<PAGE>
ANNUAL REPORT
1996
1996
1996
1996
1996
[GRAPHIC]
SMITH BARNEY
PREMIUM TOTAL
RETURN FUND
- -----------------
December 31, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
SMITH BARNEY PREMIUM TOTAL RETURN FUND
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to present to you the Smith Barney Premium Total Return Fund's
annual report for the period ended December 31, 1996. An annual report is being
sent to you now, in addition to the usual September mailing, because the Fund's
Board of Trustees approved changing its fiscal year end from July 31 to December
31. In the future, you can expect the Fund's annual report about this time each
year.
In this report, we comment on the period's prevailing economic and market
conditions and describe our portfolio strategy. A detailed summary of
performance can be found in the appropriate sections that follow in the report.
Fund Performance Overview
For the period of August 1, 1996 through December 31, 1996, the Smith Barney
Premium Total Return Fund had a total return of 13.80% for Class A shares.
During this time, the U.S. stock market, as measured by the Standard & Poor's
500 Index ("S&P 500"),* had a total return of 11.68%. In addition, the Fund paid
monthly dividends which totaled $0.63 per Class A share over the same time
period. For the year ended December 31, 1996, the Fund posted a total return of
20.67% for Class A shares.
We are pleased by the Premium Total Return Fund's relative performance versus
the S&P 500 during the reporting period because the Fund is meeting one of its
key policies, which is to provide shareholders with the potential benefits of
stock investing with less risk than investing in the overall stock market. The
Premium Total Return Fund invests primarily in dividend-paying common stocks and
employs a conservative and defensive investment strategy which may cause it to
underperform in a rising stock market but should experience smaller losses when
the stock market declines. One of the key elements of the Fund's conservative
and defensive investment strategy, which is explained in greater detail later on
in this letter, involves the use of S&P 500 Index call options which help to
reduce the volatility of the Fund's net asset value (NAV).
Over the long term, the Premium Total Return Fund's defensive strategy has
generated a competitive total return versus the S&P 500. For the five-year
period ended December 31, 1996, the Fund had an average total return for
* The Standard & Poor's 500 Stock Index is an unmanaged capitalization weighted
index of 500 widely held common stocks.
1
<PAGE>
Class B shares of 13.52%, which compares with the S&P 500's annual total return
of 15.20% during the same time period. In addition to providing shareholders
with competitive total returns over the long term, the Fund continues to make
monthly distributions of approximately $0.10 per Class B share (a portion of
which may include capital gains and/or return of capital). Additional
information about the Smith Barney Premium Total Return Fund's distribution
policy can be found immediately after this letter
Fund's Investment Strategy
The Smith Barney Premium Total Return Fund seeks total return by investing in a
well-diversified portfolio of primarily dividend-paying common stocks.
Historically, dividend-paying common stocks have offered relatively low
volatility.
In selecting individual stocks, the Fund follows a "bottom up" value approach to
stock investing, which means the Fund generally does not rely on economic or
market forecasting, but instead selects individual stocks based on whether the
stock is available at a reasonable price, the issuing company is fundamentally
healthy and whether the company's business is improving.
The Fund's investment process usually begins with a close examination of all
public information available on a particular company. The Fund then conducts
extensive company and industry research to determine whether a company's
business momentum is positive, negative or neutral. In addition to conducting
extensive research, the Fund also considers traditional measurements of a
stock's relative value in order to identify undervalued stocks. Another way the
Fund tries to manage risk and further limit potential portfolio volatility is
through diversification. At the end of December, the Fund owned approximately
150 securities, representing a wide range of companies and industries.
A Defensive Hedging Strategy
The Fund's defensive hedging strategy, which seeks to limit the volatility of
the Fund's NAV, involves writing (or selling) index call options to hedge a
portion of the portfolio. The Fund's defensive hedging strategy has been used in
varying degrees during the past twelve months.
The Fund's defensive hedging strategy means that an outside investor has
purchased index call options from the Fund. When the Fund sells (or writes)
these options, it collects a premium from the investor who purchases them. If
the market goes down, the Fund has sold this market exposure and the net gain to
the Fund is positive in the form of premium income. If the market goes up (as it
has over the last twelve months), the Fund loses the increase in value of a
position on the portfolio as a whole because an outside investor who purchased
2
<PAGE>
the option contracts from the Fund will exercise the contract and earn a portion
of what the market has gained.
In 1996, the Fund's defensive hedging strategy slightly hurt its relative
performance versus the S&P 500 due to the manager's stock selection. However,
when the broad market goes down (as it did dramatically in July 1996), the
Fund's defensive hedging strategy helped protect the value of the portfolio from
the market decline. For example, the U.S. stock market, as measured by the S&P
500, has experienced only one down year (1990) since 1981, when the index had a
total return of -3.17%. For the same year, the Premium Total Return Fund's Class
B shares (the only class of shares offered prior to November of 1991) generated
a total return of 2.02%.
Over the long term, the Fund's defensive hedging strategy will potentially help
to reduce NAV volatility and protect the portfolio when the market declines. Our
goal is to participate in rising markets while safeguarding principal in falling
markets. The trade off is that the Fund's performance may lag the broad market
in periods when stock prices rise rapidly. Yet, there will be times like this
past year when the Fund performs roughly in line with the broad market. However,
the Premium Total Return Fund is designed to be an appropriate vehicle for
investors who want greater protection of principal in a declining market and who
are willing to accept less total return potential in a rising market.
Throughout 1996, the Premium Total Return Fund continued to emphasize the stocks
of financial companies, particularly small-to-middle capitalization insurance
companies based both in the U.S. and offshore because they are reasonably priced
and have high earnings stability. In addition, the Fund maintained its
underweighting in cyclical company stocks in the basic industries, capital goods
and consumer durables sectors because of our belief that their ability to
maintain earnings growth is questionable. At the end of 1996, the Fund's ongoing
underweighting in technology stocks was even more pronounced than at the end of
1995 because of our concerns that many of these companies may not enjoy the same
profit margins in the future than they have had in the past. Looking ahead at
1997, we will focus on the stocks of high-quality companies that, in our view,
are fairly valued or undervalued and show positive business momentum.
Market Overview and Outlook
Though most stock prices ended 1996 on a declining note, the U.S. stock market,
as measured by the S&P 500, continued to perform well in the fourth quarter of
1996 and generated a total return of 8.33%, bringing the S&P 500's total return
in 1996 to 22.95%. In the fourth quarter, large capitalization stocks
outperformed small capitalization stocks, continuing a trend that began after
July's brief market correction. For example, in comparison to the S&P 500, the
3
<PAGE>
Russell 2000 (a common benchmark of small capitalization stocks) generated a
total return of 5.20% in the fourth quarter.
We continue to believe that the stock market is trading at extremely high
valuation levels. In our view, the market's performance in 1997 will be greatly
influenced by the rate of growth of corporate earnings. As we have stated in the
past, we do not accept the view that 20% or higher return on equities and
12%-15% corporate earnings growth rates are permanent features of the U.S.
economy. Historically, stock prices have risen in line with corporate earnings
growth rates. While the consensus on Wall Street is for corporate earnings to
grow at an annual rate of roughly 14%, we believe this estimate is too high. We
think the growth rate in corporate earnings will be more in the 7% range and
this is a reasonable expectation for how the stock market may perform in 1997.
Moreover, stock market volatility has risen markedly of late. The uncertainty
regarding where the economy and interest rates may be heading, combined with
expectations for slowing corporate earnings growth, has also exacerbated
volatility. Against this backdrop, we believe the Premium Total Return Fund's
conservative strategy makes it well positioned to meet the challenges of a more
turbulent market.
In closing, we would like to thank you for your investment in the Smith Barney
Premium Total Return Fund. We look forward to continuing to serve your
investment needs.
Sincerely,
/s/ Heath B. McLendon /s/ Harry J. Rosenbluth
Heath B. McLendon Harry J. Rosenbluth
Chairman and Investment Officer
Chief Executive Officer
January 9, 1997
4
<PAGE>
Smith Barney Premium Total
Return Fund Distribution Policy
A mutual fund pays dividends to satisfy one of the requirements to qualify as a
regulated investment company and to avoid paying income tax at the fund level.
As such, the Smith Barney Premium Total Return Fund must distribute (as do all
mutual funds) at least 90% of its investment company taxable income, but will
generally distribute substantially all of its ordinary and net capital gains in
order to avoid any federal income or excise taxes. As a regulated investment
company, the tax benefits of net long-term capital gains can be passed through
to shareholders. A mutual fund's distributions at calendar year-end generally
are designed to ensure that substantially all earned income and net capital
gains have been distributed to shareholders; which could cause these amounts to
differ from the regular distributions. Based on its objectives, an individual
fund may, as a result of its distribution policy, return a portion of the
shareholders' principal in the form of a return of capital, which may not be
considered taxable income.
The Smith Barney Premium Total Return Fund's distribution policy is designed to
provide an attractive level of monthly distributions. Since 1989, the Fund has
paid out approximately $0.10 per share each month. The Fund's distribution
strategy takes into account the long-term total return potential of its
investment in equities. Over time, the Fund has been able to distribute income
as well as provide its shareholders with moderate growth of principal. The Smith
Barney Premium Total Return Fund meets its distribution objective by paying out
to shareholders substantially all dividends, interest and net capital gains
earned over the course of the year. In certain years, the Fund's distributions
may also supplement this income with a return of capital in order to maintain
the fixed payout. Each year, shareholders of the Fund receive a 1099 federal tax
form that indicates the amount of the distributions which represented ordinary
income (dividends, interest and short-term capital gains), long-term capital
gains and return of capital.
5
<PAGE>
================================================================================
Historical Performance -- Class A Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
----------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96+++ $17.40 $19.14 $0.16 $0.47 $0.00 13.80%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 16.33 17.40 0.37 0.91 0.00 14.76
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 15.69 16.33 0.43 0.14 0.71 12.92
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 15.65 15.69 0.55 0.52 0.21 8.65
- ------------------------------------------------------------------------------------------------------------------------------------
Inception*-7/31/93 15.15 15.65 0.20 0.49 0.33 10.31+
====================================================================================================================================
Total $1.71 $2.53 $1.25
====================================================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class B Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
----------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96+++ $17.40 $19.14 $0.12 $0.47 $0.00 13.57%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 16.33 17.40 0.29 0.91 0.00 14.21
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 15.69 16.33 0.34 0.14 0.72 12.36
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 15.65 15.69 0.49 0.52 0.20 8.12
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/93 15.21 15.65 0.19 0.63 0.44 11.68
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/92 14.26 15.21 0.22 0.00 0.98 15.68
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/91 13.30 14.26 0.24 0.00 0.96 17.53
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/90 13.98 13.30 0.22 0.00 1.06 4.62
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/89 12.90 13.98 0.89 0.26 0.33 21.49
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/88 14.47 12.90 0.18 1.28 0.00 0.21
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/87 14.52 14.47 0.28 1.42 0.00 12.07
====================================================================================================================================
Total $3.46 $5.63 $4.69
====================================================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class C Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96+++ $17.41 $19.15 $0.12 $0.47 $0.00 13.58%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 16.33 17.41 0.29 0.91 0.00 14.30
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 15.69 16.33 0.35 0.14 0.71 12.36
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 15.65 15.69 0.49 0.52 0.20 8.12
- ------------------------------------------------------------------------------------------------------------------------------------
Inception*-7/31/93 15.45 15.65 0.04 0.09 0.07 2.60+
====================================================================================================================================
Total $1.29 $2.13 $0.98
====================================================================================================================================
</TABLE>
6
<PAGE>
================================================================================
Historical Performance -- Class Y Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
----------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96+++ $17.42 $19.17 $0.18 $0.47 $0.00 13.95%+
- ------------------------------------------------------------------------------------------------------------------------------------
Inception*-7/31/96 17.57 17.42 0.21 0.46 0.00 2.93+
====================================================================================================================================
Total $0.39 $0.93 $0.00
====================================================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
-----------------------------------------------------------------
Class A Class B Class C Class Y
====================================================================================================================================
<S> <C> <C> <C> <C>
Period Ended 12/31/96+++ 13.80%+ 13.57%+ 13.58%+ 13.95%+
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 12/31/96 20.67 20.09 20.13 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/96 N/A 13.52 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/96 N/A 12.76 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/96 14.69 13.40 14.37 16.75
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Without Sales Charge(2)
-----------------------------------------------------------------
Class A Class B Class C Class Y
====================================================================================================================================
<S> <C> <C> <C> <C>
Period Ended 12/31/96+++ 8.08%+ 8.57%+ 12.58%+ 13.95%+
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 12/31/96 14.64 15.09 19.13 N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/96 N/A 13.40 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/96 N/A 12.76 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/96 13.28 13.40 14.37 16.75
====================================================================================================================================
</TABLE>
7
<PAGE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (Inception* through 12/31/96) 76.73%
- --------------------------------------------------------------------------------
Class B (12/31/86 through 12/31/96) 232.23
- --------------------------------------------------------------------------------
Class C (Inception* through 12/31/96) 61.83
- --------------------------------------------------------------------------------
Class Y (Inception* through12/31/96) 16.75
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00% and Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase and declines thereafter by 1.00% per year until
no CDSC occurs. Class C shares reflect the deduction of a 1.00% CDSC, which
applies if shares are redeemed within the first year of purchase.
+++ For the period from August 1, 1996 to December 31, 1996, which reflects a
change in the fiscal year end of the Fund.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B, C and Y shares are November 6, 1992,
September 16, 1985, June 1, 1993 and February 7, 1996, respectively.
8
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class B Shares
of the Smith Barney Premium Total Return Fund
vs. the Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
December 1986 -- December 1996
[GRAPHIC]
<TABLE>
<CAPTION>
Smith Barney Premium Total Return Fund S&P 500 Index
-------------------------------------- -------------
<S> <C> <C>
12/86 $ 10,000 $ 10,000
12/87 9,079 10,525
12/88 11,416 12,269
12/89 13,398 16,150
12/90 13,674 15,648
12/91 17,623 20,406
12/92 19,843 21,960
12/93 22,062 24,167
12/94 22,707 24,485
12/95 27,665 33,675
12/96 33,223 38,816
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1986, assuming reinvestment of dividends and capital gains, if any, at
net asset value through December 31, 1996. The Standard & Poor's 500 Index
is an index composed of widely held common stocks listed on the New York
Stock Exchange, American Stock Exchange and over-the-counter market.
Figures for the index include reinvestment of dividends. The index is
unmanaged and is not subject to the same management and trading expenses as
a mutual fund. The performance of the Fund's other classes may be greater
or less than the Class B shares' performance indicated on this chart,
depending on whether greater or lesser sales charges and fees were incurred
by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
9
<PAGE>
================================================================================
Portfolio Highlights (unaudited) December 31, 1996
================================================================================
Portfolio Breakdown
[PIE CHART]
December 1986 -- December 1996
Banking & Financial Services 17.5%
Utilities 9.5%
Insurance 10.1%
Consumer Services 7.0%
Capital Goods 2.8%
Energy 9.4%
Healthcare 7.5%
Tobacco 9.2%
Other Common Stocks,
Preferred Stocks,
Corporate Bonds and
Convertible Bond 13.5%
Repurchase Agreements 13.5%
Top Ten Common Stock Holdings
Percentage of
Company Total Investments
- -------------------------------------------------------
Loews Corp. 4.9%
Student Loan Marketing Association 4.2
Phillip Morris Cos., Inc. 3.7
Bristol-Myers Squibb Co. 3.0
Lehman Brothers Holding Inc. 2.3
Republic of New York Corp. 2.0
Telefonica Espana S.A. ADR 1.9
Sprint Corp. 1.9
Repsol S.A. ADR 1.5
J.P. Morgan & Co., Inc. 1.5
10
<PAGE>
================================================================================
Schedule of Investments December 31, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 81.1%
================================================================================
Banking & Financial-Services -- 14.7%
<C> <S> <C>
552,692 Bank of Boston Corp. $35,510,461
1,000,000 Cal Fed BanCorp Inc.* 24,500,000
600,000 Dean Witter Discover & Co.+++ 39,750,000
142,900 Federal Home Loan Mortgage Corp. 15,736,863
462,100 J.P. Morgan & Co., Inc. 45,112,512
143,700 JSB Financial Inc. 5,460,600
2,249,500 Lehman Brothers Holding Inc.+++ 70,578,063
140,400 PHH Corp. 6,037,200
484,140 PNC Bank Corp. 18,215,766
766,900 Republic of New York Corp.+++ 62,598,212
1,382,500 Student Loan Marketing Association+++ 128,745,313
- --------------------------------------------------------------------------------
452,244,990
- --------------------------------------------------------------------------------
Capital Goods -- 2.8%
1,500,000 Allegheny Teledyne Inc. 34,500,000
51,000 Emerson Electric Co. 4,934,250
120,938 Lockheed Martin Corp. 11,065,827
258,100 Lubrizol Corp. 8,001,100
280,188 Martin Marietta Materials 6,514,371
400,000 Raytheon Co. 19,250,000
6,000 Textron Inc. 565,500
- --------------------------------------------------------------------------------
84,831,048
- --------------------------------------------------------------------------------
Consumer Durables -- 1.9%
140,000 Borg-Warner Automotive Inc. 5,390,000
924,300 Digital Equipment* 33,621,413
876,100 Volvo Aktie Bolget, Sponsored ADR 19,055,175
- --------------------------------------------------------------------------------
58,066,588
- --------------------------------------------------------------------------------
Consumer Non-Durables -- 2.2%
305,300 Dial Corp. 4,503,175
458,600 Nestle S.A., Sponsored ADR 24,420,450
18,260 Nestle S.A., Sponsored ADR+ 974,628
482,000 Sara Lee Corp. 17,954,500
394,300 Tupperware Corp. 21,144,337
- --------------------------------------------------------------------------------
68,997,090
- --------------------------------------------------------------------------------
Consumer Services -- 7.0%
3 Acnielsen Corp. 45
210,000 Alberto Culver Co., Class A Shares 8,662,500
600,000 American Stores Co. 24,525,000
308,900 Bowne & Co., Inc. 7,606,662
678,600 Comsat Corp. 16,710,525
196,500 Deluxe Corp. 6,435,375
789,100 Dun & Bradstreet Corp. 18,741,125
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
================================================================================
Schedule of Investments (continued) December 31, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
Consumer Services -- 7.0% (continued)
<C> <S> <C>
748,600 H & R Block Inc. $ 21,709,400
949,378 Limited Inc. 17,444,821
400,000 Linens N' Things Inc.* 7,850,000
268,312 Luby's Cafeterias Inc. 5,332,701
370,300 Mercantile Stores Co. Inc. 18,283,563
394,300 Premark International Inc. 8,773,175
1,000,000 Rite Aid Corp. 39,750,000
221,500 Sbarro Inc. 5,648,250
171,466 Sears, Roebuck & Co. 7,908,869
- --------------------------------------------------------------------------------
215,382,011
- --------------------------------------------------------------------------------
Diversified Operations -- 0.8%
789,100 Cognizant Corp. 26,040,300
- --------------------------------------------------------------------------------
Energy -- 9.4%
117,700 Amoco Corp. 9,474,850
141,751 British Petroleum PLC ADR 20,040,048
600,000 Elf Aquitaine - Sponsored ADR 27,150,000
311,400 Exxon Corp.+++ 30,517,200
240,100 Mobil Oil Corp.+++ 29,352,225
1,242,800 Repsol S.A., Sponsored ADR 47,381,750
322,500 Shell Transport & Trading ADR 33,015,937
200,000 Texaco Inc. 19,625,000
278,200 Tosco Corp. 22,012,575
1,466,200 Trizec Hahn Corp. 32,256,400
614,448 Ultramar Diamond Shamrock CP 19,431,918
- --------------------------------------------------------------------------------
290,257,903
- --------------------------------------------------------------------------------
Forest Products -- 1.4%
550,000 Boise Cascade Corp. 17,462,500
606,000 Champion International Corp.+++ 26,209,500
- --------------------------------------------------------------------------------
43,672,000
- --------------------------------------------------------------------------------
Healthcare -- 7.5%
253,700 Abbott Labs, Inc. 12,875,275
909,600 Astra AB, Class A Shares ADR 44,570,400
847,400 Bristol-Myers Squibb Co.+++ 92,154,750
1,100,000 Glaxo Welcome PLC, Sponsored ADR+++ 34,925,000
333,000 Pharmacia & Upjohn Inc. 13,195,125
521,900 Schering Plough Corp. 33,793,025
- --------------------------------------------------------------------------------
231,513,575
- --------------------------------------------------------------------------------
Insurance -- 10.1%
731,300 Ace Ltd. 43,969,413
745,100 Allmerica Financial Corp. 24,960,850
467,000 Allmerica Property & Casualty Companies, Inc. 14,185,125
299,750 Allstate Corp. 17,348,031
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
================================================================================
Schedule of Investments (continued) December 31, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
Insurance -- 10.1% (continued)
<C> <S> <C>
275,200 American International Group Inc. $ 29,790,400
350,450 Aon Corp. 21,771,706
156,000 CIGNA Corp. 21,313,500
464,600 Exel Ltd. 17,596,725
215,000 Financial Security Assurance Holdings Inc. 7,068,125
364,000 GCR Holdings Ltd. 8,099,000
100,600 Horace Mann Educators Co. 4,061,725
297,500 IPC Holdings Ltd. 6,656,563
308,900 John Alden Financial Corp. 5,714,650
253,300 Mid Ocean Ltd. 13,298,250
251,600 Partnerre Ltd. 8,554,400
319,000 Prudential Reinsurance Holdings Corp. 9,171,250
272,300 St. Paul Cos., Inc. 15,963,587
205,000 Terra Nova Holdings Ltd. (Bermuda) 4,407,500
603,500 TIG Holdings Inc. 20,443,563
123,200 Transatlantic Holdings Inc. 9,917,600
348,100 Western National Corp. 6,700,925
1,800 Zurich Reinsurance Centre Holdings 56,250
- --------------------------------------------------------------------------------
311,049,138
- --------------------------------------------------------------------------------
Real Estate -- 1.7%
200,000 Ambassador Apartments Inc. 4,725,000
89,200 Associated Estates Realty Corp. 2,118,500
120,700 Avalon Properties Inc. 3,470,125
142,433 Camden Property Trust 4,077,145
154,800 Charles E. Smith Residential Realty Inc. 4,527,900
328,800 Equity Inns Inc. 4,274,400
286,300 Mid-America Apartment Communities 8,266,912
304,900 RFS Hotels Investment Inc. 6,021,775
201,800 Storage Trust Realty 5,448,600
160,000 Summit Properties Inc. 3,540,000
250,600 Wellsford Residential Property Trust 6,077,050
- --------------------------------------------------------------------------------
52,547,407
- --------------------------------------------------------------------------------
Telecommunication Equipment -- 1.6%
2,690,300 Alcatel Alsthom CGE - Sponsored ADR 43,044,800
141,462 Lucent Technologies Inc. 6,542,618
- --------------------------------------------------------------------------------
49,587,418
- --------------------------------------------------------------------------------
Tobacco -- 9.2%
900,000 B.A.T. Industries PLC, Sponsored ADR 14,850,000
1,604,900 Loews Corp.+++ 151,261,825
1,002,500 Phillip Morris Cos., Inc.+++ 112,906,563
100,000 RJR Nabisco Holdings Corp. 3,887,500
- --------------------------------------------------------------------------------
282,905,888
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
================================================================================
Schedule of Investments (continued) December 31, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
Transportation -- 1.3%
<C> <S> <C>
1,270,900 Canadian Pacific Ltd. $ 33,678,850
75,500 Pittston Burlington Group Inc. 1,510,000
94,400 Stolt Nielson S.A. 1,781,800
127,400 Stolt Nielson S.A. ADR 2,388,750
- --------------------------------------------------------------------------------
39,359,400
- --------------------------------------------------------------------------------
Utilities -- 9.5%
2,306,100 Centerior Energy Corp. 24,790,575
835,500 CMS Energy Corp.+++ 28,093,687
711,000 Entergy Corp. 19,730,250
339,600 Illinova Corp. 9,339,000
575,000 Nynex Corp. 27,671,875
864,300 Pinnacle West Capital Corp. 27,441,525
475,000 Portland General Corp. 19,950,000
8,500 Public Service New Mexico 166,813
1,481,000 Sprint Corp.+++ 59,054,875
216,300 Telebras - Sponsored ADR 16,546,950
867,300 Telefonica Espana S.A. ADR 60,060,525
- --------------------------------------------------------------------------------
292,846,075
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $1,806,769,410) 2,499,300,831
================================================================================
PREFERRED STOCKS -- 4.1%
================================================================================
Banking & Financial Services -- 2.8%
100,000 Allstate Corp., Convertible 6.765%+++ 4,725,000
2,500 BankUnited Financial, Convertible 10.250%+ 2,500,000
80,000 Criimi Mae Inc., Series B, Convertible 10.875%+++ 2,320,000
760,000 Glendale Federal Bank, Federal Savings Bank of
California, Convertible, Series E,
Exchange 8.750%+++ 44,650,000
304,767 Riggs National Corp., Washington, D.C.,
Series B, Exchange 10.750%+++ 8,685,860
250,000 Salomon Inc., Convertible 6.750%+++ 7,500,000
459,700 Time Warner Financial Corp.+++ 17,813,375
- --------------------------------------------------------------------------------
88,194,235
- --------------------------------------------------------------------------------
Industrial -- 0.3%
305,000 Bowater Inc.,Depository Shares,Convertible,
Series B, Exchange 7.000%+++ 9,302,500
- --------------------------------------------------------------------------------
Real Estate -- 1.0%
200,000 First Washington Realty Inc., Series A,
Exchange 9.750%+ +++ 5,450,000
243,000 Prime Retail Inc., Series A, Exchange 10.500%+++ 5,832,000
77,700 Security Capital Pacific Trust+++ 2,379,562
400,000 Walden Residential Properties Inc., Series B,
Exchange 9.160%+++ 11,550,000
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
================================================================================
Schedule of Investments (continued) December 31, 1996
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
Real Estate -- 1.0% (continued)
<C> <S> <C>
200,000 Walden Residential Properties Inc.,
Convertible 9.200% $ 4,800,000
- --------------------------------------------------------------------------------
30,011,562
- --------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost -- $96,105,904) 127,508,297
================================================================================
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
CORPORATE BONDS -- 1.2%
================================================================================
Financial -- 0.2%
<C> <S> <C>
$2,000,000 Mego Mortgage, 12.500% due 12/1/01 2,037,500
3,000,000 Wilshire Financial Services, 13.000% due 1/1/04 3,022,500
- --------------------------------------------------------------------------------
5,060,000
- --------------------------------------------------------------------------------
Gas Transmission -- 0.2%
Columbia Gas Systems Inc., Debentures:
774,000 6.390% due 12/28/00 769,162
771,000 6.610% due 11/28/02 770,036
771,000 6.800% due 11/28/05 761,363
771,000 7.050% due 11/28/07 754,616
771,000 7.320% due 11/28/10 755,580
771,000 7.420% due 11/28/15 741,124
771,000 7.620% due 11/28/25 740,160
- --------------------------------------------------------------------------------
5,292,041
- --------------------------------------------------------------------------------
Industrial -- 0.8%
5,635,000 Comcast Corp., 9.375% due 5/15/06 5,860,400
6,000,000 Tenet Healthcare Corp., 10.125% due 3/1/05 6,637,500
4,915,000 Paging Network, 8.875% due 2/1/06 4,706,112
3,000,000 Riveria Holdings Corp., First Mortgage, 11.000%
due 12/31/02 3,063,750
6,000,000 Rogers Cable Systems Inc., 10.000% due 3/15/05 6,427,500
- --------------------------------------------------------------------------------
26,695,262
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost -- $35,460,767) 37,047,303
================================================================================
CONVERTIBLE BONDS -- 0.1%
2,500,000 Ashanti Capital, 5.500% due 3/15/03 2,106,250
1,500,000 Pacific Concord Financial, 4.750% due 12/10/98+ 1,365,000
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost -- $4,000,000) 3,471,250
================================================================================
SUB-TOTAL INVESTMENTS
(Cost -- $1,942,336,081) 2,667,327,681
================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
================================================================================
Schedule of Investments (continued) December 31, 1996
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENTS -- 13.5%
<C> <S> <C>
$ 85,996,000 Chase Manhattan Bank, 6.500% due 1/2/97;
Proceeds at maturity -- $86,027,054; (Fully
collateralized by U.S. Treasury Notes, 5.875%
due 10/31/98; Market value -- $87,820,758) $ 85,996,000
59,450,000 Goldman Sachs & Co., 6.520% due 1/2/97; Proceeds
at maturity -- $59,471,534; (Fully
collateralized by U.S. Treasury Notes, 7.125%
due 9/30/99; Market value -- $60,688,720) 59,450,000
270,000,000 Morgan Stanley, 6.250% due 1/2/97; Proceeds at
maturity -- $270,093,750; (Fully collateralized
by U.S. Treasury Notes, 6.125% due 7/31/00;
Market value -- $275,793,375) 270,000,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $415,446,000) 415,446,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $2,357,782,081**) $3,082,773,681
================================================================================
</TABLE>
* Non-income producing security.
+++ Security segregated by Custodian to cover written call options.
+ Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
16
<PAGE>
================================================================================
Statement of Assets and Liabilities December 31, 1996
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost--$1,942,336,081) $2,667,327,681
Repurchase agreements (Cost--$415,446,000) 415,446,000
Cash 577
Dividends and interest receivable 6,932,152
Receivable for Fund shares sold 6,381,513
Receivable for securities sold 3,496,204
- --------------------------------------------------------------------------------
Total Assets 3,099,584,127
- --------------------------------------------------------------------------------
LIABILITIES:
Options written (Note 4) 61,118,749
Payable for Fund shares purchased 2,322,576
Investment advisory fees payable 1,387,677
Distribution fees payable 619,668
Administration fees payable 516,564
Payable for securities purchased 299,790
Accrued expenses 576,495
- --------------------------------------------------------------------------------
Total Liabilities 66,841,519
- --------------------------------------------------------------------------------
Total Net Assets $3,032,742,608
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 158,461
Capital paid in excess of par value 2,304,653,273
Undistributed net investment income 1,192,859
Accumulated net realized gain from security transactions 7,300,708
Net unrealized appreciation of investments and options 719,437,307
- --------------------------------------------------------------------------------
Total Net Assets $3,032,742,608
================================================================================
Shares Outstanding:
Class A 31,770,378
- --------------------------------------------------------------------------------
Class B 123,077,239
- --------------------------------------------------------------------------------
Class C 2,226,473
- --------------------------------------------------------------------------------
Class Y 1,387,020
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $19.14
- --------------------------------------------------------------------------------
Class B * $19.14
- --------------------------------------------------------------------------------
Class C ** $19.15
- --------------------------------------------------------------------------------
Class Y (and redemption price) $19.17
- --------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net assets value per share) $20.15
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase. See Notes to Financial
Statements.
See Notes to Financial Statements.
17
<PAGE>
================================================================================
Statement of Operations For the Period Ended December 31, 1996(a)
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 27,135,208
Interest 10,237,354
Less: Foreign withholding tax (320,736)
- --------------------------------------------------------------------------------
Total Investment Income 37,051,826
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 7,545,851
Investment advisory fees (Note 2) 6,454,801
Administration fees (Note 2) 2,347,201
Shareholder and system servicing fees 993,127
Shareholder communications 237,080
Registration fees 139,968
Custody 39,713
Audit and legal 32,901
Insurance 16,721
Trustees' fees 9,000
Other 70,349
- --------------------------------------------------------------------------------
Total Expenses 17,886,712
- --------------------------------------------------------------------------------
Net Investment Income 19,165,114
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND OPTIONS (NOTES 3 AND 4):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 73,367,991
Options written (46,932,947)
- --------------------------------------------------------------------------------
Net Realized Gain 26,435,044
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments and Options:
Beginning of period 406,164,137
End of period 719,437,307
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 313,273,170
- --------------------------------------------------------------------------------
Net Gain on Investments and Options 339,708,214
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 358,873,328
================================================================================
</TABLE>
(a) For the period from August 1, 1996 to December 31, 1996.
See Notes to Financial Statements.
18
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Period Ended December 31, 1996 and
the Year Ended July 31, 1996
<TABLE>
<CAPTION>
December 31(a) July 31
================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 19,165,114 $ 42,604,346
Net realized gain 26,435,044 185,268,214
Increase in net unrealized appreciation 313,273,170 88,232,117
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 358,873,328 316,104,677
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (18,736,290) (42,253,658)
Net realized gains (73,502,296) (129,273,168)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (92,238,586) (171,526,826)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 245,247,901 535,462,312
Net asset value of shares issued
for reinvestment of dividends 68,372,367 126,644,485
Cost of shares reacquired (146,875,918) (346,996,312)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 166,744,350 315,110,485
- --------------------------------------------------------------------------------
Increase in Net Assets 433,379,092 459,688,336
NET ASSETS:
Beginning of period 2,599,363,516 2,139,675,180
- --------------------------------------------------------------------------------
End of period* $ 3,032,742,608 $ 2,599,363,516
================================================================================
* Includes undistributed net
investment income of: $ 1,192,859 $ 252,227
================================================================================
</TABLE>
(a) For the period from August 1, 1996 to December 31, 1996.
See Notes to Financial Statements.
19
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
The Smith Barney Premium Total Return Fund ("Fund"), a separate investment
fund of the Smith Barney Income Funds ("Trust"), a Massachusetts business trust,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust consists of the
Fund and six other separate investment funds: Smith Barney Exchange Reserve
Fund, Smith Barney Convertible Fund, Smith Barney High Income Fund, Smith Barney
Tax-Exempt Income Fund, Smith Barney Diversified Strategic Income Fund and Smith
Barney Utilities Fund. The financial statements and financial highlights for the
other Funds are presented in separate annual reports dated July 31, 1996.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) 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 Board of Trustees. Portfolio securities that are traded primarily on a
domestic or foreign exchange are valued at the last sale price on that exchange
or, if there were no sales during the day, at the current quoted bid price.
Over-the-counter securities are valued on the basis of the bid price at the
close of business each day. Options are generally valued at the last sale price
or, in the absence of the last price, the last offer price. Investments in U.S.
Government securities (other than short-term securities) are valued at the mean
of the quoted bid and ask price; (c) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates market value; (d) interest income, adjusted for amortization of
premium and accretion of discount, is recorded on the accrual basis; (e)
dividend income is recorded on the ex-dividend date; foreign dividends are
recorded on the ex-dividend date or as soon as practicable after the Fund
determines the existence of a dividend declaration after exercising reasonable
due diligence; (f) dividends and distributions to shareholders are recorded on
the ex-dividend date; (g) gains or losses on the sale of securities calculated
by using the specific identification method; (h) the accounting records are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of securities, and income and expenses are translated at the rate of
exchange quoted on the respective date that such transactions are recorded.
Differences between income and expense amounts recorded and
20
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
collected or paid are adjusted when reported by the custodian bank; (i) direct
expenses are charged to each fund and each class; management fees and general
fund expenses are allocated on the basis of relative net assets of each class;
(j) the character of income and gains distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At December 31, 1996, reclassifications are made to the Portfolio's
capital accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Net investment income,
net realized gains and net assets were not affected by this change; (k) the Fund
intends to comply with the applicable provisions of the Internal Revenue Code of
1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; and (l) estimates and assumptions are required
to be made regarding assets, liabilities and changes in net assets resulting
from operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
In addition, the Fund may from time to time enter into options and/or
futures contracts in order to hedge market risk.
The Fund changed its fiscal year-end from July 31 to December 31. This
change was done to facilitate the administration of the Fund.
2. Investment Advisory Agreement, Administration
Agreement and Other Transactions
Smith Barney Strategy Advisers Inc. ("SBSA"), a subsidiary of Smith Barney
Mutual Funds Management Inc. ("SBMFM"), which, in turn, is a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Trust. The Fund
pays SBSA an advisory fee calculated at an annual rate of 0.55% of the average
daily net assets. This fee is calculated daily and paid monthly.
SBSA has entered into a sub-advisory agreement with Boston Partners Asset
Management, L.P. ("Boston Partners"). Pursuant to the sub-advisory agreement,
Boston Partners is responsible for the day-to-day portfolio operations and
investment decisions for the Fund. SBSA pays Boston Partners a monthly fee
calculated at an annual rate of 0.10% of the average daily net assets of the
Fund. This fee is paid monthly.
21
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
SBMFM also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
period ended December 31, 1996, SB received brokerage commissions of $346,980
and sales charges of approximately $435,000 for sales of the Fund's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs within one year from initial purchase
and declines thereafter by 1.00% per year until no CDSC is incurred. Class C
shares have a 1.00% CDSC, which applies if redemption occurs within the first
year of purchase. In addition, Class A shares also have a 1.00% CDSC, which
applies if redemption occurs within the first year of purchase. This CDSC only
applies to those purchases of Class A shares, which, when combined with current
holdings of Class A shares, equal or exceed $500,000 in the aggregate. These
purchases do not incur an initial sales charge. For the period ended December
31, 1996, CDSCs paid to SB were:
Class A Class B Class C
================================================================================
CDSCs $ 3,000 $1,009,000 $ 5,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with
respect to Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets of each respective class. The Fund also pays a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.50% and 0.45% of the average daily net assets of each class,
respectively. For the period ended December 31, 1996, total Distribution Plan
fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $ 592,473 $6,846,405 $ 106,973
================================================================================
All officers and one Trustee of the Trust are employees of SB.
22
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
3. Investments
During the period ended December 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $372,498,047
- --------------------------------------------------------------------------------
Sales 335,205,557
================================================================================
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $ 746,357,193*
Gross unrealized depreciation (21,365,593)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 724,991,600*
================================================================================
* Substantially the same Federal income tax purposes.
4. Option Contracts
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into a closing sales transaction, the Fund will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Fund exercises a put
option, it will realize a gain or loss from the sale of the underlying security
and the proceeds from such sale will be decreased by the premium originally
paid. When the Fund exercises a call option, the cost of the security which the
Fund purchases upon exercise will be increased by the premium originally paid.
As of December 31, 1996, the Fund had no open purchased call or put
options.
When a Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
sold) without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is eliminated. When a written call
option is exercised the cost of the security sold will be decreased by the
premium originally received. When a written put option is exercised, the amount
of the premium originally received will reduce the cost of the security which
the Fund purchased upon exercise. When written
23
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
index options are exercised, settlement is made in cash. The risk associated
with purchasing options is limited to the premium originally paid. The Fund
enters into options for hedging purposes. The risk in writing a covered call
option is that the Fund gives up the opportunity to participate in any increase
in the price of the underlying security beyond the exercise price. The risk in
writing a put option is that the Fund is exposed to the risk of loss if the
market price of the underlying security declines.
The following written call option transactions occurred during the period
ended December 31, 1996:
<TABLE>
<CAPTION>
Number of
Premiums Contracts
=========================================================================================================
<S> <C> <C>
Options written, outstanding at July 31, 1996 $ 45,341,727 23,025
Options written during the period ended December 31, 1996 103,068,012 23,700
Options cancelled in closing purchase transactions (92,344,033) (24,000)
Options expired (501,250) (10,025)
- ---------------------------------------------------------------------------------------------------------
Options written, outstanding at December 31, 1996 $ 55,564,456 12,700
=========================================================================================================
</TABLE>
The following table represents the written call option contracts open as of
December 31, 1996:
<TABLE>
<CAPTION>
Number of Strike
Contracts Expiration Price Value
==================================================================================================
<S> <C> <C> <C>
Call Option Written
12,700 S&P 500 Index
(Premiums received -- $55,564,456) 6/20/97 $730 $(61,118,749)
==================================================================================================
</TABLE>
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
6. Shares of Beneficial Interest
At December 31, 1996, the Trust had an unlimited number of shares of
beneficial interest authorized with a par value of $0.001 per share. The Fund
has the ability to issue multiple classes of shares. Each share of a class
represents an identical interest and has the same rights, except that each class
bears certain direct expenses specifically related to the distribution of its
shares.
24
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
At December 31, 1996, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
====================================================================================================================================
<S> <C> <C> <C> <C>
Total Paid-in Capital $ 481,032,264 $1,761,641,515 $ 37,312,020 $ 24,825,935
====================================================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Period Ended Year Ended
December 31, 1996* July 31, 1996**
------------------------------------ ------------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,879,826 $ 34,394,839 4,407,887 $ 74,401,892
Shares issued on
reinvestment 826,867 15,241,668 1,719,698 29,658,966
Shares redeemed (1,636,594) (29,718,184) (4,309,199) (74,624,179)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 1,070,099 $ 19,918,323 1,818,386 $ 29,436,679
====================================================================================================================================
Class B
Shares sold 10,374,378 $ 189,390,976 24,708,121 $ 427,376,024
Shares issued on
reinvestment 2,825,089 52,114,744 5,545,245 95,657,996
Shares redeemed (6,245,730) (114,229,669) (15,497,442) (267,822,402)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 6,953,737 $ 127,276,051 14,755,924 $ 255,211,618
====================================================================================================================================
Class C
Shares sold 548,279 $ 10,029,903 1,176,592 $ 20,291,428
Shares issued on
reinvestment 54,950 1,015,955 76,551 1,327,523
Shares redeemed (159,786) (2,928,065) (262,293) (4,549,731)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 443,443 $ 8,117,793 990,850 $ 17,069,220
====================================================================================================================================
Class Y
Shares sold 629,645 $ 11,432,183 757,375 $ 13,392,968
Shares issued on
reinvestment -- -- -- --
Shares redeemed -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 629,645 $ 11,432,183 757,375 $ 13,392,968
====================================================================================================================================
</TABLE>
* For the period from August 1, 1996 to December 31, 1996.
** Transactions for Class Y Shares are for the period from February 7, 1996
(inception date) to December 31, 1996.
25
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1996(1)(2) 1996 1995 1994 1993(3)
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 17.40 $ 16.33 $ 15.69 $ 15.65 $ 15.15
- -----------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.16 0.37 0.44 0.33 0.19
Net realized and unrealized gain 2.21 1.98 1.48 0.99 1.33
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 2.37 2.35 1.92 1.32 1.52
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.16) (0.37) (0.43) (0.31) (0.17)
Overdistribution of net
investment income -- -- -- (0.24) (0.03)
Net realized gains (0.47) (0.91) (0.14) (0.52) (0.44)
Overdistribution of net
realized gains -- -- -- -- (0.05)
Capital -- -- (0.71) (0.21) (0.33)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.63) (1.28) (1.28) (1.28) (1.02)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.14 $ 17.40 $ 16.33 $ 15.69 $ 15.65
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 13.80%+++ 14.76% 12.92% 8.65% 10.31%+++
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 608,203 $ 534,329 $ 471,578 $ 67,699 $ 39,677
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.12%+ 1.12% 1.16% 1.19% 1.20%+
Net investment income 2.05+ 2.16 2.81 2.05 1.64+
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 30% 58% 63% 34% 55%
- -----------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $ 0.06 $ 0.06 -- -- --
===================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
26
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1996(1)(2) 1996 1995 1994 1993 1992
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 17.40 $ 16.33 $ 15.69 $ 15.65 $ 15.21 $ 14.26
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.12 0.28 0.36 0.25 0.23 0.22
Net realized and unrealized gain 2.21 1.99 1.48 1.00 1.47 1.93
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 2.33 2.27 1.84 1.25 1.70 2.15
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.12) (0.29) (0.34) (0.27) (0.16) (0.22)
Overdistribution of net
investment income -- -- -- (0.22) (0.03) --
Net realized gains (0.47) (0.91) (0.14) (0.52) (0.57) --
Overdistribution of net
realized gains -- -- -- -- (0.06) --
Capital -- -- (0.72) (0.20) (0.44) (0.98)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.59) (1.20) (1.20) (1.21) (1.26) (1.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.14 $ 17.40 $ 16.33 $ 15.69 $ 15.65 $ 15.21
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 13.57%+++ 14.21% 12.36% 8.12% 11.68% 15.68%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $ 2,355 $ 2,021 $ 1,655 $ 1,697 $ 1,231 $ 585
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.54%+ 1.62% 1.66% 1.66% 1.69% 1.69%
Net investment income 1.63+ 1.66 2.31 1.58 1.16 1.53
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 30% 58% 63% 34% 55% 57%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $ 0.06 $ 0.06 -- -- -- --
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
27
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1996(1)(2) 1996 1995 1994(3) 1993(4)
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 17.41 $ 16.33 $ 15.69 $ 15.65 $ 15.45
- -----------------------------------------------------------------------------------------------------------------------------------
Income From Operations From:
Net investment income 0.12 0.29 0.36 0.23 0.05
Net realized and unrealized gain 2.21 1.99 1.48 1.02 0.35
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 2.33 2.28 1.84 1.25 0.40
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.12) (0.29) (0.35) (0.27) (0.03)
Overdistribution of net
investment income -- -- -- (0.22) (0.01)
Net realized gains (0.47) (0.91) (0.14) (0.52) (0.08)
Overdistribution of net
realized gains -- -- -- -- (0.01)
Capital -- -- (0.71) (0.20) (0.07)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.59) (1.20) (1.20) (1.21) (0.20)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.15 $ 17.41 $ 16.33 $ 15.69 $ 15.65
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 13.58%+++ 14.30% 12.36% 8.12% 2.60%+++
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 42,637 $ 31,044 $ 12,937 $ 1,878 $ 357
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.55%+ 1.59% 1.62% 1.60% 1.31%+
Net investment income 1.61+ 1.68 2.35 1.65 1.54+
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 30% 58% 63% 34% 55%
- -----------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5) $ 0.06 $ 0.06 -- -- --
===================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) On November 7, 1994 the former Class D shares were renamed Class C shares.
(4) For the period from June 1, 1993 (inception date) to July 31, 1993.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
28
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Y Shares 1996(1)(2) 1996(3)
================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Period $ 17.42 $ 17.57
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.17 0.19
Net realized and unrealized gain 2.23 0.33
- --------------------------------------------------------------------------------
Total Income From Operations 2.40 0.52
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.18) (0.21)
Net realized gains (0.47) (0.46)
- --------------------------------------------------------------------------------
Total Distributions (0.65) (0.67)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 19.17 $ 17.42
- --------------------------------------------------------------------------------
Total Return+++ 13.95% 2.93%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 26,585 $ 13,192
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.80% 0.87%
Net investment income 2.36 2.24
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 30% 58%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $ 0.06 $ 0.06
================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) For the period from February 7, 1996 (inception date) to July 31, 1996.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
29
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
The Shareholders and Board of Trustees of
Smith Barney Income Funds:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Premium Total Return Fund
of Smith Barney Income Funds as of December 31, 1996, the related statement of
operations for the period from August 1, 1996 to December 31, 1996, the
statement of changes in net assets for the period from August 1, 1996 to
December 31, 1996 and the year ended July 31, 1996 and financial highlights for
the period from August 1, 1996 to December 31, 1996 and for each of the years in
the two-year period ended July 31, 1996. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the years in the three-year period ended July 31, 1994, were audited by other
auditors whose report thereon, dated September 19, 1994, expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. As to securities
purchased or sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Smith Barney Premium Total Return Fund of Smith Barney Income Funds as of
December 31, 1996, the results of its operations for the period from August 1,
1996 to December 31, 1996, the changes in its net assets for the period from
August 1, 1996 to December 31, 1996 and the year ended July 31, 1996 and
financial highlights for the period from August 1, 1996 to December 31, 1996 and
each of the years in the two-year period ended July 31, 1996, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 7, 1997
30
<PAGE>
================================================================================
Tax Information (unaudited)
================================================================================
The amount of long-term capital gains paid by the Fund to its shareholders
for the fiscal year ended December 31, 1996, was $65,957,970.
31
<PAGE>
[This page intentionally left blank]
<PAGE>
SMITH BARNEY
PREMIUM TOTAL
RETURN FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
Chairman and Investment Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Harry J. Rosenbluth
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- ----------------------------------
A Member of TravelersGroup [LOGO]
INVESTMENT ADVISER
Smith Barney Strategy Advisers Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER
SERVICING AGENT
First Data Investors Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Premium Total Return Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by an effective Prospectus
for the Fund, which contains information concerning the Fund's investment
policies and expenses as well as other pertinent information.
SMITH BARNEY
PREMIUM TOTAL
RETURN FUND
388 Greenwich Street
New York, New York 10013
FD042 2/97
