ 14.47 $ 14.52
------------------------------------------------------------------------------
15.68% 17.53% 4.62% 21.49% 0.21% 12.07% 21.28%
------------------------------------------------------------------------------
$585,049 $470,381 $507,762 $599,849 $585,634 $960,898 $533,487
1.69% 1.75% 1.78% 1.75% 1.70% 1.74% 1.87%**
1.53% 1.84% 1.66% 4.17% 3.58% 1.97% 2.99%**
57% 43% 47% 41% 56% 294% 212%
------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
Smith Barney
Premium Total Return Fund
Financial Highlights
For a Class C share outstanding throughout each period.
<TABLE>
<CAPTION>
Six Months Year Period
Ended Ended Ended
1/31/95+++ 7/31/94#+++ 7/31/93*+++
(Unaudited)
<S> <C> <C> <C>
Net Asset Value, beginning of period $15.69 $15.65 $15.45
-------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.17 0.23 0.05
Net realized and unrealized gain on
investments 0.03 1.02 0.35
-------------------------------------------------------------------------------
Total from investment operations 0.20 1.25 0.40
-------------------------------------------------------------------------------
Distributions to shareholders:
Distributions from net investment income (0.60) (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 (0.60) (1.21) (0.20)
-------------------------------------------------------------------------------
Net Asset Value, end of period $15.29 $15.69 $15.65
-------------------------------------------------------------------------------
Total return+ 1.32% 8.12% 2.60%
-------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $5,986 $1,878 $ 357
Ratio of operating expenses to average
net assets 1.61%** 1.60% 1.31%**
Ratio of net investment income to average
net assets 2.36%** 1.65% 1.54%**
Portfolio turnover rate 19% 34% 55%
-------------------------------------------------------------------------------
</TABLE>
* The Fund commenced selling Class C shares (formerly Class D shares) on June
1, 1993.
** 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 net investment income 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-in-vestment adviser to the Fund.
See Notes to Financial Statements.
20
<PAGE>
Smith Barney
Premium Total Return Fund
Notes to Financial Statements (unaudited)
1. Significant Accounting Policies
Smith Barney Income Funds (formerly 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 in-
vestment funds: Smith Barney Premium Total Return Fund (the "Fund"), Smith
Barney Convertible Fund, Smith Barney Global Bond Fund, Smith Barney High In-
come Fund, Smith Barney Tax-Exempt Income Fund, Smith Barney Exchange Reserve
Fund, Smith Barney Diversified Strategic Income Fund and Smith Barney Utili-
ties Fund. Effective November 7, 1994, the Fund began offering Class Y shares
and continued to offer Class A, Class B and Class C shares (Class C shares
were previously designated "Class D" shares). As of January 31, 1995, no Class
Y shares had been sold. Class A shares are sold with a front-end sales charge.
Class B and Class C shares may be subject to a contingent deferred sales
charge ("CDSC") upon redemption. Class B shares will convert automatically to
Class A shares eight years after the date of original purchase. Class Y shares
are available to investors making an initial investment of at least $5 million
and are not subject to any sales charges, distribution or service fees. 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 securi-
ties, 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 domes-
tic 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 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.
21
<PAGE>
Smith Barney
Premium Total Return Fund
Notes to Financial Statements (unaudited) (continued)
Option accounting principles: Upon the purchase of a put option or a call op-
tion 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 pro-
ceeds 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 pre-
mium 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 clos-
ing 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 se-
curity 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 ex-
ercise.
The risk associated with purchasing options is limited to the premium origi-
nally 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 security or in-
dex 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 il-
liquid secondary market.
Repurchase agreements: The Fund may engage in repurchase agreement transac-
tions. Under the terms of a typical repurchase agreement, the Fund takes pos-
session 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
22
<PAGE>
Smith Barney
Premium Total Return Fund
Notes to Financial Statements (unaudited) (continued)
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 and administra-
tor, 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. dol-
lars. 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 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 re-
corded 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. Re-
alized 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. Invest-
ment 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 in-
come, 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
23
<PAGE>
Smith Barney
Premium Total Return Fund
Notes to Financial Statements (unaudited) (continued)
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 in-
come 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 4.00% nonde-
ductible 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 dif-
fer from generally accepted accounting principles. These differences are pri-
marily 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 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 dis-
tributing substantially all of its taxable income to its shareholders. There-
fore, 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 Smith Barney Strategy Advisers Inc. ("SBSA"), a wholly owned
subsidiary of Smith Barney Mutual Fund Management Inc. ("SBMFM"). SBMFM is a
wholly owned subsidiary of Smith Barney Holdings Inc., which in turn is a
wholly owned subsidiary of The Travelers Inc. Under the Advisory Agreement,
the Fund pays a monthly fee at the annual rate of 0.55% of the value of its
average daily net assets.
The Fund has entered into a sub-investment advisory agreement (the "Sub-
Advisory Agreement") with The Boston Company Advisors, Inc. ("Boston Advi-
sors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under the Sub-Advisory Agreement, SBSA pays Boston Advisors a
monthly fee at an annual rate of 0.275% of the value of the Fund's average
daily net assets.
The Fund is also party to an administration agreement (the "Administration
Agreement") with SBMFM. Under the agreement, the Fund pays a monthly fee at
the annual rate of 0.20% of the value of its average daily net assets.
24
<PAGE>
Smith Barney
Premium Total Return Fund
Notes to Financial Statements (unaudited) (continued)
The Fund and SBMFM have entered into a sub-administration agreement (the "Sub-
Administration Agreement") with Boston Advisors. Under the Sub-Administration
Agreement, SBMFM pays Boston Advisors a portion of its administration fee at a
rate agreed upon from time to time between SBMFM and Boston Advisors.
For the six months ended January 31, 1995, the Fund incurred total brokerage
commissions of $1,130,997, of which $321,526 was paid to Smith Barney.
For the six months ended January 31, 1995, Smith Barney received $280,373 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 certain Class A, Class B and Class C shares. In circumstances in which the
CDSC is imposed, the amount of the charge will vary depending on the number of
years since the date of purchase. For the six months ended January 31, 1995,
Smith Barney received from shareholders $75,586 and $199 in CDSCs on the re-
demption of Class B and Class C shares, respectively.
No officer, director or employee of Smith Barney or any of its affiliates re-
ceives 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 em-
ployee of Smith Barney or any of its affiliates $15,000 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 distribu-
tion agreement with the Trust, and sells shares of the Fund through Smith Bar-
ney or its affiliates.
25
<PAGE>
Smith Barney
Premium Total Return Fund
Notes to Financial Statements (unaudited) (continued)
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 C
shareholders and covers expenses incurred in distributing Class B and Class C
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class C 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 C shares at the annual rates of 0.50% and 0.45%, respectively, of
the value of the average daily net assets attributable to those classes. For
the six months ended January 31, 1995, the service fee for Class A, Class B
and Class C shares was $417,786, $1,883,131 and $3,695, respectively. For the
six months ended January 31, 1995, the distribution fee for Class B and Class
C shares was $3,766,262 and $6,935, 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 dis-
tribution fees, class specific operating expenses for the six months ended
January 31, 1995 include the transfer agent fees. For the six months ended
January 31, 1995, transfer agent fees for Class A, Class B and Class C shares
were $230,560, $889,980 and $1,397, respectively.
5. Securities Transactions
Cost of purchases and proceeds from sales of securities, excluding short-term
investments and U.S. government securities, aggregated $438,248,243 and
$294,836,137, respectively, for the six months ended January 31, 1995.
Option activity for the six months ended January 31, 1995 was as follows:
<TABLE>
<CAPTION>
Number of
Premiums Contracts
---------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at July 31, 1994 $ 31,985,942 16,000
Options written 50,187,265 22,000
Options cancelled in closing purchase transactions (31,985,942) (16,000)
---------------------------------------------------------------------------
Options outstanding at January 31, 1995 $ 50,187,265 22,000
---------------------------------------------------------------------------
</TABLE>
26
<PAGE>
Smith Barney
Premium Total Return Fund
Notes to Financial Statements (unaudited) (continued)
At January 31, 1995, the aggregate gross unrealized appreciation for all secu-
rities in which there is an excess of value over tax cost was $167,748,931 and
the aggregate gross unrealized depreciation for all securities in which there
is an excess of tax cost over value was $66,502,293.
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 Y) were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
1/31/95 7/31/94
Class A shares: Shares Amount Shares Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 25,320,688 $ 393,949,237 2,416,033 $ 38,376,582
Issued as reinvestment
of dividends 796,978 12,177,065 237,495 3,757,532
Redeemed (1,672,279) (25,554,790) (837,722) (13,837,727)
-------------------------------------------------------------------------------
Net increase 24,445,387 $ 380,571,512 1,779,806 $ 28,296,387
-------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Year Ended
1/31/95 7/31/94
Class B shares: Shares Amount Shares Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 13,142,453 $ 203,463,115 34,622,952 $549,526,346
Issued as reinvestment
of dividends 2,747,633 42,236,671 5,522,273 87,393,944
Redeemed (30,149,177) (467,875,169) (10,605,754) (168,163,492)
-------------------------------------------------------------------------------
Net increase/(decrease) (14,259,091) $(222,175,383) 29,539,471 $468,756,798
-------------------------------------------------------------------------------
<CAPTION>
Six Months Ended Year Ended
1/31/95 7/31/94
Class C shares: Shares Amount Shares Amount
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 273,559 $ 4,152,020 101,169 $ 1,602,910
Issued as reinvestment
of dividends 7,655 117,133 5,174 81,621
Redeemed (9,385) (140,002) (9,504) (155,230)
-------------------------------------------------------------------------------
Net increase 271,829 $ 4,129,151 96,839 $ 1,529,301
-------------------------------------------------------------------------------
</TABLE>
As of January 31, 1995, no Class Y shares have been sold.
27
<PAGE>
Smith Barney
Premium Total Return Fund
Notes to Financial Statements (unaudited) (continued)
7. Line of Credit
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Bank of America (formerly known as 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 25% of its net assets. How-
ever, pursuant to the Fund's prospectus, the Fund may only borrow up to 10% of
its total 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, 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 in-
cluding funds borrowed pursuant to the Agreement) to aggregate amount of in-
debtedness pursuant to the Agreement of no less than 5 to 1. During the six
months ended January 31, 1995, the Fund did not borrow under the Agreement.
28
<PAGE>
Premium [LOGO OF SMITH BARNEY
Total Return A MEMBER OF TRAVELERSGROUP
Fund APPEARS HERE]
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
Jessica M. Bibliowicz
President
This report is submitted for
Harry Rosenbluth the general information of the
Investment Administrator shareholders of Smith Barney
Premium Total Return Fund. It is
Patricia Zuch not authorized for distribution to
Investment Administrator prospective investors unless
accompanied or preceded by an
Lewis E. Daidone effective Prospectus for the Fund,
Senior Vice President which contains information
and Treasurer concerning the Fund's investment
policies, fees and expenses as well
Christina T. Sydor as other pertinent information.
Secretary
Smith Barney
Mutual Funds
388 Greenwich Street
New York, New York 10013
Fund 17 178 247, 451
[RECYCLED PAPER LOGO APPEARS HERE] FD 2169 C5
<PAGE>
GRAPHICS APPENDIX LIST
----------------------
EDGAR Version Typeset Version
------------- ---------------
Report Cover Small box above fund name showing a black and
white picture of Sundial clock with a sky shot
of earth in the background.
Pie Charts in Pie chart depicting the allocation of the
Shareholder Report Premium Total Return Fund investment
securities held at January 31, 1995 by
industry breakdown. The pie is broken in
pieces representing industry breakdown in the
following percentages:
SEMI-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
GLOBAL BOND FUND
JANUARY 31, 1995
DEAR SHAREHOLDER:
PERFORMANCE
We are pleased to provide the Semi-Annual Report for Smith Barney Global
Bond Fund. For the six months ended January 31, 1995, the Fund's total re-
turns for Class A, Class B and Class C shares were 3.26%, 2.97% and 2.97%,
respectively.
PORTFOLIO ACTIVITY
The Fund had minimal exposure to Emerging Markets in
recent months.
Portfolio duration currently stands at 3.7 years, reflecting our continu-
ing caution about the bond markets in the current environment. Our core
bond positioning is unchanged; we are predominantly invested in a broad
range of European government securities with maturities averaging 2 to 4
years. We think that yields have adjusted to acceptable levels in many of
the core European markets -- providing a generous degree of income for the
portfolio and protection from future official interest rate action.
Our management of foreign currency exposure has become more flexible to
maximize total return in a volatile U.S. dollar environment. This has sig-
nificantly helped the Fund's performance in the last two quarters.
The Fund's exposure to the more volatile peripheral European currencies
such as the Swedish Kroner, the Italian Lira, the Spanish Peseta has been
eliminated in favor of the core currency bloc, particularly the Deutsche-
mark.
As active currency management is a key component of the current portfolio
strategy, we expect to continue aggressively positioning between the dol-
lar and the Deutschemark as trends develop in the currency markets.
The Fund's top five individual bond holdings, based on market value, are:
Ireland 8 3/4% July 24, 1997 -- 6.6%
UK Treasury 7% August 1, 1997 -- 5.8%
Canada 7.5% July 1, 1997 -- 5.1%
France 7.5% November 12, 1999 -- 5.1%
Sweden 10 3/4% January 23, 1997 -- 5.0%
MARKET OUTLOOK OVER THE MONTHS AHEAD
Despite the ongoing Mexican Peso crisis and the fallout from the Orange
County debacle which would perhaps argue for an easier monetary stance,
the U.S. expansion continues at a pace which will keep the Federal Reserve
in a restrictive mode. Hence the recent half-percent further rise in offi-
cial interest rates. There is a growing consensus in the marketplace that
the Fed has recognized the latent inflationary pressures behind the expan-
sion and is willing to act decisively to counter this threat.
We feel caution is still warranted, however, as strong employment gains,
rising commodity prices and continuing above-trend growth are likely to
periodically unnerve bond investors. The recent fall in the unemployment
rate and the release of 4th Quarter GDP data showing economic activity ad-
vancing at a 4.7% annualized rate are good indicators of an economy that
is proving very resilient to tighter monetary conditions.
In Europe, a return to economic growth is now apparent in the core econo-
mies, although unemployment rates will stay high, acting as a partial
brake on future inflationary pressures. Despite indications that the Ger-
man money supply, a key determinant of that country's monetary policy, is
falling back into acceptable growth ranges, recent comments from the
Bundesbank suggest that some degree of monetary tightening is imminent,
with obvious implications for the rest of the continent. The most signifi-
cant threat to bond market performance in Europe remains the high level of
debt servicing necessary to fund government deficits. In light of this, we
expect the higher-yielding markets like Sweden, Italy, and Belgium to pro-
vide trading opportunities, but we still are not giving them high weight-
ing in our portfolios despite their high yields.
In Japan, the aftermath of the Kobe earthquake, a strong currency and a
relatively high unemployment rate suggest a continuing accommodative mone-
tary policy. We expect the yield curve to steepen in anticipation of in-
creased public spending through increased deficit financing. We remain un-
derweight regarding Japanese assets as the yield on Japanese bonds is too
low for our income objectives.
In the near-term, the outlook for the major currencies has been clouded by
recent events, in particular the Peso devaluation and the subsequent loss
of investor confidence in emerging market assets. The U.S. dollar has been
under pressure on concerns over the impact of the proposed U.S. loan guar-
antees for new Mexican borrowing. In addition, the implications of the
earthquake on Japanese investment flows have yet to be fully digested in
the marketplace. Looking further ahead, however, we believe the fundamen-
tal picture will reassert itself with currency trends dependent upon rela-
tive economic performance.
We thank you for your continued confidence and encourage you to contact us
or your Smith Barney Financial Consultant if you have any questions about
your investment.
Sincerely,
Heath B. McLendon Victor S. Filatov
Chairman of the Board Vice President and
Investment Officer
March 20, 1995
PORTFOLIO HIGHLIGHTS (UNAUDITED)
JANUARY 31, 1995
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
COUNTRY BREAKDOWN
Pie chart depicting the allocation of the Income Funds - Global Bond
Fund's investment securities held at January 31, 1995 by country classifi-
cation. The pie is broken in pieces representing countries in the follow-
ing percentages:
<TABLE>
<CAPTION>
COUNTRY PERCENTAGE
<S> <C>
French Franc 5.1%
Great Britain Pound Sterling Bonds 5.8%
Irish Punt Bond 6.6%
Canadian Dollar Bond 9.5%
United States Dollar Bonds 18.0%
Time Deposits, Commercial Paper, Repurchase
Agreement and Net Other Assets and Liabilities 28.9%
Other Bonds 11.4%
Danish Kroner Bond 4.7%
Spanish Preseta Bonds 5.0%
Swedish Krona Bonds 5.0%
</TABLE>
<TABLE>
TOP TEN HOLDINGS
<CAPTION>
PERCENTAGE OF
NET ASSETS
<S> <C>
GOVERNMENT OF CANADA 9.5%
GOVERNMENT OF IRELAND 6.6
UNITED KINGDOM CONVERSION 5.8
GOVERNMENT OF FRANCE 5.1
KINGDOM OF SWEDEN 5.0
KINGDOM OF SPAIN 5.0
KINGDOM OF DENMARK 4.7
UNITED STATES TREASURY BONDS 4.5
UNITED STATES TREASURY NOTES 4.5
KINGDOM OF BELGIUM 4.3
</TABLE>
PORTFOLIO OF INVESTMENTS (UNAUDITED)
JANUARY 31, 1995
KEY TO CURRENCY ABBREVIATIONS
BEF -- Belgium Franc FRF -- French Franc
CAD -- Canadian Dollar GBP -- Great Britain Pound Sterling
DEM -- German Marks IEP -- Irish Punt
DKK -- Danish Kroner JPY -- Japanese Yen
ESP -- Spanish Peseta NZD -- New Zealand Dollar
FIM -- Finnish Marrka SEK -- Swedish Krona
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<S> <C> <C>
UNITED STATES DOLLAR BONDS -- 18.0%
$ 3,000,000 Abbey National, $ 2,906,400
4.750% due 4/25/96
2,500,000 Gas Argentino, 1,937,500
7.250% due 12/7/98
3,000,000 International Bank for Recon- 3,122,850
struction & Development,
8.625% due 10/1/95
2,000,000 Republic of Portugal, 1,695,000
5.750% due 10/8/03
5,000,000 United States Treasury Bonds, 4,881,250
7.500% due 11/15/24
5,000,000 United States Treasury Notes, 4,817,344
6.500% due 4/30/99
TOTAL UNITED STATES DOLLAR 19,360,344
BONDS
(Cost $20,171,130)
CANADIAN DOLLAR BONDS -- 9.5%
CAD 8,000,000 Government of Canada, 5,495,122
7.500% due 7/1/97
8,000,000 Government of Canada, 4,728,756
6.500% due 6/1/04
TOTAL CANADIAN DOLLAR BONDS 10,223,878
(Cost $10,694,157)
IRISH PUNT BOND -- 6.6% (Cost $6,953,326)
IEP 4,500,000 Government of Ireland, 7,084,102
8.750% due 7/27/97
GREAT BRITAIN POUND STERLING BOND -- 5.8% (Cost $6,082,046)
GBP 4,000,000 United Kingdom Conversion, $ 6,183,666
7.000% due 8/6/97
FRENCH FRANC BOND -- 5.1% (Cost $5,503,325)
FRF 30,000,000 Government of France, BTAN 5,505,582
7.000% due 11/12/99
SWEDISH KRONA BOND -- 5.0% (Cost $5,240,667)
SEK 40,000,000 Kingdom of Sweden, 5,402,680
10.750% due 1/23/97
SPANISH PESETA BOND -- 5.0% (Cost $5,542,094)
ESP 700,000,000 Kingdom of Spain, 5,329,230
11.600% due 1/15/97
DANISH KRONER BOND -- 4.7% (Cost $4,994,076)
DKK 30,000,000 Kingdom of Denmark, 5,064,870
9.000% due 11/15/98
BELGIUM FRANC BOND -- 4.3% (Cost $4,507,861)
BEF 140,000,000 Kingdom of Belgium, 4,644,757
9.000% due 7/30/98
FINNISH MARRKA BOND -- 4.1% (Cost $4,034,993)
FIM 20,000,000 Republic of Finland, 4,405,070
11.000% due 6/15/97
JAPANESE YEN BONDS -- 3.0%
JPY 125,000,000 International Bank for Recon- 1,306,890
struction & Development,
5.250% due 3/20/02
175,000,000 Japan Development Bank, 1,953,734
6.500% due 9/20/01
TOTAL JAPANESE YEN BONDS 3,260,624
(Cost $3,158,383)
TIME DEPOSITS -- 14.6%
CREDIT LYONNAIS:
DEM 4,600,000 4.750% DUE 2/3/95 3,019,066
4,500,000 4.875% DUE 2/9/95 2,953,434
NATIONAL BANK OF AUSTRALIA:
DEM 4,500,000 4.688% DUE 2/2/95 2,953,434
NZD 10,600,000 8.063% DUE 2/3/95 6,770,749
TOTAL TIME DEPOSITS 15,696,683
(Cost $15,831,368)
COMMERCIAL PAPER -- 5.6% (Cost $5,950,000)
$ 5,950,000 G.E. Capital, $ 5,950,000
5.800% due 2/1/95
REPURCHASE AGREEMENT -- 8.5% (Cost $9,080,000)
9,080,000 Agreement with Salomon Broth- 9,080,000
ers Inc. 5.750% dated
1/31/95 to be repurchased at
$9,081,450 on 2/1/95, col-
lateralized by $7,568,000
U.S. Treasury Bond, 10.375%
due 11/15/12
TOTAL INVESTMENTS (Cost $107,743, 426*) 99.8% 107,191,486
OTHER ASSETS AND LIABILITIES (NET) 0.2 221,767
NET ASSETS 100.0% $107,413,253
<FN>
* Aggregate cost for Federal tax purposes.
</TABLE>
<TABLE> SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS
(UNAUDITED)
JANUARY 31, 1995
<CAPTION>
CONTRACT VALUE MARKET VALUE
DATE (NOTE 1)
<S> <C> <C>
FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
(Contract Amount $4,800,000)
7,310,640 German Deutschemarks 2/07/95 $ 4,798,110
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
148,867,778 Belgium Franc 2/23/95 $ (4,740,585)
14,258,072 Canadian Dollars 2/23/95 (10,106,503)
31,113,763 Danish Kroners 2/23/95 (5,176,432)
20,128,888 Finnish Marrka 2/23/95 (4,222,215)
42,002,932 French Francs 2/23/95 (7,950,300)
3,957,165 Great Britain Pounds Sterling 2/23/95 (6,257,565)
4,537,549 Irish Punts 2/23/95 (7,088,547)
773,934,723 Spanish Pesetas 2/23/95 (5,836,771)
40,085,155 Swedish Krona 2/23/95 (5,338,039)
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(Contract Amount $56,554,039) $ (56,716,957)
</TABLE>
See Notes to Financial Statements
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JANUARY 31, 1995
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost $107,743,426)
(Note 1)
See accompanying schedule $ 107,191,486
Cash and foreign currency (Cost $1,678,586) 1,695,066
Receivable for forward foreign exchange contracts
to sell 56,554,039
Forward foreign exchange contracts to buy, at
value (Contract cost $4,800,000) (Note 1) 4,798,110
Interest receivable 1,939,222
Receivable for Fund shares sold 7,993
Other assets 55,313
TOTAL ASSETS 172,241,229
LIABILITIES:
Forward foreign exchange contracts to sell, at
value (Contract cost $56,554,039) (Note 1)
See accompanying schedule $ 56,716,957
Payable for forward foreign exchange contracts to
buy 4,800,000
Payable for investment securities purchased 2,953,433
Payable for Fund shares redeemed 90,804
Custodian fees payable (Note 2) 30,000
Investment advisory fee payable (Note 2) 27,705
Service fee payable (Note 3) 23,088
Distribution fee payable (Note 3) 18,940
Administration fee payable (Note 2) 18,470
Transfer agent fees payable (Note 2) 17,747
Accrued Trustees' fees and expenses (Note 2) 2,000
Accrued expenses and other payables 128,832
TOTAL LIABILITIES 64,827,976
NET ASSETS $ 107,413,253
NET ASSETS CONSIST OF:
Distributions in excess of net investment income
earned to date $ (3,382,501)
Accumulated net realized loss on securities, for-
ward foreign exchange contracts and foreign cur-
rency transactions (2,379,148)
Net unrealized depreciation of securities, for-
ward foreign exchange contracts, foreign curren-
cies and net other assets (660,897)
Par value 7,080
Paid-in capital in excess of par value 113,828,719
TOTAL NET ASSETS $ 107,413,253
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($63,938,490 / 4,214,262 shares of beneficial
interest outstanding) $15.17
Maximum offering price per share ($15.17 / 0.955)
(based on sales charge of 4.50% of the offering
price on January 31, 1995) $15.88
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($43,438,457 / 2,863,081 shares of beneficial
interest outstanding) $15.17
CLASS C SHARES:
NET ASSET VALUE and offering price per share+
($36,306 / 2,394 shares of beneficial interest
outstanding) $15.17
<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 (UNAUDITED)
FOR THE SIX MONTHS ENDED JANUARY 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of
$2,686) $ 4,420,229
EXPENSES:
Investment advisory fee (Note 2) $ 346,832
Distribution fee (Note 3) 146,711
Service fee (Note 3) 144,460
Administration fee (Note 2) 115,611
Transfer agent fees (Notes 2 and 4) 86,281
Custodian fees (Note 2) 68,965
Registration and filing fees 53,551
Legal and audit fees 26,669
Trustees' fees and expenses (Note 2) 6,803
Other 41,355
Fees waived by investment adviser (Note 2) (173,416)
TOTAL EXPENSES 863,822
NET INVESTMENT INCOME 3,556,407
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain on:
Securities transactions 369,554
Forward foreign exchange contracts 261,179
Foreign currency transactions 42,282
Net realized gain on investments during the period 673,015
Net change in unrealized depreciation of:
Securities (366,001)
Forward foreign exchange contracts (298,751)
Foreign currencies and net other assets (45,692)
Net unrealized depreciation of investments during
the period (710,444)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(37,429)
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $
3,518,978
</TABLE>
See Notes to Financial Statements
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
1/31/95 7/31/94
(UNAUDITED)
<S> <C> <C>
Net investment income $ 3,556,407 $ 3,692,373
Net realized gain/(loss) on securities, forward
foreign exchange contracts and foreign currency
transactions during the period 673,015 (4,444,865)
Net unrealized depreciation of investments, for-
ward foreign exchange contracts, foreign cur-
rencies and net other assets during the period (710,444) (656,997)
Net increase/(decrease) in net assets resulting
from operations 3,518,978 (1,409,489)
Distributions to shareholders from net invest-
ment income:
Class A (1,972,950) (332,973)
Class B (1,447,969) (3,671,937)
Class C (formerly Class D shares) (1,165) (1,187)
Distributions in excess of net investment in-
come:
Class A -- (36,182)
Class B -- (399,001)
Class C (formerly Class D shares) -- (129)
Distributions to shareholders from net realized
gain on investments:
Class A -- (45,122)
Class B -- (1,361,030)
Class C (formerly Class D shares) -- (430)
Distributions from capital (tax basis):
Class A -- (9,784)
Class B -- (109,471)
Class C (formerly Class D shares) -- (36)
Net increase/(decrease) in net assets from Fund
share transactions (Note 6):
Class A 24,369,109 37,594,525
Class B (39,569,712) 23,454,235
Class C (formerly Class D shares) 8,105 7,322
Net increase/(decrease) in net assets (15,095,604) 53,679,311
NET ASSETS:
Beginning of period 122,508,857 68,829,546
End of period (including distributions in excess
of net investment income of $3,382,501 and
$3,516,824, respectively) $107,413,253 $122,508,857
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS YEAR PERIOD
ENDED ENDED ENDED
1/31/95++ 7/31/94#@ 7/31/93*++
(UNAUDITED)
<S> <C> <C> <C>
Net Asset Value, beginning of period $15.16 $16.53 $16.32
Income from investment operations:
Net investment income 0.50*** 0.84*** 0.61
Net realized and unrealized gain-
/(loss) on investments (0.01) (0.90) 0.60
Total from investment operations 0.49 (0.06) 1.21
Less distributions:
Distributions from net investment in-
come (0.48) (0.88) (0.88)
Distributions in excess of net invest-
ment income -- (0.10) (0.12)
Distributions from net realized gains -- (0.30) --
Distributions from capital -- (0.03) --
Total distributions (0.48) (1.31) (1.00)
Net Asset Value, end of period $15.17 $15.16 $16.53
Total return+ 3.26% (0.67)% 7.70%
Ratios to average net assets/supple-
mental data:
Net assets, end of period (in 000's) $63,939 $39,491 $2,389
Ratio of operating expenses to average
net assets 1.25%**+++ 1.58%+++ 1.71%**
Ratio of net investment income to av-
erage net assets 6.40%** 5.24% 5.37%**
Portfolio turnover rate 81% 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 six months ended January 31, 1995 and year ended July
31, 1994 were $0.48 and $0.82, respectively.
+ 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 per share data for the pe-
riod since the use of the undistributed net investment income method
does not accord with results of operations.
+++ Annualized expense ratio before waiver of fees by investment adviser
for the six months ended January 31, 1995 and year ended July 31, 1994
were 1.55% and 1.69%, respectively.
# As of March 21, 1994, the Fund changed its investment adviser from Le-
hman Brothers Global Asset Management Limited to its current invest-
ment adviser.
@ The calculated per share amounts do not reflect the actual results of
operations due to the timing of the merger. (Note 9)
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR
ENDED ENDED ENDED
1/31/95++ 7/31/94#@ 7/31/93++
(UNAUDITED)
<S> <C> <C> <C>
Net Asset Value, beginning of period $15.16 $16.53 $16.32
Income from investment operations:
Net investment income 0.44*** 0.25*** 0.79
Net realized and unrealized gain-
/(loss) on investments 0.01<F1> (0.41) 0.57
Total from investment operations 0.45 (0.16) 1.36
Less distributions:
Distributions from net investment in-
come (0.44) (0.80) (1.01)
Distributions in excess of net invest-
ment income -- (0.09) (0.14)
Distributions from net realized gains -- (0.30) --
Distributions from capital -- (0.02) --
Total distributions (0.44) (1.21) (1.15)
Net Asset Value, end of period $15.17 $15.16 $16.53
Total return+ 2.97% (1.19)% 8.67%
Ratios to average net assets/supple-
mental data:
Net assets, end of period (in 000's) $43,438 $82,989 $66,418
Ratio of operating expenses to average
net assets 1.73%**+++ 2.06%+++ 2.22%
Ratio of net investment income to av-
erage net assets 5.92%** 4.75% 4.85%
Portfolio turnover rate 81% 257% 216%
<FN>
* The Fund commenced operations on October 27,1986. The Fund commenced
selling Class A shares on November 6, 1992. 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 six months ended January 31, 1995, year ended July 31,
1994 and period ended July 31, 1987 were $0.42, $0.24 and $0.23, re-
spectively.
+ 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 net investment income method
does not accord with results of operations.
+++ Annualized expense ratio before waiver of fees by investment adviser
and/or sub-investment adviser and administrator and distributor for
the six months ended January 31, 1995, year ended July 31, 1994 and
period ended July 31, 1987 were 2.03%, 2.17% and 2.00%, respectively.
# 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. (Note 9)
(1) The amount shown may not accord with the change in aggregate gains
and losses of portfolio securities due to the timing of sales and the
redemptions of Fund shares.
</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*
<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 C SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS YEAR PERIOD
ENDED ENDED ENDED
1/31/95++ 7/31/94#@ 7/31/93*++
(UNAUDITED)
<S> <C> <C> <C>
Net Asset Value, beginning of period $15.16 $16.53 $15.98
Income from investment operations:
Net investment income 0.48*** 0.29*** 0.38
Net realized and unrealized gain-
/(loss) on investments (0.03) (0.45) 0.61
Total from investment operations 0.45 (0.16) 0.99
Less distributions:
Distributions from net investment in-
come (0.44) (0.80) (0.39)
Distributions in excess of net invest-
ment income -- (0.09) (0.05)
Distributions from net realized gains -- (0.30) --
Distributions from capital -- (0.02) --
Total distributions (0.44) (1.21) (0.44)
Net Asset Value, end of period $15.17 $15.16 $16.53
Total return+ 2.97% (1.19)% 6.19%
Ratios to average net assets/supple-
mental data:
Net assets, end of period (in 000's) $36 $28 $23
Ratio of operating expenses to average
net assets 1.75%**+++ 2.48%+++ 2.18%**
Ratio of net investment income to av-
erage net assets 5.90%** 4.34% 4.89%**
Portfolio turnover rate 81% 257% 216%
<FN>
* The Fund commenced selling Class C shares (previously designated as
Class D shares) on February 4, 1993.
** Annualized.
*** Net investment income per share before waiver of fees by investment
adviser for the six months ended January 31, 1995 and year ended July
31, 1994 were $0.45 and $0.29, respectively.
+ 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 net investment income method
does not accord with results of operations.
+++ Annualized expense ratio before waiver of fees by investment adviser
for the six months ended January 31, 1995 and year ended July 31, 1994
were 2.05% and 2.59%, respectively.
# 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. (Note 9)
</TABLE>
See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Income Funds (formerly 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 Invest-
ment Company Act of 1940, as amended (the "1940 Act"), as an open-end man-
agement investment company. As of the date of this report, the Trust of-
fered eight managed investment funds: Smith Barney Premium Total Return
Fund, Smith Barney Convertible Fund, Smith Barney Global Bond Fund (the
"Fund"), Smith Barney High Income Fund, Smith Barney Tax-Exempt Income
Fund, Smith Barney Exchange Reserve Fund, Smith Barney Diversified Strate-
gic Income Fund and Smith Barney Utilities Fund. Effective November 7,
1994, the Fund began offering Class Y shares and continued to offer Class
A, Class B and Class C shares (Class C shares were previously designated
"Class D" shares). As of January 31, 1995, no Class Y shares had been
sold. Class A shares are sold with a front-end sales charge. Class B and
Class C shares may be subject to a contingent deferred sales charge
("CDSC") upon redemption. Class B shares will convert automatically to
Class A shares eight years after the date of original purchase. Class Y
shares are available to investors making an initial investment of at least
$5 million and are not subject to any sales charges, distribution and ser-
vice fees. All classes of shares have identical rights and privileges ex-
cept with respect to the effect of the respective sales charges, the dis-
tribution and/or service fees borne by each class, expenses allocable ex-
clusively 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
received 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.
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 poten-
tial gain that 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.
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 capital
gains earned by the Fund will be made annually after the close of the fis-
cal year in which they are earned. Additional distributions of net invest-
ment 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
4.00% nondeductible excise tax on certain undistributed amounts of ordi-
nary income and capital gains. Income distributions and capital gain dis-
tributions on a Fund level 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 and tim-
ing 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
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Smith Barney Global Capital Management Inc. ("Global Cap-
ital Management"), a wholly owned subsidiary of 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 0.60% of the value of its average daily net assets.
The Fund is also party to an administration agreement (the "Administration
Agreement") with Smith Barney Mutual Funds Management Inc. ("SBMFM") (for-
merly known as Smith, Barney Advisers, Inc.). Under the Administration
Agreement, the Fund pays a monthly fee at the annual rate of 0.20% of the
value of its average daily net assets.
The Fund and SBMFM entered into a sub-administration agreement (the "Sub-
Administration Agreement") with Boston Advisors, an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Sub-
Administration Agreement, SBMFM pays Boston Advisors a portion of its ad-
ministration fee at a rate agreed upon from time to time between SBMFM and
Boston Advisors.
From time to time, the investment adviser may voluntarily waive a portion
or all of its fees otherwise payable to it. For the six months ended Janu-
ary 31, 1995, the investment adviser waived fees in the amount of
$173,416.
For the six months ended January 31, 1995, Smith Barney received $2,309
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 certain Class A, Class B and Class C shares. In circum-
stances in which the CDSC is imposed, the amount of the charge will vary
depending on the number of years since the date of purchase. For the six
months ended January 31, 1995, Smith Barney received from shareholders
$66,544 and $0 in CDSCs on the redemption of Class B and Class C shares,
respectively.
No officer, director or employee of Smith Barney or any of its affiliates
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 employee of Smith Barney or any of its affiliates $15,000 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 this Plan, the Fund compensates
Smith Barney for servicing shareholder accounts for Class A, Class B and
Class C shareholders and covers expenses incurred in distributing Class B
and Class C shares. Smith Barney is paid an annual service fee with respect
to Class A, Class B and Class C 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 C shares at the annual rate of 0.50% and 0.45%
of the value of the average daily net assets of each respective class of
shares. For the six months ended January 31, 1995, the service fee for
Class A, Class B and Class C shares was $71,102, $73,308 and $50, respect-
ively. For the six months ended January 31, 1995, the distribution fee
for Class B and Class C shares was $146,615 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 six months ended January 31, 1995, transfer
agent fees for Class A, Class B and Class C shares were $45,176, $41,069
and $36, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term investments and U.S. government securities, aggregated $58,986,054
and $78,319,690, respectively, for the six months ended January 31, 1995.
Cost of purchases of U.S. government securities, excluding short-term in-
vestments, aggregated $4,786,719. There were no proceeds from the sales of
U.S. government securities for the six months ended January 31, 1995.
At January 31, 1995, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$1,171,206, and the aggregate gross unrealized depreciation for all secu-
rities in which there was an excess of tax cost over value was $1,723,146.
Option activity for the six months ended January 31, 1995 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
PREMIUMS CONTRACTS
<S> <C> <C>
Options outstanding at July 31, 1994 0 0
Options written $289,800 105
Options exercised (289,800) (105)
Options outstanding at January 31, 1995 $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 four
classes (Class A, Class B, Class C and Class Y) were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 2,593,240 $39,308,775 1,468,604 $23,955,756
Issued as reinvestment of
dividends 83,347 1,263,814 21,704 342,846
Issued in exchange for shares
of Smith Barney Shearson
Short-Term World Income Fund
(Note 9) -- -- 2,480,481 37,703,310
Redeemed (1,067,106) (16,203,480) (1,510,560) (24,407,387)
Net increase 1,609,481 $24,369,109 2,460,229 $37,594,525
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 293,689 $4,448,286 1,827,392 $30,747,555
Issued as reinvestment of
dividends 82,824 1,254,575 285,115 4,614,096
Issued in exchange for shares
of Smith Barney Shearson
Short-Term World Income Fund
(Note 9) -- -- 1,108,398 16,836,575
Redeemed (2,987,406) (45,272,573) (1,766,032) (28,743,991)
Net increase/(decrease) (2,610,893) $(39,569,712) 1,454,873 $23,454,235
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS C SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 1,286 $19,364 536 $8,508
Issued as reinvestment of
dividends 77 1,165 110 1,783
Redeemed (815) (12,424) (182) 2,969
Net increase 548 $8,105 464 $7,322
</TABLE>
As of January 31, 1995, no Class Y shares had been sold.
7. 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 United States companies and the United States
government. These risks include revaluation of currencies and future ad-
verse 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 United
States companies and the United States government.
8. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Bank of America (formerly known as Continental Bank
N.A.) under an Amended and Restated Line of Credit Agreement (the "Agree-
ment") 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 securi-
ties. Under this Agreement, the Fund may borrow up to the lesser of $25
million or 25% of its net assets. However, pursuant to the Fund's prospec-
tus, the Fund may only borrow up to 10% of its total assets. Interest is
payable either at the bank's Money Market Rate or the London Interbank Of-
fered 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
six months ended January 31, 1995, the Fund did not borrow under the
Agreement.
9. 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 3,588,879 $54,539,885 $70,297,535
Short-Term World In-
come Fund
</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.
10. PROPOSED REORGANIZATION
On December 21, 1994, the Trust's Board of Trustees approved a proposed
reorganization pursuant to which all or substantially all of the assets of
the Fund would be acquired by Smith Barney World Funds, Inc. -- Global
Government Bond Portfolio. Subject to the approval of the Fund's share-
holders, the reorganization will take place on or about May 19, 1995.
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
COUNSEL
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services
Group, Inc.
Exchange Place
Boston, Massachusetts 02109
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 mutual fund with the same sales charge structure without incurring a
sales charge.*
SYSTEMATIC INVESTMENT PLAN
This program allows you to invest equal dollar amounts automatically on a
regular basis, monthly or quarterly.
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 INC.
388 GREENWICH STREET 37TH FLOOR
NEW YORK, NY 10013
* After written notification, exchange privilege may be modified or
terminated at any time.
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
Jessica M. Bibliowicz
President
Victor S. Filatov
Vice President and
Investment Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Christina T. Sydor
Secretary
This report is submitted for the general information of the shareholders
of Smith Barney 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
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 30, 202, 244, 457
FD2171 C5
<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME SHOWING
A BLACK AND WHITE PICTURE
OF A TOUCH-TONE PHONE,
A LIGHT BULB AND A CANDLE.
SEMI- SMITH BARNEY
ANNUAL UTILITIES
REPORT FUND
.......................................
JANUARY 31, 1995
[LOGO]
<PAGE>
Utilities Fund
DEAR SHAREHOLDER:
We are pleased to present the Semi-Annual Report and
unaudited financial statements for the six months ended
January 31, 1995 for Smith Barney Utilities Fund.
MARKET AND ECONOMIC OVERVIEW
In the six months since our last report, the electric utilities
industry continued to be influenced by rising interest rates, the
evolution to a more competitive environment and investor concerns
about earnings and dividend growth. The major factor affecting the
price of utilities stocks continued to be the yield of the long-term
(30-year) Treasury bond. The yield on the 30-year Treasury bond rose from a low
of 7.37% on August 4, 1994, to a high of 8.18% on November 4, 1994, and then
retraced its path to yield 7.70% on January 31, 1995. Utilities investors with
the patience to endure the unusual volatility of 1994 were rewarded with a
rally
in the price of electric utilities stocks. The rally in the bond market (which
resulted in these lower yields) was sparked by the slowing in the rate of
economic growth, and caused investment strategists to re-evaluate their
recommended portfolio allocation. Many strategists subsequently increased their
recommended bond weightings and reduced exposure to cyclical industries. In
addition, several utilities analysts raised their recommended
utilities industry
weightings. This shift by institutional investors from cyclical to more
defensive
sectors resulted in substantial outperformance by the utilities sector
when compared to the broad-based equity market indices.
We expect that the domestic economy will continue to grow during 1995 but at a
slower rate than experienced during the past year. The increase in short-term
rates engineered by the Federal Reserve already is beginning to slow both
retail
sales and inventory growth. However, the economy still appears to have momentum
and we expect the Federal Reserve to raise short-term interest rates again
during the first half of 1995. The level of long-term interest rates has
stabilized, indicating confidence in the abilities and policies of the Federal
Reserve to recognize and control inflation. As a result, we expect utilities
stocks to provide competitive total returns in 1995 with less volatility. It
appears that the substantial period of underperformance of utilities compared
with the major market indices has ended. If the equity market becomes more
volatile because of lower-than-expected corporate earnings, utilities
investments could outperform as the more defensive sectors attract investment
capital.
The evolution from a highly regulated to a more competitive utilities industry
will continue for several years with the goal of reducing the overall cost of
electricity and improving industry efficiency. We continue to recommend
utilities as part of a well-balanced, diversified investment strategy but
emphasize
careful stock selection and diversification. Utilities have faced many
problems in the past -- rising oil prices in the 1970s, while the 1980s
witnessed a major capacity expansion and the regulatory and financial problems
resulting from large
1
<PAGE>
nuclear plants -- and have survived because they provide an essential service
necessary for our country's continued growth. The challenge of the decade of
the
1990s will be one of increasing competition. It is important to note that not
all electric utilities companies will be impacted to the same degree by these
changes.
Those companies with lower imbedded cost structures will be in a better
position to compete for customers.
PORTFOLIO STRATEGY
Our portfolio strategy continues to focus on providing investors with a
combination
of current income and long-term growth. We place special emphasis on
attractive relative valuations, both in our stock and bond allocations and our
individual stock selection criteria. The Fund is currently 58% invested in
common stocks (47% electric and gas and 11% communications), 40% invested in
long-term
investment grade utilities bonds and 2% in cash and other investments.
During the past several months, we have continued to focus on companies with
positive earnings momentum and favorable corporate or regulatory events that
were not fully reflected in the price of the common stock. We have also
gradually increased our holdings in the natural gas sector, again focusing on
long-term valuations and taking advantage of recent price declines. Recent
portfolio additions include: Houston Industries Inc., Panhandle Eastern
Corporation, Coastal Corporation, Public Service Company of Colorado, SCE
Corporation, Pinnacle West Capital Corporation and American Electric Power
Company, Inc. We have sold or reduced our holdings in Dominion Resources, Inc.,
Public
Service Enterprise Group, Western Resources Inc. and Long Island Lighting
Company since we viewed these as overvalued relative to the electric utilities
sector. Our disciplined investment strategy includes earnings evaluations, risk
assessment and valuation and a careful analysis of corporate management
strategies to improve shareholder value.
We appreciate your continued confidence and support during the difficult market
environment of the past six months, and join you in looking forward to a better
investment environment in the months ahead. Should you have any questions about
your
investment in the Fund or how other Smith Barney mutual funds may be useful
in helping you reach your financial goals, please speak with your Smith Barney
Financial Consultant. We look forward to reporting to you in the Annual Report.
Sincerely,
Heath B. McLendon Jack S. Levande
CHAIRMAN OF THE BOARD VICE PRESIDENT
AND INVESTMENT OFFICER AND INVESTMENT OFFICER
MARCH 6, 1995
2
<PAGE>
Smith Barney
Utilities Fund
---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) JANUARY 31, 1995
PORTFOLIO BREAKDOWN
Pie
chart depicting the allocation of the Smith Barney Utilities Fund investment
securities held at January 31, 1995 by industry breakdown. The pie is broken in
pieces representing industry breakdown in the following percentages:
<TABLE>
<CAPTION>
INDUSTRY BREAKDOWN PERCENTAGE
<S> <C>
Common Stocks 58.4%
Repurchase Agreement and Net Other
Assets and Liabilities 2.0%
Corporate Bonds and Notes 39.6%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Company Net Assets
<S> <C>
------------------------------------------------------------------
TOP FIVE EQUITY HOLDINGS
SOUTHERN COMPANY 3.6%
TEXAS UTILITIES COMPANY 3.4
UNICOM CORPORATION 2.8
AMERICAN ELECTRIC POWER COMPANY, INC. 2.6
FPL GROUP INC. 2.1
................................................................................
TOP FIVE BOND HOLDINGS
PACIFIC GAS & ELECTRIC COMPANY 2.5%
COMMONWEALTH EDISON COMPANY 2.0
UTILCORP UNITED INC. 2.0
PENNSYLVANIA POWER & LIGHT COMPANY 1.5
ATLANTIC CITY ELECTRIC COMPANY 1.5
</TABLE>
3
<PAGE>
Smith Barney
Utilities Fund
---------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) JANUARY 31,
1995
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
<C> <S> <C>
------------------------------------------------------------------------------
COMMON STOCKS -- 58.4%
ELECTRIC & GAS -- 47.4%
1,300,000 American Electric Power Company, Inc. $ 45,500,000
425,000 Boston Edison Company 10,625,000
1,000,000 Central & SouthWest Corporation 24,375,000
1,200,000 CINergy Corporation 29,550,000
200,000 Coastal Corporation 5,400,000
750,000 Consolidated Edison Company of New York,
Inc. 21,187,500
1,000,000 Detroit Edison Company 28,000,000
1,000,000 DPL, Inc. 21,500,000
1,000,000 Entergy Corporation 24,375,000
1,000,000 FPL Group Inc. 36,625,000
1,200,000 General Public Utilities Corporation 33,900,000
445,000 Houston Industries Inc. 17,744,375
500,000 Long Island Lighting Company 8,250,000
400,000 MCN Corporation 7,050,000
700,000 New England Electric Systems 23,275,000
250,000 New York State Electric & Gas
Corporation 5,218,750
1,000,000 NIPSCO Industry Inc. 30,500,000
500,000 Northeast Utilities Company 11,937,500
350,000 Oklahoma Gas & Electric Company 12,337,500
1,200,000 Pacific Gas & Electric Company 30,300,000
1,000,000 PacifiCorp. 19,500,000
750,000 Panhandle Eastern Corporation 15,750,000
1,200,000 Peco Energy Company 32,100,000
750,000 Pinnacle West Capital Corporation 15,562,500
800,000 Public Service Company of Colorado 24,200,000
300,000 Public Service Company of New Mexico+ 4,162,500
1,200,000 Public Service Enterprise Group 34,650,000
500,000 San Diego Gas & Electric Company 10,500,000
500,000 SCANA Corporation 22,062,500
1,500,000 SCE Corporation 24,562,500
3,000,000 Southern Company 62,625,000
500,000 Tenneco Inc. 22,000,000
1,700,000 Texas Utilities Company 59,075,000
1,900,000 Unicom Corporation 49,400,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- (CONTINUED)
ELECTRIC & GAS -- (CONTINUED)
500,000 Westcoast Energy Inc. $ 7,312,500
------------------------------------------------------------------------------
831,113,125
------------------------------------------------------------------------------
COMMUNICATIONS -- 11.0%
500,000 Ameritech Corporation, New 21,937,500
600,000 AT&T Corporation 29,925,000
600,000 BellSouth Corporation 35,550,000
700,000 GTE Corporation 23,712,500
750,000 NYNEX Corporation 29,625,000
700,000 Pacific Telesis Group 21,437,500
800,000 U.S. West, Inc. 31,300,000
------------------------------------------------------------------------------
193,487,500
------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,025,137,908) 1,024,600,625
------------------------------------------------------------------------------
<CAPTION>
FACE VALUE
<C> <S> <C>
------------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 39.6%
ELECTRIC & GAS -- 38.9%
$ 3,000,000 Arizona Public Service Company, First
Mortgage,
7.250% due 8/1/23 2,505,000
5,000,000 Arkansas Power & Light Company, First
Mortgage,
8.700% due 11/1/22 5,156,250
Atlantic City Electric Company, First
Mortgage:
16,000,000 7.000% due 9/1/23 13,380,000
15,000,000 7.000% due 8/1/28 12,450,000
5,000,000 Boston Edison Company, Debenture,
9.875% due 6/1/20 5,331,250
Carolina Power & Light Company, First
Mortgage:
11,950,000 8.625% due 9/15/21 12,233,812
10,000,000 8.200% due 7/1/22 9,687,500
2,000,000 Central Illinois Light Company, First
Mortgage,
8.200% due 1/15/22 1,920,000
10,700,000 Central Illinois Public Service Company,
8.500% due 5/15/22 11,034,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
ELECTRIC & GAS -- (CONTINUED)
$ 4,000,000 Central Power & Light Company,
Debenture,
7.500% due 4/1/23 $ 3,545,000
Cincinnati Gas & Electric Company, First
Mortgage:
2,800,000 8.500% due 9/1/22 2,768,500
2,700,000 7.200% due 10/1/23 2,322,000
3,000,000 Cleveland Electric Illuminating Company,
First Mortgage,
9.000% due 7/1/23 2,553,750
3,500,000 Columbus Southern Power,
8.700% due 7/1/22 3,412,500
Commonwealth Edison Company, First
Mortgage:
5,100,000 7.625% due 4/15/13 4,507,125
7,000,000 9.875% due 6/15/20 7,402,500
14,250,000 8.375% due 9/15/22 13,270,313
10,850,000 7.750% due 7/15/23 9,453,062
Duquesne Light Company:
12,000,000 7.550% due 6/15/25 10,500,000
First Mortgage:
2,500,000 8.750% due 5/15/22 2,478,125
3,000,000 7.625% due 4/15/23 2,640,000
5,500,000 8.375% due 5/15/24 5,238,750
10,000,000 Florida Power Corporation, First
Mortgage,
8.625% due 11/1/21 10,050,000
15,100,000 Houston Lighting & Power Company, First
Mortgage,
9.150% due 3/15/21 16,157,000
Hydro-Quebec, Debenture:
20,000,000 8.250% due 1/15/27 18,550,000
5,000,000 8.625% due 6/15/29 4,831,250
11,800,000 Idaho Power Company, First Mortgage,
8.750% due 3/15/27 11,991,750
Illinois Power Company:
8,000,000 7.500% due 7/15/25 6,980,000
5,200,000 First Mortgage,
8.750% due 7/1/21 5,284,500
10,500,000 Interstate Power Company, First
Mortgage,
8.625% due 9/15/21 10,355,625
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
ELECTRIC & GAS -- (CONTINUED)
$12,400,000 Iowa Electric Light & Power Company,
Collateral Trust Bonds,
7.000% due 10/1/23 $ 10,354,000
Iowa Illinois Gas & Electric Company,
First Mortgage:
3,500,000 7.450% due 3/15/23 3,119,375
8,500,000 6.950% due 10/15/25 7,097,500
20,000,000 Jersey Central Power & Light Company,
First Mortgage,
6.750% due 11/1/25 16,100,000
15,500,000 Kentucky Utilities Company, First
Mortgage,
8.550% due 5/15/27 15,383,750
Long Island Lighting Company:
11,000,000 Debenture,
9.000% due 11/1/22 9,418,750
8,000,000 General & Refundable Mortgage,
9.625% due 7/1/24 7,480,000
10,000,000 Madison Gas & Electric Company, First
Mortgage,
7.700% due 2/15/28 8,987,500
2,000,000 Midwest Power System Inc., First
Mortgage,
8.000% due 2/15/22 1,885,000
13,000,000 Mississippi Power & Light Company, First
Refundable Mortgage,
8.650% due 1/15/23 12,593,750
5,500,000 Monongahela Power Company, First
Mortgage,
8.625% due 11/1/21 5,486,250
3,000,000 Montana Power Company, First Mortgage,
8.950% due 2/1/22 3,033,750
2,000,000 Narragansett Electric Company, First
Mortgage,
9.125% due 5/1/21 2,075,000
3,000,000 Nevada Power & Light Company, First
Mortgage,
8.500% due 1/1/23 2,835,000
18,450,000 New Orleans Public Service Inc., First
Mortgage,
8.000% due 3/1/23 16,812,563
New York State Electric & Gas
Corporation, First Mortgage:
11,750,000 8.300% due 12/15/22 11,147,812
2,250,000 7.450% due 7/15/23 1,965,938
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
ELECTRIC & GAS -- (CONTINUED)
Niagara Mohawk Power Corporation, First
Mortgage:
$ 5,000,000 8.750% due 4/1/22 $ 4,637,500
5,275,000 7.875% due 4/1/24 4,431,000
1,940,000 Northern States Power Company,
Wisconsin, First Mortgage,
9.125% due 4/1/21 2,066,100
14,000,000 Oklahoma Gas & Electric Company, First
Mortgage,
8.875% due 12/1/20 14,262,500
10,000,000 Old Dominion Electric Company, First
Mortgage,
7.780% due 12/1/23 9,150,000
Pacific Gas & Electric Company, First
and Refundable Mortgage:
14,250,000 6.750% due 10/1/23 11,524,688
13,500,000 7.050% due 3/1/24 11,441,250
4,000,000 8.800% due 5/1/24 4,120,000
19,000,000 7.250% due 3/1/26 16,245,000
Pennsylvania Power & Light Company,
First Mortgage:
14,000,000 9.375% due 7/1/21 14,735,000
7,500,000 8.500% due 5/1/22 7,415,625
5,000,000 7.875% due 2/1/23 4,662,500
10,000,000 Philadelphia Electric Company, First and
Refundable Mortgage,
7.750% due 5/1/23 9,000,000
6,000,000 Portland General Electric Company, First
Mortgage,
7.750% due 4/15/23 5,400,000
Potomac Edison Company, First Mortgage:
5,000,000 7.750% due 2/1/23 4,631,250
5,000,000 8.500% due 5/15/27 4,931,250
17,000,000 Public Service Company of Colorado,
First Mortgage,
8.750% due 3/1/22 17,106,250
6,700,000 Public Service Company of Oklahoma,
First Mortgage,
7.375% due 4/1/23 5,879,250
Public Service Electric & Gas Company:
7,192,000 First and Refundable Mortgage,
8.750% due 2/1/22 7,209,980
7,000,000 Series C,
9.250% due 6/1/21 7,446,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
------------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
ELECTRIC & GAS -- (CONTINUED)
$ 3,000,000 Rochester Gas & Electric Company, First
Mortgage, Series P,
9.375% due 4/1/21 $ 3,082,500
12,500,000 San Diego Gas & Electric Company, First
Mortgage,
8.500% due 4/1/22 12,359,375
9,000,000 South Carolina Electric & Gas Company,
First Mortgage,
7.625% due 6/1/23 8,066,250
15,000,000 Southwestern Electric Power Company,
First Mortgage,
6.875% due 10/1/25 12,318,750
22,500,000 Tampa Electric Company, First Mortgage,
7.750% due 11/1/22 20,784,375
Texas Utilities Electric Company, First
Mortgage:
7,000,000 9.750% due 5/1/21 7,402,500
12,000,000 7.875% due 3/1/23 10,890,000
5,000,000 7.875% due 4/1/24 4,537,500
Utilcorp United Inc., Sr. Notes:
23,000,000 9.000% due 11/15/21 22,798,750
13,000,000 8.000% due 3/1/23 11,586,250
5,000,000 Virginia Electric & Power Company, First
and Refundable Mortgage, Series A,
8.750% due 4/1/21 5,087,500
14,000,000 Western Pennsylvania Power Company,
First Mortgage,
Series EE,
7.875% due 9/1/22 12,967,500
4,500,000 Western Resources, First Mortgage,
8.500% due 7/1/22 4,455,000
5,000,000 Wisconsin Electric Power, First
Mortgage,
7.700% due 12/15/27 4,593,750
3,700,000 Wisconsin Power & Light Company, First
Mortgage,
8.600% due 3/15/27 3,769,375
6,900,000 Wisconsin Public Service Corporation,
First Mortgage,
8.800% due 9/1/21 7,167,375
------------------------------------------------------------------------------
681,928,018
------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<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 $ 5,012,500
5,000,000 7.830% due 5/1/23 4,512,500
------------------------------------------------------------------------------
9,525,000
------------------------------------------------------------------------------
OTHER -- 0.2%
3,000,000 Selkirk Cogen Funding Corporation, First
Mortgage,
8.980% due 6/26/12 2,970,000
------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost $739,610,638) 694,423,018
------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.2% (COST $3,005,000)
3,005,000 Repurchase agreement with Citibank New
York, 5.800% dated 1/31/95, to be
repurchased at $3,005,484 on 2/1/95,
collateralized by $3,050,484 U.S.
Treasury Notes, 7.750% due 1/31/00 3,005,000
------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $1,767,753,546*) 98.2% 1,722,028,643
OTHER ASSETS AND LIABILITIES (NET) 1.8 31,520,096
------------------------------------------------------------------------------
NET ASSETS 100.0% $1,753,548,739
------------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
Utilities Fund
---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JANUARY 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$1,767,753,546) (Note 1)
See accompanying schedule $ 1,722,028,643
Receivable for investment securities
sold 29,765,181
Interest receivable 15,819,695
Dividends receivable 6,838,735
Receivable for Fund shares sold 4,438,855
------------------------------------------------------------------------
TOTAL ASSETS 1,778,891,109
------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities
purchased $20,555,889
Payable for Fund shares redeemed 1,269,875
Dividends payable 1,206,398
Investment advisory fee payable (Note
2) 649,452
Distribution fee payable (Note 3) 645,430
Service fee payable (Note 3) 358,449
Administration fee payable (Note 2) 288,645
Transfer agent fees payable (Note 2) 185,090
Custodian fees payable (Note 2) 30,000
Due to custodian 14,441
Accrued expenses and other payables 138,701
------------------------------------------------------------------------
TOTAL LIABILITIES 25,342,370
------------------------------------------------------------------------
NET ASSETS $ 1,753,548,739
------------------------------------------------------------------------
NET ASSETS consist of:
Distributions in excess of net
investment income earned to date $ (5,563,725)
Accumulated net realized loss on
investments sold (15,756,607)
Unrealized depreciation of investments (45,724,903)
Par value 131,305
Paid-in capital in excess of par value 1,820,462,669
------------------------------------------------------------------------
TOTAL NET ASSETS $ 1,753,548,739
------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (CONTINUED)
------------------------------------------------------- JANUARY 31, 1995
<TABLE>
<S> <C>
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price
per share
($173,473,316 DIVIDED BY 12,989,754
shares of beneficial interest
outstanding) $13.35
-----------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE
($13.35 DIVIDED BY 0.95)
(based on sales charge of 5.00% of the
offering price on January 31, 1995) $14.05
-----------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per
share+
($1,565,613,906 DIVIDED BY
117,232,151 shares of beneficial
interest outstanding) $13.35
-----------------------------------------------------------
CLASS C SHARES:
NET ASSET VALUE and offering price per
share+
($2,868,806 DIVIDED BY 214,823 shares
of beneficial interest outstanding) $13.35
-----------------------------------------------------------
CLASS Z SHARES:
NET ASSET VALUE, offering and
redemption price per share
($11,592,711 DIVIDED BY 868,057
shares of beneficial interest
outstanding) $13.35
-----------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
Utilities Fund
---------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
-------------------------------------------------------------
FOR THE SIX MONTHS ENDED JANUARY 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of
$39,865) $ 34,259,129
Interest 30,466,344
-------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 64,725,473
-------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $4,019,205
Investment advisory fee (Note 2) 3,928,172
Service fee (Note 3) 2,168,901
Administration fee (Note 2) 1,745,854
Transfer agent fees (Notes 2 and 4) 1,094,830
Custodian fees (Note 2) 93,594
Trustees' fees and expenses (Note 2) 6,895
Other 107,427
-------------------------------------------------------------------------------
TOTAL EXPENSES 13,164,878
-------------------------------------------------------------------------------
NET INVESTMENT INCOME 51,560,595
-------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND
5):
Net realized loss on investments sold during the
period (26,688,485)
Net unrealized appreciation of investments
during the period 36,175,137
-------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
9,486,652
-------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $
61,047,247
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
Utilities Fund
---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
1/31/95 ENDED
(UNAUDITED) 7/31/94
<S> <C> <C>
Net investment income $ 51,560,595 $ 123,112,775
Net realized gain/(loss) on investments sold during the
period (26,688,485) 51,444,413
Net unrealized appreciation/(depreciation) of
investments during the period 36,175,137 (410,755,069)
-------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
operations 61,047,247 (236,197,881)
Distributions to shareholders from net investment
income:
Class A (4,249,761) (3,496,920)
Class B (49,767,707) (115,814,975)
Class C (formerly Class D shares) (72,201) (54,545)
Class Z (formerly Class C shares) (369,055) (1,106,602)
Distributions in excess of net investment income:
Class A -- (131,143)
Class B -- (4,418,049)
Class C (formerly Class D shares) -- (2,239)
Class Z (formerly Class C shares) -- (41,285)
Distributions to shareholders from net realized gain on
investments:
Class A -- (1,710,735)
Class B -- (80,281,991)
Class C (formerly Class D shares) -- (32,306)
Class Z (formerly Class C shares) -- (709,605)
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A 125,212,757 (3,077,993)
Class B (256,593,055) (512,787,025)
Class C (formerly Class D shares) 926,086 1,863,341
Class Z (formerly Class C shares) 144,870 (6,947,831)
-------------------------------------------------------------------------------------
Net decrease in net assets (123,720,819) (964,947,784)
NET ASSETS:
Beginning of period 1,877,269,558 2,842,217,342
-------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of $5,563,725 and $2,665,596,
respectively) $1,753,548,739 $1,877,269,558
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney
Utilities Fund
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
1/31/95** ENDED ENDED
(UNAUDITED) 7/31/94 7/31/93*
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 13.28 $ 15.97 $ 14.36
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.39 0.56 0.66
Net realized and unrealized gain/(loss) on
investments 0.11 (1.92) 1.72
-------------------------------------------------------------------------------------
Total from investment operations 0.50 (1.36) 2.38
Less distributions:
Distributions from net investment income (0.43) (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 (0.43) (1.33) (0.77)
-------------------------------------------------------------------------------------
Net Asset Value, end of period $ 13.35 $ 13.28 $ 15.97
-------------------------------------------------------------------------------------
Total return++ 3.92% (8.99)% 17.01%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (000's) $173,473 $41,458 $53,856
Ratio of operating expenses to average net assets 1.15%+ 1.07% 1.07%+
Ratio of net investment income to average net
assets 6.26%+ 5.54% 5.67%+
Portfolio turnover rate 14% 28% 37%
-------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on November 6, 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 use of the undistributed net investment income method does not accord
with the results of operations for all classes of 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.
15
<PAGE>
Smith Barney
Utilities Fund
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
1/31/95** ENDED
(UNAUDITED) 7/31/94
<S> <C> <C>
Net Asset Value, beginning of period $ 13.28 $ 15.97
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.37 0.75
Net realized and unrealized gain/(loss) on
investments 0.10 (2.19)
-------------------------------------------------------------------------------------
Total from investment operations 0.47 (1.44)
Less distributions:
Distributions from net investment income (0.40) (0.72)
Distributions in excess of net investment income -- (0.03)
Distributions from net realized capital gains -- (0.50)
Distributions from capital (Note 1) -- --
-------------------------------------------------------------------------------------
Total distributions (0.40) (1.25)
-------------------------------------------------------------------------------------
Net Asset Value, end of period $ 13.35 $ 13.28
-------------------------------------------------------------------------------------
Total return++ 3.65% (9.52)%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 1,565,614 $ 1,822,546
Ratio of operating expenses to average net assets 1.54%+ 1.54%
Ratio of net investment income to average net assets 5.87%+ 5.07%
Portfolio turnover rate 14% 28%
-------------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on March 28, 1988. Those shares in existence
prior to November 6, 1992 were designated Class B shares.
** 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 net investment income method does not accord
with the results of operations for all classes of shares.
+ 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.
16
<PAGE>
Smith Barney
Utilities Fund
------------------------------------------
<TABLE>
<CAPTION>
YEAR PERIOD YEAR YEAR YEAR
PERIOD
ENDED ENDED ENDED ENDED ENDED
ENDED
7/31/93 7/31/92# 2/28/92 2/28/91 2/28/90
2/28/89*
<S> <C> <C> <C> <C> <C>
$ 14.83 $ 13.95 $ 13.21 $ 12.93 $ 12.09 $
12.00
-------------------------------------------------------------------------------------
0.79 0.35 0.82 0.88 0.87 0.64
1.30 0.89 0.94 0.40 1.08 0.17
-------------------------------------------------------------------------------------
2.09 1.24 1.76 1.28 1.95 0.81
(0.79) (0.35) (0.84) (0.90) (0.90) (0.57)
(0.01) -- -- -- -- --
(0.15) -- (0.15) (0.10) (0.21) (0.15)
-- (0.01) (0.03) -- -- --
-------------------------------------------------------------------------------------
(0.95) (0.36) (1.02) (1.00) (1.11) (0.72)
-------------------------------------------------------------------------------------
$ 15.97 $ 14.83 $ 13.95 $ 13.21 $ 12.93 $
12.09
-------------------------------------------------------------------------------------
14.69% 8.98% 13.63% 10.46% 16.34%
6.80%
-------------------------------------------------------------------------------------
$ 2,765,858 $ 1,721,312 $ 1,274,853 $ 707,272 $ 603,739
$ 416,320
1.56% 1.57%+ 1.58% 1.65% 1.70%
1.77%+
5.17% 5.78%+ 6.04% 6.89% 6.83%
6.99%+
37% 10% 33% 31% 50% 46%
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney
Utilities Fund
--------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
1/31/95** ENDED ENDED
(UNAUDITED) 7/31/94 7/31/93*
<S> <C> <C> <C>
Net Asset Value, beginning of period $13.28 $15.97 $15.17
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income/(loss) 0.33 0.76 0.35
Net realized and unrealized gain/(loss) on
investments 0.14 (2.20) 0.86
---------------------------------------------------------------------------------
Total from investment operations 0.47 (1.44) 1.21
Less distributions:
Distributions from net investment income (0.40) (0.81) (0.38)
Distributions in excess of net investment
income -- -- (0.01)
Distributions from net realized capital
gains -- (0.44) (0.02)
---------------------------------------------------------------------------------
Total distributions (0.40) (1.25) (0.41)
---------------------------------------------------------------------------------
Net Asset Value, end of period $13.35 $13.28 $15.97
---------------------------------------------------------------------------------
Total return++ 3.65% (9.52)% 8.08%
---------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $2,869 $1,894 $ 252
Ratio of operating expenses to average net
assets 1.43%+ 1.48% 1.49%+
Ratio of net investment income to average
net assets 5.99%+ 5.13% 5.25%+
Portfolio turnover rate 14% 28% 37%
---------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C (formerly Class D) shares on February 4,
1993.
** 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 net investment income method does not accord
with the results of operations for all classes of 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.
18
<PAGE>
Smith Barney
Utilities Fund
--------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS Z SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
1/31/95** ENDED ENDED
(UNAUDITED) 7/31/94 7/31/93*
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 13.28 $ 15.97 $ 14.36
------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.42 0.89 0.69
Net realized and unrealized gain/(loss) on
investments 0.10 (2.21) 1.72
------------------------------------------------------------------------------------
Total from investment operations 0.52 (1.32) 2.41
Less distributions:
Distributions from net investment income (0.45) (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 (0.45) (1.37) (0.80)
------------------------------------------------------------------------------------
Net Asset Value, end of period $ 13.35 $ 13.28 $ 15.97
------------------------------------------------------------------------------------
Total Return++ 4.10% (8.78)% 17.21%
------------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $11,593 $11,372 $22,251
Ratio of operating expenses to average net
assets 0.67%+ 0.69% 0.68%+
Ratio of net investment income to average
net assets 6.74%+ 5.92% 6.06%+
Portfolio turnover rate 14% 28% 37%
------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class Z (formerly Class C) shares on November 6,
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 use of the undistributed net investment income method does not accord
with the results of operations for all classes of shares.
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney
Utilities Fund
---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Income Funds (formerly known as 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 Premium Total Return Fund, Smith Barney Convertible
Fund, Smith Barney Global Bond Fund, Smith Barney High Income Fund, Smith
Barney
Tax-Exempt Income Fund, Smith Barney Exchange Reserve Fund, Smith Barney
Diversified Strategic Income Fund and Smith Barney Utilities Fund (the "Fund").
Effective November 7, 1994, the Fund began offering Class Y shares and
continued
to offer Class A, Class B, Class C (Class C shares were previously designated
"Class D" shares) and Class Z shares (Class Z shares were previously designated
"Class C" shares). As of January 31, 1995, no Class Y shares had been sold.
Class A shares are sold with a front-end sales charge. Class B and Class C
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
original purchase date. Class Y shares are available to investors making an
initial investment of at least $5 million and are not subject to any sales
charges, distribution or service fees. Class Z 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 and are offered without any sales charge, CDSC or service or
distribution fees. 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
20
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 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 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
21
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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, 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, if any, of net long-term capital gains earned by
the Fund will be made annually after the close of the fiscal year in which they
are
earned. In addition, in order to avoid the application of a 4% nondeductible
excise tax, the Fund may make additional distributions of any undistributed
amounts of net investment 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 timing differences and
differing characterization of distributions made by the Fund as a whole.
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 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 Management
Corp., which was transferred effective November 7, 1994 to Smith Barney Mutual
Funds Management Inc. ("SBMFM"). Mutual Management Corp. and SBMFM are both
wholly owned subsidiaries of 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.
22
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The Fund is also party to an administration agreement (the "Administration
Agreement") with SBMFM. Under the Administration Agreement, the Fund pays a
monthly fee at the annual rate of 0.20% of the value of its average daily net
assets.
The Fund and SBMFM have entered into a sub-administration agreement (the
"Sub-Administration Agreement") with The Boston Company Advisors, Inc. ("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon").
Under the Sub-Administration Agreement, SBMFM pays Boston Advisors a
portion of its administration fee at a rate agreed upon from time to time
between SBMFM and Boston Advisors.
For the six months ended January 31, 1995, the Fund incurred total brokerage
commissions of $1,183,692, of which $63,846 was paid to Smith Barney.
For the six months ended January 31, 1995, Smith Barney received from
shareholders
$78,559, representing commissions (sales charges) on sales of Class
A shares.
A CDSC is generally payable by a shareholder in connection with the redemption
of certain Class A, Class B and Class C shares. In circumstances in which the
CDSC is imposed, the amount of the charge will vary depending on the number of
years since the date of purchase. For the six months ended January 31, 1995,
Smith
Barney received from shareholders $2,740,772 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 $15,000 per annum plus $1,500
per meeting attended and reimburses each such Trustee for travel and
out-of-pocket expenses.
23
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 C
shareholders, and covers expenses incurred in distributing Class B and Class C
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class C 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 C shares
at the rate of 0.50% and 0.45%, respectively, of the value of the average daily
net assets attributable to those classes of shares. For the six months ended
January 31, 1995, the service fee for Class A, Class B and Class C shares was
$159,169, $2,007,234 and $2,498, respectively. For the six months ended January
31, 1995, the distribution fee for Class B shares and Class C shares was
$4,014,469 and $4,736, 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 six
months
ended January 31, 1995, transfer agent fees for Class A, Class B, Class C
and Class Z shares were $146,424, $948,110, $275 and
$21, respectively.
24
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding long-term
U.S. government securities and short-term investments, aggregated $235,902,818
and $361,345,503, respectively, for the six months ended January 31, 1995.
At January 31, 1995, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $52,042,757 and
aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $97,767,660.
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 five classes (Class A,
Class B, Class C, Class Y and Class Z) were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 11,623,094 $ 147,544,579 1,190,478 $ 18,086,455
Issued as reinvestment of dividends 261,922 3,371,346 263,745 3,899,160
Redeemed (2,018,219) (25,703,168) (1,703,880) (25,063,608)
-------------------------------------------------------------------------------------
Net increase/(decrease) 9,866,797 $ 125,212,757 (249,657) $ (3,077,993)
-------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 4,771,070 $ 59,066,470 18,848,373 $ 289,406,819
Issued as reinvestment of dividends 2,899,882 37,368,061 10,988,064
162,852,087
Redeemed (27,721,591) (353,027,586) (65,768,788) (965,045,931)
-------------------------------------------------------------------------------------
Net decrease (20,050,639) $(256,593,055) (35,932,351) $(512,787,025)
-------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS C SHARES:+ Shares Amount Shares Amount
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 103,580 $ 1,331,907 142,046 $ 2,066,406
Issued as reinvestment of dividends 4,593 59,221 6,211 88,581
Redeemed (35,964) (465,042) (21,427) (291,646)
-------------------------------------------------------------------------------------
Net increase 72,209 $ 926,086 126,830 $ 1,863,341
-------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS Z SHARES:++ Shares Amount Shares Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 142,089 $ 1,813,311 493,082 $ 7,492,064
Issued as reinvestment of dividend 28,783 370,914 123,974 1,844,601
Redeemed (159,462) (2,039,355) (1,153,635) (16,284,496)
-------------------------------------------------------------------------------------
Net increase/(decrease) 11,410 $ 144,870 (536,579) $ (6,947,831)
-------------------------------------------------------------------------------------
<FN>
+ Class C shares were previously designated as Class D shares.
++ Class Z shares were previously designated as Class C shares.
</TABLE>
As of January 31, 1995, no Class Y shares had been sold.
7. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Bank of America (formerly known as 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 the Agreement, the
Fund may borrow up to the lesser of $25 million or 25% of its net assets.
However, pursuant to the Fund's prospectus, the Fund may only borrow up to 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 the aggregate amount of
indebtedness pursuant to the Agreement of no less than 5 to 1.
26
<PAGE>
Smith Barney
Utilities Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
During the six months ended January 31, 1995, the Fund had an average
outstanding
daily balance of $979,348 with interest rates ranging from 4.813% to
6.625%. Interest expense for the six months ended January 31, 1995 totalled
$36,668. At January 31, 1995, the Fund had no outstanding borrowings under the
Agreement.
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.
27
<PAGE>
Smith Barney
Utilities Fund
---------------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER AND
ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
COUNSEL
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
28
<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
AND INVESTMENT OFFICER
Jessica M. Bibliowicz
PRESIDENT
Jack S. Levande
VICE PRESIDENT
AND INVESTMENT OFFICER
Lewis E. Daidone
SENIOR VICE PRESIDENT
AND TREASURER
Christina T. Sydor
SECRETARY
[LOGO]
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE
SHAREHOLDERS OF
SMITH BARNEY UTILITIES 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, APPLICABLE SALES CHARGES AND EXPENSES AS WELL AS
OTHER PERTINENT
INFORMATION.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 65, 173, 174, 210, 455
[[LOGO]]
FD 2175 C5
<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME SHOWING
A BLACK AND WHITE PICTURE OF
CERTIFICATES, THE
AMERICAN FLAG, BRITISH FLAG AND THE
GLOBE.
SEMI- SMITH BARNEY
ANNUAL DIVERSIFIED
REPORT STRATEGIC
INCOME
FUND
.......................................
JANUARY 31, 1995
[LOGO]
<PAGE>
Diversified Strategic Income Fund
DEAR SHAREHOLDER:
We are pleased to provide the Semi-Annual Report for Smith
Barney Diversified Strategic Income Fund for the six months
ended January 31, 1995. The Fund's primary objective is to
deliver
high current income by investing in U.S. government, mortgage,
high yield corporate and foreign government securities. The Fund
successfully met its investment objective during this fiscal period,
providing investors with income distributions as noted in the
following table. Despite the difficult interest rate environment, the
Fund also provided shareholders with a positive return for this
investment period.
<TABLE>
<CAPTION>
<S> <C> <C>
SHARE INCOME DISTRIBUTIONS TOTAL
CLASS PER SHARE RETURN
A $ 0.34 1.03%
B 0.32 0.84
C 0.32 0.84
Z 0.35 1.40
</TABLE>
Further information about the performance of the Fund during
this and previous periods is available in the "Financial
Highlights" pages of this report.
MARKET AND ECONOMIC OVERVIEW
At the end of this reporting period, 33% of the Fund was invested in mortgage
securities, 27% in high yield corporate securities, and 34% in foreign issues.
Following is a review of the three sectors in which the Fund invests, and the
market conditions which influenced its management policies during the past six
months.
U.S. GOVERNMENT AND MORTGAGE SECURITIES
The six months ended January 31, 1995 witnessed a continuation of the waiting
game as investors tried to discern a pattern and meaning in the economic and
market crosscurrents. The Federal Reserve increased the Federal funds rate (a
sensitive indicator of the direction of interest rates) twice more, bringing to
six
the total number of increases and the Federal funds rate itself to 5.50%. In
February
of 1995, the Federal Reserve increased the Federal funds rate to 6.00%.
1
<PAGE>
Interest for most longer-term securities rose during the past six months in
response to the uncertainties in the economic landscape. For example, the yield
on the benchmark 30-year Treasury bond rose from a low of 7.37% on August 4,
1994 to a high of 8.18% on November 4, 1994 and then retraced its path to yield
7.70% on January 31, 1995. Interest rates on other types of securities and
maturities displayed similar volatility. At this juncture, we expect interest
rates to decline, particularly on maturities of five years and longer, though
not to the remarkably low levels reached in 1993. This decline will be prompted
by
clear signs of a moderating economy and a deficit reduction program emanating
from Washington.
The mortgage component of the Fund emphasizes liquid, income-producing
securities such as those issued by Government National Mortgage Association
(GNMA), Federal Home Loan Mortgage Association (FHLMC), and Federal National
Mortgage Association (FNMA). Neither our investment strategy nor sector
structure changed drastically during the past six months. In early August, in
light of the volatility in the financial markets in the previous months and our
expectations for continued uncertainty, we anticipated that income still would
be the greatest component of total return to the Fund's shareholders and that
minimizing the erosion of their principal would be the most crucial investment
challenge. As a result, we invested the majority of the Fund's mortgage assets
in securities that had coupons higher than the then-current market rate.
HIGH INCOME AND CORPORATE SECURITIES
In response to the significant rise in interest rates in the bond market in
reaction
to the Federal Reserve's tightening of monetary policy, we continued to
shift the portfolio into higher-coupon, intermediate-maturity (5-10 years)
issues
of the relatively more economically-sensitive companies in order to limit
interest rate risk and to capitalize on the improving economy. Our largest
industry weightings remain in paper and forest products, packaging and
containers, and hotels and gaming. In recent weeks, as we have become more
confident of a sustainable market upturn in 1995, we have begun to favor deeper
discount securities which should provide greater price appreciation potential
during market rallies. In the months ahead, we will be focusing on eliminating
portfolio holdings that have generated disappointing results in the past year,
as well as shifting the overall portfolio away from the more
economically
-sensitive sectors that would be vulnerable to an economic slowdown.
We will be looking to increase exposure in the more traditionally defensive
industries such as cable TV, telecommunications, media, broadcasting, food and
beverage, to name a few.
2
<PAGE>
FOREIGN GOVERNMENT SECURITIES
The world's economies strengthened significantly during 1994, led by the United
States, Australia, New Zealand and the United Kingdom. These countries achieved
growth of over 4% and helped pull continental Europe into recovery, where
economic activity rose sharply in the second half of 1994. Led by the United
States, the English-speaking countries noted above tightened monetary policy
throughout the year in order to curb excessive growth and keep control of
inflation. However, fears of both rising inflation and enormous budget deficits
(and therefore borrowing requirements) have been negative for global bond
markets.
After becoming very overbought during 1993 and into January 1994, the global
bond markets sold off consistently throughout virtually the whole year, finally
stabilizing in November and December of 1994. All major markets were down for
the year although core European countries like Germany and Belgium were least
affected, dropping around 2% in local currency terms.
The interest rate cycle in continental Europe is approximately one and a half
years behind that of the United States, Australia, New Zealand and the United
Kingdom. Consequently, the bulk of monetary tightening has already occurred in
the United States but hasn't yet started in Europe. Current short-term rates in
the United States are 1% higher than in Germany, but this will be eroded during
1995 as the Bundesbank begins tightening this summer. This is expected to limit
the upside potential for the U.S. dollar and therefore the Fund intends to
maintain some exposure to the European currencies.
Bond markets around the world (except Japan) continue to have very high real
yields of up to 8%, largely due to investors' fears of inflation. In the
dollar-bloc countries (Australia, New Zealand, Canada) and the United Kingdom,
monetary tightening last year led to much flatter yield curves -- actually
inverted in New Zealand. Since the bulk of the tightening has now occurred,
positions have been established in the shorter maturities to take advantage of
the higher yields while eliminating the risk. In continental Europe, selected
positions
in shorter-term bonds have been established in markets where the yield
curve has pre-empted the anticipated tightening. Some medium-term paper in
"core" European currencies has also been purchased to secure attractive yields.
Longer-term emerging market debt, particularly in Latin America, ended the year
badly, due to the Mexican crisis, with some markets down over 25% for
3
<PAGE>
1994. This weakness appears likely to continue for the foreseeable future. The
Fund has continued to have minimal exposure to the emerging markets,
particularly the more volatile, poorer quality markets. Once again, very short-
term, cash-type instruments in the Far East have benefited the Fund; yields
upwards of 10% are available along with the potential for some limited currency
gain. While these yields remain attractive, the Fund will continue to maintain
some exposure to both the Far East and Eastern Europe.
Opportunities
for securing higher yields in the dollar-bloc countries and Europe
are positive, and as investors' inflationary fears subside there will be room
for yields to fall. Our allocation to this sector is expected to remain at 35%.
We appreciate your confidence during this difficult and sometimes perplexing
investment environment and join you in looking forward to a more benign 1995.
Should you have any questions about your investment in the Fund or how other
Smith Barney mutual funds may help you reach your financial goals, please speak
with your Smith Barney Financial Consultant.
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
MARCH 20, 1995
4
<PAGE>
Smith Barney
Diversified Strategic Income Fund
---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) JANUARY 31, 1995
PORTFOLIO BREAKDOWN
Pie chart depicting the allocation of the Diversified Strategic Income Fund
investment securities held at January 31, 1995 by portfolio breakdown. The pie
is broken in pieces representing portfolio breakdown in the following
percentages:
<TABLE>
<CAPTION>
PORTFOLIO BREAKDOWN PERCENTAGE
<S> <C>
Preferred Stocks 1.7%
Corporate Bonds and Notes 27.4%
U.S. Government and Agency
Securities 0.6%
Mortgage-Backed Securities 32.6%
U.S. Treasury Note 0.6%
Warrants, Repurchase
Agreement and Net Other
Assets and Liabilities 3.3%
Foreign Bonds and Notes 33.8%
</TABLE>
AVERAGE MATURITY 4.8 years
5
<PAGE>
Smith Barney
Diversified Strategic Income Fund
---------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) JANUARY 31,
1995
-------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C>
KEY TO CURRENCY ABBREVIATIONS
AUD -- Australian Dollar THB -- Thailand Baht
GBP -- Great Britain IEP -- Irish Punt
Pound Sterling
CAD -- Canadian Dollar ITL -- Italian Lira
CSK -- Czech Koruna USD -- United States
Dollar
DEM -- German MXP -- Mexican Peso
Deutschemark
DKK -- Danish Kroner NZD -- New Zealand
Dollar
ECU -- European Currency PTE -- Portuguese
Unit Escudo
ESP -- Spanish Peseta SEK -- Swedish Krona
FIM -- Finnish Markka FRF -- French Franc
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
---------------------------------------------------------------------------
FOREIGN BONDS AND NOTES -- 33.8%
SPANISH PESETA BONDS -- 5.1%
ESP 300,000,000 Bancomext,
12.650% due 6/21/98 $ 2,036,325
250,000,000 Banco Nacional,
13.000% due 1/29/97 1,793,603
697,000,000 Credit Lyonnais,
7.938% due 2/3/95 5,263,754
400,000,000 Eurofima,
11.350% due 7/22/97 2,994,223
European Investment Bank:
250,000,000 14.000% due 2/21/01 2,034,324
240,000,000 11.700% due 2/10/03 1,787,471
350,000,000 11.250% due 4/20/03 2,534,041
Kingdom of Spain:
700,000,000 11.900% due 7/15/96 5,356,191
1,300,000,000 10.250% due 11/30/98 9,399,388
4,500,000,000 8.300% due 12/15/98 30,565,268
1,440,000,000 12.250% due 3/25/00 11,058,687
6,000,000,000 11.600% due 1/15/97 45,679,115
320,000,000 Nafinsa,
13.600% due 4/2/98 2,241,438
---------------------------------------------------------------------------
122,743,828
---------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
AUSTRALIAN DOLLAR BONDS -- 3.6%
AUD 2,500,000 Credit Lyonnais,
7.375% due 2/3/95 $ 1,892,875
17,100,000 New South Wales Treasury,
12.000% due 12/1/01 13,769,815
3,500,000 Phillipines National Bank,
8.000% due 3/25/97 2,464,524
Queensland Treasury:
60,000,000 8.000% due 5/14/97 43,294,061
40,000,000 8.000% due 5/14/03 26,236,767
---------------------------------------------------------------------------
87,658,042
---------------------------------------------------------------------------
IRISH PUNT BONDS -- 3.4%
IEP 1,700,000 Barclays Bank of London,
5.188% due 2/9/95 2,654,977
Republic of Ireland:
22,500,000 8.750% due 7/27/97 35,420,509
13,500,000 6.250% due 4/1/99 19,245,143
4,000,000 9.000% due 7/15/01 6,318,844
11,900,000 9.250% due 7/11/03 19,095,918
---------------------------------------------------------------------------
82,735,391
---------------------------------------------------------------------------
SWEDISH KRONA BONDS -- 3.2%
SEK 54,500,000 Barclays Bank of London,
7.350% due 2/9/95 7,264,632
35,000,000 European Investment Bank,
10.000% due 2/26/99 4,553,392
Kingdom of Sweden:
50,000,000 10.750% due 1/23/97 6,753,351
400,000,000 11.000% due 1/21/99 52,561,283
50,000,000 Nordic Investment Bank,
10.250% due 1/7/99 6,531,504
---------------------------------------------------------------------------
77,664,162
---------------------------------------------------------------------------
CANADIAN DOLLAR BONDS -- 3.0%
CAD 7,000,000 Asfinag (Auto-Bahn Schnell),
10.125% due 3/15/01 5,035,728
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
CANADIAN DOLLAR BONDS -- (CONTINUED)
Canadian Government Bonds:
CAD 3,500,000 7.750% due 9/15/96 $ 2,448,324
5,000,000 7.500% due 7/1/97 3,434,451
6,500,000 Electric Power Development,
8.750% due 6/11/97 4,554,266
11,000,000 Electricite de France,
9.750% due 9/8/99 7,844,598
6,000,000 Eurofima,
10.750% due 7/31/01 4,444,066
1,500,000 Export Finance,
10.250% due 5/29/96 1,076,636
5,400,000 International Finance
Corporation,
7.750% due 8/18/98 3,634,870
9,000,000 Kingdom of Sweden,
10.625% due 6/3/98 6,546,035
2,500,000 National Bank of Australia,
7.000% due 2/3/95 1,773,993
Oest KontrolBank:
2,000,000 9.000% due 5/21/97 1,410,254
8,000,000 10.250% due 7/27/99 5,783,502
10,000,000 10.750% due 8/8/01 7,389,037
2,000,000 Province of Alberta,
7.750% due 2/4/98 1,367,323
3,000,000 Province of Ontario,
10.000% due 9/30/96 2,148,590
14,190,000 Stelco Inc.,
10.400% due 11/30/09 9,162,959
7,000,000 Tokyo Electric Power,
10.500% due 6/14/01 5,096,328
---------------------------------------------------------------------------
73,150,960
---------------------------------------------------------------------------
NEW ZEALAND DOLLAR BONDS -- 3.0%
NZD 5,000,000 National Bank of Australia,
8.063% due 2/3/95 3,193,750
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
NEW ZEALAND DOLLAR BONDS -- (CONTINUED)
New Zealand Government Bonds:
NZD 40,000,000 8.000% due 11/15/95 $ 25,263,703
40,000,000 9.000% due 11/15/96 25,378,933
27,000,000 10.000% due 3/15/02 18,414,434
---------------------------------------------------------------------------
72,250,820
---------------------------------------------------------------------------
ITALIAN LIRA BONDS -- 2.4%
ITL 7,000,000,000 Buoni Poliennali Del Tes,
Italian Government,
11.500% due 3/1/96 4,376,712
10,000,000,000 Cert Di Credito Del Tes,
Floating Rate Note,
9.900% due 8/1/99 6,216,426
3,600,000,000 National Bank of Australia,
8.250% due 2/3/95 2,235,677
3,000,000,000 Nordiska Investerin,
8.250% due 5/24/03 1,781,090
70,000,000,000 Republic of Italy,
12.000% due 1/1/98 43,993,169
---------------------------------------------------------------------------
58,603,074
---------------------------------------------------------------------------
GREAT BRITAIN POUND STERLING BONDS -- 2.4%
GBP 3,000,000 Auto-Bahn Schnell,
10.375% due 10/1/01 5,011,616
3,500,000 European Investment Bank,
9.000% due 7/16/01 5,573,306
5,000,000 Hydro Quebec,
6.500% due 12/9/98 7,195,826
5,000,000 Republic of Finland,
8.000% due 4/7/03 7,329,637
7,500,000 Smithkline Beecham,
8.125% due 11/25/98 11,515,888
12,500,000 United Kingdom Treasury
Dividend,
9.750% due 8/27/02 20,886,923
---------------------------------------------------------------------------
57,513,196
---------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
GERMAN DEUTSCHEMARK BONDS -- 1.7%
DEM 60,000,000 Credit Lyonnais,
4.750% due 2/3/95 $ 39,379,122
5,000,000 Hungary National Bank,
9.250% due 3/17/00 3,273,390
---------------------------------------------------------------------------
42,652,512
---------------------------------------------------------------------------
FINNISH MARKKA BONDS -- 1.4%
FIM 9,300,000 Barclays Bank, Plc.,
5.000% due 2/3/95 1,950,074
50,000,000 Finnish Export Credit,
6.000% due 1/15/99 9,199,945
Finnish Treasury Notes:
58,000,000 11.000% due 1/15/99 12,735,786
56,000,000 9.500% due 3/15/04 11,172,875
---------------------------------------------------------------------------
35,058,680
---------------------------------------------------------------------------
PORTUGUESE ESCUDO BONDS -- 1.4%
PTE 673,000,000 Barclays Bank, Plc.,
8.750% due 2/3/95 4,273,694
550,000,000 Eurofima,
8.875% due 12/6/00 2,968,725
European Investment Bank:
200,000,000 15.500% due 7/12/95 1,281,854
1,150,000,000 8.875% due 12/15/98 6,521,353
1,196,000,000 10.400% due 5/26/99 7,063,216
950,000,000 10.125% due 8/3/00 5,436,673
970,000,000 World Bank,
11.500% due 2/28/97 6,073,472
---------------------------------------------------------------------------
33,618,987
---------------------------------------------------------------------------
UNITED STATES DOLLAR BONDS -- 1.3%
USD 2,000,000 Development Bank of
Philippines,
8.000% due 7/22/98 1,870,000
1,000,000 Government of Barbados,
10.500% due 6/9/97++ 981,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
UNITED STATES DOLLAR BONDS -- (CONTINUED)
Mexican Government:
USD 2,000,000 Floating Rate Note,
5.813% due 3/31/08 $ 1,662,500
10,000,000 Series B,
6.250% due 12/31/19 5,337,500
Republic of Argentina:
3,500,000 Zero coupon, 5/31/96 1,120,000
Floating Rate Notes:
10,000,000 4.250% due 3/31/23 4,325,000
3,000,000 5.813% due 3/31/23 1,773,750
Republic of Venezuela:
500,000 9.000% due 5/27/96 457,500
Floating Rate Notes:
1,000,000 6.125% due 12/28/98 670,000
3,000,000 6.125% due 12/30/03 1,323,750
7,925,000 Rogers Cablesystem Ltd.,
9.650% due 1/15/14 4,477,083
2,000,000 Trinidad & Tobago,
11.500% due 11/20/97 2,010,000
Uruguay Government Bonds:
1,500,000 8.250% due 6/8/95 1,485,000
2,000,000 Floating Rate Note,
6.125% due 2/18/07 1,200,000
4,500,000 Series A,
6.750% due 2/19/21 2,250,000
---------------------------------------------------------------------------
30,943,083
---------------------------------------------------------------------------
FRENCH FRANC BONDS -- 0.8%
Government of France:
FRF 5,000,000 7.250% due 3/26/98 6,068,557
5,000,000 9.500% due 4/25/00 6,498,217
5,000,000 United Kingdom,
9.125% due 2/1/01 6,386,617
---------------------------------------------------------------------------
18,953,391
---------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
FOREIGN BONDS AND NOTES -- (CONTINUED)
DANISH KRONER BONDS -- 0.7%
DKK 65,000,000 Kingdom of Denmark,
9.000% due 11/15/98 $ 10,973,885
15,000,000 Great Belt,
7.000% due 9/2/03 2,178,603
20,000,000 Oeresundsforbindeosen,
6.500% due 9/22/98 3,100,712
---------------------------------------------------------------------------
16,253,200
---------------------------------------------------------------------------
THAILAND BAHT BONDS -- 0.2%
THB 50,000,000 ABN Ambro,
9.100% due 8/5/97 1,873,082
100,000,000 Industrial Financial
Corporation,
Zero coupon due 5/2/95 3,901,059
---------------------------------------------------------------------------
5,774,141
---------------------------------------------------------------------------
CZECH KORUNA BOND -- 0.2%
CSK 100,000,000 Czech Electric Company,
14.375% due 1/27/01 3,929,059
---------------------------------------------------------------------------
TOTAL FOREIGN BONDS AND NOTES
(Cost $844,538,792) 819,502,526
---------------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 27.4%
PACKAGING AND CONTAINERS -- 2.6%
$ 8,250,000 Container Corporation of
America, Sr. Sub. Note,
11.250% due 5/1/04 8,456,250
Gaylord Container Corporation,
Sr. Notes:
10,850,000 11.500% due 5/15/01 11,012,750
2,000,000 Non-interest bearing until
5/15/96,
12.750% due 5/15/05 1,785,000
10,375,000 Silgan Holdings, Sr.
Discounted Deb.,
Non-interest bearing until
6/15/96,
13.250% due 12/15/02 8,922,500
9,100,000 Stone-Consolidated
Corporation, Sr. Secured
Note,
10.250% due 12/15/00 8,929,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
PACKAGING AND CONTAINERS -- (CONTINUED)
Stone Container:
$ 2,100,000 12.625% due 7/15/98 $ 2,205,000
1,200,000 11.875% due 12/1/98 1,248,000
1,000,000 10.750% due 10/1/02 992,500
13,050,000 11.500% due 10/1/04 13,115,250
5,345,000 United States Can Company, Sr.
Sub. Note,
13.500% due 1/15/02 5,839,413
---------------------------------------------------------------------------
62,506,038
---------------------------------------------------------------------------
HOTELS AND GAMING -- 2.4%
8,950,000 Boyd Gaming Corporation,
10.750% due 9/1/03 8,413,000
6,000,000 Empress River Casino,
10.750% due 4/1/02 5,640,000
13,600,000 GNF Corporation, Guaranteed
Note,
10.625% due 4/1/03 9,809,000
4,850,000 Santa Fe Hotel Inc.,
Guaranteed First Mortgage,
11.000% due 12/15/00 4,365,000
13,175,000 Station Casinos, Inc., Sr.
Sub. Note,
9.625% due 6/1/03 11,099,937
8,150,000 Trump Plaza Funding, Inc.,
Note,
12.250% due 6/30/01 6,611,688
18,427,999 Trump Taj Mahal Funding Inc.,
First Mortgage,
Pay-in-kind
11.350% due 11/15/99 12,623,179
---------------------------------------------------------------------------
58,561,804
---------------------------------------------------------------------------
PAPER AND FOREST PRODUCTS -- 2.4%
Domtar, Inc.:
3,575,000 Deb.,
11.750% due 3/15/99 3,704,594
12,850,000 Sr. Note,
12.000% due 4/15/01 13,556,750
Indah Kiat International:
5,600,000 11.375% due 6/15/99 5,432,000
5,450,000 11.875% due 6/15/02 5,211,563
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
PAPER AND FOREST PRODUCTS -- (CONTINUED)
$ 11,850,000 Repap Wisconsin, Second
Priority Note,
9.875% due 5/1/06 $ 10,279,875
13,050,000 Riverwood International
Corporation, Sr. Sub. Note,
11.250% due 6/15/02 13,490,437
5,700,000 S.D. Warren Company,
11.000% due 12/15/02++ 5,928,000
---------------------------------------------------------------------------
57,603,219
---------------------------------------------------------------------------
HEALTH CARE -- 2.1%
13,215,000 American Medical International
Inc., Sr. Sub. Note,
13.500% due 8/15/01 14,602,575
6,350,000 Charter Medical,
11.250% due 4/15/04 6,350,000
9,515,000 Healthtrust Inc., The Hospital
Company, Sub. Note,
10.750% due 5/1/02 10,276,200
17,425,000 Ornda Healthcorp, Sr. Sub.
Note,
12.250% due 5/15/02 18,601,187
---------------------------------------------------------------------------
49,829,962
---------------------------------------------------------------------------
BUILDING AND CONSTRUCTION -- 1.7%
14,000,000 American Standard Inc.,
11.375% due 5/15/04 14,770,000
9,075,000 Greystone Homes, Inc.,
10.750% due 3/1/04 7,623,000
4,850,000 Hovnainan K Enterprises Inc.,
Guaranteed Note,
11.250% due 4/15/02 4,098,250
2,800,000 Miles Home Services,
12.000% due 4/1/01 1,680,000
8,325,000 UDC Homes, Inc., Sr. Note,
11.750% due 4/30/03 5,827,500
8,575,000 U.S. Home Corporation, Sr.
Note,
9.750% due 6/15/03 7,578,156
---------------------------------------------------------------------------
41,576,906
---------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
PERSONAL CARE -- 1.4%
$ 4,635,000 MacAndrews & Forbes Group,
Sub. Note,
12.250% due 7/1/96 $ 4,623,413
8,100,000 Revlon Consumer Products
Corporation, Sr. Sub. Note,
Series B,
10.500% due 2/15/03 7,229,250
37,275,000 Revlon Worldwide Corporation,
Sr. Secured Note, Series B,
Zero Coupon due 3/15/98 21,759,281
---------------------------------------------------------------------------
33,611,944
---------------------------------------------------------------------------
DIVERSIFIED INDUSTRIAL AND CONGLOMERATE
MANUFACTURING -- 1.3%
5,875,000 Federal Industries Ltd., Sr.
Note,
10.250% due 6/15/00 5,507,812
6,575,000 Gearbulk Holdings,
11.125% due 12/1/04 6,772,250
7,375,000 Interlake Corporation,
12.125% due 3/1/02 7,080,000
13,000,000 NL Industries,
11.750% due 10/15/03 13,162,500
---------------------------------------------------------------------------
32,522,562
---------------------------------------------------------------------------
CONSUMER DURABLES -- 1.3%
15,200,000 Coleman Holdings Inc., Sr.
Secured Note,
Zero Coupon due 5/27/98 10,355,000
32,875,000 International Semi-Tech Micro,
Sr. Secured Note,
Non-interest bearing until
8/15/00,
11.500% due 8/15/03 14,300,625
8,350,000 Remington Arms Inc., New, Sr.
Sub. Note,
10.500% due 12/1/03++ 6,940,938
---------------------------------------------------------------------------
31,596,563
---------------------------------------------------------------------------
BROADCASTING AND CABLE TELEVISION -- 1.3%
14,825,000 Bell Cablemedia, Non-interest
bearing until 7/15/99,
11.950% due 7/15/04 8,450,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
BROADCASTING AND CABLE TELEVISION --
(CONTINUED)
Cablevision System
Corporation:
$ 4,200,000 9.875% due 2/15/13 $ 3,916,500
1,000,000 9.875% due 4/1/13 910,000
7,300,000 Continental Cablevision Inc.,
Sr. Sub. Deb.,
11.000% due 6/1/07 7,336,500
3,125,000 Rogers Cablesystems Ltd., Sr.
Secured Deb.,
10.125% due 9/1/12 3,019,531
4,400,000 Rogers Communications Inc.,
Sr. Deb.,
10.875% due 4/15/04 4,361,500
2,850,000 Young Broadcasting, Inc.,
11.750% due 11/15/04 2,935,500
---------------------------------------------------------------------------
30,929,781
---------------------------------------------------------------------------
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 9,039,000
23,850,000 Marvel Holdings, Inc., Sr.
Secured Note, Series B,
Zero coupon due 4/15/98 14,936,063
10,750,000 News American Holdings Inc.,
Deb.,
8.625% due 2/07/04 5,962,084
---------------------------------------------------------------------------
29,937,147
---------------------------------------------------------------------------
METALS AND MINING -- 1.2%
1,765,000 Armco, Inc.,
11.375% due 10/15/99 1,765,000
6,600,000 A.K. Steel Corporation,
10.750% due 4/1/04 6,600,000
1,000,000 Essex Group, Inc., Sr. Note,
10.000% due 5/1/03 936,250
2,000,000 Geneva Steel Company, Sr.
Note,
11.125% due 3/15/01 1,877,500
Inland Steel Company, First
Mortgage Note, Series T:
1,400,000 12.000% due 12/1/98 1,487,500
2,825,000 12.750% due 12/15/02 3,051,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
METALS AND MINING -- (CONTINUED)
$ 7,400,000 Republic Engineered Steel,
First Mortgage Bond,
9.875% due 12/15/01 $ 6,882,000
6,400,000 Ucar Global,
12.000% due 1/15/05++ 6,592,000
---------------------------------------------------------------------------
29,191,250
---------------------------------------------------------------------------
GROCERY AND CONVENIENCE STORES -- 1.2%
3,500,000 Big V Supermarkets Inc., Sr.
Sub. Note,
11.000% due 2/15/04 2,800,000
9,925,000 Farm Fresh, Inc.,
12.250% due 10/1/00 8,994,531
3,195,000 P & C Food Markets Inc., Deb.,
11.500% due 10/15/01 3,278,869
Pathmark Stores, Inc., Sub.
Notes:
7,325,000 11.625% due 6/15/02 7,077,781
6,515,000 12.625% due 6/15/02 6,580,150
---------------------------------------------------------------------------
28,731,331
---------------------------------------------------------------------------
TELEPHONE AND COMMUNICATIONS -- 1.0%
5,600,000 Dial Call, Units,
Zero coupon due 4/15/04 1,596,000
19,875,000 Nextel Communications, Inc.,
Non-interest bearing until
2/15/99,
9.750% due 8/15/04 6,757,500
Pagemart Inc., Discount Notes:
9,150,000 Non-interest bearing until
11/1/98,
12.250% due 11/1/03++ 5,490,000
5,500,000 Non-interest bearing until
2/1/00,
15.000% due 2/1/05++ 2,832,500
7,900,000 USA Mobile Communications,
9.500% due 2/1/04 7,660,000
---------------------------------------------------------------------------
24,336,000
---------------------------------------------------------------------------
RETAIL -- 1.0%
8,875,000 Barnes & Noble Inc., Sr. Sub.
Note, Series B, 11.875% due
1/15/03 9,496,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
RETAIL -- (CONTINUED)
$ 9,775,000 Bradlees Inc., Sr. Sub. Note,
11.000% due 8/1/02 $ 8,528,688
6,300,000 Wickes Lumber Company, Sr.
Sub. Note,
11.625% due 12/15/03 5,922,000
---------------------------------------------------------------------------
23,946,938
---------------------------------------------------------------------------
COMPUTERS -- 0.8%
20,150,000 Anacomp, Inc., Sr. Sub. Note,
15.000% due 11/1/00 19,747,000
---------------------------------------------------------------------------
TEXTILE AND APPAREL -- 0.8%
7,150,000 CMI Industries Inc., Sr. Sub.
Note,
9.500% due 10/1/03 6,041,750
6,000,000 Dan River, Inc., Sr. Sub.
Note,
10.125% due 12/15/03 5,550,000
8,475,000 Hartmarx Corporation,
10.875% due 1/15/02 7,849,969
---------------------------------------------------------------------------
19,441,719
---------------------------------------------------------------------------
INSURANCE -- 0.7%
7,455,000 Bankers Life Holding
Corporation,
Sr. Sub. Note, Series B,
13.000% due 11/1/02 8,498,700
8,720,000 Life Partners Group, Inc., Sr.
Sub. Note,
12.750% due 7/15/02 9,483,000
---------------------------------------------------------------------------
17,981,700
---------------------------------------------------------------------------
AUTOMOBILES -- 0.7%
4,150,000 Fairfield Manufacturing Inc.,
Sr. Sub. Note,
11.375% due 7/1/01 3,901,000
4,050,000 Harvard Industries, Inc.,
12.000% due 7/15/04 4,095,562
5,725,000 SPX Corporation,
11.750% due 6/1/02 5,760,781
3,925,000 Truck Components,
12.750% due 6/30/01 4,101,625
---------------------------------------------------------------------------
17,858,968
---------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
OIL AND NATURAL GAS -- 0.7%
$ 4,250,000 Giant Industries, Inc.,
Guaranteed Sr. Sub. Note,
9.750% due 11/15/03 $ 3,793,125
11,575,000 Mesa Capital Corporation,
Secured Discount Note,
Non-interest bearing until
6/30/95,
12.750% due 6/30/98 10,099,188
3,725,000 Santa Fe Energy Resources,
11.000% due 5/15/04 3,743,625
---------------------------------------------------------------------------
17,635,938
---------------------------------------------------------------------------
ELECTRIC UTILITY -- 0.5%
13,330,985 Midland Funding Corporation I,
Sr. Secured Lease Obligation
Bond, Series C,
10.330% due 7/23/02 12,914,391
---------------------------------------------------------------------------
BANKING AND FINANCE -- 0.2%
6,225,000 Lomas Mortgage USA Inc., Sr.
Note,
10.250% due 10/01/02 5,042,250
---------------------------------------------------------------------------
TRANSPORTATION -- 0.2%
4,575,000 Sea Containers, Ltd.,
12.500% due 12/1/04 4,758,000
---------------------------------------------------------------------------
CONSUMER NON-DURABLES -- 0.2%
5,075,000 Consolidated Cigar,
10.500% due 3/1/03 4,681,688
---------------------------------------------------------------------------
LEISURE AND ENTERTAINMENT -- 0.2%
4,200,000 Gillett Holdings Inc., Sr.
Sub. Note, Series A, 12.250%
due 6/30/02 4,326,000
---------------------------------------------------------------------------
AEROSPACE -- 0.2%
3,925,000 Tracor, Inc., Sr. Sub. Note,
10.875% due 8/15/01 3,841,594
---------------------------------------------------------------------------
CHEMICALS -- 0.1%
2,571,000 UCC Investors Holdings, Inc.,
Sub. Discount Note,
Non-interest bearing until
5/1/98,
12.000% due 5/1/05 1,693,646
---------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND
NOTES
(Cost $717,545,875) 664,804,339
---------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
MORTGAGE-BACKED SECURITIES -- 32.6%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA)
CERTIFICATES -- 21.7%
GNMA:
$ 226,878,309 9.000% due 9/15/08-5/15/23 $ 231,910,294
85,323,525 9.500% due 8/15/09-12/15/21 89,163,083
200,000,000 Platinum,
9.000% due 4/15/18-10/15/24 205,126,000
---------------------------------------------------------------------------
TOTAL GNMA POOLS -- 1,110 526,199,377
---------------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)
CERTIFICATES -- 6.5%
FHLMC:
3,359,959 7.000% due 1/1/08-2/1/08 3,201,403
14,659,378 7.500% due 12/1/22-2/1/23 Gold 13,967,602
87,004,045 8.000% due 1/1/22-1/1/23 84,964,670
110,785 8.500% due 10/1/07 110,023
10,052,610 8.500% due 11/1/16-7/1/21 9,983,448
3,112,248 9.000% due 5/1/03-7/1/09 3,150,641
24,379,886 9.000% due 11/1/10-9/1/21 24,699,750
4,979,421 9.500% due 8/1/16-10/1/20 5,144,339
10,423,162 10.000% due 7/1/15-8/1/20 10,963,811
---------------------------------------------------------------------------
TOTAL FHLMC POOLS -- 443 156,185,687
---------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) --
4.4%
9,078,232 FNMA,
8.000% due 3/1/02-1/1/08 9,004,426
14,750,000 FNMA Medium Term Note,
12.950% due 3/9/95 5,125,625
19,000,000 FNMA Medium Term Note,
Canadian Dollars, Reverse
Yen, Principal Exchange Rate
Linked Security, 13.050% due
6/7/95 2,850,000
FNMA Strips:
20,000,000 Non-interest bearing until
12/18/95,
7.050% due 12/18/98 18,282,200
31,125,000 Non-interest bearing until
10/10/96,
8.040% due 10/10/01 27,381,285
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
MORTGAGE-BACKED SECURITIES -- (CONTINUED)
$ 20,000,000 Non-interest bearing until
11/22/96,
7.940% due 11/22/01 $ 16,924,200
32,500,000 Non-interest bearing until
3/9/97,
7.890% due 3/9/02 27,473,550
---------------------------------------------------------------------------
TOTAL FNMA POOLS -- 48 107,041,286
---------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED
SECURITIES
(Cost $827,999,001) 789,426,350
---------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY SECURITIES -- 0.6%
STUDENT LOAN MARKETING ASSOCIATION (SLMA)
17,750,000 SLMA Multi-Currency Index,
Reverse European Currency
Unit, Principal Exchange
Rate Linked Security,
11.150% due 4/7/97 4,082,500
15,000,000 SLMA New Zealand Dollars,
Reverse Yen, Principal
Exchange Rate Linked
Security,
12.050% due 3/19/96 10,481,250
---------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND
AGENCY SECURITIES (Cost
$29,006,765) 14,563,750
---------------------------------------------------------------------------
U.S. TREASURY NOTE -- 0.6% (Cost $15,055,683)
15,000,000 U.S. Treasury Note,
5.250% due 7/31/98 13,995,000
---------------------------------------------------------------------------
<CAPTION>
SHARES
<C> <S> <C>
---------------------------------------------------------------------------
PREFERRED STOCKS -- 1.7%
554,102 Algoma, Series A, 5.500% 8,355,272
328,581 Foxmeyer Health Corporation,
Conv. Pfd., $4.20 10,843,161
34,350 Geneva Steel Company, Series
B, Exchangeable Pfd.,
Adjustable Rate,
Pay-in-kind, 14.000% 3,692,625
702,350 Gulf Canada Resources Ltd.,
Series 1 1,694,511
K-III Communications
Corporation, Sr.
Exchangeable Pfd.:
165,000 11.500% 4,166,250
42,212 Series B, Pay-in-kind,
11.625% 3,999,621
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
---------------------------------------------------------------------------
<C> <S> <C>
PREFERRED STOCKS -- (CONTINUED)
146,400 Navistar International
Corporation, Series G, Conv.
Pfd., $6.00 $ 7,557,900
---------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $44,318,545) 40,309,340
---------------------------------------------------------------------------
WARRANTS -- 0.4%
5,600 Dial Call Warrants, expire
4/15/04+ 2,800
485,325 Gaylord Warrants, expire
7/31/96+ 3,336,609
33,600 Miles Home Services Warrants,
expire 4/1/97+ 16,800
42,090 Pagemart Warrants, expire
12/31/03+ 189,405
209,250 S.D.W. Holdings, expire
12/15/02+ 5,754,375
320 Trump Plaza Holding Warrants,
expire 6/15/03+ 160,000
---------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $8,088,802) 9,459,989
---------------------------------------------------------------------------
<CAPTION>
FACE VALUE
<C> <S> <C>
---------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.9% (Cost $21,933,000)
$ 21,933,000 Agreement with United Bank of
Switzerland, 5.700% dated
1/31/95 to be repurchased at
$21,936,473 on 2/1/95,
collateralized by
$22,470,000 U.S. Treasury
Note 4.625% due 2/28/98 21,933,000
---------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $2,508,486,463*) 98.0% 2,373,994,294
OTHER ASSETS AND LIABILITIES (NET) 2.0 48,070,146
---------------------------------------------------------------------------
TOTAL NET ASSETS 100.0% $ 2,422,064,440
---------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
+ 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.
22
<PAGE>
Smith Barney
Diversified Strategic Income Fund
------------------------------------------
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS (UNAUDITED)
-------------------------------------------------------- JANUARY 31, 1995
<TABLE>
<CAPTION>
CONTRACT MARKET VALUE
VALUE DATE (NOTE 1)
<S> <C> <C>
----------------------------------------------------------------------
FORWARD FOREIGN EXCHANGE CONTRACT
TO BUY
(Contract Amount $2,186,150)
3,341,754 German Deutschemarks 2/9/95 $ 2,193,581
----------------------------------------------------------------------
FORWARD FOREIGN EXCHANGE CONTRACTS
TO SELL
45,000,000 Canadian Dollars 2/9/95 $ (31,924,131)
16,341,055 European Currency Units 2/9/95 (20,263,603)
10,173,188,073 Spanish Pesetas 2/9/95 (76,804,643)
147,650,178 Finnish Markka 2/9/95 (30,962,744)
36,331,805,217 Italian Lira 2/9/95 (22,555,460)
5,531,928,500 Portuguese Escudo 2/9/95 (35,114,842)
409,627,460 Swedish Krona 2/9/95 (54,589,933)
20,302,978 Danish Kroner 2/9/95 (3,377,271)
4,219,304 Great Britain Pound
Sterling 2/9/95 (6,672,767)
14,000,000 German Deutschemarks 2/9/95 (9,189,825)
----------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE
CONTRACTS TO SELL
(Contract Amount $290,305,078) $ (291,455,219)
----------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
Smith Barney
Diversified Strategic Income Fund
---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JANUARY 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$2,508,486,463) (Note 1)
See accompanying schedule $ 2,373,994,294
Cash and foreign currency (Cost
$4,570,399) 4,774,845
Receivable for forward foreign exchange
contracts to sell 290,305,078
Receivable for investment securities
sold 216,615,506
Dividends and interest receivable 50,635,101
Receivable for Fund shares sold 4,464,905
Forward foreign exchange contracts to
buy, at value
(Contract cost $2,186,150) (Note 1)
See accompanying schedule 2,193,581
Other Assets 210,000
-------------------------------------------------------------------------
TOTAL ASSETS 2,943,193,310
-------------------------------------------------------------------------
LIABILITIES:
Forward foreign exchange contracts to
sell, at value
(Contract cost $290,305,078) (Note 1)
See accompanying schedule $291,455,219
Payable for investment securities
purchased 219,326,055
Dividends payable 2,408,131
Payable for Fund shares redeemed 2,336,575
Payable for forward foreign exchange
contracts to buy 2,186,150
Distribution fee payable (Note 3) 953,043
Investment advisory fee payable (Note
2) 821,077
Service fee payable (Note 3) 510,622
Administration fee payable (Note 2) 410,539
Custodian fees payable (Note 2) 306,906
Transfer agent fees payable (Note 2) 148,645
Accrued expenses and other payables 265,908
-------------------------------------------------------------------------
TOTAL LIABILITIES 521,128,870
-------------------------------------------------------------------------
NET ASSETS $ 2,422,064,440
-------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (CONTINUED)
--------------------------------------------------- JANUARY 31, 1995
<TABLE>
<S> <C>
NET ASSETS consist of:
Distributions in excess of net
investment income earned to date $ (42,366,680)
Accumulated net realized loss on
securities, forward foreign
exchange contracts, written
options and foreign currency
transactions (63,629,427)
Net unrealized depreciation of
securities, forward foreign
exchange contracts, foreign
currencies and net other assets (135,452,907)
Par value 322,828
Paid-in capital in excess of par
value 2,663,190,626
-------------------------------------------------------------
TOTAL NET ASSETS $2,422,064,440
-------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price
per share
($160,693,175 DIVIDED BY 21,421,059
shares of beneficial interest
outstanding) $7.50
-------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($7.50
DIVIDED BY 0.955)
(based on sales charge of 4.50% of the
offering price on January 31, 1995) $7.85
-------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per
share+
($2,245,494,228 DIVIDED BY
299,290,202 shares of beneficial
interest outstanding) $7.50
-------------------------------------------------------------
CLASS C SHARES:
NET ASSET VALUE and offering price per
share+
($3,572,323 DIVIDED BY 476,118 shares
of beneficial interest outstanding) $7.50
-------------------------------------------------------------
CLASS Z SHARES:
NET ASSET VALUE, offering and
redemption price per share
($12,304,714 DIVIDED BY 1,640,316
shares of beneficial interest
outstanding) $7.50
-------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>
Smith Barney
Diversified Strategic Income Fund
---------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
-------------------------------------------------------------
FOR THE SIX MONTHS ENDED JANUARY 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of
$677,027) $ 118,735,632
Dividends (net of foreign withholding taxes of
$41,901) 1,450,672
-------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 120,186,304
-------------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $ 5,883,129
Investment advisory fee (Note 2) 5,628,234
Service fee (Note 3) 3,112,023
Administration fee (Note 2) 2,501,437
Transfer agent fees (Notes 2 and 4) 998,952
Custodian fees (Note 2) 946,288
Legal and audit fees 36,025
Amortization of organization costs (Note 7) 14,735
Trustees' fees and expenses (Note 2) 3,645
Other 296,569
Fees waived by sub-investment adviser (Note 2) (625,359)
-------------------------------------------------------------------------------------
TOTAL EXPENSES 18,795,678
-------------------------------------------------------------------------------------
NET INVESTMENT INCOME 101,390,626
-------------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 5):
Net realized loss on:
Securities (40,653,170)
Forward foreign exchange contracts (11,978,303)
Foreign currency transactions (6,940,458)
-------------------------------------------------------------------------------------
Net realized loss on investments during the
period (59,571,931)
-------------------------------------------------------------------------------------
Net change in unrealized depreciation of:
Securities (22,765,831)
Forward foreign exchange contracts (1,054,036)
Foreign currencies and net other assets (162,438)
-------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (23,982,305)
-------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(83,554,236)
-------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS
$17,836,390
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
26
<PAGE>
Smith Barney
Diversified Strategic Income Fund
---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
1/31/95 ENDED
(UNAUDITED) 7/31/94
<S> <C> <C>
Net investment income $ 101,390,626 $ 180,627,831
Net realized loss on securities, forward foreign
exchange contracts, written options and foreign
currency transactions during the period (59,571,931) (37,948,143)
Net unrealized depreciation on securities, forward
foreign exchange contracts, written options, foreign
currencies and net other assets during the period (23,982,305)
(133,930,059)
-------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 17,836,390 8,749,629
Distributions to shareholders from net investment
income:
Class A (6,042,084) (4,706,348)
Class B (96,718,018) (158,059,325)
Class C (formerly Class D shares) (71,037) (25,994)
Class Z (formerly Class C shares) (539,799) (957,973)
Distributions to shareholders in excess of net
investment income:
Class A -- (496,837)
Class B -- (16,685,917)
Class C (formerly Class D shares) -- (2,744)
Class Z (formerly Class C shares) -- (101,131)
Distributions to shareholders from net realized gain on
investments:
Class A -- (764,707)
Class B -- (27,997,349)
Class C (formerly Class D shares) -- (2,015)
Class Z (formerly Class C shares) -- (162,730)
Distributions to shareholders from capital:
Class A -- (301,769)
Class B -- (10,134,711)
Class C (formerly Class D shares) -- (1,667)
Class Z (formerly Class C shares) -- (61,425)
Net increase/(decrease) in net assets from share
transactions (Note 6):
Class A 89,232,268 33,859,808
Class B (142,894,480) 568,199,512
Class C (formerly Class D shares) 2,551,524 1,100,257
Class Z (formerly Class C shares) 1,152,010 873,754
-------------------------------------------------------------------------------------
Net increase/(decrease) in net assets (135,493,226) 392,320,318
NET ASSETS:
Beginning of period 2,557,557,666 2,165,237,348
-------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of $42,366,680 and $40,386,368,
respectively) $ 2,422,064,440 $ 2,557,557,666
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
Smith Barney
Diversified Strategic Income Fund
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
1/31/95++ ENDED ENDED
(UNAUDITED) 7/31/94++ 7/31/93*
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 7.76 $ 8.41 $ 8.24
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.32 0.63 0.47
Net realized and unrealized gain/(loss) on
investments (0.24) (0.52) 0.27
-------------------------------------------------------------------------------------
Total from investment operations 0.08 0.11 0.74
Distributions to shareholders:
Distributions from net investment income (0.34) (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 (0.34) (0.76) (0.57)
-------------------------------------------------------------------------------------
Net Asset Value, end of period $ 7.50 $ 7.76 $ 8.41
-------------------------------------------------------------------------------------
Total return+ 1.03% 1.16% 9.30%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $160,693 $76,019 $48,334
Ratio of operating expenses to average net
assets*** 1.08%** 1.10% 1.10%**
Ratio of net investment income to average net
assets 8.53%** 7.67% 8.26%**
Portfolio turnover rate 29% 93% 116%
-------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
*** Annualized operating expense ratios before waiver of fees by the
sub-investment adviser for the six months ended January 31, 1995 and the year
ended July 31, 1994 were 1.13% and 1.12%, respectively.
+ Total return represents aggregate total return for the periods 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 use of the undistributed net investment income method does not accord
with the results of operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-investment
adviser for the six months ended January 31, 1995 and the year ended July 31,
1994 was $0.32 and $0.63, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
Smith Barney
Diversified Strategic Income Fund
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR
1/31/95++ ENDED ENDED
(UNAUDITED) 7/31/94++ 7/31/93
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 7.76 $ 8.41 $ 8.55
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.31 0.59 0.65
Net realized and unrealized loss on investments (0.25) (0.51) (0.07)
-------------------------------------------------------------------------------------
Total from investment operations 0.06 0.08 0.58
Distributions to shareholders:
Distributions from net investment income (0.32) (0.54) (0.58)
Distributions in excess of net investment income -- (0.06) --
Distributions from net realized gains -- (0.10) (0.14)
Distributions from capital -- (0.03) --
-------------------------------------------------------------------------------------
Total distributions (0.32) (0.73) (0.72)
-------------------------------------------------------------------------------------
Net Asset Value, end of period $ 7.50 $ 7.76 $ 8.41
-------------------------------------------------------------------------------------
Total return+ 0.84% 0.66% 7.28%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $2,245,494 $2,468,922 $2,105,089
Ratio of operating expenses to average net
assets*** 1.53%** 1.57% 1.59%
Ratio of net investment income to average net
assets 8.08%** 7.20% 7.77%
Portfolio turnover rate 29% 93% 116%
-------------------------------------------------------------------------------------
<FN>
** Annualized.
*** Annualized operating expense ratios before waiver of fees by the
sub-investment adviser for the six months ended January 31, 1995 and the year
ended July 31, 1994 were 1.58% and 1.59%, respectively.
+ Total return represents aggregate total return for the periods 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 use of the undistributed net investment income method does not accord
with the results of operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-investment
adviser for the six months ended January 31, 1995 and the year ended July 31,
1994 was $0.31 and $0.59, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
29
<PAGE>
Smith Barney
Diversified Strategic Income Fund
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
7/31/92 7/31/91 7/31/90*
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 7.98 $ 8.06 $ 8.00
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.68 0.71 0.41
Net realized and unrealized gain on investments 0.64 0.07 0.05
-------------------------------------------------------------------------------------
Total from investment operations 1.32 0.78 0.46
Distributions to shareholders:
Distributions from net investment income (0.68) (0.71) (0.40)
Distributions in excess of net investment income -- -- --
Distributions from net realized gains -- (0.06) --
Distributions from capital (0.07) (0.09) --
-------------------------------------------------------------------------------------
Total distributions (0.75) (0.86) (0.40)
-------------------------------------------------------------------------------------
Net Asset Value, end of period $ 8.55 $ 7.98 $ 8.06
-------------------------------------------------------------------------------------
Total return+ 17.12% 10.42% 6.00%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $1,464,744 $502,571 $179,496
Ratio of operating expenses to average net assets 1.62% 1.63% 1.74%**
Ratio of net investment income to average net
assets 7.99% 9.21% 9.59%**
Portfolio turnover rate 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.
+ Total return represents aggregate total return for the periods 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 use of the undistributed net investment income method does not accord
with the results of operations for all classes of shares.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
Smith Barney
Diversified Strategic Income Fund
------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEAR PERIOD
1/31/95++ ENDED ENDED
(UNAUDITED) 7/31/94++ 7/31/93*
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 7.76 $ 8.41 $8.36
------------------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.30 0.55 0.22
Net realized and unrealized gain/(loss) on
investments (0.24) (0.47) 0.06
------------------------------------------------------------------------------
Total from investment operations 0.06 0.08 0.28
Distributions to shareholders:
Distributions from net investment income (0.32) (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 (0.32) (0.73) (0.23)
------------------------------------------------------------------------------
Net Asset Value, end of period $ 7.50 $ 7.76 $8.41
------------------------------------------------------------------------------
Total return+ 0.84% 0.66% 3.41%
------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $3,572 $1,065 $ 11
Ratio of operating expenses to average net
assets*** 1.46%** 1.57% 1.50%**
Ratio of net investment income to average
net assets 8.15%** 7.20% 7.87%**
Portfolio turnover rate 29% 93% 116%
------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares (formerly Class D shares) on March
19, 1993.
** Annualized.
*** Annualized operating expense ratios before waiver of fees by the
sub-investment adviser for the six months ended January 31, 1995 and the year
ended July 31, 1994 were 1.51% and 1.58%, respectively.
+ Total return represents aggregate total return for the periods 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 use of the undistributed net investment income method does not accord
with the results of operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-investment
adviser for the six months ended January 31, 1995 and the year ended July 31,
1994 was $0.29 and $0.55, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
31
<PAGE>
Smith Barney
Diversified Strategic Income Fund
------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS Z SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
1/31/95++ ENDED ENDED
(UNAUDITED) 7/31/94++ 7/31/93*
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 7.76 $ 8.41 $ 8.24
----------------------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.34 0.68 0.51
Net realized and unrealized gain/(loss) on
investments (0.25) (0.54) 0.25
----------------------------------------------------------------------------------
Total from investment operations 0.09 0.14 0.76
Distributions to shareholders:
Distributions from net investment income (0.35) (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 (0.35) (0.79) (0.59)
----------------------------------------------------------------------------------
Net Asset Value, end of period $ 7.50 $ 7.76 $ 8.41
----------------------------------------------------------------------------------
Total return+ 1.40% 1.43% 9.47%
----------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $12,305 $11,552 $11,803
Ratio of operating expenses to average net
assets*** 0.72%** 0.75% 0.80%**
Ratio of net investment income to average
net assets 8.89%** 8.02% 8.56%**
Portfolio turnover rate 29% 93% 116%
----------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class Z shares (formerly Class C shares) on
November 6, 1992.
** Annualized.
*** Annualized operating expense ratios before waiver of fees by the
sub-investment adviser for the six months ended January 31, 1995 and the year
ended July 31, 1994 were 0.77% and 0.77%, respectively.
+ Total return represents aggregate total return for the periods 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 use of the undistributed net investment income method does not accord
with the results of operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-investment
adviser for the six months ended January 31, 1995 and the year ended July 31,
1994 was $0.34 and $0.68, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
Smith Barney
Diversified Strategic Income Fund
---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith
Barney Income Funds (formerly known as 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 Premium Total Return Fund, Smith Barney Convertible Fund, Smith
Barney Global Bond Fund, Smith Barney High Income Fund, Smith Barney Tax-Exempt
Income Fund, Smith Barney Exchange Reserve Fund, Smith Barney Diversified
Strategic Income Fund (the "Fund") and Smith Barney Utilities Fund. Effective
November 7, 1994, the Fund began offering Class Y shares and continued to offer
Class A, Class B, Class C (which were previously designated "Class D" shares)
and Class Z shares (which were previously designated "Class C" shares). As of
January 31, 1995, no Class Y shares had been sold. Class A shares are sold with
a front-end sales charge. Class B and Class C shares may be subject to a
contingent deferred sales charge ("CDSC") upon redemption. Class B shares will
convert automatically to Class A shares eight years after the date of original
purchase.
Class Y shares are available to investors making an initial investment
of
at least $5 million and are not subject to any sales charges, distribution or
service
fees. Class Z shares are offered without any sales charge, CDSC, service
or distribution fees 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. 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
33
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 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 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 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 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 Trust's 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
34
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 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.
35
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 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.
PAYMENT-IN-KIND BONDS: The Fund may invest in payment-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. PIK 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
36
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 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, formerly a division of Mutual
Management Corporation, which was transferred effective November 7, 1994 to
Smith Barney Mutual Funds Management Inc. ("SBMFM"). Mutual Management
Corporation and SBMFM are both wholly owned subsidiaries of 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.
Smith
Barney Global Capital Management Inc. ("Global Capital Management"), which
is a wholly owned subsidiary of Holdings, serves as the Fund's sub-investment
adviser pursuant to a sub-investment advisory agreement (the "Sub-Advisory
Agreement"). Under the Sub-Advisory Agreement, Global Capital Management
receives from SBMFM a fee computed daily and paid monthly at the annual rate of
0.10% of the value of its average daily net assets. Global Capital Management
has agreed to waive 50% of its sub-investment advisory fee until such time as
the Trust's Board of Trustees and Global Capital Management mutually agree
otherwise. For the six months ended January 31, 1995, Global Capital Management
voluntarily waived $625,359 in sub-investment advisory fees.
37
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
The Fund is also party to an administration agreement (the "Administration
Agreement")
with SBMFM (formerly known as "Smith, Barney Advisors, Inc."). Under
the Administration Agreement, the Fund pays a monthly fee at the annual rate of
0.20% of the value of its average daily net assets.
The Fund and SBMFM have also entered into a sub-administration agreement (the
"Sub-Administration Agreement") with Boston Advisors, an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Sub-Administration
Agreement, SBMFM pays Boston Advisors a portion of its administration fee at a
rate agreed upon from time to time between SBMFM and Boston Advisors.
For the six months ended January 31, 1995, the Fund incurred total brokerage
commissions of $21,866, of which none was paid to Smith Barney.
For the six months ended January 31, 1995, Smith Barney received $206,526 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 certain Class A, Class B and Class C shares. In circumstances in which the
CDSC is imposed, the amount of the charge will vary depending on the number of
years since the date of purchase. For the six months ended January 31, 1995,
Smith
Barney received from shareholders $3,370,961 in CDSCs on the redemption of
Class B shares.
No officer, director or employee of Smith Barney, Global Capital Management, or
any of their 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 $15,000
per annum plus $1,500 per meeting attended and reimburses each such Trustee for
travel and out-of-pocket expenses.
38
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 C
shareholders, and covers expenses incurred in distributing Class B and Class C
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class C 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 C
shares
at the annual rates of 0.50% and 0.45%, respectively, of the value of the
average daily net assets of each respective class of shares. For the six months
ended January 31, 1995, the service fee for Class A, Class B and Class C shares
was $170,315, $2,939,493 and $2,215, respectively. For the six months ended
January 31, 1995, the distribution fee for Class B and Class C shares was
$5,878,987 and $4,142, respectively.
Under its terms, the Plan shall remain in effect from year to year, provided
that such continuance is approved annually by vote of the Trust's Trustees,
including a majority of those Trustees who are not "interested persons" of the
Trust and who have no direct or indirect financial interest in the operation of
the Plan.
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
39
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
distribution fees, class specific operating expenses include transfer agent
fees. For the six months ended January 31, 1995, transfer agent fees for Class
A, Class B, Class C and Class Z shares were $87,252, $910,521, $338 and $841,
respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
investments and U.S. government securities, aggregated $409,088,128 and
$434,678,519, respectively, for the six months ended January 31, 1995. Cost of
purchases and proceeds from sales of long-term U.S. government securities
aggregated
$254,275,082 and $340,996,113, respectively, for the six months ended
January 31, 1995.
At January 31, 1995, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $18,170,150 and
aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $152,662,319.
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 $0.001 par value. Changes in shares of
beneficial interest of the Fund, which are divided into five classes (Class A,
Class B, Class C, Class Y and Class Z) were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
CLASS A SHARES: Shares 1/31/95 Amount Shares 7/31/94
Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 13,645,711 $ 104,500,000 5,922,523 $
49,276,958
Issued as reinvestment of dividends 490,308 3,710,596 527,613
4,331,434
Redeemed (2,506,874) (18,978,328) (2,408,094)
(19,748,584)
-------------------------------------------------------------------------------------
Net increase 11,629,145 $ 89,232,268 4,042,042 $
33,859,808
-------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS B SHARES: Shares Amount Shares
Amount
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 18,755,974 $ 142,628,367 98,298,288 $
819,073,265
Issued as reinvestment of dividends 7,234,605 54,870,113 15,557,855
128,023,970
Redeemed (44,721,955) (340,392,960) (46,268,945)
(378,897,723)
-------------------------------------------------------------------------------------
Net increase/(decrease) (18,731,376) $ (142,894,480) 67,587,198 $
568,199,512
-------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94*
CLASS C SHARES:+ Shares Amount Shares
Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 342,899 $ 2,582,025 141,778 $ 1,148,159
Issued as reinvestment of dividends 8,834 66,769 3,978
31,889
Redeemed (12,788) (97,270) (9,930) (79,791)
-------------------------------------------------------------------------------------
Net increase 338,945 $ 2,551,524 135,826 $ 1,100,257
-------------------------------------------------------------------------------------
<FN>
+ Formerly Class D shares.
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
CLASS Z SHARES:# Shares 1/31/95 Amount Shares 7/31/94
Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 213,264 $ 1,614,547 958,456 $ 7,950,340
Issued as reinvestment of dividends 70,243 532,523 154,190
1,271,890
Redeemed (131,191) (995,060) (1,028,793)
(8,348,476)
-------------------------------------------------------------------------------------
Net increase 152,316 $ 1,152,010 83,853 $ 873,754
-------------------------------------------------------------------------------------
<FN>
# Formerly Class C shares.
</TABLE>
As of January 31, 1995, no Class Y shares had been sold.
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
41
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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. As of January 31, 1995, all costs have been fully
amortized.
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-valuation 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 U.S. 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
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 Bank of America (formerly known as 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 the Agreement, the
Fund may borrow up to the lesser of $25 million or 25% of its net assets.
However, pursuant to the Fund's prospectus, the Fund may only borrow up to 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, as amended, the Fund and the other affiliated entities
are
42
<PAGE>
Smith Barney
Diversified Strategic Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 six months ended January
31,
1995, the Fund had an average outstanding balance of $1,701,630 with interest
rates ranging from 5.125% to 8.125%. Interest expense totaled $48,857 and has
been offset against income in the Statement of Operations for the six months
ended January 31, 1995. At January 31, 1995, the Fund had no outstanding
borrowings under this Agreement.
43
<PAGE>
Smith Barney
Diversified Strategic Income Fund
---------------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-INVESTMENT ADVISER
Smith Barney Global Capital
Management Inc.
10 Piccadilly
London, W1V 9LA
United Kingdom
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
COUNSEL
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
44
<PAGE>
DIVERSIFIED
STRATEGIC
INCOME FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson
Heath B. McLendon
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD AND
INVESTMENT OFFICER
Jessica M. Bibliowicz
PRESIDENT
John C. Bianchi
VICE PRESIDENT AND
INVESTMENT OFFICER
James E. Conroy
FIRST VICE PRESIDENT
AND INVESTMENT OFFICER
Victor S. Filatov
VICE PRESIDENT AND
INVESTMENT OFFICER
Lewis E. Daidone
SENIOR VICE PRESIDENT
AND TREASURER
Christina T. Sydor
SECRETARY
[LOGO]
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE
SHAREHOLDERS OF
SMITH BARNEY 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, APPLICABLE SALES CHARGE AND
EXPENSES AS WELL
AS OTHER PERTINENT INFORMATION.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 128, 175, 176, 211, 456
[[LOGO]]
FD 2174 C5
SEMI- ANNUAL REPORT
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above fund name showing a black and white picture of stock cer-
tificates, a desk plotter, pocket watch and an ink pen.
SMITH BARNEY
CONVERTIBLE FUND
JANUARY 31, 1995
DEAR SHAREHOLDER:
We are pleased to provide you with the Semi-Annual Report which includes
the portfolio of investments for Smith Barney Convertible Fund for the six
months ended January 31, 1995.
MARKET AND ECONOMIC OVERVIEW
During the past six months since our last report, the U.S. economy gained
momentum and expanded at a rate not matched since 1987. The strength in
the economy, led by an increase in employment and a surge in consumer
spending, required the Federal Reserve Bank to continue their restrictive
monetary policy initiated in February 1994. The Federal Reserve raised
short-term interest rates twice during the Fund's semi-annual reporting
period in an effort to slow the economy and reduce inflationary expecta-
tions, bringing to six the total number of Federal Reserve increases in
1994 and a rise in short-term interest rates of two and half percentage
points. In February 1995, the Federal funds rate was raised to 6.00%. We
agree with the Federal Reserve's actions and believe they are succeeding
in their efforts. Recent economic statistics relating to retail sales and
housing suggest that economic growth is indeed slowing. In addition, in-
flation remains relatively subdued. We have confidence that the economy
will continue to grow in 1995, although at a slower pace than in 1994,
which should prevent inflation from accelerating and keep interest rates
relatively stable.
The past year proved to be a difficult period for the financial markets as
a result of the higher interest rate environment. The rise in short-term
interest rates had an adverse affect on long-term interest rates, and the
yield on the 30-year Treasury bond consequently rose to a peak of 8.16% in
November. Equity prices were volatile as the improving corporate earnings
environment brought on by the expanding economy was offset by fears of
higher interest rates. The markets were also negatively influenced by the
unsettling events pertaining to the Mexican debt crisis and overall emerg-
ing markets concerns.
Looking forward, we believe that the financial markets will improve as we
expect long-term rates to stabilize or drift lower in response to the in-
flation fighting policies of the Federal Reserve. The equity market should
continue to benefit from rising corporate earnings.
PERFORMANCE
The convertible securities market was adversely impacted by the difficul-
ties in the financial markets. Convertible securities have both equity and
fixed income characteristics and the combination of higher interest rates
and languishing equity prices helped contribute to a contraction in con-
version premiums. As a result, the net asset value for Class A and Class B
shares of the Fund declined to $13.79 per share on January 31, 1995, from
$14.56 on July 31, 1994. For the period from November 7, 1994 to January
31, 1995, the net asset value of Class C shares declined from $14.09 per
share to $13.79 per share. The Fund's monthly distributions somewhat off-
set the decline in net asset value, but nonetheless resulted in a negative
total return to shareholders for the past six months. Specific performance
information for this and past fiscal periods for each available class of
shares can be found in the "Financial Highlights" pages of this report.
Given our positive outlook for the financial markets over the next year,
the convertible securities market should rebound and continue to attract
investors seeking long-term growth and higher income. We believe convert-
ible securities can provide long-term investors with superior risk-
adjusted returns.
PORTFOLIO STRATEGY
Our investment strategy focuses on purchasing convertible securities that
provide both current income and the potential for capital appreciation. We
invest in companies that have strong fundamentals and convertible
securities that are attractively priced. Our emphasis is on higher quality
issues and, as of January 31, 1995, over 50% of the issues in the Fund
were rated investment grade (BBB or higher) by Standard & Poor's Corpora-
tion. Although the new issue calendar has been slow over the past months,
we believe that a better interest rate environment will bring numerous op-
portunities in this market as corporations begin to raise funds again.
The Fund is well diversified with approximately 20 different industries
represented that cover a broad range of economic sectors. Given our out-
look for the economy, we believe that a balance between growth and
economically- sensitive issues is appropriate. Some of the sectors well
represented in the Fund include financials, metals, technology and papers.
Recent additions to the portfolio include Ford Motor Company, Champion In-
ternational Corporation, Inco Ltd., Interpublic Group Co., EMC Corporation
and Corning Delaware L.P. We sold our holdings in Rogers Communications
Inc., Unocal Corp., California Microwave Inc. and Kroger Company.
We appreciate your continued confidence during the difficult investment
environment of the past six months, and join you in looking forward to a
better investment environment in the months ahead. Should you have any
questions about your investment in the Fund or how other Smith Barney mu-
tual funds may be useful in helping you reach your financial goals, please
speak with your Smith Barney Financial Consultant.
Sincerely,
Heath B. McLendon Jack S. Levande
Chairman of the Board Vice President
and Investment Officer and Investment Officer
March 6, 1995
PORTFOLIO HIGHLIGHTS (UNAUDITED)
JANUARY 31, 1995
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Smith Barney Convertible Fund
investment securities held at January 31, 1995 by industry breakdown. The
pie is broken in pieces representing industry breakdown in the following
percentages:
<TABLE>
<CAPTION>
PERCENTAGE
<S> <C>
Banking and Finance 17.0%
Oil, Gas Metals and Mining 29.7%
Other Industries 15.9%
Repurchase Agreement and Net Other Assets
and Liabilities 4.4%
Transportation 2.8%
Automotive 3.6%
Leisure and Amusement 5.3%
Insurance 6.6%
Computers and Electronics 9.2%
Grocery, Food and Beverage 5.5%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY NET ASSETS
<S> <C>
Freeport McMoRan Inc. 4.7%
Time Warner Inc. 4.3
Cyprus AMAX Minerals Company 3.8
General Motors Corporation 3.7
Pennzoil Company 3.6
BankAmerica Corp. 3.4
Newmont Mining 3.2
Barnett Banks Inc. 3.2
Bethlehem Steel Corporation 3.0
Amoco CDA Petroleum Company 2.9
</TABLE>
PORTFOLIO OF INVESTMENTS (UNAUDITED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
<S> <C> <C>
CONVERTIBLE SECURITIES -- 92.5%
CONVERTIBLE PREFERRED STOCKS -- 49.3%
BANKING AND FINANCE -- 17.0%
40,000 Ahmanson (HF) & Co., Conv. Pfd., Series D, $ 1,660,000
6.00%
30,000 Banc One Corporation, Conv. Pfd., Series C, 1,597,500
Exch. $3.50
50,000 BankAmerica Corp., Conv. Pfd., Series G, 2,643,750
6.50%
30,000 Barnett Banks Inc., Conv. Pfd., Series A, 2,475,000
Exch. $4.50
20,000 First Fidelity Bancorporation, Conv. Pfd., 750,000
Series B, Exch. $2.15
40,000 Great Western Financial Corporation, Conv. 2,135,000
Pfd., Represents 1/5 Share
20,000 SunAmerica Inc., Depository Shares Repre- 790,000
senting 1/50 Demand Conv. Pfd., Series D,
Exch. $2.78
40,000 Union Planter Corporation, Conv. Pfd., Se- 1,200,000
ries E, 8.00%
13,251,250
OIL, GAS, METALS AND MINING -- 13.7%
30,000 Bethlehem Steel Corporation, Conv. Pfd., 1,336,875
Exch. $3.50+
20,000 Bethlehem Steel Corporation, Conv. Pfd., 1,035,000
Exch. $5.00
50,000 Cyprus AMAX Minerals Company, Conv. Pfd., 2,993,750
Series A, Exch. $4.00
40,000 Freeport McMoRan Inc., Conv. Pfd., Exch. 1,875,000
$42.3758+
50,000 Newmont Mining, Depositary Share, Repre- 2,534,375
sents 1/2 Share Conv. Pfd., Series A,
Exch. $2.75+
20,000 WHX Corp., Pfd., Series A, 6.50% 935,000
10,710,000
COMPUTERS AND ELECTRONICS -- 6.5%
50,000 General Motors Corporation, Depositary 2,868,750
Share Represents 1/10 Share Conv. Pfd.,
Series C, Exch. $3.25
40,000 Salomon Inc., Equity-Linked Debt Securi- 1,475,000
ties, Series Oracle, 7.250% due 10/21/96,
Conv. Pfd.
50,000 Westinghouse Electric Corp., Depository 737,500
Share, Represents 1/10 Pfd. Series C,
Exch. $1.30 6/01/97+
5,081,250
GROCERY, FOOD AND BEVERAGE -- 2.8%
50,000 Conagra Inc., Conv. Pfd., $1.6875 8/14/02, 1,600,000
Class E
100,000 RJR Nabisco Holdings Corporation, Deposi- 625,000
tary Share Represents 1/10 Share Conv.
Pfd., Series C, 9.25%
2,225,000
TRANSPORTATION -- 2.8%
40,000 Burlington Northern Inc., Conv. Pfd., Se- $ 2,175,000
ries A, 6.25%
REAL ESTATE -- 2.5%
50,000 Property Trust America, Conv. Pfd. $1.75, 1,125,000
Series A
40,000 Tanger Factory Outlet Centers Inc., Deposi- 845,000
tary Share Represents 1/10 Pfd., Series
A, Exch. $1.658
1,970,000
PACKAGING AND CONTAINERS -- 2.5%
40,000 Corning Delaware L.P., Conv. Pfd., 6.00% 1,955,000
AUTOMOTIVE -- 1.0%
10,000 Ford Motor Company, Depositary Share Repre- 818,780
sents 1/1000 Pfd. Shares, Series A, Exch.
$4.20
CONSTRUCTION -- 0.5%
25,000 Kaufman & Broad Home Corporation, Deposi- 362,500
tory Share, Representing 1/5 Share Conv.
Pfd., Series B, Exch. $1.52
TOTAL CONVERTIBLE PREFERRED STOCKS (Cost 38,548,780
$41,250,021)
FACE
VALUE
CONVERTIBLE BONDS AND NOTES -- 43.2%
OIL, GAS, METALS AND MINING -- 13.7%
$2,000,000 Amoco CDA Petroleum Company, Conv. Sub. 2,270,000
Deb., Series 7.375% due 9/01/13
2,000,000 Freeport McMoRan Inc., Conv. Sub. Deb., 1,820,000
6.550% due 1/15/01
2,000,000 Inco Ltd., Conv. Deb., 5.750% due 7/1/04 2,165,000
2,500,000 Pennzoil Company, Conv. Bonds, 6.500% due 2,840,625
1/15/03
2,000,000 USX-Marathon Group, Conv. Sub. Deb., 7.000% 1,640,000
due 6/15/17
10,735,625
INSURANCE -- 6.6%
1,500,000 Alexander & Alexander Services, Conv. Deb., 1,530,000
11.000% due 4/15/07
2,000,000 Chubb Capital Corporation, Conv. Bonds, 2,065,000
6.000% due 05/15/98
1,500,000 Cigna Corporation, Conv. Sub. Deb., 8.200% 1,567,500
due 7/10/10
5,162,500
LEISURE AND AMUSEMENT -- 5.3%
$3,000,000 Coleman WorldWide Corporation, Conv. Note, $ 810,000
Zero Coupon due 5/27/13
3,500,000 Time Warner Inc., Sub. Deb. Conv., 8.750% 3,368,750
due 01/10/15
4,178,750
AIRLINES -- 2.8%
3,000,000 Delta Airlines Inc., Conv. Sub. Note, 2,220,000
3.230% due 6/15/03
GROCERY, FOOD AND BEVERAGE -- 2.7%
2,000,000 American Stores Company, Conv. Sub. Notes, 2,140,000
7.250% due 9/15/01
COMPUTERS & ELECTRONICS -- 2.7%
500,000 EMC Corporation, Conv. Sub. Note, 4.250% 525,000
due 1/1/01
1,500,000 Thermo Electron Corp., Conv. Senior Deb., 1,586,250
5.000% due 4/15/01+
2,111,250
AUTOMOTIVE -- 2.6%
2,000,000 Arvin Industries Inc., Conv. Sub. Deb., 2,000,000
7.500% due 9/30/14
BUILDING MATERIALS -- 1.6%
1,000,000 Home Depot Inc., Conv. Sub. Note, 4.500% 1,220,000
due 2/15/97
PAPER AND FORESTRY PRODUCTS -- 1.5%
1,000,000 Champion International Corporation, Conv. 1,133,750
Sub. Deb., 6.500% due 4/15/11
HOUSEHOLD APPLIANCES -- 1.0%
2,000,000 Whirlpool Corporation, Conv. Sub. Liquid 740,000
Note, Zero Coupon due 5/14/11
OTHER -- 2.7%
2,500,000 Interpublic Group Co., Conv. Sub. Deb., 2,121,875
3.750% due 4/1/02+
TOTAL CONVERTIBLE BONDS AND NOTES (Cost 33,763,750
$35,091,724)
TOTAL CONVERTIBLE SECURITIES (Cost 72,312,530
$76,341,745)
SHARES
COMMON STOCKS -- 3.1%
NATURAL GAS -- 2.3%
40,000 Tenneco Inc. 1,760,000
COMMUNICATIONS -- 0.8%
30,000 Tele-Communications Inc., Class A++ 637,500
TOTAL COMMON STOCKS (Cost $2,352,884) 2,397,500
FACE MARKET VALUE
VALUE (NOTE 1)
REPURCHASE AGREEMENT -- 4.9% ($3,811,000)
$3,811,000 Agreement with Credit Lyonnais, 5.800% $ 3,811,000
dated 01/31/95, to be repurchased at
$3,811,614 on 02/01/95, collateralized by
$3,830,000 U.S. Treasury Note, 7.375% due
11/15/97
TOTAL INVESTMENTS (Cost $82,505,629*) 100.5% 78,521,030
OTHER ASSETS AND LIABILITIES (NET) (0.5) (379,189)
NET ASSETS 100.0% $ 78,141,841
<FN>
* Aggregate cost for Federal tax purposes.
+ Security exempt from registration under Rule 144A of the Securities Act
of 1933, as amended. These securities may be resold in transactions ex-
empt from registration to qualified institutional buyers.
++ Non-income producing security.
</TABLE>
See Notes to Financial Statements
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED)
JANUARY 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $82,505,629) (Note 1)
See accompanying schedule $78,521,030
Interest receivable 490,587
Dividends receivable 145,985
Receivable for Fund shares sold 31,881
TOTAL ASSETS 79,189,483
LIABILITIES:
Payable for investment securities purchased $818,780
Accrued shareholder reports' expense 68,001
Payable for Fund shares redeemed 36,569
Investment advisory fee payable (Note 2) 33,408
Distribution fee payable (Note 3) 18,867
Service fee payable (Note 3) 16,704
Administration fee payable (Note 2) 13,363
Transfer agent fees payable (Note 2) 12,500
Custodian fees payable (Note 2) 5,739
Due to custodian 2,682
Accrued Trustees' fees and expenses (Note 2) 833
Accrued expenses and other payables 20,196
TOTAL LIABILITIES 1,047,642
NET ASSETS $78,141,841
NET ASSETS CONSIST OF:
Distributions in excess of net investment income
earned to date $ (66,840)
Accumulated net realized loss on investments sold (6,763,762)
Unrealized depreciation of investments (3,984,599)
Par value 5,665
Paid-in capital in excess of par value 88,951,377
TOTAL NET ASSETS $78,141,841
NET ASSET VALUE:
CLASS A SHARES:
Net asset value and redemption price per share
($34,005,318 / 2,465,140 shares of beneficial interest
outstanding) $13.79
Maximum offering price per share ($13.79 / 0.95)
(based on sales charge of 5.00% of the offering price
on January 31, 1995) $14.52
CLASS B SHARES:
Net asset value and offering price per share+
($44,095,336 / 3,196,648 shares of beneficial interest
outstanding) $13.79
CLASS C SHARES:
Net asset value and offering price per share+
($41,187 / 2,986 shares of beneficial interest out-
standing) $13.79
<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 (UNAUDITED)
FOR THE SIX MONTHS ENDED JANUARY 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends $1,386,129
Interest 1,326,355
TOTAL INVESTMENT INCOME 2,712,484
EXPENSES:
Investment advisory fee (Note 2) $ 208,560
Distribution fee (Note 3) 144,101
Service fee (Note 3) 104,280
Administration fee (Note 2) 83,424
Transfer agent fees (Notes 2 and 4) 70,116
Legal and audit fees 24,044
Custodian fees (Note 2) 18,793
Trustees' fees and expenses (Note 2) 5,902
Other 55,040
TOTAL EXPENSES 714,260
NET INVESTMENT INCOME 1,998,224
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(NOTES 1 AND 5):
Net realized loss on investments sold during the pe-
riod (584,940)
Net unrealized depreciation of investments during the
period (3,916,824)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(4,501,764)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(2,503,540)
</TABLE>
See Notes to Financial Statements
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
1/31/95 7/31/94
(UNAUDITED)
<S> <C> <C>
Net investment income $1,998,224 $3,684,983
Net realized gain/(loss) on investments sold
during the period (584,940) 2,361,914
Net unrealized depreciation on investments dur-
ing the period (3,916,824) (5,170,821)
Net increase/(decrease) in net assets resulting
from operations (2,503,540) 876,076
Distributions to shareholders from net invest-
ment income:
Class A (771,244) (105,174)
Class B (1,228,254) (3,525,176)
Class C (formerly Class D shares) (360) --
Distributions to shareholders in excess of net
investment income:
Class A -- (4,222)
Class B -- (141,524)
Net increase/(decrease) in net assets from Fund
share transactions (Note 6):
Class A 33,641,789 723,617
Class B (38,521,791) 13,148,417
Class C (formerly Class D shares) 41,352 --
Net increase/(decrease) in net assets (9,342,048) 10,972,014
NET ASSETS:
Beginning of period 87,483,889 76,511,875
End of period (including distributions in excess
of net investment income of $66,840 and $65,206,
respectively) $78,141,841 $87,483,889
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS YEAR PERIOD
ENDED ENDED ENDED
1/31/95 7/31/94 7/31/93*
(UNAUDITED)
<S> <C> <C> <C>
Net asset value, beginning of period $14.56 $14.99 $13.82
Income from investment operations:
Net investment income 0.34 0.72 0.49
Net realized and unrealized gain/(loss)
on investments (0.74) (0.42) 1.22
Total from investment operations (0.40) 0.30 1.71
Less distributions:
Dividends from net investment income (0.37) (0.70) (0.50)
Distributions in excess of net invest-
ment income -- (0.03) (0.01)
Distributions in excess of net realized
gains -- -- (0.03)
Total distributions (0.37) (0.73) (0.54)
Net asset value, end of period $13.79 $14.56 $14.99
Total return++ (2.80)% 1.99% 12.63%
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $34,005 $2,294 $1,655
Ratio of operating expenses to average net
assets 1.39%+ 1.40% 1.37%+
Ratio of net investment income to average
net assets 5.11%+ 4.80% 4.86%+
Portfolio turnover rate 25% 54% 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.
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
1/31/95 7/31/94 7/31/93 7/31/92 7/31/91
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $14.56 $14.99 $13.84 $12.51 $12.21
Income from investment opera-
tions:
Net investment income 0.36 0.65 0.61 0.64 0.68
Net realized and unrealized
gain/(loss) on investments (0.80) (0.42) 1.20 1.35 0.33
Total from investment opera-
tions (0.44) 0.23 1.81 1.99 1.01
Less distributions:
Dividends from net investment
income (0.33) (0.64) (0.60) (0.64) (0.68)
Distributions in excess of
net investment income -- (0.02) (0.02) -- --
Distributions from net real-
ized gains -- -- -- -- --
Distributions in excess of
net realized gains -- -- (0.04) -- --
Distributions from capital -- -- -- (0.02) (0.03)
Total distributions (0.33) (0.66) (0.66) (0.66) (0.71)
Net asset value, end of period $13.79 $14.56 $14.99 $13.84 $12.51
Total return++ (3.05)% 1.50% 13.40% 16.25% 8.86%
Ratios to average net assets/
supplemental data:
Net assets, end of period (in
000's) $44,095 $85,190 $74,857 $57,120 $65,523
Ratio of operating expenses to
average net assets 1.86%+ 1.88% 2.00% 1.88% 1.92%
Ratio of net investment income
to average net assets 4.65%+ 4.32% 4.20% 4.76% 5.81%
Portfolio turnover rate 25% 54% 95% 77% 26%
<FN>
+ 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
FINANCIAL HIGHLIGHTS (continued)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
7/31/90 7/31/89 7/31/88 7/31/87*
<S> <C> <C> <C> <C>
Net asset value, beginning of period $13.80 $13.04 $13.93 $13.00
Income from investment operations:
Net investment income 0.79 0.85 0.87 0.63
Net realized and unrealized gain-
/(loss) on investments (1.40) 0.78 (0.64) 0.95
Total from investment operations (0.61) 1.63 0.23 1.58
Less distributions:
Dividends from net investment income (0.83) (0.86) (0.85) (0.62)
Distributions in excess of net in-
vestment income -- -- -- --
Distributions from net realized gains (0.11) (0.01) (0.27) (0.03)
Distributions in excess of net real-
ized gains -- -- -- --
Distributions from capital (0.04) -- -- --
Total distributions (0.98) (0.87) (1.12) (0.65)
Net asset value, end of period $12.21 $13.80 $13.04 $13.93
Total return++ (4.53)% 13.09% 2.22% 12.34%
Ratios to average net assets/supplemen-
tal data:
Net assets, end of period (in 000's) $97,157 $153,137 $172,587 $235,685
Ratio of operating expenses to average
net assets 1.85% 1.74% 1.75% 1.78%+**
Ratio of net investment income to aver-
age net assets 6.10% 6.41% 6.74% 5.85%+
Portfolio turnover rate 24% 32% 45% 21%
<FN>
* The Fund commenced operations on September 2, 1986. Those shares in ex-
istence 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 indicated
and does not reflect any applicable sales charge.
</TABLE>
See Notes to Financial Statements
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
1/31/95*
(UNAUDITED)
<S> <C>
Net asset value, beginning of period $14.09
Income from investment operations:
Net investment income 0.15
Net realized and unrealized loss on investments (0.28)
Total from investment operations (0.13)
Less distributions:
Dividends from net investment income (0.17)
Total distributions (0.17)
Net asset value, end of period $13.79
Total return++ (0.95)%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $41
Ratio of operating expenses to average net assets 1.84%+
Ratio of net investment income to average net assets 4.66%+
Portfolio turnover rate 25%
<FN>
* The Fund commenced selling Class C (formerly Class D) shares on Novem-
ber 7, 1994.
+ 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
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Income Funds (formerly known as 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 Premium Total
Return Fund, Smith Barney Convertible Fund (the "Fund"), Smith Barney Glo-
bal Bond Fund, Smith Barney High Income Fund, Smith Barney Tax-Exempt In-
come Fund, Smith Barney Exchange Reserve Fund, Smith Barney Diversified
Strategic Income Fund and Smith Barney Utilities Fund. Effective November
7, 1994, the Fund began offering Class Y shares and continued to offer
Class A, Class B and Class C shares (Class C shares were previously
designated "Class D" shares). As of January 31, 1995, no Class Y shares
had been sold. Class A shares are sold with a front-end sales charge.
Class B and Class C shares may be subject to a contingent deferred sales
charge ("CDSC") upon redemption. Class B shares will convert automatically
to Class A shares eight years after the date of original purchase. Class Y
shares are available to investors making an initial investment of at least
$5 million and are not subject to any sales charges, distribution or ser-
vice fees. All classes of shares have identical rights and privileges ex-
cept with respect to the effect of the respective sales charges, the dis-
tribution and/or service fees borne by each class, expenses allocable ex-
clusively 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
market value or, in the absence of market value with respect to any port-
folio securities, at fair value as determined by or under the direction of
the Trust's Board of Trustees. Portfolio securities that are traded prima-
rily 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 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.
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. 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, 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 compa-
nies, 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 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 was transferred effective November 7, 1994 to Smith Bar-
ney Mutual Funds Management Inc. ("SBMFM"). Mutual Management Corp. and
SBMFM are both wholly owned subsidiaries of 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.
The Fund is also party to an administration agreement (the "Administration
Agreement") with SBMFM. Under the Administration Agreement, the Fund pays
a monthly fee at the annual rate of 0.20% of the value of its average
daily net assets.
The Fund and SBMFM have entered into a sub-administration agreement (the
"Sub-Administration Agreement") with Boston Advisors, an indirect wholly
owned subsidiary of Mellon Bank Corporation ("Mellon"). Under the Sub-
Administration Agreement, SBMFM pays Boston Advisors a portion of its ad-
ministration fee at a rate agreed upon from time to time between SBMFM and
Boston Advisors.
For the six months ended January 31, 1995, the Fund incurred total broker-
age commissions of $18,000, none of which was paid to Smith Barney.
For the six months ended January 31, 1995, Smith Barney received from in-
vestors $4,879 representing commissions (sales charges) on sales of Class
A shares.
A CDSC is generally payable by a shareholder in connection with the
redemption of certain Class A, Class B and Class C shares. In circum-
stances in which the CDSC is imposed, the amount of the charge will vary
depending on the number of years since the date of purchase. For the six
months ended January 31, 1995, Smith Barney received from shareholders
$62,492 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 of its Trustees who is not an
officer, director or employee of Smith Barney or any of its affiliates
$15,000 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 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 C shareholders, and covers expenses incurred in distributing Class B
and Class C shares. Smith Barney is paid an annual service fee with re-
spect to Class A, Class B and Class C 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 C shares at the annual rate of 0.50% and
0.45% of the value of the average daily net assets of each respective
class of shares. For the six months ended January 31, 1995, the Fund
incurred service fees of $32,228, $72,035 and $17 for Class A, Class B and
Class C shares, respectively. For the six months ended January 31, 1995,
the Fund incurred distribution fees of $144,070 and $31 for Class B and
Class C shares, 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 six months ended January 31, 1995, the Fund
incurred transfer agent fees of $24,773, $45,330 and $13 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 $19,518,855
and $24,609,998, respectively, for the six months ended January 31, 1995.
At January 31, 1995, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$1,246,166, and the aggregate gross unrealized depreciation for all secu-
rities in which there was an excess of tax cost over value was $5,230,765.
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 Y) were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 2,402,286 $ 34,961,184 84,040 $1,276,232
Issued as reinvestment of dividends 45,879 641,005 6,923 103,472
Redeemed (140,597) (1,960,400) (43,742) (656,087)
Net increase 2,307,568 $33,641,789 47,221 $723,617
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 168,786 $2,403,746 1,720,098 $25,995,096
Issued as reinvestment of dividends 68,539 969,253 199,238 2,978,825
Redeemed (2,891,585) (41,894,790) (1,060,928) (15,825,504)
Net increase/(decrease) (2,654,260) $(38,521,791) 858,408 $13,148,417
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
1/31/95*
CLASS C SHARES: Shares Amount
<S> <C> <C>
Sold 2,958 $40,992
Issued as reinvestment of dividends 27 360
Net increase 2,985 $41,352
<FN>
* The Fund commenced selling Class C (formerly Class D) shares on November
7, 1994.
</TABLE>
As of January 31, 1995, no Class Y shares had been sold.
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.
8. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Bank of America (formerly known as Continental Bank
N.A.) under an Amended and Restated Line of Credit Agreement (the
"Agreement") dated April 30, 1992, and renewal 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 the Agreement, the Fund may borrow up to the lesser
of $25 million or 25% of its net assets. However, pursuant to the Fund's
prospectus, the Fund may only borrow up to 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 provisions, each participating fund to maintain a ratio of net as-
sets (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 six months ended January 31, 1995, 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.
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
COUNSEL
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 fund. If a stock or bond appreciates
in price, there is a capital gain; if it depreciates there is a capital
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.
CDSC (CONTINGENT DEFERRED SALES CHARGE) A kind of back-end load, a
CDSC
is imposed if shares are redeemed during the first few years of ownership.
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 under certain circumstances.
DISTRIBUTION RATE This is the rate at which a mutual fund pays out (or
distributes) interest, dividends and realized capital gains to sharehold-
ers. A fund's distribution rate is usually expressed as an annualized per-
cent of the fund's offering price.
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 value of all
securities 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 fund. It may be expressed on an average an-
nual basis or cumulative basis (total change over a given period). In ad-
dition, 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. This standardized calculation was introduced to insure
that investors can compare different funds on an equal basis. The SEC av-
erage annual total return calculation includes the effects of all fees and
sales charges and assumes the reinvestment of all dividends and capital
gains.
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
Jessica M. Bibliowicz
President
Jack S. Levande
Vice President and
Investment Officer
Lewis E. Daidone
Senior Vice President and
Treasurer
Christina T. Sydor
Secretary
This report is submitted for the general information of the shareholders
of Smith Barney Convertible Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by an effective Pro-
spectus for the Fund which contains information concerning the Fund's in-
vestment policies, fees, applicable sales charge and expenses as well as
other pertinent information.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 27, 196, 245, 445
FD2170 C5
<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.
SEMI- SMITH BARNEY
ANNUAL HIGH
REPORT INCOME
FUND
.......................................
JANUARY 31, 1995
[LOGO]
<PAGE>
High Income Fund
DEAR SHAREHOLDER:
We are pleased to provide you with the semi-annual report for
Smith Barney High Income Fund for the six months ended
January 31, 1995. Over the past six months the Fund generated
a total return of (1.44%) for Class A shares, (1.71%) for Class B
shares, (0.17%) for Class C shares and (1.27)% for Class Z shares,
respectively, and paid dividends totaling $0.56 for Class A shares,
$0.53
for Class B shares, $0.44 for Class C shares and $0.58 for Class
Z shares. The Fund's primary objective is to deliver a consistently
high level of current income. To achieve this goal, 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.
Although the Fund continued to be negatively impacted by a number of factors
until
early 1995, the major factor impacting the Fund was the significant backup
in interest rates in 1994. It should be noted that our negative performance was
not
the result of holding any defaulting issues or derivative securities but, as
mentioned earlier, a result of the significant rise in interest rates in the
bond market in reaction to the Federal Reserve's tightening of monetary policy.
In this environment, even relatively conservative, intermediate-maturity (3-7
years) Treasury issues experienced a meaningful erosion in principal value.
MARKET AND ECONOMIC OVERVIEW
While
the economic expansion remains on track, weaker than expected retail sales
in
the final months of 1994 may be evidence that consumption is finally slowing.
Throughout 1994, individuals financed a large portion of their purchases with
debt. As a result, debt levels are back to their historical highs, which may be
starting to act as a drag on consumption expenditures. The industrial side of
the economy remains strong, however, with factory capacity utilization at
relatively high levels. The Federal Reserve's ongoing fear has been that
inflation rates may begin to move unacceptably higher given the high levels of
employment and robust industrial production. Although inflation has not
increased thus far (as evidenced by the relatively modest 2.7% increase in the
Consumer Price Index for 1994), to prevent the general economy from overheating
with unacceptably higher inflation rates, the Federal Reserve may raise
short-term interest rates by another 50 basis
1
<PAGE>
points (one-half of a percentage point) by the middle of 1995 on top of
the 300 basis points (3.00%) increase in short-term interest rates since
February 1994.
On
the political front, the recent overpowering Republican victories in Congress
may mark a watershed event in economic circles as well. In addition to the
expected changes in fiscal policy, where government may actually be downsized
for the first time in over 40 years, some market analysts feel the recent
Republican victories will alter the relationship between the U.S. Congress and
Federal Reserve Bank. In effect, the Federal Reserve may be given stronger
support
to pursue a more consistent anti-inflationary monetary policy that would
be welcomed by the bond market. In any event, we believe the Federal Reserve
will
succeed in controlling economic growth and limiting inflationary pressures,
which should allow interest rates to once again move lower with corresponding
bond price appreciation. We have already begun to witness a decline in general
interest rates over the first two months of 1995 as investors have become more
confident in the Federal Reserve's ability to control economic growth and
inflation.
PORTFOLIO STRATEGY
Throughout 1994, we continued to shift the portfolio into higher-coupon,
intermediate-maturity (5-10 years) issues of the relatively more economically-
sensitive companies in order to limit interest rate risk and to capitalize on
the improving economy. Our largest industry weightings remain in forest
products,
paper and containers, metals and mining, hotel and gaming, and general
manufacturing. Since we believe the high yield market is in a bottoming phase,
we
have moved to a more fully invested position with an average maturity between
seven and eight years. In recent weeks, as we have become more confident of a
sustainable market upturn in 1995, we have begun to favor deeper discount
securities which should provide greater price appreciation potential during
market
rallies. In the months ahead we will be focusing on eliminating portfolio
holdings that have generated disappointing results in the past year as well as
shifting
the overall portfolio away from the more economically-sensitive sectors
that
would be vulnerable to an economic slowdown. We will be looking to increase
exposure in the more traditionally defensive industries such as cable TV,
telecommunications, media, broadcasting, food and beverage, to name a few.
2
<PAGE>
SUMMARY THOUGHTS
We believe that the worst of the bond market correction is behind us and that
the high yield market offers reasonable value at current levels. We remain
confident that the Federal Reserve will succeed in controlling both economic
growth and inflation. A peak in short-term interest rates in the first half of
1995 hopefully should mark the end of one of the worst bond market declines in
the past century.
We
appreciate your past support during these difficult times and look forward to
achieving
improving results over the course of 1995. While patience may still be
required as the financial markets bottom in 1995, we believe that patience will
be
rewarded as market conditions strengthen. Should you have any questions about
your
investment in the Fund, please call your Smith Barney Financial Consultant.
Sincerely,
Heath B. McLendon John C. Bianchi, CFA
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
INVESTMENT OFFICER
MARCH 13, 1995
3
<PAGE>
Smith Barney
High Income Fund
---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) JANUARY 31, 1995
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Income Funds - High Income Fund's
investment securities held at January 31, 1995 by industry classification. The
pie is broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Building and Construction 5.6%
Metals & Mining 7.4%
Publishing 7.4%
Health Care & Pharmaceuticals 7.8%
Containers 7.3%
Hotel, Casino and Gaming 7.9%
Paper and Forest Products 9.1%
Repurchase Agreement and Net Other
Assets and Liabilities 5.0%
Other Industries 25.9%
Grocery 3.2%
Consumer Durables 4.2%
Broadcasting 4.6%
Personal Care 4.6%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Company Net Assets
<S> <C>
------------------------------------------------------------------
REVLON CONSUMER PRODUCTS CORPORATION 3.9%
ANACOMP, INC. 2.6
STONE CONTAINER CORPORATION 2.6
ORNDA HEALTH CORP. 2.4
GAYLORD CONTAINER CORPORATION 2.1
DOMTAR INC. 2.1
AMERICAN STANDARD, INC. 2.0
INTERNATIONAL SEMI-TECH 1.9
MARVEL HOLDINGS, INC. 1.8
AMERICAN MEDICAL INTERNATIONAL, INC. 1.8
</TABLE>
4
<PAGE>
Smith Barney
High Income Fund
---------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) JANUARY 31,
1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
--------------------------------------------------------------------
CORPORATE BONDS AND NOTES -- 85.5%
PAPER AND FOREST PRODUCTS
-- 8.3%
Domtar Inc, Sr. Notes:
$ 2,475,000 11.750% due 3/15/99 $ 2,564,719
11,350,000 12.000% due 4/15/01 11,974,250
India Kiat International
Finance Company:
5,075,000 11.375% due 6/15/99 4,922,750
5,600,000 11.875% due 6/15/02 5,355,000
10,300,000 Repap Wisconsin, Second
Priority Sr. Note,
9.875% due 5/1/06 8,935,250
11,300,000 Riverwood International
Corporation, Sr. Sub.
Notes,
11.250% due 6/15/02 11,681,375
5,400,000 S D Warren Company, Sr.
Sub. Note,
12.000% due 12/15/04+ 5,616,000
7,875,000 Stone Consolidated
Corporation, Sr. Secured
Note,
10.250% due 12/15/00 7,727,344
--------------------------------------------------------------------
58,776,688
--------------------------------------------------------------------
CONTAINERS -- 7.3%
7,000,000 Container Corporation of
America, Guaranteed Sr.
Note,
11.250% due 5/1/04 7,175,000
Gaylord Container
Corporation:
10,275,000 11.500% due 5/15/01 10,429,125
1,500,000 Zero coupon due 5/15/05
(1) 1,338,750
8,650,000 Silgan Holdings, Inc., Sr.
Disc. Deb.,
Zero coupon due 12/15/02
(2) 7,439,000
Stone Container
Corporation:
1,850,000 First Mortgage,
10.750% due 10/1/02 1,836,125
Sr. Notes:
1,800,000 12.625% due 7/15/98 1,890,000
3,000,000 11.875% due 12/1/98 3,120,000
11,425,000 11.500% due 10/1/04 11,482,125
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
CONTAINERS -- (CONTINUED)
$ 6,100,000 United States Can Company,
Sr. Sub. Note,
13.500% due 1/15/02 $ 6,664,250
--------------------------------------------------------------------
51,374,375
--------------------------------------------------------------------
METALS AND MINING -- 6.9%
4,850,000 AK Steel Corporation, Sr.
Notes,
10.750% due 4/1/04 4,850,000
1,675,000 Armco, Inc., Sr. Note,
11.375% due 10/15/99 1,675,000
1,300,000 Essex Group Inc., Sr. Note,
10.000% due 5/1/03 1,217,125
6,175,000 Federal Industries Ltd.,
Sr. Note,
10.250% due 6/15/00 5,789,063
1,700,000 Geneva Steel Company, Sr.
Notes,
11.125% due 3/15/01 1,595,875
Inland Steel Company, First
Mortgage, Series T:
800,000 12.000% due 12/1/98 850,000
2,700,000 12.750% due 12/15/20 2,916,000
6,300,000 Interlake Corporation, Sr.
Sub. Deb.,
12.125% due 3/1/02 6,048,000
7,500,000 Republic Engineered Steels,
9.875% due 12/15/01 6,975,000
Stelco Inc:
CAD 12,415,000 Deb.,
10.400% due 11/30/09 8,038,806
CAD 3,413,000 Note,
13.500% due 1/10/00 2,446,074
$ 6,100,000 UCAR Global, Sr. Secured
Note,
12.000% due 1/15/05+ 6,283,000
--------------------------------------------------------------------
48,683,943
--------------------------------------------------------------------
HEALTH CARE AND
PHARMACEUTICALS -- 6.5%
11,595,000 American Medical
International, Inc.,
Sr. Sub. Note,
13.500% due 8/15/01 12,812,475
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
HEALTH CARE AND
PHARMACEUTICALS --
(CONTINUED)
$ 6,100,000 Charter Medical
Corporation, Sr. Sub. Note,
11.250% due 4/15/04 $ 6,100,000
8,900,000 Healthtrust Inc., The
Hospital Company,
10.750% due 5/1/02 9,612,000
15,960,000 Ornda HealthCorp, Sr. Sub.
Notes,
12.250% due 5/15/02 17,037,300
--------------------------------------------------------------------
45,561,775
--------------------------------------------------------------------
PUBLISHING -- 6.2%
17,590,000 Anacomp, Inc., Sr. Sub.
Note,
15.000% due 11/1/00 17,238,200
16,975,000 Bell & Howell Holdings
Company, Sr. Disc. Deb.,
Series B,
Zero Coupon due 3/1/05
(3) 8,338,969
20,800,000 Marvel Holdings Inc., Sr.
Disc. Note, Series B,
Zero Coupon due 4/15/98 13,026,000
AUD 9,550,000 News America Holdings Inc.,
Deb.,
8.625% due 2/7/14 5,296,548
--------------------------------------------------------------------
43,899,717
--------------------------------------------------------------------
HOTEL, CASINO AND GAMING --
5.6%
$ 8,475,000 Boyd Gaming Corporation,
Series B,
10.750% due 9/1/03 7,966,500
5,550,000 Empress River Casino
Financing Corporation Note,
10.750% due 4/1/02 5,217,000
12,850,000 GNF Corporation,
10.625% due 4/1/03 9,268,062
Station Casinos Inc., Sr.
Sub. Notes:
7,150,000 9.625% due 6/1/03 6,023,875
6,425,000 9.625% due 6/1/03 5,413,063
7,100,000 Trump Plaza Funding Inc.,
Note,
10.875% due 6/15/01 5,759,875
--------------------------------------------------------------------
39,648,375
--------------------------------------------------------------------
BUILDING AND CONSTRUCTION
-- 5.4%
13,325,000 American Standard, Inc.,
Sr. Sub. Disc. Deb.,
11.375% due 5/15/04 14,057,875
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
BUILDING AND CONSTRUCTION
-- (CONTINUED)
$ 8,250,000 Greystone Homes, Inc.,
Guaranteed Sr. Note,
10.750% due 3/1/04 $ 6,930,000
5,500,000 Hovnainan K Enterprises
Inc., Guaranteed Note,
11.250% due 4/15/02 4,647,500
7,700,000 UDC Homes Inc., Sr. Notes,
11.750% due 4/30/03 5,390,000
8,050,000 US Homes Corporation, New
Notes,
9.750% due 6/15/03 7,114,188
--------------------------------------------------------------------
38,139,563
--------------------------------------------------------------------
PERSONAL CARE -- 4.6%
5,305,000 MacAndrews & Forbes Group,
Sub. Note,
12.250% due 7/1/96 5,291,737
Revlon Consumer Products
Corporation:
8,025,000 10.500% due 2/15/03 7,162,312
34,700,000 Sr. Disc. Note,
Zero coupon due 3/15/98 20,256,125
--------------------------------------------------------------------
32,710,174
--------------------------------------------------------------------
BROADCASTING -- 4.6%
14,050,000 Bell Cablemedia PLC Sr.
Disc. Note,
Zero coupon due 7/15/04
(4) 8,008,500
4,000,000 Cablevision Systems,
9.875% due 2/15/13 3,730,000
6,400,000 Continental Cablevision
Inc., Sr. Sub. Deb.,
11.000% due 6/1/07 6,432,000
Rogers Cablesystems Ltd.,
Guaranteed Notes:
2,815,000 10.125% due 9/1/12 2,719,994
CAD 7,350,000 9.650% due 1/15/14 4,172,432
$ 4,625,000 Rogers Communications,
Inc., Sr. Sub. Deb.,
10.875% due 4/15/04 4,584,531
2,450,000 Young Broadcasting Inc.,
Guaranteed Note,
11.750% due 11/15/04 2,523,500
--------------------------------------------------------------------
32,170,957
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
CONSUMER DURABLES -- 4.2%
$ 14,700,000 Coleman Holdings Inc., Sr.
Secured Note,
Zero coupon due 5/27/98 $ 10,014,375
30,175,000 International Semi-Tech,
Sr. Notes,
Zero coupon due 8/15/03
(5) 13,126,125
8,125,000 Remington Arms, Inc., New
Sr. Notes,
10.500% due 12/1/03+ 6,753,906
--------------------------------------------------------------------
29,894,406
--------------------------------------------------------------------
GROCERY -- 3.2%
3,300,000 Big V Supermarket Inc., Sr.
Sub. Note,
11.000% due 2/15/04 2,640,000
Farm Fresh, Inc.:
3,975,000 Sr. Note, Series A,
12.250% due 10/1/00 3,602,344
4,800,000 Sr. Sub. Note,
12.250% due 10/1/00 4,350,000
Pathmark Stores Inc.:
Sub. Notes:
6,650,000 11.625% due 6/15/02 6,425,562
5,550,000 12.625% due 6/15/02 5,605,500
--------------------------------------------------------------------
22,623,406
--------------------------------------------------------------------
TELEPHONE AND
COMMUNICATIONS -- 3.1%
Dial Call Communications:
4,900,000 Note,
Zero Coupn due 4/15/99
(6) 1,396,500
7,500,000 Sr. Disc. Notes,
Zero coupon due 12/15/05
(7) 2,025,000
18,725,000 Nextel Communications,
Inc., Sr. Note,
Zero Coupon due 8/15/04 6,366,500
8,150,000 Pagemart Inc., Sr. Disc.
Note,
12.250% due 11/1/03 4,890,000
USA Mobile Communication,
Inc.:
2,400,000 9.500% due 2/1/04 1,995,000
5,000,000 14.000% due 11/1/04 5,187,500
--------------------------------------------------------------------
21,860,500
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
RETAIL -- 2.9%
$ 7,750,000 Barnes & Noble, Inc., Sr.
Sub. Deb., Series 14,
11.875% due 1/15/03 $ 8,292,500
8,115,000 Bradlees Inc., Sr. Sub.
Note,
11.000% due 8/1/02 7,080,337
5,575,000 Wickes Lumber Company, Sr.
Sub. Notes,
11.625% due 12/15/03 5,240,500
--------------------------------------------------------------------
20,613,337
--------------------------------------------------------------------
TEXTILES AND APPAREL --
2.9%
6,525,000 CMI Industries, Sr. Sub.
Notes,
9.500% due 10/1/03 5,513,625
8,000,000 Dan River Inc., Sr. Sub.
Notes,
10.125% due 12/15/03 7,400,000
8,000,000 Hartmarx Corporation, Sr.
Sub. Note,
10.875% due 1/15/02 7,410,000
--------------------------------------------------------------------
20,323,625
--------------------------------------------------------------------
OIL AND GAS -- 2.4%
4,250,000 Giant Industries Inc.,
Guaranteed Sr. Sub. Notes,
9.750% due 11/15/03 3,793,125
10,925,000 Mesa Capital Corporation,
Secured. Disc. Note,
Zero Coupon due 6/30/98
(8) 9,532,063
3,500,000 Santa Fe Energy Resources,
Inc., Sr. Sub. Note,
11.000% due 5/15/04 3,517,500
--------------------------------------------------------------------
16,842,688
--------------------------------------------------------------------
INSURANCE -- 2.3%
6,570,000 Bankers Life Holding
Corporation, Series B,
13.000% due 11/1/02 7,489,800
8,250,000 Life Partners Group Inc.,
Sr. Sub. Note,
12.750% due 7/15/02 8,971,875
--------------------------------------------------------------------
16,461,675
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
CHEMICAL -- 2.0%
$ 12,000,000 NL Industries, Inc., Sr.
Secured Note,
11.750% due 10/15/03 $ 12,150,000
3,100,000 UCC Investment Holding
Inc., Sub. Notes,
Zero coupon due 5/1/05
(9) 2,042,125
--------------------------------------------------------------------
14,192,125
--------------------------------------------------------------------
AUTOMOBILES AND TRUCKING --
1.7%
3,550,000 Harvard Industries, Inc.,
Sr. Note,
12.000% due 7/15/04 3,589,937
4,990,000 SPX Corporation, Sr. Sub.
Note,
11.750% due 6/1/02 5,021,187
3,400,000 Truck Components, Inc., Sr.
Note,
12.750% due 6/30/01 3,553,000
--------------------------------------------------------------------
12,164,124
--------------------------------------------------------------------
TRANSPORTATION -- 1.5%
6,250,000 Gearbulk Holdings Ltd., Sr.
Note,
11.250% due 12/1/04 6,437,500
3,850,000 Sea Containers Ltd., Sr.
Sub. Deb.,
12.500% due 12/1/04 4,004,000
--------------------------------------------------------------------
10,441,500
--------------------------------------------------------------------
ELECTRIC UTILITIES -- 0.8%
5,863,801 Midland Funding
Corporation, Sr. Secured
Note,
10.330% due 7/23/02 5,680,557
--------------------------------------------------------------------
LEISURE -- 0.7%
5,100,000 Gillett Holdings, Inc., Sr.
Sub. Note,
12.250% due 6/30/02 5,253,000
--------------------------------------------------------------------
FINANCE -- 0.7%
5,750,000 Lomas Mortgage USA, Inc.,
Sr. Note,
10.250% due 10/1/02 4,657,500
--------------------------------------------------------------------
TOBACCO -- 0.6%
4,775,000 Consolidated Cigar,
10.500% due 3/1/03 4,404,938
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
CORPORATE BONDS AND NOTES -- (CONTINUED)
MANUFACTURING -- 0.6%
$ 4,150,000 Fairfield Manufacturing
Inc., Sr. Sub. Note,
11.375% due 7/1/01 $ 3,901,000
--------------------------------------------------------------------
AEROSPACE AND DEFENSE --
0.5%
3,425,000 Tracor Inc., Sr. Sub.
Notes,
10.875% due 8/15/01 3,352,219
--------------------------------------------------------------------
TOTAL CORPORATE BONDS AND
NOTES
(Cost $650,031,095) 603,632,167
--------------------------------------------------------------------
<CAPTION>
SHARES
<C> <S> <C>
--------------------------------------------------------------------
PREFERRED STOCKS -- 4.1%
HEALTH CARE AND
PHARMACEUTICALS -- 1.3%
283,569 Foxmeyer Health
Corporation, Series A,
Pay-in-Kind, Exch. Pfd.,
$4.20 9,357,777
--------------------------------------------------------------------
FINANCE -- 1.1%
501,983 Algoma Finance Corporation,
Preferred Cumulative, 5.50% 7,569,373
--------------------------------------------------------------------
PUBLISHING -- 1.0%
K-III Communications
Corporation:
37,106 Series B, Sr. Conv. Pfd.,
Exch. $11.625,
Pay-in-Kind 3,515,792
143,600 Sr. Conv. Pfd. Exch.,
11.500% 3,625,900
--------------------------------------------------------------------
7,141,692
--------------------------------------------------------------------
METALS & MINING -- 0.5%
35,225 Geneva Steel Company,
Series B, Pay-in-Kind,
Conv. Pfd. Exch.,
14.000%** 3,786,687
--------------------------------------------------------------------
OIL AND GAS -- 0.2%
640,100 Gulf CDA Res Ltd., Series
1, Conv. Pfd. Exch.,
Adjustable Dividend** 1,544,324
--------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost $32,495,549) 29,399,853
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
UNITS -- 3.7%
HOTEL AND GAMING -- 2.3%
5,050,000 Santa Fe Hotels Inc., Unit
Guaranteed,
11.000% due 12/15/00 $ 4,545,000
17,431,048 Trump Taj Mahal Funding,
1st Mortgage,
Pay-in-Kind, 11.350% due
11/15/99 11,940,268
--------------------------------------------------------------------
16,485,268
--------------------------------------------------------------------
PAPER AND FOREST PRODUCTS
-- 0.8%
198,000 SDW Holdings Corporation,
Unit 1, Series A,
Sr. Pfd. Exch.+ 5,445,000
--------------------------------------------------------------------
TELEPHONE AND
COMMUNICATIONS -- 0.4%
5,250,000 Pagemart Inc., Sr. Disc.
Note, Zero coupon due
2/1/05+ 2,703,750
--------------------------------------------------------------------
BUILDING AND CONSTRUCTION
-- 0.2%
2,400,000 Miles Homes Services, Inc.,
Units, 12.000% due 4/1/01 1,440,000
--------------------------------------------------------------------
TOTAL UNITS
(Cost $31,858,462) 26,074,018
--------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS -- 1.2%
AUTOMOBILES & TRUCKING --
1.0%
139,100 Navistar International
Corporation, Series G,
Conv. Pfd. $6.00 7,181,037
--------------------------------------------------------------------
PUBLISHING -- 0.2%
42,000 Anacomp Inc., Conv. Pfd.
Exch. Adjustable Dividend 1,386,000
--------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED
STOCKS
(Cost $9,473,948) 8,567,037
--------------------------------------------------------------------
WARRANTS -- 0.5%
Kendall International Inc.:
4,057 Series A, Expires
7/7/99**+ 178,001
4,339 Series B, Expires
7/7/99**+ 168,679
2,450 Reallocation Certificate,
Expires 7/7/99**+ 107,494
Dial Call:
11,572 Expires 4/15/97**+ 5,786
4,900 Expires 4/25/99** 2,450
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED)
JANUARY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
WARRANTS -- (CONTINUED)
431,300 Gaylord Container
Corporation, Expires
7/31/96** $ 2,965,188
29,000 Miles Home Inc., Expires
4/1/97** 14,500
37,490 Pagemart Inc., Expires
12/31/03**+ 168,705
320 Trump Plaza Holdings
Association, Expires
6/15/96** 160,000
--------------------------------------------------------------------
TOTAL WARRANTS
(Cost $3,283,470) 3,770,803
--------------------------------------------------------------------
<CAPTION>
FACE VALUE
<C> <S> <C>
--------------------------------------------------------------------
REPURCHASE AGREEMENT -- 2.4% (Cost $16,207,000)
$ 16,207,000 Agreement with Credit
Lyonnaise, 5.800% dated
1/31/95, to be
repurchased at
$16,209,611 on 2/1/95,
collateralized by
$16,290,000 U.S. Treasury
Note, 7.375% due 11/15/97 16,207,000
--------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $743,349,524*) 97.4% 687,650,878
OTHER ASSETS AND LIABILITIES (NET) 2.6 18,516,373
--------------------------------------------------------------------
NET ASSETS 100.0% $ 706,167,251
--------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
** Non-incoming 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 3/1/00, 11.500% due 3/1/05.
(4) Non-interest bearing until 7/15/99, 11.950% due 7/15/04.
(5) Non-interest bearing until 8/15/00, 11.500% due 8/15/03.
(6) Non-interest bearing until 4/15/99, 12.250% due 4/15/04.
(7) Non-interest bearing until 12/15/98, 10.250% due 12/15/05.
(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.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney
High Income Fund
---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JANUARY 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value ($743,349,524)
(Note 1)
See accompanying schedule $ 687,650,878
Cash 93,196
Interest receivable 13,760,311
Receivable for investment securities
sold 8,465,062
Receivable for Fund shares sold 2,031,170
Dividends receivable 103,213
-----------------------------------------------------------------------------
TOTAL ASSETS 712,103,830
-----------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities
purchased $4,577,292
Payable for Fund shares redeemed 410,943
Investment advisory fee payable (Note
2) 298,264
Distribution fee payable (Note 3) 171,733
Service fee payable (Note 3) 147,055
Administration fee payable (Note 2) 119,306
Transfer agent fees payable (Note 2) 62,194
Custodian fees payable (Note 2) 23,864
Dividends payable 2,233
Accrued Trustees' fees and expenses
(Note 2) 833
Accrued expenses and other payables 122,862
-----------------------------------------------------------------------------
TOTAL LIABILITIES 5,936,579
-----------------------------------------------------------------------------
NET ASSETS $ 706,167,251
-----------------------------------------------------------------------------
NET ASSETS consist of:
Distributions in excess of net
investment income earned to date $ (3,611,214)
Accumulated net realized loss on
securities, future contracts and
foreign currencies (228,748,924)
Net unrealized depreciation of
securities, foreign currency and net
other assets (55,705,063)
Par value 67,672
Paid-in capital in excess of par value 994,164,780
-----------------------------------------------------------------------------
TOTAL NET ASSETS $ 706,167,251
-----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (CONTINUED)
-------------------------------------------------------- JANUARY 31, 1995
<TABLE>
<S> <C> <C>
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($288,574,357 DIVIDED BY 27,654,466 shares of
beneficial interest outstanding) $10.44
--------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($10.44 DIVIDED BY
0.955)
(based on a sales charge of 4.50% of the offering
price on January 31, 1995) $10.93
--------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($406,442,157 DIVIDED BY 38,949,340 shares of
beneficial interest outstanding) $10.44
--------------------------------------------------------------------------
CLASS C SHARES:
NET ASSET VALUE and offering price per share+
($1,392,782 DIVIDED BY 133,472 shares of beneficial
interest outstanding) $10.44
--------------------------------------------------------------------------
CLASS Z SHARES:
NET ASSET VALUE, offering and redemption price per
share
($9,757,955 DIVIDED BY 935,118 shares of beneficial
interest outstanding) $10.44
--------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney
High Income Fund
---------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
-------------------------------------------------------------
FOR THE SIX MONTHS ENDED JANUARY 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 38,761,036
Dividends (net of foreign withholding taxes of
$37,690) 1,388,493
------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 40,149,529
------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) $ 1,800,691
Distribution fee (Note 3) 1,092,278
Service fee (Note 3) 887,176
Administration fee (Note 2) 720,276
Transfer agent fees (Notes 2 and 4) 344,130
Custodian fees (Note 2) 71,343
Trustees' fees and expenses (Note 2) 6,895
Other 131,239
------------------------------------------------------------------------------------
TOTAL EXPENSES 5,054,028
------------------------------------------------------------------------------------
NET INVESTMENT INCOME 35,095,501
------------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTES 1 AND 5):
Net realized loss on:
Securities (21,705,729)
Future contracts (937,313)
Foreign currencies (56,372)
------------------------------------------------------------------------------------
Net realized loss on investments during the period (22,699,414)
------------------------------------------------------------------------------------
Net change in unrealized depreciation on:
Securities (24,794,283)
Foreign currencies and net other assets (8,541)
------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the period (24,802,824)
------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(47,502,238)
------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$(12,406,737)
------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney
High Income Fund
---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
1/31/95 ENDED
(UNAUDITED) 7/31/94
<S> <C> <C>
Net investment income $ 35,095,501 $ 67,533,971
Net realized gain/(loss) on securities, future
contracts and currency transactions during the
period (22,699,414) 23,115,966
Net unrealized depreciation on securities, foreign
currency and net other assets during the period (24,802,824) (78,041,218)
-------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
operations (12,406,737) 12,608,719
Distributions to shareholders from net investment
income:
Class A (14,583,915) (21,175,998)
Class B (20,834,793) (42,140,515)
Class C (formerly Class D shares) (16,888) --
Class Z (formerly Class C shares) (560,635) (1,971,416)
Distributions in excess of net investment income:
Class A -- (1,130,680)
Class B -- (2,250,069)
Class C (formerly Class D shares) -- --
Class Z (formerly Class C shares) -- (105,263)
Net increase/(decrease) in net assets from share
transactions (Note 6):
Class A 83,124,782 (1,922,300)
Class B (73,720,113) 99,101,201
Class C (formerly Class D shares) 1,404,268 --
Class Z (formerly Class C shares) (895,589) (13,478,394)
-------------------------------------------------------------------------------------
Net increase/(decrease) in net assets (38,489,620) 27,535,285
NET ASSETS:
Beginning of period 744,656,871 717,121,586
-------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income of $3,611,214 and $2,710,484,
respectively) $ 706,167,251 $ 744,656,871
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney
High Income Fund
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
1/31/95 ENDED ENDED
(UNAUDITED) 7/31/94 7/31/93*#
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 11.16 $ 12.01 $ 11.03
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.53 1.08 0.75
Net realized and unrealized gain/(loss) on investments (0.69) (0.81) 1.09
-------------------------------------------------------------------------------------
Total from investment operations (0.16) 0.27 1.84
Less distributions:
Distributions from net investment income (0.56) (1.06) (0.82)
Distributions in excess of net investment income -- (0.06) (0.04)
-------------------------------------------------------------------------------------
Total distributions (0.56) (1.12) (0.86)
-------------------------------------------------------------------------------------
Net Asset Value, end of period $ 10.44 $ 11.16 $ 12.01
-------------------------------------------------------------------------------------
Total return+ (1.44)% 2.11% 17.29%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $288,574 $223,678 $242,371
Ratio of operating expenses to average net assets 1.11%++ 1.11%
1.16%++
Ratio of net investment income average net assets 10.04%++ 9.27%
9.52%++
Portfolio turnover rate 24% 98% 95%
-------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
++ Annualized.
# 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 net investment income method does not accord
with results of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney
High Income Fund
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR
1/31/95 ENDED ENDED
(UNAUDITED) 7/31/94 7/31/93#
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 11.16 $ 12.01 $ 11.15
----------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.52 1.02 1.08
Net realized and unrealized gain/(loss) on
investments (0.71) (0.81) 0.88
----------------------------------------------------------------------------------
Total from investment operations (0.19) 0.21 1.96
Less distributions:
Distributions from net investment income (0.53) (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 (0.53) (1.06) (1.10)
----------------------------------------------------------------------------------
Net Asset Value, end of period $ 10.44 $ 11.16 $ 12.01
----------------------------------------------------------------------------------
Total return+ (1.71)% 1.60% 18.55%
----------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $406,442 $509,608 $448,639
Ratio of operating expenses to average net
assets 1.60%++ 1.60% 1.66%
Ratio of net investment income to average net
assets 9.55%++ 8.77% 9.02%
Portfolio turnover rate 24% 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,
sub-investment adviser and administrator was 1.77%.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
++ Annualized.
+++ The annualized operating expenses 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 use of the undistributed net investment income method does not accord
with results of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney
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.
21
<PAGE>
Smith Barney
High Income Fund
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
1/31/95
(UNAUDITED)
<S> <C>
Net Asset Value, beginning of period $ 10.90
-----------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.43
Net realized and unrealized loss on investments (0.45)
-----------------------------------------------------------------------------
Total from investment operations (0.02)
Less distributions:
Distributions from net investment income (0.44)
-----------------------------------------------------------------------------
Total distributions (0.44)
-----------------------------------------------------------------------------
Net Asset Value, end of period $ 10.44
-----------------------------------------------------------------------------
Total return+ (0.17)%
-----------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 1,393
Ratio of operating expenses to average net assets 1.56%++
Ratio of net investment income to average net assets 9.59%++
Portfolio turnover rate 24%
-----------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares (formerly Class D shares) on August
24,1994.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
++ Annualized.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS Z SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEAR PERIOD
1/31/95 ENDED ENDED
(UNAUDITED) 7/31/94 7/31/93*#
<S> <C> <C> <C>
Net Asset Value, beginning of period $11.16 $ 12.01 $ 11.03
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.56 1.10 0.79
Net realized and unrealized gain/(loss) on investments (0.70) (0.80) 1.07
-------------------------------------------------------------------------------------
Total from investment operations (0.14) 0.30 1.86
Less distributions:
Distributions from net investment income (0.58) (1.09) (0.84)
Distributions in excess of net investment income -- (0.06) (0.04)
-------------------------------------------------------------------------------------
Total distributions (0.58) (1.15) (0.88)
-------------------------------------------------------------------------------------
Net Asset Value, end of period $10.44 $ 11.16 $ 12.01
-------------------------------------------------------------------------------------
Total return+ (1.27)% 2.37% 17.47%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $9,758 $11,370 $26,112
Ratio of operating expenses to average net assets 0.76%++ 0.77%
0.81%++
Ratio of net investment income to average net assets 10.39%++ 9.61%
9.88%++
Portfolio turnover rate 24% 98% 95%
-------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class Z shares (formerly Class C shares) on
November 6, 1992.
+ Total return represents aggregate total return for the period indicated.
++ Annualized.
# 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 net investment income method does not accord
with results of operations.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
Smith Barney
High Income Fund
---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Income Funds (formerly 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 Premium Total Return Fund, Smith Barney Convertible Fund, Smith Barney
Global Bond Fund, Smith Barney High Income Fund (the "Fund"), Smith Barney
Tax-Exempt Income Fund, Smith Barney Exchange Reserve Fund, Smith Barney
Diversified Strategic Income Fund and Smith Barney Utilities Fund. Effective
November 7, 1994, the Fund began offering Class Y shares and continued to offer
Class A, Class B, Class C shares (Class C shares were previously designated
"Class D" shares) and Class Z (Class Z shares were previously designated "Class
C" shares). As of January 31, 1995, no Class Y shares had been sold. Class A
shares
are sold with a front-end sales charge. Class B and Class C shares may be
subject to a contingent deferred sales charge ("CDSC") upon redemption. Class B
shares will convert automatically to Class A shares eight years after the date
of original purchase. Class Y shares are available to investors making an
initial investment of at least $5 million and are not subject to any sales
charges,
service or distribution fees. Class Z 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 without any sales charge, CDSC, service or distribution fees. 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
24
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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. 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 the 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.
25
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
There are several risks in connection with the use of futures contracts as a
hedging device. The change in the value of futures contracts primarily
corresponds with the value of their underlying instruments, which may not
correlate
with the change in value of the hedged investments. In addition, there
is a 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 or 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.
PAYMENT-IN-KIND BONDS: The Fund may invest in payment-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
26
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 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. 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
27
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 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 TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Greenwich Street Advisors, a division of Mutual Management
Corp., which was transferred effective November 7, 1994, to Smith Barney Mutual
Funds Management Inc. ("SBMFM"). Mutual Management Corp. and SBMFM are both
wholly owned subsidiaries of 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.
The Fund is also party to an administration agreement (the "Adminstration
Agreement") with SBMFM (formerly Smith, Barney Advisers, Inc.). Under the
Administration Agreement, the Fund pays a monthly fee based on the annual rate
of 0.20% of the value of the Fund's average daily net assets.
The Fund and SBMFM also entered into a sub-administration agreement (the
"Sub-Administration Agreement") with Boston Advisors, an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Sub-Administration
Agreement, SBMFM pays Boston Advisors a portion of its administration fee at a
rate agreed upon from time to time between SBMFM and Boston Advisors.
28
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
For the six months ended January 31, 1995, Smith Barney received from investors
$178,072, representing commissions (sales charges) on sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the redemption
of certain Class A, Class B and Class C shares. In circumstances in which the
CDSC is imposed, the amount of the charge will vary depending on the number of
years since the date of purchase. For the six months ended January 31, 1995,
Smith Barney received from shareholders $532,325 and $0 in CDSCs on the
redemption of Class B and Class C shares, respectively.
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 $15,000 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 C
shareholders, and covers expenses incurred in distributing Class B and Class C
shares. Smith Barney is paid an annual service fee with respect to Class A,
Class B and Class C 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
29
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
shares. Smith Barney is also paid an annual distribution fee with respect to
Class B and Class C shares at the annual rate of 0.50% and 0.45%, respectively,
of
the value of the average daily net assets of each respective class of shares.
For the six months ended January 31, 1995, the Fund incurred a service fee of
$341,001, $545,783 and $392 for Class A, Class B and Class C shares,
respectively. For the six months ended January 31, 1995, the Fund incurred a
distribution fee of $1,091,565 and $713 for Class B and Class C shares,
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 servicing and distribution
fees,
class specific operating expenses include transfer agent fees. For the six
months ended January 31, 1994, the Fund incurred transfer agent fees of
$142,599, $201,297, $195 and $39 for Class A, Class B, Class C and Class Z
shares, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
investments and U.S. government securities, aggregated $170,584,918 and
$164,391,435, respectively, for the six months ended January 31, 1995.
At January 31, 1995, aggregate gross unrealized appreciation for all securities
in
which there was an excess of value over tax cost was $5,245,000 and aggregate
gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $60,943,646.
30
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 five classes (Class A,
Class B, Class C, Class Z and Class Y) were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 10,548,207 $ 114,463,539 4,325,503 $ 50,678,736
Issued as reinvestment of dividends 782,213 8,315,108 1,107,951
13,065,031
Redeemed (3,721,284) (39,653,865) (5,572,672) (65,666,067)
-------------------------------------------------------------------------------------
Net increase/(decrease) 7,609,136 $ 83,124,782 (139,218) $
(1,922,300)
-------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/95 7/31/94
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 5,369,601 $ 57,636,510 16,441,359 $ 195,368,628
Issued as reinvestment of dividends 975,832 10,395,750 1,985,753
23,392,959
Redeemed (13,056,692) (141,752,373) (10,131,679)
(119,660,386)
-------------------------------------------------------------------------------------
Net increase/(decrease) (6,711,259) $ (73,720,113) 8,295,433 $
99,101,201
-------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED
1/31/95*
CLASS C SHARES: Shares Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 148,818 $ 1,565,297
Issued as reinvestment of dividends 1,338 14,001
Redeemed (16,685) (175,030)
-------------------------------------------------------------------------------------
Net increase 133,471 $ 1,404,268
-------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares (formerly Class D shares) on August
24, 1994.
</TABLE>
31
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
CLASS Z SHARES:** Shares 1/31/95Amount Shares 7/31/94
Amount
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Sold 9,481 $ 103,508 358,636 $ 4,317,604
Issued as reinvestment of dividends 52,653 560,608 174,500
2,076,668
Redeemed (145,880) (1,559,705) (1,688,775) (19,872,666)
-------------------------------------------------------------------------------------
Net decrease (83,746) $ (895,589) (1,155,639) $ (13,478,394)
-------------------------------------------------------------------------------------
<FN>
** Class Z shares were previously designated Class C shares.
</TABLE>
As of January 31, 1995, no Class Y shares had been sold.
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 Bank of America (formerly 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 25% of its net assets. However,
pursuant to the Fund's prospectus, the Fund may only borrow up to 10% of its
total 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, as amended, the Fund and the other affiliated entities
are charged an aggregate
32
<PAGE>
Smith Barney
High Income Fund
-------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 the aggregate amount of indebtedness pursuant to the Agreement
of no less than 5 to 1. During the six months ended January 31, 1995, the Fund
did not borrow under this Agreement.
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.
33
<PAGE>
SMITH BARNEY
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
Jessica M. Bibliowicz
PRESIDENT
John C. Bianchi
VICE PRESIDENT AND
INVESTMENT OFFICER
Lewis E. Daidone
SENIOR VICE PRESIDENT AND
TREASURER
Christina T. Sydor
SECRETARY
[LOGO]
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE
SHAREHOLDERS OF
SMITH BARNEY 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, APPLICABLE SALES CHARGES AND EXPENSES AS WELL AS
OTHER PERTINENT
INFORMATION.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 28, 185, 186, 243, 459
[[LOGO]]
FD2172 C5
