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SEMI-ANNUAL REPORT
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Smith Barney
Convertible
Fund
- --------------------------------
January 31, 1997
logo Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
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Smith Barney Convertible Fund
- -----------------------------
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Convertible Fund for the period ended January 31, 1997. In this report, we
summarize the period's prevailing economic and market conditions, and outline
our portfolio strategy. A detailed summary of performance and current holdings
can be found in the appropriate sections that follow in the semi-annual report.
Fund Performance Update
For the six-month period ended January 31, 1997, the Smith Barney Convertible
Fund had a total return of 11.62% for Class A shares compared with the Lipper
Analytical Services, Inc. peer group average of 14.19% for the same period.
Convertible securities have both equity and fixed income characteristics. The
equity portion of convertible securities particularly benefited from the
dramatic rise in stock prices during this period. We are pleased with the
performance of the Fund during this period given the conservative risk-reward
profile of the Fund relative to other convertible funds.
Economic and Market Overview
Since our last report, the U.S. economy has continued to grow at a sustained
moderate pace. The economic expansion that began in 1990 is now close to seven
years long, one of the longest periods of growth since the Second World War.
Throughout this expansion, inflation has been low as a result of heightened
global competition and stable labor costs. In fact, according to recently
released CPI (Consumer Price Index) figures, the present inflation environment
remains favorable.
Market observers have attributed the success of the financial markets over the
past six months to the combination of moderate economic growth, low inflation
and strong corporate profitability. Long-term interest rates as measured by the
30-year U.S. Treasury bond declined from 6.97% to 6.79% while short-term rates
remained unchanged. The strength in the economy coupled with corporate
restructuring and cost cutting helped to keep corporate earnings growing above
analysts' expectations during the past two quarters. The stock market responded
positively to the continued improvement in corporate profitability. For example,
the S&P 500 Index, a widely reported stock market average, increased nearly 24%
for the six-month period ended January 31, 1997.
1
<PAGE>
The strength in the stock market the past six months directly benefited the
convertible securities market. Convertible securities are unique investments
with both common stock and bond attributes. A convertible bond can be exchanged
into a pre-established number of common shares of an issuing company. Therefore
a rise in the price of the common shares of an issuing company increases the
value of the company's existing convertible security. The equity component of
convertibles dominated the overall performance of the convertibles market the
past six months, because interest rates were relatively stable and had little
impact on the fixed income component of convertibles.
Fund's Investment Strategy
The Smith Barney Convertible Fund remains broadly diversified, consisting
primarily of convertible bonds and convertible preferred stocks. Unlike other
convertible funds, the Smith Barney Convertible Fund rarely holds common stock,
rarely purchases illiquid private placements and avoids purchasing unrated
securities. We believe the conservative risk-reward profile of the Fund benefits
investors over the long term by keeping portfolio volatility low. Since
convertible bonds have the characteristics of both stocks and bonds, they have
experienced significantly less volatility than the overall stock market.
As of January 31, 1997 , the Fund continues to maintain a high credit quality
orientation. Over 50% of the Fund's investments are rated investment grade
(BBB/Baa or higher) by Standard & Poor's Rating Service or Moody's Investors
Service Inc., two leading bond credit rating organizations. Investment grade
companies generally have strong balance sheets and solid earnings records. The
remaining portion of the Fund's invested assets are rated below investment
grade. However, we believe these issues have the potential for credit upgrades
sometime in the near future due to improving fundamentals.
During the period covered by this report, the Fund participated in several new
convertible issues. The Fund established positions in Home Depot, a large home
improvement retailer; Saks Holding Inc., a top line fashion retailer; and
Diamond Offshore Drilling, a contract driller of offshore oil and gas wells.
Convertible issuance was strong throughout most of 1996 with approximately $24
billion in new issues. However, $34 billion of redeemed convertibles offset the
new issue supply. The Fund's positions in Medusa Corporation and Great Western
Financial were among those redeemed. Given the strong equity market and low
interest rate environment, we believe the new issue market will continue to
provide investment opportunities in 1997.
We continue to favor the financial services sector. The Equitable Companies, a
holding company for a group of insurance and financial services businesses;
2
<PAGE>
Chubb, a large property and casualty insurer; and St. Paul Companies, a leading
diversified financial services company are all top holdings in the Fund. These
companies have shown solid earnings growth over the past year. Technology is
another sector well represented in the Fund's portfolio. We believe that
technology has tremendous long-term capital appreciation potential. The Fund has
a sizable position in National Semiconductor, a designer and manufacturer of
semiconductors for the audio, video, communications, and computer markets.
During the past six months, we added to existing positions in WMX Technology, a
leading waste management services company, and Alaska Air Group, a regional
airline. We sold our positions in Danka Business Systems, Prime Hospitality
Corp., HFS, and EMC.
Market Outlook
We expect the U.S. economy will continue to grow at a moderate pace over the
next twelve months with Gross Domestic Product (GDP) growth in the 2-3% range
and relatively low inflation. The Federal Reserve Board ("Fed") has not adjusted
monetary policy for over a year. If the present environment continues, the Fed
should keep short-term interest rates steady for most of the year. The past two
years have been an extraordinary period for the financial markets, especially
the stock market. Although, the fundamentals remain strong, the stock market
returns of the past two years will be difficult to match in 1997. Nevertheless,
we remain optimistic on the U.S. stock market's prospects for 1997. Given our
positive outlook for the financial markets, we believe the Smith Barney
Convertible Fund should continue to provide investors with competitive
risk-adjusted returns.
In closing, we thank you for your investment in the Smith Barney Convertible
Fund. We look forward to helping you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Robert E. Swab
Heath B. McLendon Robert E. Swab
Chairman and Vice President and
Investment Officer Investment Officer
February 14, 1997
3
<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)
===================================================================================================
<C> <C> <C> <C> <C> <C> <C>
1/31/97 $ 15.66 $ 16.73 $0.37 $0.36 $0.00 11.62%+
- ---------------------------------------------------------------------------------------------------
7/31/96 15.27 15.66 0.73 0.00 0.00 7.41
- ---------------------------------------------------------------------------------------------------
7/31/95 14.56 15.27 0.73 0.00 0.00 10.35
- ---------------------------------------------------------------------------------------------------
7/31/94 14.99 14.56 0.73 0.00 0.00 1.99
- ---------------------------------------------------------------------------------------------------
Inception* - 7/31/93 13.82 14.99 0.51 0.03 0.00 12.63+
===================================================================================================
Total $3.07 $0.39 $0.00
===================================================================================================
</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)
===================================================================================================
<C> <C> <C> <C> <C> <C> <C>
1/31/97 $ 15.66 $ 16.73 $0.33 $0.36 $0.00 11.37%+
- ---------------------------------------------------------------------------------------------------
7/31/96 15.27 15.66 0.66 0.00 0.00 6.91
- ---------------------------------------------------------------------------------------------------
7/31/95 14.56 15.27 0.66 0.00 0.00 9.80
- ---------------------------------------------------------------------------------------------------
7/31/94 14.99 14.56 0.66 0.00 0.00 1.50
- ---------------------------------------------------------------------------------------------------
7/31/93 13.84 14.99 0.62 0.04 0.00 13.40
- ---------------------------------------------------------------------------------------------------
7/31/92 12.51 13.84 0.64 0.00 0.02 16.25
- ---------------------------------------------------------------------------------------------------
7/31/91 12.21 12.51 0.68 0.00 0.03 8.86
- ---------------------------------------------------------------------------------------------------
7/31/90 13.80 12.21 0.83 0.11 0.04 (4.53)
- ---------------------------------------------------------------------------------------------------
7/31/89 13.04 13.80 0.86 0.01 0.00 13.09
- ---------------------------------------------------------------------------------------------------
7/31/88 13.93 13.04 0.85 0.27 0.00 2.22
- ---------------------------------------------------------------------------------------------------
Inception* - 7/31/87 13.00 13.93 0.62 0.03 0.00 12.34+
===================================================================================================
Total $7.41 $0.82 $0.09
===================================================================================================
</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)
===================================================================================================
<C> <C> <C> <C> <C> <C> <C>
1/31/97 $ 15.64 $ 16.69 $0.33 $0.36 $0.00 11.27%+
- ---------------------------------------------------------------------------------------------------
7/31/96 15.27 15.64 0.67 0.00 0.00 6.82
- ---------------------------------------------------------------------------------------------------
Inception*- 7/31/95 14.09 15.27 0.49 0.00 0.00 12.17+
===================================================================================================
Total $1.49 $0.36 $0.00
===================================================================================================
</TABLE>
4
<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)
===================================================================================================
<C> <C> <C> <C> <C> <C> <C>
1/31/97 $ 15.68 $ 16.77 $0.39 $0.36 $0.00 11.87%+
- ---------------------------------------------------------------------------------------------------
Inception*- 7/31/96 16.15 15.68 0.39 0.00 0.00 (0.56)+
===================================================================================================
Total $0.78 $0.36 $0.00
===================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- ---------------------------
Average Annual Total Return
- ---------------------------
Without Sales Charge(1)
------------------------------------------
Class A Class B Class C Class Y
================================================================================
Six Months Ended 1/31/97+ 11.62% 11.37% 11.27% 11.87%
- --------------------------------------------------------------------------------
Year Ended 1/31/97 11.62 11.11 10.97 N/A
- --------------------------------------------------------------------------------
Five Years Ended 1/31/97 N/A 9.91 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 1/31/97 N/A 8.40 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/97 10.40 8.60 13.73 11.25+
================================================================================
With Sales Charge(2)
---------------------------------------
Class A Class B Class C Class Y
================================================================================
Six Months Ended 1/31/97+ 6.07% 6.37% 10.27% 11.87%
- --------------------------------------------------------------------------------
Year Ended 1/31/97 6.06 6.11 9.97 N/A
- --------------------------------------------------------------------------------
Five Years Ended 1/31/97 N/A 9.77 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 1/31/97 N/A 8.40 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/97 9.06 8.60 13.73 11.25+
================================================================================
- -----------------------
Cumulative Total Return
- -----------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/97) 51.97%
- --------------------------------------------------------------------------------
Class B (1/31/87 through 1/31/97) 123.96
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/97) 33.33
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/97) 11.25+
================================================================================
(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%; 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 CDSCis incurred. Class C shares reflect the deduction of a 1.00% CDSC,
which applies if shares are redeemed within the first year of purchase.
* Inception dates for Class A, B, C and Y shares are November 6, 1992,
September 9, 1986, November 7, 1994 and February 7, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
5
<PAGE>
- ----------------------------------
Historical Performance (unaudited)
- ----------------------------------
Growth of $10,000 Invested in Class B Shares of the
Smith Barney Convertible Fund vs. Standard & Poor's 500 Index and
Lipper Convertible Securities Fund Peer Group Average+
- --------------------------------------------------------------------------------
January 1987 -- January 1997
[The following table was depicted as a line chart in the printed material]
1/87 1/97
------- -------
Smith Barney Convertible Fund $10,000 $22,396
Lipper Convertible Securities Fund Pear Group Average $10,000 $25,858
Standard & Poor's 500 Index $10,000 $38,841
+ Hypothetical illustration of $10,000 invested in Class B shares on January
1987, assuming reinvestment of dividends and capital gains, if any, at net
asset value through January 31, 1997. The Standard & Poor's 500 Index is
composed of widely held common stocks listed on the New York Stock Exchange,
American Stock Exchange and the over-the-counter market. Figures for the index
include reinvestment of dividends. The Lipper Convertible Securities Fund Peer
Group Average is composed of the Fund's peer group of 42 mutual funds, as of
January 31, 1997, investing in convertible securities. 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 the 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.
6
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
[The following table was depicted as a pie chart in the printed material]
Portfolio Breakdown
Other Convertible Preferred Stocks, Bonds and Notes
25.7%
Finance Companies/Consumer Credit
9.5%
Metals/Mining
11.7%
Oil/Natural Gas
8.4%
Restaurants/Food Service
5.8%
Repurchase Agreement
8.2%
Electronics/Computers
4.3%
Transportation (Non-Rail)
5.5%
Retail
5.0%
Healthcare/Drugs/Hospital Supplies
6.3%
Diversified/Conglomerate Manufacturing
5.4%
Environmental Control
4.2%
Percentage of
Total Investments
================================================================================
Top Five Equity Holdings
Bethlehem Steel Corp. 2.9%
St. Paul Capital LLC 2.4
Cyprus AMAX Minerals Co., Series A 2.2
International Paper Co. 1.9
Corning Delaware LP 1.9
Top Five Bond Holdings
USXMarathon Group 4.2%
Equitable Cos., Inc. 3.8
Grand Metropolitan PLC 3.6
Inco Ltd. 3.3
Airborne Freight Corp. 3.2
================================================================================
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
CONVERTIBLE PREFERRED STOCKS -- 31.6%
================================================================================
Bank/Savings and Loans -- 1.6%
30,000 Union Planters Corp., Series E, Exchange 8.000% $ 1,530,000
- --------------------------------------------------------------------------------
Broadcast Radio & Television -- 0.7%
30,000 Cable Systems Corp., Series I, Exchange 8.500% 648,750
- --------------------------------------------------------------------------------
Building/Construction -- 1.1%
40,000 Beazer Homes USA, Series A, Exchange 8.000% 1,080,000
- --------------------------------------------------------------------------------
Electrical Equipment -- 1.7%
100,000 Westinghouse Electric Corp., Depository Shares,
Series C, Exchange $1.30 + 1,675,000
- --------------------------------------------------------------------------------
Finance Companies/Consumer Credit -- 5.7%
30,000 American General Corp., Series A, Exchange $3.00 1,638,750
20,000 H.F. Ahmanson & Co., Series D, Exchange 6.000% 1,560,000
40,000 St. Paul Capital LLC, Exchange 6.000% 2,300,000
- --------------------------------------------------------------------------------
5,498,750
- --------------------------------------------------------------------------------
Metals/Mining -- 8.4%
30,000 Amax Gold Inc., Series B, Exchange $3.75 1,552,500
Bethlehem Steel Corp.:
30,000 Exchange $3.50+ 1,140,000
32,000 Exchange $5.00 1,700,000
40,000 Cyprus AMAX Minerals Co., Series A, Exchange $4.00 2,150,000
40,000 WHX Corp., Series A, Exchange 6.500% 1,595,000
- --------------------------------------------------------------------------------
8,137,500
- --------------------------------------------------------------------------------
Oil/Natural Gas -- 1.8%
30,000 Occidental Petroleum Corp., Series 1993,
Exchange $3.875+ 1,807,500
- --------------------------------------------------------------------------------
Packaging/Containers -- 1.9%
30,000 Corning Delaware LP, Exchange 6.000% 1,837,500
- --------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 1.9%
40,000 International Paper Co., Exchange 5.250%+ 1,870,000
- --------------------------------------------------------------------------------
Real Estate Development/REITS -- 2.6%
50,000 Security Capital Corp., Series A, Exchange $1.75 1,593,750
40,000 Tangier Factory Outlet Centers Inc., Depository Shares,
Series A, Exchange $1.802 905,000
- --------------------------------------------------------------------------------
2,498,750
- --------------------------------------------------------------------------------
Restaurants/Food Service -- 1.1%
20,000 Wendy's Financing I, Series A, Exchange 5.000% 1,070,000
- --------------------------------------------------------------------------------
Retail -- 1.6%
30,000 KMart Financing, Exchange 7.750% 1,530,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) January 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Telecommunications/Equipment -- 1.5%
20,000 Airtouch Communications, Series C, Exchange 4.250% $ 930,000
10,000 Loral Space & Communications, Exchange 6.000%+ 541,250
- --------------------------------------------------------------------------------
1,471,250
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost-- $29,636,522) 30,655,000
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
CONVERTIBLE BONDS AND NOTES -- 60.2%
================================================================================
Automobile Parts -- 1.6%
$ 500,000 Magna International Inc., 5.000% due 10/15/02 579,375
2,500,000 Deutsche Bank Finance B.V., zero coupon due 2/2/17 1,025,000
- --------------------------------------------------------------------------------
1,604,375
- --------------------------------------------------------------------------------
Communications -- 0.9%
1,000,000 California Microwave Inc., subordinate notes, 5.250%
due 12/15/03 852,500
- --------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 5.4%
2,500,000 Cooper Industries Inc., 7.050% due 1/1/15 2,728,125
2,000,000 GenCorp Inc., subordinate debentures, 8.000% due 8/1/02 2,470,000
- --------------------------------------------------------------------------------
5,198,125
- --------------------------------------------------------------------------------
Drug Distributor/Health Care -- 0.9%
1,000,000 McKesson Corp., 4.500% due 3/1/04 876,250
- --------------------------------------------------------------------------------
Electronics/Computers -- 4.3%
500,000 Adaptec Inc., 4.750% due 2/1/04 543,750
500,000 Baan Co. N.V., 4.500% due 12/15/01+ 601,250
500,000 General Instrument Corp., 5.000% due 6/15/00 565,000
500,000 Integrated Device Technology Corp., 5.500% due 6/1/02 422,500
2,000,000 Natural Semiconductor Corp., 6.500% due 10/1/02+ 2,042,500
- --------------------------------------------------------------------------------
4,175,000
- --------------------------------------------------------------------------------
Environmental Control -- 4.2%
1,000,000 U.S. Filter Corp., 4.500% due 12/15/01 1,106,250
3,000,000 WMX Technologies Inc., 2.000% due 1/24/05 2,966,250
- --------------------------------------------------------------------------------
4,072,500
- --------------------------------------------------------------------------------
Finance Companies/Consumer Credit -- 3.8%
3,000,000 Equitable Cos., Inc., 6.125% due 12/15/24 3,648,750
- --------------------------------------------------------------------------------
Healthcare/Drugs/Hospital Supplies -- 6.3%
500,000 Alza Corp., 5.000% due 5/1/06 501,250
1,000,000 Chiron Corp., 1.900% due 11/17/00 891,250
1,000,000 Nabi Inc., 6.500% due 2/1/03 1,032,500
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
Healthcare/Drugs/Hospital Supplies -- 6.3% (continued)
$1,000,000 Phycor Inc., 4.500% due 2/15/03 $1,075,000
2,500,000 Tenet Healthcare Corp., 6.000% due 12/1/05 2,600,000
- --------------------------------------------------------------------------------
6,100,000
- --------------------------------------------------------------------------------
Home Improvements-- 1.0%
1,000,000 Home Depot Inc., 3.250% due 10/1/01 981,250
- --------------------------------------------------------------------------------
Insurance -- 2.6%
2,000,000 Chubb Capital Corp., 6.000% due 5/15/98 2,482,500
- --------------------------------------------------------------------------------
Leisure/Amusement/Motion Picture -- 3.0%
3,000,000 Coleman WorldWide Corp., zero coupon due 5/27/13 903,750
500,000 Scholastic Corp., 5.000% due 8/15/05 503,750
4,000,000 Time Warner Inc., zero coupon due 12/17/12 1,510,000
- --------------------------------------------------------------------------------
2,917,500
- --------------------------------------------------------------------------------
Lodging -- 1.1%
1,000,000 Hilton Hotels Corp., 5.000% due 5/15/06 1,073,750
- --------------------------------------------------------------------------------
Metals/Mining -- 3.3%
3,000,000 Inco Ltd., 7.750% due 3/15/16 3,210,000
- --------------------------------------------------------------------------------
Miscellaneous -- 1.1%
1,000,000 Interpublic Group Cos., Inc., 3.750% due 4/1/02+ 1,077,500
- --------------------------------------------------------------------------------
Office/Business Equipment -- 0.5%
500,000 Unisys Corp., 8.250% due 8/1/00 491,250
- --------------------------------------------------------------------------------
Oil/Natural Gas -- 6.6%
1,000,000 Diamond Offshore Drilling, 3.750% due 2/15/07 1,050,000
1,000,000 Nabors Industries, Inc., 5.000% due 5/15/06 1,253,750
4,000,000 USX Marathon Group, subordinate debentures, 7.000%
due 6/15/17 4,060,000
- --------------------------------------------------------------------------------
6,363,750
- --------------------------------------------------------------------------------
Restaurants/Food Service -- 4.7%
Boston Chicken:
500,000 4.500% due 2/1/04 615,000
1,500,000 Zero coupon due 6/1/15 465,000
3,000,000 Grand Metropolitan PLC, 6.500% due 1/31/00+ 3,476,250
- --------------------------------------------------------------------------------
4,556,250
- --------------------------------------------------------------------------------
Retail -- 3.4%
500,000 Saks Holdings, 5.500% due 9/15/06 471,875
1,000,000 The Men's Wearhouse Inc., 5.250% due 3/1/03 1,022,500
500,000 The Sports Authority Inc., 5.250% due 9/15/01 441,875
1,250,000 Waban Inc., 6.500% due 7/1/02 1,393,750
- --------------------------------------------------------------------------------
3,330,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
Transportation (Non-Rail) -- 5.5%
$3,000,000 Airborne Freight Corp., 6.750% due 8/15/01 $ 3,082,500
2,000,000 Alaska Air Group, 6.500% due 6/15/05 2,277,500
- --------------------------------------------------------------------------------
5,360,000
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS AND NOTES
(Cost--$55,605,015) 58,371,250
================================================================================
REPURCHASE AGREEMENT -- 8.2%
7,927,000 Chase Manhattan Bank, 5.500% due 2/3/97; Proceeds
at maturity -- $7,930,633; (Fully collateralized by
U.S. Treasury Notes, 6.375% due 3/31/01;
Market value--$8,085,586) (Cost--$7,927,000) 7,927,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost--$93,168,537*) $96,953,250
================================================================================
+ Security is exempt from registration under Rule 144A of the Securities Act of
1933. This security 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.
11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost--$93,168,537) $ 96,953,250
Cash 134,945
Receivable for Fund shares sold 114,402
Receivable for securities sold 2,320,083
Dividends and interest receivable 935.186
- --------------------------------------------------------------------------------
Total Assets 100,457,866
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 3,526,625
Dividends payable 345,110
Payable for Fund shares purchased 44,196
Investment advisory fees payable 41,609
Administration fees payable 16,643
Distribution fees payable 8,399
Accrued expenses 223,887
- --------------------------------------------------------------------------------
Total Liabilities 3,206,469
- --------------------------------------------------------------------------------
Total Net Assets $ 97,251,397
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 5,811
Capital paid in excess of par value 91,972,334
Undistributed net investment income 120,385
Accumulated net realized gain from security transactions 1,368,154
Net unrealized appreciation of investments 3,784,713
- --------------------------------------------------------------------------------
Total Net Assets $ 97,251,397
================================================================================
Shares Outstanding:
Class A 2,085,610
----------------------------------------------------------------------------
Class B 2,526,817
----------------------------------------------------------------------------
Class C 55,793
----------------------------------------------------------------------------
Class Y 1,142,434
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $16.73
----------------------------------------------------------------------------
Class B* $16.73
----------------------------------------------------------------------------
Class C** $16.69
----------------------------------------------------------------------------
Class Y (and redemption price) $16.77
----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $17.61
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed less than 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.
12
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1997
INVESTMENT INCOME:
Dividends $ 1,831,816
Interest 1,001,995
- --------------------------------------------------------------------------------
Total Investment Income 2,833,811
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 237,685
Distribution fees (Note 2) 211,731
Administration fees (Note 2) 95,074
Shareholder and system servicing fees 57,401
Registration fees 30,393
Shareholder communications 26,246
Audit and legal 16,527
Trustees' fees 11,373
Pricing 2,700
Custody 2,601
Other 5,839
- --------------------------------------------------------------------------------
Total Expenses 697,570
- --------------------------------------------------------------------------------
Net Investment Income 2,136,241
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 20,252,753
Cost of securities sold 16,692,732
- --------------------------------------------------------------------------------
Net Realized Gain 3,560,021
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments:
Beginning of year (757,866)
End of year 3,784,713
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 4,542,579
- --------------------------------------------------------------------------------
Net Gain on Investments 8,102,600
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $10,238,841
================================================================================
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1997 (unaudited)
For the Year Ended July 31, 1996
1997 1996
================================================================================
OPERATIONS:
Net investment income $ 2,136,241 $ 3,060,8221
Net realized gain 3,560,021 4,983,498
Increase (decrease) in net unrealized
appreciation 4,542,579 (3,181,315)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 10,238,841 5,483,004
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,044,898) (3,651,779)
Net realized gains (2,061,461) --
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (4,106,359) (3,651,779)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 12,346,240 21,711,359
Net asset value of shares issued for
reinvestment of dividends 2,539,070 2,647,871
Cost of shares reacquired (10,904,385) (19,897,156)
- --------------------------------------------------------------------------------
Increase in Net Assets From Fund Share
Transactions 3,980,925 4,462,074
- --------------------------------------------------------------------------------
Increase in Net Assets 10,113,407 6,293,299
NET ASSETS:
Beginning of period 87,137,990 80,844,691
- --------------------------------------------------------------------------------
End of period* $97,251,397 $87,137,990
================================================================================
* Includes undistributed net investment
income of: $120,385 $20,042
================================================================================
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Convertible 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 Premium Total Return 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 semi-annual reports.
The Smith Barney Premium Total Return Fund changed its fiscal year end to
December 31 and, therefore, the semi-annual report will be prepared as of June
30, 1997.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
securities for which no sales price were reported are valued at bid price, or in
the absence of a recent bid price, at the bid equivalent obtained from one or
more of the major market makers; (c) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, as
applicable; (d) dividend income is recorded on ex-dividend date and interest
income, adjusted for accretion of original issue discount, is recorded on an
accrual basis; (e) gains or losses on the sale of securities are calculated
using the specific identification method; (f) dividends and distributions to
shareholders are recorded on the ex-dividend date; (g) direct expenses are
charged to each class; management fees and general fund expenses are allocated
on the basis of relative net assets; (h) 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 (i) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION
AGREEMENT AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Trust. The Fund
pays SBMFM an advisory fee calculated at an annual rate of 0.50%
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
of the average daily net assets. This fee is calculated daily and paid monthly.
SBMFM also acts as the Trust'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
Trust shares and primary broker for its portfolio agency transactions. For the
six months ended January 31, 1997, SB received sales charges of approximately
$4,000 on 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 less than 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 certain cases, 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 six months ended
January 31, 1997, CDSCs paid to SB for Class B shares were approximately
$24,000.
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 six months ended January 31, 1997, total Distribution Plan fees incurred
were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $44,710 $164,140 $2,881
================================================================================
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the six months ended January 31, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $23,253,175
- --------------------------------------------------------------------------------
Sales 20,252,753
================================================================================
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At January 31, 1997, aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $6,015,171)*
Gross unrealized depreciation (2,230,458)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $3,784,713)*
================================================================================
* Substantially the same for Federal income tax purposes.
4. CAPITAL LOSS CARRYFORWARD
At July 31, 1996, the Fund had, for Federal income tax purposes,
approximately $130,000 of unused capital loss carryforwards available to offset
future capital gains expiring July 31, 1999. To the extent that these
carryforward losses are used to offset capital gains, it is probable that the
gains so offset will not be distributed.
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. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Fund represent
investments, which are marked-to-market daily and are included in the schedule
of investments. 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 January 31, 1997, the Fund had no open purchased put or call options
contracts.
When a Fund writes a covered call or put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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 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 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 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 a loss if the market price of the underlying security declines.
During the six months ended January 31, 1997, the Fund did not write any
options.
7. SHARES OF BENEFICIAL INTEREST
At January 31, 1997, 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, including those specifically related to the
distribution of its shares.
At January 31, 1997, total paid-in capital amounted to the following for
each class:
Class A Class B Class C Class Y
================================================================================
Total Paid-in Capital $30,079,680 $42,441,802 $879,702 $18,576,961
================================================================================
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
Six Months Ended Year Ended
January 31, 1997 July 31, 1996*
------------------- -------------------
Shares Amount Shares Amount
================================================================================
Class A
Shares sold 57,711 $ 942,002 343,603 $ 5,423,126
Shares issued on reinvestment 71,326 1,171,935 83,599 1,324,932
Shares redeemed (271,323) (4,458,535) (506,755) (7,997,467)
- --------------------------------------------------------------------------------
Net Decrease (142,286) $(2,344,598) (79,553) $ (1,249,409)
================================================================================
Class B
Shares sold 123,277 $ 2,016,753 374,014 $ 5,938,214
Shares issued on reinvestment 81,638 1,341,230 82,158 1,306,252
Shares redeemed (387,329) (6,368,691) (727,414) (11,577,304)
- --------------------------------------------------------------------------------
Net Decrease (182,414) $(3,010,708) (271,242) $ (4,332,838)
================================================================================
Class C
Shares sold 17,901 $ 290,946 55,056 $ 869,581
Shares issued on reinvestment 1,578 25,905 1,049 16,687
Shares redeemed (4,674) (77,159) (20,518) (322,369)
- --------------------------------------------------------------------------------
Net Increase 14,805 $ 239,692 35,587 $ 563,899
================================================================================
Class Y
Shares sold 556,305 $ 9,096,539 586,130 $ 9,480,438
Shares issued on reinvestment -- -- -- --
Shares redeemed -- -- (1) (16)
- --------------------------------------------------------------------------------
Net Increase 556,305 $ 9,096,539 586,129 $ 9,480,422
================================================================================
* For Class Y shares, transactions are for the period from February 7, 1996
(inception date) to July 31, 1996.
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1996(2) 1995 1994 1993(3)
===================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $15.66 $15.27 $14.56 $14.99 $13.82
- ---------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.39 0.74 0.74 0.72 0.49
Net realized and unrealized gain (loss) 1.41 0.38 0.70 (0.42) 1.22
- ---------------------------------------------------------------------------------------------------
Total Income From Operations 1.80 1.12 1.44 0.30 1.71
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.73) (0.73) (0.70) (0.50)
Overdistribution of net investment income -- -- -- (0.03) (0.01)
Net realized gain (0.36) -- -- -- --
Overdistribution of net realized gains -- -- -- -- (0.03)
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.73) (0.73) (0.73) (0.73) (0.54)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $16.73 $15.66 $15.27 $14.56 $14.99
- ---------------------------------------------------------------------------------------------------
Total Return 11.62%++ 7.41% 10.35% 1.99% 12.63%++
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $34,899 $34,888 $35,238 $2,294 $1,655
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.30%+ 1.40% 1.40% 1.40% 1.37%+
Net investment income 4.65+ 4.68 5.13 4.80 4.86+
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 59% 48% 54% 95%
- ---------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $0.06 $0.06 -- -- --
===================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) 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.
(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.
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1997(1) 1996(2) 1995 1994 1993 1992
==================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $15.66 $15.27 $14.56 $14.99 $13.84 $12.51
- --------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.35 0.66 0.67 0.65 0.61 0.64
Net realized and unrealized
gain (loss) 1.41 0.39 0.70 (0.42) 1.20 1.35
- --------------------------------------------------------------------------------------------------
Total Income From Operations 1.76 1.05 1.37 0.23 1.81 1.99
- --------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.33) (0.66) (0.66) (0.64) (0.60) (0.64)
Overdistribution of net
investment income -- -- -- (0.02) (0.02) --
Net realized gain (0.36) -- -- -- -- --
Overdistribution of net
realized gains -- -- -- -- (0.04) --
Capital -- -- -- -- -- (0.02)
- --------------------------------------------------------------------------------------------------
Total Distributions (0.69) (0.66) (0.66) (0.66) (0.66) (0.66)
- --------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $16.73 $15.66 $15.27 $14.56 $14.99 $13.84
- --------------------------------------------------------------------------------------------------
Total Return 11.37%++ 6.91% 9.80% 1.50% 13.40% 16.25%
- --------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $42,266 $42,420 $45,524 $85,190 $74,857 $57,120
- --------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.80%+ 1.90% 1.90% 1.88% 2.00% 1.88%
Net investment income 4.17+ 4.18 4.63 4.32 4.20 4.76
- --------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 59% 48% 54% 95% 77%
- --------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.06 $0.06 -- -- -- --
==================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) 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.
(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.
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
Class C Shares 1997(1) 1996(2) 1995(3)(4)
================================================================================
Net Asset Value, Beginning of Period $15.64 $15.27 $14.09
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.33 0.67 0.50
Net realized and unrealized gain 1.41 0.37 1.17
- --------------------------------------------------------------------------------
Total Income From Operations 1.74 1.04 1.67
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.33) (0.67) (0.49)
Net realized gains (0.36) -- --
- --------------------------------------------------------------------------------
Total Distributions (0.69) (0.67) (0.49)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $16.69 $15.64 $15.27
- --------------------------------------------------------------------------------
Total Return 11.27%++ 6.82% 12.17%++
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $931 $641 $83
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.75%+ 1.86% 1.87%+
Net investment income 4.22+ 4.17 4.77+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 59% 48%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5) $0.06 $0.06 --
================================================================================
(1) For the six months ended January 31, 1997 (unaudited).
(2) 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.
(3) On November 7, 1994, the former Class D shares were renamed Class C shares.
(4) For the period from November 7, 1994 (inception date) to July 31,1995.
(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.
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
Class Y Shares 1997(1) 1996(2)(3)
================================================================================
Net Asset Value, Beginning of Period $15.68 $16.15
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.43 0.38
Net realized and unrealized gain (loss) 1.41 (0.46)
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.84 (0.08)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.39) (0.39)
Net realized gains (0.36) --
- --------------------------------------------------------------------------------
Total Distributions (0.75) (0.39)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $16.77 $15.68
- --------------------------------------------------------------------------------
Total Return++ 11.87% (0.56)%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $19,155 $9,189
- --------------------------------------------------------------------------------
Ratios to Average Net Assets(+):
Expenses 0.88% 1.00%
Net investment income 5.02 4.98
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 24% .59%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.06 $0.06
================================================================================
(1) For the six months ended January 31, 1997 (unaudited).
(2) 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.
(3) For the period from February 7, 1996 (inception date) to July 31, 1996.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
23
<PAGE>
(This page intentionally left blank.)
<PAGE>
Smith Barney
Convertible
Fund
Trustees
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon De Voe Talley
Officers
Heath B. McLendon
Chairman and Investment Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Robert E. Swab
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
------------
A Member of Travelers Group [logo]
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for
the general information of the
shareholders of Smith Barney
Convertible Fund. It is not authorized for
distribution to prospective investors unless
accompanied or preceded by a current
Prospectus for the Fund, which contains
information concerning the Fund's invest-
ment policies and expenses as well as
other pertinent information.
Smith Barney
Convertible Fund
388 Greenwich Street
New York, New York 10013
FD2170 3/97
<PAGE>
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
================================================================================
[LOGO]
Smith Barney
Diversified
Strategic
Income Fund
-----------------------------
January 31,1997
[GRAPHIC] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- ----------------------------------------------
Smith Barney Diversified Strategic Income Fund
- ----------------------------------------------
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the period ended
January 31, 1997 for the Smith Barney Diversified Strategic Income Fund. In this
report, we summarize the period's prevailing economic and market conditions and
outline our portfolio strategy. A detailed summary of performance and current
holdings can be found in the appropriate sections that follow in the semi-annual
report.
The Smith Barney Diversified Strategic Income Fund seeks to provide investors
with a high current income while minimizing the risk of interest rate and
currency fluctuations. The Fund follows a flexible investment approach that
emphasizes diversification and balance. Based on an analysis of the current
economic and market conditions, the Fund's management team allocates assets
across three classes of bonds: U.S. government and mortgage securities,
high-yield corporate bonds, and foreign government bonds.
For the six-month period ended January 31, 1997, the Diversified Strategic
Income Fund had a total return of 6.25% for Class A shares, exceeding the Lehman
Brothers Aggregate Bond Index total return of 5.23% for the same period. (The
Lehman Brothers Aggregate Bond Index is an index composed of a mix of corporate
and government bond issues.) During the period, the Fund paid dividends totaling
$0.33 per Class A shares. Based on a net asset value (NAV) of $7.97 on January
31, 1997 for Class A shares, this is equivalent to an annualized distribution
rate of 8.36%. A relatively conservative approach to high yield issues,
carefully selected mortgage-backed securities in the U.S. government sector, and
a well diversified portfolio in the foreign government sector all contributed to
the Fund's performance.
Market Review
As of January 31, 1997, the Fund's allocation was 37.8% in U.S. government
securities and mortgage securities, 24.7% in high-yield corporate bonds, 35.8%
in foreign government bonds, and the remaining 1.7% in cash. Following are brief
summaries of the economic and market conditions that affected the Fund's three
major sectors during the past six months.
U.S. Government and Mortgage-Backed Securities
In our view, one of the most important factors for the U.S. financial markets in
1996 was the unexpected strength of the U.S. economy during the first half of
the year followed by weaker economic growth during the second half. In
1
<PAGE>
addition to President Clinton's re-election and Congress maintaining its
Republican majority, other significant market events in 1996 include the
introduction of inflation-indexed securities, the Boskin Report that suggests
inflation may be roughly 1% lower than previously reported, and Russian
President Boris Yeltsin surviving both medically and politically.
Looking ahead to 1997, we believe there may be some possible (although not
necessarily probable) market challenges on the horizon such as:
o Data that indicates moderate to weaker U.S. economic growth
o Continued partisan ethics probes that negatively impact our political
leaders
o U.S. dollar coming under short-term pressure because of the U.S.
administration's failure to put in place a credible fiscal plan
o Renewed tension in the Middle East -- possibly oil related
o Political problems resurfacing in Russia
In our opinion, the yield on the 30 Year U.S. Treasury bond should remain in a
broad range of 6%-7%. However, if any of the above expected 1997 events take
place, the yield could temporarily rise above the 7% level. Ultimately, we
believe this would represent a buying opportunity because U.S. economic
fundamentals do not in our view, warrant higher rates.
The table below shows how yields have changed during the reporting period:
Yields on U.S. Treasuries
<TABLE>
<CAPTION>
7/31/96 1/31/97
------- -------
<S> <C> <C>
2-Year Treasury Note 6.22% 5.92%
3-Year Treasury Note 6.36 6.04
5-Year Treasury Note 6.57 6.25
10-Year Treasury Note 6.79 6.50
30-Year Treasury Bond 6.97 6.79
</TABLE>
The Fund benefited from the strong demand for "spread" investment assets such as
mortgage-backed securities and corporate bonds, which pay a higher rate of
interest than comparable maturity U.S. Treasuries. In addition, relatively weak
prepayments among mortgage securities enabled the Fund to generate an attractive
income stream with comparatively little risk of these securities being called
away. As of January 31, 1997, mortgage-backed securities made up approximately
89% of the Fund's U.S. government sector.
High-Yield Corporate Bonds
The high yield market has generally outperformed the more interest-rate
sensitive, longer maturity Treasury and investment grade markets throughout the
past six months. However, lower quality issues (i.e., rated CCC/Caa and
2
<PAGE>
CC/Ca by Standard and Poor's or Moody's Investors Services, two major bond
rating agencies) turned in disappointing performance due to the slowdown in the
U.S. economic growth and an increasing number of bond defaults in the latter
half of 1996. The most visible defaults or failures in 1996 included Marvel
Entertainment, Moblemedia, Anchor Glass, CAI Wireless and MidAmerican Waste. A
number of these issues experienced price declines of between 60% to 80%. Because
of our relatively conservative investment philosophy, we avoided these high risk
issues.
In contrast to the performance of the lower-rated high yield issues, the current
steady growth rate of the U.S. economy has been particularly constructive for
the better quality high yield issues (those rated B/B and BB/Ba by Standard &
Poor's and Moody's Investors Services). During the past six months, the
performance of better quality issues has exceeded that of the more speculative,
lower quality issues. In addition, more investors have become dissatisfied with
the modest returns and extreme price swings in the U.S. Treasury market and have
invested increasing amounts of money into the upper-rated tier of the high yield
market.
In our view, this trend is likely to continue well into 1997 as investors search
for higher yielding investment alternatives. Although we consider the high yield
market to be currently fully valued, we believe that the present environment of
moderate growth and modest inflation poses little serious threat of either
economic recession or accelerated inflation. Given the fully valued levels in
the high yield market and the possibility of increased bond defaults, careful
selection will become even more important to achieving competitive returns in
the months ahead.
Foreign Government Securities
In the global government bond markets, performance varied considerably during
the six-month period. For example, the U.S. government bond market produced low
single-digit returns during the year, while the bond markets of Italy and Spain
both returned in excess of 20% in local currency terms. In our opinion, the
driving force of the strong performance of the European bond markets was the
trend toward lower interest rates in those countries. In anticipation of a
possible European Monetary Union in 1999, which proposes a common European
currency, interest rates in the member countries have tended to drop to similar
levels. Moreover, this process was accentuated by low economic growth rates on
the continent, which led officials in Germany to cut interest rates. Interest
rate cuts followed elsewhere in Europe, further underpinning the relative
outperformance of these bond markets. The dollar- bloc bond markets other than
the U.S. also outperformed the overall global bond market. Canadian and
Australian government bonds, in particular, posted strong returns in U.S. dollar
terms. Economic activity and falling inflation in
3
<PAGE>
both countries enabled the authorities to ease monetary policy substantially
over the course of the year.
We continue to devote a major portion of the Fund's international sector
allocation to the European markets. We especially favor the peripheral markets
of Spain, Italy, and Sweden compared to the core European markets of France,
Germany, and the United Kingdom. In our opinion, relatively high interest rates
and low inflation in these peripheral markets should provide investors with
competitive performance in the months ahead. In addition, we expect to maintain
our exposure to dollar-bloc countries and further add to the Fund's
diversification in the foreign government bond market.
Overall, we continue to emphasize a diversified, high quality approach in
selecting investments for the Smith Barney Diversified Strategic Income Fund.
Since we believe the high yield market to be presently fully valued, we have
reduced our allocation in that sector and increased our exposure to the U.S.
government and foreign government sectors to capture new investment
opportunities in those markets.
In closing, we thank you for your investment in the Smith Barney Diversified
Strategic Income Fund. We look forward to continuing to help you achieve your
financial goals in the years ahead.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
-------------------- ----------------------
Heath B. McLendon James E. Conroy
Chairman and Vice President and
Investment Officer Investment Officer
/s/ John C. Bianchi /s/ Simon Hildreth
-------------------- ----------------------
John C. Bianchi, CFA Simon Hildreth
Vice President and Vice President and
Investment Officer Investment Officer
February 14, 1997
4
<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>
1/31/97 $ 7.82 $ 7.97 $ 0.33 $ 0.00 $ 0.00 6.25%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 7.85 7.82 0.62 0.00 0.05 8.39
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 7.76 7.85 0.48 0.00 0.19 10.35
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 8.41 7.76 0.62 0.10 0.04 1.16
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* - 7/31/93 8.24 8.41 0.45 0.12 0.00 9.30+
====================================================================================================================================
Total $ 2.50 $ 0.22 $ 0.28
====================================================================================================================================
</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>
1/31/97 $ 7.83 $ 7.99 $ 0.31 $ 0.00 $ 0.00 6.09%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 7.86 7.83 0.57 0.00 0.05 7.80
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 7.76 7.86 0.44 0.00 0.18 10.00
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 8.41 7.76 0.60 0.10 0.03 0.66
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/93 8.55 8.41 0.58 0.14 0.00 7.28
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/92 7.98 8.55 0.68 0.00 0.07 17.12
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/91 8.06 7.98 0.71 0.06 0.09 10.42
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* - 7/31/90 8.00 8.06 0.40 0.00 0.00 6.00+
====================================================================================================================================
Total $ 4.29 $ 0.30 $ 0.42
====================================================================================================================================
</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>
1/31/97 $ 7.81 $ 7.98 $ 0.31 $ 0.00 $ 0.00 6.31%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 7.84 7.81 0.57 0.00 0.05 7.82
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 7.76 7.84 0.44 0.00 0.18 9.73
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 8.41 7.76 0.60 0.10 0.03 0.66
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* - 7/31/93 8.36 8.41 0.20 0.03 0.00 3.41+
====================================================================================================================================
Total $ 2.12 $ 0.13 $ 0.26
====================================================================================================================================
</TABLE>
5
<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>
1/31/97 $ 7.82 $ 7.97 $ 0.35 $ 0.00 $ 0.00 6.45%+
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* - 7/31/96 7.89 7.82 0.53 0.00 0.05 6.65+
====================================================================================================================================
Total $ 0.88 $ 0.00 $ 0.05
====================================================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class Z 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>
1/31/97 $ 7.82 $ 7.98 $ 0.35 $ 0.00 $ 0.00 6.54%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 7.85 7.82 0.63 0.00 0.06 8.72
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 7.76 7.85 0.49 0.00 0.20 10.94
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 8.41 7.76 0.65 0.10 0.04 1.43
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* - 7/31/93 8.24 8.41 0.47 0.12 0.00 9.47+
====================================================================================================================================
Total $ 2.59 $ 0.22 $ 0.30
====================================================================================================================================
</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 Class Z
================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/97+ 6.25% 6.09% 6.31% 6.45% 6.54%
- --------------------------------------------------------------------------------
Year Ended 1/31/97 8.89 8.43 8.66 9.29 9.35
- --------------------------------------------------------------------------------
Five Years Ended 1/31/97 N/A 7.88 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/97 8.36 9.15 7.20 10.15 8.75
================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(1)
-------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/97+ 1.45% 1.59% 5.31% 6.45% 6.54%
- --------------------------------------------------------------------------------
Year Ended 1/31/97 3.93 3.93 7.66 9.29 9.35
- --------------------------------------------------------------------------------
Five Years Ended 1/31/97 N/A 7.73 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/97 7.18 9.15 7.20 10.15 8.75
================================================================================
</TABLE>
6
<PAGE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charges(1)
================================================================================
<S> <C>
Class A (Inception* through 1/31/97) 40.52%
- --------------------------------------------------------------------------------
Class B (Inception* through 1/31/97) 86.20
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/97) 30.91
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/97) 13.52
- --------------------------------------------------------------------------------
Class Z (Inception* through 1/31/97) 42.67
- --------------------------------------------------------------------------------
</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 charge with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSCs") 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 4.50% and Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from initial purchase. This CDSC declines by 0.50% the first year
after purchase and thereafter by 1.00% per year until no CDSC is incurred.
Class C shares reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within the first year of purchase.
* Inception dates for Class A, B, C, Y and Z shares are November 6, 1992,
December 28, 1989, March 19, 1993, October 10, 1995 and November 6, 1992,
respectively.
+ Total return is not annualized, as it may not be representive of the total
return for the year.
7
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class B Shares of
the Smith Barney Diversified Strategic Income Fund vs.
Lehman Brothers Aggregate Bond Index+
- --------------------------------------------------------------------------------
December 1989 -- January 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
Smith Barney Diversified Lehman Brothers
Date Strategic Income Fund Aggreagte Bond Index
- ---- --------------------- --------------------
12/28/89 10,000 10,000
7/90 10,600 10,425
7/91 11,704 11,541
7/92 13,707 13,247
7/93 14,705 14,595
7/94 14,801 14,609
7/95 16,281 16,086
7/96 17,551 16,976
1/31/96 18,620 17,815
+ Hypothetical illustration of $10,000 invested in Class B shares at inception
on December 28, 1989, assuming reinvestment of dividends and capital gains, if
any, at net asset value through January 31, 1997. The Lehman Brothers
Aggregate Bond Index is composed of the Government Corporate Bond Index, the
Asset-Backed Securities Index and the Mortgage-Backed Securities Index and
includes treasury issues, agency issues, corporate bond issues and
mortgage-backed issues. The index is unmanaged and it 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.
8
<PAGE>
================================================================================
Portfolio Highlights (unaudited) January 31, 1997
================================================================================
Portfolio Breakdown
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Corporate Bonds and Notes 22.8%
U.S. Government Agencies & Obligations 37.8%
Repurchase Agreement 1.7%
Foreign Bonds 35.8%
Preferred Stock, Convertible Preferred
Stocks, Common Stock and Warrants 1.9%
9
<PAGE>
================================================================================
Schedule of Investments (unaudited) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
U.S. GOVERNMENT SECTOR -- 37.8%
================================================================================
U.S. Government Agencies & Obligations -- 37.8%
$ 110,000,000 U.S. Treasury Notes, 6.500% due 10/15/06 $ 109,906,500
27,419,233 FHLMC, 9.000% due 5/1/03 through 1/1/23 28,952,791
69,207,242 FHLMC, 8.000% due 10/1/22 through 1/1/23 70,764,395
183,012,903 FHLMC Gold, 9.000% due 4/15/25 193,248,815
83,301 GNMA, 9.000% due 2/15/21 88,013
379,386,045 GNMA, 8.000% due 3/15/25 through 1/15/27 388,157,525
230,416,152 GNMA Platinum, 9.000% due 12/15/17 247,047,591
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR
(Cost-- $1,018,381,327) 1,038,165,630
================================================================================
HIGH YIELD SECTOR -- 24.7%
================================================================================
CORPORATE BONDS AND NOTES -- 22.8%
================================================================================
Aerospace and Defense -- 0.7%
4,875,000 Airplanes Pass Through Trust, 10.875% due 3/15/19 5,406,863
2,000,000 Hawk Corp., 10.250% due 12/1/03(a) 2,042,500
4,675,000 Howmet Corp., 10.000% due 12/1/03(a) 5,084,063
3,925,000 Tracor Inc., 10.875% due 8/15/01 4,194,844
2,375,000 UNC, Inc., 11.000% due 6/1/06 2,559,063
- --------------------------------------------------------------------------------
19,287,333
- --------------------------------------------------------------------------------
Aviation Components -- 0.3%
7,725,000 Terex Corp., 13.250% due 5/15/02 8,555,438
- --------------------------------------------------------------------------------
Banking -- 0.4%
7,325,000 First Nationwide, 12.500% due 4/15/03 8,194,844
3,175,000 Imperial Credit Industrial Inc.,
9.875% due 1/15/07 3,262,313
- --------------------------------------------------------------------------------
11,457,157
- --------------------------------------------------------------------------------
Broadcasting - TV, Cable and Radio -- 5.6%
1,425,000 All American Communications Inc.,
10.875% due 10/15/01(a) 1,444,594
7,575,000 Australis Holdings Pty. Ltd., step bond to
yield 15.750% due 11/1/02 4,469,250
16,225,000 Australis Media Ltd. Units, step bond to
yield 15.750% due 5/15/03(b) 9,410,500
Bell Cablemedia PLC:
17,875,000 Step bond to yield 11.950% due 7/15/04 15,573,594
5,145,000 Step bond to yield 11.875% due 9/15/05 4,161,019
Cablevision Systems Corp.:
7,700,000 10.750% due 4/1/04 8,008,000
5,450,000 9.875% due 2/15/13 5,436,375
10,275,000 Comcast Cable, step bond to yield 11.200% due
11/15/077,295,250 Globo Communicacoes:
2,750,000 9.875% due 12/20/04(a) 2,770,625
2,750,000 10.500% due 12/20/06(a) 2,798,125
3,600,000 Multicanal SA, 10.500% due 2/1/07(a) 3,640,500
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
Broadcasting - TV, Cable and Radio -- 5.6% (continued)
$ 19,600,000 NWCG Holdings, zero coupon due 6/15/99 $ 16,488,500
Rogers Cablesystems Ltd.:
4,400,000 10.000% due 12/1/07 4,625,500
5,700,000 9.650% due 1/15/14 4,148,895
5,700,000 11.000% due 12/1/15 6,156,000
9,875,000 Rogers Communications Inc., 10.875% due 4/15/04 10,393,438
4,000,000 SCI Television, 11.000% due 6/30/05 4,280,000
6,500,000 SFX Broadcasting, 10.750% due 5/15/06 6,890,000
12,325,000 UIH Australia/Pacific, step bond to
yield 14.000% due 5/15/06 6,301,156
UIH Inc.:
9,375,000 Step bond to yield 14.000% due 11/15/99 6,832,031
7,450,000 Zero coupon due 11/15/99 5,429,188
2,675,000 Videotron Groupe Ltd., 10.625% due 2/15/05 2,985,969
5,375,000 Videotron Holdings PLC, step bond to yield 11.000%
due 8/15/05 4,279,844
4,500,000 Videotron Ltee., 10.250% due 10/15/02 4,809,375
2,000,000 Wireless One, Inc., 13.000% due 10/15/03 1,960,000
2,850,000 Young Broadcasting Inc., 11.750% due 11/15/04 3,142,125
- --------------------------------------------------------------------------------
153,729,853
- --------------------------------------------------------------------------------
Building/Construction -- 0.1%
2,250,000 American Standard Inc., 11.375% due 5/15/04 2,441,250
- --------------------------------------------------------------------------------
Cable/Cellular -- 0.8%
27,600,000 Marcus Cable Operating, step bond to
yield 13.500% due 8/1/04 22,873,500
- --------------------------------------------------------------------------------
Chemicals-- 0.9%
NL Industries Inc.:
2,125,000 11.750% due 10/15/03 2,244,531
3,300,000 Step bond to yield 13.000% due 10/15/05 2,895,750
6,150,000 Pt. Polysindo Eka Perkasa, 13.000% due 6/15/01 6,888,000
8,350,000 Terra Industries Inc., 10.500% due 6/15/05 9,080,625
2,525,000 Texas Petrochemical Corp., 11.125% due 7/1/06 2,711,219
- --------------------------------------------------------------------------------
23,820,125
- --------------------------------------------------------------------------------
Consumer Durable Goods/Home Furnishings -- 0.6%
20,925,000 International Semi Tech Microelectronics Inc.,
step bond to yield 11.500% due 8/15/03 12,581,156
2,389,000 TAG-Heuer International, 12.000% due 12/15/05(a) 2,771,240
- --------------------------------------------------------------------------------
15,352,396
- --------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 0.3%
4,696,000 American Pad & Paper, 13.000% due 11/15/05 5,558,890
3,700,000 Interlake Corp., 12.125% due 3/1/02 3,885,000
- --------------------------------------------------------------------------------
9,443,890
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
Electric Utilities -- 0.4%
$ 7,775,000 Calpine Corp., 10.500% due 5/15/06 $ 8,299,813
3,349,105 Midland Funding Corp. I, 10.330% due 7/23/02 3,570,984
- --------------------------------------------------------------------------------
11,870,797
- --------------------------------------------------------------------------------
Electronics/Computers -- 0.6%
3,175,000 Graphic Controls, 12.000% due 9/15/05 3,536,156
Unisys Corp.:
8,500,000 12.000% due 4/15/03 9,233,125
2,950,000 11.750% due 10/15/04 3,178,625
- --------------------------------------------------------------------------------
15,947,906
- --------------------------------------------------------------------------------
Food -- 0.4%
2,750,000 International Home Foods, 10.375% due 11/1/06 2,873,750
3,800,000 TLC Beatrice International, 11.500% due 10/1/05 4,042,250
2,475,000 Van de Kamp Inc., 12.000% due 9/15/05 2,744,156
- --------------------------------------------------------------------------------
9,660,156
- --------------------------------------------------------------------------------
Grocery/Convenience Stores -- 0.3%
7,615,000 Pathmark Stores Inc., 12.625% due 6/15/02 7,910,081
- --------------------------------------------------------------------------------
Healthcare/Drugs/Hospital Supplies -- 1.3%
6,350,000 Magellan Health Services, 11.250% due 4/15/04 7,048,500
17,425,000 OrNda Healthcorp, 12.250% due 5/15/02 18,731,875
Tenet Healthcare Corp.:
4,400,000 8.000% due 1/15/05 4,416,500
5,600,000 8.625% due 1/15/07 5,705,000
- --------------------------------------------------------------------------------
35,901,875
- --------------------------------------------------------------------------------
Hotel/Gaming -- 0.6%
1,000,000 Aztar Corp., 13.750% due 10/1/04 1,105,000
5,375,000 Courtyard by Marriott, 10.750% due 2/1/08(a) 5,717,656
5,275,000 Mohegan Tribal Gaming Authority, 13.500%
due 11/15/02 7,022,344
2,000,000 Showboat Inc., 13.000% due 8/1/09 2,275,000
- --------------------------------------------------------------------------------
16,120,000
- --------------------------------------------------------------------------------
Leisure/Amusement/Motion Pictures -- 0.2%
2,928,675 Gillett Holdings Inc., 12.250% due 6/30/02 3,075,109
3,150,000 Remington Arms Inc., 10.000% due 12/1/03(a) 2,649,938
- --------------------------------------------------------------------------------
5,725,047
- --------------------------------------------------------------------------------
Machinery -- 0.1%
3,000,000 Alvey Systems Inc., 11.375% due 1/31/03(a) 3,183,750
- --------------------------------------------------------------------------------
Metals/Mining -- 0.6%
5,000,000 Ivex Holdings Corp., step bond to yield
13.250% due 3/15/05 3,875,000
5,425,000 Kaiser Aluminum & Chemical Corp., 12.750%
due 2/1/03 5,906,469
1,500,000 Russel Metals Inc., 10.250% due 6/15/00 1,539,375
3,410,000 UCAR Global Enterprises Inc., 12.000% due 1/15/05 3,921,500
- --------------------------------------------------------------------------------
15,242,344
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
Oil/Natural Gas -- 1.3%
$ 2,650,000 Clark R&M Holdings, zero coupon due 2/15/00 $ 1,944,438
6,500,000 Clark USA, 10.875% due 12/1/05 6,654,375
3,200,000 Deeptech International, 12.000% due 12/15/00 3,436,000
6,950,000 Global Marine Inc., 12.750% due 12/15/99 7,479,938
6,525,000 Parker Drilling Corp., 9.750% due 11/15/06 6,867,563
3,725,000 Santa Fe Energy Resources Inc., 11.000%
due 5/15/04 4,120,781
4,450,000 United Meridian Corp., 10.375% due 10/15/05 4,895,000
- --------------------------------------------------------------------------------
35,398,095
- --------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 1.0%
12,950,000 Indah Kiat International Finance Co., 11.875%
due 6/15/02 14,358,313
4,825,000 SD Warren Co., 12.000% due 12/15/04(a) 5,295,438
6,750,000 Tjiwi Kimia International Finance Co., 13.250%
due 8/1/01 7,686,563
- --------------------------------------------------------------------------------
27,340,314
- --------------------------------------------------------------------------------
Personal Care Products/Cosmetics -- 0.9%
3,500,000 Revlon Consumer Products Corp., 10.500%
due 2/15/03 3,710,000
22,850,000 Revlon Worldwide Corp., zero coupon due 3/15/98 20,679,250
- --------------------------------------------------------------------------------
24,389,250
- --------------------------------------------------------------------------------
Real Estate Development/Investment -- 0.3%
7,725,000 Trizec Finance, 10.875% due 10/15/05 8,487,844
- --------------------------------------------------------------------------------
Retail -- 0.3%
7,550,000 Barnes & Noble Inc., 11.875% due 1/15/03 8,323,875
- --------------------------------------------------------------------------------
Telephone/Communications -- 4.3%
475,000 Albritton Communications Co., 11.500% due 8/15/04 502,906
Brooks Fiber Properties:
3,000,000 Step bond to yield 10.875% due 3/1/06 2,021,250
12,900,000 Step bond to yield 11.875% due 11/1/06 8,352,750
2,175,000 Celestica International, 10.500% due 12/31/06(a) 2,343,563
17,150,000 Clearnet Communications, step bond to yield 14.750%
due 12/15/05 11,168,938
3,250,000 Colt Telecom Group PLC, step bond to yield 12.000%
due 12/15/06 1,998,750
3,400,000 Fonorola Inc., 12.500% due 8/15/02 3,714,500
16,000,000 Intelcom Group Inc., step bond to yield 12.500%
due 5/1/06 10,660,000
10,950,000 Intermedia Communications of Florida, step bond
to yield 12.500% due 5/15/06 7,432,313
14,000,000 Millicom International Cellular, step bond to
yield 13.500% due 6/1/06(a) 9,222,500
22,825,000 Nextel Communications Inc., step bond to yield
9.750% due 8/15/04 16,205,750
9,125,000 Nextlink Communications, 12.500% due 4/15/06(a) 9,969,063
9,150,000 Pagemart Inc., step bond to yield 12.250%
due 11/1/03 7,285,688
4,525,000 Pagemart Nationwide Inc., step bond to yield
15.000% due 2/1/05 3,054,375
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
Telephone/Communications -- 4.3% (continued)
$ 7,800,000 RSL Communications Ltd., 12.250% due 11/15/06 $ 8,092,500
14,750,000 Telewest Communications, step bond to yield
11.000% due 10/1/07 10,325,000
5,300,000 U.S.A. Mobile Communications Inc. II, 14.000%
due 11/1/04 5,942,625
- --------------------------------------------------------------------------------
118,292,471
- --------------------------------------------------------------------------------
Tobacco -- 0.2%
5,575,000 Consolidated Cigar Corp., 10.500% due 3/1/03 5,846,781
- --------------------------------------------------------------------------------
Transportation/Shipping -- 0.3%
6,800,000 Sea Containers Ltd., Series A, 12.500% due 12/1/04 7,582,000
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $574,634,781) 624,183,528
================================================================================
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 0.1%
================================================================================
Metals/Mining -- 0.1%
278,658 Algoma Steel Inc.(c)
(Cost $1,407,263) 1,746,651
================================================================================
CONVERTIBLE PREFERRED STOCKS -- 1.2%
================================================================================
Banking -- 0.1%
121,000 California Federal Bank Preferred Capital
Exchange 9.125% 3,040,125
- --------------------------------------------------------------------------------
Automobile/Auto Parts/Truck Manufacturing -- 0.3%
169,800 Navistar International Corp., Series G,
Exchange $6.000 9,572,475
- --------------------------------------------------------------------------------
Healthcare/Drugs/Hospital Supplies -- 0.0%
88,518 Foxmeyer Health Corp., Series A, Exchange $4.200 575,367
- --------------------------------------------------------------------------------
Publishing -- 0.0%
1,502 K-III Communications Corp., Series B,
Exchange $11.625 148,734
- --------------------------------------------------------------------------------
Telephone/Communications -- 0.8%
35,000 Nextlink Communications Units, Exchange 14.000%(a) 1,754,375
15,455 Panamsat Corp., Exchange $12.750 18,855,100
- --------------------------------------------------------------------------------
20,609,475
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost-- $33,431,949) 33,946,176
================================================================================
PREFERRED STOCK -- 0.6%
================================================================================
Broadcasting - TV, Cable, and Radio -- 0.6%
14,290 Time Warner Inc. Series K(a)
(Cost $14,601,904) 15,576,100
================================================================================
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
WARRANTS -- 0.0%
================================================================================
Broadcasting - TV, Cable, and Radio -- 0.0%
6,000 Wireless One, Inc., Expires 9/9/09(a)(c) $ 13,500
- --------------------------------------------------------------------------------
Finance Companies/Consumer Credit -- 0.0%
33,600 Degeorge Financial Corp., Expires 4/1/97(c) 336
- --------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.0%
8,500 SD Warren Co., Expires 12/15/06(a)(c) 110,500
- --------------------------------------------------------------------------------
Telephone/Communications -- 0.0%
56,595 Clearnet Communications, Expires 9/15/05(c) 339,570
6,775 Nextel Communications, Inc., Expires 5/23/99(c) 68
19,250 Pagemart Inc., Expires 11/1/03(c) 144,375
42,090 Pagemart Nationwide Inc., Expires 12/31/03(a)(c) 199,928
- --------------------------------------------------------------------------------
683,941
- --------------------------------------------------------------------------------
TOTAL WARRANTS
================================================================================
(Cost-- $431,176) 808,277
================================================================================
TOTAL HIGH YIELD SECTOR
(Cost-- $624,507,073) 676,260,732
================================================================================
FACE
AMOUNT+ SECURITY VALUE
================================================================================
INTERNATIONAL SECTOR -- 35.8%
================================================================================
BONDS -- 35.8%
================================================================================
Argentina -- 0.1%
3,000,000 Argentina Discount Series L, 6.375% due 3/31/23(d) 2,439,390
- --------------------------------------------------------------------------------
Australia -- 3.6%
Queensland Treasury Corp.:
60,000,000 8.000% due 5/14/97 45,766,797
66,000,000 8.000% due 5/14/03 52,014,834
- --------------------------------------------------------------------------------
97,781,631
- --------------------------------------------------------------------------------
Austria -- 0.6%
Oesterreichischekontrollbank:
2,000,000 9.000% due 5/21/97 1,508,605
8,000,000 10.250% due 7/27/99 6,661,227
10,000,000 10.750% due 8/8/01 8,799,421
- --------------------------------------------------------------------------------
16,969,253
- --------------------------------------------------------------------------------
Barbados -- 0.0%
1,000,000 Barbados Government, 10.500% due 6/9/97 1,015,000
- --------------------------------------------------------------------------------
Brazil -- 0.1%
3,000,000 Banco Nac Desen, 10.375% due 4/27/98 3,155,625
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT+ SECURITY VALUE
================================================================================
<S> <C> <C>
Canada -- 3.2%
456,000 Algoma Steel Inc., 12.375% due 7/15/05 $ 512,270
7,000,000 Autobahn Schnell, 10.125% due 3/15/01 6,003,820
6,500,000 Electric Power Development Co., 8.750% due 6/11/97 4,912,006
6,000,000 Eurofima, 10.750% due 7/31/01 5,279,653
60,000,000 Government of Canada, 9.000% due 12/1/04 51,724,354
5,400,000 International Finance Corp., 7.750% due 8/18/98 4,208,423
9,000,000 Kingdom of Sweden, 10.625% due 6/3/98 7,226,838
2,000,000 Province of Alberta, 7.750% due 2/4/98 1,541,918
7,000,000 Tokyo Electric Power, 10.500% due 6/14/01 6,081,708
- --------------------------------------------------------------------------------
87,490,990
- --------------------------------------------------------------------------------
Czech Republic -- 0.1%
100,000,000 Czech Electric Co., 14.375% due 1/27/01 3,605,163
- --------------------------------------------------------------------------------
Denmark -- 1.9%
Kingdom of Denmark:
100,000,000 8.000% due 5/15/03 17,841,473
200,000,000 7.000% due 12/15/04 33,553,243
- --------------------------------------------------------------------------------
51,394,716
- --------------------------------------------------------------------------------
Finland -- 0.5%
56,000,000 Government of Finland, 9.500% due 3/15/04 13,993,978
- --------------------------------------------------------------------------------
France -- 0.3%
11,000,000 Electricite de France, 9.750% due 9/8/99 9,087,790
- --------------------------------------------------------------------------------
Germany -- 5.1%
220,000,000 Bundesobligation, 5.250% due 2/21/01 138,915,552
- --------------------------------------------------------------------------------
Ireland -- 3.4%
55,000,000 Republic of Ireland, 8.000% due 10/18/00 93,575,144
- --------------------------------------------------------------------------------
Italy -- 2.9%
Buoni Poliennali Del Tesoro:
40,000,000,000 8.500% due 8/1/99 25,920,208
80,000,000,000 8.500% due 8/1/04 53,912,690
- --------------------------------------------------------------------------------
79,832,898
- --------------------------------------------------------------------------------
Mexico -- 0.2%
10,000,000 Mexican Value Recovery Rights, Expire 6/30/03(c) 0
United Mexican States:
2,000,000 7.398% due 3/31/08(d) 1,995,000
5,000,000 Series B, 6.250% due 12/31/19 3,781,250
- --------------------------------------------------------------------------------
5,776,250
- --------------------------------------------------------------------------------
New Zealand -- 2.0%
New Zealand Government:
52,000,000 6.500% due 2/15/00 35,237,912
27,000,000 10.000% due 3/15/02 20,683,850
- --------------------------------------------------------------------------------
55,921,762
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT+ SECURITY VALUE
================================================================================
<S> <C> <C>
Spain -- 5.2%
3,150,000,000 European Investment Bank, 11.250% due 3/15/00 $ 26,329,953
Government of Spain:
6,500,000,000 10.250% due 11/30/98 50,798,990
7,840,000,000 10.100% due 2/28/01 65,470,083
- --------------------------------------------------------------------------------
142,599,026
- --------------------------------------------------------------------------------
Sweden -- 2.4%
400,000,000 Kingdom of Sweden, 10.250% due 5/5/03 66,762,912
- --------------------------------------------------------------------------------
Thailand -- 0.1%
50,000,000 ABN Ambro Bank N.V., 9.100% due 8/5/97 1,922,246
- --------------------------------------------------------------------------------
Trinidad -- 0.1%
2,000,000 Trinidad & Tobago, 11.500% due 11/20/97 2,062,500
- --------------------------------------------------------------------------------
United Kingdom -- 3.6%
59,600,000 U.K. Treasury , 7.750% due 9/8/06 97,449,801
- --------------------------------------------------------------------------------
Uruguay -- 0.2%
Uruguay Banco Central:
4,500,000 6.750% due 2/19/21 3,954,375
2,000,000 Foreign, 6.500% due 2/18/07(d) 1,900,000
- --------------------------------------------------------------------------------
5,854,375
- --------------------------------------------------------------------------------
Venezuela -- 0.2%
Republic of Venezuela Foreign:
1,000,000 6.813% due 12/28/98(d) 1,000,000
3,000,000 6.813% due 12/31/03(d) 2,827,500
- --------------------------------------------------------------------------------
3,827,500
- --------------------------------------------------------------------------------
TOTAL INTERNATIONAL SECTOR
(Cost-- $963,637,596) 981,433,502
================================================================================
REPURCHASE AGREEMENT -- 1.7%
47,932,000 CS First Boston Corp., 5.480% due 2/3/97;
Proceeds at maturity -- $47,953,889; (Fully
collateralized by U.S. Treasury Notes, 6.250%
due 10/31/01; Market value -- $48,914,618)
(Cost -- $47,932,000) 47,932,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $2,654,457,996**) $2,743,791,864
================================================================================
</TABLE>
(a) Securities 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.
(b) Security issued with attached warrants.
(c) Non-income producing security.
(d) Variable rate security.
+ Represents local currency.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
17
<PAGE>
================================================================================
Statement of Assets and Liabilities (unaudited) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost-- $2,654,457,996) $ 2,743,791,864
Foreign currency (Cost-- $2,844,830) 2,779,246
Dividends and interest receivable 59,706,919
Receivable for securities sold 5,134,573
Receivable for Fund shares sold 4,959,670
Receivable for open forward foreign currency contacts 1,756,265
- --------------------------------------------------------------------------------
Total Assets 2,818,128,537
- --------------------------------------------------------------------------------
LIABILITIES:
Dividend payable 18,285,398
Payable for securities purchased 9,974,813
Payable to bank 1,312,180
Investment advisory fees payable 1,070,303
Distribution fees payable 743,074
Administration fees payable 475,690
Payable for Fund shares purchased 62,453
Accrued expenses 520,223
- --------------------------------------------------------------------------------
Total Liabilities 32,444,134
- --------------------------------------------------------------------------------
Total Net Assets $2,785,684,403
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 348,626
Capital paid in excess of par value 2,792,152,285
Undistributed net investment income 5,032,624
Accumulated net realized loss from security transactions (100,960,629)
Net unrealized appreciation of investments and foreign
currencies 89,111,497
- --------------------------------------------------------------------------------
Total Net Assets $2,785,684,403
================================================================================
Shares Outstanding:
Class A 29,290,415
- --------------------------------------------------------------------------------
Class B 302,829,560
- --------------------------------------------------------------------------------
Class C 7,584,010
- --------------------------------------------------------------------------------
Class Y 6,636,654
- --------------------------------------------------------------------------------
Class Z 2,285,660
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $7.97
- --------------------------------------------------------------------------------
Class B * $7.99
- --------------------------------------------------------------------------------
Class C ** $7.98
- --------------------------------------------------------------------------------
Class Y (and redemption price) $7.97
- --------------------------------------------------------------------------------
Class Z (and redemption price) $7.98
- --------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net assets value per share) $8.35
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% 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.
18
<PAGE>
================================================================================
Statement of Operations (unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Six Months Ended January 31, 1997
<S> <C>
INVESTMENT INCOME:
Interest $109,735,168
Dividends 2,676,983
Less: Foreign withholding tax (77,371)
- --------------------------------------------------------------------------------
Total Investment Income 112,334,780
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 9,654,738
Investment advisory fees (Note 2) 6,248,696
Administration fees (Note 2) 2,777,198
Shareholder and system servicing fees 997,924
Custody 402,185
Registration fees 50,272
Audit and legal 24,382
Shareholder communications 18,098
Trustees' fees 15,082
Pricing service fees 15,082
Other 37,207
- --------------------------------------------------------------------------------
Total Expenses 20,240,864
- --------------------------------------------------------------------------------
Net Investment Income 92,093,916
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 5):
Realized Gain From:
Security transactions (excluding short-term securities) 14,487,355
Foreign currency transactions 20,374,109
- --------------------------------------------------------------------------------
Net Realized Gain 34,861,464
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period 52,871,839
End of period 89,111,497
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 36,239,658
- --------------------------------------------------------------------------------
Net Gain on Investments 71,101,122
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $163,195,038
================================================================================
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
<TABLE>
<CAPTION>
For the Six Months Ended January 31, 1997 (unaudited)
and the Year Ended July 31, 1996
1997 1996
================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 92,093,916 $ 177,161,540
Net realized gain 34,861,464 14,882,931
Increase in net unrealized appreciation 36,239,658 5,832,962
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 163,195,038 197,877,433
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (108,481,142) (192,230,951)
Capital -- (16,857,212)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (108,481,142) (209,088,163)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 259,396,961 480,703,999
Net asset value of shares issued for
reinvestment of dividends 49,051,929 117,096,917
Cost of shares reacquired (245,087,828) (490,087,798)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 63,361,062 107,713,118
- --------------------------------------------------------------------------------
Increase in Net Assets 118,074,958 96,502,388
NET ASSETS:
Beginning of period 2,667,609,445 2,571,107,057
- --------------------------------------------------------------------------------
End of period* $2,785,684,403 $2,667,609,445
================================================================================
* Includes undistributed net investment
income of: $5,032,624 $1,045,741
================================================================================
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Diversified Strategic Income Fund ("Fund"), a separate
investment fund of 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 Premium Total Return Fund and Smith Barney
Utilities Fund. The financial statements and financial highlights for the other
funds are presented in separate semi-annual reports. The Smith Barney Premium
Total Return Fund changed its fiscal year end to December 31 and, therefore, the
semi-annual report will be prepared as of June 30, 1997.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities traded
in national securities markets are valued at the closing prices in the primary
exchange on which they are traded; securities listed or traded on certain
foreign exchanges or other markets whose operations are similar to the U.S.
over-the-counter market (including securities listed on exchanges where the
primary market is believed to be over-the-counter) and securities for which no
sales were reported on that date are valued at the mean between the bid and ask
prices. Securities which are listed or traded on more than one exchange or
market are valued at the quotations on the exchange or market determined to be
the primary market for such securities; (c) securities maturing within 60 days
are valued at cost plus accreted discount, or minus amortized premium, as
applicable; (d) dividend income is recorded on ex-dividend date and interest
income, adjusted for accretion of original issue discount, is recorded on an
accrual basis; (e) gains or losses on the sale of securities are calculated
using the specific identification basis; (f) dividends and distributions to
shareholders are recorded on the ex-dividend date; (g) 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 collected
or paid are adjusted when reported by the custodian bank; (h) direct expenses
are charged to each class; management fees and general fund expenses are
allocated on the basis of relative net assets; (i) the Fund intends to comply
with the applicable provisions of the Internal Revenue Code of 1986, as
21
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
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; (j) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At July 31, 1996, reclassifications
are made to the Fund's capital accounts to reflect permanent book/tax
differences and income and gains available for distributions under income tax
regulations. Accordingly, a portion of accumulated net investment loss amounting
to $16,811,606 has been reclassified to paid-in capital. Net investment income,
net realized gains and net assets were not affected by this change; and (k)
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 enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked to market daily,
by recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Trust. The Fund
pays SBMFM an investment advisory fee calculated at an annual rate of 0.45% of
the average daily net assets. The Fund has also entered into a sub-advisory
agreement with Smith Barney Global Capital Management ("Global Capital
Management"), a subsidiary of SBH. From its fee, SBMFM pays Global Capital
Management a sub-advisory fee calculated at an annual rate of 0.10% of the
Fund's average daily net assets. These fees are calculated daily and paid
monthly.
SBMFM also acts as the Trust'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
Trust shares and primary broker for its portfolio agency transactions. For the
six months ended January 31, 1997, SB received sales charges of approximately
$477,000 on sales of the Fund's Class A shares.
22
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs within one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
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 certain cases, 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 six months ended January 31, 1997,
CDSCs paid to SB were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
CDSCs $3,000 $1,549,000 $12,000
================================================================================
</TABLE>
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 for 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
six months ended January 31, 1997, total Distribution Plan fees incurred were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $278,036 $9,196,354 $180,348
================================================================================
</TABLE>
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the six months ended January 31, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Purchases $1,146,988,370
- --------------------------------------------------------------------------------
Sales 1,162,990,674
================================================================================
</TABLE>
At January 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Gross unrealized appreciation $112,876,559*
Gross unrealized depreciation (23,542,691)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 89,333,868*
================================================================================
</TABLE>
* Substantially the same for Federal income tax purposes.
23
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
4. CAPITAL LOSS CARRYFORWARD
At July 31, 1996, the Fund had, for Federal tax purposes, approximately
$113,189,000 of capital loss carryforwards available to offset future capital
gains. To the extent that these carryforward losses are used to offset capital
gains, it is probable that the gains so offset will not be distributed. The
amount and expiration of the carryforwards are indicated below. Expiration
occurs on July 31 of the year indicated:
<TABLE>
<CAPTION>
2003 2004
================================================================================
<S> <C>
Carryforward Amounts $22,009,000 $91,180,000
================================================================================
</TABLE>
5. FORWARD FOREIGN CURRENCY CONTRACTS
At January 31, 1997, the Fund had the following open forward foreign
currency contracts:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain
================================================================================
<S> <C> <C> <C> <C> <C>
To Sell:
Australian Dollar 64,000,000 $ 48,772,797 2/27/97 $ 680,002
British Pound 4,000,000 6,406,801 2/27/97 129,199
Canadian Dollar 31,400,000 23,329,966 2/27/97 120,370
German Deutschmark 122,000,000 74,611,782 2/27/97 97,343
Irish Punt 22,600,000 35,938,097 2/27/97 221,903
Spanish Peseta 7,000,000,000 50,497,855 2/27/97 451,625
Swedish Krona 90,000,000 12,455,472 2/27/97 55,823
- --------------------------------------------------------------------------------
Total Market Value and
Unrealized Gain on Forward
Foreign Currency Contracts $252,012,770 $1,756,265
================================================================================
</TABLE>
6. 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.
24
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
7. REVERSE REPURCHASE AGREEMENT
The Fund may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by the Fund
of securities that it holds with an agreement by the Fund to repurchase the same
securities at an agreed upon price and date. A reverse repurchase agreement
involves the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of the securities.The Fund will establish a
segregated account with its custodian, in which the Fund will maintain cash,
U.S. government securities or other liquid high grade debt obligations equal in
value to its obligations with respect to reverse repurchase agreements.
At January 31, 1997, the Fund had no open reverse repurchase agreements.
8. SECURITIES TRADED ON A TO-BE-ANNOUNCED BASIS
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a
TBA transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly the
face amount and maturity date in GNMA transactions. Securities purchased on a
TBA basis are not settled until they are delivered to the Fund, normally 15 to
45 days later. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other securities.
As of January 31, 1997, the Fund held no TBA securities.
9. SHARES OF BENEFICIAL INTEREST
At January 31, 1997, 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, including those specifically related to the
distribution of its shares. Effective November 7, 1994, the Fund adopted a new
class structure, renaming the former Class C and Class D shares as Class Z and
Class C shares, respectively.
At January 31, 1997, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y Class Z
====================================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $227,948,633 $2,434,355,044 $59,474,110 $52,520,738 $18,202,386
====================================================================================================
</TABLE>
25
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1997 July 31, 1996*
--------------------- --------------------
Shares Amount Shares Amount
================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 6,060,486 $ 48,557,886 10,064,712 $ 79,242,075
Shares issued on
reinvestment 545,491 4,354,008 1,195,005 9,395,484
Shares redeemed (3,245,883) (26,001,389) (7,912,833) (62,199,723)
- --------------------------------------------------------------------------------
Net Increase 3,360,094 $ 26,910,505 3,346,884 $ 26,437,836
================================================================================
Class B
Shares sold 20,278,344 $ 162,591,612 42,794,620 $338,212,178
Shares issued on
reinvestment 5,357,078 42,848,828 13,269,424 104,516,969
Shares redeemed (26,647,792) (213,598,289) (53,265,139) (420,311,482)
- --------------------------------------------------------------------------------
Net Increase (Decrease) (1,012,370) $ (8,157,849) 2,798,905 $ 22,417,665
================================================================================
Class C
Shares sold 2,435,469 $ 19,498,126 4,096,751 $ 32,284,568
Shares issued on
reinvestment 153,755 1,227,619 217,477 1,708,186
Shares redeemed (408,363) (3,273,535) (534,146) (4,194,091)
- --------------------------------------------------------------------------------
Net Increase 2,180,861 $ 17,452,210 3,780,082 $ 29,798,663
================================================================================
Class Y
Shares sold 3,354,610 $ 26,789,796 3,547,674 $ 27,875,262
Shares issued on
reinvestment 2,362 18,665 19,630 154,747
Shares redeemed (166,209) (1,305,442) (121,413) (955,401)
- --------------------------------------------------------------------------------
Net Increase 3,190,763 $ 25,503,019 3,445,891 $ 27,074,608
================================================================================
Class Z
Shares sold 244,083 $ 1,959,541 391,370 $ 3,089,916
Shares issued on
reinvestment 75,491 602,809 168,060 1,321,531
Shares redeemed (114,430) (909,173) (308,090) (2,427,101)
- --------------------------------------------------------------------------------
Net Increase 205,144 $ 1,653,177 251,340 $ 1,984,346
================================================================================
</TABLE>
* Transactions for Class Y shares are for the period from October 10, 1995
(inception date) to July 31, 1996
26
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
10. FUND CONCENTRATION
The Fund's investment in foreign securities may involve risks not present
in domestic investments. Since securities may be denominated in a foreign
currency and may require settlement in foreign currencies and pay interest and
or dividends in foreign currencies, changes in the relationship of these foreign
currencies to the U.S. dollar can significantly affect the value of the
investments and earnings of the Fund. Foreign investments may also subject the
Fund to foreign government exchange restrictions, expropriation, taxation or
other political, social or economic developments, all of which could affect the
market and/or credit risk of the investments.
27
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1996 1995 1994 1993(2)
===================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $7.82 $7.85 $7.76 $8.41 $8.24
- -----------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.36 0.61 0.94 0.63 0.47
Net realized and unrealized
gain (loss) 0.12 0.03 (0.18) (0.52) 0.27
- -----------------------------------------------------------------------------------
Total Income From Operations 0.48 0.64 0.76 0.11 0.74
- -----------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.33) (0.62) (0.48) (0.56) (0.45)
Overdistributions of net
investment income -- -- (0.06) --
Net realized gains -- -- (0.10) (0.12)
Capital -- (0.05) (0.19) (0.04) --
- -----------------------------------------------------------------------------------
Total Distributions (0.33) (0.67) (0.67) (0.76) (0.57)
- -----------------------------------------------------------------------------------
Net Asset Value, End of Period $7.97 $7.82 $7.85 $7.76 $8.41
- -----------------------------------------------------------------------------------
Total Return 6.25%++ 8.39% 10.35% 1.16% 9.30%++
- -----------------------------------------------------------------------------------
Net Assets, End of
Period (000s) $233,584 $202,700 $177,336 $76,019 $48,334
- -----------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.04%+ 1.04% 1.09% 1.10% 1.10%+
Net investment income 8.91+ 7.85 8.15 7.67 8.26+
- -----------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 90% 83% 93% 116%
- -----------------------------------------------------------------------------------
Average commissions per share
paid on equity
transactions(4) $0.00* $0.00* -- -- --
===================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) For the period from November 6, 1992 (inception date) to July 31, 1993.
(3) The manager waived part of its fees for the years ended July 31, 1995 and
1994. If such fees were not waived, the per share effect on net investment
income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Class A $0.01 $0.00* 1.14% 1.12%
</TABLE>
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* Amount represents less than $0.01 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 B Shares 1997(1) 1996 1995 1994 1993 1992
=================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $7.83 $7.86 $7.76 $8.41 $8.55 $7.98
- ---------------------------------------------------------------------------------
Income From Operations:
Net investment income(2) 0.34 0.58 0.70 0.59 0.65 0.68
Net realized and unrealized
gain (loss) 0.13 0.01 0.02 (0.51) (0.07) 0.64
- ---------------------------------------------------------------------------------
Total Income From Operations 0.47 0.59 0.72 0.08 0.58 1.32
- ---------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) (0.57) (0.44) (0.54) (0.58) (0.68)
Overdistributions of net
investment income -- -- (0.06) -- --
Net realized gains -- -- (0.10) (0.14) --
Capital -- (0.05) (0.18) (0.03) -- (0.07)
- ---------------------------------------------------------------------------------
Total Distributions (0.31) (0.62) (0.62) (0.73) (0.72) (0.75)
- ---------------------------------------------------------------------------------
Net Asset Value, End of Period $7.99 $7.83 $7.86 $7.76 $8.41 $8.55
- ---------------------------------------------------------------------------------
Total Return 6.09%++ 7.80% 10.00% 0.66% 7.28% 17.12%
- ---------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $2,420 $2,380 $2,367 $2,469 $2,105 $1,465
- ---------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 1.52%+ 1.52% 1.56% 1.57% 1.59% 1.62%
Net investment income 8.37+ 7.36 6.82 7.20 7.77 7.99
- ---------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 90% 83% 93% 116% 125%
- ---------------------------------------------------------------------------------
Average commissions per share
paid on equity
transactions(3) $0.00* $0.00* -- -- -- --
=================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) The manager waived part of its fees for the years ended July 31, 1995 and
1994. If such fees were not waived, the per share effect on net investment
income and the ratios of expenses to average net assets would have been as
follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Class B $0.00* $0.00* 1.61% 1.59%
</TABLE>
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
29
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1997(1) 1996 1995(2) 1994 1993(3)
====================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $7.81 $7.84 $7.76 $8.41 $8.36
- ------------------------------------------------------------------------------------
Income From Operations:
Net investment income(4) 0.32 0.52 1.16 0.55 0.22
Net realized and unrealized
gain (loss) 0.16 0.07 (0.46) (0.47) 0.06
- ------------------------------------------------------------------------------------
Total Income From Operations 0.48 0.59 0.70 0.08 0.28
- ------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) (0.57) (0.44) (0.54) (0.20)
Overdistributions of net
investment income -- -- (0.06) --
Net realized gains -- -- (0.10) (0.03)
Capital -- (0.05) (0.18) (0.03) --
- ------------------------------------------------------------------------------------
Total Distributions (0.31) (0.62) (0.62) (0.73) (0.23)
- ------------------------------------------------------------------------------------
Net Asset Value, End of Period $7.98 $7.81 $7.84 $7.76 $8.41
- ------------------------------------------------------------------------------------
Total Return 6.31%++ 7.82% 9.73% 0.66% 3.41%++
- ------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $60,499 $42,222 $12,730 $1,065 $11
- ------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.43%+ 1.47% 1.46% 1.57% 1.50%+
Net investment income 8.62+ 7.61 10.23 7.20 7.87+
- ------------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 90% 83% 93% 116%
- ------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(5) $0.00* $0.00* -- --
====================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) On November 7, 1994, the former Class D shares were renamed Class C shares.
(3) For the period from March 19, 1993 (inception date) to July 31, 1993.
(4) The manager waived part of its fees for the years ended July 31, 1995 and
1994. If such fees were not waived, the per share effect on net investment
income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Class C $0.00* $0.00* 1.51% 1.58%
</TABLE>
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
30
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Y Shares 1997(1) 1996(2)
==================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Period $7.82 $7.89
- ----------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.37 0.50
Net realized and unrealized gain 0.13 0.01
- ----------------------------------------------------------------------------------
Total Income From Operations 0.50 0.51
- ----------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.35) (0.53)
Capital -- (0.05)
- ----------------------------------------------------------------------------------
Total Distributions (0.35) (0.58)
- ----------------------------------------------------------------------------------
Net Asset Value, End of Period $7.97 $7.82
- ----------------------------------------------------------------------------------
Total Return++ 6.45% 6.65%
- ----------------------------------------------------------------------------------
Net Assets, End of Period (000s) $52,924 $26,940
- ----------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.70% 0.69%
Net investment income 9.48 8.54
- ----------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 90%
- ----------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.00* $0.00*
==================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) For the period from October 10, 1995 (inception date) to July 31, 1996.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
31
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Z Shares 1997(1) 1996 1995(2) 1994 1993(3)
===================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $7.82 $7.85 $7.76 $8.41 $8.24
- -----------------------------------------------------------------------------------
Income From Operations:
Net investment income(4) 0.37 0.64 0.84 0.68 0.51
Net realized and unrealized
gain (loss) 0.14 0.02 (0.06) (0.54) 0.25
- -----------------------------------------------------------------------------------
Total Income From Operations 0.51 0.66 0.78 0.14 0.76
- -----------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.35) (0.63) (0.49) (0.59) (0.47)
Overdistributions of net
investment income -- -- (0.06) --
Net realized gains -- -- (0.10) (0.12)
Capital -- (0.06) (0.20) (0.04) --
- -----------------------------------------------------------------------------------
Total Distributions (0.35) (0.69) (0.69) (0.79) (0.59)
- -----------------------------------------------------------------------------------
Net Asset Value, End of Period $7.98 $7.82 $7.85 $7.76 $8.41
- -----------------------------------------------------------------------------------
Total Return 6.54%++ 8.72% 10.94% 1.43% 9.47%++
- -----------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $18,239 $16,270 $14,361 $11,552 $11,803
- -----------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 0.69%+ 0.70% 0.75% 0.75% 0.80%+
Net investment income 9.25+ 8.19 8.30 8.02 8.56+
- -----------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 90% 83% 93% 116%
- -----------------------------------------------------------------------------------
Average commissions per share
paid on equity
transactions(5) $0.00* $0.00* -- -- --
===================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) On November 7, 1994, the former Class C shares were renamed Class Z shares.
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
(4) The manager waived part of its fees for the years ended July 31, 1995 and
1994. If such fees were not waived, the per share effect on net investment
income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Class Z $0.00* $0.00* 0.80% 0.77%
</TABLE>
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
32
<PAGE>
Smith Barney SMITH BARNEY
Diversified ------------
Strategic Income
Fund A Member of [LOGO]
Trustees Investment Adviser
Lee Abraham Smith Barney Mutual Funds
Antoinette C. Bentley Management Inc.
Allan J. Bloostein
Richard E. Hanson, Jr. Distributor
Heath B. McLendon
Madelon DeVoe Talley Smith Barney Inc.
Custodian
Officers
The Chase Manhattan Bank
Heath B. McLendon
Chairman and Investment Officer Shareholder
Servicing Agent
Jessica M. Bibliowicz
President First Data Investor Services Group, Inc.
P.O. Box 9134
Lewis E. Daidone Boston, MA 02205-9134
Senior Vice President and
Treasurer This report is submitted for the general
information of the shareholders of Smith
James E. Conroy Barney Diversified Strategic Income
Vice President and Fund. It is not authorized for
Investment Officer distribution to prospective investors
unless accompanied or preceded by an
John C. Bianchi effective Prospectus for the Fund, which
Vice President and contains information concerning the
Investment Officer Fund's investment policies and expenses
as well as other pertinent information.
Simon Hildreth
Vice President and Smith Barney
Investment Officer Diversified Strategic
Income Fund
Irving P. David 388 Greenwich Street
Controller New York, New York 10013
Christina T. Sydor FD2174 3/97
Secretary
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
Smith Barney
Utilities Fund
------------------------------
January 31, 1997
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- ---------------------------
Smith Barney Utilities Fund
- ---------------------------
Dear Shareholder:
In this semi-annual report, we summarize the prevailing economic and market
conditions and outline our portfolio strategy for the Smith Barney Utilities
Fund for the period ended January 31, 1997. A detailed summary of performance
and current holdings can be found in the appropriate sections that follow in
this semi-annual report.
Fund Performance Update
For the six-month period ended January 31, 1997, the Smith Barney Utilities Fund
generated a total return of 7.91% for the Class A shares, underperforming its
Lipper Analytical Services, Inc. peer group average of 13.15% total return for
the same period. (Lipper Analytical Services, Inc. is a major fund tracking
organization.) The Smith Barney Utilities Fund places a greater emphasis on
bonds than many of its peers. Since stocks tended to outperform bonds last year,
the Smith Barney Utilities Fund underperformed relative to its peers. However,
we believe this more conservative investment approach should provide investors
with a steady and reliable income stream over the long term.
Market and Economic Overview
The U.S. economy in 1996, which had moderate inflation, stable-to-lower interest
rates, and strong corporate earnings growth, proved quite favorable not only for
the domestic equity markets, but worldwide equity markets as well. However, the
domestic bond market experienced significant volatility as reports of a
stronger-than-expected U.S. economy were released throughout the year. At the
end of the year, the U.S. unemployment rate was approximately 5.3%. Higher
employment, coupled with a surge in consumer spending, has led many bond
investors to think the economy was growing faster than expected, which would
cause inflation ultimately to rise. Although U.S. Treasuries performed well in
the fall, renewed fears of inflation and the specter of a possible rate hike by
the Federal Reserve Board drove up the yield of the benchmark 30-year Treasury
bond to finish the year at 6.64%.
The economic outlook for 1997 calls for a continuation of slow to moderate
growth without any significant inflation. In our view, the 30-year U.S. Treasury
bond should trade in a fairly narrow range of 6.25% to 7%. This scenario is
favorable for the fixed income markets and interest rate sensitive sectors such
as electric utilities. However, higher overall market volatility may increase if
there are any surprises regarding the U.S. economy or corporate earnings.
1
<PAGE>
Fund's Industry Overview
Since our last report, electric utility stocks rallied from the mid-1996 lows to
close the year with positive total returns. Overall, however, the past year was
a challenging one for utility investors as the sector underperformed the broad
based equity market. The continued strength of the equity market, a weaker fixed
income market and regulatory uncertainty has diverted investor attention away
from the traditional defensive characteristics of utilities. In our opinion, the
disappointing performance of investor-owned electric utilities, and therefore
the Fund, indicates that many investors have overlooked generally positive
developments for the industry.
Two major themes emerged for utilities in 1996 -- the relatively positive
regulatory decisions regarding industry restructuring and the rapid pace of
mergers between electric companies and between electric utility and natural gas
companies. The power generation industry continues its massive transformation
toward a more competitive environment where power companies will compete for
customers. The future of many electric companies was clouded with uncertainty
while various restructuring plans were under review. Initiatives recently
introduced in several states have begun to clarify the future direction and
shape of the utility industry. We believe these proposals will prove to be more
beneficial to some electric utility companies than originally expected because
they not only recognize the need for lower rates, but also allow utilities an
opportunity to recover costs for investments in uneconomic facilities -- so
called stranded costs -- as the industry continues its transition phase. Many
investors feared that utility companies would not be able to recoup any of their
investments made in power plants and other facilities if competitive pressures
cut their revenues. We believe these initiatives indicate that the industry is
moving towards allowing utility companies to recover a portion of their capital
costs through securitized bond issues. Electric utilities would use the money
raised in these bond issues to improve their balance sheets and reduce rates
charged to customers. The bonds would be repaid through a competitive transition
charge added to customer bills. California and Pennsylvania are leaders in this
deregulation trend and investors could see debt offerings from utilities in
those states later this year. Although these proposals are still under review
and their content will most likely vary widely from state to state, we believe
that they offer electric utilities the opportunity to become more competitive.
In our opinion, the second major theme affecting the electric utility industry
is the convergence of utility and natural gas companies. During 1996, there were
ten proposed utility mergers including both electric utility companies and
electric utility and natural gas companies. These proposed mergers included
Texas Utilities/Enserch Corporation, Enova Corporation/Pacific Enterprises,
2
<PAGE>
Duke Power/PanEnergy, Long Island Lighting/Brooklyn Union Gas Company. The goal
of these merger proposals is to increase customers, lower costs, and improve
customer service by enabling electric utilities to become full-service energy
providers emphasizing the most economical fuel.
Fund's Investment Strategy
The Smith Barney Utility Fund continues to seek a combination of current income
and long-term capital growth through careful stock selection and
diversification. The Fund's structure is a balance between bonds and stocks with
a current mix of approximately 59% stocks and 41% bonds. After two years of
substantially above historical average returns, we believe that an increase in
stock market volatility could refocus investor attention on electric utilities
as their defensive nature becomes more appealing. Moreover, on a valuation
basis, we think electric utilities are attractive investments when compared to
the broad-based stock market. The relative price-to-earnings ratios of electric
utilities are close to their historical lows and the relative yield spread is
near historical highs, making the sector attractive for income-oriented
investors. (The price-to-earning ratio, or P/E ratio, is a common method used by
investors to determine a stock's relative value. The P/E ratio compares a
stock's price to its current earning power.)
The changes occurring within the electric utility industry make individual stock
selection very important to achieving competitive total returns. We expect a
wide variance in total returns within the electric utility sector as individual
states formulate plans to create a more competitive industry. We tend to favor
higher-quality companies with strong earnings and dividend growth prospects,
superior management teams and favorable environments. The Fund's stock selection
continues to emphasize total return and not only current income. Since our last
report, we have added to our holdings in Allegheny Power and General Public
Utilities in the electric sector and established new positions in Equitable
Resources and Pacific Enterprises in the natural gas sector. As the
telecommunications sector continues to face its own competitive problems, we
sold our holdings in American Telephone & Telegraph Corporation awaiting further
clarification of their long-term competitive strategy. The fixed income portion
of the Fund continues to focus on investment grade bonds. We have recently
increased our holdings in telecommunication bonds since competition does not
have an immediate impact on credit ratings and we believed the issues were
attractively priced relative to the overall bond market.
Conclusion
For conservative income-oriented investors, utilities provide a good defensive
balance to a diversified investment portfolio. While the industry is changing
and becoming more competitive, we believe these changes represent
3
<PAGE>
competitive investment opportunities. Moreover, we believe that careful
individual stock selection and broad diversification are essential to achieving
investment goals. In our opinion, the Smith Barney Utilities Fund is a good
vehicle for investors to participate in the utility industry while its
diversification should help to reduce risk.
In closing, thank you for your investment in the Smith Barney Utilities Fund. We
look forward to continuing to help you reach your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Jack S. Levande
Heath B. McLendon Jack S. Levande
Chairman and Vice President and
Investment Officer Investment Officer
February 14, 1997
4
<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>
1/31/97 $14.51 $14.92 $0.41 $0.32 $0.00 7.91%+
- ------------------------------------------------------------------------------------------------
7/31/96 14.03 14.51 0.82 0.00 0.00 9.21
- ------------------------------------------------------------------------------------------------
7/31/95 13.28 14.03 0.82 0.08 0.02 13.24
- ------------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.83 0.50 0.00 (8.99)
- ------------------------------------------------------------------------------------------------
Inception*
-7/31/93 14.36 15.97 0.64 0.13 0.00 17.01+
================================================================================================
Total $3.52 $1.03 $0.02
================================================================================================
</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>
1/31/97 $14.51 $14.92 $0.37 $0.32 $0.00 7.67%+
- ------------------------------------------------------------------------------------------------
7/31/96 14.02 14.51 0.75 0.00 0.00 8.78
- ------------------------------------------------------------------------------------------------
7/31/95 13.28 14.02 0.76 0.08 0.02 12.62
- ------------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.75 0.50 0.00 (9.52)
- ------------------------------------------------------------------------------------------------
7/31/93 14.83 15.97 0.80 0.15 0.00 14.69
- ------------------------------------------------------------------------------------------------
7/31/92++ 13.95 14.83 0.35 0.00 0.01 8.98+
- ------------------------------------------------------------------------------------------------
2/28/92 13.21 13.95 0.84 0.15 0.03 13.63
- ------------------------------------------------------------------------------------------------
2/28/91 12.93 13.21 0.90 0.10 0.00 10.46
- ------------------------------------------------------------------------------------------------
2/28/90 12.09 12.93 0.90 0.21 0.00 16.34
- ------------------------------------------------------------------------------------------------
Inception*
-2/28/89 12.00 12.09 0.57 0.15 0.00 6.80+
================================================================================================
Total $6.99 $1.66 $0.06
================================================================================================
</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>
1/31/97 $14.51 $14.90 $0.37 $0.32 $0.00 7.55%+
- ------------------------------------------------------------------------------------------------
7/31/96 14.02 14.51 0.75 0.00 0.00 8.80
- ------------------------------------------------------------------------------------------------
7/31/95 13.28 14.02 0.76 0.08 0.02 12.62
- ------------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.75 0.50 0.00 (9.52)
- ------------------------------------------------------------------------------------------------
Inception*
-7/31/93 15.17 15.97 0.39 0.02 0.00 8.08+
================================================================================================
Total $3.02 $0.92 $0.02
================================================================================================
</TABLE>
5
<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>
1/31/97 $14.52 $14.94 $0.42 $0.32 $0.00 8.17%+
- ------------------------------------------------------------------------------------------------
Inception*
-7/31/96 14.88 14.52 0.71 0.00 0.00 2.28+
================================================================================================
Total $1.13 $0.32 $0.00
================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Z 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>
1/31/97 $14.52 $14.95 $0.42 $0.32 $0.00 8.10%+
- ------------------------------------------------------------------------------------------------
7/31/96 14.02 14.52 0.85 0.00 0.00 9.62
- ------------------------------------------------------------------------------------------------
7/31/95 13.28 14.02 0.87 0.08 0.02 13.55
- ------------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.87 0.50 0.00 (8.78)
- ------------------------------------------------------------------------------------------------
Inception*
-7/31/93 14.36 15.97 0.66 0.14 0.00 17.21+
================================================================================================
Total $3.67 $1.04 $0.02
================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
---------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================
Six Months Ended 1/31/97+ 7.91% 7.67% 7.55% 8.17% 8.10%
- --------------------------------------------------------------------------------
Year Ended 1/31/97 2.31 1.84 1.75 2.18 2.61
- --------------------------------------------------------------------------------
Five Years Ended 1/31/97 N/A 8.24 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/97 8.64 10.01 6.55 7.95 8.95
================================================================================
With Sales Charge(2)
---------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================
Six Months Ended 1/31/97+ 2.54% 2.67% 6.55% 8.17% 8.10%
- --------------------------------------------------------------------------------
Year Ended 1/31/97 (2.82) (3.16) 0.75 2.18 2.61
- --------------------------------------------------------------------------------
Five Years Ended 1/31/97 N/A 8.09 N/A N/A N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/97 7.33 10.01 6.55 7.59 8.95
================================================================================
6
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/97) 42.08%
- --------------------------------------------------------------------------------
Class B (Inception* through 1/31/97) 132.61
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/97) 28.84
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/97) 10.10
- --------------------------------------------------------------------------------
Class Z (Inception* through 1/31/97) 43.83
================================================================================
(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%; 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 charge is incurred. Class C shares reflect the deduction of a 1.00%
CDSC, which applies if shares are redeemed within the first year of
purchase.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ For the period from March 1, 1992 to July 31, 1992, which reflects a change
in the fiscal year end of the Fund.
* Inception dates for Class A, B, C, Y and Z shares are November 6, 1992,
March 28, 1988, February 4, 1993, October 9, 1995 and November 6, 1992,
respectively.
7
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of
the Smith Barney Utilities Fund vs.
Standard & Poor's 500 Index and Lipper Utilities Fund Average+
- --------------------------------------------------------------------------------
March 1988 - January 1997
[The following table is represented as a line graph in the printed material.]
- --------------------------------------------------------------------------------
Smith Barney Lipper Utilities Standard & Poor's
Date Utilities Fund Fund Average 500 Index
- --------------------------------------------------------------------------------
3/28/88 10,000 10,000 10,000
- --------------------------------------------------------------------------------
7/88 10,208 10,476 10,624
- --------------------------------------------------------------------------------
7/89 12,210 13,180 14,012
- --------------------------------------------------------------------------------
7/90 12,785 13,670 14,923
- --------------------------------------------------------------------------------
7/91 14,362 14,948 16,822
- --------------------------------------------------------------------------------
7/92 16,997 17,917 18,970
- --------------------------------------------------------------------------------
7/93 19,494 21,008 20,624
- --------------------------------------------------------------------------------
7/94 17,636 19,744 21,685
- --------------------------------------------------------------------------------
7/95 19,861 21,745 27,338
- --------------------------------------------------------------------------------
7/96 21,605 24,239 31,864
- --------------------------------------------------------------------------------
1/31/97 23,262 27,426 39,553
- --------------------------------------------------------------------------------
+ Hypothetical illustration of $10,000 invested in Class B shares at
inception on March 28, 1988, assuming reinvestment of dividends and capital
gains, if any, at net asset value through January 31, 1997. The Standard &
Poor's 500 Index is composed of widely held common stocks listed on the New
York Stock Exchange, American Stock Exchange and 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 of
a mutual fund. The Lipper Analytical Services, Inc. Utilities Fund Average
("Lipper Utilities Fund Average") is composed of the Fund's peer group of
mutual funds (13 funds as of January 31, 1997) investing in utilities
securities. 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.
8
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
Portfolio Breakdown
[The following table is represented as a pie graph in the printed material.]
Electric & Gas 86.7%
Telephone 13.0%
Repurchase Agreement 0.3%
Percentage of
Company Total Investments
================================================================================
Top Five Equity Holdings
FPLGroup Inc. 4.6%
Texas Utilities Co. 4.2
Edison International 3.1
Panenergy Corp. 2.9
Cinergy Corp. 2.9
Top Five Bond Holdings
Utilicorp United Inc. 2.6%
Hydro-Quebec 2.5
Bell South Telecommunications 2.4
GTE Corp. 2.3
US West Communications 1.7
================================================================================
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 59.1%
================================================================================
Electric & Gas -- 56.0%
750,000 Allegheny Power System, Inc. $ 22,968,750
1,000,000 American Electric Power Co. 41,375,000
675,000 Baltimore Gas & Electric Co. 18,562,500
500,000 Carolina Power & Light Co. 18,812,500
1,200,000 Cinergy Corp. 41,400,000
350,000 Cipsco 12,643,750
700,000 Coastal Corp. 33,862,500
600,000 Consolidated Edison Co. of New York, Inc. 18,600,000
525,000 Dominion Resources, Inc. 20,803,125
500,000 DPL, Inc. 12,250,000
1,000,000 DTE Energy Co. 31,375,000
2,100,000 Edison International 44,887,500
500,000 Entergy Corp. 13,437,500
250,000 Equitable Resources, Inc. 8,125,000
1,500,000 FPL Group, Inc. 66,375,000
777,900 General Public Utilities Corp. 26,059,650
1,200,000 Houston Industries, Inc. 27,150,000
1,065,000 Kansas City Power & Light Co. 30,751,875
500,000 Long Island Lighting Co. 11,375,000
110,000 New York State Electric & Gas Corp. 2,502,500
372,000 Niagara Mohawk Power Corp. 3,766,500
1,000,000 Nipsco 39,000,000
273,200 Pacific Enterprises 8,230,150
850,000 Pacificorp. 18,062,500
900,000 Panenergy Corp. 41,512,500
250,000 Peco Energy Co. 5,750,000
400,000 Pennsylvania Power & Light Co. 9,050,000
500,000 Pinnacle West Capital Corp. 15,812,500
800,000 Public Service Co. of Colorado 31,200,000
650,000 SCANA Corp. 16,981,250
500,000 Sierra Pacific Resources 14,187,500
1,200,000 Southern Co. 26,250,000
250,000 Southwest Gas Corp. 4,937,500
1,500,000 Texas Utilities Co. 60,750,000
250,000 Unicom Corp. 5,906,250
- --------------------------------------------------------------------------------
804,713,800
- --------------------------------------------------------------------------------
Telephone -- 3.1%
750,000 GTE Corp. 35,250,000
500,000 U.S. West Media Group 9,312,500
44,562,500
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $731,368,956) 849,276,300
================================================================================
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
CORPORATE BONDS AND NOTES -- 40.6%
================================================================================
Electric & Gas -- 30.6%
$5,000,000 Arkansas Power & Light Co., 8.700% due 11/1/22 $ 4,987,500
15,000,000 Atlantic City Electric Co., 7.000% due 8/1/28 13,406,250
Boston Edison Co.:
5,000,000 9.875% due 6/1/20 5,437,500
7,000,000 8.250% due 9/15/22 6,816,250
11,950,000 Carolina Power & Light Co., 8.625% due 9/15/21 13,369,063
4,000,000 Central Power & Light Co., 7.500% due 4/1/23 3,830,000
2,800,000 Cincinnati Gas & Electric Co., 8.500% due
9/1/22 2,796,500
3,000,000 Cleveland Electric Illuminating Co., 9.000%
due 7/1/23 3,022,500
Coastal Corp.:
2,000,000 10.750% due 10/1/10 2,605,000
2,000,000 9.625% due 5/15/12 2,375,000
5,000,000 7.750% due 10/15/35 4,893,750
10,000,000 Columbia Gas Systems, Inc., 7.620% due 11/28/25 9,562,500
Commonwealth Edison Co.:
2,000,000 7.500% due 7/1/13 1,952,500
14,250,000 8.375% due 9/15/22 14,250,000
Duquesne Light Co.:
3,000,000 7.625% due 4/15/23 2,846,250
15,000,000 7.550% due 6/15/25 14,156,250
12,000,000 Equitable Resources, Inc., 7.750% due 7/15/26 12,255,000
8,000,000 Gulf Power Co., 6.875% due 1/1/26 7,420,000
15,100,000 Houston Lighting & Power Co., 9.150% due 3/15/21 17,742,500
Hydro-Quebec:
20,000,000 8.250% due 1/15/27 21,350,000
12,500,000 8.625% due 6/15/29 13,906,250
11,800,000 Idaho Power Co., 8.750% due 3/15/27 12,493,250
13,000,000 Illinois Power Co., 7.500% due 7/15/25 12,236,250
7,500,000 Kentucky Utilities Co., 8.550% due 5/15/27 7,818,750
5,000,000 Louisiana Power and Light Co., 8.750% due 3/1/26 5,087,500
Mississippi Power & Light Co.:
17,000,000 8.650% due 1/15/23 18,126,250
4,800,000 6.875% due 12/1/25 4,368,000
2,000,000 Narragansett Power Co., 9.125% due 5/1/21 2,117,500
3,000,000 Nevada Power & Light Co., 8.500% due 1/1/23 3,086,250
18,450,000 New Orleans Public Service, Inc., 8.000% due
3/1/23 18,196,312
New York State Electric & Gas Co.:
11,750,000 8.300% due 12/15/22 11,985,000
2,250,000 7.450% due 7/15/23 2,148,750
2,000,000 Northern States Power Co., 7.375% due 12/1/26 1,955,000
4,250,000 Pacific Gas & Electric Co., 6.750% due 10/1/23 3,782,500
10,000,000 Pacific Gas Transmission, 7.800% due 6/1/25 9,862,500
4,000,000 PacifiCorp, 6.710% due 6/15/26 3,620,000
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
Electric & Gas -- 30.6% (continued)
Pennsylvania Power & Light Co.:
$7,500,000 8.500% due 5/1/22 $ 7,781,250
3,100,000 6.750% due 10/1/23 2,759,000
6,000,000 Portland General Electric Co., 7.750% due
4/15/23 5,820,000
Potomac Electric Power Co.:
5,800,000 7.375% due 9/15/25 5,582,500
5,000,000 8.500% due 5/15/27 5,287,500
10,000,000 Public Service Co. of Colorado, 8.750% due
3/1/22 10,587,500
7,000,000 Public Service Electric & Gas Co., 9.250% due
6/1/21 8,242,500
3,000,000 Selkirk Cogen, 8.980% due 6/26/12 3,195,000
10,000,000 South Carolina Electric & Gas Co., 7.625% due
6/1/23 9,900,000
15,000,000 South West Gas, 8.000% due 8/1/26 15,300,000
15,000,000 Southwestern Electric Power Co., 6.875% due
10/1/25 13,893,750
6,000,000 Texas Utilities, 7.875% due 3/1/23 6,045,000
Utilicorp United, Inc.:
23,000,000 9.000% due 11/15/21 24,581,250
13,000,000 8.000% due 3/1/23 12,886,250
6,500,000 Western Pennsylvania Power Co., 8.875% due
2/1/21 6,849,375
4,500,000 Western Resources, 8.500% due 7/1/22 4,601,250
- --------------------------------------------------------------------------------
439,176,500
- --------------------------------------------------------------------------------
Telephone -- 10.0%
Bell South Telecommunications:
21,500,000 7.625% due 5/15/35 21,688,125
13,500,000 7.000% due 12/1/2095 12,993,750
7,500,000 Century Telephone Enterprises, Inc., 7.200%
due 12/1/25 7,031,250
GTE Corp.:
5,000,000 8.750% due 11/1/21 5,650,000
10,000,000 7.830% due 5/1/23 9,862,500
17,500,000 7.900% due 2/1/27 17,696,875
6,000,000 GTE Northwest, 7.875% due 6/1/26 6,097,500
MCI Communications Corp.:
5,000,000 8.250% due 1/20/23 5,206,250
18,500,000 8.250% due 3/23/25 18,430,625
Pacific Bell:
5,000,000 7.500% due 2/1/33 4,812,500
10,000,000 7.375% due 7/15/43 9,587,500
26,500,000 US West Communications Group, 6.875% due 9/15/33 23,783,750
- --------------------------------------------------------------------------------
142,840,625
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $576,025,348) 582,017,125
================================================================================
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 0.3%
$3,873,000 Chase Manhattan Bank, 5.498% due 2/3/97;
Proceeds at maturity -- $3,874,774;
(Fully collateralized by U.S. Treasury Note,
6.375% due 3/31/01; Market value -- $3,950,482)
(Cost -- $3,873,000) $ 3,873,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $1,311,267,304*) $1,435,166,425
================================================================================
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $1,311,267,304) $1,435,166,425
Cash 1,595,651
Receivable for securities sold 31,134,179
Receivable for Fund shares sold 331,689
Dividends and interest receivable 14,210,379
- --------------------------------------------------------------------------------
Total Assets 1,482,438,323
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 22,884,789
Dividend payable 6,202,652
Distribution fees payable 1,110,718
Investment advisory fees payable 565,558
Administration fees payable 251,389
Payable for Fund shares purchased 78,156
Accrued expenses 924,574
- --------------------------------------------------------------------------------
Total Liabilities 32,017,836
- --------------------------------------------------------------------------------
Total Net Assets $1,450,420,487
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 97,220
Capital paid in excess of par value 1,313,672,057
Undistributed net investment income 795,963
Accumulated net realized gains from security transactions 11,956,126
Net unrealized appreciation of investments 123,899,121
- --------------------------------------------------------------------------------
Total Net Assets $1,450,420,487
================================================================================
Shares Outstanding:
Class A 17,461,120
-----------------------------------------------------------------------------
Class B 77,038,690
-----------------------------------------------------------------------------
Class C 716,765
-----------------------------------------------------------------------------
Class Y 1,069,007
-----------------------------------------------------------------------------
Class Z 934,054
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $14.92
-----------------------------------------------------------------------------
Class B* $14.92
-----------------------------------------------------------------------------
Class C** $14.90
-----------------------------------------------------------------------------
Class Y (and redemption price) $14.94
-----------------------------------------------------------------------------
Class Z (and redemption price) $14.95
-----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $15.71
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed less than 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.
14
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1997
INVESTMENT INCOME:
Dividends $ 25,479,190
Interest 24,428,980
- --------------------------------------------------------------------------------
Total Investment Income 49,908,170
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 5,096,530
Investment advisory fees (Note 2) 3,526,141
Administration fees (Note 2) 1,567,174
Shareholder and system servicing fees 747,690
Shareholder communications 235,365
Registration fees 40,219
Custody 38,710
Audit and legal 25,136
Trustees' fees 15,082
Insurance fees 15,082
Pricing fees 6,033
Other 58,968
- --------------------------------------------------------------------------------
Total Expenses 11,372,130
- --------------------------------------------------------------------------------
Net Investment Income 38,536,040
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 525,109,402
Cost of securities sold 513,183,233
- --------------------------------------------------------------------------------
Net Realized Gain 11,926,169
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 56,728,484
End of period 123,899,121
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 67,170,637
- --------------------------------------------------------------------------------
Net Gain on Investments 79,096,806
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $117,632,846
================================================================================
See Notes to Financial Statements.
15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1997 (unaudited)
and the Year Ended July 31, 1996
<TABLE>
<CAPTION>
1997 1996
========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 38,536,040 $ 92,572,143
Net realized gain 11,926,169 66,480,225
Increase (decrease) in net unrealized appreciation 67,170,637 (3,572,589)
- ----------------------------------------------------------------------------------------
Increase in Net Assets From Operations 117,632,846 155,479,779
- ----------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (39,616,918) (90,695,144)
Net realized gains (32,857,230) --
- ----------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (72,474,148) (90,695,144)
- ----------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sales 51,257,914 184,600,350
Net asset value of shares issued in connection
with the transfer of Smith Barney Funds, Inc.--
Utility Portfolio's net assets (Note 6) -- 77,275,976
Net asset value of shares issued for
reinvestment of dividends 51,888,493 69,393,301
Cost of shares reacquired (308,007,630) (546,072,751)
- ----------------------------------------------------------------------------------------
Decrease in Net Assets From Fund
Share Transactions (204,861,223) (214,803,124)
- ----------------------------------------------------------------------------------------
Decrease in Net Assets (159,702,525) (150,018,489)
NET ASSETS:
Beginning of period 1,610,123,012 1,760,141,501
- ----------------------------------------------------------------------------------------
End of period* $ 1,450,420,487 $ 1,610,123,012
========================================================================================
* Includes undistributed net investment income of: $ 795,963 $ 1,876,841
========================================================================================
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Utilities 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 Convertible Fund,
Smith Barney Diversified Strategic Income Fund, Smith Barney High Income Fund,
Smith Barney Premium Total Return Fund, Smith Barney Tax-Exempt Income Fund and
Smith Barney Exchange Reserve Fund. The financial statements and financial
highlights for the other funds are presented in separate semi-annual reports.
The Smith Barney Premium Total Return Fund changed its fiscal year end to
December 31 and, therefore, the semi-annual report will be prepared as of June
30, 1997.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
securities for which no sales price were reported and U.S. Government and Agency
obligations are valued at bid price, or in the absence of a recent bid price, at
the bid equivalent obtained from one or more of the major market makers; (c)
securities maturing within 60 days are valued at cost plus accreted discount, or
minus amortized premium, as applicable (d) dividend income is recorded on
ex-dividend date and interest income is recorded on an accrual basis; (e)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (f) gains or losses on the sale of securities are recorded on the
identified cost basis; (g) direct expenses are charged to each class; management
fees and general fund expenses are allocated on the basis of relative net assets
of each class; (h) 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; (i) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At July 31, 1996, reclassifications were made to the Fund's capital
accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Accordingly, a portion
of accumulated net realized loss amounting to $78,795 and a portion of
undistributed net investment income amounting to $158 has been reclassified to
paid-in-capital. Net investment income, net realized gains and net assets were
not affected by this change; and (j) 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.
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Trust. The Fund
pays SBMFM an advisory fee calculated at an annual rate of 0.45% of the average
daily net assets. This fee is calculated daily and paid monthly.
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 asset. 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
six months ended January 31, 1997, SB received sales charges of approximately
$32,000 on sales of the Fund's Class A shares and brokerage commissions of
$80,610.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than 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 if redemption occurs within the first year of
purchase. In certain cases, Class A shares 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 six months ended January 31, 1997,
CDSCs paid to SB were approximately:
Class A Class B Class C
================================================================================
CDSCs $1,000 $1,382,000 $1,000
================================================================================
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 for each respective class. In addition, the Fund 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 for each class. For the
six months ended January 31, 1997, total Distribution Plan fees incurred were as
follows:
Class A Class B Class C
================================================================================
Distribution Plan Fees $338,417 $4,718,278 $39,835
================================================================================
All officers and one Trustee of the Trust are employees of SB.
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
3. INVESTMENTS
During the six months ended January 31, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $ 297,074,226
- --------------------------------------------------------------------------------
Sales 525,109,402
================================================================================
At January 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $ 139,393,990 *
Gross unrealized depreciation (15,494,869)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 123,899,121 *
================================================================================
* Substantially the same for Federal income tax purposes.
4. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Fund requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. SHARES OF BENEFICIAL INTEREST
At January 31, 1997, 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 expenses, specifically related to the distribution of its shares.
Effective November 7, 1994, the Fund adopted a new class structure, renaming the
former Class D and C shares as Class C and Z shares, respectively.
At January 31, 1997, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y Class Z
==============================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $237,867,426 $1,034,880,634 $10,821,337 $15,852,295 $14,347,585
==============================================================================================
</TABLE>
19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1997 July 31, 1996
-------------------------- --------------------------
Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,549,239 $ 22,962,451 5,522,642 $ 84,582,536
Net asset value of shares
issued in connection
with the transfer of
Smith Barney Funds,
Inc. - Utility Portfolio's
net assets (Note 6) -- -- 4,473,406 67,910,384
Shares issued on reinvestment 628,950 9,424,042 686,576 10,274,588
Shares redeemed (3,061,959) (45,681,374) (4,384,228) (65,447,502)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) (883,770) $ (13,294,881) 6,298,396 $ 97,320,006
============================================================================================
Class B
Shares sold 1,264,678 $ 18,828,459 5,598,593 $ 83,916,266
Net asset value of shares
issued in connection
with the transfer of
Smith Barney Funds,
Inc. - Utility Portfolio's
net assets (Note 6) -- -- 130,708 1,973,562
Shares issued on reinvestment 2,763,206 41,392,697 3,863,108 57,767,942
Shares redeemed (17,324,133) (257,811,992) (31,436,995) (470,651,907)
- --------------------------------------------------------------------------------------------
Net Decrease (13,296,249) $(197,590,836) (21,844,586) $(326,994,137)
============================================================================================
Class C
Shares sold 50,134 $ 742,920 252,794 $ 3,788,442
Net asset value of shares
issued in connection
with the transfer of
Smith Barney Funds,
Inc. - Utility Portfolio's
net assets (Note 6) -- -- 486,438 7,392,030
Shares issued on reinvestment 27,438 410,915 28,059 421,315
Shares redeemed (149,461) (2,240,103) (258,618) (3,895,440)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) (71,889) $ (1,086,268) 508,673 $ 7,706,347
============================================================================================
Class Y
Shares sold 544,579 $ 8,084,217 681,967 $ 10,097,754
Shares issued on reinvestment 4 64 4,680 71,463
Shares redeemed (168) (2,427) (162,055) (2,399,434)
- --------------------------------------------------------------------------------------------
Net Increase 544,415 $ 8,081,854 524,592 $ 7,769,783
============================================================================================
Class Z
Shares sold 43,047 $ 639,867 147,037 $ 2,215,352
Shares issued on reinvestment 44,089 660,775 57,372 857,993
Shares redeemed (152,799) (2,271,734) (247,957) (3,678,468)
- --------------------------------------------------------------------------------------------
Net Decrease (65,663) $ (971,092) (43,548) $ (605,123)
============================================================================================
</TABLE>
20
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
6. TRANSFER OF NET ASSETS
On November 17, 1995, the Fund acquired the assets and certain liabilities
of the Smith Barney Funds, Inc. -- Utility Portfolio ("Utility Portfolio")
pursuant to a plan of reorganization approved by Utility Portfolio shareholders
on November 15, 1995. Total shares issued by the Fund and the total net assets
of Utility Portfolio on the date of transfer were:
Total Net
Shares Assets of Total Net
Issued by Acquired Assets of
Acquired Portfolio the Fund Portfolio the Fund
================================================================================
Utility Portfolio 5,090,552 $77,275,976 $1,917,693,490
================================================================================
The total net assets of the Utility Portfolio before acquisition included
unrealized appreciation of $7,088,433, an overdistribution of income of $43,610
and a net realized loss of $74,262. Total net assets of the Fund immediately
after the transfer were $1,994,969,466. The transaction was structured for tax
purposes to qualify as a tax-free reorganization under the Internal Revenue
Code.
7. CONCENTRATION OF CREDIT RISK
Because the Fund concentrates its investments in the utilities industry,
its portfolio may be subject to greater risk and market fluctuations than a
portfolio of securities representing a broader range of investment alternatives.
The economic risks associated with the concentration of the Fund in only one
industry could mean that adverse conditions could substantially impact the
income earned by the Fund and the value of the Fund's holdings.
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1996 1995 1994 1993(2)
=================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.51 $ 14.03 $ 13.28 $ 15.97 $ 14.36
- -------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.40 0.83 0.85 0.56 0.66
Net realized and unrealized gain (loss) 0.74 0.47 0.82 (1.92) 1.72
- -------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.14 1.30 1.67 (1.36) 2.38
- -------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.41) (0.82) (0.82) (0.80) (0.63)
Overdistribution of net investment
income -- -- -- (0.03) (0.01)
Net realized gains (0.32) -- -- (0.50) (0.13)
Overdistribution of net realized gains -- -- (0.08) -- --
Capital -- -- (0.02) -- --
- -------------------------------------------------------------------------------------------------
Total Distributions (0.73) (0.82) (0.92) (1.33) (0.77)
- -------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 14.92 $ 14.51 $ 14.03 $ 13.28 $ 15.97
- -------------------------------------------------------------------------------------------------
Total Return 7.91%++ 9.21% 13.24% (8.99)% 17.01%++
- -------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $260,592 $266,163 $168,963 $41,458 $53,856
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.05%+ 1.04% 1.07% 1.07% 1.07%+
Net investment income 5.29+ 5.55 6.36 5.54 5.67+
- -------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 58% 36% 28% 37%
- -------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (3) $ 0.06 $ 0.06 -- -- --
=================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) For the period from November 6, 1992 (inception date) to July 31, 1993.
(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.
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1997(1) 1996 1995 1994 1993 1992(2)
===========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 14.51 $ 14.02 $ 13.28 $ 15.97 $ 14.83 $ 13.95
- -----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.36 0.77 0.78 0.75 0.79 0.35
Net realized and unrealized
gain (loss) 0.74 0.47 0.82 (2.19) 1.30 0.89
- -----------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 1.10 1.24 1.60 (1.44) 2.09 1.24
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.75) (0.76) (0.72) (0.79) (0.35)
Overdistribution of net investment
income -- -- -- (0.03) (0.01) --
Net realized gains (0.32) -- -- (0.50) (0.15) --
Overdistribution of net realized gains -- -- (0.08) -- -- --
Capital -- -- (0.02) -- -- (0.01)
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.69) (0.75) (0.86) (1.25) (0.95) (0.36)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 14.92 $ 14.51 $ 14.02 $ 13.28 $ 15.97 $ 14.83
- -----------------------------------------------------------------------------------------------------------
Total Return 7.67%++ 8.78% 12.62% (9.52)% 14.69% 8.98%++
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of
Period (millions) $ 1,149 $ 1,310 $ 1,573 $ 1,823 $ 2,766 $ 1,721
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.55%+ 1.55% 1.56% 1.54% 1.56% 1.57%+
Net investment income 4.81+ 5.13 5.82 5.07 5.17 5.78+
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 58% 36% 28% 37% 10%
- -----------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (3) $ 0.06 $ 0.06 -- -- -- --
===========================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) For the period from March 1, 1992 to July 31, 1992.
(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.
23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1997(1) 1996 1995(2) 1994 1993(3)
========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.51 $ 14.02 $ 13.28 $ 15.97 $ 15.17
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.36 0.77 0.78 0.73 0.35
Net realized and unrealized gain (loss) 0.72 0.47 0.82 (2.17) 0.86
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.08 1.24 1.60 (1.44) 1.21
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.75) (0.76) (0.72) (0.38)
Overdistribution of net investment income -- -- -- (0.03) (0.01)
Net realized gains (0.32) -- -- (0.50) (0.02)
Overdistribution of net realized gains -- -- (0.08) -- --
Capital -- -- (0.02) -- --
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.69) (0.75) (0.86) (1.25) (0.41)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 14.90 $ 14.51 $ 14.02 $ 13.28 $ 15.97
- --------------------------------------------------------------------------------------------------------
Total Return 7.55%++ 8.80% 12.62% (9.52)% 8.08%++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 10,679 $ 11,441 $ 3,925 $ 1,894 $ 252
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.50%+ 1.50% 1.51% 1.48% 1.49%+
Net investment income 4.81+ 5.19 5.77 5.13 5.25+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 58% 36% 28% 37%
- --------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (4) $ 0.06 $ 0.06 -- -- --
========================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) On November 7, 1994, the former Class D shares were renamed Class C shares.
(3) For the period from February 4, 1993 (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.
24
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
Class Y Shares 1997(1) 1996(2)
================================================================================
Net Asset Value, Beginning of Period $ 14.52 $ 14.88
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.42 0.64
Net realized and unrealized gain (loss) 0.74 (0.29)
- --------------------------------------------------------------------------------
Total Income From Operations 1.16 0.35
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.42) (0.71)
Net realized gains (0.32) --
- --------------------------------------------------------------------------------
Total Distributions (0.74) (0.71)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 14.94 $ 14.52
- --------------------------------------------------------------------------------
Total Return++ 8.17% 2.28%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $15,976 $ 7,617
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.73% 0.78%
Net investment income 5.48 5.54
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 58%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $ 0.06 $ 0.06
================================================================================
(1) For the six months ended January 31, 1997 (unaudited).
(2) For the period from October 9, 1995 (inception date) to July 31, 1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Z Shares 1997(1) 1996 1995(2) 1994 1993(3)
===================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 14.52 $ 14.02 $ 13.28 $ 15.97 $ 14.36
- ---------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.43 0.88 0.89 0.89 0.69
Net realized and unrealized gain (loss) 0.74 0.47 0.82 (2.21) 1.72
- ---------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.17 1.35 1.71 (1.32) 2.41
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.42) (0.85) (0.87) (0.84) (0.65)
Overdistribution of net investment income -- -- -- (0.03) (0.01)
Net realized gains (0.32) -- -- (0.50) (0.14)
Overdistribution of net realized gains -- -- (0.08) --
Capital -- -- (0.02) -- --
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.74) (0.85) (0.97) (1.37) (0.80)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 14.95 $ 14.52 $ 14.02 $ 13.28 $ 15.97
- ---------------------------------------------------------------------------------------------------
Total Return 8.10%++ 9.62% 13.55% (8.78)% 17.21%++
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $13,955 $14,515 $14,631 $11,372 $22,251
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.76%+ 0.78% 0.81% 0.69% 0.68%+
Net investment income 5.59+ 5.90 6.58 5.92 6.06+
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 58% 36% 28% 37%
- ---------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (4) $ 0.06 $ 0.06 -- -- --
===================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) OnNovember 7, 1994, the former Class C shares were renamed Class Z shares.
(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>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney
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 and
Investment Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
Jack S. Levande
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
------------
A Member of TravelersGroup [LOGO]
Investment Adviser
Smith Barney Mutual Funds
Management 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 Utilities Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
Smith Barney
Utilities Fund
388 Greenwich Street
New York, New York 10013
FD2175 3/97
- ---------------------------------
SEMI-ANNUAL REPORT
====================
Smith Barney
Exchange
Reserve
Fund
- ----------------------
January 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- ----------------------------------
Smith Barney Exchange Reserve Fund
- ----------------------------------
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Exchange Reserve Fund for the period ended January 31, 1997. In this report, we
summarize the period's prevailing economic and market conditions and outline our
portfolio strategy. A more detailed summary of performance can be found in the
appropriate sections that follow. As of January 31, 1997, the Fund's average
annual yield was 4.26%, and the average annual effective yield, which assumes
the reinvestment of dividends, was 4.35%.
You should be aware that your investment in the Smith Barney Exchange Reserve
Fund is neither insured nor guaranteed by the U.S. Government. Moreover, no
assurance can be given that the Fund will be able to maintain a stable net asset
value of $1.00 per share.
Market and Economic Update and Outlook
The year 1996 posed a dilemma for both the Federal Reserve Board ("Fed") and
investors because of widespread expectations that the Fed would raise short-term
interest rates. Instead, the Fed chose to remain on the sidelines and left
interest rates unchanged. The last Fed action came in January 1996 when it
lowered the federal funds rate from 5.50% to 5.25%. The economy continued to
perform at an above potential rate, albeit in a sawtooth pattern, and the Gross
Domestic Product averaged 3.3% for the year. Throughout the year, because the
economy was growing above the Fed's targets, the markets anticipated several Fed
tightenings. Although these changes in policy never materialized, they were
priced in, at times, in the short-term yield curve. For example, even though the
federal funds rate was unchanged at 5.25%, one-year European Certificates of
Deposit were as high as 6.15% in August 1996.
While the Fed under the leadership of Chairman Alan Greenspan will continue to
closely monitor the economy for any signs of inflationary pressures, we believe
there are several current factors that should help to keep inflation in check
and make it unnecessary for the Fed to change its monetary policy over the
coming months.
First, intense global competition between the U.S. and both developed and
emerging economies recently has kept many industries from shifting any cost
increases to consumers in the form of higher priced products, which has in turn
acted to prevent wages from rising as well as other costs. Second, the
strengthening of the U.S. dollar should also keep inflation subdued by lowering
the cost of many imported goods and services. Finally, labor productivity has
1
<PAGE>
risen primarily because of technology which has enabled many companies to
produce more without having to hire additional workers.
Overall, we believe that the U.S. economy appears to be operating at a
sustainable level. Inventories are under control and real estate prices are
fairly stable. Although job creation remains strong, many U.S. consumers have
started to save more and consumer spending has slowed down from early 1996.
Given these conditions, we do not believe a recession is likely nor will
inflation emerge as a problem over the short term.
Investment Strategy
During the reporting period, the average maturity of the Smith Barney Exchange
Reserve Fund was extended from 33 days to 50 days. Over the near term, we expect
to maintain an average maturity for the Fund between 50 and 60 days. Over the
last six months, we focused on quality "A1/P1"-rated issues and increased our
holdings of domestic banks and industrials as spreads narrowed between foreign
and domestic securities.
In closing, thank you for investing in the Smith Barney Exchange Reserve Fund.
We look forward to continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Phyllis M. Zahorodny
Heath B. McLendon Phyllis M. Zahorodny
Chairman and Vice President and
Chief Executive Officer Investment Officer
February 11, 1997
2
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
=========================================================================================
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY -- 3.4%
$ 5,000,000 Federal Home Loan Mortgage Corp.
matures 4/4/97 (Cost -- $4,954,792) 5.32% $ 4,954,792
=========================================================================================
DOMESTIC BANK OBLIGATIONS -- 6.8%
5,000,000 FCC National matures 4/25/97 5.42 5,000,723
5,000,000 First Union National Bank matures 2/18/97 5.36 4,987,510
- -----------------------------------------------------------------------------------------
TOTAL DOMESTIC BANK OBLIGATIONS
(Cost -- $9,988,233) 9,988,233
=========================================================================================
DOMESTIC CERTIFICATE OF DEPOSIT -- 3.4%
5,000,000 Chase Manhattan Bank matures 4/22/97
(Cost -- $5,000,000) 5.41 5,000,000
=========================================================================================
COMMERCIAL PAPER -- 44.6%
3,000,000 Abbey National PLC matures 3/3/97 5.38 2,986,724
4,000,000 Association Corp. of North America
matures 4/30/97 5.41 3,947,787
5,000,000 BBL N.A. Inc. matures 4/16/97 5.41 4,945,117
5,000,000 BCI Funding Corp. matures 4/16/97 5.44 4,944,808
5,000,000 Bear Stearns matures 4/28/97 5.43 4,936,097
7,000,000 Citicorp matures 2/3/97 5.59 6,997,826
5,000,000 Compagnie de Saint-Gobain matures 3/31/97 5.40 4,957,306
5,000,000 Cregum North America matures 4/7/97 5.42 4,951,701
5,000,000 Ford Motor Credit Corp. matures 2/3/97 5.36 4,998,531
5,800,000 General Electric Capital Corp.
mature 2/18/97 to 4/9/97 5.36 to 5.49 5,764,626
3,000,000 J.P. Morgan & Co. matures 3/24/97 5.40 2,977,390
2,000,000 Norwest Corp. matures 4/9/97 5.41 1,980,086
5,000,000 Pfizer Inc. matures 3/5/97 5.36 4,976,489
6,000,000 Philip Morris Co., Inc. matures 2/3/97 5.50 5,998,167
- -----------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost -- $65,362,655) 65,362,655
=========================================================================================
TIME DEPOSITS -- 17.7%
7,000,000 Bank Austriengellschaft matures 2/3/97 5.56 7,000,000
6,000,000 Canadian Imperial Bank of Commerce
matures 2/3/97 5.56 6,000,000
6,000,000 First Chicago matures 2/3/97 5.56 6,000,000
7,000,000 Republic National Bank matures 2/3/97 5.56 7,000,000
- -----------------------------------------------------------------------------------------
TOTAL TIME DEPOSITS
(Cost -- $26,000,000) 26,000,000
=========================================================================================
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
=========================================================================================
<S> <C> <C> <C>
FOREIGN CERTIFICATES OF DEPOSIT -- 19.8%
$2,000,000 Abbey National PLC matures 4/15/97 5.50% $ 2,000,036
5,000,000 Bank of Nova Scotia mature 3/10/97 to 4/28/97 5.41 to 5.79 5,000,020
2,000,000 Bayerische Vereinsbank AG matures 6/3/97 5.41 2,000,067
2,000,000 Credit Agricole matures 2/6/97 5.52 1,999,992
5,000,000 Credit Suisse matures 2/13/97 5.55 4,999,890
3,000,000 Deutsche Bank mature 2/3/97 to 1/30/98 5.70 to 5.85 2,999,421
5,000,000 Rabo Bank matures 4/28/97 5.39 5,000,920
2,000,000 Royal Bank of Canada matures 1/14/98 5.84 1,999,255
3,000,000 Societe Generale matures 6/10/97 5.43 3,004,877
- -----------------------------------------------------------------------------------------
TOTAL FOREIGN CERTIFICATES OF DEPOSIT
(Cost -- $29,004,478) 29,004,478
=========================================================================================
SHORT-TERM NOTE -- 1.3%
2,000,000 Merrill Lynch & Co. matures 1/26/98
(Cost -- $1,999,570) 5.81 1,999,570
=========================================================================================
REPURCHASE AGREEMENT -- 3.0%
4,377,000 Morgan Stanley Group, Inc., 5.54% due 2/3/97;
Proceeds at maturity -- $4,379,021; (Fully
collateralized by U.S. Treasury Notes, 6.50%
due 4/30/99; Market value -- $4,397,511)
(Cost -- $4,377,000) 4,377,000
=========================================================================================
TOTAL INVESTMENTS -- 100% (Cost -- $146,686,728*) $146,686,728
=========================================================================================
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at amortized cost $ 146,686,728
Cash 1,277
Interest receivable 602,975
Prepaid registration fees 206,286
Other assets 83,977
- -------------------------------------------------------------------------------
Total Assets 147,581,243
- -------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 320,514
Investment advisory fees payable 68,800
Distribution fees payable 35,605
- -------------------------------------------------------------------------------
Total Liabilities 424,919
- -------------------------------------------------------------------------------
Total Net Assets $ 147,156,324
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 147,197
Capital paid in excess of par value 147,049,914
Accumulated net realized loss on investments (40,787)
- -------------------------------------------------------------------------------
Total Net Assets $ 147,156,324
================================================================================
Shares Outstanding:
Class B 140,605,555
- -------------------------------------------------------------------------------
Class C 6,591,557
- -------------------------------------------------------------------------------
Net Asset Value, Per Class $ 1.00
================================================================================
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1997
INVESTMENT INCOME:
Interest $4,220,176
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 385,974
Investment advisory fees (Note 3) 231,584
Administration fees (Note 3) 154,390
Registration fees 50,968
Shareholder and system servicing fees 34,960
Audit and legal 15,272
Custody 7,544
Shareholders communications 7,544
Trustees' fees 4,968
Other 2,944
- --------------------------------------------------------------------------------
Total Expenses 896,148
- --------------------------------------------------------------------------------
Net Investment Income 3,324,028
- --------------------------------------------------------------------------------
Net Realized Gain From Security Transactions 14,669
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $3,338,697
================================================================================
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1997 (unaudited)
and the Year Ended July 31, 1996
1997 1996
================================================================================
OPERATIONS:
Net investment income $ 3,324,028 $ 6,646,611
Net realized gain 14,669 15,797
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 3,338,697 6,662,408
- --------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 2) (3,324,028) (6,646,611)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 218,335,517 417,673,055
Net asset value of shares issued for
reinvestment of dividends 2,839,845 5,866,729
Cost of shares reacquired (233,899,044) (426,972,534)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (12,723,682) (3,432,750)
- --------------------------------------------------------------------------------
Decrease in Net Assets (12,709,013) (3,416,953)
NET ASSETS:
Beginning of period 159,865,337 163,282,290
- --------------------------------------------------------------------------------
End of period $ 147,156,324 $ 159,865,337
================================================================================
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Exchange Reserve Fund ("Fund") is a separate investment
fund of the Smith Barney Income Funds ("Trust"). The 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
Convertible Fund, Smith Barney Diversified Strategic Income Fund, Smith Barney
High Income Fund, Smith Barney Premium Total Return Fund, Smith Barney
Tax-Exempt Income Fund and Smith Barney Utilities Fund. The financial statements
and financial highlights for the other Funds are presented in separate
semi-annual reports. The Smith Barney Premium Total Return Fund changed its
fiscal year end to December 31 and, therefore, the semi-annual report will be
prepared as of June 30, 1997.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) the Fund uses the
amortized cost method for valuing investments; accordingly, the cost of
securities plus accreted discount, or minus amortized premium, approximates
market value; (c) interest income is recorded on the accrual basis; (d) direct
expenses are charged to each class; management fees and general Fund expenses
are allocated on the basis of the relative net assets; (e) dividends and
distributions to shareholders are recorded on the ex-dividend date; (f) gains or
losses on the sale of securities are calculated using the specific
identification method; (g) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
(h) 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; and (i) certain prior year numbers have been restated to
reflect current year's presentation. Net investment income, net realized gains,
and net assets were not affected by this change.
2. DIVIDENDS
The Fund declares and records a dividend of substantially all of its net
investment income on each business day. Such dividends are paid or reinvested
monthly on the payable date. Net realized gains, if any, are distributed
annually.
8
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
3. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The Fund
pays SBMFM an advisory fee calculated at an annual rate of 0.30% of the average
daily net assets. 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. These fees are calculated daily and paid monthly.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter declines 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 from
the date such investment was made. For the six months ended January 31, 1997,
CDSCs paid to Smith Barney Inc. ("SB") were approximately:
Class B Class C
================================================================================
CDSCs $338,000 $4,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a distribution fee with
respect to Class B and C shares calculated at the annual rate of 0.50% of the
average daily net assets for that class. For the six months ended January 31,
1997, total Distribution Plan fees incurred were:
Class B Class C
================================================================================
Distribution Plan Fees $366,226 $19,748
================================================================================
All officers and one Trustee of the Fund are employees of SB.
4. CAPITAL LOSS CARRYFORWARD
At July 31, 1996, the Fund had, for Federal tax purposes, a capital loss
carryforward of approximately $55,000, available to offset future capital gains
through 1998. To the extent that these carryforward losses are used to offset
capital gains, it is probable that any gains so offset will not be distributed.
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.
9
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
6. SHARES OF BENEFICIAL INTEREST
The Fund may issue an unlimited number of shares of beneficial interest
with a par value of $.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,
including those specifically related to the distribution of its shares. Because
the Fund has sold shares, issued shares as reinvestments of dividends and
redeemed shares only at a constant net asset value of $1.00 per share, the
number of shares represented by such sales, reinvestments and redemptions is the
same as the amounts shown below for such transactions.
Transactions in shares of beneficial interest of the Fund were as follows:
Six Months Ended Year Ended
January 31, 1997 July 31, 1996
================================================================================
Class B
Shares sold 175,137,279 341,531,323
Shares issued on reinvestment 2,685,476 5,711,961
Shares redeemed (187,693,939) (357,269,797)
- --------------------------------------------------------------------------------
Net Decrease (9,871,184) (10,026,513)
================================================================================
Class C
Shares sold 43,198,238 76,141,732
Shares issued on reinvestment 154,369 154,768
Shares redeemed (46,205,105) (69,702,737)
- --------------------------------------------------------------------------------
Net Increase (Decrease) (2,852,498) 6,593,763
================================================================================
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1997(1) 1996 1995 1994 1993 1992
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.022 0.044 0.044 0.022 0.021 0.040
Dividends from net
investment income (0.022) (0.044) (0.044) (0.022) (0.021) (0.040)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 2.19%++ 4.53% 4.49% 2.18% 2.15% 4.06%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $140,563 $150,421 $160,432 $252,246 $166,262 $225,476
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.16%+ 1.17% 1.24% 1.26% 1.25% 1.22%
Net investment income 4.33+ 4.45 4.35 2.24 2.16 4.13
====================================================================================================================================
</TABLE>
Class C Shares 1997(1) 1996 1995(2)
================================================================================
Net Asset Value,
Beginning of Period $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
Net investment income 0.022 0.044 0.035
Dividends from net
investment income (0.022) (0.044) (0.035)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------
Total Return 2.18%++ 4.51% 3.52%++
- --------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $6,593 $9,444 $2,850
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.16%+ 1.17% 1.21%+
Net investment income 4.33+ 4.39 4.76+
================================================================================
(1) For the six months ended January 31, 1997 (unaudited).
(2) For the period from November 7, 1994 (inception date) to July 31, 1995.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
11
<PAGE>
Smith Barney SMITH BARNEY
Exchange Reserve Fund ------------
A Member of TravelersGroup[Logo]
Trustees
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
Officers
Heath B. McLendon
Chairman and Investment Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Phyllis M. Zahorodny
Vice President and Investment Officer
Irving P. David
Controller
Christina T. Sydor
Secretary
Investment Adviser
and Administrator
Smith Barney Mutual Funds Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investor Services
Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Exchange Reserve Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies,
fees and expenses as well as other pertinent information.
Smith Barney
Exchange Reserve Fund
388 Greenwich Street
New York, New York 10013
FD2388 3/97
================================================================================
- --------------------
SEMI-ANNUAL REPORT
====================
Smith Barney
Tax-Exempt
Income Fund
- --------------------
January 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- -----------------------------------
Smith Barney Tax-Exempt Income Fund
- -----------------------------------
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Tax-Exempt Income Fund for the period ended January 31, 1997. In this report, we
summarize the period's prevailing economic and market conditions and outline our
portfolio strategy. A detailed summary of performance can be found in the
appropriate sections that follow in the semi-annual report.
Fund Performance Update
For the six months ended January 31, 1997, the Smith Barney Tax-Exempt Income
Fund generated a total return of 4.44% on Class A shares outperforming the
Lipper Analytical Services, Inc. peer group average of 3.83% for the same
period. This performance helped the Fund earn a ranking of 35th in a field of
229 of its peers. (Lipper Analytical Services, Inc. is a major fund tracking
organization.)
Municipal Bond Market Update
The fixed income markets began to rally in the fourth quarter of 1996, with
strong performance gains by investment grade and U.S. Treasury bonds. An
apparent slowdown in U.S. economic growth at the onset of the fourth quarter of
1996, combined with favorable inflation data, helped to bolster the fixed income
markets. The bond market rally was also fueled by the Federal Reserve Board's
decision to remain on the sidelines and not raise interest rates. However,
during early December, several factors prevented interest rates from declining
further, with a modest upturn in rates occurring in January. For example,
Federal Reserve Chairman Alan Greenspan's comments about "irrational exuberance"
in the financial markets caused a widespread but temporary sell-off in both the
equity and bond markets. In addition, conflicting reports of weakness in the
retail sector and stronger-than-expected growth in the manufacturing and
construction sectors in the past several weeks have caused interest rates to
gyrate up and down with increased price volatility in the bond markets.
Within the municipal bond market, the major factor that had shaped the market
throughout 1996 -- the fear of tax reform -- subsided once the November
Presidential election was concluded. Looking ahead into 1997, we believe that
any future tax reform will be modest, and will have little or no effect on the
relative investment merits of municipal bonds. Another factor that continues to
cause investors to focus their assets elsewhere is the continuing powerful surge
in the U.S. stock market. With the stock market posting its second straight year
of impressive returns, investors have, in our view, temporarily turned away from
fixed income securities, particularly municipal bonds, in the hopes of
1
<PAGE>
participating in the high-return potential of the U.S. stock market as opposed
to the seemingly modest yields currently offered by municipal bonds. However, we
believe that investors will soon realize the need to rebalance their portfolios
and should begin to refocus on municipal bonds.
Fund's Investment Strategy
The Smith Barney Tax-Exempt Income Fund seeks to maximize current income exempt
from federal income taxes by investing primarily in municipal bonds and notes.
We continue to emphasize a broadly diversified, high-quality orientation for the
Fund's portfolio. As of January 31, 1997, approximately 86% of the Fund's
portfolio was invested in investment grade (BBB/Baa or higher) securities, as
measured by Standard and Poor's Corporation or Moody's Investor Service, Inc.
(Standard and Poor's and Moody's are major credit rating and reporting
agencies.) In addition, we continue to maintain an average maturity of 20 years
or more, as well as modestly extending the call protection on our current
holdings. In our view, the housing sector represents an attractive investment
opportunity and we have increased our exposure to that area of the market. We
believe that given the current interest rate environment, there is reduced risk
of prepayments. Furthermore, despite recurring fears of interest rate hikes in
1996, we did not increase our cash levels. Instead, we view these dips in the
market as buying opportunities.
Municipal Bond Market Outlook
The municipal bond market made a significant recovery in late 1996 following
voter's rejection of flat tax proponents in the November election. In our
opinion, while this issue is far from dead, it is not likely to enter into
public debate again in the near future. We are optimistic on other political
developments in 1997 which we consider to be positive for the fixed income
market. For example, the current efforts in Washington, D.C. to lower the
capital gains tax rate. Advocates of a reduction in the capital gains tax rate
argue that lower capital gains taxes encourage new investments and that would
benefit not only financial markets, but the U.S. economy as a whole. In
addition, there is a great deal of interest in the Boskin Report released in
late 1996 which reported that inflation, as measured by the Consumer Price Index
(CPI), has been overstated. As a result, efforts are underway to adjust the CPI
to more accurately reflect the rate of inflation. We believe that the CPI
adjustment could take place this year, though not likely before summer.
Looking ahead, we believe that the U.S. economy will continue along its present
path of moderate growth with stable interest rates and relatively low inflation.
A possible sell off of U.S Treasury bonds by Japanese investors could exert an
upward pressure on interest rates in March, the end of the
2
<PAGE>
Japanese fiscal year. However, we consider that to be a remote possibility since
U.S. Treasury bonds continue to outperform domestic Japanese fixed income
securities.
In closing, we thank you for your investment in Smith Barney Tax-Exempt Income
Fund. We look forward to continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman and Vice President and
Investment Officer Investment Officer
February 24, 1997
3
<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>
1/31/97 $17.31 $17.58 $0.49 $0.00 $0.00 4.44%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 17.25 17.31 1.00 0.00 0.00 6.28
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 17.26 17.25 1.00 0.02 0.04 6.42
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 18.24 17.26 1.06 0.13 0.00 1.14
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* - 7/31/93 17.45 18.24 0.83 0.16 0.00 10.24+
====================================================================================================================================
Total $4.38 $0.31 $0.04
====================================================================================================================================
</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>
1/31/97 $17.32 $17.59 $0.45 $0.00 $0.00 4.76%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 17.26 17.32 0.92 0.00 0.00 5.74
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 17.26 17.26 0.91 0.02 0.04 5.91
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 18.24 17.26 0.96 0.13 0.00 0.60
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/93 18.00 18.24 1.02 0.17 0.00 8.28
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/92 16.97 18.00 1.04 0.14 0.00 13.50
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/91 16.98 16.97 1.10 0.11 0.00 7.40
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/90 17.31 16.98 1.12 0.03 0.00 4.95
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/89 16.44 17.31 1.13 0.01 0.00 12.68
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/88 16.48 16.44 1.13 0.06 0.00 7.32
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/87 16.30 16.48 1.10 0.00 0.00 7.90
====================================================================================================================================
Total $10.88 $0.67 $0.04
====================================================================================================================================
</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>
1/31/97 $17.31 $17.56 $0.44 $0.00 $0.00 4.04%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 17.25 17.31 0.91 0.00 0.00 5.69
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* - 7/31/95 15.83 17.25 0.62 0.02 0.04 13.45+
====================================================================================================================================
Total $1.97 $0.02 $0.04
====================================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
4
<PAGE>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-----------------------------------------------
Class A Class B Class C
================================================================================
Six Months Ended 1/31/97+ 4.44% 4.72% 4.04%
- --------------------------------------------------------------------------------
Year Ended 1/31/97 4.13 3.60 3.43
- --------------------------------------------------------------------------------
Five Years Ended 1/31/97 N/A 6.42 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 1/31/97 N/A 6.71 N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/97 6.71 8.22 10.53
================================================================================
With Sales Charge(2)
-----------------------------------------------
Class A Class B Class C
================================================================================
Six Months Ended 1/31/97+ 0.27% (0.26)% 3.04%
- --------------------------------------------------------------------------------
Year Ended 1/31/97 (0.01) (0.90) 2.43
- --------------------------------------------------------------------------------
Five Years Ended 1/31/97 N/A 6.26 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 1/31/97 N/A 6.71 N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/97 5.68 8.22 10.53
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/97) 31.69%
- --------------------------------------------------------------------------------
Class B (1/31/87 through 1/31/97) 91.42
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/97) 24.74
================================================================================
(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 4.00% and Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within one
year from initial purchase. This CDSC declines by 0.50% the first year after
purchase and thereafter by 1.00% per year until no CDSC is incurred. Class C
shares reflect the deduction of a 1.00% CDSC, which applies if shares are
redeemed within the first year of purchase.
* Inception dates for Class A, B and C shares are November 6, 1992, September
16, 1985 and November 17, 1994, respectively.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of
Smith Barney Tax-Exempt Income Fund vs.
the Lehman Municipal Bond Index+
- --------------------------------------------------------------------------------
January 1987 -- January 1997
[GRAPH]
+ Hypothetical illustration of $10,000 invested in Class B shares on January
31, 1987, assuming reinvestment of dividends and capital gains, if any, at
net asset value through January 31, 1997. The Lehman Municipal Bond Index is
a broad-based index which includes about 8,000 tax-free bonds and reflects
approximately $300 billion of market capitalization. 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.
6
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
[THE FOLLOWING REPRESENTS A PIE CHART IN THE ORIGINAL DOCUMENT]
Portfolio Breakdown
Water/Sewer
2.5%
Transportation
10.0%
Hospital
13.8%
Education
3.8%
Utility
15.3%
Housing
11.7%
Short-Term
0.7%
General
Obligation
8.4%
Industrial Development
10.7%
Solid Waste
0.5%
Miscellaneous
9.9%
Pollution Control
12.7%
Top Five States Represented
Percentage of
State Total Investments
================================================================================
Pennsylvania 9.3%
New York 8.7
Texas 7.9
California 7.5
New Jersey 5.2
Summary of Municipal Bonds and Notes and
Short-Term Tax-Exempt Investments by Combined Ratings
Standard & Percentage of
Moody's or Poor's Total Investments
================================================================================
Aaa AAA 38.4%
Aa AA 10.5
A A 11.5
Baa BBB 26.0
Ba BB 4.7
B B 1.3
NR NR 7.6
-----
100.0%
=====
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
MUNICIPAL BONDS AND NOTES -- 99.3%
================================================================================
Alabama -- 1.4%
$4,000,000 Baa3* Alabama IDA-Boise Cascade
Project, 6.450% due 12/1/23(a) $ 3,990,000
2,000,000 AAA Birmingham Alabama Airport Authority
Revenue, MBIA-Insured, 5.625% due
7/1/26 1,970,000
3,000,000 AAA Huntsville, AL Health Care Facilities
Authority, Series A, MBIA-Insured,
6.375% due 6/1/12 3,180,000
2,500,000 AAA Morgan County-Decatur, AL Healthcare
Authority Hospital Revenue, Decatur
General Hospital, CONNIE LEE-Insured,
6.250% due 3/1/13 2,631,250
- --------------------------------------------------------------------------------
11,771,250
- --------------------------------------------------------------------------------
Alaska -- 0.6%
Alaska State Housing Finance Corp.:
840,000 AAA 1st Series, Veteran's Mortgage
Purchase, FHA-Insured, 5.875% due
12/1/35 826,350
2,250,000 A+ Series A, 6.600% due 12/1/23 2,494,687
2,000,000 AA Valdez, AK Marine Terminal Revenue,
(Pipelines Inc. Project), Series A,
5.800% due 8/1/25 1,940,000
- --------------------------------------------------------------------------------
5,261,037
- --------------------------------------------------------------------------------
Arizona -- 2.1%
1,000,000 Aa* Arizona Educational Loan Marketing
Corp., Sr. Series, 6.375% due
9/1/05(a) 1,043,750
1,170,000 AAA Arizona State COP, FSA-Insured, 6.625%
due 9/1/08 1,270,912
70,000 AAA Arizona State Municipal Financing COP,
Series 10, BIG-Insured, (Pre-Refunded
-- Escrowed with U.S. Government
Securities to 8/1/97 Call @ 101),
7.900% due 8/1/17(b) 72,254
1,000,000 BBB Gila County, AZ IDA, PCR, Series 1987,
(ASARCO Inc. Project), 8.900% due
7/1/06 1,045,190
5,000,000 BB Maricopa County, AZ PCR, Public Service
Co., Palo Verde, Series A, 6.375% due
8/15/23 5,056,250
1,300,000 AAA Maricopa County, AZ School District,
Fountain Hills, No. 98, FGIC-Insured,
6.625% due 7/1/10 1,392,625
7,500,000 BBB Navajo County, AZ PCR, Arizona Public
Service Co., Series A, 5.875% due
8/15/28 7,453,125
326,000 NR Peoria, AZ IDA, Sierra Winds Life Care,
Inc., 6.500% due 11/1/17 293,400
- --------------------------------------------------------------------------------
17,627,506
- --------------------------------------------------------------------------------
Arkansas -- 0.1%
995,000 AAA Arkansas State Development Authority,
Single-Family Mortgage Revenue,
Series A, GNMA/FNMA-Collateralized,
6.200% due 7/1/15 1,022,362
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
California -- 7.5%
$ 4,000,000 A- Burbank, CA Redevelopment Agency,
Series A, (Golden State Redevelopment
Project), 6.250% due 12/1/24 $ 4,065,000
5,000,000 AA California Health Facilities Finance
Authority Revenue, Kaiser Permanente,
5.550% due 8/15/25 4,800,000
California Housing Finance Agency
Revenue:
1,500,000 AAA Home Mortgage, Series E,
MBIA-Insured, 6.150% due 8/1/25 1,501,875
1,500,000 A+ Multi-Unit Rental Housing, Series
B-II, 6.700% due 8/1/15(a) 1,569,375
2,900,000 AA California PCR, (Mobil Oil Corp.
Project), 5.500% due 12/1/29(a) 2,794,875
2,400,000 AAA California State University Revenue &
Colleges, Housing System,
FGIC-Insured, 5.900% due 11/1/21 2,439,000
California Statewide Community
Development Authority Revenue, COP:
2,235,000 AAA Huntington Memorial Hospital,
CONNIE LEE-Insured, 5.800% due
7/1/26 2,221,021
2,500,000 AAA Sutter Health, AMBAC-Insured,
6.125% due 8/15/22 2,581,250
2,600,000 BBB- Central Valley Finance Authority, CA
(Cogeneration/Carson Ice Project),
6.200% due 7/1/20 2,626,000
3,000,000 Baa1* Duarte, CA Hope Medical Center, 6.250%
due 4/1/23 3,015,000
Long Beach, CA (Aquarium of the Pacific
Project), Series A:
5,500,000 BBB 6.125% due 7/1/15 5,390,000
4,000,000 BBB 6.125% due 7/1/23 3,870,000
4,000,000 A- Los Angeles, CA Regional Airports
Improvement, Corporate Lease Revenue,
LA International Airport, 6.800% due
1/1/27(a) 4,090,000
4,500,000 AA Metropolitan Water District, Waterworks
Revenue, Series C, 5.250% due 7/1/16 4,291,875
4,000,000 AAA Port Oakland California, Port Revenue,
MBIA-Insured, Series I, 5.600% due
11/1/19 3,940,000
12,900,000 NR San Joaquin Hills, CA Transportation
Authority, (Transcorridor Agency
Project), Toll Road, Sr. Lien, 6.750%
due 1/1/32(c) 13,657,875
- --------------------------------------------------------------------------------
62,853,146
- --------------------------------------------------------------------------------
Colorado -- 2.0%
1,500,000 B* Arvada, CO Urban Renewal Authority,
Arvada City Center, Series R, 8.750%
due 3/1/06 1,473,750
4,750,000 BBB+ Colorado Springs, CO Airport Revenue,
Series A, 7.000% due 1/1/22(a) 4,981,562
See Notes to Financial Statements.
9
<PAGE>
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Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Colorado -- 2.0% (continued)
Denver, CO City and County Airport
Revenue:
$1,000,000 BBB 8.000% due 11/15/17(a) $ 1,046,060
250,000 BBB Series A, 7.500% due 11/15/23(a) 276,875
2,170,000 BBB Series C, 6.750% due 11/15/22(d) 2,283,925
2,250,000 AAA Jefferson County, CO COP, MBIA-Insured,
6.650% due 12/1/08 2,469,375
235,000 AAA Jefferson County, CO Single-Family
Mortgage, Series A, MBIA-Insured,
8.875% due 10/1/13 249,393
1,500,000 A* Larimer County, CO COP, School District
No. R-1, Poudre-Ft. Collins, Colorado
School Board Lease, 6.700% due 12/1/13 1,606,875
500,000 A3* Meridian, CO Metropolitian District,
7.000% due 12/1/98 516,250
2,065,000 AA- Pueblo County, CO Single-Family Housing
Authority, Series A,
FNMA/GNMA-Collateralized, 6.850% due
12/1/25 2,142,437
- --------------------------------------------------------------------------------
17,046,502
- --------------------------------------------------------------------------------
Connecticut -- 2.0%
1,930,000 A Connecticut Development Authority,
Resource Recovery Authority,
(Bridgeport Project), Series B,
8.500% due 1/1/00 1,992,899
2,000,000 AAA Connecticut State Airport Revenue,
Bradley International Airport,
FGIC-Insured, 7.650% due 10/1/12 2,307,500
Connecticut State Health and
Educational Facilities:
1,200,000 BBB- Quinnipiac College, Series D, 6.000%
due 7/1/23 1,150,500
University of Hartford, Series D:
1,655,000 Baa* 6.750% due 7/1/12 1,650,863
1,450,000 Baa* 6.800% due 7/1/22 1,457,250
Connecticut State HFA, Series A:
3,120,000 AA 6.750% due 11/15/23 3,276,000
5,150,000 AA 6.000% due 11/15/27(a) 5,098,500
- --------------------------------------------------------------------------------
16,933,512
- --------------------------------------------------------------------------------
Delaware -- 0.7%
1,000,000 AAA Delaware River & Bay Authority Revenue,
FGIC-Insured, 5.250% due 1/1/26 952,500
Delaware State EDA, PCR, AMBAC-Insured:
2,500,000 AAA Series B, 6.750% due 5/1/19 2,700,000
2,000,000 AAA Water & Sewer Revenue, 6.200% due
6/1/25(d) 2,062,500
- --------------------------------------------------------------------------------
5,715,000
- --------------------------------------------------------------------------------
District of Columbia -- 0.9%
District of Columbia:
6,500,000 B COP, 7.300% due 1/1/13 6,743,750
1,000,000 A+ Georgetown University, 5.375% due
4/1/23 958,750
- --------------------------------------------------------------------------------
7,702,500
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Florida -- 4.1%
Alachua County, FL Health Facilities
Authority, Health Facilities Revenue,
(Santa Fe Healthcare Facilities
Project):
$ 340,000 AAA Pre-Refunded -- Escrowed with U.S.
Government Securities to 11/15/00
Call @ 102, 6.875% due 11/15/02(b) $ 369,325
500,000 AAA Pre-Refunded -- Escrowed with U.S.
Government Securities to 11/15/00
Call @ 102, 7.600% due 11/15/13(b) 564,375
2,500,000 AAA Broward County FL, Professional Sports
Facility, (Civic Arena Project),
Series A, MBIA-Insured, 5.625% due
9/1/28 2,453,125
Broward County, FL Resource Recovery,
Waste Energy:
550,000 A North, 7.950% due 12/1/08 603,625
2,460,000 A South, 7.950% due 12/1/08 2,699,850
825,000 AAA Dade County, FL Aviation Revenue,
Series B, MBIA-Insured, 6.600% due
10/1/22(a) 884,813
Florida State HFA, Series A:
500,000 AAA General Mortgage, FHA-Insured, 6.400%
due 6/1/24 516,250
2,140,000 AAA Single-Family Mortgage,
GNMA/FNMA-Collateralized, 6.650%
due 1/1/24(a) 2,228,275
1,300,000 NR Hialeah, FL Hospital Revenue Refunding,
Hialeah Hospital, Class B, (Escrowed
to maturity with U.S. Government
Directs), 8.000% due 2/1/14 1,451,125
2,800,000 BBB+ Hillsborough County, FL Utility
Revenue, Series A, 7.000% due 8/1/14 3,003,000
Jacksonville, FL Health Facilities
Revenue:
2,000,000 AAA Children's Hospital - Baptist Medical
Center, MBIA-Insured, 7.000% due
6/1/11 2,197,500
3,440,000 AAA University Medical Center, CONNIE
LEE-Insured, 6.600% due 2/1/21 3,642,100
1,000,000 AAA Orange County, FL Tourist Development
Tax Revenue, Series B, AMBAC-Insured,
6.500% due 10/1/19 1,076,250
300,000 BBB Pace Property Finance Authority, FL
Utility Revenue, 6.250% due 9/1/13 302,625
950,000 AAA Palm Beach County, FL Health Facilities
Authority Revenue, J.F.K. Medical
Center, Pre-Refunded -- Escrowed with
U.S. Government Securities to 12/1/98
Call @102, 8.875% due 12/1/18(b) 1,048,563
4,000,000 AA Polk County, FL IDA, Solid Waste
Disposal Facility Revenue, (Tampa
Electric Co. Project), 5.850% due
12/1/30(a) 3,975,000
3,000,000 BBB- Putnam County, FL Development
Authority, PCR, Georgia Pacific,
7.000% due 12/1/05 3,315,000
1,900,000 AAA Tampa, FL Utility Tax and Special
Revenue, AMBAC-Insured, 6.900% due
10/1/09 2,113,750
1,850,000 NR Tampa, FL Water System Revenue,
(Aquarium Inc. Project), 7.750%
due 5/1/27 2,143,688
- --------------------------------------------------------------------------------
34,588,239
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Georgia -- 2.8%
$4,000,000 A Atlanta, GA Airport Facilities Revenue,
7.250% due 1/1/17(a) $ 4,325,000
1,500,000 AAA Dalton, GA Development Authority
Revenue, Hamilton Health Care System,
MBIA-Insured, 5.375% due 8/15/16 1,455,000
4,750,000 AA- George L. Smith, Georgia World Congress
Center Authority Revenue, (Domed
Stadium Project), 7.875% due 7/1/20(a) 5,230,938
7,000,000 AAA Georgia Municipal Electric Authority
Power Revenue, Series EE,
AMBAC-Insured, 6.400% due 1/1/23 7,568,750
5,000,000 AAA Medical Center Hospital Authority, GA
Columbus Healthcare, Series C,
MBIA-Insured, 6.400% due 8/1/06 5,425,000
- --------------------------------------------------------------------------------
24,004,688
- --------------------------------------------------------------------------------
Guam -- 0.2%
1,500,000 A- Government of Guam, Limited Obligation
Revenue, Series A, 7.000% due 11/15/04 1,578,750
- --------------------------------------------------------------------------------
Hawaii -- 0.5%
Hawaii State Department of Budget and
Finance, Special Purpose Mortgage
Revenue:
2,000,000 AAA Hawaiian Electric Co. Project,
Series B, MBIA-Insured, 5.875% due
12/1/26(a) 1,975,000
2,000,000 A Kapiolani Health Care Systems,
6.400% due 7/1/13 2,060,000
- --------------------------------------------------------------------------------
4,035,000
- --------------------------------------------------------------------------------
Idaho -- 0.2%
1,465,000 AA Idaho Housing Agency, Single-Family
Mortgage, Series C, 7.875% due
1/1/21(a) 1,527,263
- --------------------------------------------------------------------------------
Illinois -- 3.5%
1,760,000 AA Chicago, IL HDC, Section 8, Series A,
FHA-Insured, 6.700% due 7/1/12 1,834,800
Chicago, IL O'Hare International
Airport, Special Facilities:
2,125,000 BB+ Delta Airlines, 6.450% due 5/1/18 2,156,875
1,800,000 AAA Lufthansa German Airlines Project,
7.125% due 5/1/18(a) 1,946,250
United Airlines:
1,940,000 BB 8.250% due 5/1/99 2,032,150
3,240,000 BB Series B, 8.950% due 5/1/18(a) 3,661,200
3,830,000 BB Series C, 8.200% due 5/1/18 4,136,400
4,000,000 AAA Cook County, IL Series A, MBIA-Insured,
6.600% due 11/15/22(d) 4,285,000
3,000,000 BB- East Chicago, IL Industrial PCR, Inland
Steel Co., (Project 10), 6.800% due
6/1/13 3,060,000
1,300,000 A- Illinois Education Facilities Authority
Revenue, Northern Illinois Medical
Center, 6.000% due 9/1/19 1,239,875
See Notes to Financial Statements.
12
<PAGE>
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Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Illinois -- 3.5% (continued)
$1,500,000 A+ Illinois Housing and Development
Authority, Multi-Family Housing,
Series A, 6.125% due 7/1/25 $ 1,501,875
2,750,000 AAA Illinois State Toll Highway Authority,
Series A, FGIC-Insured, 6.200% due
1/1/16 2,829,063
670,000 NR Sauget, IL Special Service Area No. 1,
10.250% due 1/1/00 692,257
- --------------------------------------------------------------------------------
29,375,745
- --------------------------------------------------------------------------------
Indiana -- 1.2%
Indianapolis, IN Airport Authority
Revenue, Special Facility:
5,245,000 BBB Federal Express Corporate Project,
7.100% due 1/15/17(a) 5,644,931
3,970,000 BB United Airlines Project, Series A,
6.500% due 11/15/31(a) 4,019,625
250,000 AA+ Indianapolis, IN Local Public
Improvement, Series A, 6.000% due
1/10/18 254,375
500,000 BBB Lawrenceburg, IN PCR, Indiana Power
Co., Series E, 5.900% due 11/1/19 486,250
- --------------------------------------------------------------------------------
10,405,181
- --------------------------------------------------------------------------------
Iowa -- 0.1%
1,000,000 AAA Dubuque County, IA Hospital Revenue,
Sisters of Mercy Hospital, Series L,
FSA-Insured, 7.000% due 8/15/21 1,088,750
- --------------------------------------------------------------------------------
Kentucky -- 2.7%
5,000,000 AAA Jefferson County, KY Hospital Revenue,
MBIA-Insured, 6.436% due
10/23/14(a)(c) 5,268,750
Kenton County, KY Airport Board
Revenue, Delta Airlines:
1,230,000 A 8.250% due 3/1/15(a) 1,297,404
4,250,000 A Project A, 7.500% due 2/1/20(a) 4,600,625
590,000 Aaa* Kentucky Multi-County Residential
Mortgage, 10.500% due 10/1/00 590,000
3,750,000 AAA Lexington-Lafayette Urban County
Project, (University of Kentucky
Alumni Assoc. Inc. Project),
MBIA-Insured, 6.750% due 11/1/24 4,082,813
4,000,000 A Pendleton County, KY Multi-County Lease
Revenue, Series A, 6.500% due 3/1/19 4,155,000
2,605,000 AA Trimble County, KY PCR, Series B,
6.550% due 11/1/20(a) 2,718,969
- --------------------------------------------------------------------------------
22,713,561
- --------------------------------------------------------------------------------
Louisiana -- 2.4%
2,500,000 Aa3* Calcasieu Parish Inc., LA IDB Exempt
Facility Revenue, (Conoco Inc.
Project), 5.750% due 12/1/26(a) 2,456,250
5,000,000 NR Hodge, LA Utility Revenue, 9.000% due
3/1/10(a) 5,400,000
2,600,000 Baa3* Lake Charles, LA Harbor and Terminal
District, (Trunkline Liquid Natural
Gas Co. Project), 7.750% due 8/18/22 2,954,250
2,500,000 Baa* Louisiana Public Facilities, LA
Association of Independent Colleges
and Universities, 7.000% due 12/1/17 2,565,625
See Notes to Financial Statements.
13
<PAGE>
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Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Louisiana -- 2.4% (continued)
$2,000,000 BB- Port of New Orleans, LA IDR,
(Continential Grain Co. Project),
7.500% due 7/1/13 $ 2,142,500
1,210,000 AAA State Tammany Parish, LA Hospital
Revenue, District 2, CONNIE
LEE-Insured, 6.250% due 10/1/14 1,267,475
3,000,000 BB+ West Feliciana Parish, LA PCR, Gulf
State Utilities, 7.700% due 12/1/14 3,296,250
- --------------------------------------------------------------------------------
20,082,350
- --------------------------------------------------------------------------------
Maryland -- 2.0%
3,000,000 AAA Baltimore County, MD Mortgage Revenue,
Series A, Dunfield Townhouses,
FHA-Insured, 6.900% due 8/1/28 3,142,500
2,000,000 AAA Howard County, MD Mortgage Revenue,
Howard Hills Townhouses, Series A,
MBIA-Insured, 6.400% due 7/1/24 2,055,000
Maryland State Community Development
Administration, Department of Housing
& Community Development:
1,280,000 Aa* Multi-Family Housing, Insured
Mortgage, Series A, FHA-Insured,
6.625% due 5/15/23 1,326,400
1,000,000 Aa* Single-Family Program, Fourth
Series, 6.450% due 4/1/14 1,032,500
Northeast Maryland Waste Disposal
Authority, Recovery Revenue,
MBIA-Insured, Southwest Resource
Recovery:
3,000,000 AAA 7.200% due 1/1/06 3,431,250
3,000,000 AAA 7.200% due 1/1/07 3,412,500
1,600,000 Baa* Prince Georges County, MD Greater
Southeast Healthcare System, 6.375%
due 1/1/23 1,576,000
500,000 AAA Prince Georges County, MD Housing
Authority, (Stevenson Apartments
Project), Series A,
GNMA-Collateralized, 6.350% due
7/20/20 510,000
- --------------------------------------------------------------------------------
16,486,150
- --------------------------------------------------------------------------------
Massachusetts -- 4.2%
4,800,000 A+ Massachusetts Bay Transportation
Authority, General Transportation
System, Series C, 6.100% due 3/1/23 4,968,000
Massachusetts State Health and
Educational Facilities Authority
Revenue:
735,000 AAA Community College Program, CONNIE
LEE-Insured, Series A, 6.600%
due 10/1/22 757,050
1,325,000 AAA Lowell General Hospital,
FSA-Insured Series B, 5.250%
due 6/1/16 1,253,781
3,500,000 AAA New England Medical Center
Hospitals, Series F,
FGIC-Insured, 6.625% due 7/1/25 3,762,500
1,500,000 B1* Saint Memorial Medical Center,
Series A, 6.000% due 10/1/23 1,269,375
See Notes to Financial Statements.
14
<PAGE>
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Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Massachusetts -- 4.2% (continued)
$2,650,000 AAA University of Massachusetts,
(Medical School Research Project),
CONNIE LEE-Insured, Series A,
6.000% due 7/1/23 $ 2,653,313
Massachusetts State HFA, Housing
Projects:
Residental Development,
FNMA-Collateralized:
2,000,000 AAA Series C, 6.875% due 11/15/11 2,147,500
3,000,000 AAA Series D, 6.800% due 11/15/12 3,202,500
2,445,000 A+ Series A, 6.375% due 4/1/21 2,521,406
2,500,000 AA Series 41, Single-Family Housing,
6.300% due 12/1/14(a) 2,556,250
Massachusetts State Industrial
Financial Agency, Resource Recovery
Revenue, (Semass Project):
2,700,000 NR Series A, 9.000% due 7/1/15 3,044,250
4,335,000 NR Series B, 9.250% due 7/1/15(a) 4,903,969
2,400,000 AAA Massachusetts State Port Authority
Revenue, (U.S. Air Project), Series
A, MBIA-Insured, 5.875% due 9/1/23(a) 2,403,000
- --------------------------------------------------------------------------------
35,442,894
- --------------------------------------------------------------------------------
Michigan -- 2.7%
Detroit, MI Water Supply System,
FGIC-Insured:
3,500,000 AAA 6.500% due 7/1/15 3,893,750
3,000,000 AAA 6.375% due 7/1/22(a)(c) 3,116,250
5,000,000 AAA Michigan State Hospital Finance
Authority Revenue, FSA-Insured,
6.300% due 2/15/22(a)(d) 5,156,250
2,000,000 A- Michigan State Strategic PCR, General
Motors Corp., 6.200% due 9/1/20(d) 2,065,000
4,500,000 AAA Monroe County, MI PCR, Detroit Edison
Monroe, Series 1, MBIA-Insured,
6.875% due 9/1/22(a) 4,820,625
3,750,000 AAA Western Townships, MI Utilities
Authority, Sewer Disposal Systems,
FSA-Insured, 6.750% due 1/1/15 3,970,313
- --------------------------------------------------------------------------------
23,022,188
- --------------------------------------------------------------------------------
Minnesota -- 0.6%
1,200,000 NR Minneapolis, MN Commercial Development
Revenue, (Holiday Inn Metrodome
Project), 10.500% due 6/1/03 1,208,580
4,000,000 BBB- St. Paul, MN Housing and Redevelopment
Authority, (Healtheast Project),
Series A, 6.625% due 11/1/17 4,080,000
- --------------------------------------------------------------------------------
5,288,580
- --------------------------------------------------------------------------------
Mississippi -- 1.9%
9,000,000 BBB- Claireborne County PCR, (System Energy
Resource Inc. Project), 6.200% due
2/1/26 8,831,250
2,250,000 AAA Gulfport, MS Hospital Facilities
Revenue, Memorial Hospital Gulfport,
Series A, MBIA-Insured, 6.200% due
7/1/18 2,356,875
2,000,000 Aaa* Mississippi Home Corp., Single-Family
Mortgage Revenue,
GNMA-Collateralized, 6.550% due
4/1/21(a) 2,065,000
See Notes to Financial Statements.
15
<PAGE>
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Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Mississippi -- 1.9% (continued)
$2,400,000 AAA Mississippi, Hospital Equipment and
Facilities Authority Revenue, North
Mississippi Health Service,
AMBAC-Insured, Series 1,
5.750% due 5/15/16 $ 2,412,000
- --------------------------------------------------------------------------------
15,665,125
- --------------------------------------------------------------------------------
Montana -- 0.6%
4,000,000 NR Montana State Board Resource Recovery,
(Yellowstone Energy LP Project),
7.000% due 12/31/19(a) 5,355,625
- --------------------------------------------------------------------------------
Nevada -- 0.3%
2,000,000 AAA Humboldt County, NV PCR, (Sierra
Pacific Project), AMBAC-Insured,
6.550% due 10/1/13 2,147,500
- --------------------------------------------------------------------------------
New Hampshire -- 0.7%
3,340,000 BBB- New Hampshire Business Financing
Authority, PCR, United Illuminating
Company, Series A, 5.875% due 10/1/33 3,127,075
1,000,000 AA- New Hampshire IDA, Resource Recovery
Series, (Concord Project), 8.500% due
1/1/09 1,045,650
2,000,000 A New Hampshire, Turnpike System Revenue,
6.000% due 4/1/13 2,037,500
- --------------------------------------------------------------------------------
6,210,225
- --------------------------------------------------------------------------------
New Jersey --- 5.2%
775,000 Ba* Atlantic County, NJ Utilities
Authority, Solid Waste Revenue,
7.125% due 3/1/16 777,906
2,500,000 AAA Hoboken, Union City, Weehawken, NJ
Sewer Authority Revenue,
MBIA-Insured, 6.200% due 8/1/19 2,628,125
2,500,000 BBB- Hudson County, NJ Improvement
Authority, Solid Waste Revenue,
7.100% due 1/1/20 2,481,250
6,300,000 AAA Mercer County, NJ Improvement
Authority, (Solid Waste Site
Project), Series A, FGIC-Insured,
6.700% due 4/1/13(a) 6,433,875
New Jersey EDA:
495,000 NR First Mortgage Gross Revenue, Dayton
Manor Residential Health Care,
13.000% due 9/1/15 336,600
2,500,000 AAA Irvington General Hospital,
FHA-Insured, 6.375% due 8/1/15 2,650,000
2,950,000 A- Kennedy Memorial University Medical
Center, Series D, 7.875% due 7/1/09 3,127,000
1,000,000 NR Raritan Bay Medical Center, 7.250%
due 7/1/27 1,047,500
2,500,000 AAA RWJ Health Care Corporation,
FSA-Insured, 6.500% due 7/1/24 2,678,125
2,000,000 Baa* St. Elizabeth Hospital, 6.000% due
7/1/20 1,987,500
2,400,000 BBB- Zurbrugg Memorial Hospital, Series C,
8.500% due 7/1/12 2,476,464
See Notes to Financial Statements.
16
<PAGE>
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Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
New Jersey -- 5.2% (continued)
$1,330,000 NR New Jersey State Educational Facilities
Authority, Fairleigh Dickinson
University, Series C, 7.750% due
7/1/01 $ 1,433,075
3,700,000 AAA New Jersey State Housing & Mortgage
Finance Agency, Multi-Family Housing
Revenue, Presidental Plaza
FHA-Insured, 7.000% due 5/1/30 3,875,750
2,150,000 AAA New Jersey State Transportation Corp.
COP, FSA-Insured, 6.500% due 10/1/16 2,340,813
2,500,000 AAA Perth Amboy, NJ Board of Education COP,
FSA-Insured, 6.125% due 12/15/17 2,581,250
Union County, NJ Utility Authority,
Solid Waste Revenue:
4,600,000 BB Series A, 7.200% due 6/15/14(a) 4,680,500
2,000,000 AA+ Series D, 6.850% due 6/15/14(a) 2,152,500
- --------------------------------------------------------------------------------
43,688,233
- --------------------------------------------------------------------------------
New Mexico -- 0.0%
90,846 Aaa* Santa Fe, NM Single-Family Mortgage
Revenue, 8.450% due 12/1/11(d) 96,865
- --------------------------------------------------------------------------------
New York -- 8.7%
2,650,000 BBB+ Metropolitan Transportation Authority,
New York Commuter Facilities Revenue,
Series A, 6.500% due 7/1/24 2,719,563
New York, NY, GO Bonds:
4,500,000 BBB+ Series A, 6.250% due 8/1/17 4,522,500
4,685,000 BBB+ Series A-1, 6.500% due 8/1/19 4,626,438
4,175,000 BBB+ Series B, 7.000% due 10/1/12 4,430,719
5,000,000 BBB+ Series C, 6.660% due 8/1/09 5,100,000
40,000 AAA Series D, FSA-Insured, 8.500% due
8/1/13 41,387
5,500,000 BBB+ Series F, 6.125% due 2/1/25 5,431,250
3,700,000 BBB+ Series I, 5.875% due 3/15/14 3,598,250
3,085,000 BBB New York State COP, (Hanson
Redevelopment Project), 8.375% due
5/1/08 3,582,456
New York State Dormitory Authority
Revenue:
2,500,000 AAA Ellis Hospital, MBIA/FHA-Insured,
5.625% due 8/1/35 2,421,875
2,970,000 BBB+ St. University Educational
Facilities, 6.000% due 5/15/18 2,970,000
4,500,000 BBB- Upstate Community College, Series A,
6.250% due 7/1/25 4,545,000
1,500,000 AA Wesley Garden Nursing Home,
FHA-Insured, 6.125% due 8/1/35 1,539,375
New York State Energy, Research and
Development Authority, Long Island
Lighting Co.:
3,000,000 BB+ 7.150% due 6/1/20(a) 3,225,000
1,150,000 BB+ 7.150% due 12/1/20(a) 1,236,250
1,700,000 BBB New York State Housing Finance Agency
Service, Contract Obligation Revenue,
Series A, 6.000% due 9/15/16 1,683,000
See Notes to Financial Statements.
17
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
New York -- 8.7% (continued)
New York State Medical Care Facilities
Finance Agency Revenue:
$1,020,000 BBB+ 7.750% due 2/15/20 $ 1,111,800
2,895,000 AAA Series C, Long-Term Health Care,
FSA-Insured, 6.400% due 11/1/14 3,043,369
4,500,000 BBB+ Series F, Mental Health Services
Facilities, 6.500% due 2/15/19 4,657,500
520,000 BBB+ Pre-Refunded -- Escrowed with U.S.
Government Securities to 2/15/00
Call @ 102, 7.750% due 2/15/20(b) 578,500
5,500,000 AA- New York State Power Authority Revenue,
Series Z, MBIA-Insured, 6.500% due
1/1/19 5,912,500
2,500,000 BBB+ State of New York Municipal Bond
Banking Agency, Special Program,
Buffalo, Series A, 6.500% due 8/1/19 2,556,250
4,500,000 AA Triborough Bridge & Tunnel Authority,
General Purpose, Series B, 5.200% due
1/1/22 4,224,375
- --------------------------------------------------------------------------------
73,757,357
- --------------------------------------------------------------------------------
North Carolina -- 3.5%
2,675,000 B+ Charlotte, NC Special Facilities
Revenue, (Piedmont Aviation Inc.
Project), 9.000% due 7/1/17(a) 2,775,580
2,000,000 AA Charlotte, NC Water & Sewer System
Revenue, 5.250% due 12/1/21 1,887,500
8,500,000 AAA New Hanover County, NC Hospital
Revenue, (Regional Medical Center
Project), AMBAC-Insured, 5.750% due
10/1/26 8,510,625
North Carolina Eastern Municipal Power
Agency, Power System Revenue:
280,000 A- Pre-Refunded-- Escrowed with U.S.
Government Securities to 1/1/98
Call @ 102, 8.000% due 1/1/21(b) 296,545
8,700,000 A- Series B, 7.000% due 1/1/08(e) 9,580,875
North Carolina HFA:
2,415,000 AA Single-Family Housing, Series NN,
5.950% due 9/1/25(a) 2,411,981
3,000,000 AA Multi-Family Housing, Series H,
6.050% due 7/1/28 3,033,750
1,000,000 AAA Pitt County, NC COP, FGIC-Insured,
6.900% due 4/1/08 1,073,750
- --------------------------------------------------------------------------------
29,570,606
- --------------------------------------------------------------------------------
North Dakota -- 1.0%
Mercer County, ND PCR, Basin Electric
Power:
3,000,000 AAA Second Series, AMBAC-Insured, 6.050%
due 1/1/19 3,082,500
4,765,000 A Series E, 7.000% due 1/1/19 4,997,294
- --------------------------------------------------------------------------------
8,079,794
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
18
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Ohio -- 2.3%
$4,000,000 NR Cleveland, OH Airport Special Revenue,
Continental Airlines Inc., 9.000% due
12/1/19(a) $ 4,345,000
100,000 Baa* Miami County, OH Hospital Facilities
Refunding & Improvement, Upper Valley
Medical Center, Series C, 6.250% due
5/15/13 100,500
Ohio State Air Quality Development
Authority:
4,000,000 AAA Columbus and Southern Ohio, Series A,
FGIC-Insured, 6.375% due 12/1/20 4,215,000
5,000,000 BB Pollution Control-Toledo Edison,
6.875% due 7/1/23(a) 5,100,000
Ohio State Water Development Authority
Revenue:
Series A:
3,475,000 BB Cleveland Electric, 8.000% due
10/1/23(a) 3,774,719
1,500,000 BB Toledo Edison, 8.000% due 10/1/23(a) 1,629,375
210,000 BB+ Series B, Pennsylvania Power Project,
8.100% due 9/1/18(a) 217,298
250,000 AAA Richland County, OH AMBAC-Insured,
5.400% due 12/1/15 245,625
- --------------------------------------------------------------------------------
19,627,517
- --------------------------------------------------------------------------------
Oklahoma -- 1.5%
4,550,000 AAA Oklahoma HFA, Single-Family Mortgage
Revenue, Series B,
GNMA-Collateralized, 7.997% due
8/1/18(a) 4,999,313
Tulsa, OK Municipal Airport Revenue,
American Airlines:
2,400,000 BB+ 7.350% due 12/1/11 2,601,000
5,400,000 BB+ 6.250% due 6/1/20 5,447,250
- --------------------------------------------------------------------------------
13,047,563
- --------------------------------------------------------------------------------
Pennsylvania -- 9.3%
4,000,000 AAA Allegheny County, PA Airport Revenue,
Greater Pittsburgh International
Airport, Series B, FSA-Insured,
6.625% due 1/1/22(a) 4,260,000
2,500,000 BB+ Allegheny County, PA Series A, 6.700%
due 12/1/20 2,615,625
4,500,000 BBB Allentown, PA Hospital Authority
Revenue, Sacred Heart Hospital of
Allentown, Series B, 6.750% due
11/15/15 4,601,250
1,250,000 AAA Beaver County, PA Hospital Authority,
Beaver Medical Center, Series A,
AMBAC-Insured, 6.250% due 7/1/22 1,301,563
3,000,000 AAA Berks County, PA Solid Waste Authority,
FGIC-Insured, 6.000% due 4/1/11 3,153,750
2,000,000 A+ Delaware County, PA IDA, (Resource
Recovery Project), Series A, 8.100%
due 12/1/13 2,087,140
3,000,000 AAA Franklin, PA IDA, (Chamberburgs
Hospital Project), FGIC-Insured,
6.250% due 7/1/12 3,161,250
1,380,000 BBB- Grove City, PA Area Hospital Authority
Revenue, United Community Hospital,
8.125% due 7/1/12 1,402,425
4,475,000 AAA Lehigh County General Purpose Authority
Revenue, Lehigh Valley Hospital,
Series B, MBIA-Insured, 5.625% due
7/1/25 4,379,906
See Notes to Financial Statements.
19
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Pennsylvania -- 9.3% (continued)
Lehigh County, PA IDA, PCR,
MBIA-Insured:
$7,500,000 AAA 6.400% due 9/1/29 $ 7,940,625
1,750,000 AAA Series A, 6.400% due 11/1/21 1,846,250
Luzerne County, PA IDA, Pennsylvania
Gas and Water Co., Series A:
2,500,000 BBB- 7.200% due 10/1/17(a) 2,668,750
2,250,000 BBB- 6.050% due 1/1/19 2,241,563
3,380,000 AAA Montgomery County, PA IDA, PCR, Series
B, MBIA-Insured, 6.700% due 12/1/21 3,633,500
6,750,000 BBB+ Montgomery County, PA Redevelopment
Authority, Multi-Family Housing,
Series A, 6.500% due 7/1/25 6,665,625
350,000 AAA North Huntington Township, PA Municipal
Guaranteed Sewer Revenue,
MBIA-Insured, 6.875% due 4/1/14 368,375
Pennsylvania EDA:
4,500,000 BBB- Resource Recovery Revenue, (Colver
Project), Series D, 7.125% due
12/1/15 4,719,375
4,000,000 BBB+ WasteWater Treatment Revenue, Sun Co.
Inc., (RTM Project), Series A,
7.600% due 12/1/24(a) 4,475,000
5,000,000 AAA Pennsylvania State Higher Education,
Student Loan Revenue, Series D,
AMBAC-Insured, 6.050% due 1/1/19(a) 5,062,500
2,750,000 AAA Pennsylvannia State IDA Revenue,
AMBAC-Insured, 6.000% due 1/1/12 2,863,439
Philadelphia, PA Municipal Authority
Gas Works Lease Revenue:
2,500,000 BBB- 7.625% due 5/1/14 2,643,750
2,750,000 BBB 14th Series, 6.375% due 7/1/26 2,822,188
990,000 BB Series B, 6.400 % due 11/15/16 1,015,988
2,500,000 BB+ Scranton-Lackawanna, PA Health and
Welfare Authority Revenue, Series B,
Moses Taylor Hospital, 8.500% due
7/1/20 2,721,875
- --------------------------------------------------------------------------------
78,651,712
- --------------------------------------------------------------------------------
Puerto Rico -- 0.9%
Commonwealth of Puerto Rico:
455,000 A GO, Pre-Refunded -- Escrowed with U.S.
Government Securities to 7/1/98
Call @ 102, 8.000% due 7/1/08(b) 484,006
1,100,000 A- Municipal Finance Agency, Series A,
8.250% due 7/1/08 1,179,750
5,760,000 BBB Urban Renewal & Housing Corp., 7.875%
due 10/1/04 6,285,600
- --------------------------------------------------------------------------------
7,949,356
- --------------------------------------------------------------------------------
Rhode Island -- 1.5%
2,650,000 AAA Rhode Island Depositors Economic
Protection Corp., Series B,
MBIA-Insured, 6.000% due 8/1/17 2,736,125
9,500,000 AA+ Rhode Island Housing and Mortgage
Finance Authority, 7.100% due
4/1/24(a)(d) 9,903,750
- --------------------------------------------------------------------------------
12,639,875
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
20
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
South Carolina -- 1.1%
$2,400,000 NR Fairfield County, SC IDR, Rite Aid
Corp., 7.900% due 12/1/16(a) $ 2,469,720
1,500,000 A- Greenville County, SC IDR, (Lockheed
Aeromod Center Project), 7.200% due
11/1/21(a) 1,606,875
500,000 AAA Lexington County, SC Health Services
District, Hospital Revenue,
FSA-Insured, 6.750% due 10/1/18 534,375
4,000,000 A- Richland County, SC PCR, (Union Camp
Corp. Project), 6.625% due 5/1/22 4,250,000
- --------------------------------------------------------------------------------
8,860,970
- --------------------------------------------------------------------------------
South Dakota -- 0.2%
Ogalala Sioux, SD Tribal Revenue Bond:
1,865,000 NR 7.500% due 7/1/13 1,892,975
180,000 NR 7.000% due 7/1/99 181,575
- --------------------------------------------------------------------------------
2,074,550
- --------------------------------------------------------------------------------
Tennessee -- 3.1%
7,000,000 AA Humphreys County, TN IDB, 6.700% due
5/1/24(a) 7,507,500
1,000,000 AAA Knoxville, TN Community Development
Corp., GNMA-Collateralized,
Morningside Gardens, 6.100% due
7/20/20 1,006,250
7,100,000 A- Maury County, TN IDB, PCR, (Saturn
Corp. Project), 6.500% due 9/1/24(d) 7,463,875
3,150,000 BBB Memphis-Shelby County, TN Airport
Authority, Federal Express Corp.,
6.750% due 9/1/12 3,342,938
5,000,000 AAA Metropolitan Nashville Airport
Authority, TN Airport Revenue,
Special Facilities, Series C,
FGIC-Insured, 6.600% due 7/1/15 5,381,250
1,000,000 NR Metropolitan Nashville & Davidson
County, TN IDB Revenue, Volunteer
Health Care, Series A, 10.750% due
6/1/18 300,000
1,500,000 AAA Tennessee Housing Development Mortgage
Agency, MBIA-Insured, Series B,
6.200% due 7/1/18 1,524,375
- --------------------------------------------------------------------------------
26,526,188
- --------------------------------------------------------------------------------
Texas -- 7.9%
5,000,000 BBB Alliance Airport Authority Inc.,
Special Federal Express Corp.
Project, 6.375% due 4/1/21 5,031,250
Brazos River Authority, TX PCR, Houston
Lighting & Power Co.:
2,000,000 AAA Series A, AMBAC-Insured, 6.700% due
3/1/17 2,177,500
1,900,000 AAA Series B, FGIC- Insured, 7.200% due
12/1/18 2,047,250
4,000,000 AAA Dallas-Fort Worth, TX International
Airport Facilities, UPS Services,
Inc., 6.600% due 5/1/32(a) 4,235,000
2,000,000 NR Denton County, TX Reclamation and Road
District, 8.500% due 6/1/16 2,011,280
See Notes to Financial Statements.
21
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Texas -- 7.9% (continued)
Gulf Coast Waste Disposal Authority, TX
Waste Disposal & Sewer System
Control, Revenue Refunding,
Bay Port Area System, Series A,
FSA-Insured:
$1,395,000 AAA 6.700% due 10/1/10 $ 1,483,931
990,000 AAA 6.700% due 10/1/11 1,054,350
970,000 AAA Harris County, TX Refunding Toll Road
Authority, Series A, AMBAC-Insured,
6.500% due 8/15/17 1,041,539
130,000 BBB Heart of Texas, HFA, Single-Family
Mortgage Revenue, Series 1984,
11.000% due 1/1/11 132,187
Matagorda County, TX PCR, Navajo
District No. 1:
7,000,000 AAA Central Power & Light Co. Project,
MBIA-Insured, 6.100% due 7/1/28 7,166,250
Houston Light and Power Co. Project:
7,200,000 AAA AMBAC-Insured, 6.700% due 3/1/27 7,776,000
500,000 A Series B, 7.700% due 2/1/19 523,230
2,100,000 AAA Series E, FGIC-Insured, 7.200% due
12/1/18 2,273,250
3,000,000 NR North Texas, Higher Education Authority
Inc., 6.300% due 4/1/09(a) 3,037,500
4,000,000 AA- Port Corpus Christi, TX IDR, Hoechst
Celanese Corp. Project, 6.875% due
4/1/17(a) 4,260,000
Sam Rayburn, TX Municipal Power Agency,
Power Supply System Revenue:
2,200,000 BB Series A, 6.750% due 10/1/14 2,068,000
2,500,000 BB Series B, 6.125% due 10/1/13 2,206,250
San Antonio, TX Airport System Revenue,
AMBAC-Insured:
3,000,000 AAA 7.125% due 7/1/06 3,420,000
1,000,000 AAA 7.125% due 7/1/08 1,140,000
2,000,000 AAA 7.375% due 7/1/13 2,267,500
2,000,000 AAA Terrel Hills, TX Higher Education,
(Incarnate World College Project),
CONNIE LEE-Insured, 5.750% due 3/15/13 2,020,000
3,010,000 AAA Texas Municipal Power Agency Revenue
Bonds, Series A, AMBAC-Insured,
6.750% due 9/1/12 3,273,375
2,070,000 AAA Texas State Department of Housing and
Community Affairs, Home Mortgage
Revenue, Series A, 6.950% due 7/1/23 2,173,500
2,605,000 AA Texas State Veterans Housing
Assistance, Single-Family Mortgage
Revenue, 6.800% due 12/1/23(a) 2,692,919
960,000 NR Tyler, TX Health Facilities Revenue,
(Park Place Limited Project), 8.500%
due 12/1/18 964,800
- --------------------------------------------------------------------------------
66,476,861
- --------------------------------------------------------------------------------
Utah -- 0.6%
4,000,000 AAA Utah Municipal Power System Revenue,
(San Juan Project), MBIA-Insured,
6.375% due 6/1/22 4,215,000
Utah State HFA, Single-Family Mortgage:
440,000 AA Series D, 8.625% due 1/1/19(a) 461,450
330,000 NR Series D1, 6.200% due 7/1/16 334,125
- --------------------------------------------------------------------------------
5,010,575
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
22
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Virginia -- 1.5%
$2,435,000 AAA Fairfax County, VA Redevelopment and
Housing Authority Revenue,
Multi-Family Housing, Series A,
Kingsley, FHA-Insured, 7.000% due
5/1/26 $ 2,584,144
1,720,000 A- Henrico County, VA IDA, Maryview
Hospital, Series B, 7.500% due 9/1/11 1,915,650
8,000,000 A- Isle Wight County, VA IDA, Solid Waste
Disposal Revenue, 6.550% due 4/1/24(a) 8,390,000
- --------------------------------------------------------------------------------
12,889,794
- --------------------------------------------------------------------------------
Washington -- 1.5%
1,500,000 AAA King County, WA Public Hospital
District 1, Hospital Facilities
Revenue, Valley Medical Center,
AMBAC-Insured, 7.250% due 9/15/15 1,638,750
2,000,000 BBB Port Moses Lake, WA PCR, Union Carbide,
7.875% due 8/1/06(a) 2,051,520
2,000,000 AAA Port of Seattle, WA Subordinated Lien,
MBIA-Insured, 6.625% due 8/1/17 2,155,000
3,000,000 AAA Snohomish County, WA Electric Revenue
Generation System, Public Utility
District No. 1, FGIC-Insured, 6.000%
due 1/1/18 3,060,000
2,750,000 AAA Washington State Health Care Facilities
Authority Revenue, Franciscan Health,
State Joseph, MBIA-Insured, 6.700% due
7/1/21 2,928,750
500,000 AAA Washington State Public Power Supply
System, Nuclear Project No. 1, Series
A, MBIA-Insured, 6.250% due 7/1/17 512,500
- --------------------------------------------------------------------------------
12,346,520
- --------------------------------------------------------------------------------
West Virginia -- 1.1%
2,000,000 A Beckley, WV IDR, (Water Commission
Project), 7.000% due 10/1/17(a) 2,147,500
Marion County, WV Solid Waste Disposal
Revenue, American Power, Paper
Recycling:
2,500,000 NR 7.750% due 12/1/11(a) 1,250,000
5,000,000 NR 9.000% due 12/1/11(a) 2,500,000
2,300,000 AAA West Virginia School Building Authority
Revenue, Series A, MBIA-Insured,
7.000% due 7/1/11 2,495,500
500,000 AAA West Virginia State Water Development
Authority, Series A, 7.000% due 11/1/25 541,250
- --------------------------------------------------------------------------------
8,934,250
- --------------------------------------------------------------------------------
Wisconsin -- 0.2%
1,670,000 BBB Racine County, WI Health Center
Revenue, 8.125% due 8/1/21 1,722,856
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
23
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Wyoming -- 0.2%
$1,250,000 AA Wyoming Community Development
Authority, Housing Revenue, 7.100%
due 6/1/17 $ 1,321,875
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS AND NOTES
(Cost -- $804,430,128) 838,223,946
================================================================================
SHORT-TERM INVESTMENTS (e) -- 0.7%
1,400,000 AAA Massachussetts State Health &
Educational Facility Authority
Revenue, Series D, 5.000% due 1/1/35 1,400,000
1,400,000 AA Ohio State Air Quality Development
Revenue, Cincinnati Gas & Electric,
Series A, 5.000% due 9/1/30 1,400,000
1,400,000 A Port Authority NY & NJ, Series 2,
5.100% due 5/1/19 1,400,000
1,700,000 AA+ Puerto Rico Government Development
Bank, 5.000% due 12/1/15 1,700,000
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost -- $5,900,000) 5,900,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $810,330,128**) $844,123,946
================================================================================
(a) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(b) Pre-Refunded bonds escrowed by U.S. Government securities and bonds escrowed
to maturity by U.S. Government securities are considered by manager to be
triple-A rated even if issuer has not applied for new ratings.
(c) Security segregated by custodian for open purchase commitments.
(d) Residual interest bonds -- coupon varies inversely with level of short-term
tax-exempt interest rates.
(e) Variable rate municipal bonds and notes are payable upon not more than seven
business days' notice.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 25 and 26 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements.
24
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Corporation ("Standard & Poors"), except
that those identified by an asterisk (*) are rated by Moody's Investor Service,
Inc. ("Moody's"). The definitions of the applicable rating symbols are set forth
below:
Standard & Poor's -- Rating from "AA" to "B" may be modified by the addition of
a plus (+) or a minus (-) sign to show relative standings within the major
rating categories.
AAA -- Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issue only in a small
degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB -- Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties of
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments.
B -- Debt rated "B" have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal payments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BB" or "BB-" rating.
D -- Debt rated "D" are in default, and payment of interest and/or
repayment of principal is in arrears.
Moody's -- Numerical modifiers 1, 2, and 3 may be applied to each generic rating
from "Aa" to "B", where 1 is the highest and 3 the lowest rating within its
generic category.
Aaa -- Bonds that are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa -- Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in "Aaa" securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in "Aaa" securities.
A -- Bonds that are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment some
time in the future.
Baa -- Bonds that are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba -- Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds that are rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
25
<PAGE>
- --------------------------------------------------------------------------------
Short-Term Securities Ratings
- --------------------------------------------------------------------------------
SP-1 -- Standard & Poor's highest rating indicating very strong or strong
capacity to pay principal and interest; those issues determined to
possess overwhelming safety characteristics are denoted with a
plus (+) sign.
A-1 -- Standard & Poor's highest commercial paper and variable-rate
demand obligation (VRDO) rating indicating that the degree of
safety regarding timely payment is either overwhelming or very
strong; those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign.
VMIG 1 -- Moody's highest rating for issues having demand feature -- VRDO.
P-1 -- Moody's highest rating for commercial paper and for VRDO prior to
the advent of the VMIG 1 rating.
- --------------------------------------------------------------------------------
Security Descriptions
- --------------------------------------------------------------------------------
ABAG -- Association of Bay Area Governors
AIG -- American International Guaranty
AMBAC -- AMBAC Indemnity Corporation
BAN -- Bond Anticipation Notes
BIG -- Bond Investors Guaranty
CGIC -- Capital Guaranty Insurance Company
CHFCLI -- California Health Facility Construction Loan Insurance
CONNIE LEE -- College Construction Loan Association
COP -- Certificate of Participation
EDA -- Economic Development Authority
ETM -- Escrowed to Maturity
FAIRS -- Floating Adjustable Interest Rate Securities
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
FRTC -- Floating Rate Trust Certificates
FSA -- Federal Savings Association
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage Association
GO -- General Obligation
HDC -- Housing Development Corporation
HFA -- Housing Finance Authority
IDA -- Industrial Development Agency
IDB -- Industrial Development Board
IDR -- Industrial Development Revenue
INFLOS -- Inverse Floaters
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
MVRICS -- Municipal Variable Rate Inverse Coupon Security
PCR -- Pollution Control Revenue
RAN -- Revenue Anticipation Notes
RIBS -- Residual Interest Bonds
RITES -- Residual Interest Tax-Exempt Securities
SYCC -- Structured Yield Curve Certificate
TAN -- Tax Anticipation Notes
TECP -- Tax-Exempt Commercial Paper
TOB -- Tender Option Bonds
TRAN -- Tax and Revenue Anticipation Notes
VA -- Veterans Administration
VRWE -- Variable Rate Wednesday Demand
26
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $810,330,128) $844,123,946
Interest receivable 12,473,214
Receivable for securities sold 1,894,370
Receivable for Fund shares sold 113,632
Cash 44,517
- --------------------------------------------------------------------------------
Total Assets 858,649,679
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 5,923,867
Dividends payable 3,700,004
Payable for Fund shares purchased 328,653
Investment advisory fees payable 151,451
Distribution fees payable 101,785
Accrued expenses 154,205
- --------------------------------------------------------------------------------
Total Liabilities 10,359,965
- --------------------------------------------------------------------------------
Total Net Assets $848,289,714
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 48,241
Capital paid in excess of par value 811,899,201
Undistributed net investment income 325,922
Accumulated net realized gain from security transactions 2,222,532
Net unrealized appreciation of investments 33,793,818
- --------------------------------------------------------------------------------
Total Net Assets $848,289,714
================================================================================
Shares Outstanding:
Class A 13,519,097
- --------------------------------------------------------------------------------
Class B 34,688,615
- --------------------------------------------------------------------------------
Class C 33,532
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 17.58
- --------------------------------------------------------------------------------
Class B* $ 17.59
- --------------------------------------------------------------------------------
Class C** $ 17.56
- --------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.17% of net asset value per share) $ 18.31
================================================================================
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed within one year from initial purchase (See Note 3).
** 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.
27
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1997
INVESTMENT INCOME:
Interest $ 28,278,198
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 2,266,538
Investment advisory fees (Note 3) 1,761,181
Administration fees (Note 3) 880,591
Shareholder and system servicing fees 160,103
Registration fees 55,452
Shareholder communications 31,638
Audit and legal 30,250
Pricing service fees 25,710
Custody 17,612
Trustees' fees 15,125
Other 9,830
- --------------------------------------------------------------------------------
Total Expenses 5,254,030
- --------------------------------------------------------------------------------
Net Investment Income 23,024,168
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE4):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 223,532,424
Cost of securities sold 218,327,494
- --------------------------------------------------------------------------------
Net Realized Gain 5,204,930
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 25,816,358
End of period 33,793,818
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 7,977,460
- --------------------------------------------------------------------------------
Net Gain on Investments 13,182,390
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 36,206,558
================================================================================
See Notes to Financial Statements.
28
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1997 (unaudited)
and the Year Ended July 31, 1996
<TABLE>
<CAPTION>
1997 1996
===================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 23,024,168 $ 50,346,526
Net realized gain 5,204,930 4,816,209
Increase (decrease) in net unrealized appreciation 7,977,460 (642,445)
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations 36,206,558 54,520,290
- -----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2):
Net investment income (22,770,067) (50,274,705)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (22,770,067) (50,274,705)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 34,665,716 55,204,274
Net asset value of shares issued for
reinvestment of dividends 10,427,474 27,635,290
Cost of shares reacquired (95,562,827) (176,253,665)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (50,469,637) (93,414,101)
- -----------------------------------------------------------------------------------
Decrease in Net Assets (37,033,146) (89,168,516)
NET ASSETS:
Beginning of period 885,322,860 974,491,376
- -----------------------------------------------------------------------------------
End of period* $ 848,289,714 $ 885,322,860
===================================================================================
* Includes undistributed net investment income of: $ 325,922 $ 71,821
===================================================================================
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Tax-Exempt Income 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 Premium Total Return Fund, Smith Barney High Income Fund,
Smith Barney Convertible 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 semi-annual reports.
The Smith Barney Premium Total Return Fund changed its fiscal year end to
December 31 and, therefore, the semi-annual report will be prepared as of June
30, 1997.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities are
valued at mean prices by an independent pricing service that are based on
transactions in municipal obligations, quotations from municipal bond dealers,
market transactions in comparable securities and various relationships between
securities; (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 premiums and accretion of
original issue discount, is recorded on the accrual basis; (e) gains or losses
on the sale of securities are calculated using the specific identification
method; (f) direct expenses are charged to each class; management fees and
general Fund expenses are allocated on the basis of relative net assets of each
class; (g) dividends and distributions to shareholders are recorded on the
ex-dividend date; (h) 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 (i)
estimates and assumptions are required to be made regarding assets, liabilities
and changes in net assets resulting from operations when financial statements
are prepared. Changes in the economic environment, financial markets and any
other parameters used in determining these estimates could cause actual results
to differ.
2. EXEMPT-INTEREST DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to satisfy requirements that allows interest from
municipal securities, which is exempt from regular Federal income tax and
from certain states' income taxes, to retain its exempt-interest status when
distributed to the shareholders of the Fund.
30
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Capital gain distributions, if any, are taxable to shareholders, and are
declared and paid at least annually. Additional taxable distributions may be
made if necessary to avoid a Federal excise tax.
3. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Trust. The Fund
pays SBMFM an advisory fee calculated at an annual rate of 0.40% of the average
daily net assets. This fee is calculated daily and paid monthly.
SBMFM acts as the Trust'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
Trust shares. For the six months ended January 31, 1997, SB received sales
charges of approximately $17,000 on sales of the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs within one year from initial purchase
and thereafter declines by 0.50% the first year after purchase and 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 certain cases, 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 six months ended January 31, 1997, CDSCs paid to SB were
approximately:
Class A Class B
================================================================================
CDSCs $1,000 $314,000
================================================================================
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 0.15% 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 rates of 0.50% and
0.55% of the average daily net assets of each class, respectively. For the six
months ended January 31, 1997, total Distribution Plan fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $178,657 $2,085,897 $1,984
================================================================================
All officers and one Trustee of the Fund are employees of SB.
31
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
4. INVESTMENTS
During the six months ended January 31, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $170,995,781
- --------------------------------------------------------------------------------
Sales 223,532,424
================================================================================
At January 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $40,340,848)*
Gross unrealized depreciation (6,547,030)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $33,793,818)*
================================================================================
* Substantially the same for Federal income tax purposes.
5. CAPITAL LOSS CARRYFORWARD
At July 31, 1996, the Fund had, for Federal income tax purposes,
approximately $2,982,000 of loss carryforwards available to offset future
capital gains. To the extent that these carryforward losses are used to offset
capital gains, it is probable that the gains so offset will not be distributed.
The amount and expiration of the carryforwards are indicated below. Expiration
occurs on July 31 of the year indicated:
2003 2004
================================================================================
Carryforward Amounts $2,037,000 $945,000
================================================================================
6. SHARES OF BENEFICIAL INTEREST
At January 31, 1997, 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, including those specifically related to the
distribution of its shares.
At January 31, 1997, total paid-in capital amounted to the following for
each class:
Class A Class B Class C
================================================================================
Total Paid-in Capital $232,800,043 $578,567,176 $580,223
================================================================================
32
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1997 July 31, 1996
------------------------ ---------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,428,352 $ 25,028,061 1,718,386 $ 29,741,505
Shares issued on reinvestment 185,357 3,246,472 435,764 8,042,396
Shares redeemed (1,471,263) (25,776,473) (2,554,580) (44,691,662)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 142,446 $ 2,498,060 (400,430) $ (6,907,761)
====================================================================================================================================
Class B
Shares sold 545,691 $ 9,583,053 1,517,563 $ 25,090,157
Shares issued on reinvestment 409,310 7,171,760 1,032,778 19,575,379
Shares redeemed (3,974,630) (69,757,796) (7,527,055) (131,511,049)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Decrease (3,019,629) $ (53,002,983) (4,976,714) $ (86,845,513)
====================================================================================================================================
Class C
Shares sold 3,120 $ 54,602 21,320 $ 372,612
Shares issued on reinvestment 528 9,242 908 17,515
Shares redeemed (1,654) (28,558) (2,922) (50,954)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase 1,994 $ 35,286 19,306 $ 339,173
====================================================================================================================================
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1996 1995 1994 1993(2)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $17.31 $17.25 $17.26 $18.24 $17.45
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.49 1.00 1.04 1.06 0.78
Net realized and unrealized gain (loss) 0.27 0.06 0.01* (0.85) 1.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.76 1.06 1.05 0.21 1.78
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.49) (1.00) (1.00) (1.02) (0.80)
Overdistribution of
net investment income -- -- -- (0.04) (0.03)
Net realized gains -- -- -- (0.13) (0.16)
Overdistribution of net realized gains -- -- (0.02) -- --
Capital -- -- (0.04) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.49) (1.00) (1.06) (1.19) (0.99)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $17.58 $17.31 $17.25 $17.26 $18.24
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 4.44%++ 6.28% 6.42% 1.14% 10.24%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $237,616 $231,589 $237,656 $17,792 $13,508
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.84%+ 0.84% 0.84% 0.84% 0.86%+
Net investment income 5.59+ 5.74 6.04 5.83 6.03+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 44% 38% 39% 34%
====================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) For the period from November 6, 1992 (inception date) to July 31, 1993.
* Includes the net per share effect of shareholder sales and redemption
activity during the period, most of which occurred at net asset values
less than the beginning of the period.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
34
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1997(1) 1996 1995 1994 1993 1992
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $17.32 $17.26 $17.26 $18.24 $18.00 $16.97
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.45 0.92 0.95 0.96 0.98 1.04
Net realized and unrealized
gain (loss) 0.27 0.06 0.02* (0.85) 0.45 1.17
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.72 0.98 0.97 0.11 1.43 2.21
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.45) (0.92) (0.91) (0.92) (0.98) (1.04)
Overdistribution of
net investment income -- -- -- (0.04) (0.04) --
Net realized gains -- -- (0.02) (0.13) (0.17) (0.14)
Capital -- -- (0.04) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.45) (0.92) (0.97) (1.09) (1.19) (1.18)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $17.59 $17.32 $17.26 $17.26 $18.24 $18.00
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 4.18%++ 5.74% 5.91% 0.60% 8.28% 13.50%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $610 $653 $737 $1,069 $1,108 $871
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.33%+ 1.33% 1.35% 1.33% 1.38% 1.45%
Net investment income 5.10+ 5.23 5.61 5.34 5.52 5.96
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 44% 38% 39% 34% 61%
====================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
* Includes the net per share effect of shareholder sales and redemption
activity during the period, most of which occurred at net asset values less
than the beginning of the period.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
35
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
Class C Shares 1997(1) 1996 1995(2)
================================================================================
Net Asset Value, Beginning of Period $17.31 $17.25 $15.83
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.43 0.89 0.60
Net realized and unrealized gain 0.26 0.08 1.50*
- --------------------------------------------------------------------------------
Total Income From Operations 0.69 0.97 2.10
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.44) (0.91) (0.62)
Net realized gains -- -- (0.02)
Capital -- -- (0.04)
- --------------------------------------------------------------------------------
Total Distributions (0.44) (0.91) (0.68)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $17.56 $17.31 $17.25
- --------------------------------------------------------------------------------
Total Return 4.04%++ 5.69% 13.45%++
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $589 $546 $211
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.39%+ 1.39% 1.18%+
Net investment income 4.83+ 5.18 5.56+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 44% 38%
================================================================================
(1) For the six months ended January 31, 1997 (unaudited).
(2) For the period from November 17, 1994 (inception date) to July 31, 1995.
* Includes the net per share effect of shareholder sales and redemption
activity during the period, most of which occurred at net asset values less
than the beginning of the period.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
<PAGE>
Smith Barney SMITH BARNEY
Tax-Exempt ------------
Income Fund A Member of TravelersGroup [LOGO]
Trustees
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
Officers
Heath B. McLendon
Chairman and Investment Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Lawrence T. McDermott
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds Management 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 Tax-
Exempt Income Fund. It is not
authorized for distribution to prospective
investors unless accompanied or preceded
by a current Prospectus for the Fund,
which contains information concerning the
Fund's investment policies and
expenses as well as other pertinent
information.
Smith Barney Tax-Exempt
Income Fund
388 Greenwich Street
New York, New York 10013
FD2173 3/97
================================================================================
<PAGE>
SEMI-ANNUAL REPORT
[GRAPHIC]
SMITH BARNEY
HIGH INCOME
FUND
- ---------------------------------
January 31, 1997
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney High Income Fund
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney High
Income Fund ("Fund") for the period ended January 31, 1997. In this letter we
summarize the period's prevailing economic and market conditions and outline our
portfolio strategy. A detailed summary of performance and current holdings can
be found in the appropriate sections that follow in the semi-annual report.
Over the six month period covered by this report, the Smith Barney High Income
Fund paid dividends totaling $0.54 per share for Class A shares. Given the more
challenging economic environment, we have maintained a more conservative credit
posture in the Fund, emphasizing stronger credits that have less default risk,
but generate slightly less interest income.
The Fund's total return of 9.94% for Class A shares for the six-months ended
January 31, 1997 compares favorably to the average six-month total return of
9.14% for open-end high yield funds, as reported by Lipper Analytical Services
Inc., an independent fund tracking organization.
Market and Economic Overview
The fixed income markets began to rally in the fourth quarter of 1996, with
strong performance gains by investment grade and U.S. Treasury bonds. An
apparent slowdown in U.S. economic growth over the fourth quarter of 1996,
combined with favorable inflation data, helped to bolster the fixed income
markets. The bond market rally was also fueled by the Federal Reserve Board's
decision to remain on the sidelines and not raise interest rates. However,
during early December, several factors prevented interest rates from declining
further, with a modest upturn in rates occurring in January. For example,
Federal Reserve Chairman Alan Greenspan's comments about "irrational exuberance"
in the financial markets caused a widespread but temporary sell-off in both the
equity and bond markets. In addition, conflicting reports of weakness in the
retail sector and stronger-than-expected growth in the manufacturing and
construction sectors in the past several weeks have caused interest rates to
gyrate up and down with increased price volatility in the U.S. Treasury and
investment grade bond markets.
The high yield market has generally outperformed the more interest-rate
sensitive, longer maturity Treasury and investment grade markets throughout the
past six months. More specifically, the lower quality issues (CCC/Caa and CC/Ca)
turned in a disappointing performance, most likely due to the slowdown in U.S.
economic growth and an increasing number of bond defaults in the latter half of
1996. The most visible defaults or failures in 1996 included
1
<PAGE>
Marvel Entertainment, Moblemedia, Anchor Glass, CAI Wireless and MidAmerican
Waste. A number of these high yield issues experienced price declines between
60% and 80%. Given our relatively conservative investment philosophy, we avoided
these issues.
In contrast to the performance of the lower-rated high yield issues, the current
steady growth rate of the U.S. economy has been particularly positive for the
better-quality, high yield issues (BB/Ba and B/B). During the past six months,
the performance of better-quality issues has exceeded that of the more
speculative, lower-quality issues. In addition, more investors have become
dissatisfied with the modest returns and extreme price swings in the U.S.
Treasury market and have invested increasing amounts of money into the
upper-rated tier of the high yield market. In fact, during the course of 1996,
over $15 billion flowed into high yield bond funds. At the same time, a large
number of institutional investors such as insurance companies and municipal and
corporate pension fund managers allocated a larger portion of their assets to
the high yield market, particularly the better quality issues. In our view, this
trend is likely to continue well into 1997 as investors search for
higher-yielding investment alternatives. Given the relatively strong performance
of the high yield market compared to U.S. Treasuries over this time frame, high
yield bond spreads (i.e., the difference between the yield to maturity on a high
yield bond and the yield to maturity on a similar maturity U.S. Treasury bond)
are now 1.00% tighter than they were at the beginning of 1996. In fact, we now
consider the high yield market to be fully valued. Fortunately, the current U.S.
economic and financial condition is relatively benign, with moderate economic
growth and little signs of inflation. Nevertheless, selectivity has become
increasingly more important when picking investment ideas given the high yield
market's fully valued levels and the likelihood of an increasing number of bond
defaults in 1997.
Portfolio Strategy
Despite the increasing number of disappointments, the outlook for the high yield
bond market in 1997 is still positive for a large number of companies that are
successfully competing in their markets. These companies tend to be in
industries that continue to benefit from new technology. We have found many
growth opportunities in the telecommunications, media, cable TV and oil and
natural gas industries, and the High Income Fund is overweighted in these areas.
Some of the issues that we continue to favor include Time Warner, Brooks Fiber,
Teleport and Revlon to name a few. All of these companies continue to generate
improving results through either increased market share and/or improved cost
controls.
2
<PAGE>
We still firmly believe that the better quality high yield issues offer superior
risk-adjusted returns and lower default risk relative to lower-rated issues.
When one considers the trend toward greater industry competition and little
pricing power in most sectors of the domestic economy, we believe our prudent
investment approach will continue to generate consistent positive returns in
1997. We therefore will continue to avoid those sectors of the economy that are
experiencing weak consumer spending as well as heavy industry competition. In
addition, we will continue to place a greater emphasis on higher quality issues
and avoid the weaker, lower-tier issues.
We have experienced a slight rise in our cash reserves as a result of some
sector shifting and profit taking. However, we expect to be fully invested
within the first quarter of 1997 as we take advantage of a relatively heavy new
issue calendar in the coming months. As we become fully invested, we will begin
to extend the Fund's average maturity modestly to the 7- to 8-year range from
the 5- to 6-year range. This strategy should not be construed as an attempt to
time the beneficial effects of falling interest rates, but rather as a
reflection of the Fund being fully invested.
Outlook
In our opinion, the U.S. economy will grow at a moderate pace, at least through
the first half of 1997. We expect most consumer sensitive sectors will continue
to experience problems as individuals slowly reduce their debt burdens. As a
result, we believe there will be a continued increase in default rates among
high yield issuers, especially the weaker, more vulnerable companies that are
having trouble competing. Although we expect intermediate and long-term interest
rates to decline over the first half of 1997, there is still the possibility for
some market turbulence over the next six months resulting from conflicting or
inconclusive economic data. Nevertheless, we do remain optimistic on the high
yield market's prospects for 1997, particularly among the higher rated issues,
and the Fund is positioned accordingly.
In closing, thank you for investing in the Smith Barney High Income Fund. We
look forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi, CFA
Heath B. McLendon John C. Bianchi, CFA
Chairman and Vice President and
Investment Officer Investment Officer
February 14, 1997
3
<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>
1/31/97 $10.98 $11.51 $0.54 $0.00 $0.00 9.94%+
- -----------------------------------------------------------------------------------------------------------
7/31/96 11.10 10.98 1.08 0.00 0.00 8.95
- -----------------------------------------------------------------------------------------------------------
7/31/95 11.16 11.10 1.05 0.00 0.07 10.28
- -----------------------------------------------------------------------------------------------------------
7/31/94 12.01 11.16 1.12 0.00 0.00 2.11
- -----------------------------------------------------------------------------------------------------------
Inception*
- 7/31/93 11.03 12.01 0.86 0.00 0.00 17.29+
===========================================================================================================
Total $4.65 $0.00 $0.07
===========================================================================================================
</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>
1/31/97 $10.99 $11.52 $ 0.52 $0.00 $0.00 9.67%+
- -----------------------------------------------------------------------------------------------------------
7/31/96 11.11 10.99 1.02 0.00 0.00 8.41
- -----------------------------------------------------------------------------------------------------------
7/31/95 11.16 11.11 0.99 0.00 0.07 9.77
- -----------------------------------------------------------------------------------------------------------
7/31/94 12.01 11.16 1.06 0.00 0.00 1.60
- -----------------------------------------------------------------------------------------------------------
7/31/93 11.15 12.01 1.10 0.00 0.00 18.55
- -----------------------------------------------------------------------------------------------------------
7/31/92 10.05 11.15 1.11 0.00 0.06 23.86
- -----------------------------------------------------------------------------------------------------------
7/31/91 10.59 10.05 1.27 0.00 0.02 8.82
- -----------------------------------------------------------------------------------------------------------
7/31/90 13.36 10.59 1.61 0.00 0.01 (8.66)
- -----------------------------------------------------------------------------------------------------------
7/31/89 14.01 13.36 1.53 0.00 0.00 6.60
- -----------------------------------------------------------------------------------------------------------
7/31/88 14.26 14.01 1.54 0.04 0.00 10.06
- -----------------------------------------------------------------------------------------------------------
Inception*
- 7/31/87 14.00 14.26 1.03 0.03 0.00 9.55+
===========================================================================================================
Total $12.78 $0.07 $0.16
===========================================================================================================
</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>
1/31/97 $11.00 $11.53 $0.52 $0.00 $0.00 9.68%+
- -----------------------------------------------------------------------------------------------------------
7/31/96 11.11 11.00 1.03 0.00 0.00 8.56
- -----------------------------------------------------------------------------------------------------------
Inception*
- 7/31/95 10.90 11.11 0.90 0.00 0.07 11.50+
===========================================================================================================
Total $2.45 $0.00 $0.07
===========================================================================================================
</TABLE>
4
<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>
1/31/97 $10.99 $11.52 $0.55 $0.00 $0.00 10.07%+
- -----------------------------------------------------------------------------------------------------------
7/31/96 11.10 10.99 0.92 0.00 0.00 9.32
- -----------------------------------------------------------------------------------------------------------
Inception*
- 7/31/95 10.88 11.10 0.03 0.00 0.07 2.91+
===========================================================================================================
Total $1.50 $0.00 $0.07
===========================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class Z 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>
1/31/97 $10.99 $11.52 $0.55 $0.00 $0.00 10.07%+
- -----------------------------------------------------------------------------------------------------------
7/31/96 11.09 10.99 1.11 0.00 0.00 9.42
- -----------------------------------------------------------------------------------------------------------
7/31/95 11.16 11.09 1.08 0.00 0.07 10.55
- -----------------------------------------------------------------------------------------------------------
7/31/94 12.01 11.16 1.15 0.00 0.00 2.37
- -----------------------------------------------------------------------------------------------------------
Inception*
- 7/31/93 11.03 12.01 0.88 0.00 0.00 17.47+
===========================================================================================================
Total $4.77 $0.00 $0.07
===========================================================================================================
</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 Class Z
=============================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/97+ 9.94% 9.67% 9.68% 10.07% 10.07%
- ---------------------------------------------------------------------------------------------
Year Ended 1/31/97 11.81 11.35 11.39 N/A** 12.27
- ---------------------------------------------------------------------------------------------
Five Years Ended 1/31/97 N/A 11.59 N/A N/A N/A
- ---------------------------------------------------------------------------------------------
Ten Years Ended 1/31/97 N/A 8.90 N/A N/A N/A
- ---------------------------------------------------------------------------------------------
Inception* through 1/31/97 11.43 9.14 12.31 11.48 11.74
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
-------------------------------------------------------------
Class A Class B Class C Class Y Class Z
=============================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/97+ 4.97% 5.17% 8.68% 10.07% 10.07%
- ---------------------------------------------------------------------------------------------
Year Ended 1/31/97 6.81 6.85 10.39 N/A** 12.27
- ---------------------------------------------------------------------------------------------
Five Years Ended 1/31/97 N/A 11.46 N/A N/A N/A
- ---------------------------------------------------------------------------------------------
Ten Years Ended 1/31/97 N/A 8.90 N/A N/A N/A
- ---------------------------------------------------------------------------------------------
Inception* through 1/31/97 10.23 9.14 12.31 11.48 11.74
=============================================================================================
</TABLE>
5
<PAGE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (Inception* through 1/31/97) 58.21%
- --------------------------------------------------------------------------------
Class B (Inception* through 1/31/97) 134.60
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/97) 32.76
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/97) 11.48
- --------------------------------------------------------------------------------
Class Z (Inception* through 1/31/97) 60.11
================================================================================
</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 4.50%; Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed within the
first year from initial purchase. This CDSC declines by 0.50% the first
year after purchase and thereafter by 1.00% per year until no CDSC is
incurred. Class C shares reflect the deduction of a 1.00% CDSC which
applies, if shares are redeemed within the first year of purchase.
* Inception dates for Class A, B, C, Y and Z shares are November 6, 1992,
September 2, 1986, August 24, 1994, April 28, 1995 and November 6, 1992,
respectively.
** Total return is not relevant since the class was not in existence for the
full year due to full redemption of shares during the period.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
6
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class B Shares of
the Smith Barney High Income Fund vs.
Salomon Brothers Intermediate-Term High-Yield Index
- --------------------------------------------------------------------------------
January 1987 -- January 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Salomon Brothers
Smith Barney Intermediate-Term
Date High Income Fund High-Yield Index
- ---- ----------------------- -----------------------
<S> <C> <C>
1/87 $ 10,601.00 $ 10,000.00
7/87 10,334.00 10,087.00
7/88 11,373.00 10,456.00
7/89 12,123.00 10,637.00
7/90 11,073.00 10,238.00
7/91 12,050.00 10,694.00
7/92 14,925.00 11,214.00
7/93 17,694.00 11,580.00
7/94 17,977.00 11,895.00
7/95 19,733.00 12,211.00
7/96 21,393.00 13,311.00
1/97 23,460.00 14,554.00
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class B shares on January
31, 1987, assuming reinvestment of dividends and capital gains, if any, at
net asset value through January 31, 1997. The Salomon Brothers
Intermediate-Term High-Yield Index includes cash-pay and deferred-interest
bonds with a remaining maturity of at least seven years, but less than ten
years. This 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.
7
<PAGE>
================================================================================
Portfolio Highlights (unaudited) January 31, 1997
================================================================================
Portfolio Breakdown
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Broadcasting 23.2%
Other Corporate Bonds & Notes 21.1%
Communications 20.2%
Oil & Natural Gas 5.5%
Repurchase Agreements 5.0%
Paper & Printing 4.4%
Other Preferred Stock,
Convertible Preferred Stock,
Common Stock & Warrants 3.6%
Electronics/Computers 3.4%
Chemicals 3.1%
Metals & Mining 2.8%
Finance 2.8%
Aerospace/Defence 2.6%
Personal Care 2.3%
</TABLE>
Top Ten Holdings
<TABLE>
<CAPTION>
Percentage of
Company Total Investments
================================================================================
<S> <C>
Cablevision Systems Corp. 4.1%
Brooks Fiber Properties Inc. 2.6
Rogers Cablesystems 2.4
NWCG Holdings Inc. 2.4
Marcus Cable Capital Corp. 2.3
Nextel Communications Inc. 2.2
Unisys Corp. 2.2
Time Warner Inc. 2.1
Bell Cablemedia PLC 2.1
Revlon Worldwide Corp. 2.0
================================================================================
</TABLE>
8
<PAGE>
================================================================================
Schedule of Investments (unaudited) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================================
CORPORATE BONDS AND NOTES -- 88.3%
===========================================================================================================
<C> <C> <S> <C>
Aerospace/Defense -- 2.6%
$ 10,050,000 BB Airplanes Pass-Through Trust, Corporate Collateralized
Mortgage Obligation, Series D, 10.875% due 3/15/19 $11,146,454
4,750,000 B- Howmet Corp., Senior Subordinate Notes, 10.000%
due 12/1/03 5,165,625
5,000,000 B2* K&F Industries Inc., Senior Subordinate Notes, 10.375%
due 9/1/04 5,275,000
3,800,000 B Tracor Inc., Senior Subordinate Notes, 10.875% due 8/15/01 4,061,250
2,750,000 B UNC Inc., Senior Subordinate Notes, 11.000% due 6/1/06 2,963,125
- -----------------------------------------------------------------------------------------------------------
28,611,454
- -----------------------------------------------------------------------------------------------------------
Automobile -- 0.3%
2,800,000 B+ Hawk Corp., Senior Notes, 10.250% due 12/1/03(a) 2,859,500
- -----------------------------------------------------------------------------------------------------------
Broadcasting -- 20.6%
4,225,000 B- All American Communications Inc., Senior Subordinate
Notes, 10.875% due 10/15/01 4,283,094
5,148,000 B- Allbritton Communications Co., Senior Subordinate
Debentures, 11.500% due 8/15/04 5,450,445
11,550,000 B2* Australis Holdings, Ltd., Senior Discount Notes,
step bond to yield 15.000% due 11/1/02 6,814,500
21,600,000 NR Australis Media Ltd., Senior Discount Notes, step bond
to yield 12.583% due 5/15/03 12,528,000
Bell Cablemedia PLC, Senior Discount Notes, step
bond to yield:
18,975,000 BB- 11.996% due 7/15/04 16,531,968
8,025,000 BB- 11.319% due 9/15/05 6,490,219
Cablevision Systems Corp., Senior Subordinate Debentures:
16,725,000 B 10.750% due 4/1/04 17,394,000
21,325,000 B 9.875% due 2/15/13 21,271,688
6,575,000 B 10.500% due 5/15/16 6,821,563
Globo Communicacoes, Notes:
4,500,000 B+ 9.875% due 12/20/04(a) 4,533,750
4,500,000 B+ 10.500% due 12/20/06(a) 4,578,750
2,000,000 B Jacor Communication Co., Guaranteed Senior
Subordinate Notes, 9.750% due 12/15/06 2,060,000
30,700,000 B Marcus Cable Capital Corp., Senior Discount Notes,
step bond to yield 11.961% due 8/1/04 25,442,624
4,425,000 B1* Multicanal SA, 10.500% due 2/1/07(a) 4,474,781
31,900,000 BBB- NWCG Holdings Inc., Zero Coupon Senior Discount
Notes to yield 9.732% due 6/15/99 26,835,873
Rogers Cablesystems:
11,357,000 BB- Senior Debentures, 10.875% due 4/15/04 11,953,243
4,675,000 BB+ Senior Secured Debentures, 10.000% due 12/1/07 4,914,594
5,350,000 BB+ Senior Secured Second Priority Debentures, 9.650%
due 1/15/14 3,894,138
5,850,000 BB- Senior Subordinate Debentures, 11.000% due 12/1/15 6,318,000
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================================
<C> <C> <S> <C>
Broadcasting -- 20.6% (continued)
$ 5,000,000 BBB SCI Television Inc., Senior Notes, 11.000% due 6/30/05 $ 5,350,000
7,525,000 B- SFX Broadcasting Inc., Senior Subordinate Notes,
10.750% due 5/15/06 7,976,500
16,250,000 B3* UIH Australia Inc., Senior Discount Notes, step bond
to yield 14.058% due 5/15/06 8,307,813
United International Holdings Inc., Zero Coupon Senior
Discount Notes to yield:
9,700,000 B- 13.068% due 11/15/99 7,068,875
8,035,000 B- 13.298% due 11/15/99 5,855,506
2,450,000 B Young Broadcasting, Senior Subordinate Notes,
11.750% due 11/15/04 2,701,125
- -----------------------------------------------------------------------------------------------------------
229,851,049
- -----------------------------------------------------------------------------------------------------------
Building/Construction -- 0.3%
2,800,000 BB- American Standard Inc., Senior Subordinate Debentures,
11.375% due 5/15/04 3,038,000
- -----------------------------------------------------------------------------------------------------------
Chemicals -- 3.1%
NL Industries, Inc., Senior Secured Notes:
6,025,000 B1* 11.750% due 10/15/03 6,363,906
6,210,000 B Step bond to yield 12.488% due 10/15/05 5,449,275
6,800,000 BB Pt. Polysindo Eka Perkasa, Senior Notes, 13.000%
due 6/15/01 7,616,000
9,400,000 Ba3* Terra Industries, Inc., Senior Notes, Series B, 10.500%
due 6/15/05 10,222,499
4,725,000 NR Texas Petrochemical Inc., Senior Subordinate Notes,
11.125% due 7/1/06(a) 5,073,469
- -----------------------------------------------------------------------------------------------------------
34,725,149
- -----------------------------------------------------------------------------------------------------------
Communications -- 20.2%
Brooks Fiber Properties Inc., Senior Discount Notes:
20,945,000 NR Step bond to yield 11.793% due 3/1/06 14,111,694
23,850,000 NR Step bond to yield 11.698% due 11/1/06 15,442,873
19,800,000 B3* Clearnet Communications Inc., Senior Discount Notes,
step bond to yield 13.784% due 12/15/05 12,894,750
7,675,000 NR Colt Telecom Group, Senior Discount Notes,
step bond to yield 11.494% due 12/15/06 4,720,125
16,525,000 B Comcast UK Cable, Senior Subordinate Debentures,
step bond to yield 11.395% due 11/15/07 11,732,749
4,425,000 B+ Fonorola Inc., Senior Subordinate Notes, 12.500%
due 8/15/02 4,834,313
17,300,000 NR Intelcommunications Group USA Inc., Senior Discount
Notes, step bond to yield 12.500% due 5/1/06 11,526,125
14,925,000 B- Intermedia Communications Inc., Senior Discount
Notes, step bond to yield 12.527% due 5/15/06 10,130,344
19,175,000 B- Millicom International Cellular SA, Senior Subordinate
Discount Notes, step bond to yield 13.500% due 6/1/06 12,631,531
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================================
<C> <C> <S> <C>
Communications -- 20.2% (continued)
$ 34,675,000 B3* Nextel Communications Inc., Senior Discount Notes,
step bond to yield 12.882% due 8/15/04 $ 24,619,250
10,950,000 NR Nextlink Communications, Senior Discount Notes,
12.500% due 4/15/06 11,962,875
7,875,000 B3* Omnipoint Corp., Senior Notes, 11.625% due 8/15/06 8,239,219
Pagemart Nationwide, Inc., Senior Discount Notes,
step bond to yield:
12,050,000 NR 12.128% due 11/1/03(a) 9,594,813
7,475,000 NR 13.243% due 2/1/05(a) 5,045,625
3,725,000 B2* Phonetel Technologies Inc., Senior Notes, 12.000%
due 12/15/06 3,925,219
4,250,000 B1* Pricecellular Wireless Corp., Senior Notes, 10.750%
due 11/1/04 4,446,563
9,550,000 NR RSL Communications Ltd., 12.250% due 11/15/06 9,908,125
16,950,000 B1* Teleport Communications, Senior Discount Notes,
step bond to yield 11.462% due 7/1/07 11,674,313
23,000,000 BB Telewest Communications, PLC, Senior Discount
Debentures, step bond to yield 11.091% due 10/1/07 16,100,000
6,125,000 B2* USA Mobile Communication Inc., Senior Discount Notes,
14.000% due 11/1/04 6,867,656
Videotron Holdings PLC:
4,975,000 B+ Senior Discount Notes, step bond to yield 11.286%
due 8/15/05 3,961,344
4,075,000 BBB- Senior Notes, 10.625% due 12/15/05 4,548,719
4,525,000 BBB- Senior Subordinate Notes, 10.250% due 10/15/02 4,836,094
1,975,000 B- Wireless One, Inc., Senior Discount Notes, 13.000%
due 10/15/03 1,935,500
- -----------------------------------------------------------------------------------------------------------
225,689,819
- -----------------------------------------------------------------------------------------------------------
Consumer Durables -- 1.5%
21,150,000 Ba2* International Semi-Tech Microelectronics Inc., Senior
Secured Notes, step bond to yield 11.325% due 8/15/03 12,716,438
3,656,000 B+ TAG-Heuer International Inc., Senior Subordinate Notes,
12.000% due 12/15/05 4,240,960
- -----------------------------------------------------------------------------------------------------------
16,957,398
- -----------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 1.4%
4,200,000 B Goss Graphic System Inc., Senior Subordinate Notes,
12.000% due 10/15/06 4,404,750
5,675,000 B3* Interlake Corp., Senior Subordinate Debentures,
12.125% due 3/1/02 5,958,750
5,000,000 B Russel Metals Inc., Senior Notes, 10.250% due 6/15/00 5,131,250
- -----------------------------------------------------------------------------------------------------------
15,494,750
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================================
<C> <C> <S> <C>
Electric-Utilities -- 1.6%
$ 8,350,000 Ba3* Calpine Corp., Senior Notes, 10.500% due 5/15/06 $ 8,913,625
Midland Cogeneration Venture Limited Partnership,
Midland Funding, Senior Secured Lease Bond:
2,293,414 BB- Series C 91, 10.330% due 7/23/02 2,445,354
5,711,891 BB- Series C 94, 10.330% due 7/23/02 6,090,304
- -----------------------------------------------------------------------------------------------------------
17,449,283
- -----------------------------------------------------------------------------------------------------------
Electronics/Computers -- 3.4%
6,550,000 B Celestica International Inc., Senior Subordinate Notes,
10.500% due 12/31/06(a) 7,057,625
6,375,000 B- Graphic Controls Corp., Senior Subordinate Notes,
12.000% due 9/15/00(a) 7,100,156
Unisys Corp., Senior Notes:
9,100,000 B+ 12.000% due 4/15/03 9,884,875
13,150,000 NR 11.750% due 10/15/04 14,169,125
- -----------------------------------------------------------------------------------------------------------
38,211,781
- -----------------------------------------------------------------------------------------------------------
Environmental -- 0.7%
7,150,000 B+ Allied Waste North America Inc., Senior Subordinate
Notes, 10.250% due 12/1/06 7,632,625
- -----------------------------------------------------------------------------------------------------------
Finance -- 2.5%
18,805,000 B First Nationwide Parent Holdings Ltd., Senior Exchange
Notes, 12.500% due 4/15/03 21,038,094
5,225,000 B+ Imperial Credit, Senior Notes, 9.875% due 1/15/07 5,368,688
1,250,000 B+ Ocwen Financial Corp., Senior Notes, 11.875% due 10/1/03 1,370,313
- -----------------------------------------------------------------------------------------------------------
27,777,095
- -----------------------------------------------------------------------------------------------------------
Food & Beverages -- 1.9%
5,000,000 B- Ameriking Inc., Senior Notes, 10.750% due 12/1/06 5,218,750
2,325,000 B+ CFP Holdings, Senior Notes, 11.625% due 1/15/04 2,394,750
1,500,000 B+ Delta Beverage Group, Senior Notes, 9.750%
due 12/15/03(a) 1,558,125
4,350,000 B2* International Home Foods, Senior Subordinate Notes,
10.375% due 8/15/03 4,545,750
4,075,000 BB- TLC Beatrice International Inc., Senior Secured Notes,
11.500% due 10/1/05 4,334,781
2,825,000 B2* Van de Kamp Inc., Senior Subordinate Notes, 12.000%
due 9/15/05 3,132,219
- -----------------------------------------------------------------------------------------------------------
21,184,375
- -----------------------------------------------------------------------------------------------------------
Grocery/Convenience Stores -- 0.8%
8,800,000 B- Pathmark Stores Inc., Debentures, 12.625% due 6/15/02 9,141,000
- -----------------------------------------------------------------------------------------------------------
Healthcare -- 1.7%
6,300,000 B Magellan Health Services, Senior Subordinate Notes,
11.250% due 4/15/04 6,993,000
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================================
<C> <C> <S> <C>
Healthcare -- 1.7% (continued)
Tenet Healthcare:
$ 5,500,000 Ba1* Senior Notes, 8.000% due 1/15/05 $ 5,520,625
6,900,000 Ba3* Senior Subordinate Notes, 8.625% due 1/15/07 7,029,375
- -----------------------------------------------------------------------------------------------------------
19,543,000
- -----------------------------------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 2.2%
3,000,000 B Aztar Corp., Senior Subordinate Notes, 13.750%
due 10/1/04 3,315,000
6,300,000 B- Courtyard by Marriott II, Senior Secured Notes,
10.750% due 2/1/08 6,701,625
6,025,000 BB+ Mohegan Tribal Gaming Authority, Senior Secured Notes,
13.500% due 11/15/02 8,020,781
5,475,000 B Showboat Inc., Senior Subordinate Notes, 13.000%
due 8/1/09 6,227,813
- -----------------------------------------------------------------------------------------------------------
24,265,219
- -----------------------------------------------------------------------------------------------------------
Leisure -- 0.4%
2,861,025 NR Gillett Holdings, Inc., Senior Subordinate Notes,
12.250% due 6/30/02 3,004,076
2,325,000 B3* Remington Arms Co., Inc., Senior Subordinate Notes,
10.000% due 12/1/03 1,955,906
- -----------------------------------------------------------------------------------------------------------
4,959,982
- -----------------------------------------------------------------------------------------------------------
Machinery -- 1.7%
3,775,000 B- Alvey Systems, Inc., Senior Subordinate Notes, 11.325%
due 1/31/03 4,006,219
2,375,000 B Spinnaker Industries Inc., Senior Notes, 10.750%
due 10/15/06 2,478,906
Terex Corp., Senior Notes:
1,500,000 NR- 13.250% due 5/15/02(a) 1,661,250
9,675,000 B- 13.250% due 5/15/02 10,715,063
- -----------------------------------------------------------------------------------------------------------
18,861,438
- -----------------------------------------------------------------------------------------------------------
Metals & Mining -- 2.6%
412,000 NR Algoma Steel Inc., 12.375% due 7/15/05 462,841
4,800,000 NR Commonwealth Aluminum Corp., Subordinate Notes,
10.750% due 10/1/06 4,980,000
6,175,000 B2* Kaiser Aluminum Corp., Senior Subordinate Notes,
12.750% due 2/1/03 6,723,031
8,550,000 B- Haynes International Inc., Senior Notes, 11.625%
due 9/1/00 9,255,375
7,180,000 BB- UCAR Global Enterprises Inc., Senior Subordinate Notes,
12.000% due 1/15/05 8,257,000
- -----------------------------------------------------------------------------------------------------------
29,678,247
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================================
<C> <C> <S> <C>
Miscellaneous -- 1.6%
$ 5,950,000 B3* Intertek Finance PLC, Senior Subordinate Notes,
10.250% due 11/1/06 $ 6,240,063
5,150,000 B- Outsourcing Solutions Inc., Senior Subordinate Notes,
11.000% due 11/1/06 5,484,750
5,650,000 B Unifrax Investment Corp., Senior Notes, 10.500%
due 11/1/03 5,805,375
- -----------------------------------------------------------------------------------------------------------
17,530,188
- -----------------------------------------------------------------------------------------------------------
Oil & Natural Gas -- 5.5%
10,400,000 B+ Clark USA Inc., Senior Notes, 10.875% due 12/1/05 10,647,000
3,900,000 CCC+ Deeptech International, Senior Notes, 12.000%
due 12/15/00 4,187,625
8,495,000 Ba1* Global Marine, Senior Secured Notes, 12.750%
due 12/15/99 9,142,744
4,900,000 B- Kelley Oil & Gas Corp., Senior Notes, 10.375%
due 10/15/06(a) 5,224,625
10,375,000 B+ Parker Drilling, Senior Notes, 9.750% due 11/15/06 10,919,687
10,280,000 B+ R & M Clark Holdings Inc., Zero Coupon Senior Notes
to yield 10.797% due 2/15/00 7,542,950
6,825,000 BB- Santa Fe Energy Resources, Senior Subordinate
Debentures, 11.000% due 5/15/04 7,550,156
5,375,000 B United Meridian Corp., Senior Subordinate Notes,
10.375% due 10/15/05 5,912,500
- -----------------------------------------------------------------------------------------------------------
61,127,287
- -----------------------------------------------------------------------------------------------------------
Packaging & Containers -- 1.8%
7,500,000 B+ Container Corp. of America, Guaranteed Senior Notes,
11.250% due 5/1/04 8,195,175
2,525,000 B- Gaylord Container Corp., Senior Subordinate Debentures,
12.750% due 5/15/05 2,793,281
8,400,000 B- Ivex Holdings Corp., Debentures, step bond to yield
12.917% due 3/15/05 6,510,000
2,500,000 B+ Plastic Containers Inc., Senior Secured Notes, 10.000%
due 12/15/06 2,587,500
- -----------------------------------------------------------------------------------------------------------
20,085,956
- -----------------------------------------------------------------------------------------------------------
Paper & Printing -- 4.4%
4,810,000 B- American Pad & Paper Co., Inc., Senior Subordinate
Notes, 13.000% due 11/15/05 5,693,838
18,950,000 BB Indah Kiat International Finance Co., Senior Secured
Notes, 11.875% due 6/15/02 21,010,813
13,175,000 B+ S.D. Warren Co., Senior Subordinate Notes, 12.000%
due 12/15/04 14,459,562
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================================
<C> <C> <S> <C>
Paper & Printing -- 4.4% (continued)
$ 7,300,000 BB Tjiwi Kimia International, Senior Notes, 13.250%
due 8/1/01 $ 8,312,875
- -----------------------------------------------------------------------------------------------------------
49,477,088
- -----------------------------------------------------------------------------------------------------------
Personal Care -- 2.3%
3,135,000 B- Revlon Consumer Products Corp., Senior Subordinate
Notes, 10.500% due 2/15/03 3,323,100
25,000,000 B- Revlon Worldwide Corp., Zero Coupon Senior
Secured Notes to yield 23.466% due 3/15/98(a) 22,625,000
- -----------------------------------------------------------------------------------------------------------
25,948,100
- -----------------------------------------------------------------------------------------------------------
Real Estate -- 0.7%
7,525,000 BB- Trizec Finance Ltd., Senior Notes, 10.875% due 10/15/05 8,268,094
- -----------------------------------------------------------------------------------------------------------
Retail -- 1.0%
10,025,000 B+ Barnes and Noble, Senior Subordinate Notes,
11.875% due 1/15/03 11,052,562
- -----------------------------------------------------------------------------------------------------------
Textiles -- 0.3%
3,800,000 B+ Pillowtex Corp., Debenture, 10.000% due 11/15/06 3,990,000
- -----------------------------------------------------------------------------------------------------------
Tobacco -- 0.5%
5,550,000 B Consolidated Cigar Acquisition Corp., Senior Subordinate
Notes, 10.500% due 3/1/03 5,820,563
- -----------------------------------------------------------------------------------------------------------
Transportation -- 0.7%
7,575,000 BB- Sea Containers Ltd., Senior Subordinate Debentures,
12.500% due 12/1/04 8,446,125
- -----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $942,799,058) 987,677,127
===========================================================================================================
SHARES SECURITY VALUE
===========================================================================================================
COMMON STOCKS -- 0.3%
===========================================================================================================
Diversified/Conglomerate Manufacturing -- 0.1%
28,086 Tyco International Ltd. 1,604,413
- -----------------------------------------------------------------------------------------------------------
Metals & Mining -- 0.2%
297,744 Algoma Steel Inc. 1,866,282
- -----------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $2,174,951) 3,470,695
===========================================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
===========================================================================================================
<C> <S> <C>
PREFERRED STOCKS -- 5.5%
===========================================================================================================
Broadcasting -- 2.6 %
47,250 SFX Broadcasting $ 4,819,500
21,788 Time Warner Inc., Series K,
Exchange 10.250%(a) 23,748,920
- -----------------------------------------------------------------------------------------------------------
28,568,420
- -----------------------------------------------------------------------------------------------------------
Finance -- 0.3%
148,300 California Federal Bank Preferred Capital 3,726,038
- -----------------------------------------------------------------------------------------------------------
Food & Beverages -- 0.2%
1,500 Ameriking Inc., Unit 1,665,000
- -----------------------------------------------------------------------------------------------------------
Healthcare & Pharmaceuticals -- 0.5%
274,916 Foxmeyer Health Corp., Series A,
Payment-in-kind, Exchange $4.20 1,786,954
3,800 Fresensius Medical Care 3,857,000
- -----------------------------------------------------------------------------------------------------------
5,643,954
- -----------------------------------------------------------------------------------------------------------
Publishing -- 0.0 %
1,355 K-III Communications Corp., Series B, Exchange 11.625% 134,173
- -----------------------------------------------------------------------------------------------------------
Telecommunications -- 1.9%
60,000 Nextlink Communications Unit 3,007,500
14,896 PanAmSat Corp., Series A, Exchange $31.875 18,173,868
- -----------------------------------------------------------------------------------------------------------
21,181,368
- -----------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost-- $63,953,808) 60,918,953
===========================================================================================================
CONVERTIBLE PREFERRED STOCKS -- 0.8%
===========================================================================================================
Automobiles/Trucking -- 0.8%
166,100 Navistar International Corp., Series G, Convertible $6.00
(Cost-- $9,275,133) 9,363,888
===========================================================================================================
WARRANTS -- 0.1 %
65,340 Clearnet Communications, Expires 9/15/05(b) 392,039
29,000 DeGeorge Financial Corp., Expires 4/1/97(b) 290
18,522 Nextel Communications Inc., Expires 4/25/99(b) 186
37,490 Pagemart Inc., Expires 12/31/03(a)(b) 178,078
18,375 Pagemart Nationwide, Expires 12/31/03(a)(b) 137,813
8,025 S.D. Warren Co., Expires 12/15/06(a)(b) 104,325
213,479 Trump Castle Hotel & Casino, Expires 9/15/00(b) 0
5,925 Wireless One, Inc. Expires 10/15/03(b) 13,331
- -----------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $516,472) 826,062
===========================================================================================================
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===========================================================================================================
<C> <S> <C>
REPURCHASE AGREEMENTS -- 5.0%
===========================================================================================================
$ 50,000,000 CS First Boston Corp., 5.477% due 2/3/97,
Proceeds at maturity-- $50,022,821;
(Fully collateralized by U.S. Treasury Notes,
7.250% due 3/15/98; Market value-- $51,023,299) $ 50,000,000
6,150,000 Chase Manhattan Bank, 5.498% due 2/3/97,
Proceeds at maturity-- $6,152,818;
(Fully collateralized by U.S. Treasury Notes,
6.375% due 3/31/01; Market value-- $6,273,036) 6,150,000
- -----------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost-- $56,150,000) 56,150,000
===========================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $1,074,869,422**) $1,118,406,725
===========================================================================================================
</TABLE>
(a) Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from registration,
normally to qualified institutional buyers.
(b) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 18 for definition of ratings.
See Notes to Financial Statements.
17
<PAGE>
================================================================================
Bond Ratings
================================================================================
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except that those identified by an asterisk (*) are rated by Moody's Investors
Services, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's letter ratings may be modified by the addition of a plus (+)
or a minus (-) sign, which is used to show relative standing within the major
rating categories, except in the AAA-Prime Grade category.
BBB -- Bonds rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas
they normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category
than for bonds in higher rated categories.
BB, B and CCC -- Bonds rated "BB" and "B" are regarded, on balance, as
predominantly speculative with respect to capacity to
pay interest and repay principal in accordance with the
terms of the obligation. BB represents a lower degree
of speculation than B, and CCC the highest degree of
speculation. While such bonds will likely have some
quality and protective characteristics, these are
outweighed by large uncertainties or major risk
exposures to adverse conditions.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "B". The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic category.
Baa -- Bonds rated "Baa" are considered to be medium grade
obligations; that is they are neither highly protected
nor poorly secured. Interest payment and principal
security appear adequate for the present but certain
protective elements may be lacking or may be
characteristically unreliable over any great length of
time. These bonds lack outstanding investment
characteristics and may have speculative
characteristics as well.
Ba -- Bonds that are rated "Ba" are judged to have
speculative elements; their future cannot be considered
as well assured. Often the protection of interest and
principal payments may be very moderate and thereby may
not well characterize bonds in this class.
B -- Bonds that are rated "B" generally lack characteristics
of desirable investments. Assurance of interest and
principal payment or of maintenance of other terms of
the contract over any long period of time may be small.
Caa -- Bonds that are rated "Caa" are of poor standing. These
issues may be in default, or present elements of danger
may exist with respect to principal or interest.
NR -- Indicates that the bond is not rated by Standard &
Poor's or Moody's.
18
<PAGE>
================================================================================
Statement of Assets and Liabilities (unaudited) January 31, 1997
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $1,074,869,422) $ 1,118,406,725
Receivable for Fund shares sold 3,667,517
Receivable for securities sold 30,932,623
Dividends receivable 345,104
Interest receivable 17,325,824
- --------------------------------------------------------------------------------------
Total Assets 1,170,677,793
- --------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 8,926,336
Dividends payable 8,741,483
Investment advisory fees payable 484,558
Administration fees payable 193,823
Distribution fees payable 104,726
Payable for Fund shares purchased 12,000
Accrued expenses 291,615
- --------------------------------------------------------------------------------------
Total Liabilities 18,754,541
- --------------------------------------------------------------------------------------
Total Net Assets $ 1,151,923,252
======================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 99,999
Capital paid in excess of par value 1,345,969,168
Undistributed net investment income 1,236,017
Accumulated net realized loss on security transactions, options
and futures contracts (238,919,160)
Net unrealized appreciation of investments and foreign currencies 43,537,228
- --------------------------------------------------------------------------------------
Total Net Assets $ 1,151,923,252
======================================================================================
Shares Outstanding:
Class A 33,671,078
- --------------------------------------------------------------------------------------
Class B 54,478,391
- --------------------------------------------------------------------------------------
Class C 2,930,503
- --------------------------------------------------------------------------------------
Class Y 8,910,350
- --------------------------------------------------------------------------------------
Class Z 8,578
- --------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $11.51
- --------------------------------------------------------------------------------------
Class B * $11.52
- --------------------------------------------------------------------------------------
Class C ** $11.53
- --------------------------------------------------------------------------------------
Class Y (and redemption price) $11.52
- --------------------------------------------------------------------------------------
Class Z (and redemption price) $11.52
- --------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value) $12.05
======================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% 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.
19
<PAGE>
================================================================================
Statement of Operations (unaudited)
================================================================================
<TABLE>
<S> <C>
For the Six Months Ended January 31, 1997
INVESTMENT INCOME:
Interest $ 55,966,564
Dividends 2,845,115
- -----------------------------------------------------------------------------------------
Total Investment Income 58,811,679
- -----------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 2,812,630
Investment advisory fees (Note 2) 2,716,951
Administration fees (Note 2) 1,086,780
Shareholder and system servicing fees 368,300
Registration fees 90,740
Shareholders communications 39,321
Custody 22,987
Audit and legal 19,156
Trustees' fees 12,602
Other 21,153
- -----------------------------------------------------------------------------------------
Total Expenses 7,190,620
- -----------------------------------------------------------------------------------------
Net Investment Income 51,621,059
- -----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS, OPTIONS, FUTURES CONTRACTS
AND FOREIGN CURRENCIES (NOTES 3, 5 AND 6):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 625,775
Options contracts (515,134)
Futures contracts 723,333
- -----------------------------------------------------------------------------------------
Net Realized Gain 833,974
- -----------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of
Investments and Foreign Currencies:
Beginning of period (4,516,037)
End of period 43,537,228
- -----------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 48,053,265
- -----------------------------------------------------------------------------------------
Net Gain on Investments, Options, Future Contracts and Foreign Currencies 48,887,239
- -----------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 100,508,298
=========================================================================================
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended January 31, 1997 (unaudited)
and the Year Ended July 31, 1996
<TABLE>
<CAPTION>
1997 1996
==========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 51,621,059 $ 84,120,788
Net realized gain 833,974 5,895,839
Increase (decrease) in net unrealized appreciation 48,053,265 (16,205,851)
- ------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 100,508,298 73,810,776
- ------------------------------------------------------------------------------------------
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net investment income (50,405,793) (84,933,098)
- ------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (50,405,793) (84,933,098)
- ------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 254,874,005 368,319,175
Net asset value of shares issued for
reinvestment of dividends 20,317,269 43,349,499
Cost of shares reacquired (137,745,546) (257,795,961)
- ------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 137,445,728 153,872,713
- ------------------------------------------------------------------------------------------
Increase in Net Assets 187,548,233 142,750,391
NET ASSETS
Beginning of period 964,375,019 821,624,628
- ------------------------------------------------------------------------------------------
End of period* $ 1,151,923,252 $ 964,375,019
==========================================================================================
* Includes undistributed net investment
income of: $ 1,236,017 $ 20,751
==========================================================================================
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney High Income 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 Premium Total Return Fund, Smith Barney Convertible 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 semi-annual reports.
The Smith Barney Premium Total Return Fund changed its fiscal year end to
December 31 and, therefore, the semi-annual report will be prepared as of June
30, 1997.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at bid price, or in the absence of a recent
bid price, at the bid equivalent obtained from one or more of the major market
makers; (c) securities that have a maturity of more than 60 days are valued at
prices based on market quotations for securities of similar type, yield and
maturity; (d) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, as applicable; (e) 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 collected
or paid are adjusted when reported by the custodian bank; (f) dividend income is
recorded on ex-dividend date and interest income is recorded on an accrual
basis; (g) gains or losses on the sale of securities are recorded using the
specific identification method; (h) dividends and distributions to shareholders
are recorded on the ex-dividend date; (i) direct expenses are charged to each
class; management fees and general fund expenses are allocated on the basis of
the relative net assets; (j) the character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At July 31, 1996, reclassifications
were made to the Fund's capital accounts to reflect permanent book/tax
differences and income and gains available for distributions under income tax
regulations.
22
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
Accordingly, a portion of accumulated net realized loss amounting to $3,088,904
has been reclassified to paid-in capital. 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 from time to time may enter into options and/or
futures contracts to hedge market risk.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The Fund
pays SBMFM an investment advisory fee calculated at an annual rate of 0.50% of
the average daily net assets. This fee is calculated daily and paid monthly.
SBMFM 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
Trust shares and primary broker for its portfolio agency transactions. For the
six months ended January 31, 1997, SB received sales charges of approximately
$315,000 on sales of the Fund's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
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. For the six months ended January 31, 1997, CDSCs paid to SB were
approximately:
<TABLE>
<CAPTION>
Class B Class C
================================================================================
<S> <C> <C>
CDSCs $405,000 $6,000
================================================================================
</TABLE>
23
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
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. In addition, the Fund pays a
distribution fee with respect to Class B and C shares calculated at an annual
rate of 0.50% and 0.45%, respectively, of the average daily net assets for each
class. For the six months ended January 31, 1997, total Distribution Plan fees
incurred were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $462,491 $2,255,000 $95,139
================================================================================
</TABLE>
All officers and one Trustee of the Trust are employees of SB.
3. INVESTMENTS
During the six months ended January 31, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
PURCHASES $525,735,013
- --------------------------------------------------------------------------------
Sales 351,230,801
================================================================================
</TABLE>
At January 31, 1997, aggregate gross unrealized appreciation and
depreciation of investments were as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Gross unrealized appreciation $78,581,591*
Gross unrealized depreciation 35,044,288*
- --------------------------------------------------------------------------------
Net unrealized appreciation $43,537,303*
================================================================================
</TABLE>
* Substantially the same for Federal income tax purposes.
4. CAPITAL LOSS CARRYFORWARD
At July 31, 1996, the Fund had, for Federal tax purposes, capital loss
carryforwards of approximately $239,724,000 available, to offset future realized
capital gains. To the extent that these capital carryforward losses are used to
offset realized capital gains, it is probable that the gains so offset will not
be distributed. The following capital loss carryforward amounts expire on July
31 in the year indicated below:
<TABLE>
<CAPTION>
Carryforward
Year Amount
================================================================================
<S> <C>
1997 $39,893,000
1998 68,550,000
1999 84,656,000
2000 9,861,000
2003 13,404,000
2004 23,360,000
================================================================================
</TABLE>
24
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
5. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
received or made and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Fund's basis in the contract. The Fund enters into such contracts to hedge a
portion of its portfolio. The Fund bears the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts) and the credit risk should a counterparty fail to perform
under such contracts.
As of January 31, 1997, the Fund had no open futures contracts.
6. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily and are included in the schedule
of investments. When a purchased option expires, the Fund will realize a loss in
the amount of the premium paid. When the Fund enters into 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 January 31, 1997, the Fund had no open purchased put or call options
contracts.
When a Fund writes a covered 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 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
25
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
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 put option is exercised, the amount of the premium
orginally received will reduce the cost of the security which the Fund purchased
upon exercise. When written 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 a loss if the market price of the underlying security declines.
During the six months ended January 31, 1997, the Fund did not write any
options.
7. 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.
8. SHARES OF BENEFICIAL INTEREST
At January 31, 1997, 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 expenses specifically related to the distribution of its shares.
At January 31, 1997, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y Class Z
=========================================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $398,115,805 $813,780,986 $32,739,444 $99,078,270 $2,354,662
=========================================================================================================
</TABLE>
26
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1997 July 31, 1996
--------------------------------- -------------------------------
Shares Amount Shares Amount
============================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 5,034,746 $ 56,812,255 8,308,861 $ 92,921,114
Shares issued on
reinvestment 726,088 8,172,246 1,612,994 17,961,926
Shares redeemed (3,137,120) (35,429,310) (7,405,625) (82,925,205)
- ------------------------------------------------------------------------------------------------------------
Net Increase 2,623,714 $ 29,555,191 2,516,230 $ 27,957,835
============================================================================================================
Class B
Shares sold 7,656,142 $ 86,565,492 15,087,459 $ 168,856,580
Shares issued on
reinvestment 913,333 10,285,432 2,055,044 22,903,819
Shares redeemed (5,041,364) (56,998,333) (9,273,067) (103,699,076)
- ------------------------------------------------------------------------------------------------------------
Net Increase 3,528,111 $ 39,852,591 7,869,436 $ 88,061,323
============================================================================================================
Class C
Shares sold 1,158,921 $ 13,143,156 1,609,793 $ 18,045,708
Shares issued on
reinvestment 52,678 594,014 66,555 742,283
Shares redeemed (194,710) (2,206,039) (303,748) (3,396,461)
- ------------------------------------------------------------------------------------------------------------
Net Increase 1,016,889 $ 11,531,131 1,372,600 $ 15,391,530
============================================================================================================
Class Y
Shares sold 8,760,453 $ 98,342,283 7,916,081 $ 88,491,973
Shares issued on
reinvestment 89,546 1,009,633 76,423 856,979
Shares redeemed (3,133,044) (35,504,042) (5,727,363) (64,207,334)
- ------------------------------------------------------------------------------------------------------------
Net Increase 5,716,955 $ 63,847,874 2,265,141 $ 25,141,618
============================================================================================================
Class Z
Shares sold 846 $ 10,819 340 $ 3,800
Shares issued on
reinvestment 22,771 255,944 79,450 884,492
Shares redeemed (666,461) (7,607,822) (322,209) (3,567,885)
- ------------------------------------------------------------------------------------------------------------
Net Decrease (642,844) $ (7,341,059) (242,419) $ (2,679,593)
============================================================================================================
</TABLE>
27
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1996 1995 1994 1993(2)
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.98 $11.10 $11.16 $12.01 $11.03
- ---------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.55 1.08 1.08 1.08 0.75
Net realized and unrealized gain (loss) 0.52 (0.12) (0.02) (0.81) 1.09
- ---------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.07 0.96 1.06 0.27 1.84
- ---------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.54) (1.08) (1.05) (1.06) (0.82)
Overdistribution of net investment income -- -- -- (0.06) (0.04)
Capital -- -- (0.07) -- --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.54) (1.08) (1.12) (1.12) (0.86)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.51 $10.98 $11.10 $11.16 $12.01
- ---------------------------------------------------------------------------------------------------------------
Total Return 9.94%++ 8.95% 10.28% 2.11% 17.29%++
- ---------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $387,692 $341,040 $316,716 $233,678 $242,371
- ---------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.06%+ 1.10% 1.11% 1.11% 1.16%+
Net investment income 9.67+ 9.65 10.03 9.27 9.52+
- ---------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 72% 60% 98% 95%
===============================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) For the period from November 6, 1992 (inception date) to July 31, 1993.
++ 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 B Shares 1997(1) 1996 1995 1994 1993
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.99 $11.11 $11.16 $12.01 $11.15
- ---------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.53 1.02 1.03 1.02 1.08
Net realized and unrealized gain (loss) 0.52 (0.12) (0.02) (0.81) 0.88
- ---------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.05 0.90 1.01 0.21 1.96
- ---------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.52) (1.02) (0.99) (1.00) (1.05)
Overdistribution of net investment income -- -- -- (0.06) (0.05)
Capital -- -- (0.07) -- --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.52) (1.02) (1.06) (1.06) (1.10)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.52 $10.99 $11.11 $11.16 $12.01
- ---------------------------------------------------------------------------------------------------------------
Total Return 9.67%++ 8.41% 9.77% 1.60% 18.55%
- ---------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $627,674 $560,031 $478,499 $509,608 $448,639
- ---------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.55%+ 1.59% 1.61% 1.60% 1.66%
Net investment income 9.18+ 9.16 9.52 8.77 9.02
- ---------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 72% 60% 98% 95%
===============================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
29
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1997(1) 1996 1995(2)(3)
========================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $11.00 $11.11 $10.90
- ----------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.53 1.03 0.95
Net realized and unrealized gain (loss) 0.52 (0.11) 0.23
- ----------------------------------------------------------------------------------------
Total Income From Operations 1.05 0.92 1.18
- ----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.52) (1.03) (0.90)
Capital -- -- (0.07)
- ----------------------------------------------------------------------------------------
Total Distributions (0.52) (1.03) (0.97)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.53 $11.00 $11.11
- ----------------------------------------------------------------------------------------
Total Return 9.68%++ 8.56% 11.50%++
- ----------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $33,791 $21,049 $6,011
- ----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.49%+ 1.51% 1.56%+
Net investment income 9.24+ 9.23 9.58+
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 72% 60%
========================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) On November 7, 1994, the former Class D shares were renamed Class C shares.
(3) For the period from August 24, 1994 (inception date) to July 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
30
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Y Shares 1997(1) 1996 1995(2)
========================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.99 $11.10 $10.88
- ----------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.56 0.92 0.09
Net realized and unrealized gain (loss) 0.52 (0.11) 0.23
- ----------------------------------------------------------------------------------------
Total Income From Operations 1.08 0.81 0.32
- ----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.55) (0.92) (0.03)
Capital -- -- (0.07)
- ----------------------------------------------------------------------------------------
Total Distributions (0.55) (0.92) (0.10)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.52 $10.99 $11.10
- ----------------------------------------------------------------------------------------
Total Return 10.07%++ 9.32% 2.91%++
- ----------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $102,667 $35,097 $10,306
- ----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.73%+ 0.76% 0.86%+
Net investment income 10.00+ 9.98 10.28+
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 72% 60%
========================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) For the period from April 28, 1995 (inception date) to July 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
31
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Z Shares 1997(1) 1996 1995(2) 1994 1993(3)
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.99 $11.09 $11.16 $12.01 $11.03
- ---------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.56 1.11 1.11 1.10 0.79
Net realized and unrealized gain (loss) 0.52 (0.10) (0.03) (0.80) 1.07
- ---------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.08 1.01 1.08 0.30 1.86
- ---------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.55) (1.11) (1.08) (1.09) (0.84)
Overdistribution of net investment
income -- -- -- (0.06) (0.04)
Capital -- -- (0.07) -- --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.55) (1.11) (1.15) (1.15) (0.88)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.52 $10.99 $11.09 $11.16 $12.01
- ---------------------------------------------------------------------------------------------------------------
Total Return 10.07%++ 9.42% 10.55% 2.37% 17.47%++
- ---------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $99 $7,158 $9,917 $11,370 $26,112
- ---------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.74%+ 0.77% 0.86% 0.77% 0.81%+
Net investment income 9.99+ 9.98 10.28 9.61 9.88+
- ---------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 36% 72% 60% 98% 95%
===============================================================================================================
</TABLE>
(1) For the six months ended January 31, 1997 (unaudited).
(2) On November 7, 1994, the former Class C shares were renamed Class Z shares.
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
32
<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 and Investment Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
John C. Bianchi
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- ---------------------------------
A Member of TravelersGroup [LOGO]
INVESTMENT ADVISER
Smith Barney Mutual Funds
Management Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER
SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general
information of the shareholders of Smith
Barney 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 and expenses as well as other
pertinent information.
SMITH BARNEY
HIGH INCOME FUND
388 Greenwich Street
New York, New York 10013
FD2172 3/97
