[PHOTO]
[PHOTO] Smith Barney
Diversified
Strategic
Income Fund
------------------
SEMI-ANNUAL REPORT
------------------
January 31, 1998
[LOGO] Smith Barney
Investing for your future.
Every day(SM).
<PAGE>
Smith Barney
Diversified Strategic
Income Fund
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================================================================================
The Smith Barney Diversified Strategic Income Fund ("Fund") seeks high current
income through investments in bonds issued by the U.S. Government and its
agencies, high-yield corporate bonds and foreign government bond issues.
Smith Barney Diversified Strategic Income
Average Annual Total Returns
January 31, 1998
Without Sales Charge*
----------------------------------------------
Class A Class B Class C
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Six-Months+ 4.43% 4.28% 4.29%
- --------------------------------------------------------------------------------
One-Year 9.46 9.00 8.88
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Five-Year 8.39 7.92 N/A
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Since Inception++ 8.57 9.13 7.54
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With Sales Charge**
----------------------------------------------
Class A Class B Class C
================================================================================
Six-Months+ (0.30)% (0.22)% 3.29%
- --------------------------------------------------------------------------------
One-Year 4.48 4.50 7.88
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Five-Year 7.39 7.77 N/A
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Since Inception++ 7.61 9.13 7.54
================================================================================
* Assumes reinvestment of all dividend and capital gain distributions, if
any, at net asset value and does not reflect 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 Class C shares.
** Assumes reinvestment of all dividend and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum 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.
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.
+ Total return is not annualized, as it may not be a representative of the
total return for the year.
++ Inception dates for Class A, B and C shares are November 6, 1992, December
28, 1989 and March 19, 1993, respectively.
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FUND HIGHLIGHT
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Moderate U.S. economic growth, combined with historically low inflation and the
ongoing financial and economic turmoil in Southeast Asia, should provide more
than enough ammunition for U.S. interest rates to fall lower. With respect to
the U.S. high yield bond market, we believe the uncertainties that exist in the
world's stock markets will tend to favor the higher-quality high yield bonds
over the lower-quality bonds, which are usually more vulnerable in the event of
a market downturn. In the global arena, the onset of the EMU should continue to
exert a positive influence on many European bond markets.
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NASDAQ SYMBOL
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Class A SDSAX
Class B SLDSX
Class C SDSIX
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WHAT'S INSIDE
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Shareholder Letter ........................................................... 1
Historical Performance ....................................................... 5
Smith Barney Diversified Strategic
Income Fund at a Glance ...................................................... 8
Schedule of Investments ...................................................... 9
Statement of Assets and Liabilities ..........................................19
Statement of Operations ......................................................20
Statements of Changes in Net Assets ..........................................21
Notes to Financial Statements ................................................22
Financial Highlights .........................................................27
<PAGE>
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Shareholder Letter
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[PHOTO] [PHOTO]
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President and
Investment Officer
[PHOTO] [PHOTO]
JOHN C. SIMON
BIANCHI, CFA HILDRETH
Vice President and Vice President and
Investment Officer Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for Smith Barney Diversified
Strategic Income Fund ("Fund") for the period ended January 31, 1998. In this
report, we summarize the period's prevailing economic and market conditions and
briefly outline our portfolio strategy. A detailed summary of performance and
current holdings can be found in the appropriate sections that follow.
The Fund seeks to provide investors with a high current income while attempting
to minimize the risk of interest rate and currency fluctuations. The Fund's
managers follows a flexible investment approach that emphasizes both
diversification and balance. Based on their analysis of 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 months ended January 31, 1998, the Fund's Class B shares had a total
return of 4.28% versus its Lipper Analytical Services, Inc. peer group average
total return of 3.29%. (Lipper is a major fund-tracking organization.) We are
pleased to report that during the past six months, the Fund received an overall
four-star rating from Morningstar Inc.,* a mutual fund research firm. The Fund
distributed dividends totaling $0.31 per Class B share over the past six months.
Based on the Fund's net asset value of $8.06 and current monthly income dividend
of $0.047 per Class B share as of January 31, 1998, this equates to an
annualized dividend yield of 7.00%.
As of January 31, 1998, the Fund's allocation was roughly 32.9% in foreign
government bonds, 26.6% in high-yield securities and 33.5% in U.S. government,
mortgage-backed securities and 7% cash. In comparison, as of July 31, 1997, the
Fund's allocation was 35.5% in foreign government bonds, 19.7% in high-yield
corporate bonds and 38% in U.S. government and mortgage-backed securities.
Following are brief summaries of the economic and market conditions that
affected the Fund's three major sectors during its past fiscal year.
U.S. Government and Mortgage-Backed Securities
In our view, one of the most important events for the market in 1997 was the
widely publicized currency and
- ----------
* Morningstar Inc., proprietary ratings reflect historical risk-adjusted
performance through 1/31/98. The ratings are subject to change every month.
Past performance is not a guarantee of future results. Morningstar ratings
are calculated from the Fund's 3- and 5-year returns (with fee adjustments)
in excess of 90-day T-bill returns. The Fund's Class A and B shares
received a 4-star rating for the 3- and 5-year periods and overall in a
field of 1,383 and 797 funds, respectively. The Fund's Class C shares
received a 4-star rating for both overall and for the 3-year period among
1,383 funds. The top ten percent of funds in any one category receive 5
stars, the next 22.5% receive 4 stars, the middle 35% receive 3 stars, the
next 22.5% receive two stars and the bottom 10% receive a single star.
Funds with less than 36 months of return data are not rated.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 1
<PAGE>
economic turmoil in Asia, specifically in Korea, Japan and Indonesia. As these
currencies were devalued, the U.S. dollar strengthened. Other notable events
during the reporting period include:
o The drastic reduction in the U.S. budget deficit. According to the latest
report by the Congressional Budget Office, the deficit will go down to $5
billion in fiscal 1998 and may actually run annual surpluses in 2001 if
present policies continue and the economy continues to grow.
o As a result of lower rates, mortgage refinancing has increased.
o The drive toward the European Monetary Union ("EMU") continues to be on
target for 1999.
As you can see from the chart below, interest rates continued to decline during
the reporting period.
Yields from U.S. Treasury Securities
1/31/98 7/31/97
------- -------
2-year U.S. Treasury Note 5.35% 5.72%
3-year U.S. Treasury Note 5.36 5.78
5-year U.S. Treasury Note 5.43 5.90
10-year U.S. Treasury Bond 5.56 6.01
30-year U.S. Treasury Bond 5.87 6.30
Looking ahead to the remainder of 1998, we anticipate the following events to
have an impact on the bond market:
o The turmoil in Asia may be worse than what is being reported. Therefore,
the troubles in Asia will depress U.S. economic activity even more than
current consensus expectations.
o The Federal Reserve Board ("Fed") will probably ease monetary policy and
lower rates. In fact, several Fed Governors have recently shifted to a
"dovish" view regarding interest rates.
o U.S economic growth is expected to be modestly weaker.
o Interest rates will likely be lower and the yield on the 30-year U.S.
Treasury bond may initially trend toward 51/2%.
High-Yield Corporate Bonds
The high yield bond market generated relatively strong performance over the past
six months ended January 31, 1998 with total returns in excess of 6.50% compared
to the roughly 4% to 5% returns for intermediate U.S. Treasury securities and
investment-grade corporate bonds, and the roughly 6% to 9% returns for long-term
U.S. Treasury securities and investment grade corporate bonds, respectively.
(Intermediate-term usually refers to bonds with maturities of less than ten
years and long-term bonds are generally considered to have maturities of ten or
more years.)
The Salomon Smith Barney High Yield Market Index was up 6.79% for the past six
months. (The Salomon Smith Barney High Yield Market Index is a broad-based
measure and consists of cash-pay, deferred interest securities with remaining
maturities of at least one year.) The lower-quality issues, or bonds rated
CCC/Caa or less, generated the strongest total returns (i.e., a roughly 7%-8%
range) in the past six months. This was not surprising given the strong
performance of the U.S. stock markets. The lower-quality segment of the high
yield bond market tends to more closely track the U.S. stock market than the
higher quality segments of the high yield bond market.
After a relatively strong performance through the first three quarters of 1997,
the high yield bond market began to underperform U.S. Treasury securities in the
fourth quarter as fears of an economic slowdown and lower corporate profits
caused high yield bond premiums to increase versus the Treasury market. The
greatest underperformance in the fourth quarter was among the lower quality
issues. In periods of increasing economic uncertainty, the lower-quality
segments of the high yield market generally underperform because of their
greater vulnerability to weaker economic conditions. The more interest-rate
sensitive, higher-quality issues generated the strongest total returns as
general interest rates declined.
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2 1998 Semi-Annual Report to Shareholders
<PAGE>
By the start of the fourth quarter of 1997, the crisis in Asia had taken center
stage with severe currency and financial market declines in a number of Asian
countries potentially threatening economic stability not only throughout the Far
Eastern region, but throughout the world. Asia represents more than 25% of world
economic output and is a significant producer and consumer of a large number of
products and services. Consequently, there was a dramatic increase in market
volatility in the fourth quarter, especially in the world's stock markets. Many
investors began to invest more aggressively in U.S. Treasury securities which
are viewed as the ultimate safe haven during periods of economic uncertainty.
Yet, despite this increasing uncertainty over economic growth and corporate
profitability, the U.S. stock markets had another strong year with total returns
in the 25% to 33% range.
In 1997, the U.S. high yield bond market responded favorably to the strength in
the domestic stock and U.S. Treasury markets. During the year a total of
approximately $19 billion of new money flowed into open-end high yield mutual
funds. In addition, there was increased demand for high yield securities by
insurance companies and pension funds. The overall demand was significant enough
to absorb a record total of more than $120 billion of new high yield issues.
Given this record new issuance, the high yield market now totals over $450
billion in size, representing a meaningful 25% of the entire U.S. corporate bond
market.
Foreign Government Securities
In contrast with the world's other major regions, the European continent
experienced a relatively trouble free period during the reporting period. The
key factor determining interest rate behavior was the growing confidence
observed in the progress towards the EMU in 1999. The German Bundesbank raised
its key discount rate by 30 basis points (a basis point is one hundredth of a
percent) in October in a move that was seen to have a double-edged effect. The
first effect was to arrest the mark's depreciation against the U.S. dollar, a
development that was deemed detrimental to the future inflationary outlook in
Germany. Secondly, the interest rate hike helped set the tone for a pan-European
monetary policy under the EMU.
German government bonds returned approximately 6.3% during 1997, as measured by
the J.P. Morgan Government Bond Index. (The J.P. Morgan Government Bond Index is
the most widely-used benchmark for measuring performance and quantifying risk
across international fixed income bond markets.) This performance was marginally
exceeded by the returns for the other core markets of Holland (about 6.7%) and
Belgium (roughly 6.9%). The French government bond market outperformed the index
by an even wider margin, with a return of approximately 7.6%, supported by
ongoing demand from domestic institutions. The Danish government bond market
followed suit with a local currency return of about 9.42%. Bond yields across
the continent were additionally supported by shrinking budget deficits as
European governments kept their fiscal policies directed at meeting the
Maastricht criteria.
Against this background, it was not surprising that the higher-yielding bond
markets all generated superior returns during the year. The Italian government
bond market led the pack with a return of nearly 14.5% in local currency terms
as it seemed increasingly likely that Italy would participate with the first
round of the EMU entrants in 1999. Within the Exchange Rate Mechanism, Italian
bonds had the greatest potential for interest rate convergence against the core
European economies, and the interest rate differential versus Germany contracted
to imply a 25 basis point differential between German and Italian 10-year
government bonds at the point of Monetary Union.
The best-performing European bond market was the U.K. government market with a
local currency return of roughly 14.85%. British gilt yields fell on speculation
that the newly victorious Labor government would prove less hostile than the
previous Conservative administration toward the European
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 3
<PAGE>
integration initiatives and that it may signal British intentions to join a
currency union, perhaps in 2002. The Bank of England was granted political
independence and asserted its credentials by raising official interest rates
five times in 25 basis point increments to 7.25% during the course of the year.
The Swedish bond market returned nearly 8.0%, unable to decouple from the
over-riding EMU optimism elsewhere in Europe. The commitment of the Scandinavian
countries to a single currency is far from certain, but with the convergence
theme almost fully played out in continental Europe, investors were left with
few options but to look farther afield in the pursuit of higher-returning
strategies.
The Canadian government bond market underperformed U.S. Treasury securities with
a total return in local currency terms of roughly 9.39%. The Bank of Canada
began to raise interest rates independently of the Fed, tightening by a total of
125 basis points in four moves between June and December. At the end of the year
Canadian official interest rates stood at 4.25%. Weakness in the Canadian dollar
allied with strong domestic demand growth were both factors behind the policy
shift.
Market Outlook
Moderate U.S. economic growth, combined with historically low inflation and the
ongoing financial and economic turmoil in Southeast Asia, should provide more
than enough ammunition for U.S. interest rates to fall lower. With respect to
the high yield bond market, we believe the uncertainties that exists in the
world's stock markets will tend to favor the higher-quality high yield bonds
over the lower quality bonds, which are usually more vulnerable in the event of
a market downturn. In the global arena, the onset of the EMU should continue to
exert a positive influence on many European bond markets. The integration of
Europe's key economies should help keep interest rates low and encourage greater
fiscal restraint from the member governments.
In closing, we thank you for investing in the Smith Barney Diversified Strategic
Income Fund. We look forward to continuing to help you pursue your financial
goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President and
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
March 4, 1998
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4 1998 Semi-Annual Report to Shareholders
<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>
1/31/98 $8.01 $8.03 $0.33 $0.00 $0.00 4.43%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 7.82 8.01 0.67 0.00 0.00 11.36
- ------------------------------------------------------------------------------------------------------------------------------------
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 $3.17 $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>
1/31/98 $8.03 $8.06 $0.31 $0.00 $0.00 4.28%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 7.83 8.03 0.62 0.00 0.00 10.89
- ------------------------------------------------------------------------------------------------------------------------------------
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 $4.91 $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>
1/31/98 $8.01 $8.04 $0.31 $0.00 $0.00 4.29%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 7.81 8.01 0.62 0.00 0.00 10.92
- ------------------------------------------------------------------------------------------------------------------------------------
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 $2.74 $0.13 $0.26
====================================================================================================================================
</TABLE>
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Smith Barney Diversified Strategic Income Fund 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>
1/31/98 $8.00 $8.03 $0.34 $0.00 $0.00 4.75%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 7.82 8.00 0.70 0.00 0.00 11.64
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/96 7.89 7.82 0.53 0.00 0.05 6.65+
====================================================================================================================================
Total $1.57 $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>
1/31/98 $8.01 $8.04 $0.34 $0.00 $0.00 4.71%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 7.82 8.01 0.69 0.00 0.00 11.69
- ------------------------------------------------------------------------------------------------------------------------------------
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 $3.27 $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 1/31/98+ 4.43% 4.28% 4.29% 4.75% 4.71%
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 1/31/98 9.46 9.00 8.88 9.87 9.78
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/98 8.39 7.92 N/A N/A 8.77
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 1/31/98 8.57 9.13 7.54 10.02 8.94
==============================================================================================================================
<CAPTION>
With Sales Charge(2)
------------------------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/98+ (0.30)% (0.22)% 3.29% 4.75% 4.71%
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended 1/31/98 4.48 4.50 7.88 9.87 9.78
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/98 7.39 7.77 N/A N/A 8.77
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 1/31/98 7.61 9.13 7.54 10.02 8.94
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Cumulative Total Return
================================================================================
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/98) 53.81%
- --------------------------------------------------------------------------------
Class B (Inception* through 1/31/98) 102.96
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/98) 42.54
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/98) 24.72
- --------------------------------------------------------------------------------
Class Z (Inception* through 1/31/98) 56.62
================================================================================
(1) Assumes reinvestment of all dividend 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 ("CDSCs") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividend 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 representative of the
total return for the year.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 7
<PAGE>
================================================================================
Smith Barney Diversified Strategic Income Fund at a Glance (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 1998
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney Diversified Lehman Brothers
Strategic Income Aggregate Bond Index
<S> <C> <C>
Dec 1989 10000 10000
July 1990 10150 10425
July 1991 11305 11541
July 1992 13407 13247
July 1993 14505 14595
July 1994 14704 14609
July 1995 16281 16086
July 1996 17551 16976
July 1997 19463 18804
Jan 1998 20296 19725
</TABLE>
+ 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, 1998. 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.
Top Ten Holdings* As of January 31, 1998
- --------------------------------------------------------------------------------
1. Government National Mortgage Association 20.0%
- --------------------------------------------------------------------------------
2. Federal Home Loan Mortgage Corp. 8.0
- --------------------------------------------------------------------------------
3. CIBC Wood Gundy Securities Corp. 7.0
- --------------------------------------------------------------------------------
4. U.K. Treasury 6.2
- --------------------------------------------------------------------------------
5. Republic of Ireland 4.8
- --------------------------------------------------------------------------------
6. Deutschland Republic 4.5
- --------------------------------------------------------------------------------
7. Government of Spain 3.6
- --------------------------------------------------------------------------------
8. Federal National Mortgage Association 3.5
- --------------------------------------------------------------------------------
9. Buoni Poliennali Del Tesoro 2.6
- --------------------------------------------------------------------------------
10. Swedish Government 2.2
- --------------------------------------------------------------------------------
*As a percentage of total investments.
Investment Breakdown
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY PIE CHART IN THE PRINTED MATERIAL.]
Common Stock, Preferred Stock and Warrants 1.7%
Repurchase Agreement 7.0%
U.S. Government Agencies and Obligations 33.5%
Corporate Bonds and Notes 24.9%
International Bonds 32.9%
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Schedule of Investments (unaudited) January 31, 1998
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
====================================================================================================================
U.S. GOVERNMENT SECTOR -- 33.5%
U.S. Government Agencies & Obligations -- 33.5%
<S> <C> <C>
$ 10,000,000 U.S. Treasury Notes, 6.500% due 10/15/06 $ 10,633,400
32,000,000 U.S. Treasury Principal Strips, due 11/15/09 16,180,800
48,000,000 U.S. Treasury Principal Strips, due 2/15/15 18,152,160
50,000,000 U.S. Treasury Principal Strips, due 11/15/21 12,310,000
22,635,233 Federal Home Loan Mortgage Corp., 9.000% due 5/1/03
through 1/1/23 24,219,698
387 Federal Home Loan Mortgage Corp., 10.000% due 7/1/20 385
60,096,790 Federal Home Loan Mortgage Corp., 8.000% due 10/1/22
through 1/1/23 62,331,189
134,537,457 Federal Home Loan Mortgage Corp. Gold, 9.000% due 4/15/25 143,282,393
136,000,000 Federal National Mortgage Association Strip, due 7/5/14 50,284,640
190,000,000 Federal National Mortgage Association Strip, due 10/9/19 50,758,500
254,433,235 Government National Mortgage Association, 7.000% due 3/15/01
through 1/15/28 258,407,482
64,849 Government National Mortgage Association, 9.000% due 2/15/21 69,611
111,870,190 Government National Mortgage Association, 8.000% due 3/15/25
through 1/15/27 116,309,265
186,253,596 Government National Mortgage Association Platinum, 9.000%
due 12/15/17 202,783,603
- --------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR
(Cost -- $931,557,536) 965,723,126
====================================================================================================================
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
====================================================================================================================
<S> <C> <C> <C>
HIGH YIELD SECTOR -- 26.6%
CORPORATE BONDS AND NOTES -- 24.9%
Aerospace and Defense -- 0.5%
12,550,000 Ba2* Airplanes Pass Through Trust, Corporate Collateralized
Mortgage Obligation, Series D, 10.875% due 3/15/20 14,228,939
- --------------------------------------------------------------------------------------------------------------------
Banks/Savings and Loans -- 0.4%
9,575,000 B First Nationwide Holdings, Sr. Notes, 12.500% due 4/15/03 10,903,531
- --------------------------------------------------------------------------------------------------------------------
Broadcasting - TV, Cable, and Radio -- 3.0%
Cablevision Systems Corp., Sr. Sub. Debentures:
16,075,000 BB- 9.875% due 2/15/13 18,044,188
5,650,000 BB- 10.500% due 5/15/16 6,695,250
4,075,000 BB- 9.875% due 4/1/23 4,553,813
6,475,000 B2* Comcast UK Cable, Sr. Discount Debenture,
step bond to yield 11.200% due 11/15/07 5,349,969
Marcus Cable Capital Corp., Sr. Discount Notes:
3,650,000 B2* Step bond to yield 13.500% due 8/1/04 3,449,250
2,000,000 B3* Step bond to yield 14.250% due 12/15/05 1,787,500
Rogers Cablesystems Ltd.:
4,650,000 BB+ Debenture, 10.000% due 3/15/05 5,248,688
4,400,000 BB+ Sr. Secured Debenture, 10.000% due 12/1/07 4,955,500
5,700,000 BB- Sr. Sub. Debenture, 11.000% due 12/1/15 6,733,125
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 9
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) January 31, 1998
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
====================================================================================================================
<S> <C> <C> <C>
Broadcasting - TV, Cable, and Radio -- 3.0% (continued)
$ 3,225,000 BB- Rogers Communications, Sr. Notes, 8.875% due 7/15/07 $ 3,273,375
2,675,000 BB+ Le Groupe Videotron Ltee., Sr. Notes, 10.625% due 2/15/05 3,009,375
2,050,000 B- Satellites Mexicanos SA, Sr. Notes, 10.125% due 11/1/04(a) 2,108,938
TV Azteca S.A., Sr. Notes:
3,075,000 Ba3* 10.125% due 2/15/04 3,221,063
6,100,000 Ba3* 10.500% due 2/15/07(a) 6,450,750
12,325,000 B- UIH Australia/Pacific Communications Inc., Sr. Discount Notes,
step bond to yield 14.000% due 5/15/06 8,766,156
2,925,000 B- United International Holdings Inc., Sr. Discount Notes,
zero coupon due 11/15/99 2,584,969
2,000,000 B- Wireless One Inc., Sr. Notes, 13.000% due 10/15/03 472,500
- --------------------------------------------------------------------------------------------------------------------
86,704,409
- --------------------------------------------------------------------------------------------------------------------
Building/Construction -- 0.1%
2,725,000 B- Koppers Industry Inc., Sr. Sub. Notes, 9.875% due 12/1/07(a) 2,868,063
- --------------------------------------------------------------------------------------------------------------------
Chemicals -- 0.2%
2,125,000 B1* NL Industries, Sr. Secured Notes, 11.750% due 10/15/03 2,372,031
1,750,000 BB- Terra Industries Inc., Sr. Notes, 10.500% due 6/15/05 1,890,000
- --------------------------------------------------------------------------------------------------------------------
4,262,031
- --------------------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 0.5%
1,421,000 B- American Pad & Paper, Sr. Sub Notes, 13.000% due 11/15/05 1,564,876
5,895,000 B3* Interlake Corp., Sr. Sub. Debenture, 12.125% due 3/1/02 6,108,694
4,725,000 B+ Park-Ohio Industries, Sr. Sub. Notes, 9.250% due 12/1/07(a) 4,949,438
2,700,000 B2* Unifrax Investment Corp., Sr. Notes, 10.500% due 11/1/03 2,828,250
- --------------------------------------------------------------------------------------------------------------------
15,451,258
- --------------------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Services -- 0.1%
3,550,000 B- Axioham Transaction Solutions, Sr. Sub Notes, 9.750% due 10/1/07(a) 3,638,750
- --------------------------------------------------------------------------------------------------------------------
Electric-Utilities -- 1.6%
AES Corp., Sr. Sub. Notes:
2,400,000 Ba1* 10.250% due 7/15/06 2,652,000
2,500,000 Ba1* 8.375% due 8/15/07 2,562,500
11,100,000 Ba1* 8.500% due 11/1/07(a) 11,405,250
Calpine Corp., Sr. Notes:
7,775,000 B+ 10.500% due 5/15/06 8,513,625
5,000,000 BB- 8.750% due 7/15/07 5,162,500
2,750,000 BB+ Cleveland Electric Illuminating Co., Sr. Notes, 7.430% due 11/1/09(a) 2,880,625
5,615,000 BB+ El Paso Electric Co., First Mortgage, 8.900% due 2/1/06 6,267,744
3,076,280 BB- Midland Funding Corp. I, Debenture, 10.330% due 7/23/02 3,318,538
3,075,000 Ba3* Niagara Mohawk Power, First Mortgage, 7.750% due 5/15/06 3,286,406
- --------------------------------------------------------------------------------------------------------------------
46,049,188
- --------------------------------------------------------------------------------------------------------------------
Electronics/Computers -- 2.0%
4,675,000 B2* Celestica International, Sr. Sub. Notes, 10.500% due 12/31/06 5,089,906
8,525,000 B2* Fairchild Semiconductor Inc., Sr. Sub. Notes, 10.125% due 3/15/07 9,079,125
3,675,000 B- Fisher Scientific International, Sr. Sub. Notes, 9.000% due 2/1/08(a) 3,771,469
3,650,000 B2* Flextronics International Ltd., Sr. Sub. Notes, 8.750% due 10/15/07(a) 3,695,625
4,075,000 B Graphic Controls, Sr. Sub. Notes, 12.000% due 9/15/05 4,584,375
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) January 31, 1998
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
====================================================================================================================
<S> <C> <C> <C>
Electronics/Computers -- 2.0% (continued)
Unisys Corp., Sr. Notes:
$ 10,000,000 B+ 12.000% due 4/15/03 $ 11,400,000
8,475,000 B+ 11.750% due 10/15/04 9,862,781
1,400,000 B+ 7.875% due 4/1/08 1,403,500
7,900,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07 8,225,875
- --------------------------------------------------------------------------------------------------------------------
57,112,656
- --------------------------------------------------------------------------------------------------------------------
Finance Companies/Consumer Credit -- 0.4%
6,140,000 B2* Amresco Inc., Sr. Sub. Notes, 10.000% due 3/15/04 6,423,975
4,100,000 B- Ocwen Capital Trust I, Notes, 10.875% due 8/1/27 4,525,375
- --------------------------------------------------------------------------------------------------------------------
10,949,350
- --------------------------------------------------------------------------------------------------------------------
Food -- 0.7%
2,800,000 B+ Ameriserve Food Distribution Inc., Sr. Notes, 8.875% due 10/15/06 2,884,000
5,775,000 B- B&G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07(a) 5,933,813
7,400,000 B2* Imperial Holly Corp., Sr. Sub. Notes, 9.750% due 12/15/07(a) 7,603,500
2,475,000 B- Van de Kamps Inc., Sr. Sub. Notes, 12.000% due 9/15/05 2,753,438
- --------------------------------------------------------------------------------------------------------------------
19,174,751
- --------------------------------------------------------------------------------------------------------------------
Grocery/Convenience Stores -- 0.1%
4,500,000 CCC+ Pathmark Stores Inc., Debenture, 12.625% due 6/15/02 4,235,625
- --------------------------------------------------------------------------------------------------------------------
Healthcare/Drugs/Hospital Supplies -- 1.4%
3,700,000 B- Extendicare Health Services, Sr. Sub. Notes, 9.350% due 12/15/07(a) 3,875,750
6,250,000 BB ICN Pharmaceuticals Inc., Sr. Notes, 9.250% due 8/15/05 6,656,250
4,125,000 B- Integrated Health Services, Sr. Sub. Notes, 9.250% due 1/15/08(a) 4,331,250
4,625,000 B Magellan Health Services, Sr. Sub. Notes,11.250% due 4/15/04 5,162,656
5,525,000 B- Paragon Health Networks, Sr. Sub. Notes, 9.500% due 11/1/07(a) 5,773,625
4,000,000 B- Pharmaceutical Fine Chemicals, Sr. Sub. Notes, 9.750% due 11/15/07(a) 4,120,000
Tenet Healthcare Corp.:
4,400,000 Ba1* Sr. Notes, 8.000% due 1/15/05 4,554,000
5,600,000 Ba3* Sr. Sub. Notes, 8.625% due 1/15/07 5,894,000
- --------------------------------------------------------------------------------------------------------------------
40,367,531
- --------------------------------------------------------------------------------------------------------------------
Hotel/Gaming -- 1.6%
1,000,000 B2* Aztar Corp., Sr. Sub. Notes, 13.750% due 10/1/04 1,152,500
5,375,000 B- Courtyard by Marriott, Sr. Secured Notes, 10.750% due 2/1/08 5,972,969
700,000 Ba3* Grand Casinos Inc., First Mortgage, 10.125% due 12/1/03 763,000
HMH Properties Inc., Sr. Notes:
16,315,000 BB- 9.500% due 5/15/05 17,518,231
4,500,000 Ba3* 8.875% due 7/15/07 4,770,000
5,275,000 NR Mohegan Tribal Gaming Authority,
Sr. Secured Notes, 13.500% due 11/15/02 6,831,125
2,000,000 B2* Showboat Inc., Sr. Sub. Notes, 13.000% due 8/1/09 2,432,500
5,100,000 B3* Signature Resorts Inc., Sr. Sub. Notes, 9.750% due 10/1/07(a) 5,240,250
- --------------------------------------------------------------------------------------------------------------------
44,680,575
- --------------------------------------------------------------------------------------------------------------------
Insurance -- 0.2%
2,175,000 NR Sig Capital Trust I, Notes, 9.500% due 8/15/27 2,253,844
4,350,000 BB- Veritas Capital Trust, Trust Certificates, 10.000% due 1/1/28(a) 4,611,000
- --------------------------------------------------------------------------------------------------------------------
6,864,844
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 11
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) January 31, 1998
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
====================================================================================================================
<S> <C> <C> <C>
Machinery -- 0.4%
$ 3,500,000 NR Alvey Systems, Sr. Sub. Notes, 11.375% due 1/31/03 $ 3,670,625
6,783,000 B- Terex Corp., Debenture, 13.250% due 5/15/02 7,766,535
- --------------------------------------------------------------------------------------------------------------------
11,437,160
- --------------------------------------------------------------------------------------------------------------------
Metals/Mining -- 0.3%
5,425,000 B2* Kaiser Aluminum & Chemical Corp.,
Sr. Sub. Notes, 12.750% due 2/1/03 5,825,094
3,350,000 BB- UCAR Global Enterprises Inc., Sr. Sub. Notes,
12.000% due 1/15/05 3,777,125
- --------------------------------------------------------------------------------------------------------------------
9,602,219
- --------------------------------------------------------------------------------------------------------------------
Oil/Natural Gas -- 1.8%
4,275,000 B2* Canadian Forest Oil Ltd., Sr. Sub. Notes, 8.750% due 9/15/07(a) 4,328,438
Clark R&M Inc.:
2,025,000 B+ Sr. Sub. Notes, 8.875% due 11/15/07(a) 2,057,906
1,350,000 Ba3* Sr. Notes, 8.375% due 11/15/07(a) 1,377,000
8,000,000 B+ Clark USA, Sr. Notes, 10.875% due 12/1/05 8,810,000
4,125,000 B- Coho Energy Inc., Sr. Sub. Notes, 8.875% due 10/15/07 4,150,781
7,035,000 BB+ Gulf Canada Resources Ltd., Sub. Debenture, 9.625% due 7/1/05 7,632,975
9,700,000 B+ Parker Drilling Corp., Sr. Notes, 9.750% due 11/15/06 10,524,500
3,725,000 BB+ Santa Fe Energy Resources Inc.,
Sr. Sub. Debenture, 11.000% due 5/15/04 4,060,250
4,400,000 B- Stone Energy Corp., Sr. Sub. Notes, 8.750% due 9/15/07 4,554,000
4,900,000 B2- United Meridian Corp., Sr. Sub. Notes, 10.375% due 10/15/05 5,353,250
- --------------------------------------------------------------------------------------------------------------------
52,849,100
- --------------------------------------------------------------------------------------------------------------------
Oil Services -- 0.8%
9,100,000 B+ Dawson Production Services, Sr. Notes, 9.375% due 2/1/07 9,600,500
3,200,000 BBB+ DeepTech International, Sr. Notes, 12.000% due 12/15/00 3,420,000
2,750,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07 2,997,500
2,025,000 BB- J Ray McDermott S.A., Sr. Sub. Notes, 9.375% due 7/15/06 2,181,938
3,625,000 BB- Pride Petroleum Services Inc., Sr. Notes, 9.375% due 5/1/07 3,933,125
- --------------------------------------------------------------------------------------------------------------------
22,133,063
- --------------------------------------------------------------------------------------------------------------------
Packaging/Containers -- 0.3%
1,975,000 B2* Aep Industries Inc., Sr. Sub. Notes, 9.875% due 11/15/07(a) 2,083,625
1,000,000 B Gaylord Container, Sr. Sub. Debenture,
step bond to yield 12.750% due 5/15/05 1,075,000
4,490,000 B2* Huntsman Packaging Corp., Sr. Sub. Notes, 9.125% due 10/1/07(a) 4,647,150
- --------------------------------------------------------------------------------------------------------------------
7,805,775
- --------------------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.9%
9,950,000 B2* Indah Kiat International Finance Co.,
Sr. Notes, 11.875% due 6/15/02 8,532,125
10,325,000 B+ SD Warren Co., Sr. Sub. Notes, 12.000% due 12/15/04 11,564,000
6,750,000 BB Tjiwi Kimia International Finance Co., Sr. Notes, 13.250% due 8/1/01 5,880,938
- --------------------------------------------------------------------------------------------------------------------
25,977,063
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) January 31, 1998
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
====================================================================================================================
<S> <C> <C> <C>
Pollution Control/Waste Removal -- 0.1%
$ 2,000,000 B+ Allied Waste Inc., Sr. Sub. Notes, 10.250% due 12/1/06 $ 2,227,500
1,625,000 NR Cia Latino Americana, Sr. Notes, 11.625% due 6/1/04(a) 1,661,562
- --------------------------------------------------------------------------------------------------------------------
3,889,062
- --------------------------------------------------------------------------------------------------------------------
Real Estate Development/Investment -- 0.1%
2,491,000 BB- Trizec Finance Ltd., Sr. Notes, 10.875% due 10/15/05 2,824,171
- --------------------------------------------------------------------------------------------------------------------
Telephone/Communications -- 7.0%
4,400,000 NR Allegiance Telecom Inc., Sr. Discount Notes,
step bond to yield 11.750% due 2/15/08(e) 2,475,000
Century Communications Corp., Sr. Notes:
5,400,000 BB- 8.750% due 10/1/07 5,643,000
1,600,000 BB- 8.375% due 12/15/07 1,632,000
11,350,000 B3* Clearnet Communications Inc., Sr. Discount Notes,
step bond to yield 14.750% due 12/15/05 9,278,625
7,600,000 NR Colt Telecom Group PLC,
step bond to yield 12.000% due 12/15/06(e) 6,232,000
3,950,000 NR Esprit Telecom Group PLC, Sr. Notes, 11.500% due 12/15/07 4,246,250
2,300,000 NR Facilicom International, Sr. Notes, 10.500% due 1/15/08(a) 2,386,250
5,500,000 BB- Fonorola Inc., Sr. Secured Notes, 12.500% due 8/15/02 6,160,000
3,250,000 B3* Hermes Europe Railtel BV, Sr. Notes, 11.500% due 8/15/07(a) 3,640,000
9,350,000 B2* Intermedia Communiactions of Florida, Sr. Discount Notes,
step bond to yield 12.500% due 5/15/06 7,561,812
Iridium LLC/Capital Corp., Sr. Notes:
3,375,000 B- 13.000% due 7/15/05 3,657,656
9,950,000 B- 14.000% due 7/15/05 11,193,750
15,480,000 B3* McLeod USA Inc., Sr. Discount Notes,
step bond to yield 10.500% due 3/1/07 11,861,550
6,425,000 NR Metronet Communications Corp., Sr. Notes, 12.000% due 8/15/07(a) 7,372,687
10,000,000 B3* Millicom International Cellular, Sr. Discount Notes,
step bond to yield 13.500% due 6/1/06(a) 7,687,500
3,400,000 B3* Netia Holdings BV, Sr. Notes, 10.250% due 11/1/07(a) 3,421,250
Nextel Communications Inc., Sr. Discount Notes:
15,375,000 B3* Step bond to yield 9.750% due 8/15/04 14,721,562
18,300,000 B3* Step bond to yield 10.650% due 9/15/07(a) 12,174,125
9,125,000 B Nextlink Communications, Sr. Notes, 12.500% due 4/15/06 10,619,218
4,525,000 NR Pagemart Nationwide Inc., Sr. Discount Notes,
step bond to yield 15.000% due 2/1/05 3,982,000
11,075,000 Caa* Pagemart Wireless Inc., Sr. Discount Notes,
step bond to yield 11.250% due 2/1/08(a) 6,700,375
8,600,000 B- Primus Telecom Group, Sr. Notes, 11.750% due 8/1/04 9,578,250
Qwest Communications International:
13,275,000 B+ Sr. Discount Notes, step bond to yield 9.470% due 10/15/07(a) 9,392,062
2,550,000 B+ Sr. Notes, 10.875% due 4/1/07 2,948,437
RCN Corp.:
9,375,000 B3* Sr. Discount Notes, step bond to yield 11.125% due 10/15/07(a) 6,316,406
4,750,000 B3* Sr. Notes, 10.000% due 10/15/07(a) 5,094,375
7,800,000 B- RSL Communications Ltd., Sr. Notes, 12.250% due 11/15/06 8,892,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 13
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) January 31, 1998
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
====================================================================================================================
<S> <C> <C> <C>
Telephone/Communications -- 7.0% (continued)
Telesystems International Wireless, Sr. Discount Notes:
$ 13,750,000 B Step bond to yield 13.250% due 6/30/07(a) $ 9,092,187
2,800,000 B- Step bond to yield 10.500% due 11/1/07(a) 1,669,500
7,450,000 B- United International Holdings, Sr. Discount Notes,
zero coupon due 11/15/99 6,583,937
- --------------------------------------------------------------------------------------------------------------------
202,213,764
- --------------------------------------------------------------------------------------------------------------------
Transportation -- 0.4%
4,075,000 Ba3* GS Superhighway Holdings, Sr. Notes, 10.250% due 8/15/07(a) 3,270,187
6,800,000 BB- Sea Containers Ltd., Sr. Sub. Debenture,
Series A, 12.500% due 12/1/04 7,726,500
- --------------------------------------------------------------------------------------------------------------------
10,996,687
- --------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $685,429,156) 717,219,565
====================================================================================================================
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================
<S> <C> <C>
COMMON STOCK -- 0.0%
Telephone/Communications -- 0.0%
21,418 Nextel Communications Inc. (Cost-- $345,609) 584,979
- --------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK -- 1.6%
Automobile/Auto Parts/Truck Manufacturing -- 0.3%
169,800 Navistar International Corp., Series G, $6.000, Convertible until 12/31/49 8,606,741
- --------------------------------------------------------------------------------------------------------------------
Banks/Savings and Loans -- 0.2%
221,000 California Federal Preferred Capital Corp., Series A, Exchangeable 9.125% 5,911,750
- --------------------------------------------------------------------------------------------------------------------
Broadcasting - TV, Cable, and Radio -- 1.0%
24,109 Time Warner Inc., Series M, 10.250% 27,845,895
- --------------------------------------------------------------------------------------------------------------------
Publishing -- 0.0%
1,502 Primedia Inc., Series B, 11.625% 160,432
- --------------------------------------------------------------------------------------------------------------------
Telephone/Communications -- 0.1%
3,186 IXC Communications, Inc., 12.500% 3,791,340
- --------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $44,238,421) 46,316,158
====================================================================================================================
WARRANTS -- 0.1%
Broadcasting - TV, Cable, and Radio -- 0.0%
6,775 Australis Holdings, Expire 10/30/01(a)(b) 0
12,325 UIH Australia, Expire 5/15/06(b) 147,900
6,000 Wireless One Inc., Expire 10/19/00(b) 1,500
- --------------------------------------------------------------------------------------------------------------------
149,400
- --------------------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.0%
8,500 SD Warren Holdings Corp., Expire 12/15/06(a)(b) 149,600
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) January 31, 1998
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================
<S> <C> <C>
Telephone/Communications -- 0.1%
56,595 Clearnet Communications Inc., Expire 9/15/05(b) $ 339,570
25,000 Globalstar Telecom, Expire 2/15/04(a)(b) 292,500
5,000 Iridium World Communications, Expire 7/15/05(b) 70,000
6,425 Metronet Communications, Expire 8/15/07(a)(b) 128,500
6,775 Nextel Communications Inc., Expire 5/23/99(b) 9,417
19,250 Pagemart Inc., Expire 11/1/03(b) 170,844
42,090 Pagemart Nationwide Inc., Expire 12/31/03(b) 315,675
5,100 Primus Telecommunications, Expire 8/1/04(b) 1,020
7,800 RSL Communications Ltd., Expire 11/15/06(b) 312,000
- --------------------------------------------------------------------------------------------------------------------
1,639,526
- --------------------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $601,228) 1,938,526
====================================================================================================================
TOTAL HIGH YIELD SECTOR
(Cost -- $730,614,414) 766,059,228
====================================================================================================================
<CAPTION>
FACE
AMOUNT+ SECURITY VALUE
====================================================================================================================
<S> <C> <C>
INTERNATIONAL SECTOR -- 32.9%
BONDS -- 32.9%
Argentina -- 0.1%
3,000,000 Argentina Discount Series L, 6.875% due 3/31/23(c) 2,523,750
- --------------------------------------------------------------------------------------------------------------------
Australia -- 1.7%
66,000,000 Queensland Treasury Corp., 8.000% due 5/14/03 49,621,234
- --------------------------------------------------------------------------------------------------------------------
Belgium -- 0.5%
500,000,000 Government of Belgium, 7.000% due 5/15/06 14,981,432
- --------------------------------------------------------------------------------------------------------------------
Brazil -- 0.1%
3,000,000 Banco Nac Desen, 10.375% due 4/27/98 3,011,250
- --------------------------------------------------------------------------------------------------------------------
Canada -- 1.5%
Government of Canada:
20,000,000 7.000% due 9/1/01 14,465,727
30,000,000 9.000% due 12/1/04 24,749,075
5,400,000 International Finance Corp., 7.750% due 8/18/98 3,754,105
2,000,000 Province of Alberta, 7.750% due 2/4/98 1,368,176
- --------------------------------------------------------------------------------------------------------------------
44,337,083
- --------------------------------------------------------------------------------------------------------------------
Czech Republic -- 0.1%
100,000,000 Czech Electric Co., 14.375% due 1/27/01 2,804,771
- --------------------------------------------------------------------------------------------------------------------
Denmark -- 1.7%
Kingdom of Denmark:
100,000,000 8.000% due 5/15/03 16,364,967
200,000,000 7.000% due 12/15/04 31,707,842
- --------------------------------------------------------------------------------------------------------------------
48,072,809
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 15
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) January 31, 1998
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT+ SECURITY VALUE
====================================================================================================================
<S> <C> <C>
Germany -- 4.7%
220,000,000 Deutschland Republic, 6.000% due 7/4/07 $ 128,702,407
7,525,000 Esprit Telecom, 11.500% due 12/15/07 4,373,803
4,250,000 Texon International PLC, 10.000% due 2/1/08(a) 2,426,662
- --------------------------------------------------------------------------------------------------------------------
135,502,872
- --------------------------------------------------------------------------------------------------------------------
Ireland -- 4.9%
Republic of Ireland:
55,000,000 8.000% due 10/18/00 81,630,207
40,000,000 6.500% due 10/18/01 58,100,571
- --------------------------------------------------------------------------------------------------------------------
139,730,778
- --------------------------------------------------------------------------------------------------------------------
Italy -- 2.6%
Buoni Poliennali Del Tesoro:
80,000,000,000 8.500% due 8/1/04 52,039,374
40,000,000,000 8.500% due 8/1/99 23,175,932
- --------------------------------------------------------------------------------------------------------------------
75,215,306
- --------------------------------------------------------------------------------------------------------------------
Mexico -- 0.1%
5,000,000 United Mexican States Series B, 6.250% due 12/31/19(d) 4,253,150
- --------------------------------------------------------------------------------------------------------------------
New Zealand -- 1.6%
New Zealand Government:
52,000,000 6.500% due 2/15/00 29,947,303
27,000,000 10.000% due 3/15/02 17,415,900
- --------------------------------------------------------------------------------------------------------------------
47,363,203
- --------------------------------------------------------------------------------------------------------------------
Spain -- 4.4%
3,150,000,000 European Investment Bank, 11.250% due 3/15/00 23,092,277
Kingdom of Spain:
6,500,000,000 10.250% due 11/30/98 43,866,057
7,840,000,000 10.100% due 2/28/01 58,508,520
- --------------------------------------------------------------------------------------------------------------------
125,466,854
- --------------------------------------------------------------------------------------------------------------------
Sweden -- 2.2%
500,000,000 Kingdom of Sweden, 5.500% due 4/12/02 62,634,805
- --------------------------------------------------------------------------------------------------------------------
United Kingdom -- 6.4%
2,125,000 Colt Telecom Group PLC, 10.125% due 11/30/07 3,700,214
101,000,000 U.K. Treasury, 7.250% due 12/7/07 179,687,755
- --------------------------------------------------------------------------------------------------------------------
183,387,969
- --------------------------------------------------------------------------------------------------------------------
Uruguay -- 0.2%
Uruguay Banco Central:
2,000,000 6.750% due 2/18/07(c) 2,005,000
4,500,000 6.750% due 2/19/21 3,982,500
- --------------------------------------------------------------------------------------------------------------------
5,987,500
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) January 31, 1998
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT+ SECURITY VALUE
====================================================================================================================
<S> <C> <C>
Venezuela -- 0.1%
Republic of Venezuela:
1,000,000 7.188% due 12/28/98(c) $ 1,001,900
3,000,000 7.188% due 12/31/03(c) 2,970,150
- --------------------------------------------------------------------------------------------------------------------
3,972,050
- --------------------------------------------------------------------------------------------------------------------
TOTAL INTERNATIONAL SECTOR
(Cost -- $965,714,043) 948,866,816
====================================================================================================================
REPURCHASE AGREEMENT -- 7.0 %
$203,000,000 CIBC Wood Gundy Securities Corp., 5.500% due 2/2/98; Proceeds
at maturity -- $203,093,042; (Fully collateralized by
U.S. Treasury Notes, 7.125% due 9/30/99; Market value--
$207,073,540) (Cost -- $203,000,000) 203,000,000
====================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $2,830,885,993**) $2,883,649,170
====================================================================================================================
</TABLE>
(a) 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.
(b) Non-income producing security.
(c) Variable rate security.
(d) Security is traded with value recovery rights.
(e) Security issued with attached warrants.
+ Represents local currency.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 18 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 17
<PAGE>
================================================================================
Bond Ratings
================================================================================
All ratings are by Standard & Poor's Rating Service ("Standard & Poor's"),
except 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 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 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================
Statement of Assets and Liabilities (unaudited) January 31, 1998
=====================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost -- $2,830,885,993) $ 2,883,649,170
Foreign currency (Cost -- $22,675,772) 22,543,525
Receivable for securities sold 25,890,953
Receivable for Fund shares sold 4,882,029
Receivable for open forward foreign currency contracts (Note 5) 7,194,712
Dividends and interest receivable 67,274,918
- -------------------------------------------------------------------------------------
Total Assets 3,011,435,307
- -------------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 17,476,962
Payable to bank 13,983,869
Payable for securities purchased 12,913,207
Payable for open forward foreign currency contracts (Note 5) 5,440,602
Investment advisory fees payable 1,094,225
Distribution fees payable 701,872
Administration fees payable 486,322
Payable for Fund shares purchased 94,726
Accrued expenses 816,459
- -------------------------------------------------------------------------------------
Total Liabilities 53,008,244
- -------------------------------------------------------------------------------------
Total Net Assets $ 2,958,427,063
=====================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 367,407
Capital paid in excess of par value 2,934,234,608
Overdistributed net investment income (18,820,338)
Accumulated net realized loss
from security transactions and foreign currencies (10,591,208)
Net unrealized appreciation
of investments and foreign currencies 53,236,594
- -------------------------------------------------------------------------------------
Total Net Assets $ 2,958,427,063
=====================================================================================
Shares Outstanding:
Class A 43,164,519
-----------------------------------------------------------------------------------
Class B 295,305,228
-----------------------------------------------------------------------------------
Class C 13,771,273
-----------------------------------------------------------------------------------
Class Y 12,610,576
-----------------------------------------------------------------------------------
Class Z 2,554,917
-----------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $8.03
-----------------------------------------------------------------------------------
Class B* $8.06
-----------------------------------------------------------------------------------
Class C** $8.04
-----------------------------------------------------------------------------------
Class Y (and redemption price) $8.03
-----------------------------------------------------------------------------------
Class Z (and redemption price) $8.04
-----------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $8.41
=====================================================================================
</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.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 19
<PAGE>
================================================================================
Statement of Operations (unaudited) For the Six Months Ended January 31, 1998
================================================================================
INVESTMENT INCOME:
Dividends $ 112,677,774
Interest 2,703,141
Less: Interest expense (Note 7) (1,643,874)
- --------------------------------------------------------------------------------
Total Investment Income 113,737,041
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 9,771,266
Investment advisory fees (Note 2) 6,582,232
Administration fees (Note 2) 2,925,437
Shareholder and system servicing fees 894,838
Custody 400,000
Registration fees 49,999
Audit and legal 24,249
Shareholder communications 18,000
Pricing service fees 15,000
Trustees' fees 15,000
Other 37,004
- --------------------------------------------------------------------------------
Total Expenses 20,733,025
- --------------------------------------------------------------------------------
Net Investment Income 93,004,016
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 5):
Realized Gain From:
Security transactions (excluding short-term securities) 57,581,551
Foreign currency transactions 1,100,299
- --------------------------------------------------------------------------------
Net Realized Gain 58,681,850
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments and Foreign Currencies:
Beginning of period 80,927,000
End of period 53,236,594
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (27,690,406)
- --------------------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies 30,991,444
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 123,995,460
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
20 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended January 31, 1998 (unaudited) and the Year Ended July
31, 1997
<TABLE>
<CAPTION>
1998 1997
==========================================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 93,004,016 $ 206,195,823
Net realized gain 58,681,850 53,421,481
Increase (decrease) in net unrealized appreciation (27,690,406) 28,055,161
- --------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 123,995,460 287,672,465
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (112,924,871) (220,307,575)
- --------------------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (112,924,871) (220,307,575)
- --------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 402,887,218 561,402,817
Net asset value of shares issued for
reinvestment of dividends 50,224,514 118,710,947
Cost of shares reacquired (397,560,860) (523,282,497)
- --------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 55,550,872 156,831,267
- --------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets 66,621,461 224,196,157
NET ASSETS:
Beginning of period 2,891,805,602 2,667,609,445
- --------------------------------------------------------------------------------------------------------------------------
End of period* $ 2,958,427,063 $ 2,891,805,602
==========================================================================================================================
* Includes undistributed (overdistributed) net investment income of: $(18,820,338) $218
==========================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 21
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
1. Significant Accounting Policies
The Smith Barney Diversified Strategic 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 this Fund and seven other separate investment funds: Smith Barney
Exchange Reserve Fund, Smith Barney Convertible Fund, Smith Barney High Income
Fund, Smith Barney Municipal High Income Fund (formerly known as Smith Barney
Tax-Exempt Income Fund), Smith Barney Premium Total Return Fund, Smith Barney
Utilities Fund and Smith Barney Total Return Bond Fund. The financial statements
and financial highlights for the other funds are presented in separate
semi-annual reports except for the Smith Barney Premium Total Return Fund which
will have a semi-annual report dated June 30, 1998.
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, which
approximates value; (d) dividend income is recorded on ex-dividend date; foreign
dividends are recorded on the ex-dividend date or as soon as practical after the
Fund determines the existence of a dividend declaration after exercising
reasonable due diligence; (e) interest income, adjusted for accretion of
original issue discount, is recorded on an accrual basis; (f) gains or losses on
the sale of securities are calculated by using the specific identification
method; (g) dividends and distributions to shareholders are recorded on the
ex-dividend date; (h) the accounting records are maintained in U.S. dollars. All
assets and liabilities denominated in foreign currencies are translated into
U.S. dollars based on the rate of exchange of such currencies against U.S.
dollars on the date of valuation. Purchases and sales of securities and income
and expenses are translated at the rate of exchange quoted on the respective
date that such transactions are recorded. Differences between income or expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (i) direct expenses are charged to each class; management fees
and general fund expenses are allocated on the basis of relative net assets; (j)
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; (k) 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, 1997, 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 $6,919,973 has been reclassified to
paid-in capital. Net investment income, net realized gains and net assets were
not affected by this adjustment; 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.
- --------------------------------------------------------------------------------
22 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)(continued)
================================================================================
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
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"),
acts as investment adviser to the Trust. The Fund pays MMC 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
SSBH. From its fee, MMC 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.
MMC 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 SSBH, acts as distributor of
Trust shares and primary broker for its portfolio agency transactions. For the
six months ended January 31, 1998, SB received sales charges of approximately
$774,000 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. 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, 1998, CDSCs paid to SB were:
Class A Class B Class C
================================================================================
CDSCs $19,000 $1,284,000 $12,000
================================================================================
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. The Fund also pays a distribution
fee with respect to Class B and C shares calculated at the annual rates of 0.50%
and 0.45% of the average daily net assets of each class, respectively. For the
six months ended January 31, 1998, total Distribution Plan fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $379,633 $9,051,829 $339,804
================================================================================
All officers and one Trustee of the Trust are employees of SB.
3. Investments
During the six months ended January 31, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $1,044,060,276
- --------------------------------------------------------------------------------
Sales 1,469,749,504
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 23
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)(continued)
================================================================================
At January 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $105,862,496
Gross unrealized depreciation (53,099,319)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 52,763,177
================================================================================
4. Capital Loss Carryforward
At July 31, 1997, the Fund had, for Federal tax purposes, approximately
$64,213,000 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:
2004
================================================================================
Carryforward Amounts $ 64,213,000
================================================================================
5. Forward Foreign Currency Contracts
At January 31, 1998, the Fund had the following open forward foreign currency
contracts:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
=====================================================================================================================
<S> <C> <C> <C> <C>
To Sell:
Australian Dollar 74,000,000 $ 50,727,415 2/9/98 $(3,276,395)
British Pound 110,200,000 180,091,302 2/9/98 (1,706,154)
British Pound 1,013,329 1,653,739 3/9/98 44,220
British Pound 1,120,838 1,819,836 5/26/98 55,515
Danish Krone 342,000,000 49,117,348 2/9/98 303,903
German Deutschemark 150,000,000 82,101,132 2/9/98 2,159,537
German Deutschemark 150,000,000 82,101,132 2/9/98 2,513,645
German Deutschemark 4,250,000 2,331,066 3/18/98 45,874
German Deutschemark 7,525,000 4,127,357 3/18/98 138,516
Irish Punt 104,000,000 142,428,453 2/9/98 (458,053)
Italian Lira 139,000,000,000 77,069,795 2/9/98 593,381
Italian Lira 4,462,500,000 2,474,571 2/2/98 27,321
Spanish Pesata 20,500,000,000 132,285,090 2/9/98 689,320
Swedish Krona 500,000,000 61,681,816 2/9/98 623,480
- ---------------------------------------------------------------------------------------------------------------------
Total Unrealized Gain on Forward
Foreign Currency Contracts $ 1,754,110
=====================================================================================================================
</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 1998 Semi-Annual Report to Shareholders
<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.
During the six months ended January 31, 1998, the maximum and average amount of
reverse repurchase agreements outstanding were as follows:
================================================================================
Maximum amount outstanding $106,215,625
- --------------------------------------------------------------------------------
Average amount outstanding 103,994,792
================================================================================
Interest rates ranged from 4.50% to 5.30% during the period.
Interest expense for the six months ended January 31, 1998 on borrowings by the
Fund under reverse repurchase agreements totalled $1,643,874. The Fund had no
open reverse repurchase agreements at January 31, 1998.
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 FNMA/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.
At January 31, 1998, the Fund held no TBA securities.
9. Shares of Beneficial Interest
At January 31, 1998, 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, 1998, 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 $338,048,885 $2,367,579,257 $108,722,451 $99,954,382 $20,297,040
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 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, 1998 July 31, 1997
-------------------------------------- -------------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 15,933,611 $ 127,563,981 13,256,070 $ 105,627,582
Shares issued on
reinvestment 722,043 5,764,992 1,415,052 11,233,913
Shares redeemed (6,876,939) (55,082,607) (7,215,639) (57,534,430)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 9,778,715 $ 78,246,366 7,455,483 $ 59,327,065
====================================================================================================================================
Class B
Shares sold 27,627,620 $ 221,780,732 44,187,260 $ 352,736,728
Shares issued on
reinvestment 5,189,249 41,543,690 12,856,077 102,306,573
Shares redeemed (41,530,712) (333,326,476) (56,866,196) (453,930,784)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (8,713,843) $ (70,002,054) 177,141 $ 1,112,517
====================================================================================================================================
Class C
Shares sold 4,053,413 $ 32,492,432 5,723,599 $ 45,618,957
Shares issued on
reinvestment 272,075 2,174,112 449,137 3,565,931
Shares redeemed (981,811) (7,868,042) (1,148,289) (9,138,226)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 3,343,677 $ 26,798,502 5,024,447 $ 40,046,662
====================================================================================================================================
Class Y
Shares sold 2,553,567 $ 20,428,516 6,772,038 $ 53,896,925
Shares issued on
reinvestment 1,244 9,925 4,050 32,008
Shares redeemed -- -- (166,214) (1,305,484)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 2,554,811 $ 20,438,441 6,609,874 $ 52,623,449
====================================================================================================================================
Class Z
Shares sold 77,697 $ 621,557 440,488 $ 3,522,625
Shares issued on
reinvestment 91,592 731,795 198,007 1,572,522
Shares redeemed (160,109) (1,283,735) (173,274) (1,373,573)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 9,180 $ 69,617 465,221 $ 3,721,574
====================================================================================================================================
</TABLE>
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.
- --------------------------------------------------------------------------------
26 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996 1995 1994 1993(2)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $8.01 $7.82 $7.85 $7.76 $8.41 $8.24
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.28 0.62 0.61 0.94 0.63 0.47
Net realized and unrealized gain (loss) 0.07 0.24 0.03 (0.18) (0.52) 0.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.35 0.86 0.64 0.76 0.11 0.74
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.33) (0.67) (0.62) (0.48) (0.62) (0.45)
Net realized gains -- -- -- (0.10) (0.12)
Capital -- -- (0.05) (0.19) (0.04) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.33) (0.67) (0.67) (0.67) (0.76) (0.57)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.03 $8.01 $7.82 $7.85 $7.76 $8.41
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 4.43%++ 11.36% 8.39% 10.35% 1.16% 9.30%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $346,739 $267,272 $202,700 $177,336 $76,019 $48,334
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.02%+ 1.03% 1.04% 1.09% 1.10% 1.10%+
Net investment income 6.70+ 7.75 7.85 8.15 7.67 8.26+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 37% 85% 90% 83% 93% 116%
====================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (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:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class A $0.01 $0.00* 1.14% 1.12%
* 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.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 27
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1998(1) 1997 1996 1995 1994 1993
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $8.03 $7.83 $7.86 $7.76 $8.41 $8.55
- -----------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(2) 0.25 0.59 0.58 0.70 0.59 0.65
Net realized and unrealized gain (loss) 0.09 0.23 0.01 0.02 (0.51) (0.07)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.34 0.82 0.59 0.72 0.08 0.58
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) (0.62) (0.57) (0.44) (0.60) (0.58)
Net realized gains -- -- -- (0.10) (0.14)
Capital -- -- (0.05) (0.18) (0.03) --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.31) (0.62) (0.62) (0.62) (0.73) (0.72)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.06 $8.03 $7.83 $7.86 $7.76 $8.41
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 4.28%++ 10.89% 7.80% 10.00% 0.66% 7.28%
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $2,379 $2,440 $2,380 $2,367 $2,469 $2,105
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 1.50%+ 1.51% 1.52% 1.56% 1.57% 1.59%
Net investment income 6.29+ 7.34 7.36 6.82 7.20 7.77
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 37% 85% 90% 83% 93% 116%
=============================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (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 expense ratios would have been as follows:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class B $0.00* $0.00* 1.61% 1.59%
* 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 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1998(1) 1997 1996 1995(2) 1994 1993(3)
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $8.01 $7.81 $7.84 $7.76 $8.41 $8.36
- -----------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(4) 0.26 0.58 0.52 1.16 0.55 0.22
Net realized and unrealized gain (loss) 0.08 0.24 0.07 (0.46) (0.47) 0.06
- -----------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.34 0.82 0.59 0.70 0.08 0.28
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) (0.62) (0.57) (0.44) (0.60) (0.20)
Net realized gains -- -- -- -- (0.10) (0.03)
Capital -- -- (0.05) (0.18) (0.03) --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.31) (0.62) (0.62) (0.62) (0.73) (0.23)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.04 $8.01 $7.81 $7.84 $7.76 $8.41
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 4.29%++ 10.92% 7.82% 9.73% 0.66% 3.41%++
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $110,752 $83,543 $42,222 $12,730 $1,065 $11
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 1.45%+ 1.46% 1.47% 1.46% 1.57% 1.50%+
Net investment income 6.29+ 7.19 7.61 10.23 7.20 7.87+
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 37% 85% 90% 83% 93% 116%
=============================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (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:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class C $0.00* $0.00* 1.51% 1.58%
* 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.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 29
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Y Shares 1998(1) 1997 1996(2)
===================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $8.00 $7.82 $7.89
- ---------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.30 0.64 0.50
Net realized and unrealized gain 0.07 0.24 0.01
- ---------------------------------------------------------------------------------------------------
Total Income From Operations 0.37 0.88 0.51
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.34) (0.70) (0.53)
Capital -- -- (0.05)
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.34) (0.70) (0.58)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.03 $8.00 $7.82
- ---------------------------------------------------------------------------------------------------
Total Return 4.75%++ 11.64% 6.65%++
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $101,263 $80,479 $26,940
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.69%+ 0.70% 0.69%+
Net investment income 7.06+ 7.84 8.54+
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 37% 85% 90%
===================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
(2) For the period from October 10, 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.
- --------------------------------------------------------------------------------
30 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Z Shares 1998(1) 1997 1996 1995(2) 1994 1993(3)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $8.01 $7.82 $7.85 $7.76 $8.41 $8.24
- -----------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(4) 0.28 0.65 0.64 0.84 0.68 0.51
Net realized and unrealized gain (loss) 0.09 0.23 0.02 (0.06) (0.54) 0.25
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.37 0.88 0.66 0.78 0.14 0.76
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.34) (0.69) (0.63) (0.49) (0.65) (0.47)
Net realized gains -- -- -- -- (0.10) (0.12)
Capital -- -- (0.06) (0.20) (0.04) --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.34) (0.69) (0.69) (0.69) (0.79) (0.59)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $8.04 $8.01 $7.82 $7.85 $7.76 $8.41
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 4.71%++ 11.69% 8.72% 10.94% 1.43% 9.47%++
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $20,546 $20,397 $16,270 $14,361 $11,552 $11,803
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(4) 0.69%+ 0.69% 0.70% 0.75% 0.75% 0.80%+
Net investment income 7.10+ 8.08 8.19 8.30 8.02 8.56+
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 37% 85% 90% 83% 93% 116%
===================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (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:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class Z $0.00* $0.00* 0.80% 0.77%
* 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.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 31
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney
Diversified Strategic
Income Fund
Trustees Investment Adviser
Lee Abraham Mutual Management Corp.
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman Distributor
Smith Barney Inc.
Officers
Heath B. McLendon Custodian
President and The Chase Manhattan Bank
Chief Executive Officer
Lewis E. Daidone Shareholder Servicing Agent
Senior Vice President and Treasurer First Data Investor Services Group, Inc.
P.O. Box 9134
James E. Conroy Boston, MA 02205-9134
Vice President and Investment Officer
This report is submitted for the general
John C. Bianchi information of shareholders of Smith
Vice President and Investment Officer Barney Diversified Strategic Income
Fund. It is not authorized for
Simon Hildreth distribution to prospective investors
Vice President and Investment Officer unless accompanied or preceded by an
effective Prospectus for the Fund, which
Irving P. David contains information concerning the
Controller Fund's investment policies and expenses
as well as other pertinent information.
Christina T. Sydor
Secretary SMITH BARNEY
------------
A Member of TravelersGroup [LOGO]
Smith Barney Diversified Strategic
Income Fund
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD2174 3/98
================================================================================
[GRAPHIC OMITTED]
Smith Barney
Exchange
Reserve Fund
- --------------------
SEMI-ANNUAL REPORT
- --------------------
January 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Everyday.(sm)
<PAGE>
Smith Barney [PHOTO OMITTED] [PHOTO OMITTED]
Exchange Heath B. Mclendon Phyllis Zahorodny
Reserve Fund
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Exchange
Reserve Fund ("Fund") for the period ended January 31, 1998. In this report, we
summarize the period's prevailing economic and market conditions and outline our
portfolio strategy. A summary of performance and more detailed financial
information can be found in the appropriate sections that follow.
As of January 31, 1998, the Fund's average annual yield was 4.44% and the
average annual effective yield, which assumes the reinvestment of dividends, was
4.53%.
Please note that your investment in the 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 ("NAV") of $l.00 per share.
Market Update and Outlook
Despite the recent troubles in the global stock markets, it has been relatively
quiet in the money markets so far this year. The Federal Reserve Board ("Fed")
has stayed patient and has kept its monetary policy unchanged. The Fed's
hands-off approach has helped the U.S. economy to grow moderately while
inflation remains subdued. The Federal Open Market Committee ("FOMC"), a key
committee that sets short-term monetary policy for the Fed, last raised interest
rates in late March 1997. Since then, both long- and short-term interest rates
have traded in a narrow range and investors who were long and fully invested
have been rewarded.
Fed Chairman Alan Greenspan recently testified before the Joint Economic
Committee of Congress where he discussed the financial turmoil in Asia and its
possible effects on the U.S. markets. As a result of the events in Asia,
Greenspan expects some slowing in U.S. economic
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 1
<PAGE>
growth. In addition, the Fed Chairman reiterated many points that we have raised
throughout the year: namely, that inflation remains low, labor markets tight and
labor productivity continues to improve.
We think that the Asian market crisis should help to keep inflation low.
However, the degree to which it slows the capital spending of U.S. corporations
remains an open question. Weak demand in Asia and a stronger U.S. dollar will
have some modest (although negative) effect on U.S. economic growth in 1998. The
Fed will most likely wait to see the impact of all these events before adjusting
its monetary policy.
While the outcome of the Asian crisis is still unknown, U.S. leaders, the
International Monetary Fund, and the Asian countries involved are working
together to establish reforms that will assist them in stabilizing their
economies. The Asian crisis will put downward pressure on prices of goods as
Korea and Indonesia export goods to the U.S, at cheaper prices. This will keep
prices of U.S. goods low or even reduce prices in order to remain competitive.
This is not a destabilizing force as Chairman Greenspan reiterated in his speech
in early January. He distinguishes between a fall in specific goods price
declines such as in computers as opposed to sharply sliding real estate and
stock prices, which could cause a deflationary spiral. Chairman Greenspan sees
little risk of deflation because growth and consumer demand in the U.S.
remains strong.
Investment Strategy
The yield curve remains fairly flat and over the next several months we expect
relatively little interest rate volatility. (The yield curve shows the
difference between short- and long-term yields.) We will continue to invest
across the yield curve when we identify good value. In addition, we will target
the average maturity for the Fund at 45 to 50 days.
As you have probably read in various sources, major U.S. banks, brokerage firms
and multinational corporations have varying degrees of exposure to Asia.
However, these companies have had several years of excellent profitability and
reserve building among the issuers we purchase for the Fund.
We are not anticipating major downgrading in the ratings of any of our approved
issuers. The Japanese banking system remains in turmoil with major downgradings
and some bankruptcies occurring. Spreads between top European bank certificates
of deposits ("CDs") and Japanese bank CDs have widened by as much as 100 basis
points (1.00%) and are now currently 45 basis points (0.45%). At present, we
hold no Japanese bank exposure in the Fund.
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
In closing, thank you for investing in the Smith Barney Exchange Reserve Fund.
We look forward to continuing to help pursue your financial goals.
Sincerely,
/S/ Heath B. Mclendon /S/ Phyllis Zahorodny
Heath B. Mclendon Phyllis Zahorodny
Chairman Vice President and
Investment Officer
February 12, 1998
- --------------------------------------------------------------------------------
Smith Barney Exchange Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
==============================================================================================
BANK NOTES -- 4.4%
<C> <S> <C> <C>
$2,000,000 Bank America National Trust Savings
Association matures 7/22/98 5.50% $ 1,999,992
3,000,000 Harris Bank matures 3/5/98 5.50 2,999,998
- ----------------------------------------------------------------------------------------------
TOTAL BANK NOTES
(Cost-- $4,999,990) 4,999,990
==============================================================================================
COMMERCIAL PAPER -- 86.1%
5,000,000 Abbey National North America matures 2/25/98 5.71 4,981,500
5,000,000 Bank Austriengellschaft matures 4/8/98 5.56 4,949,767
3,000,000 Bank of Montreal matures 2/17/98 5.76 2,992,431
5,000,000 Bank of New York matures 3/9/98 5.55 4,972,500
2,000,000 Banque Nationale de Paris matures 6/16/98 5.81 1,957,625
5,000,000 BCI Funding Corp. mature 2/18/98 to 3/24/98 5.70 to 5.80 4,976,214
4,765,000 Bell Atlantic Financial Services matures 2/6/98 5.49 4,761,380
3,000,000 Canadian Imperial Bank Commerce matures 2/9/98 5.50 2,996,350
2,000,000 Citicorp matures 2/9/98 5.75 1,997,516
2,000,000 Den Danske Bank matures 3/2/98 5.51 1,991,187
3,000,000 Diageo PLC matures 4/7/98 5.50 2,970,588
2,000,000 General Electric Capital Corp. matures 4/16/98 5.81 1,976,567
3,000,000 General Motors Acceptance Corp. matures 5/6/98 5.75 2,956,212
5,000,000 Goldman Sachs mature 4/21/98 to 7/10/98 5.50 to 5.70 4,903,397
5,000,000 Halifax Building Society mature 2/12/98 to 4/3/98 5.50 to 5.63 4,968,800
2,000,000 International Nederlanden US Funding Corp.
matures 6/9/98 5.85 1,959,609
5,000,000 J.P. Morgan & Co. matures 3/17/98 5.50 4,966,694
5,000,000 Morgan Stanley Dean Witter Discover & Co.
mature 2/23/98 to 3/13/98 5.78 to 5.83 4,976,794
5,000,000 NationsBank matures 2/13/98 5.80 4,990,434
4,000,000 Ontario Hydro matures 3/16/98 5.79 3,972,719
5,000,000 Preferred Receivables Funding matures 3/2/98 5.50 4,978,008
2,000,000 Rabobank matures 4/29/98 5.70 1,973,223
3,000,000 San Paolo US Finance Inc. matures 7/21/98 5.50 2,924,208
4,185,000 Swedish Export Credit matures 4/6/98 5.58 4,144,079
2,400,000 Transamerica Finance Corp. matures 2/9/98 5.50 2,397,083
5,000,000 Union Bank of Switzerland matures 2/2/98 5.63 4,999,219
- -----------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost-- $96,634,104) 96,634,104
===============================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
4 1998 Semi-Annual Report to Shareholders
<PAGE>
- -------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- -------------------------------------------------------------------------------
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
===============================================================================
DOMESTIC CERTIFICATE OF DEPOSIT -- 2.7%
$3,000,000 Chase Manhattan USA Delaware matures 2/18/98
(Cost -- $3,000,000) 5.75% $ 3,000,000
===============================================================================
FOREIGN CERTIFICATE OF DEPOSIT -- 1.8%
2,000,000 Swiss Bank Corp. matures 2/12/98
(Cost -- $2,000,002) 5.75 2,000,002
===============================================================================
TIME DEPOSITS -- 5.0%
2,000,000 Chase Manhattan Bank matures 2/2/98 5.63 2,000,000
3,585,000 First Chicago National Bank matures 2/2/98 5.63 3,585,000
- -------------------------------------------------------------------------------
TOTAL TIME DEPOSITS
(Cost--$5,585,000) 5,585,000
===============================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $112,219,096*) $112,219,096
===============================================================================
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- -------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at amortized cost $ 112,219,096
Cash 772
Interest receivable 71,130
Prepaid registration fees 280,070
- --------------------------------------------------------------------------------
Total Assets 112,571,068
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 270,224
Investment advisory fees payable 30,868
Distribution fees payable 28,592
Administrative fees payable 20,579
Accrued expenses 9,552
- --------------------------------------------------------------------------------
Total Liabilities 359,815
- --------------------------------------------------------------------------------
Total Net Assets $ 112,211,253
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 112,246
Capital paid in excess of par value 112,133,608
Accumulated net realized loss from security transactions (34,601)
- --------------------------------------------------------------------------------
Total Net Assets $ 112,211,253
================================================================================
Shares Outstanding:
Class B 103,756,400
- --------------------------------------------------------------------------------
Class C 8,489,454
- --------------------------------------------------------------------------------
Net Asset Value, Per Class $ 1.00
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1998
INVESTMENT INCOME:
Interest $3,536,181
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 309,921
Investment advisory fees (Note 3) 185,953
Administration fees (Note 3) 123,968
Registration fees 33,768
Shareholder and system servicing fees 32,961
Audit and legal 21,376
Custody 14,381
Shareholder communications 10,439
Trustees' fees 5,314
Other 1,837
- --------------------------------------------------------------------------------
Total Expenses 739,918
- --------------------------------------------------------------------------------
Net Investment Income 2,796,263
- --------------------------------------------------------------------------------
Net Realized Gain From Security Transactions 3,976
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $2,800,239
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1998 (unaudited)
and the Year Ended July 31, 1997
1998 1997
================================================================================
OPERATIONS:
Net investment income $ 2,796,263 $ 6,415,575
Net realized gain 3,976 16,879
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,800,239 6,432,454
- --------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 2) (2,796,263) (6,415,575)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 221,978,991 449,494,993
Net asset value of shares issued for
reinvestment of dividends 2,423,276 5,561,231
Cost of shares reacquired (234,917,670) (492,215,760)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (10,515,403) (37,159,536)
- --------------------------------------------------------------------------------
Decrease in Net Assets (10,511,427) (37,142,657)
NET ASSETS:
Beginning of period 122,722,680 159,865,337
- --------------------------------------------------------------------------------
End of period $ 112,211,253 $ 122,722,680
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
- -------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Exchange Reserve 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 this
Fund and seven 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 Municipal High Income Fund
(formerly known as Smith Barney Tax-Exempt Income Fund), Smith Barney Utilities
Fund and Smith Barney Total Return Bond Fund. The financial statements and
financial highlights for the other Funds are presented in separate semi-annual
reports except for the Smith Barney Premium Total Return Fund which will have a
semi-annual report dated June 30, 1998.
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
value; (c) interest income is recorded on an 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 of each class; (e) dividends
and distributions to shareholders are recorded on the ex-dividend date; (f)
gains or losses on the sale of securities are calculated by 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;
and (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.
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.
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
3. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"),
acts as investment adviser to the Fund. The Fund pays MMC an advisory fee
calculated at an annual rate of 0.30% of the average daily net assets. MMC 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, 1998, CDSCs
paid to Smith Barney Inc. ("SB"), another subsidiary of SSBH, were
approximately:
Class B Class C
================================================================================
CDSCs $269,000 $2,000
================================================================================
Pursuant to a Distribution plan, the Fund pays a distribution fee with respect
to Class B and C shares calculated at an annual rate of 0.50% of the average
daily net assets for each class, respectively. For the six months ended January
31, 1998, total Distribution Plan fees incurred were:
Class B Class C
================================================================================
Distribution Plan Fees $288,846 $21,075
================================================================================
All officers and one Trustee of the Trust are employees of SB.
4. Capital Loss Carryforward
At July 31, 1997, the Fund had, for federal income tax purposes, a capital loss
carryforward of approximately $38,500, available to offset future capital gains
through July 31, 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.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<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, 1998 July 31, 1997
================================================================================
Class B
Shares sold 166,965,298 352,876,972
Shares issued on reinvestment 2,262,840 5,264,223
Shares redeemed (182,426,605) (391,663,064)
- --------------------------------------------------------------------------------
Net Decrease (13,198,467) (33,521,869)
================================================================================
Class C
Shares sold 55,013,693 96,618,021
Shares issued on reinvestment 160,436 297,008
Shares redeemed (52,491,065) (100,552,696)
- --------------------------------------------------------------------------------
Net Increase (Decrease) 2,683,064 (3,637,667)
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1998(1) 1997 1996 1995 1994 1993
=======================================================================================================================
<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 0.023 0.043 0.044 0.044 0.022 0.021
Dividends from net
investment income (0.023) (0.043) (0.044) (0.044) (0.022) (0.021)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------------------
Total Return 2.29%++ 4.43% 4.53% 4.49% 2.18% 2.15%
- -----------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $ 103,720 $ 116,915 $ 150,421 $ 160,432 $ 252,246 $ 166,262
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.20%+ 1.16% 1.17% 1.24% 1.26% 1.25%
Net investment income 4.52+ 4.34 4.45 4.35 2.24 2.16
=======================================================================================================================
Class C Shares 1998(1) 1997 1996 1995(2)
=======================================================================================================================
Net Asset Value,
Beginning of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------------------
Net investment income 0.023 0.043 0.044 0.035
Dividends from net
investment income (0.023) (0.043) (0.044) (0.035)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------------------------------------------------------
Total Return 2.29%++ 4.42% 4.51% 3.52%++
Net Assets,
End of Period (000s) $ 8,491 $ 5,808 $ 9,444 $ 2,850
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.20%+ 1.16% 1.17% 1.21%+
Net investment income 4.52+ 4.34 4.39 4.76+
=======================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (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.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
Smith Barney SMITH BARNEY
Exchange ------------
Reserve Fund
A Member of TravelersGroup[LOGO]
Trustees
Lee Abraham
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
President and Investment Officer
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
Mutual Management Corp.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing
Agent
First Data Investor Services
Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney 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
www.smithbarney.com
FD2388 3/98
================================================================================
[PHOTO OMITTED]
[PHOTO OMITTED]
Smith Barney
Convertible
Fund
- ------------------
SEMI-ANNUAL REPORT
- ------------------
January 31, 1998
[LOGO]
Smith Barney Mutual Funds
Investing for your future.
Everyday.(sm)
<PAGE>
Smith Barney
Convertible Fund
================================================================================
The Smith Barney Convertible Fund seeks current income and capital appreciation
by investing in convertible securities. Convertible securities are bonds or
preferred stocks that can be converted into a preset number of shares of common
stocks after a predetermined date.
Smith Barney Convertible Fund
Average Annual Total Returns
January 31, 1998
Without Sales Charges*
--------------------------------------
Class A Class B Class C
================================================================================
Six-Months (0.08)% (0.36)% (0.35)%
- --------------------------------------------------------------------------------
One-Year 13.65 13.00 13.17
- --------------------------------------------------------------------------------
Five-Year 10.35 9.80 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 9.90 N/A
- --------------------------------------------------------------------------------
Since Inception+ 11.01 8.98 13.56
================================================================================
Without Sales Charges*
--------------------------------------
Class A Class B Class C
================================================================================
Six-Months (5.08)% (4.90)% (1.33)%
- --------------------------------------------------------------------------------
One-Year 7.97 8.00 12.17
- --------------------------------------------------------------------------------
Five-Year 9.22 9.66 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 9.90 N/A
- --------------------------------------------------------------------------------
Since Inception+ 9.92 8.98 13.56
================================================================================
* 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.
** Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; and Class B shares reflect
the deduction of a 5.00% CDSC, which applies if shares are redeemed within
one year from purchase. Thereafter, the CDSC declines 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.
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.
+ Inception dates for Class A, B and C shares are November 6, 1992,
September 9, 1986 and November 7, 1994, respectively.
- --------------------------------------------------------------------------------
Fund Highlight
- --------------------------------------------------------------------------------
During the past six months and since our last report, the U.S. economy continued
to grow, further extending the business cycle expansion that began earlier this
decade. The expansion is now seven years old and is one of the longest in
post-World War II history. Throughout this period of economic expansion,
inflation has crept lower and lower over the past six months, inflation
measurements have declined even more. Benefiting from global competition and
worker productivity gains, recent statistics relating to the Consumer Price
Index ("CPI") indicate that inflation is now under 2%. Inflation has rarely been
this low this late in the business cycle.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SCRAX
Class B SCVSX
- --------------------------------------------------------------------------------
What's Inside
- --------------------------------------------------------------------------------
Shareholder Letter.............................................1
Historical Performance.........................................4
Smith Barney Convertible Fund at a Glance......................6
Schedule of Investments........................................7
Statement of Assets and Liabilities...........................12
Statement of Operations.......................................13
Statements of Changes in Net Assets...........................14
Notes to Financial Statements.................................15
Financial Highlights..........................................18
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. ROBERT E.
MCLENDON SWAB
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney
Convertible Fund ("Fund") for the period ended January 31, 1998. In this report,
we summarize the period's prevailing economic and market conditions, and outline
the Fund's strategy. Detailed summaries of performance and current holdings can
be found in the appropriate sections that follow.
Performance Overview
For the six months ended January 31, 1998, the Fund had a total return of -0.08%
for Class A shares. This compared with its Lipper Analytical Services, Inc. peer
group average of 1.95%. One of the reasons the Fund underperformed its Lipper
peer group average during the reporting period was due to its holdings in energy
securities. The energy sector has been under pressure lately due to the problems
in the Far East. However, we believe the long-term prospects for our energy
holdings remain bright.
Convertible securities are unique investments that have the characteristics of
both stocks and bonds and possess a lower risk profile than common stocks in
general. The Fund is a well-diversified portfolio that invests primarily in
convertible securities and avoids investing in other asset classes such as
common stock. Our relatively conservative investment management style tends to
offer more downside protection than other convertible funds with holdings in
stocks.
Economic and Market Overview
During the past six months and since our last report, the U.S. economy continued
to grow, further extending the business cycle expansion that began earlier this
decade. The expansion is now seven years old and is one of the longest in
post-World War II history. Throughout the economic expansion, inflation has
crept lower and lower over the past six months, inflation measurements have
declined even more. Benefiting from global competition and worker productivity
gains, recent statistics relating to the Consumer Price Index ("CPI") indicate
that inflation is now under 2%. Inflation has rarely been this low this late in
the business cycle.
The good news on inflation benefited bond investors the past six months as the
Federal Reserve Board ("Fed") held rates steady for the period. For example, the
yield on the thirty-year U.S. Treasury bond dropped from 6.30% to 5.80% in
response to the suprisingly low rate of inflation. The bond market also got a
boost when many investors gravitated to the bond markets following the economic
crisis and subsequent currency devaluations that developed in the Far East this
past summer. This "flight-to-quality" mentality increased investor demand for
safe, defensive investments such as U.S. Treasurys.
The stock market, as measured by the Standard & Poor's 500 Index ("S&P 500")
increased slightly from 954.29 to 980.28 between July 31, 1997 and January 31,
1998. (The S&P 500 Index is a capitalization-weighted measure of 500 widely held
common stocks.) The small rise for the stock market during the period suggests
to us that investors were hesitiant to commit heavily to stocks due to the
uncertainty surrounding Asia. Many large U.S. companies do business in the
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 1
<PAGE>
Far East and the difficulties there could have negative implications for
corporate earnings going forward.
The convertible securites market showed a slight gain over the past six months
as the difficult stock market environment directly impacted the stock component
of convertibles. However, investor demand for higher-yielding investments, such
as convertible securities, increased during this time because of lower interest
rates. This has led to an active new issue and secondary market for
convertibles. As a result, the overall universe of convertible securites has
grown. As of this report, the convertible securities market is now in excess of
$135 billion. We believe the volatility inherent in the stock market now will
continue to heighten visability for relatively low-volatility investments like
convertible securities in the future.
Investment Strategy
The primary objective of the Fund is to provide investors with current income
and capital appreciation by investing in convertible securities. We seek to
achieve our objectives through a strategy that combines identifying
fundamentally strong companies with attractively-priced convertible securities.
We like to focus on higher-rated convertible issues that represent attractive
total return opportunities with reduced volatility potential. The Fund consists
of convertible bonds and convertible preferred stocks and rarely invests in
other asset classes. The fact that other asset classes are not represented in
the Fund makes this one of the purest convertible security investments available
in the market today. We believe investing in other asset classes such as common
stocks would add both undue risk and volatility to the Fund. Moreover, we rarely
invest in securities that are not rated by at least one of the major credit
reporting and bond rating agencies such as Moody's Investors Service Inc. or
Standard & Poor's Ratings Service. (Moody's and Standard and Poor's are two
major credit reporting and bond-rating agencies.)
The Fund also seeks to further reduce volatility and risk by diversifying over a
broad range of different sectors in the economy. At the present time, more than
20 different industries are represented in the Fund. Some of the more
heavily-weighted sectors in the Fund's portfolio include manufacturing, lodging
and healthcare. We believe these sectors stand to benefit from current economic
conditions and have excellent capital apprecication potential in the year ahead.
Since our last report, the Fund also established sizable new positions in:
o Mark IV, a manufacturing company that makes engineering components and
systems for fluid handling, filtration, and power steering applications
for the industrial markets.
o Host Marriot, an owner of 100 upscale luxury hotels, mostly in the U.S.
o Elan, a company that develops delivery systems designed to control the
absorption and utilization of pharmaceutical compounds.
In addition, we added to our previously established positions in:
o Cendent, a direct marketing company that has more than 66 million discount
club members, using such services as shopping, travel, insurance, home
improvement, dining and healthcare products.
o Thermo Electron, a manufacturer of environmental, medical and industrial
products.
o K-Mart, the nation's third-largest retailer behind Wal-Mart and Sears.
During the reporting period, we sold our positions in Alaska Air, H.F. Ahmanson
and Nabors Industries because we no longer thought that the prices of these
securities were favorable. Also, our positions in Airborne Freight, Grand
Metropolitan and Unisys were called for redemption.
Market Outlook
Over the next six months, we believe the U.S. economy will continue to grow at a
moderate pace
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
with Gross Domestic Product ("GDP") increasing 2%-3%. This should extend the
economic expansion that began in late 1990 for yet another year. Strong domestic
growth early in 1998, in our opinion, could be followed by some weakness later
as the economic problems in the Far East begin to impact our exports.
We expect the good news on inflation to continue this year as a result of
heightened global competition. Over the past several years, global competition
has forced many companies to keep the price of their products or services low
relative to the competition for fear of losing valuable market share. In
response to low inflation, the Fed will probably keep short-term rates unchanged
for the remainder of the year unless labor costs escalate significantly.
The labor market has tightened this past year and the unemployment rate in the
U.S. is now less than 5%. Nevertheless, we believe that further gains in labor
productivity should offset the need to raise interest rates because of higher
wages. In terms of corporate profitability, we expect a decline in corporate
earnings growth rates this year. A slowdown in economic growth later this year,
coupled with export restraints brought on by the economic problems in the Far
East, could negatively impact future corporate profit growth. Corporate earnings
growth rates could slow to only 4%-6% this year compared to the double-digit
growth in earnings seen in years past.
The past three years have truly been an exceptional period for the financial
markets, especially the stock market. For three consecutive years, the stock
market has provided investors with returns in excess of 20% annually. We believe
the fundamentals are still strong enough to support further gains; however it
will be difficult to match the returns generated by the market of the past few
years. We think that investors might anticipate more historical returns of
10%-12% for the stock market this year. In this type of environment, we believe
that the Fund should provide competitive risk-adjusted returns.
In closing, thank you for your investment in the Smith Barney Convertible Fund.
We look forward to helping you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Robert E. Swab
Heath B. McLendon Robert E. Swab
Chairman Vice President and
Investment Officer
March 3, 1998
- --------------------------------------------------------------------------------
Top Five Stock Holdings* As of January 31, 1998
- --------------------------------------------------------------------------------
1. International Paper Co. 2.6%
- --------------------------------------------------------------------------------
2. Bethlehem Steel Corp. 2.3
- --------------------------------------------------------------------------------
3. Unocal Capital Trust 2.0
- --------------------------------------------------------------------------------
4. Occidental Petroleum Corp. 1.7
- --------------------------------------------------------------------------------
5. St. Paul Capital LLC 1.7
- --------------------------------------------------------------------------------
Top Five Bond Holdings* As of January 31, 1998
- --------------------------------------------------------------------------------
1. Cendant Inc. 3.0%
- --------------------------------------------------------------------------------
2. Alza Corp. 2.6
- --------------------------------------------------------------------------------
3. Mascotech Inc. 2.6
- --------------------------------------------------------------------------------
4. Thermo Electron Corp. 2.6
- --------------------------------------------------------------------------------
5. Hilton Hotels Corp. 2.4
- --------------------------------------------------------------------------------
* As a percentage of total investments.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 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>
1/31/98 $18.61 $16.93 $ 0.38 $ 1.28 $ 0.00 (0.08)%+
- ---------------------------------------------------------------------------------------------------------
7/31/97 15.66 18.61 0.75 0.36 0.00 26.94
- ---------------------------------------------------------------------------------------------------------
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 $ 3.83 $ 1.67 $ 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)
=========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/98 $18.60 $16.91 $ 0.34 $ 1.28 $ 0.00 (0.36)%+
- ---------------------------------------------------------------------------------------------------------
7/31/97 15.66 18.60 0.67 0.36 0.00 26.29
- ---------------------------------------------------------------------------------------------------------
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
=========================================================================================================
Total $ 7.47 $ 2.07 $ 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)
=========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/98 $18.58 $16.89 $ 0.35 $ 1.28 $ 0.00 (0.35)%+
- ---------------------------------------------------------------------------------------------------------
7/31/97 15.64 18.58 0.68 0.36 0.00 26.37
- ---------------------------------------------------------------------------------------------------------
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 $ 2.19 $ 1.64 $ 0.00
=========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
4 1998 Semi-Annual Report to Shareholders
<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>
1/31/98 $18.66 $16.99 $ 0.41 $ 1.28 $ 0.00 0.11%+
- ---------------------------------------------------------------------------------------------------------
7/31/97 15.68 18.66 0.80 0.36 0.00 27.44
Inception*-- 7/31/96 16.15 15.68 0.39 0.00 0.00 (0.56)+
=========================================================================================================
Total $ 1.60 $ 1.64 $ 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 1/31/98+ (0.08)% (0.36)% (0.35)% 0.11%
- --------------------------------------------------------------------------------
Year Ended 1/31/98 13.65 13.00 13.17 14.05
- --------------------------------------------------------------------------------
Five Years Ended 1/31/98 10.35 9.80 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 1/31/98 N/A 9.90 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/98 11.01 8.98 13.56 12.75
================================================================================
Without Sales Charge(2)
----------------------------------------
Class A Class B Class C Class Y
================================================================================
Six Months Ended 1/31/98+ (5.08)% (4.90)% (1.33)% 0.11%
- --------------------------------------------------------------------------------
Year Ended 1/31/98 7.97 8.00 12.17 14.05
- --------------------------------------------------------------------------------
Five Years Ended 1/31/98 9.22 9.66 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 1/31/98 N/A 9.90 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/98 9.92 8.98 13.56 12.75
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/98) 72.69%
- --------------------------------------------------------------------------------
Class B (1/31/88 through 1/31/98) 157.08
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/98) 50.89
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/98) 26.87
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect 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 sales charge of 5.00% and Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from purchase. Thereafter, this CDSC declines 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 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.
- -------------------------------------------------------------------------------
Smith Barney Convertible Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund at a Glance (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 1988 -- January 1998
Smith Barney Convertible Fund
Lipper Convertible Securities Fund
Peer Group Average
Standard & Poor's 500 Index
[LINE GRAPH OMITTED PLOT POINTS NEEDED]
+ Hypothetical illustration of $10,000 invested in Class B shares on January
31, 1988, assuming reinvestment of dividends and capital gains, if any, at
net asset value through January 31, 1998. 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
15 mutual funds, as of January 31, 1998, 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 values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
Industry Diversification*
================================================================================
Diversified and Coglomerate Mfg. 4.7%
- --------------------------------------------------------------------------------
Electronics - Computers 4.7%
- --------------------------------------------------------------------------------
Environmental Control 5.0%
- --------------------------------------------------------------------------------
Finance Companies - Consumer Credit 3.3%
- --------------------------------------------------------------------------------
Health Care, Drugs & Hospital Supplies 8.2%
- --------------------------------------------------------------------------------
Lodging 11.2%
- --------------------------------------------------------------------------------
Metals and Mining 8.2%
- --------------------------------------------------------------------------------
Oil and Natural Gas 6.5%
- --------------------------------------------------------------------------------
Real Estate Development - REITS 2.9%
- --------------------------------------------------------------------------------
Retail 6.3%
- --------------------------------------------------------------------------------
Other 37.5%
================================================================================
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
Investment Breakdown
================================================================================
Repurchase Agreement 17.0%
- --------------------------------------------------------------------------------
Convertible Bonds and Notes 52.1%
- --------------------------------------------------------------------------------
Convertible Preferred Stock 30.9%
================================================================================
* As a percentage of total investments.
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
=================================================================================================================
CONVERTIBLE PREFERRED STOCK -- 30.9%
Broadcast Radio and Television -- 0.8%
<S> <C> <C>
30,000 Cable Systems Corp., Series I, Exchange 8.500% $ 1,108,125
- ----------------------------------------------------------------------------------------------------------------
Building and Construction -- 0.9%
40,000 Beazer Homes USA, Series A, Exchange 8.000% 1,210,000
- ----------------------------------------------------------------------------------------------------------------
Finance Companies - Consumer Credit -- 3.3%
30,000 American General Corp., Series A, Exchange $3.00 2,190,000
30,000 St. Paul Capital LLC, Exchange 6.000% 2,274,375
- ----------------------------------------------------------------------------------------------------------------
4,464,375
- ----------------------------------------------------------------------------------------------------------------
Home Furnishings -- 0.8%
20,000 Newell Financial Trust, Exchange 5.250% 1,047,500
- ----------------------------------------------------------------------------------------------------------------
Lodging -- 2.8%
50,000 Felcor Suite Hotels Inc., Series A, Exchange $1.95+ 1,512,500
40,000 Host Marriot Financial Trust, Exchange 6.750%+ 2,250,000
- ----------------------------------------------------------------------------------------------------------------
3,762,500
- ----------------------------------------------------------------------------------------------------------------
Metals and Mining -- 5.9%
30,000 Amax Gold Inc., Series B, Exchange $3.75 1,192,500
Bethlehem Steel Corp.:
30,000 Exchange $3.50+ 1,260,000
32,000 Exchange $5.00 1,768,000
40,000 Timet Capital Trust I, Exchange 6.625% 1,920,000
40,000 WHX Corp., Series A, Exchange 6.500% 1,867,500
- ----------------------------------------------------------------------------------------------------------------
8,008,000
- ----------------------------------------------------------------------------------------------------------------
Oil and Natural Gas -- 3.7%
40,000 Occidental Petroleum Corp., Series 1993, Exchange $3.875+ 2,255,000
50,000 Unocal Capital Trust, Exhange 6.250% 2,662,500
- ----------------------------------------------------------------------------------------------------------------
4,917,500
- ----------------------------------------------------------------------------------------------------------------
Packaging and Containers -- 1.3%
30,000 Corning Delaware LP, Exchange 6.000% 1,730,625
- ----------------------------------------------------------------------------------------------------------------
Paper, Forest Products and Printing -- 2.6%
70,000 International Paper Co., Exchange 5.250% 3,526,250
- ----------------------------------------------------------------------------------------------------------------
Real Estate Development - REITS -- 2.9%
40,000 Glenborough Realty Trust, Series A, Exchange 7.750% 1,060,000
4,000 Oasis Residential Inc., Series A, Exchange $2.25 102,000
50,000 Security Capital Corp., Series A, Exchange $1.75 1,581,250
40,000 Tanger Factory Outlet Centers Inc., Depository Shares,
Series A, Exchange $1.802 1,105,000
- ----------------------------------------------------------------------------------------------------------------
3,848,250
- ----------------------------------------------------------------------------------------------------------------
Restaurants - Food Service -- 0.8%
20,000 Wendy's Financing I, Series A, Exchange 5.000% 1,057,500
- ----------------------------------------------------------------------------------------------------------------
Retail -- 1.5%
40,000 KMart Financing, Exchange 7.750% 2,060,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================================================
Telecommunications Equipment -- 2.0%
<S> <C> <C> <C>
20,000 Airtouch Communications, Series C, Exchange 4.250% $ 1,317,500
20,000 Loral Space & Communications, Exchange 6.000%+ 1,270,000
- ----------------------------------------------------------------------------------------------------------------
2,587,500
- ----------------------------------------------------------------------------------------------------------------
Transportation Services -- 0.7%
15,000 CNF Trust I, Series A, Exchange 5.000% 945,000
- ----------------------------------------------------------------------------------------------------------------
Utilities -- 0.9%
30,000 Calenergy Capital Trust, Exchange 6.500%+ 1,260,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost-- $40,093,247) 41,533,125
================================================================================================================
<CAPTION>
Face
Amount RATINGS SECURITY VALUE
================================================================================================================
CONVERTIBLE BONDS AND NOTES -- 52.1%
Aerospace and Defense -- 0.4%
<S> <C> <C> <C> <C>
$ 500,000 B3* Kellstrom Industries Inc., 5.750% due 10/15/02 504,375
- ----------------------------------------------------------------------------------------------------------------
Automobile Parts -- 2.6%
2,500,000 AAA Deutsche Bank Finance B.V., zero coupon due 2/2/17 1,134,375
2,000,000 A- Magna International Inc., 5.000% due 10/15/02 2,332,500
- ----------------------------------------------------------------------------------------------------------------
3,466,875
- ----------------------------------------------------------------------------------------------------------------
Communications -- 1.0%
1,000,000 B California Microwave Inc., Sub. Notes, 5.250% due 12/15/03 900,000
500,000 B Cellstar Corp., 5.000% due 10/15/02 388,125
- ----------------------------------------------------------------------------------------------------------------
1,288,125
- ----------------------------------------------------------------------------------------------------------------
Consumer Durable Goods -- 1.9%
3,000,000 B- U.S. Office Products Co., 5.500% due 5/15/03 2,553,750
- ----------------------------------------------------------------------------------------------------------------
Diversified and Conglomerate Manufacturing -- 4.7%
3,000,000 BB+ Mark IV Industries, 4.750% due 11/1/04 2,752,500
4,000,000 B+ Mascotech Inc., 4.500% due 12/15/03 3,535,000
- ----------------------------------------------------------------------------------------------------------------
6,287,500
- ----------------------------------------------------------------------------------------------------------------
Diversified and Conglomerate Services -- 0.9%
1,000,000 B Mail-Well Inc., 5.000% due 11/1/02 1,225,000
- ----------------------------------------------------------------------------------------------------------------
Electronics - Computers -- 4.7%
500,000 BB- Adaptec Inc., 4.750% due 2/1/04+ 416,875
1,000,000 BB- Micron Technology Inc., 7.000% due 7/1/04 992,500
3,000,000 BB- National Semiconductor, 6.500% due 10/1/02+ 3,022,500
2,000,000 B- Park Electrochemical, 5.500% due 3/1/06 1,960,000
- ----------------------------------------------------------------------------------------------------------------
6,391,875
- ----------------------------------------------------------------------------------------------------------------
Environmental Control -- 5.0%
3,000,000 B Thermo Electron Corp., 4.250% due 1/1/03 3,455,625
1,000,000 BB+ U.S. Filter Corp., 4.500% due 12/15/01 1,087,500
2,000,000 BBB+ USA Waste Services Inc., 4.000% due 2/1/02 2,172,500
- ----------------------------------------------------------------------------------------------------------------
6,715,625
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- -------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Face
Amount RATINGS SECURITY VALUE
================================================================================================================
Health Care, Drugs and Hospital Supplies -- 8.2%
<S> <C> <C> <C> <C>
$3,000,000 BBB- Alza Corp., 5.000% due 5/1/06 $ 3,435,000
2,000,000 BBB- Athena Neurosciences Inc., 4.750% due 11/15/04 2,110,000
1,000,000 B Nabi Inc., 6.500% due 2/1/03+ 760,000
2,000,000 BB- Phycor Inc., 4.500% due 2/15/03 1,800,000
3,000,000 BB- Tenet Healthcare Corp., 6.000% due 12/1/05 2,853,750
- ----------------------------------------------------------------------------------------------------------------
10,958,750
- ----------------------------------------------------------------------------------------------------------------
Home Improvements -- 1.0%
1,000,000 A+ Home Depot Inc., 3.250% due 10/1/01 1,393,750
- ----------------------------------------------------------------------------------------------------------------
Insurance -- 0.9%
1,000,000 BB+ Penn Treaty America Corp., 6.250% due 12/1/03 1,242,500
- ----------------------------------------------------------------------------------------------------------------
Leisure, Amusement and Motion Picture -- 0.3%
500,000 B Scholastic Corp., 5.000% due 8/15/05 452,500
- ----------------------------------------------------------------------------------------------------------------
Lodging -- 8.4%
2,000,000 B Capstar Hotel Corp., 4.750% due 10/15/04 1,980,000
3,000,000 A3* Cendant Inc. 4.750% due 3/1/03 4,001,250
3,000,000 Baa2* Hilton Hotels Corp., 5.000% due 5/15/06 3,251,250
2,000,000 B Signature Resorts Inc., 5.750% due 1/15/07 2,027,500
- ----------------------------------------------------------------------------------------------------------------
11,260,000
- ----------------------------------------------------------------------------------------------------------------
Metals and Mining -- 2.3%
3,000,000 Baa2* Inco Ltd., 7.750% due 3/15/16 3,018,750
- ----------------------------------------------------------------------------------------------------------------
Oil and Natural Gas -- 2.8%
1,000,000 BBB+ Diamond Offshore Drilling, 3.750% due 2/15/07 1,247,500
500,000 NR Key Energy Group Inc., 5.000% due 9/15/04 427,500
2,000,000 B- Parker Drilling Corp., 5.500% due 8/1/04 2,130,000
- ----------------------------------------------------------------------------------------------------------------
3,805,000
- ----------------------------------------------------------------------------------------------------------------
Printing -- 0.7%
1,000,000 BB- World Color Press Inc., 6.000% due 10/1/07 987,500
- ----------------------------------------------------------------------------------------------------------------
Retail -- 6.3%
1,000,000 A3* Costco Companies Inc., zero coupon due 8/19/97 587,500
1,000,000 B- Homebase Inc., 5.250% due 11/1/04 917,500
1,000,000 B The Men's Wearhouse Inc., 5.250% due 3/1/03 1,195,000
2,000,000 BBB Rite Aid Corp., 5.250% due 9/15/02 2,295,000
1,000,000 B Saks Holdings, 5.500% due 9/15/06 897,500
3,000,000 B The Sports Authority Inc., 5.250% due 9/15/01 2,557,500
- ----------------------------------------------------------------------------------------------------------------
8,450,000
- ----------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS AND NOTES
(Cost-- $69,678,219) 70,001,875
================================================================================================================
SUB-TOTAL INVESTMENTS
(Cost --- $109,771,466) 111,535,000
================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 9
<PAGE>
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
=======================================================================================================
REPURCHASE AGREEMENT -- 17.0%
<S> <C> <C>
$22,826,000 Goldman, Sachs & Co., 5.539% due 2/2/98;
Proceeds at maturity-- $22,833,024; (Fully collateralized
by U.S. Treasury Notes, 5.750% due 11/15/00;
Market value-- $23,293,442) (Cost-- $22,826,000) $ 22,826,000
=======================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $132,597,466**) $134,361,000
=======================================================================================================
</TABLE>
+ 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 page 11 for definition of ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Rating Service ("Standard & Poor's"),
except that those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "AA" to "B" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standings within the major rating
categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest
and repay principal and differ from the highest rated issue
only in a small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
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 in higher rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability in default
than other speculative issues. However, they face 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 -- Bonds 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.
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.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $109,771,466) $111,535,000
Repurchase agreement, at value (Cost-- $22,826,000) 22,826,000
Cash 923
Receivable for Fund shares sold 656,928
Receivable for securities sold 25,229
Dividends and interest receivable 1,096,356
- --------------------------------------------------------------------------------
Total Assets 136,140,436
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 508,866
Investment advisory fees payable 53,667
Administration fees payable 21,467
Distribution fees payable 5,211
Accrued expenses 57,599
- --------------------------------------------------------------------------------
Total Liabilities 646,810
- --------------------------------------------------------------------------------
Total Net Assets $135,493,626
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 7,994
Capital paid in excess of par value 131,537,408
Undistributed net investment income 73,699
Accumulated net realized gain on security transactions 2,110,991
Net unrealized appreciation of investments 1,763,534
- --------------------------------------------------------------------------------
Total Net Assets $135,493,626
================================================================================
Shares Outstanding:
Class A 2,212,866
- --------------------------------------------------------------------------------
Class B 2,264,950
- --------------------------------------------------------------------------------
Class C 97,047
- --------------------------------------------------------------------------------
Class Y 3,418,793
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 16.93
- --------------------------------------------------------------------------------
Class B* $ 16.91
- --------------------------------------------------------------------------------
Class C** $ 16.89
- --------------------------------------------------------------------------------
Class Y (and redemption price) $ 16.99
- --------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value) $ 17.82
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if
shares are redeemed within one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited) For the Six Months Ended January 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 2,168,695
Dividends 1,171,188
- --------------------------------------------------------------------------------
Total Investment Income 3,339,883
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 308,611
Distribution fees (Note 2) 204,737
Administration fees (Note 2) 123,444
Shareholder and system servicing fees 54,601
Registration fees 33,314
Audit and legal 29,316
Shareholder communications 16,926
Pricing 4,881
Custody 3,009
Trustees' fees 1,222
Other 699
- --------------------------------------------------------------------------------
Total Expenses 780,760
- --------------------------------------------------------------------------------
Net Investment Income 2,559,123
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 28,692,185
Cost of securities sold 22,828,654
- --------------------------------------------------------------------------------
Net Realized Gain 5,863,531
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 10,861,629
End of period 1,763,534
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (9,098,095)
- --------------------------------------------------------------------------------
Net Loss on Investments (3,234,564)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (675,441)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Six Months Ended January 31, 1998 (unaudited) and the Year Ended July
31, 1997
1998 1997
====================================================================================================
OPERATIONS:
<S> <C> <C>
Net investment income $ 2,559,123 $ 4,400,288
Net realized gain 5,863,531 7,647,258
Increase (decrease) in net unrealized appreciation (9,098,095) 11,619,495
- ----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (675,441) 23,667,041
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,656,869) (4,250,885)
Net realized gains (9,214,931) (2,061,461)
- ----------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (11,871,800) (6,312,346)
- ----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 39,251,362 23,690,727
Net asset value of shares issued for reinvestment of dividends 5,798,678 4,067,509
Cost of shares reacquired (9,071,654) (20,188,440)
- ----------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 35,978,386 7,569,796
- ----------------------------------------------------------------------------------------------------
Increase in Net Assets 23,431,145 24,924,491
NET ASSETS:
Beginning of period 112,062,481 87,137,990
- ----------------------------------------------------------------------------------------------------
End of period* $ 135,493,626 $ 112,062,481
====================================================================================================
* Includes undistributed net investment income of: $ 73,699 $ 171,445
====================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Convertible 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 seven other
separate investment funds: Smith Barney Exchange Reserve Fund, Smith Barney
Premium Total Return Fund, Smith Barney High Income Fund, Smith Barney Municipal
High Income Fund (formerly known as the Smith Barney Tax-Exempt Income Fund),
Smith Barney Diversified Strategic Income Fund, Smith Barney Utilities Fund and
Smith Barney Total Return Bond Fund. The financial statements and financial
highlights for the other funds are presented in separate annual reports except
for the Smith Barney Premium Total Return Fund which will have a semi-annual
report dated June 30, 1998.
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, which
approximates value; (d) dividend income is recorded on ex-dividend date and
interest income, adjusted for accretion of original 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; (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, 1997, reclassifications
were made to undistributed net investment income and accumulated net realized
gains to reflect book/tax differences and income and gains available for
distributions under income tax regulations. Net investment income, net realized
gains and net assets were not affected by this change; 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.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"),
acts as investment adviser to the Fund. The Fund pays MMC an advisory fee
calculated at an annual rate of 0.50% of the average daily net assets. This fee
is calculated daily and paid monthly.
MMC 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 SSBH, acts as distributor of
Trust shares and primary broker for its portfolio agency transactions. For the
six months ended January 31, 1998, SB received sales charges of approximately
$12,000 on sales of the Fund's Class A shares.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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. For the six months ended January 31, 1998, CDSCs paid to SB for Class
Bshares were approximately $30,000.
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, 1998, total Distribution Plan fees incurred were:
Class A Class B Class C
- --------------------------------------------------------------------------------
Distribution Plan Fees $48,107 $151,635 $4,995
- --------------------------------------------------------------------------------
All officers and one Trustee of the Trust are employees of SB.
3. Investments
During the six months ended January 31, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $48,916,543
- --------------------------------------------------------------------------------
Sales 28,692,185
================================================================================
At January 31, 1998, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $6,732,034
Gross unrealized depreciation (4,968,500)
- --------------------------------------------------------------------------------
Net unrealized appreciation $1,763,534
================================================================================
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. 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.
At January 31, 1998, 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 underly-
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
ing 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, 1998, the Fund did not write any
options.
6. Shares of Beneficial Interest
At January 31, 1998, 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, 1998, total paid-in capital amounted to the following for each
class:
Class A Class B Class C Class Y
================================================================================
Total Paid-in Capital $32,305,052 $37,705,766 $ 1,607,592 $59,926,992
================================================================================
Transactions in shares of each class were as follows:
Six Months Ended Year Ended
January 31, 1998 July 31, 1997
--------------------- ---------------------
Shares Amount Shares Amount
================================================================================
Class A
Shares sold 138,165 $ 2,517,644 163,074 $ 2,748,028
Shares issued on
reinvestment 164,188 2,827,670 116,254 1,943,840
Shares redeemed (174,474) (3,109,387) (422,237) (7,047,021)
- --------------------------------------------------------------------------------
Net Increase (Decrease) 127,879 $ 2,235,927 (142,909) $(2,355,153)
================================================================================
Class B
Shares sold 111,458 $ 1,999,068 244,740 $ 4,102,534
Shares issued on
reinvestment 165,999 2,854,159 124,505 2,077,233
Shares redeemed (320,371) (5,839,879) (770,612) (12,939,859)
- --------------------------------------------------------------------------------
Net Decrease (42,914) $ (986,652) (401,367) $(6,760,092)
================================================================================
Class C
Shares sold 29,274 $ 531,303 35,625 $ 596,934
Shares issued on
reinvestment 6,808 116,849 2,775 46,436
Shares redeemed (6,412) (122,388) (12,011) (201,552)
- --------------------------------------------------------------------------------
Net Increase 29,670 $ 525,764 26,389 $ 441,818
================================================================================
Class Y
Shares sold 1,860,435 $34,203,347 972,230 $16,243,231
Shares issued on
reinvestment -- -- -- --
Shares redeemed -- -- (1) (8)
- --------------------------------------------------------------------------------
Net Increase 1,860,435 $34,203,347 972,229 $16,243,223
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1998(1)(2) 1997 1996(2) 1995 1994 1993
================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $18.61 $15.66 $15.27 $14.56 $14.99 $13.82
- ----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.38 0.78 0.74 0.74 0.72 0.49
Net realized and unrealized gain (loss) (0.40) 3.28 0.38 0.70 (0.42) 1.22
- ----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.02) 4.06 1.12 1.44 0.30 1.71
Less Distributions From:
Net investment income (0.38) (0.75) (0.73) (0.73) (0.73) (0.51)
Net realized gains (1.28) (0.36) -- -- -- (0.03)
- ----------------------------------------------------------------------------------------------------------------
Total Distributions (1.66) (1.11) (0.73) (0.73) (0.73) (0.54)
Net Asset Value, End of Period $16.93 $18.61 $15.66 $15.27 $14.56 $14.99
Total Return (0.08)%++ 26.94% 7.41% 10.35% 1.99% 12.63%++
- ----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $37,458 $38,803 $34,888 $35,238 $2,294 $1,655
- ----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.23%+ 1.27% 1.40% 1.40% 1.40% 1.37%+
Net investment income 4.13+ 4.61 4.68 5.13 4.80 4.86+
- ----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 28% 57% 59% 48% 54% 95%
- ----------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $ 0.06 $ 0.06 $ 0.06 -- -- --
================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(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.
- --------------------------------------------------------------------------------
18 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1998(1)(2) 1997 1996(2) 1995 1994 1993
================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $18.60 $15.66 $15.27 $14.56 $14.99 $13.84
- ----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.33 0.69 0.66 0.67 0.65 0.61
Net realized and unrealized gain (loss) (0.40) 3.28 0.39 0.70 (0.42) 1.20
- ----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.07) 3.97 1.05 1.37 0.23 1.81
- ----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.34) (0.67) (0.66) (0.66) (0.66) (0.62)
Net realized gain (1.28) (0.36) -- -- -- (0.04)
- ----------------------------------------------------------------------------------------------------------------
Total Distributions (1.62) (1.03) (0.66) (0.66) (0.66) (0.66)
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $16.91 $18.60 $15.66 $15.27 $14.56 $14.99
Total Return (0.36)%++ 26.29% 6.91% 9.80% 1.50% 13.40%
- ----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $38,309 $42,927 $42,420 $45,524 $85,190 $74,857
- ----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.73%+ 1.77% 1.90% 1.90% 1.88% 2.00%
Net investment income 3.64+ 4.12 4.18 4.63 4.32 4.20
- ----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 28% 57% 59% 48% 54% 95%
Average commissions per share
paid on equity transactions(3) $ 0.06 $ 0.06 $ 0.06 -- -- --
================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(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.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
Class C Shares 1998(1)(2) 1997 1996(2) 1995(3)(4)
================================================================================
Net Asset Value, Beginning of Period $18.58 $15.64 $15.27 $14.09
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.33 0.67 0.67 0.50
Net realized and unrealized gain (0.39) 3.31 0.37 1.17
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.06) 3.98 1.04 1.67
Less Distributions From:
Net investment income (0.35) (0.68) (0.67) (0.49)
Net realized gains (1.28) (0.36) -- --
- --------------------------------------------------------------------------------
Total Distributions (1.63) (1.04) (0.67) (0.49)
Net Asset Value, End of Period $16.89 $18.58 $15.64 $15.27
Total Return (0.35)%++ 26.37% 6.82% 12.17%++
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $1,640 $1,252 $ 641 $ 83
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.69%+ 1.74% 1.86% 1.87%+
Net investment income 3.66+ 4.14 4.17 4.77+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 28% 57% 59% 48%
Average commissions per share
paid on equity transactions(5) $0.06 $0.06 $0.06 --
================================================================================
(1) For the six months ended January 31, 1998 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(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.
- --------------------------------------------------------------------------------
20 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
Class Y Shares 1998(1)(2) 1997 1996(2)(3)
===============================================================================
Net Asset Value, Beginning of Period $18.66 $15.68 $16.15
- -------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.41 0.83 0.38
Net realized and unrealized gain (loss) (0.39) 3.31 (0.46)
- -------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.02 4.14 (0.08)
Less Distributions From:
Net investment income (0.41) (0.80) (0.39)
Net realized gains (1.28) (0.36) --
- -------------------------------------------------------------------------------
Total Distributions (1.69) (1.16) (0.39)
- -------------------------------------------------------------------------------
Net Asset Value, End of Period $16.99 $18.66 $15.68
Total Return 0.11%++ 27.44% (0.56)%++
- -------------------------------------------------------------------------------
Net Assets, End of Period (000s) $58,087 $29,080 $9,189
- -------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.81%+ 0.85% 1.00%+
Net investment income 4.54+ 5.04 4.98+
- -------------------------------------------------------------------------------
Portfolio Turnover Rate 28% 57% 59%
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06
===============================================================================
(1) For the six months ended January 31, 1998 (unaudited).
(2)Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(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.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 21
<PAGE>
Smith Barney
Convertible Fund
Trustees
Lee Abraham
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
President and Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
Robert E. Swab
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Mutual Management Corp.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Convertible Fund. It is not for distribution to prospective
investors unless accompanied by an effective Prospectus for the Fund, which
contains information concerning the Fund's investment policies and expenses as
well as other pertinent information.
SMITHBARNEY
- -----------
A Member of TravelersGroup[LOGO]
Smith Barney Convertible Fund
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD2170 3/98
[GRAPHIC]
Smith Barney
Utilities Fund
---------------------------------------------
SEMI-ANNUAL REPORT
---------------------------------------------
January 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day(SM).
<PAGE>
Smith Barney
Utilities Fund
[PHOTO] [PHOTO]
HEATH B. JACK S.
MCLENDON LEVANDE
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Utilities
Fund ("Fund") for the period ended January 31, 1998. 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.
As you know, utilities have lost their natural monopoly status as protected
franchises and have entered a bold new era of competition. In particular, the
electric utility industry has undergone a significant evolution in recent years.
The cost of electric power and the growing ability of consumers to choose their
energy suppliers have helped to dramatically change the nature of the utilities
industry. Market forces, regulatory changes and political pressures have
reshaped the electric utility industry in much the same way it has impacted the
natural gas and telecommunications industries. For both utility management teams
and investors, these profound changes have brought new risks as well as new
investment opportunities.
Today, heightened competitive pressures in the utility industry have also caused
an increase in industry consolidation, a trend that has resulted in higher,
uncharacteristic volatility for many utilities stocks. Moreover, in response to
these rapid changes within the industry, many utility management teams have used
their cash flow to design new business strategies, and that has caused declines
in dividend growth.
On February 27, 1998 in response to the profound changes taking place in the
utilities industry, the Board of Trustees of Smith Barney Income Funds, on
behalf of the Smith Barney Utilities Fund, voted in favor of certain changes to
the Fund's investment objectives and policies. And while the Board of Trustees
believes these proposed changes are in the best interests of the shareholders of
the Smith Barney Utilities Fund, no guarantees can be given that the Fund's
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 1
<PAGE>
performance will necessarily improve if the proposed changes outlined below are
approved by shareholders.
The Board of Trustees voted to change the Fund's primary investment objective of
income and secondary objective of capital appreciation so that income and
capital appreciation would receive equal consideration. The Board of Trustees
also approved changing the Fund's investment policies so that the Fund would
seek to achieve its objective by investing roughly 60% of its assets in stocks
and approximately 40% in bonds. The Fund would also no longer be required to
invest in the stocks and bonds of companies in the utilities industries. In
addition, if shareholders approve these changes, the portion of Fund assets
invested in high yield securities will increase from a maximum of 10% to a
maximum of 25%. If these changes are approved by shareholders, the Fund will
become more diversified and less dependent on the success of one industry and
therefore give investors access to more investment opportunities.
Moreover, the Board of Trustees will change the Fund's name to the Smith Barney
Balanced Fund to better reflect its new proposed investment style, assuming the
proposed changes are approved by shareholders.
A proxy statement was sent to you recently. If you have not already done so, we
ask that you read the proxy statement carefully and send us your vote regarding
these proposed changes before a special shareholders' meeting scheduled to be
held on May 7, 1998. If you do not plan to attend the meeting, we ask that you
complete, sign, date and return the proxy statement as soon as possible in the
postage-paid envelope that was also sent to you.
Performance Update
As noted previously, the Fund's current primary investment objective is to
provide investors with current income; long-term capital appreciation is a
secondary objective. The Fund invests in a balanced portfolio of utility stocks
and investment-grade utility bonds. The Fund posted total returns of 11.18%,
10.95% and 10.97% for its Class A, B and C shares respectively for the six
months ended Januuy 31, 1998. In comparison, the Lipper Utilities Fund Average
gained 13.15% and the Standard & Poor's 500 Index rose 3.56% in the same period.
(Lipper is an independent fund-tracking organization and the S&P 500 Index is a
capitalization-weighted measure of 500 widely held common stocks.) The Fund's
underperformance versus its Lipper peer group average was caused primarily by
its emphasis on providing shareholders with current income and is in keeping
with its primary investment objective.
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
The Fund generally has a higher weighting in bonds than other utilities funds in
its category. The Fund's higher concentration in bonds has enabled it to provide
a relatively high current yield to shareholders over the longer term.
In addition, during the reporting period the Fund distributed income dividends
totaling $0.37 and a capital gain of $0.60 per Class B share. As of January 31,
1998, the Fund's annualized distribution rate was 4.62%, based on the current
monthly income dividend of $0.0624 and a net asset value ("NAV") of $16.21 for
Class B shares. For performance information for the Fund's other share classes,
please refer to page seven.
Market and Economic Overview
As noted, 1997 was another year of evolution for utility investors. In our view,
utility stocks and bonds were influenced by three major factors:
o The dramatic decline in long-term interest rates
o A favorable regulatory and restructuring environment for many
utilities
o The impact of the Asian financial crisis on domestic markets
Long-term interest rates continued to decline during the past six months as
inflation remained subdued despite more than seven years of U.S. economic
expansion. For example, the yield on the benchmark 30-year U.S. Treasury bond
fell to a near historic low of 5.8% on January 30, 1998, down from a yield of
6.3% on July 31, 1997. Growing investor concerns over the world's stock markets
following financial turmoil in Southeast Asia helped to ignite a bond market
rally in the closing months of 1997, especially the relative safety provided by
U.S. Treasuries. This bond market rally helped to push down interest rates even
further by driving up bond prices and lowering their yields, which move in the
opposite direction of prices. Utility stocks tend to be interest-rate sensitive
and usually react favorably when the bond market performs strongly.
Another sign of the changes taking place in the utility industry is the
improving regulatory and restructuring picture for many power providers. States
such as New York and Massachusetts announced regulatory decisions permitting a
greater percentage of recovery of stranded costs that utilities have incurred.
(Stranded costs are investments that utilities are at risk of not recovering in
a competitive marketplace.)
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 3
<PAGE>
Lastly, another factor affecting utilities has been and continues to be the
persistent uncertainties resulting from the Asian financial crisis. When the
crisis spread to domestic markets in late October 1997, many investors
gravitated to bonds and stocks with relatively high dividend yields such as
utility stocks.
Industry Overview
In a dynamic and increasingly competitive marketplace, prudent utility stock
selection continues to be critical in achieving good returns. Performance among
utility issues varied widely last year and we expect the same in 1998. As the
power industry evolves into a fully competitive marketplace, investors have been
favoring growth-oriented utilities, or companies that may have below-average
yields, but have the ability to grow earnings faster than their peers.
The merger and consolidation trend that began two years ago has continued. We
expect to see additional mergers involving electric utility companies combining
not only with other electric companies, but also with natural gas companies as
well. We view this merger trend as another sign of the tremendous changes taking
place in the utilities industry.
Power providers also face a number of challenges in the near term and, to state
the obvious, developing effective corporate strategies will be crucial to their
ultimate success. The growth rate for many utilities has been slowing down
making competition even more pronounced. In addition, there are several
environmental issues on the horizon in the next several years such as air
pollution control.
Investment Strategy
During the reporting period, we have maintained our portfolio weighting of
roughly 60% stocks and 40% bonds. In the stock portion of the Fund, electric
utilities represent 45% of the holdings with the remainder made up of 9%
telecommunication companies and 6% natural gas providers.
Among the electric utility stocks, we have increased our focus on total return
by adding more growth-oriented utilities that are priced attractively relative
to the industry. Some major new additions to the Fund include: Florida Progress,
First Energy, and Northern States Power.
- --------------------------------------------------------------------------------
4 1998 Semi-Annual Report to Shareholders
<PAGE>
We added Florida Progress due to the positive developments in moving its nuclear
power plant back on-line, which should help to improve its earnings. In our
judgment, the stock was undervalued on a price-to-earnings basis and boasts a
good service territory. (The price-to-earnings ratio shows the relationship
between a stock's price and the company's earnings for the last four quarters.)
First Energy was another new position for the Fund.
First Energy is a new company resulting from the merger of Ohio Edison and
Centerior Energy. We expect that earnings should improve nicely and, coupled
with an improving regulatory environment, the new company's share price should
move closer to the electric utilities group's average. We added to our holdings
in Northern States Power because of its attractive relative valuation compared
to its peer group.
We are still placing a greater investment emphasis on telecommunications
companies and nearly doubled our telecommunication stock exposure since our last
report. During the last six months, we established positions in Worldcom,
Ameritech and SBC Communication. Worldcom is a well-known and widely held long
distance and Internet provider. We purchased this stock because of the potential
benefits of its merger with MCI as well as the synergy stemming from other
recent acquisitions that should enable Worldcom to combine telephone and
Internet services. We bought Ameritech and SBC Communication because we believed
they were attractively valued and to increase the Fund's weighting in the
telecommunications industry.
In addition, we sold several position in companies that we thought were fully
valued or presented some fundamental or regulatory concerns relative to other
more attractive investments. We sold our positions in Kansas City Power and
Light Co., Cipsco and PacifiCorp. Kansas City Power and Light Co. was sold due
to uncertainties regarding its proposed merger with Western Resources. We sold
Cipsco because its merger was near completion and we felt there was little
upside potential left. PacifiCorp was sold because of concerns that it may not
complete its planned acquisition of the Energy Group, a European company.
In the bond portion of the Fund, we reduced some of the electric utility
holdings and added to the telecommunication holdings based on favorable market
spreads relative to electric utilities as well as favorable growth prospects for
this rapidly expanding industry.
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 5
<PAGE>
In closing, thank you in advance for your attention and vote with regard to
these important proposed changes for the Fund. We look forward to continuing to
earn your trust in the years ahead.
Sincerely,
/s/ Heath B. McLendon /s/ Jack S. Levande
Heath B. McLendon Jack S. Levande
Chairman Vice President and
Investment Officer
March 10, 1998
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<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>
1/31/98 $15.53 $16.22 $0.41 $0.60 $0.00 11.18%+
- --------------------------------------------------------------------------------------------------------
7/31/97 14.51 15.53 0.82 0.32 0.00 15.48
- --------------------------------------------------------------------------------------------------------
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 $4.34 $1.63 $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>
1/31/98 $15.52 $16.21 $0.37 $0.60 $0.00 10.95%+
- ------------------------------------------------------------------------------------------------------------
7/31/97 14.51 15.52 0.75 0.32 0.00 14.88
- ------------------------------------------------------------------------------------------------------------
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 $7.74 $2.26 $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>
1/31/98 $15.53 $16.22 $0.38 $0.60 $0.00 10.97%+
- --------------------------------------------------------------------------------------------------------------
7/31/97 14.51 15.53 0.75 0.32 0.00 15.01
- --------------------------------------------------------------------------------------------------------------
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 $3.78 $1.52 $0.02
==============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 7
<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>
1/31/98 $15.56 $16.22 $0.43 $0.60 $0.00 11.08%+
- ----------------------------------------------------------------------------------------------------------
7/31/97 14.52 15.56 0.85 0.32 0.00 15.88
- ----------------------------------------------------------------------------------------------------------
Inception*-7/31/96 14.88 14.52 0.71 0.00 0.00 2.28+
==========================================================================================================
Total $1.99 $0.92 $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>
1/31/98 $15.55 $16.26 $0.43 $0.60 $0.00 11.42%+
- ------------------------------------------------------------------------------------------------------------
7/31/97 14.52 15.55 0.85 0.32 0.00 15.81
- ------------------------------------------------------------------------------------------------------------
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 $4.53 $1.64 $0.02
============================================================================================================
</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 1/31/98+ 11.18% 10.95% 10.97% 11.08% 11.42%
- --------------------------------------------------------------------------------------------
Year Ended 1/31/98 18.98 18.39 18.67 18.99 19.36
- --------------------------------------------------------------------------------------------
Five Years Ended 1/31/98 9.72 9.18 N/A N/A 10.03
- --------------------------------------------------------------------------------------------
Inception* through 1/31/98 10.54 10.83 8.88 12.61 10.87
============================================================================================
<CAPTION>
With Sales Charge(2)
---------------------------------------------------
Class A Class B Class C Class Y Class Z
============================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/98+ 5.61% 5.95% 9.97% 11.08% 11.42%
- --------------------------------------------------------------------------------------------
Year Ended 1/31/98 13.00 13.39 17.67 18.99 19.36
- --------------------------------------------------------------------------------------------
Five Years Ended 1/31/98 8.60 9.04 N/A N/A 10.03
- --------------------------------------------------------------------------------------------
Inception* through 1/31/98 9.46 10.83 8.88 12.61 10.87
============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (Inception* through 1/31/98) 69.05%
- --------------------------------------------------------------------------------
Class B (Inception* through 1/31/98) 175.39
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/98) 52.89
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/98) 31.65
- --------------------------------------------------------------------------------
Class Z (Inception* through 1/31/98) 71.68
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from 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.
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 9
<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 1998
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
SMITH BARNEY STANDARD & POOR'S LIPPER UTILITIES
UTILITIES FUND 500 INDEX FUND AVERAGE
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
7/97 23,315 29,744 48,468
1/31/98 27,539 33,703 50,193
+ 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, 1998. 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 (11 funds as of January 31, 1998) 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.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Portfolio Highlights (unaudited) January 31, 1998
================================================================================
Portfolio Breakdown
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
U.S. Government Agencies & Obligations 1.4%
Repurchase Agreement 0.6%
Common Stock 59.6%
Corporate Bonds and Notes 38.4%
</TABLE>
<TABLE>
<CAPTION>
Percentage of
Company Total Investments
- --------------------------------------------------------------------------------
<S> <C>
Top Five Equity Holdings
FPL Group, Inc. 5.1%
Texas Utilities Co. 4.0
Nipsco Inc. 3.9
New Centuries Energies Inc. 3.3
Edison International 3.1
Top Five Bond Holdings
MCI Communications Corp. 3.5
GTE Corp. 3.1
Bellsouth Telecommunications Corp. 2.8
Pacific Bell 2.8
Century Telephone Enterprises, Inc. 2.6
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 11
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
Schedule of Investments (unaudited) January 31, 1998
====================================================================================================
SHARES SECURITY VALUE
====================================================================================================
<S> <C>
COMMON STOCK -- 59.6%
Electric & Gas -- 57.2%
500,000 American Electric Power Co. $ 24,656,250
250,000 Ameritech Corp. 10,734,375
500,000 Baltimore Gas & Electric Co. 15,187,500
250,000 Carolina Power & Light 10,156,250
750,000 Cinergy Corp.+ 25,875,000
600,000 Coastal Corp. 34,800,000
750,000 Consolidated Edison Co. of New York, Inc. 30,984,375
300,000 Dominion Resources, Inc. 11,962,500
900,000 DPL, Inc. 16,481,250
600,000 Duke Energy Corp.+ 32,512,500
1,300,000 Edison International 34,937,500
211,000 El Paso Natural Gas 13,490,813
240,000 Equitable Resources, Inc. 7,890,000
850,000 FPL Group, Inc. 48,768,750
500,000 First Energy Corp. 14,500,000
360,000 Florida Progress Corp. 13,792,500
500,000 GPU Inc. 19,656,250
750,000 Houston Industries, Inc. 19,593,750
100,000 Illinova Corp. 2,918,750
250,000 K N Energy Inc. 12,562,500
106,000 MCN Energy Corp. 3,922,000
850,000 Nipsco Inc.+ 43,403,125
800,000 New Century Energies Inc. 36,450,000
144,800 Northern States Power Co. 7,764,900
265,000 Pacific Enterprises 9,556,563
500,000 Pinnacle West Capital Corp. 20,000,000
200,000 SBC Communications, Inc. 15,550,000
350,000 SCANA Corp. 9,865,625
500,000 Sierra Pacific Resources 17,687,500
750,000 Southern Co. 18,234,375
250,000 Southwest Gas Corp. 4,453,125
1,100,000 Texas Utilities Co. 45,237,500
150,000 Worldcom Inc.++ 5,371,875
- ----------------------------------------------------------------------------------------------------
638,957,401
- ----------------------------------------------------------------------------------------------------
Telephone -- 2.4%
500,000 GTE Corp. 27,281,250
- ----------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $497,348,793) 666,238,651
====================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1998
====================================================================================================
FACE
AMOUNT RATINGS SECURITY VALUE
====================================================================================================
<S> <C>
CORPORATE BONDS AND NOTES -- 38.4%
Electric & Gas -- 19.8%
$ 30,000,000 AAA Bell South Telecommunications Corp., 7.000% due 12/1/95 $ 31,537,500
21,000,000 AAA Bell South Capital Funding, 7.120% due 7/15/07 22,811,250
12,000,000 Aa1* Bell Telephone Co. Pennsylvania, 7.375% due 3/15/33 12,210,000
2,000,000 AA+ Citizens Utilities Co., 7.000% due 11/1/25 2,077,500
Coastal Corp:
10,000,000 BBB- 7.750% due 10/15/35 11,137,500
3,500,000 BBB- 7.420% due 2/15/37 3,753,750
22,000,000 BBB+ Columbia Gas Systems, Inc., 7.620% due 11/28/25 23,292,500
Consolidated Edison:
9,000,000 A+ 7.100% due 2/1/28 8,998,200
5,000,000 A+ 7.125% due 2/15/29 5,018,750
12,000,000 A Equitable Resources, Inc., 7.750% due 7/15/26 13,440,000
Hydro-Quebec:
10,000,000 A+ 8.250% due 1/15/27 11,725,000
12,500,000 A+ 8.625% due 6/15/29 15,265,625
10,000,000 BBB Noble Affiliates, 7.250% due 8/1/07 10,375,000
2,000,000 AA Northern States Power Co., 7.375% due 12/1/26 2,095,000
10,000,000 A- Pacific Gas Transmission, 7.800% due 6/1/25 10,600,000
4,000,000 A PacifiCorp, 6.710% due 1/15/26 3,935,000
16,000,000 Baa2* South West Gas, 8.000% due 8/1/26 17,980,000
Southwestern Bell:
5,000,000 AA 6.625% due 9/1/24 4,868,750
5,000,000 AA 7.375% due 7/15/27 5,218,750
5,000,000 BBB Tennesse Valley Authority, 7.625% due 4/1/37 5,456,250
- ----------------------------------------------------------------------------------------------------
221,796,325
- ----------------------------------------------------------------------------------------------------
Telephone -- 18.6%
Century Telephone Enterprises, Inc.:
15,000,000 BBB+ 8.250% due 5/1/24 16,293,750
13,000,000 BBB+ 7.200% due 12/1/25 13,325,000
GTE Corp:
5,000,000 A 8.750% due 11/1/21 6,006,250
10,000,000 A 7.830% due 5/1/23 10,462,500
17,500,000 A 7.900% due 2/1/27 18,484,375
6,000,000 A+ GTE Northwest, 7.875% due 6/1/26 6,420,000
MCI Communications Corp:
8,000,000 A 7.750% due 3/15/24 8,280,000
30,000,000 A 7.750% due 3/23/25 31,087,500
5,000,000 A Lucent Technologies Inc., 6.500% due 1/15/28 4,931,250
NY Telephone:
20,000,000 A+ 7.000% due 8/15/25 20,025,000
4,000,000 A+ 7.000% due 12/1/33 4,060,000
Pacific Bell:
5,000,000 AA- 7.500% due 2/1/33 5,200,000
25,000,000 AA- 7.375% due 7/15/43 26,125,000
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 13
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1998
====================================================================================================
FACE
AMOUNT RATINGS SECURITY VALUE
====================================================================================================
<S> <C>
Telephone -- 18.6% (continued)
$ 10,000,000 BBB+ US West Capital Funding Inc., 7.950% due 2/1/07 $ 11,237,500
26,500,000 A US West Communications Group, 6.875% due 9/15/33 25,936,874
- ----------------------------------------------------------------------------------------------------
207,874,999
- ----------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES
(Cost -- $398,621,351) 429,671,324
====================================================================================================
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 1.4%
15,000,000 U.S. Treasury Note, 6.375% due 8/15/27
(Cost -- $14,931,559) 16,122,450
====================================================================================================
REPURCHASE AGREEMENT -- 0.6%
6,399,000 Goldman, Sachs & Co., 5.540% due 2/2/98;
Proceeds at maturity -- $6,401,954; (Fully
collateralized by U.S. Treasury Notes, 5.750% due 11/15/00;
Market value -- $6,530,042) 6,399,000
====================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $917,300,703**) $1,118,431,425
====================================================================================================
</TABLE>
+ A portion of this security issue is on loan (See Note 5).
++ Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
Statement of Assets and Liabilities (unaudited) January 31, 1998
============================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost -- $917,300,703) $1,118,431,425
Cash 144
Collateral for securities loaned (Note 5) 20,859,417
Receivable for securities sold 7,975,669
Receivable for Fund shares sold 200,881
Dividends and interest receivable 10,505,658
- --------------------------------------------------------------------------------------------
Total Assets 1,157,973,194
- --------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 5) 20,859,417
Payable for securities purchased 8,985,680
Dividends payable 4,423,014
Investment advisory fees payable 405,145
Administration fees payable 180,094
Distribution fees payable 100,261
Payable for Fund shares purchased 9,439
Accrued expenses 317,142
- --------------------------------------------------------------------------------------------
Total Liabilities 35,280,192
- --------------------------------------------------------------------------------------------
Total Net Assets $1,122,693,002
============================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 69,228
Capital paid in excess of par value 889,101,605
Overdistributed net investment income (3,105,877)
Accumulated net realized gains on security transactions 35,497,324
Net unrealized appreciation of investments 201,130,722
- --------------------------------------------------------------------------------------------
Total Net Assets $1,122,693,002
============================================================================================
Shares Outstanding:
Class A 16,059,435
-----------------------------------------------------------------------------------------
Class B 51,857,761
-----------------------------------------------------------------------------------------
Class C 571,515
-----------------------------------------------------------------------------------------
Class Y 88
-----------------------------------------------------------------------------------------
Class Z 739,539
-----------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $16.22
-----------------------------------------------------------------------------------------
Class B* $16.21
-----------------------------------------------------------------------------------------
Class C** $16.22
-----------------------------------------------------------------------------------------
Class Y (and redemption price) $16.22
-----------------------------------------------------------------------------------------
Class Z (and redemption price) $16.26
-----------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $17.07
============================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed less than one year from 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.
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 15
<PAGE>
================================================================================
Statement of Operations (unaudited)
================================================================================
For the Six Months Ended January 31, 1998
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest $ 17,106,377
Dividends 15,737,282
- --------------------------------------------------------------------------------
Total Investment Income 32,843,659
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 3,636,017
Investment advisory fees (Note 2) 2,614,565
Administration fees (Note 2) 1,162,029
Shareholder and system servicing fees 557,149
Shareholder communications 109,504
Registration fees 40,000
Audit and legal 13,412
Custody 8,015
Trustees' fees 7,521
Pricing fees 4,513
Other 7,772
- --------------------------------------------------------------------------------
Total Expenses 8,160,497
- --------------------------------------------------------------------------------
Net Investment Income 24,683,162
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 480,585,861
Cost of securities sold 428,190,680
- --------------------------------------------------------------------------------
Net Realized Gain 52,395,181
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 158,792,887
End of period 201,130,722
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 42,337,835
- --------------------------------------------------------------------------------
Net Gain on Investments 94,733,016
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $119,416,178
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Statement of Changes in Net Assets
================================================================================
For the Six Months Ended January 31, 1998 (unaudited)
and the Year Ended July 31, 1997
<TABLE>
<CAPTION>
1998 1997
============================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 24,683,162 $ 70,855,349
Net realized gain 52,395,181 24,744,410
Increase in net unrealized appreciation 42,337,835 102,064,403
- --------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 119,416,178 197,664,162
- --------------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (27,785,801) (72,735,428)
Net realized gains (41,461,407) (33,068,047)
- --------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (69,247,208) (105,803,475)
- --------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sales 40,013,831 91,097,375
Net asset value of shares issued for
reinvestment of dividends 51,225,006 81,248,229
Cost of shares reacquired (266,136,246) (626,907,862)
- --------------------------------------------------------------------------------------------
Decrease In Net Assets
From Fund Share Transactions (174,897,409) (454,562,258)
- --------------------------------------------------------------------------------------------
Decrease in Net Assets (124,728,439) (362,701,571)
NET ASSETS:
Beginning of period 1,247,421,441 1,610,123,012
- --------------------------------------------------------------------------------------------
End of period* $1,122,693,002 $1,247,421,441
============================================================================================
* Includes overdistributed net investment income of: $(3,105,877) $(3,238)
============================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 17
<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 seven 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 Municipal High Income Fund
(formerly known as the Smith Barney Tax-Exempt Income Fund), Smith Barney
Exchange Reserve Fund and Smith Barney Total Return Bond Fund. The financial
statements and financial highlights for the other funds are presented in
separate semi-annual reports except for the Smith Barney Premium Total Return
Fund which will have a semi-annual report dated June 30, 1998.
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, which approximates value; (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, 1997, 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. 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.
- --------------------------------------------------------------------------------
18 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"),
acts as investment adviser to the Trust. The Fund pays MMC 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.
MMC 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 SSBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
six months ended January 31, 1998, SB received sales charges of approximately
$28,000 on sales of the Fund's Class A shares and brokerage commissions of
$46,056.
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. For
the six months ended January 31, 1998, CDSCs paid to SB were approximately:
<TABLE>
<CAPTION>
Class B Class C
================================================================================
<S> <C> <C>
CDSCs $656,000 $1,000
================================================================================
</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. 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, 1998, total Distribution Plan fees incurred were as
follows:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $313,175 $3,290,553 $32,289
================================================================================
</TABLE>
All officers and one Trustee of the Trust are employees of SB.
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 19
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
3. Investments
During the six months ended January 31, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $272,880,795
- --------------------------------------------------------------------------------
Sales 480,585,861
================================================================================
</TABLE>
At January 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $201,406,240
Gross unrealized depreciation (275,518)
- --------------------------------------------------------------------------------
Net unrealized appreciation $201,130,722
================================================================================
</TABLE>
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. Lending of Portfolio Securities
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations. Fees earned by the Fund on securities lending are recorded as
interest income. Loans of securities by the Fund are collateralized by cash,
U.S. government securities or high quality money market instruments that are
maintained at all times in an amount at least equal to the current market value
of the loaned securities, plus a margin which may vary depending on the type of
securities loaned. The custodian establishes and maintains the collateral in a
segregated account. The Fund maintains exposure for the risk of any losses in
the investment of amounts received as collateral.
- --------------------------------------------------------------------------------
20 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
At January 31, 1998, the Fund loaned common stocks having a value of
approximately $20,310,705 and holds the following collateral for loaned
securities:
<TABLE>
<CAPTION>
Security Description Value
================================================================================
<S> <C>
Time Deposits:
Mercantile Bank, 5.656% due 2/2/98 $ 1,747,357
Svenska Banken, 5.594% due 2/2/98 1,397,742
Repurchase Agreements:
Goldman, Sachs & Co., 5.540% due 2/2/98 14,656,446
Morgan Stanley, 5.650% due 2/2/98 3,057,872
- --------------------------------------------------------------------------------
Total $20,859,417
================================================================================
</TABLE>
6. Option Contracts
Premiums paid when put or call options are purchased by the Fund represent
investments which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into closing sales transaction, the Fund will realize a gain or loss
depending on whether the sales 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.
At January 31, 1998, the Fund had no purchased call or put options outstanding.
When a Fund writes a call or put option, an amount equal to the premium received
by the Fund is recorded as a liability, the value of which is marked-to-market
daily. When a written option expires, the Fund realizes a gain equal to the
amount of the premium received. When the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
purchase transaction exceeds the premium received when the option was written)
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 reduced by the premium
originally received. When a written put option is exercised, the amount of the
premium 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.
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 21
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
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
call option is that the Fund gives up the opportunity to participate in any
decrease in the price of the underlying security beyond the exercise price. The
risk in writing a put option is that the Fund is exposed to the risk of loss if
the market price of the underlying security declines.
During the six months ended January 31, 1998, the Fund had no written call or
put options outstanding.
7. 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 made or received
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.
At January 31, 1998, the Fund had no open futures contracts.
8. Shares of Beneficial Interest
At January 31, 1998, 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, 1998, 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 $217,287,718 $651,843,634 $8,657,817 $1,313 $11,380,351
========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
22 1998 Semi-Annual Report to Shareholders
<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, 1998 July 31, 1997
---------------------------------- ---------------------------------
Shares Amount Shares Amount
=======================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,654,678 $ 26,226,852 3,016,148 $ 44,679,765
Shares issued on reinvestment 727,123 11,482,005 1,035,899 15,419,920
Shares redeemed (2,322,484) (36,595,240) (6,396,819) (95,087,891)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) 59,317 $ 1,113,617 (2,344,772) $ (34,988,206)
=======================================================================================================================
Class B
Shares sold 656,151 $ 10,427,230 1,887,342 $ 28,062,045
Shares issued on reinvestment 2,441,676 38,540,239 4,302,881 64,064,587
Shares redeemed (12,520,845) (197,070,908) (35,244,383) (522,898,114)
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease (9,423,018) $(148,103,439) (29,054,160) $(430,771,482)
=======================================================================================================================
Class C
Shares sold 42,430 $ 682,703 87,875 $ 1,301,475
Shares issued on reinvestment 29,062 458,923 43,778 651,412
Shares redeemed (104,027) (1,654,915) (316,257) (4,689,386)
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease (32,535) $ (513,289) (184,604) $ (2,736,499)
=======================================================================================================================
Class Y
Shares sold 129,563 $ 2,010,810 1,061,099 $ 15,727,332
Shares issued on reinvestment 5 80 7 113
Shares redeemed (1,715,009) (27,257,942) (169) (2,436)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,585,441) $ (25,247,052) 1,060,937 $ 15,725,009
=======================================================================================================================
Class Z
Shares sold 41,898 $ 666,236 89,172 $ 1,326,758
Shares issued on reinvestment 47,026 743,759 74,689 1,112,197
Shares redeemed (227,273) (3,557,241) (285,690) (4,230,035)
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease (138,349) $ (2,147,246) (121,829) $ (1,791,080)
=======================================================================================================================
</TABLE>
9. 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.
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 23
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996 1995 1994 1993(2)
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $15.53 $14.51 $14.03 $13.28 $15.97 $14.36
- --------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.37 0.80 0.83 0.85 0.56 0.66
Net realized and
unrealized gain (loss) 1.33 1.36 0.47 0.82 (1.92) 1.72
- --------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 1.70 2.16 1.30 1.67 (1.36) 2.38
- --------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.41) (0.82) (0.82) (0.82) (0.83) (0.64)
Net realized gains (0.60) (0.32) -- (0.08) (0.50) (0.13)
Capital -- -- -- (0.02) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.01) (1.14) (0.82) (0.92) (1.33) (0.77)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $16.22 $15.53 $14.51 $14.03 $13.28 $15.97
- --------------------------------------------------------------------------------------------------------------------------------
Total Return 11.18%++ 15.48% 9.21% 13.24% (8.99)% 17.01%++
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $261 $248 $266 $169 $41 $54
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.04%+ 1.06% 1.04% 1.07% 1.07% 1.07%+
Net investment income 4.54+ 5.29 5.55 6.36 5.54 5.67+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 45% 58% 36% 28% 37%
- --------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (3) $0.06 $0.06 $0.06 -- -- --
================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (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.
- --------------------------------------------------------------------------------
24 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1998(1) 1997 1996 1995 1994 1993
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $15.52 $14.51 $14.02 $13.28 $15.97 $14.83
- ----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.34 0.73 0.77 0.78 0.75 0.79
Net realized and
unrealized gain (loss) 1.32 1.35 0.47 0.82 (2.19) 1.30
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 1.66 2.08 1.24 1.60 (1.44) 2.09
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.75) (0.75) (0.76) (0.75) (0.80)
Net realized gains (0.60) (0.32) -- (0.08) (0.50) (0.15)
Capital -- -- -- (0.02) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.97) (1.07) (0.75) (0.86) (1.25) (0.95)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $16.21 $15.52 $14.51 $14.02 $13.28 $15.97
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 10.95%++ 14.88% 8.78% 12.62% (9.52)% 14.69%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $841 $951 $1,310 $1,573 $1,823 $2,766
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.51%+ 1.52% 1.55% 1.56% 1.54% 1.56%
Net investment income 4.10+ 4.85 5.13 5.82 5.07 5.17
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 45% 58% 36% 28% 37%
- ----------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (2) $0.06 $0.06 $0.06 -- -- --
==================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
(2) 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.
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 25
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1998(1)(2) 1997(2) 1996 1995(3) 1994 1993(4)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $15.53 $14.51 $14.02 $13.28 $15.97 $15.17
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.33 0.73 0.77 0.78 0.73 0.35
Net realized and
unrealized gain (loss) 1.34 1.36 0.47 0.82 (2.17) 0.86
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.67 2.09 1.24 1.60 (1.44) 1.21
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.38) (0.75) (0.75) (0.76) (0.75) (0.39)
Net realized gains (0.60) (0.32) -- (0.08) (0.50) (0.02)
Capital -- -- -- (0.02) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.98) (1.07) (0.75) (0.86) (1.25) (0.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $16.22 $15.53 $14.51 $14.02 $13.28 $15.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 10.97%++ 15.01% 8.80% 12.62% (9.52)% 8.08%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $9,272 $9,381 $11,441 $3,925 $1,894 $252
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.47%+ 1.47% 1.50% 1.51% 1.48% 1.49%+
Net investment income 4.13+ 4.89 5.19 5.77 5.13 5.25+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 45% 58% 36% 28% 37%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (5) $0.06 $0.06 $0.06 -- -- --
====================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) On November 7, 1994, the former Class D shares were renamed Class C shares.
(4) For the period from February 4, 1993 (inception date) to July 31, 1993.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
26 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Y Shares 1998(1)(2) 1997 1996(3)
========================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $15.56 $14.52 $14.88
- ----------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.38 0.83 0.64
Net realized and unrealized gain (loss) 1.31 1.38 (0.29)
- ----------------------------------------------------------------------------------------
Total Income From Operations 1.69 2.21 0.35
- ----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.43) (0.85) (0.71)
Net realized gains (0.60) (0.32) --
- ----------------------------------------------------------------------------------------
Total Distributions (1.03) (1.17) (0.71)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of Period $16.22 $15.56 $14.52
- ----------------------------------------------------------------------------------------
Total Return 11.08%++ 15.88% 2.28%++
- ----------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $1 $24,676 $7,617
- ----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.68%+ 0.67% 0.78%+
Net investment income 5.00+ 5.58 5.54+
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 45% 58%
- ----------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06
========================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) 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.
- --------------------------------------------------------------------------------
Smith Barney Utilities Fund 27
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Z Shares 1998(1)(2) 1997(2) 1996 1995(3) 1994 1993(4)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $15.55 $14.52 $14.02 $13.28 $15.97 $14.36
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.39 0.83 0.88 0.89 0.89 0.69
Net realized and
unrealized gain (loss) 1.35 1.37 0.47 0.82 (2.21) 1.72
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 1.74 2.20 1.35 1.71 (1.32) 2.41
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.43) (0.85) (0.85) (0.87) (0.87) (0.66)
Net realized gains (0.60) (0.32) -- (0.08) (0.50) (0.14)
Capital -- -- -- (0.02) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.03) (1.17) (0.85) (0.97) (1.37) (0.80)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $16.26 $15.55 $14.52 $14.02 $13.28 $15.97
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 11.42%++ 15.81% 9.62% 13.55% (8.78)% 17.21%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $12 $14 $15 $15 $11 $22
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.73%+ 0.73% 0.78% 0.81% 0.69% 0.68%+
Net investment income 4.91+ 5.63 5.90 6.58 5.92 6.06+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 24% 45% 58% 36% 28% 37%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (5) $0.06 $0.06 $0.06 -- -- --
====================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) On November 7, 1994, the former Class C shares were renamed Class Z shares.
(4) For the period from November 6, 1992 (inception date) to July 31, 1993.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
28 1998 Semi-Annual Report to Shareholders
<PAGE>
Smith Barney SMITH BARNEY
Utilities Fund -------------
A Member of Travelers Group [LOGO]
Trustees Investment Adviser
Lee Abraham Mutual Management Corp.
Allan J. Bloostein
Richard E. Hanson, Jr. Distributor
Heath B. McLendon Smith Barney Inc.
Officers Custodian
Heath B. McLendon PNC Bank, N.A.
Chairman and
Investment Officer Shareholder
Servicing Agent
Lewis E. Daidone First Data Investors Services Group, Inc.
Senior Vice President P.O. Box 9134
and Treasurer Boston, MA 02205-9134
Jack S. Levande
Vice President and This report is submitted for the general
Investment Officer information of the shareholders of Smith
Barney Utilities Fund. It is not
Thomas M. Reynolds authorized for distribution to
Controller prospective investors unless accompanied
or preceded by a current Prospectus for
Christina T. Sydor the Fund, which contains information
Secretary 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
www.smithbarney.com
FD2175 3/98
- --------------------------------------------------------------------------------
[PHOTO]
- --------------------------------------------------------------------------------
Smith Barney
High Income
Fund
[PHOTO]
---------------------------------------------
SEMI-ANNUAL REPORT
---------------------------------------------
January 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(SM)
<PAGE>
Smith Barney
High Income Fund
================================================================================
The Smith Barney High Income Fund seeks high current income by investing in
high-yield corporate bonds, debentures and notes.
Smith Barney High Income Fund
Average Annual Total Returns
January 31, 1998
<TABLE>
<CAPTION>
Without Sales Charges*
--------------------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Six-Month+ 5.33% 5.00% 5.02%
- --------------------------------------------------------------------------------
One-Year 13.35 12.71 12.76
- --------------------------------------------------------------------------------
Five-Year 11.09 10.52 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 9.48 N/A
- --------------------------------------------------------------------------------
Since Inception++ 11.79 9.44 12.44
================================================================================
<CAPTION>
With Sales Charges**
--------------------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Six-Month+ 0.57% 0.50% 4.02%
- --------------------------------------------------------------------------------
One-Year 8.27 8.21 11.76
- --------------------------------------------------------------------------------
Five-Year 10.06 10.39 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 9.48 N/A
- --------------------------------------------------------------------------------
Since Inception++ 10.82 9.44 12.44
================================================================================
</TABLE>
* 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.
** 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. Thereafter, the CDSC declines 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.
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.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Inception dates for Class A, B and C shares are November 6, 1992, September
2, 1986 and August 24, 1994, respectively.
================================================================================
FUND HIGHLIGHT
================================================================================
As investors continue to sort out the potential negative impact on world
economic growth from the large declines in both currencies and financial assets
in the emerging markets of Asia and Latin America, we believe the markets will
remain choppy. We will therefore continue to be even more selective in our
investment process than in the past and maintain a meaningful percentage of
stronger BB rated issues in the Fund's portfolio.
================================================================================
NASDAQ SYMBOL
================================================================================
Class A SHIAX
Class B SHIBX
================================================================================
WHAT'S INSIDE
================================================================================
Shareholder Letter ........................................................ 1
Historical Performance .................................................... 4
Smith Barney High Income Fund
at a Glance ............................................................... 7
Schedule of Investments ................................................... 8
Statement of Assets and Liabilities ....................................... 16
Statement of Operations ................................................... 17
Statements of Changes in Net Assets ....................................... 18
Notes to Financial Statements ............................................. 19
Financial Highlights ...................................................... 24
<PAGE>
================================================================================
Shareholder Letter
================================================================================
[PHOTO] [PHOTO]
HEATH B. JOHN C.
MCLENDON BIANCHI
Chairman Vice President and
Investment Officer
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, 1998. 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.
Performance Update
For the six months ended January 31, 1998, the Fund generated a total return of
5.33% for Class A shares, 5.00% for Class B shares, and 5.02% for Class C
shares, respectively, excluding any sales charges. These results were below the
average six-month total return of 5.89% for open-end, high yield funds as
reported by Lipper Analytical Services Inc., an independent fund performance
tracking organization. Our relatively higher quality orientation caused our
performance to lag the high yield bond averages to a modest degree over the past
six months. However, in light of the increased turbulence in a number of Asian
economies, we remain committed to our strategy of emphasizing better quality
issues. Moreover, we are pleased to report that during the past six months, the
Fund's Class A shares received a top five-star overall rating from Morningstar
Inc.,* a mutual fund research firm.
Over the past six months, the Fund paid income dividends totaling $0.5185 per
Class B share; based on a net asset value (NAV) of $11.89 and a current monthly
income dividend of $0.0854 per share, this equates to an annualized distribution
rate of 8.62%.
Market and Economic Overview
The high yield bond market generated relatively strong performance over the past
six months ended January 31, 1998 with total returns in excess of about 6.50%
compared to the roughly 4% to 5% returns for intermediate U.S. Treasury
securities and investment-grade corporate bonds and the roughly 6% to 9% returns
for long-term U.S. Treasury securities and investment grade corporate bonds.
(Intermediate-term usually refers to bonds with maturities of less than ten
years and long-term bonds are generally considered to have maturities of ten or
more years.)
The Salomon Smith Barney High Yield Market Index was up 6.79% for the past six
months. (The Salomon Smith Barney High Yield Market Index is a broad-based
measure and consists of cash-pay, deferred interest securities with remaining
maturities of at least one year.) The lower-quality issues, or bonds rated
CCC/Caa or less, generated the strongest total returns (i.e., a roughly 7%-8%
range) in the past six months. This was not surprising given the strong
performance of the U.S. stock markets. The lower-quality segment of the high
yield bond market tends to more closely track the U.S. stock market than the
higher quality segments of the high yield bond market.
After a relatively strong performance through the first three quarters of 1997,
the high yield bond market
- ---------
* Morningstar Inc. proprietary ratings reflect historical risk-adjusted
performance through 1/31/98. The ratings are subject to change every month.
Past performance is not a guarantee of future results. Morningstar ratings
are calculated from the Fund's 3- and 5-year returns (with fee adjustments)
in excess of 90-day T-bill returns. The Fund's Class A shares received a
5-star rating for the 3- and 5-year periods and overall, among 1383 and 797
taxable bond funds, respectively. Class B shares were rated 5-star for the
3- and 5-year periods and a 4-star rating overall in field of 1383 and 797
taxable bond funds, respectively. Class C shares were rated 5-star both
overall and for the 3-year period among 1383 funds. The top ten percent of
funds in any one category receive a 5-star rating.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 1
<PAGE>
began to underperform U.S. Treasury securities in the fourth quarter as fears of
an economic slowdown and lower corporate profits caused high yield bond premiums
to increase versus the Treasury market. The greatest underperformance in the
fourth quarter was among the lower quality issues. In periods of increasing
economic uncertainty, the lower quality segments of the high yield market
generally underperform due to their greater vulnerability to weaker economic
conditions. The more interest-rate sensitive, higher-quality issues generated
the strongest total returns as general interest rates declined.
By the start of the fourth quarter of 1997, the crisis in Asia had taken center
stage with severe currency and financial market declines in a number of Asian
countries potentially threatening economic stability not only throughout the Far
Eastern region, but throughout the world. Asia represents more than 25% of world
economic output and is a significant producer and consumer of a large number of
products and services. Consequently, there was a dramatic increase in market
volatility in the fourth quarter, especially in the world's stock markets. Many
investors began to invest more aggressively in U.S. Treasury securities that are
viewed as the ultimate safe haven during periods of economic uncertainty. Yet,
despite this increasing uncertainty over economic growth and corporate
profitability, the U.S. stock markets had another strong year with total returns
in the 25% to 33% range.
In 1997, the U.S. high yield bond market responded favorably to the strength in
the domestic stock and U.S. Treasury markets. During the year, a total of
approximately $19 billion of new money flowed into open-end high yield mutual
funds. In addition, there was increased demand for high yield securities by
insurance companies and pension funds. The overall demand was significant enough
to absorb a record total of over $120 billion of new high yield issues. Given
this record new issuance, the high yield market now totals over $450 billion in
size, representing a meaningful 25% of the entire U.S. corporate bond market.
Portfolio Strategy
We continue to believe that U.S. economic growth remains mixed and that many
consumer-sensitive sectors will continue to experience fierce price competition.
In addition, the significant problems in Asia could also put severe pressure on
commodity goods prices as troubled Asian companies attempt to increase their
exports to the rest of the world to make up for the expected economic declines
in their own region. Moreover, we believe that a slowdown in overall world
economic growth is inevitable as the severe economic decline in Asia sharply
reduces demand for many U.S. and European products. Consequently, the first half
of 1998 could see a slight increase in default rates among certain high yield
bond issuers, especially weaker, more vulnerable companies that are already
having difficulty competing.
We will therefore continue to avoid the sectors of the economy that are
adversely affected by weak consumer spending trends as well as heavy pricing
competition. In addition, we also plan to maintain our emphasis on economic
sectors that are experiencing strong growth such as telecommunications, media,
and cable television. However, we expect to remain overweighted in
stronger-rated "B" and "BB" credits and avoid the weaker lower tier issues that
are generally in the "CCC/Caa" rating category. As noted, we are more committed
than ever to our conservative credit strategy because of the higher risks and
uncertainty in today's financial markets.
Conclusion
As investors continue to sort out the potential negative impact on world
economic growth from the large declines in both currencies and financial assets
in the emerging markets of Asia and Latin America, we believe the markets will
remain choppy. We will therefore continue to be even more selective in our
investment process than in the past and maintain a meaningful percentage of
stronger BB rated issues in the Fund's portfolio. We will remain focused on
companies that should be less vulnerable to the crisis in Asia as well as other
emerging markets that are having financial difficulties. In an environment where
we
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
expect slower economic growth, the better quality high yield bonds should
perform well. However, despite our general cautiousness, we will continue to
take advantage of select high growth opportunities, especially in the
telecommunications and media industries where total returns were the strongest
in 1997.
In closing, we look forward to continuing to help you pursue your investment
goals in the years to come.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi
Heath B. McLendon John C. Bianchi, CFA
Chairman Vice President and
Investment Officer
February 18, 1998
================================================================================
Top Ten Holdings* As of January 31, 1998
================================================================================
<TABLE>
<S> <C>
1. Nextel Communications 3.6%
- --------------------------------------------------------------------------------
2. Cablevision Systems Corp. 3.4
- --------------------------------------------------------------------------------
3. Unisys Corp. 3.1
- --------------------------------------------------------------------------------
4. Roger Cablesystems 3.0
- --------------------------------------------------------------------------------
5. HMH Properties Inc. 3.0
- --------------------------------------------------------------------------------
6. Iridium LLC Capital Corp. 2.0
- --------------------------------------------------------------------------------
7. Aes Corp. 1.9
- --------------------------------------------------------------------------------
8. First Nationwide Parent Holdings Ltd. 1.9
- --------------------------------------------------------------------------------
9. Metronet Communications 1.7
- --------------------------------------------------------------------------------
10. Airplanes Pass Through Trust 1.5
- --------------------------------------------------------------------------------
</TABLE>
* As a percentage of total corporate bonds and notes.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 3
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Historical Performance -- Class A Shares
====================================================================================================================================
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>
1/31/98 $11.82 $11.89 $0.55 $0.00 $0.00 5.33%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 10.98 11.82 1.08 0.00 0.00 18.31
- ------------------------------------------------------------------------------------------------------------------------------------
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 $5.74 $0.00 $0.07
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class B Shares
====================================================================================================================================
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>
1/31/98 $11.83 $11.89 $ 0.52 $0.00 $0.00 5.00%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 10.99 11.83 1.02 0.00 0.00 17.72
- ------------------------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================================
Total $12.77 $0.04 $0.16
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class C Shares
====================================================================================================================================
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>
1/31/98 $11.84 $11.90 $0.52 $0.00 $0.00 5.02%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 11.00 11.84 1.03 0.00 0.00 17.77
- ------------------------------------------------------------------------------------------------------------------------------------
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 $3.48 $0.00 $0.07
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
4 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Historical Performance -- Class Y Shares
====================================================================================================================================
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>
1/31/98 $11.84 $11.91 $0.56 $0.00 $0.00 5.45%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 10.99 11.84 1.11 0.00 0.00 18.68
- ------------------------------------------------------------------------------------------------------------------------------------
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 $2.62 $0.00 $0.07
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class Z Shares
====================================================================================================================================
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>
1/31/98 $11.80 $11.83 $0.56 $0.00 $0.00 5.12%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 10.99 11.80 1.11 0.00 0.00 18.29
- ------------------------------------------------------------------------------------------------------------------------------------
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 $5.89 $0.00 $0.07
====================================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
<TABLE>
<CAPTION>
====================================================================================================================================
Average Annual Total Return
====================================================================================================================================
Without Sales Charge(1)
----------------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/98+ 5.33% 5.00% 5.02% 5.45% 5.12%
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 1/31/98 13.35 12.71 12.76 13.70 12.97
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/98 11.09 10.52 N/A N/A 11.26
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 1/31/98 N/A 9.48 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 1/31/98 11.79 9.44 12.44 12.66 11.98
====================================================================================================================================
<CAPTION>
With Sales Charge(2)
----------------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/98+ 0.57% 0.50% 4.02% 5.45% 5.12%
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 1/31/98 8.27 8.21 11.76 13.70 12.97
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/98 10.06 10.39 N/A N/A 11.26
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 1/31/98 N/A 9.48 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 1/31/98 10.82 9.44 12.44 12.66 11.98
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 5
<PAGE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (Inception* through 1/31/98) 79.32%
- --------------------------------------------------------------------------------
Class B (1/31/88 through 1/31/98) 147.26
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/98) 49.70
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/98) 26.75
- --------------------------------------------------------------------------------
Class Z (Inception* through 1/31/98) 80.87
================================================================================
</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% 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 occurs. 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.
* 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.
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Smith Barney High Income Fund at a Glance (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 1988--January 1998
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney Salomon Brothers
High Income Fund Intermediate-Term High-Yield Index
---------------- ----------------------------------
<S> <C> <C>
January\1988 $10,000 $10,000
July\1988 $10,185 $10,844
July\1989 $10,952 $11,914
July\1990 $10,126 $11,386
July\1991 $11,123 $12,879
July\1992 $13,876 $16,044
July\1993 $16,545 $18,518
July\1994 $16,809 $19,112
July\1995 $18,452 $21,665
July\1996 $20,004 $23,620
July\1997 $23,549 $27,652
January\1998 $24,726 $29,753
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class B shares on January
31, 1988, assuming reinvestment of dividends and capital gains, if any, at
net asset value through January 31, 1998. 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.
Industry Diversification*
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Broadcasting 12.6%
Building/Construction 3.5%
Communications 10.2%
Electronics/Computers 7.3%
Finance 7.3%
Medical 4.2%
Metal 2.7%
Oil & Natural Gas 9.3%
Paper & Printing 4.7%
Telecommunications 12.9%
Other 25.3%
</TABLE>
* As a percentage of total corporate bonds and notes.
Investment Breakdown**
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Preferred Stock 5.7%
Repurchase Agreement 8.6%
Other 2.5%
Corporate Bonds and Notes 83.2%
</TABLE>
** As a percentage of total investments.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 7
<PAGE>
<TABLE>
====================================================================================================================================
Schedule of Investments (unaudited) January 31, 1998
====================================================================================================================================
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES--83.2%
Aerospace/Defense -- 1.3%
$16,025,000 BB Airplanes Pass Through Trust, Corporate Collateralized Mortgage Obligation,
Series D, 10.875% due 3/15/19 $ 18,168,824
- ------------------------------------------------------------------------------------------------------------------------------------
Broadcasting -- 10.5%
Cablevision Systems Corp., Sr. Sub. Debentures:
23,875,000 B 9.875% due 2/15/13 26,798,967
8,425,000 B 10.500% due 5/15/16 9,983,625
3,725,000 B 9.875% due 4/1/23 4,162,687
6,550,000 B Celestica International, Sr. Sub. Notes, 10.500% due 12/31/06 7,131,312
Century Communications, Sr. Notes:
7,500,000 BB- 8.750% due 10/1/07 7,837,500
2,300,000 BB- 8.375% due 12/15/07 2,346,000
12,025,000 B Comcast UK Cable, Sr. Sub. Debentures,
step bond to yield 11.481% due 11/15/07 9,935,656
4,075,000 Ba3* Le Groupe Videotron, Sr. Notes, 10.625% due 2/15/05 4,584,375
Marcus Cable Capital Corp., Sr. Discount Notes:
4,850,000 Caa* 12.661% due 12/15/05 4,334,688
5,700,000 B Step bond to yield 11.392% due 8/1/04 5,386,500
Rogers Cablesystems:
5,800,000 BB- Sr. Debentures, 10.000% due 12/1/07 6,532,250
6,651,000 BB+ Sr. Secured Debentures, 10.000% due 3/15/05 7,507,316
6,900,000 B- Sr. Secured Second Priority Debentures, 8.875% due 7/15/07 7,003,500
12,490,000 B Sr. Sub. Debentures, 11.000% due 12/1/15 14,753,813
TV Azteca, Sr. Notes:
6,350,000 NR 10.500% due 2/15/04 6,651,625
9,350,000 AAA 10.500% due 2/15/07 9,887,625
United International Holdings Inc., Sr. Discount Notes:
11,835,000 B- Zero coupon bond to yield 13.293% due 11/15/99 10,459,181
5,350,000 B- Zero coupon bond to yield 14.714% due 11/15/99 4,728,063
- ------------------------------------------------------------------------------------------------------------------------------------
150,024,683
- ------------------------------------------------------------------------------------------------------------------------------------
Building/Construction -- 3.0%
3,000,000 NR HMC Acquisition Properties Inc., Sr. Notes, 9.000% due 12/15/07 3,172,500
HMH Properties Inc., Sr. Notes:
26,320,000 AAA 9.500% due 5/15/05 28,261,100
6,575,000 B- 8.875% due 7/15/07 6,969,500
3,460,000 BB- McDermott Inc., Sr. Sub. Notes, 9.375% due 7/15/06 3,728,150
- ------------------------------------------------------------------------------------------------------------------------------------
42,131,250
- ------------------------------------------------------------------------------------------------------------------------------------
Chemicals -- 1.5%
11,865,000 BB Clark USA Inc., Sr. Notes, 10.875% due 12/1/05 13,066,331
6,025,000 B1* NL Industries, Sr. Secured Notes, 11.750% due 10/15/03 6,725,406
2,000,000 Ba3* Terra Industries, Inc., Sr. Notes, Series B, 10.500% due 6/15/05 2,160,000
- ------------------------------------------------------------------------------------------------------------------------------------
21,951,737
- ------------------------------------------------------------------------------------------------------------------------------------
Communications -- 8.5%
17,650,000 B3* Clearnet Communications Inc., Sr. Discount Notes,
step bond to yield 13.536% due 12/15/05 14,428,875
13,100,000 NR Colt Telecom Group, Sr. Discount Notes,
step bond to yield 11.374% due 12/15/06 10,742,000
10,375,000 B+ Fonorola Inc., Sr. Sub. Notes, 12.500% due 8/15/02 11,620,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
====================================================================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1998
====================================================================================================================================
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Communications-- 8.5% (continued)
$11,125,000 B- Millicom International Cellular SA, Sr. Sub. Discount Notes,
step bond to yield 13.500% due 6/1/06 $ 8,552,344
Nextel Communications, Sr. Discount Notes:
23,800,000 B3* Step bond to yield 11.225% due 8/15/04 22,788,500
29,400,000 B- Step bond to yield 9.968% due 9/15/07 19,514,250
13,850,000 NR Nextlink Communications, Sr. Discount Notes, 12.500% due 4/15/06 16,117,938
9,550,000 NR RSL Communications Ltd., 12.250% due 11/15/06 10,887,000
4,700,000 B- Satellites Mexicanos, Sr. Notes, 10.125% due 11/1/04 4,835,125
6,275,000 B- Wireless One Inc., Sr. Discount Notes, 13.000% due 10/15/03 1,482,469
- ------------------------------------------------------------------------------------------------------------------------------------
120,968,501
- ------------------------------------------------------------------------------------------------------------------------------------
Containers -- 0.3%
4,725,000 B AEP Industries, Sr. Sub. Notes, 9.875% due 11/15/07 4,984,875
- ------------------------------------------------------------------------------------------------------------------------------------
Data Processing Management -- 0.5%
6,600,000 B- Integrated Health Services, Sr. Sub. Notes, 9.250% due 1/15/08 6,930,000
- ------------------------------------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 1.8%
4,200,000 B Goss Graphic System Inc., Sr. Sub. Notes, 12.000% due 10/15/06 4,814,250
7,050,000 B3* Interlake Corp., Sr. Sub. Debentures, 12.125% due 3/1/02 7,305,562
6,750,000 B+ Park-Ohio Industries, Sr. Sub. Notes, 9.250% due 12/1/07 7,070,625
6,575,000 NR Pharmaceutical Fine Chemical, Sr. Sub. Notes, 9.750% due 11/15/07 6,772,250
- ------------------------------------------------------------------------------------------------------------------------------------
25,962,687
- ------------------------------------------------------------------------------------------------------------------------------------
Electric/Generation -- 1.6%
Aes Corp., Sr. Sub. Notes:
3,425,000 B+ 10.250% due 7/15/06 3,784,625
3,450,000 AAA 8.375% due 8/15/07 3,536,250
15,325,000 B+ 8.500% due 11/1/07 15,746,437
- ------------------------------------------------------------------------------------------------------------------------------------
23,067,312
- ------------------------------------------------------------------------------------------------------------------------------------
Electric/Integrated -- 1.4%
5,125,000 NR Cleveland Electric Illuminator, Sr. Notes, 7.430% due 11/1/09 5,368,437
8,275,000 BB- El Paso Electric, 1st Mortgage, 8.900% due 2/1/06 9,236,969
5,050,000 BBB- Niagara Mohawk Power, 1st Mortgage, 7.750% due 5/15/06 5,397,188
- ------------------------------------------------------------------------------------------------------------------------------------
20,002,594
- ------------------------------------------------------------------------------------------------------------------------------------
Electric/Utilities -- 1.7%
Calpine Corp., Sr. Notes:
9,835,000 BB- 10.500% due 5/15/06 10,769,325
5,825,000 B- 8.750% due 7/15/07 6,014,312
6,666,394 B+ Midland Cogeneration Venture Limited Partnership,
Sr. Secured Lease Bond, Series C, 10.330% due 7/23/02 7,191,374
- ------------------------------------------------------------------------------------------------------------------------------------
23,975,011
- ------------------------------------------------------------------------------------------------------------------------------------
Electronics/Computers -- 6.1%
12,300,000 NR Fairchild Semiconductor, Sr. Sub. Notes, 10.125% due 3/15/07 (a) 13,099,500
4,975,000 AAA Flextronics International Ltd., Company Guarantee, 8.750% due 10/15/07 (a) 5,037,188
6,375,000 B- Graphic Controls Corp., Sr. Sub. Notes, 12.000% due 9/15/05 7,171,875
9,625,000 AAA Paragon Health, Sr. Sub. Notes, 9.500% due 11/1/07 10,058,125
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 9
<PAGE>
<TABLE>
====================================================================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1998
====================================================================================================================================
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Electronics/Computers -- 6.1% (continued)
Unisys Corp., Sr. Notes:
$15,350,000 B+ 12.000% due 4/15/03 $ 17,499,000
15,000,000 B+ 11.750% due 10/15/04 17,456,250
2,475,000 AA- 7.875% due 4/1/08 2,481,188
13,140,000 NR Viasystem Inc., Sr. Sub. Notes, 9.750% due 6/1/07 13,682,025
- ------------------------------------------------------------------------------------------------------------------------------------
86,485,151
- ------------------------------------------------------------------------------------------------------------------------------------
Environmental -- 0.5%
6,950,000 B+ Allied Waste North America Inc., Sr. Sub. Notes, 10.250% due 12/1/06 7,740,562
- ------------------------------------------------------------------------------------------------------------------------------------
Finance -- 6.1%
8,000,000 B Amersco Inc., Sr. Sub. Notes, 10.000% due 3/15/04 8,370,000
19,905,000 B First Nationwide Parent Holdings Ltd., Sr. Exchange Notes,
12.500% due 4/15/03 22,666,819
7,950,000 BBB Intertek Finance PLC, Sr. Sub. Notes, 10.250% due 11/1/06 8,486,625
Ocwen Financial Corp., Notes:
3,050,000 B+ 11.875% due 10/1/03 3,454,125
8,100,000 B- 10.875% due 6/15/05 8,940,375
4,000,000 B+ 12.000% due 6/15/05 4,435,000
7,250,000 BB- Pride Petroleum, Sr. Notes, 9.375% due 5/1/07 7,866,250
8,125,000 NR Sig Capital Trust, Company Guarantee, 9.500% due 8/15/27 8,419,531
6,700,000 AAA Veritas Capital Trust, Company Guarantee, 10.000% due 1/2/28 7,102,000
6,600,000 B Unifrax Investment Corp., Sr. Notes, 10.500% due 11/1/03 6,913,500
- ------------------------------------------------------------------------------------------------------------------------------------
86,654,225
- ------------------------------------------------------------------------------------------------------------------------------------
Food and Beverage -- 1.5%
3,425,000 B+ Ameriserv Food Distribution, Sr. Notes, 8.875% due 10/15/06 3,527,750
6,950,000 NR B&G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07 7,141,125
10,975,000 B Imperial Holly, Sr. Sub. Notes, 10.375% due 12/15/07 11,276,812
- ------------------------------------------------------------------------------------------------------------------------------------
21,945,687
- ------------------------------------------------------------------------------------------------------------------------------------
Foreign Government -- 0.5%
6,675,000 NR CIA Latino, Company Guarantee, 11.625% due 6/1/04 (a) 6,825,187
- ------------------------------------------------------------------------------------------------------------------------------------
Grocery/Convenience Stores -- 0.8%
5,500,000 B- Pathmark Stores Inc., Debentures, 12.625% due 6/15/02 5,176,875
3,000,000 Ba3* Trizec Finance, Senior Notes, 10.875% due 10/15/05 3,401,250
2,825,000 B- Van de Kamp Inc., Sr. Sub. Notes, 12.000% due 9/15/05 3,142,813
- ------------------------------------------------------------------------------------------------------------------------------------
11,720,938
- ------------------------------------------------------------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 2.0%
3,000,000 B Aztar Corp., Sr. Sub. Notes, 13.750% due 10/1/04 3,457,500
6,300,000 B- Courtyard by Marriott, Sr. Secured Notes, 10.750% due 2/1/08 7,000,875
1,025,000 BB- Grand Casinos, 1st Mortgage, 10.125% due 8/15/07 1,117,250
6,025,000 BB+ Mohegan Tribal Gaming Authority, Sr. Secondary Notes,
13.500% due 11/15/02 7,802,375
6,975,000 B Showboat Inc., Sr. Sub. Notes, 13.000% due 8/1/09 8,483,344
- ------------------------------------------------------------------------------------------------------------------------------------
27,861,344
- ------------------------------------------------------------------------------------------------------------------------------------
Machinery -- 1.2%
3,775,000 B- Alvey Systems, Sr. Sub. Notes, 11.325% due 1/31/03 3,959,031
12,027,000 B Terex Corp., Sr. Notes, 13.250% due 5/15/02 13,770,915
- ------------------------------------------------------------------------------------------------------------------------------------
17,729,946
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
====================================================================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1998
====================================================================================================================================
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Medical -- 3.5%
$ 6,850,000 B- Extendicare Health, Sr. Sub. Notes, 9.350% due 12/15/07 $ 7,175,375
6,175,000 AAA Fisher Scientific, Sr. Sub. Notes, 9.000% due 2/1/08 6,337,094
12,950,000 NR ICN Pharmaceutical Inc., Sr. Notes, 9.250% due 8/15/07 13,791,750
8,475,000 B Magellan Health Services, Sr. Sub. Notes, 11.250% due 4/15/04 9,460,219
Tenet Healthcare:
5,500,000 Ba1* Sr. Notes, 8.000% due 1/15/05 5,692,500
6,900,000 Ba3* Sr. Sub. Notes, 8.625% due 1/15/07 7,262,250
- ------------------------------------------------------------------------------------------------------------------------------------
49,719,188
- ------------------------------------------------------------------------------------------------------------------------------------
Metal -- 2.2%
13,315,000 B- Haynes International Inc., Sr. Notes, 11.625% due 9/1/04 15,328,894
6,700,000 B Kaiser Aluminum & Chemical, Sr. Notes, 12.750% due 2/1/03 7,194,125
3,900,000 B- Koppers Industry, Sr. Notes, 9.875% due 12/1/07 4,104,750
4,660,000 BB- UCAR Global Enterprises Inc., Sr. Sub. Notes, 12.000% due 1/15/05 5,254,150
- ------------------------------------------------------------------------------------------------------------------------------------
31,881,919
- ------------------------------------------------------------------------------------------------------------------------------------
Miscellaneous -- 0.6%
7,350,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes, 11.000% due 11/1/06 8,094,188
- ------------------------------------------------------------------------------------------------------------------------------------
Oil & Natural Gas -- 7.7%
Clark R & M Holdings Inc., Sr. Notes:
2,925,000 BB 8.375% due 11/15/07 2,983,500
3,250,000 B+ 8.375% due 11/15/07 3,302,811
3,425,000 B- COHO Energy, Sr. Sub. Notes, 8.875% due 10/15/07 3,446,406
12,450,000 B+ Dawson Production Services, Sr. Notes, 9.375% due 2/1/07 13,134,750
5,400,000 CCC+ Deeptech International, Sr. Notes, 12.000% due 12/15/00 5,771,250
6,600,000 NR Canadian Forest Oil, Sr. Sub. Notes, 8.750% due 9/15/07 6,682,500
10,520,000 Ba3* Gulf Canada Resources, Sub. Debentures, 9.625% due 7/1/05 11,414,200
7,600,000 B- ICO Inc., Sr. Notes, 10.375% due 6/1/07 8,284,000
2,000,000 AAA Ocean Energy, Company Guarantee, 9.750% due 10/1/06 2,190,000
14,525,000 B+ Parker Drilling, Sr. Notes, 9.750% due 11/15/06 15,759,625
8,600,000 BB- Santa Fe Energy Resources, Sr. Sub. Debentures, 11.000% due 5/15/04 9,374,000
5,525,000 B- Stone Energy Corp., Company Guarantee, 8.750% due 9/15/07 5,718,375
Telesystems International Wireless, Sr. Discount Notes:
17,025,000 B- Step bond to yield 12.838% due 6/30/07 11,257,780
5,200,000 B- Step bond to yield 10.513% due 11/1/07 3,100,500
7,225,000 B United Meridian Corp., Sr. Sub. Notes, 10.375% due 10/15/05 7,893,312
- ------------------------------------------------------------------------------------------------------------------------------------
110,313,009
- ------------------------------------------------------------------------------------------------------------------------------------
Packaging & Containers -- 0.6%
1,500,000 B- Gaylord Container Corp., Sr. Sub. Debentures, 12.750% due 5/15/05 1,612,500
7,000,000 B Huntsman Packaging, Sr. Sub. Notes, 9.125% due 10/1/07 7,245,000
- ------------------------------------------------------------------------------------------------------------------------------------
8,857,500
- ------------------------------------------------------------------------------------------------------------------------------------
Paper & Printing -- 3.9%
2,310,000 B- American Pad & Paper Co., Inc., Sr. Sub. Notes, 13.000% due 11/15/05 2,543,887
5,000,000 B- Axiohm Transaction Solution, Sr. Sub. Notes, 9.375% due 10/1/07 5,125,000
12,450,000 BB Indah Kiat International Finance Co., Sr. Secured Notes,
11.875% due 6/15/02 10,675,875
14,175,000 B+ SD Warren Co., Sr. Sub. Notes, 12.000% due 12/15/04 15,876,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 11
<PAGE>
<TABLE>
====================================================================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1998
====================================================================================================================================
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Paper & Printing-- 3.9% (continued)
$ 7,600,000 BB Tjiwi Kimia International, Sr. Notes, 13.250% due 8/1/01 $ 6,621,500
19,575,000 AAA UIH Australia Inc., Sr. Discount Notes,
step bond to yield 13.826% due 5/15/06 13,922,719
2,100,000 Ba2* UIH Australia Pacific ST, step bond to yield 12.775% due 5/15/06 1,493,625
- ------------------------------------------------------------------------------------------------------------------------------------
56,258,606
- ------------------------------------------------------------------------------------------------------------------------------------
Resort -- 0.6%
7,650,000 B Signature Resorts Inc., Sr. Sub. Notes, 9.750% due 10/1/07 7,860,375
- ------------------------------------------------------------------------------------------------------------------------------------
Retail -- 1.3%
7,500,000 B+ Container Corp. of America, Guaranteed Sr. Notes, 11.250% due 5/1/04 8,231,250
13,975,000 NR McLeod Inc., Sr. Discount Notes, step bond to yield 10.625% due 3/1/07 10,708,344
- ------------------------------------------------------------------------------------------------------------------------------------
18,939,594
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications -- 10.7%
7,100,000 NR Allegiance Telephone, Units, 11.750% due 2/15/08 3,993,750
5,950,000 NR Esprit Telecommunications, Sr. Notes, 11.500% due 12/15/07 (a) 6,396,250
3,750,000 AAA Facilicom International, Sr. Notes, 10.500% due 1/15/08 3,890,625
6,775,000 NR Hermes Europe Railtel BV, Sr. Notes, 11.500% due 8/15/07 7,588,000
15,300,000 B- Intermedia Communications, Sr. Discount Notes,
step bond to yield 11.752% due 5/15/06 12,373,875
Iridium LLC Capital Corp., Sr. Notes:
5,475,000 B- 13.000% due 7/15/05 5,933,531
16,075,000 B- 14.000% due 7/15/05 18,084,375
Metronet Communications, Sr. Notes:
3,025,000 B- Sr. Discount Notes, step bond to yield 10.750% due 11/1/07 1,954,906
15,425,000 NR Sr. Notes, 12.000% due 8/15/07 17,700,188
Netia Holdings, Company Guarantee:
7,100,000 AAA 10.250% due 11/1/07 7,144,375
3,000,000 AAA Step bond to yield 11.533% due 11/1/07 1,961,250
7,475,000 NR Pagemart Nationwide, Sr. Notes, step bond to yield 13.243% due 2/1/05 6,578,000
17,825,000 NR Pagemart Wireless, Sr. Discount Notes,
step bond to yield 11.250% due 2/1/08 10,784,125
12,405,000 D Primus Telecommunications, Sr. Notes, 11.750% due 8/1/04 13,816,069
Qwest Communication:
16,125,000 B+ Sr. Discount Notes, step bond to yield 9.379% due 10/15/07 11,408,438
5,600,000 NR Sr. Notes, 10.875% due 4/1/07 6,475,000
RCN Corp.:
15,185,000 NR Sr. Discount Notes, step bond to yield 10.995% due 10/15/07 10,230,894
6,000,000 NR Sr. Notes, 10.000% due 10/15/07 6,435,000
- ------------------------------------------------------------------------------------------------------------------------------------
152,748,651
- ------------------------------------------------------------------------------------------------------------------------------------
Transportation -- 1.3%
12,550,000 BB GS Superhighway, Sr. Notes, 10.250% due 8/15/07 10,071,375
7,575,000 BB- Sea Containers Ltd., Sr. Sub. Debentures, 12.500% due 12/1/04 8,607,094
- ------------------------------------------------------------------------------------------------------------------------------------
18,678,469
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $1,133,769,620) 1,188,482,013
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
====================================================================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1998
====================================================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
FOREIGN BONDS -- 1.3%
Containers -- 0.3%
8,425,000 (b) Impress Metal Inc., Sr. Sub. Notes, 9.875% due 5/29/07 $ 4,885,394
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications -- 1.0%
2,125,000 (b) Colt Telecommunication Corp., Sr. Notes, 10.125% due 11/30/07 3,700,214
11,250,000 (b) Esprit Telecommunication Inc., Sr. Notes, 11.500% due 12/15/07 6,538,909
6,850,000 (b) Texon International Corp., Sr. Notes, 10.000% due 2/1/08 3,911,208
- ------------------------------------------------------------------------------------------------------------------------------------
14,150,331
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost-- $18,797,526) 19,035,725
====================================================================================================================================
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
COMMON STOCK -- 0.3%
Communications -- 0.1%
42,063 Nextel Communications Inc. 1,148,846
- ------------------------------------------------------------------------------------------------------------------------------------
Health Care -- 0.2%
56,172 Tyco International Ltd. 2,492,633
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $2,730,146) 3,641,479
====================================================================================================================================
PREFERRED STOCK -- 5.7%
Broadcasting -- 3.7%
45,407 Time Warner Inc., Series K, Exchanged 10.250% (a) 52,445,085
- ------------------------------------------------------------------------------------------------------------------------------------
Electronics/Computers -- 0.3%
176,918 Viasystem 3,693,175
- ------------------------------------------------------------------------------------------------------------------------------------
Finance -- 0.9%
491,300 California Federal Bank Preferred Capital 13,142,275
- ------------------------------------------------------------------------------------------------------------------------------------
Oil Refining -- 0.3%
3,500 Clark USA Inc. 3,815,000
- ------------------------------------------------------------------------------------------------------------------------------------
Publishing -- 0.0%
1,355 Primedia Inc. Payment-in-kind 144,677
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications -- 0.5%
6,611 IXC Communication Inc. (a) 7,867,358
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $75,593,653) 81,107,570
====================================================================================================================================
CONVERTIBLE PREFERRED STOCK -- 0.6%
Automobiles/Trucking -- 0.6%
160,100 Navistar International Series G, Convertible $6.00 8,115,069
- ------------------------------------------------------------------------------------------------------------------------------------
Finance -- 0.0%
2,098 Ameriking Inc. Unit 56,646
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost -- $8,978,432) 8,171,715
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 13
<PAGE>
<TABLE>
====================================================================================================================================
Schedule of Investments (unaudited) (continued) January 31, 1998
====================================================================================================================================
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
WARRANTS -- 0.3%
Broadcasting -- 0.0%
13,350 Australis Holdings, Expire 10/30/01 (c) $ 0
1,000 Australis Holdings, Expire 5/15/03 (c) 0
19,575 UIH Australia, Expire 5/15/06 (c) 234,900
5,925 Wireless One Inc., Expire 10/15/03 (c) 1,481
- ------------------------------------------------------------------------------------------------------------------------------------
236,381
- ------------------------------------------------------------------------------------------------------------------------------------
Communications -- 0.0%
65,340 Clearnet Communications, Expire 9/15/05 (c) 392,040
18,522 Nextel Communications Inc., Expire 4/25/99 (c) 11,628
9,550 RSL Communications Ltd., Expire 11/15/06 (c) 382,000
- ------------------------------------------------------------------------------------------------------------------------------------
785,668
- ------------------------------------------------------------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 0.0%
213,479 Trump Castle Hotel & Casino, Expire 9/15/00 (c) 0
- ------------------------------------------------------------------------------------------------------------------------------------
Paper & Printing -- 0.0%
8,025 SD Warren Co., Expire 12/15/06 (c) 141,240
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications -- 0.3%
10,375 Globalstar LP, Expire 2/15/04 (c) 1,213,875
10,475 Iridium LLC Capital Corp., Expire 7/15/05 (c) 1,466,500
154,250 Metronet Communications, Expire 8/15/07 (c) 308,500
18,375 Page Wireless Equipment, Expire 12/31/03 (c) 163,078
37,490 Pagemart Inc., Expire 12/31/03 (c) 281,175
12,405 Primus Telecommunication Group, Expire 8/1/04 (c) 248,100
- ------------------------------------------------------------------------------------------------------------------------------------
3,681,228
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $1,711,570) 4,844,517
====================================================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
REPURCHASE AGREEMENT -- 8.6%
$123,164,000 Goldman, Sachs & Co., 5.540% due 2/2/98;
Proceeds at Maturity -- $123,220,861; (Fully collateralized
by U.S. Treasury Notes, 5.750% due 11/15/00;
Market value -- $125,686,214)
(Cost-- $123,164,000) 123,164,000
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost-- $1,364,744,947**) $1,428,447,019
====================================================================================================================================
</TABLE>
(a) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(b) Represents local currency.
(c) Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 15 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Bond Ratings (unaudited)
================================================================================
All ratings are by Standard & Poor's Rating Service ("Standard & Poor's"),
except 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 minus (-) sign, which is used to show relative standing within the major
rating categories, except in the AAA-Prime Grade category.
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.
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.
D -- Bonds rated "D" are in default, and payment
of interest and/or repayment of principal is
in arrears.
Moody's applies the numerical modifiers 1, 2, and 3 in each generic rating
classification from "Baa" through "Caa". 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.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 15
<PAGE>
<TABLE>
=========================================================================================
Statement of Assets and Liabilities (unaudited) January 31, 1998
=========================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost-- $1,364,744,947) $ 1,428,447,019
Cash 290
Interest receivable 26,402,113
Receivable for securities sold 8,952,962
Receivable for Fund shares sold 5,904,500
Receivable for open forward foreign currency contracts (Note 8) 567,705
Dividend receivable 243,152
- -----------------------------------------------------------------------------------------
Total Assets 1,470,517,741
- -----------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 27,630,425
Dividends payable 10,529,292
Investment advisory fees payable 561,919
Administration fees payable 224,767
Distribution fees payable 84,771
Payable for Fund shares purchased 5,448
Accrued expenses 286,251
- -----------------------------------------------------------------------------------------
Total Liabilities 39,322,873
- -----------------------------------------------------------------------------------------
Total Net Assets $ 1,431,194,868
=========================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 120,351
Capital paid in excess of par value 1,559,243,465
Overdistributed net investment income (1,858,129)
Accumulated net realized loss from security transactions, options,
futures contracts and foreign currencies (190,577,039)
Net unrealized appreciation of investments and foreign currencies 64,266,220
- -----------------------------------------------------------------------------------------
Total Net Assets $ 1,431,194,868
=========================================================================================
Shares Outstanding:
Class A 37,914,726
------------------------------------------------------------------------------------
Class B 62,750,178
------------------------------------------------------------------------------------
Class C 5,013,305
------------------------------------------------------------------------------------
Class Y 14,664,150
------------------------------------------------------------------------------------
Class Z 9,051
------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $11.89
------------------------------------------------------------------------------------
Class B * $11.89
------------------------------------------------------------------------------------
Class C ** $11.90
------------------------------------------------------------------------------------
Class Y (and redemption price) $11.91
------------------------------------------------------------------------------------
Class Z (and redemption price) $11.83
------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $12.45
=========================================================================================
</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 Note 2).
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
==========================================================================================
Statement of Operations (unaudited) For the Six Months Ended January 31, 1998
==========================================================================================
<S> <C>
INVESTMENT INCOME:
Interest $ 61,760,042
Dividends 4,520,196
- ------------------------------------------------------------------------------------------
Total Investment Income 66,280,238
- ------------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 3,370,892
Investment advisory fees (Note 2) 3,365,955
Administration fees (Note 2) 1,346,382
Shareholder and system servicing fees 445,363
Registration fees 90,246
Shareholder communications 39,107
Custody 22,862
Audit and legal 19,052
Trustees' fees 12,534
Other 13,517
- ------------------------------------------------------------------------------------------
Total Expenses 8,725,910
- ------------------------------------------------------------------------------------------
Net Investment Income 57,554,328
- ------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS, OPTIONS, FUTURES CONTRACTS AND
FOREIGN CURRENCIES (NOTES 3, 5, 6 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 11,284,625
Options purchased (1,044,944)
Futures contracts (967,938)
Foreign currency transactions 51,356
- ------------------------------------------------------------------------------------------
Net Realized Gain 9,323,099
- ------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period 63,292,186
End of period 64,266,220
- ------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 974,034
- ------------------------------------------------------------------------------------------
Net Gain on Investments, Options, Futures Contracts and Foreign Currencies 10,297,133
- ------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 67,851,461
==========================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 17
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended January 31, 1998 (unaudited)
and the Year Ended July 31, 1997
<TABLE>
<CAPTION>
1998 1997
=========================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 57,554,328 $ 105,547,558
Net realized gain 9,323,099 15,929,257
Increase in net unrealized appreciation 974,034 67,808,223
- ---------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 67,851,461 189,285,038
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (60,337,760) (104,694,362)
- ---------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (60,337,760) (104,694,362)
- ---------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 316,271,606 518,083,066
Net asset value of shares issued for
reinvestment of dividends 22,186,208 49,296,162
Cost of shares reacquired (203,596,273) (327,525,297)
- ---------------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 134,861,541 239,853,931
- ---------------------------------------------------------------------------------------------------------
Increase in Net Assets 142,375,242 324,444,607
NET ASSETS:
Beginning of period 1,288,819,626 964,375,019
- ---------------------------------------------------------------------------------------------------------
End of period* $ 1,431,194,868 $ 1,288,819,626
=========================================================================================================
* Includes undistributed (overdistributed) net investment income of: $(1,858,129) $873,947
=========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 1998 Semi-Annual Report to Shareholders
<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 this
Fund and seven other separate investment funds: Smith Barney Exchange Reserve
Fund, Smith Barney Premium Total Return Fund, Smith Barney Convertible Fund,
Smith Barney Municipal High Income Fund (formerly known as Smith Barney
Tax-Exempt Income Fund), Smith Barney Diversified Strategic Income Fund, Smith
Barney Utilities Fund and Smith Barney Total Return Bond Fund. The financial
statements and financial highlights for the other funds are presented in
separate semi-annual reports with the exception of the Smith Barney Premium
Total Return Fund which will have a semi-annual report dated June 30, 1998.
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, approximates value; (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 or expense amounts
recorded and collected or paid are adjusted when reported by the custodian bank;
(f) interest income, adjusted for amortization of premium and accretion of
discount, is recorded on an accrual basis; (g) dividend income is recorded on
ex-dividend date; foreign dividend income is recorded on the ex-dividend date or
as soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (h) gains or losses on
the sale of securities are recorded by using the specific identification method;
(i) dividends and distributions to shareholders are recorded on the ex-dividend
date; (j) direct expenses are charged to each class; management fees and general
fund expenses are allocated on the basis of the relative net assets; (k) 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, 1997, 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 $23,975,095 has been reclassified
to paid-in capital. Net investment income, net realized gains and net assets
were not affected by this change; (l) 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 (m) 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. The Fund from time to time may also enter
into options and/or futures contracts to hedge market risk.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 19
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"),
acts as investment adviser to the Fund. The Fund pays MMC 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.
MMC also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SSBH, acts as distributor of
Trust shares and primary broker for its portfolio agency transactions. For the
six months ended January 31, 1998, SB received sales charges of approximately
$582,000 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. 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, 1998, CDSCs paid to
SB were approximately:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
CDSCs $1,000 $488,000 $8,000
================================================================================
</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 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, 1998, total Distribution Plan fees
incurred were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $543,101 $2,648,683 $179,108
================================================================================
</TABLE>
All officers and one Trustee of the Trust are employees of SB.
3. Investments
During the six months ended January 31, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $664,710,312
- --------------------------------------------------------------------------------
Sales 512,892,538
================================================================================
</TABLE>
At January 31, 1998, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $ 93,875,222
Gross unrealized depreciation (30,173,150)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 63,702,072
================================================================================
</TABLE>
4. Capital Loss Carryforward
At July 31, 1997, the Fund had, for Federal income tax purposes, capital loss
carryforwards of approximately $199,831,000 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 Amounts
================================================================================
<S> <C>
1998 $68,550,000
1999 84,656,000
2000 9,861,000
2003 13,404,000
2004 23,360,000
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
20 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
5. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by the
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of the futures contracts. 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).
At January 31, 1998, 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.
At January 31, 1998, the Fund had no open purchased call or put 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 depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, 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, 1998, the Fund did not write any
options.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 21
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
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. Forward Foreign Currency Contracts
At January 31, 1998, the Fund had open forward foreign currency contracts as
described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized gain on the contracts reflect in
the accompanying financial statements were as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain
=====================================================================================================================
<S> <C> <C> <C> <C>
To Sell:
British Pound 2,117,137 $3,437,470 5/26/98 $104,861
German Deutschemark 9,736,070 5,335,019 3/2/98 181,794
German Deutschemark 11,250,000 6,170,468 3/18/98 207,083
German Deutschemark 6,850,000 3,757,129 3/18/98 73,967
=====================================================================================================================
Total Unrealized Gain on
Forward Foreign Currency Contracts $567,705
=====================================================================================================================
</TABLE>
9. Shares of Beneficial Interest
At January 31, 1998, the Trust had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses specifically related to the distribution of its shares.
At January 31, 1998, 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 $447,252,810 $887,203,437 $57,273,033 $165,275,637 $2,358,899
==================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
22 1998 Semi-Annual Report to Shareholders
<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, 1998 July 31, 1997
--------------------------- -----------------------------
Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 7,282,354 $ 86,530,598 11,251,248 $ 128,184,460
Shares issued on reinvestment 778,890 9,193,608 1,783,139 20,333,664
Shares redeemed (6,012,320) (71,583,144) (8,215,949) (93,966,990)
- ------------------------------------------------------------------------------------------------
Net Increase 2,048,924 $ 24,141,062 4,818,438 $ 54,551,134
================================================================================================
Class B
Shares sold 8,996,876 $ 106,955,094 14,926,125 $ 170,353,508
Shares issued on reinvestment 944,209 11,150,301 2,193,852 25,024,236
Shares redeemed (4,741,209) (56,310,156) (10,519,955) (119,922,846)
- ------------------------------------------------------------------------------------------------
Net Increase 5,199,876 $ 61,795,239 6,600,022 $ 75,454,898
================================================================================================
Class C
Shares sold 1,507,458 $ 17,936,091 2,371,080 $ 27,157,044
Shares issued on reinvestment 87,675 1,036,534 149,311 1,707,734
Shares redeemed (334,685) (3,987,104) (681,148) (7,785,579)
- ------------------------------------------------------------------------------------------------
Net Increase 1,260,448 $ 14,985,521 1,839,243 $ 21,079,199
================================================================================================
Class Y
Shares sold 8,824,583 $ 104,849,524 16,943,643 $ 192,376,935
Shares issued on reinvestment 67,977 803,636 172,615 1,971,806
Shares redeemed (5,995,450) (71,715,869) (8,542,613) (98,240,791)
- ------------------------------------------------------------------------------------------------
Net Increase 2,897,110 $ 33,937,291 8,573,645 $ 96,107,950
================================================================================================
Class Z
Shares sold 25 $ 299 872 $ 11,119
Shares issued on reinvestment 181 2,129 23,013 258,722
Shares redeemed -- -- (666,462) (7,609,091)
- ------------------------------------------------------------------------------------------------
Net Increase (Decrease) 206 $ 2,428 (642,577) $ (7,339,250)
================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 23
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996 1995 1994 1993(2)
=================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.82 $10.98 $11.10 $11.16 $12.01 $11.03
- ---------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.52 1.09 1.08 1.08 1.08 0.75
Net realized and unrealized gain (loss) 0.10 0.83 (0.12) (0.02) (0.81) 1.09
- ---------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.62 1.92 0.96 1.06 0.27 1.84
- ---------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.55) (1.08) (1.08) (1.05) (1.12) (0.86)
Capital -- -- -- (0.07) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.55) (1.08) (1.08) (1.12) (1.12) (0.86)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.89 $11.82 $10.98 $11.10 $11.16 $12.01
- ---------------------------------------------------------------------------------------------------------------------------------
Total Return 5.33%++ 18.31%%++ 8.95% 10.28% 2.11% 17.29%++
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $450,637 $424,087 $341,040 $316,716 $233,678 $242,371
- ---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.06%+ 1.06% 1.10% 1.11% 1.11% 1.16%+
Net investment income 8.73+ 9.57 9.65 10.03 9.27 9.52+
- ---------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 41% 78% 72% 60% 98% 95%
=================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (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.
- --------------------------------------------------------------------------------
24 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1998(1) 1997 1996 1995 1994 1993
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.83 $10.99 $11.11 $11.16 $12.01 $11.15
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.50 1.03 1.02 1.03 1.02 1.08
Net realized and unrealized gain (loss) 0.08 0.83 (0.12) (0.02) (0.81) 0.88
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.58 1.86 0.90 1.01 0.21 1.96
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.52) (1.02) (1.02) (0.99) (1.06) (1.10)
Capital -- -- -- (0.07) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.52) (1.02) (1.02) (1.06) (1.06) (1.10)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.89 $11.83 $10.99 $11.11 $11.16 $12.01
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 5.00%++ 17.72% 8.41% 9.77% 1.60% 18.55%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $746,186 $680,916 $560,031 $478,499 $509,608 $448,639
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.54%+ 1.55% 1.59% 1.61% 1.60% 1.66%
Net investment income 8.24+ 9.07 9.16 9.52 8.77 9.02
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 41% 78% 72% 60% 98% 95%
====================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 25
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1998(1) 1997 1996 1995(2)(3)
============================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.84 $11.00 $11.11 $10.90
- ------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.51 1.04 1.03 0.95
Net realized and unrealized gain (loss) 0.07 0.83 (0.11) 0.23
- ------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.58 1.87 0.92 1.18
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.52) (1.03) (1.03) (0.90)
Capital -- -- -- (0.07)
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.52) (1.03) (1.03) (0.97)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.90 $11.84 $11.00 $11.11
- ------------------------------------------------------------------------------------------------------------
Total Return 5.02%++ 17.77%%++ 8.56% 11.50%++
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $59,679 $44,444 $21,049 $6,011
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.47%+ 1.48% 1.51% 1.56%+
Net investment income 8.31+ 9.14 9.23 9.58+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 41% 78% 72% 60%
============================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (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.
- --------------------------------------------------------------------------------
26 1998 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Y Shares 1998(1) 1997 1996 1995(2)
===========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.84 $10.99 $11.10 $10.88
- -----------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.55 1.12 0.92 0.09
Net realized and unrealized gain (loss) 0.08 0.84 (0.11) 0.23
- -----------------------------------------------------------------------------------------------------------
Total Income From Operations 0.63 1.96 0.81 0.32
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.56) (1.11) (0.92) (0.03)
Capital -- -- -- (0.07)
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (1.11) (0.92) (0.10)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.91 $11.84 $10.99 $11.10
- -----------------------------------------------------------------------------------------------------------
Total Return 5.45%++ 18.68% 9.32% 2.91%++
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $174,586 $139,269 $35,097 $10,306
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.72%+ 0.73% 0.76% 0.86%+
Net investment income 9.06+ 9.90 9.98 10.28+
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 41% 78% 72% 60%
===========================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (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.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 27
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class Z Shares 1998(1) 1997(2) 1996 1995(3) 1994 1993(4)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.80 $10.99 $11.09 $11.16 $12.01 $11.03
- -----------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.54 1.12 1.11 1.11 1.10 0.79
Net realized and unrealized gain (loss) 0.05 0.80 (0.10) (0.03) (0.80) 1.07
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.59 1.92 1.01 1.08 0.30 1.86
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.56) (1.11) (1.11) (1.08) (1.15) (0.88)
Capital -- -- -- (0.07) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (1.11) (1.11) (1.15) (1.15) (0.88)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.83 $11.80 $10.99 $11.09 $11.16 $12.01
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 5.12%++ 18.29% 9.42% 10.55% 2.37% 17.47%++
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $107 $104 $7,158 $9,917 $11,370 $26,112
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.28%+ 0.75% 0.77% 0.86% 0.77% 0.81%+
Net investment income 8.51+ 9.88 9.98 10.28 9.61 9.88+
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 41% 78% 72% 60% 98% 95%
===================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) On November 7, 1994, the former Class C shares were renamed Class Z shares.
(4) 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 1998 Semi-Annual Report to Shareholders
<PAGE>
Smith Barney
High Income Fund
Trustees Investment Adviser
Lee Abraham Mutual Management Corp.
Allan J. Bloostein
Richard E. Hanson, Jr. Distributor
Heath B. McLendon, Chairman Smith Barney Inc.
Officers Custodian
Heath B. McLendon PNC Bank, N.A.
President and Chief Executive Officer
Shareholder Servicing Agent
Lewis E. Daidone First Data Investor Services Group, Inc.
Senior Vice President and Treasurer P.O. Box 9134
Boston, MA 02205-9134
John C. Bianchi
Vice President and Investment Officer
This report is submitted for general
Thomas M. Reynolds information of the shareholders of Smith
Controller Barney High Income Fund. It is not
authorized for distribution to
Christina T. Sydor prospective investors unless accompanied
Secretary 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
------------
A Member of TravelersGroup[LOGO]
Smith Barney
High Income Fund
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD2172 3/98
[PHOTO OMITTED]
[GRAPHIC OMITTED]
Smith Barney
Municipal High
Income Fund
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
- --------------------------------------------------------------------------------
January 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every Day.(sm)
<PAGE>
Smith Barney Municipal
High Income Fund
- --------------------------------------------------------------------------------
The Smith Barney Municipal High Income Fund, formerly known as the Smith Barney
Tax-Exempt Income Fund, seeks to invest in a broadly diversified portfolio of
higher-yielding, tax-exempt municipal bonds.
Smith Barney Municipal High Income Fund
Average Annual Total Returns
January 31, 1998
Without Sales Charges*
----------------------------
Class A Class B Class C
================================================================================
Six-Months 4.51% 4.19% 4.17%
- --------------------------------------------------------------------------------
One-Year 10.46 9.90 9.92
- --------------------------------------------------------------------------------
Five-Year 7.00 6.46 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 7.48 N/A
- --------------------------------------------------------------------------------
Since Inception+ 7.42 8.36 10.34
================================================================================
Without Sales Charges**
----------------------------
Class A Class B Class C
================================================================================
Six-Months 0.35% (0.31)% 3.17
- --------------------------------------------------------------------------------
One-Year 6.06 5.40 8.92
- --------------------------------------------------------------------------------
Five-Year 6.13 6.31 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 7.48 N/A
- --------------------------------------------------------------------------------
Since Inception+ 6.58 8.36 10.34
================================================================================
* 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.
** Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; and Class B shares reflect
the deduction of a 5.00% CDSC, which applies if shares are redeemed within
one year from initial purchase. Thereafter, the CDSC declines 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.
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.
+ Inception dates for Class A, B and C shares are November 6, 1992,
September 9, 1986 and November 7, 1994.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
We remain positive on the prospects for the municipal bond market. We expect a
moderately expanding U.S. economy with the Fed maintaining its vigilance against
higher inflationary pressure. We believe that many municipal bond investors are
concentrating on long-term opportunities rather than short-term events.
Therefore, we are still bullish on the long-term prospects for municipal bonds.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A STXAX
Class B SXMTX
- --------------------------------------------------------------------------------
What's Inside
- --------------------------------------------------------------------------------
Shareholder Letter.............................................................1
An Interview with Portfolio Manager
Lawrence T. McDermott..........................................................4
Historical Performance.........................................................6
Smith Barney Municipal High
Income Fund at a Glance........................................................8
Schedule of Investments........................................................9
Statement of Assets and Liabilities...........................................23
Statement of Operations.......................................................24
Statements of Changes in Net Assets...........................................25
Notes to Financial Statements.................................................26
Financial Highlights..........................................................29
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO OMITTED]
Heath B.
McLendon
Chairman
[PHOTO OMITTED]
Lawrence T.
McDermott
Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Municipal
High Income Fund ("Fund"), formerly known as the Smith Barney Tax-Exempt Income
Fund, for the period ended January 31, 1998. 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 addition, an interview with Lawrence T. McDermott, the
Fund's portfolio manager, appears on page four.
The Board of Trustees approved changing the name of the Smith Barney Tax-Exempt
Income Fund to the Smith Barney Municipal High Income Fund in order to better
reflect its investment style and its emphasis on maximizing current income free
from federal taxes. The Fund's manager is supported by an experienced credit
analysis team that utilizes extensive research to identify what they believe to
be undervalued issues with less risk potential.
Fund Performance
For the six months ended January 31, 1998, the Fund's Class A shares posted a
total return of 4.51% which is roughly in line with its Lipper Analytical
Services, Inc. peer group average of 4.53% for the same period. (Lipper is an
independent fund-tracking organization.) Over the past six months, the Fund
distributed income dividends totaling $0.49 for Class A shares. Based on its
Class A shares net asset value of $18.10 as of January 31, 1998, and a current
monthly dividend of $0.082 for Class A shares, the annualized distribution rate
is 5.44%. In addition, the Fund provided shareholders with a tax-free yield of
5.44%. To match this yield, investors in the 36% federal tax bracket would have
to earn 8.50% on a taxable investment alternative.
We are pleased to report that your Municipal High Income Fund has been given a
four-star rating overall for Class A and B shares and a five-star rating overall
for its Class C shares from Morningstar, Inc.* as of January 31, 1998.
Market and Economic Overview
Interest rates continued to decline overall during the course of the reporting
period. However, the bond markets did experience more volatility as investors
responded to a conflicting combination of low inflation and falling
unemployment. The persistent strength of the U.S. economy heightened fears among
many investors that the Federal Reserve Board ("Fed") would raise short-term
interest rates. The Fed last raised the federal-funds rate by 0.25% in March
1997, but has since chosen to remain on the sidelines. (The federal-funds rate
is the interest rate banks charge each other for overnight loans and a closely
watched indicator of the direction of interest rates.) Although it did not take
action, the Fed indicated a bias toward tightening monetary policy at each of
its meetings in May, July, August, September and November.
- ----------
* Morningstar, Inc. proprietary ratings reflect historical risk-adjusted
performance through 1/31/98. The ratings are subject to change every
month. Past performance is not a guarantee of future results. Morningstar
ratings are calculated from the Fund's 3- and 5-year returns (with fee
adjustments) in excess of 90-day T-bill returns. For Class A and Class B
shares, the Fund received 4 stars for the overall, 5 stars for the 3-year
period and 4 stars for the 5-year period. It was rated among 1,494 and 762
for municipal bond funds for the 3- and 5-year periods, respectively. For
Class C shares, the Fund received 5 stars for the overall and 3-year
period. It was rated among 296 municipal bond funds for the 3-year period.
Ten percent of the funds in a rating category receive five stars.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 1
<PAGE>
Since the end of October, the dominant theme in the financial markets has been
the Asian financial crisis and the extent of the impact it will have on the U.S.
economy. We expect at least a modest dampening effect on growth in the first
part of the year with inflation continuing to trend lower in spite of wage
pressures resulting from an extremely tight labor market. We also expect the Fed
to hold short-term rates steady over the near term.
In our view, all of these developments have benefited the municipal bond market.
A healthy economy has enabled many municipalities to maintain, or even upgrade,
their credit ratings, while a relatively low rate of inflation has delivered
historically high real yields (i.e., the yield after taking into account the
effects of inflation to investors).
Investment Strategy
The Municipal High Income Fund seeks to maximize current income from federal
taxes while pursuing a total return orientation. The Fund invests primarily in
intermediate- and long-term municipal bonds and notes rated A, Baa or Ba by
Moody's Investors Services, Inc. ("Moody's") or A, BBB or B by Standard & Poor's
Ratings Group ("S&P"), two major reporting and bond rating agencies. Our main
goal in the Fund is to bring the best of two worlds to our shareholders: high
total return potential and high dividend income potential.
As of January 31, 1998, approximately 63% of the Fund's portfolio was invested
in investment-grade bonds (i.e., rated BBB/BAA or higher). (Investment-grade
bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc. or
AAA, AA, A and BBB by Standard & Poor's Ratings Services, or have an equivalent
rating by any nationally recog nized statistical rating organization, or have
been deter mined by the manager to be of equivalent quality.) In addition, since
our last report dated July 31, 1997, we have modestly lengthened the average
weighted maturity to 22.1 years or more. As of January 31, 1998, the Fund's
holdings were allocated across the following major market sectors: utility bonds
(14.3%), industrial development revenue bonds (13.8%), hospital bonds (13.5%)
and pollution control revenue bonds (10.8%).
As a result of historically low interest rates, we believe select housing bonds
are currently attractive. Going forward, we think the potential for prepayment
risk has been minimized. In our opinion, many municipal bond issues with higher
rates that have not been re financed to date will certainly be refinanced in the
first half of 1998. We also favor select health care or hospital issues that
have performed well during the past two years due primarily to the growing
health care needs of an aging population.
Another area of focus for the Fund is the airline industry. These bonds were
issued by municipalities for airports with an actual guarantee by specific air
lines. As the economy continues to grow, the airline industry has clearly
benefited. We are pleased to report that our airlines issue holdings have, for
the most part, performed very well for the Fund. If concerns about a recession
emerge, we plan to reduce our exposure in this area immediately.
Municipal Bond Market Outlook
Municipal bond issuance in 1997 was the second largest issuance and the market's
ability to absorb these securities is an indication of the healthy in vestor
appetite for tax-free investments. Insurance com panies were among the largest
buyers of these bonds, but we believe that more and more individual investors
are beginning to recognize the attractive investment opportunities that exist in
tax-free munici pal bonds. Moreover, the heavy supply of bond issues usually
depresses bond prices which enables us to inexpensively purchase longer-term
bonds and
- --------------------------------------------------------------------------------
2 1998 Semi-Annual Report to Shareholders
<PAGE>
enhance the call protection and the relative performance of our funds. In
addition, municipalities have benefited from the strong economy and low
inflation.
Going forward, we remain positive on the prospects for the municipal bond
market. We expect a moderately expanding U.S. economy with the Fed maintaining
its vigilance against higher inflationary pressure. We believe that many
municipal bond investors are concentrating on long-term opportunities rather
than short-term events. Therefore, we are still bullish on the long-term
prospects for municipal bonds.
In closing, thank you for your investment in Smith Barney Municipal High Income
Fund. We look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Lawrence T. McDermott
Heath B. McLendon Lawrence T. McDermott
Chairman Vice President
February 17, 1998
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 3
<PAGE>
- --------------------------------------------------------------------------------
An Interview with Portfolio Manager
Lawrence T. McDermott
- --------------------------------------------------------------------------------
Larry McDermott is a Managing Director of Smith Barney and a portfolio manager
of the Smith Barney Municipal High Income Fund. We recently had an opportunity
to speak with Larry regarding the Municipal High Income Fund and his investment
management approach.
Larry, what is a high yield municipal bond?
Larry: A high yield municipal bond is generally considered to be one that is
rated below "BAA" and typically offers greater coupon interest payments than
other municipal bonds. For example, health care and retirement facilities are
two areas where high yield municipal bonds can be found. As a portfolio manager,
I try to find undervalued bonds that may have been overlooked in the market.
Select hospital bonds are one example of my approach. While this industry has
come under pressure because of the overbuilding of hospitals in the U.S. and the
explosive growth of managed care, we've also seen a large number of hospitals
entering joint ventures that have helped make their businesses more efficient.
Moreover, because interest rates have declined so much in the last two years,
many hospitals have been able to refinance their old high-rate debt and these
direct cost savings have greatly improved their profitability. We think many
hospital bonds are currently attractive investment opportunities. Because they
have been out of favor with investors, they tend to offer higher yields. Yet,
because of their solid financial foundations they can be good performers.
How do you manage risk in the Fund?
Larry: The two main risks for municipal bonds are credit risk and interest-rate
risk. (High yield bonds, by definition, carry a greater risk of default than
higher-rated bonds.) Before we purchase any security for the Fund, we utilize
Smith Barney's substantial resources to thoroughly research an issuer's
creditworthiness. And we continue to closely monitor the issuing municipality's
fiscal health for as long as we hold the bond.
In addition, we constantly analyze economic data in order to assess important
considerations such as interest rates. When necessary, we will use this
information to make adjustments to the Fund's portfolio such as changing its
maturity structure so that the Fund is properly positioned not only for today's
market conditions, but tomorrow's as well.
How have low interest rates affected the municipal bond market?
Larry: As noted in our shareholder letter, interest rates have fallen partly in
response to the Asian crisis that started last summer and continued into the
fall of 1997. What began as a regional currency crisis quickly spilled over to
the financial markets around the world. As the turmoil spread, many investors
sought out the stability and liquidity of U.S. Treasurys. The resulting Treasury
bond market rally helped drive interest rates even lower. In fact, interest
rates were already headed lower thanks to the productivity gains made in the
U.S. economy. The eruption of the Asian crisis only accelerated this trend.
Lower rates have helped many municipal bond issuers because it has lowered their
refinancing costs. Although the municipal bond market didn't really participate
in the recent U.S. Treasury rally, the stock market's volatility may cause many
investors to consider rebalancing their portfolios and increase their municipal
bond exposure.
Whenever you discuss bond yields, I think it's important to view them in
relation to inflation. Currently, the real yield (i.e., the yield after
subtracting the effects of inflation) of municipal
- --------------------------------------------------------------------------------
4 1998 Semi-Annual Report to Shareholders
<PAGE>
bonds is quite high by historical standards. I think that municipal bonds make
sense for certain investors, especially when you consider their tax advantages.
Given the ongoing strength in the U.S. stock market, why should investors
consider municipal bonds?
Larry: The U.S. stock markets have been on a roll for three straight years now
and it's certainly been worthy competition to the fixed income markets. Yet, if
you look at recommended asset allocation models from any one of the major
financial services companies (ours as well), a majority have urged investors to
maintain broad portfolio diversification and include some exposure to bonds
because nothing lasts forever.
Going forward, and as long as interest rates stay at their current levels, I
think we'll see a continuing healthy issuance of municipal bonds. The
infrastructure needs of the U.S., which were ignored for many years during
periods of large state and local budget deficits, can no longer be neglected.
Today, many municipalities are operating at a significant budget surplus. We
believe much of that surplus will be reinvested back into their communities.
One area where we think there may be a revival is in education funding. As the
number of young people in the U.S. grows, there will be a greater need for new
and better equipped schools. More and more municipal ities will be concentrating
on meeting these educational needs. We think that the issues of classroom over
crowding and lack of resources in many of the nation's schools will have to be
addressed. This is only one example of the rapidly expanding municipal bond
market but it's one of the reasons I think the municipal market should continue
to be healthy for some time to come.
Larry, why did you become a portfolio manager?
Larry: I started in the tax-exempt bond business in its infancy as a bond trader
and underwriter for a large New York Stock Exchange-listed firm. Although I
enjoyed the business, I noticed some glaring inefficiencies. For example,
municipal bond investors could only purchase small amounts of securities and it
was extremely difficult for them to buy tax-exempt securities in the states
where they lived.
I recognized early on that investing in municipal bonds through mutual funds was
the way for individual investors to go. I joined as a mutual fund manager with
Smith Barney in 1981. One of the things I really like about being a portfolio
manager is conducting seminars and meeting investors when I travel.
Larry, thanks for spending some time with us today.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/98 $18.07 $18.10 $ 0.49 $ 0.27 $ 0.00 4.51%+
- ----------------------------------------------------------------------------------------------
7/31/97 17.31 18.07 0.98 0.00 0.00 10.40
- ----------------------------------------------------------------------------------------------
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 $ 5.36 $ 0.58 $ 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>
1/31/98 $18.09 $18.11 $ 0.45 $ 0.27 $ 0.00 4.19%+
- ----------------------------------------------------------------------------------------------
7/31/97 17.32 18.09 0.89 0.00 0.00 9.89
- ----------------------------------------------------------------------------------------------
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
==============================================================================================
Total $10.67 $ 0.94 $ 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>
1/31/98 $18.07 $18.09 $ 0.44 $ 0.27 $ 0.00 4.17%+
- ----------------------------------------------------------------------------------------------
7/31/97 17.31 18.07 0.89 0.00 0.00 9.79
- ----------------------------------------------------------------------------------------------
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 $ 2.86 $ 0.29 $ 0.04
==============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
6 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
----------------------------------
Class A Class B Class C
================================================================================
Six Months Ended 1/31/98+ 4.51% 4.19% 4.17%
- --------------------------------------------------------------------------------
Year Ended 1/31/98 10.46 9.90 9.92
- --------------------------------------------------------------------------------
Five Years Ended 1/31/98 7.00 6.46 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 1/31/98 N/A 7.48 N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/98 7.42 8.36 10.34
================================================================================
Without Sales Charge(2)
----------------------------------
Class A Class B Class C
================================================================================
Six Months Ended 1/31/98+ 0.35% (0.31)% 3.17%
Year Ended 1/31/98 6.06 5.40 8.92
Five Years Ended 1/31/98 6.13 6.31 N/A
Ten Years Ended 1/31/98 N/A 7.48 N/A
Inception* through 1/31/98 6.58 8.36 10.34
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/98) 45.47%
- --------------------------------------------------------------------------------
Class B (1/31/88 through 1/31/98) 105.73
- --------------------------------------------------------------------------------
Class C (Inception* through 1/31/98) 37.11
================================================================================
(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 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.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the Smith Barney Municipal High
Income Fund vs. Lehman Brothers Municipal Bond Index+
- --------------------------------------------------------------------------------
[THE FOLLOWING WAS DEPICTED AS A LINE GRAPH IN THE PRINTED MATERIAL[
January 1988 -- January 1998
1/88 10,000 10,000
7/88 9,776 10,248
7/89 11,116 11,495
7/90 11,786 12,291
7/91 12,780 13,365
7/92 14,632 15,201
7/93 15,951 16,545
7/94 16,046 16,854
7/95 16,994 18,182
7/96 17,969 19,382
7/97 19,745 21,369
1/98 20,573 22,228
+ Hypothetical illustration of $10,000 invested in Class B shares on January
31, 1988, assuming reinvestment of dividends and capital gains, if any, at
net asset value through January 31, 1998. The Lehman Brothers Municipal
Bond Index is a broad-based, total return index comprised of bonds which
are all investment grade, fixed rate, long-term maturities (greater than
one year) and are selected from issues larger than $50 million dated since
January 1991. 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 values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
[THE FOLLOWING WAS DEPICTED AS A BAR GRAPH IN THE PRINTED MATERIAL]
Industry Diversification*
- ---------------------------------
3.9% Education
7.1% General Obligation
13.5% Hospital
8.8% Housing
13.8% Industrial Development
1.7% Life Care Systems
10.8% Pollution Control
10.3% Transportation
14.3% Utility
3.5% Water & Sewer
12.3% Other
* As a percentage of total investments.
Summary of Investments by Combined Ratings
- -------------------------------------------------
Standard Percentage
Moody's & Poor's of Total Investments
- -------------------------------------------------
Aaa AAA 28.6%
Aa AA 5.5
A A 11.6
Baa BBB 16.0
Ba BB 8.8
B B 1.6
VMIG 1 A-1 1.4
NR NR 26.5
-----
100.0%
=====
- --------------------------------------------------------------------------------
8 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
MUNICIPAL BONDS AND NOTES -- 98.6%
Alabama -- 1.3%
$4,000,000 BBB- Alabama IDA (Boise Cascade Project), 6.450% due 12/1/23(a) $ 4,360,000
3,000,000 AAA Huntsville, AL Health Care Facilities Authority, Series A, MBIA-Insured,
6.375% due 6/1/12 3,277,500
2,500,000 NR Morgan County-Decatur, AL Healthcare Authority Hospital Revenue,
Decatur General Hospital, CONNIE LEE-Insured, 6.250% due 3/1/13 2,743,750
- --------------------------------------------------------------------------------------------------------------------------------
10,381,250
- --------------------------------------------------------------------------------------------------------------------------------
Arizona -- 3.0%
1,000,000 NR Arizona Educational Loan Marketing Corp., Sr. Series,
6.375% due 9/1/05(a) 1,075,000
1,170,000 AAA Arizona State COP, FSA-Insured, 6.625% due 9/1/08 1,279,688
5,000,000 BB+ Maricopa County, AZ PCR, Public Service Co., Palo Verde, Series A,
6.375% due 8/15/23(b) 5,306,250
1,300,000 AAA Maricopa County, AZ School District, Fountain Hills, No. 98,
FGIC-Insured, 6.625% due 7/1/10 1,410,500
7,650,000 Baa1* Navajo County, AZ PCR, Arizona Public Service Co., Series A,
5.875% due 8/15/28 8,022,938
295,000 NR Peoria, AZ IDA, Sierra Winds Life Care Inc., 6.500% due 11/1/17 295,000
Pima County, AZ Industrial Development Authority,
Tuscon Electric Power Company:
2,000,000 B2* Series A, 6.100% due 9/1/25(a) 2,055,000
2,250,000 B2* Series B, 6.000% due 9/1/29 2,311,875
2,500,000 B2* Series C, 6.000% due 9/1/29 2,568,750
- --------------------------------------------------------------------------------------------------------------------------------
24,325,001
- --------------------------------------------------------------------------------------------------------------------------------
Arkansas -- 0.1%
860,000 NR Arkansas State Development Authority, Single-Family Mortgage Revenue,
Series A, GNMA/FNMA-Collateralized, 6.200% due 7/1/15 925,575
- --------------------------------------------------------------------------------------------------------------------------------
California -- 4.2%
4,000,000 Baa1* Burbank, CA Redevelopment Agency, Series A, (Golden State
Redevelopment Project), 6.250% due 12/1/24 4,295,000
1,500,000 A1* California Housing Finance Agency Revenue, Multi-Unit Rental Housing,
Series B-II, 6.700% due 8/1/15(a) 1,610,625
4,975,000 BB+ California Statewide Community Development Authority Lease Revenue,
Series A, United Airlines, 5.700% due 10/1/33(a) 5,074,500
2,500,000 AAA California Statewide Community Development Authority Revenue, COP,
Sutter Health, AMBAC-Insured, 6.125% due 8/15/22 2,700,000
2,600,000 NR Central Valley Finance Authority, CA (Cogeneration/Carson Ice Project),
6.200% due 7/1/20 2,765,750
3,000,000 NR Duarte, CA Hope Medical Center, 6.250% due 4/1/23
5,500,000 NR Long Beach, CA (Aquarium of the Pacific Project) Series A, 3,187,500
6.125% due 7/1/15(b) 5,775,000
4,000,000 NR Los Angeles, CA Regional Airports Improvement, Corporate Lease
Revenue, LA International Airport, 6.800% due 1/1/27(a) 4,315,000
3,500,000 AAA Los Angeles County, CA Metropolitan Transit Authority, Series A,
FSA-Insured, (forward 4/1/99) 5.000% due 7/1/19 3,390,625
- --------------------------------------------------------------------------------------------------------------------------------
33,114,000
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
Colorado -- 1.8%
$ 4,750,000 NR Colorado Springs, CO Airport Revenue, Series A, 7.000% due 1/1/22(a) $ 5,219,063
Denver, CO City and County Airport Revenue:
205,000 BBB Series A, 7.500% due 11/15/23(a) 237,544
1,715,000 BBB Series C, 6.750% due 11/15/22(a) 1,871,494
10,000,000 AAA E-470 Public Highway Authority, CO, Series B, MBIA-Insured,
zero coupon due 9/1/26 2,312,500
2,250,000 AAA Jefferson County, CO COP, MBIA-Insured, 6.650% due 12/1/08 2,522,813
1,500,000 NR Larimer County, CO COP, School District No. R-1, Poudre-Ft. Collins,
Colorado School Board Lease, 6.700% due 12/1/13 1,648,125
500,000 NR Meridian, CO Metropolitian District, 7.000% due 12/1/98 509,275
- --------------------------------------------------------------------------------------------------------------------------------
14,320,814
- --------------------------------------------------------------------------------------------------------------------------------
Connecticut -- 2.5%
1,930,000 A Connecticut Development Authority, Resource Recovery Authority,
(Bridgeport Project), Series B, 8.500% due 1/1/00 1,989,830
2,000,000 AAA Connecticut State Airport Revenue, Bradley International Airport,
FGIC-Insured, 7.650% due 10/1/12 2,372,500
Connecticut State Health and Educational Facilities:
1,200,000 NR Quinnipiac College, Series D, 6.000% due 7/1/23 1,237,500
University of Hartford, Series D:
1,655,000 Ba2* 6.750% due 7/1/12 1,752,231
1,450,000 Ba2* 6.800% due 7/1/22 1,544,250
2,745,000 Aa3* Connecticut State HFA, Series A, 6.750% due 11/15/23 2,947,444
Mashantucket Western Pequot Tribe, CT, Series B:
3,000,000 NR 5.750% due 9/1/18 3,135,000
4,500,000 NR 5.750% due 9/1/27 4,702,500
- --------------------------------------------------------------------------------------------------------------------------------
19,681,255
- --------------------------------------------------------------------------------------------------------------------------------
Delaware -- 0.6%
Delaware State EDA, PCR, AMBAC-Insured:
2,500,000 AAA Series B, 6.750% due 5/1/19 2,762,500
2,000,000 AAA Water & Sewer Revenue, 6.200% due 6/1/25(a) 2,172,500
- --------------------------------------------------------------------------------------------------------------------------------
4,935,000
- --------------------------------------------------------------------------------------------------------------------------------
District of Columbia -- 1.4%
District of Columbia:
6,500,000 NR COP, 7.300% due 1/1/13 7,393,750
1,000,000 A+ Georgetown University, 5.375% due 4/1/23 1,020,000
3,000,000 AAA Smithsonian Institution, 5.000% due 2/1/28 2,943,750
- --------------------------------------------------------------------------------------------------------------------------------
11,357,500
- --------------------------------------------------------------------------------------------------------------------------------
Florida -- 2.6%
Broward County, FL Resource Recovery, Waste Energy:
525,000 A- North, 7.950% due 12/1/08 571,594
2,355,000 A- South, 7.950% due 12/1/08 2,564,006
825,000 AAA Dade County, FL Aviation Revenue, Series B, MBIA-Insured,
6.600% due 10/1/22(a) 915,750
2,105,000 AAA Florida State HFA, Single-Family Mortgage, GNMA/FNMA-Collateralized,
Series A, 6.650% due 1/1/24(a) 2,286,556
2,800,000 BBB+ Hillsborough County, FL Utility Revenue, Series A, 7.000% due 8/1/14 3,045,000
3,440,000 NR Jacksonville, FL Health Facilities Revenue,
University Medical Center, CONNIE LEE-Insured, 6.600% due 2/1/21 3,732,400
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
Florida -- 2.6% (continued)
$2,000,000 A+ Jacksonville, FL Sewer & Solid Waste Disposal
Facilities Revenue, (Anheuser-Busch Project), 5.875% due 2/1/36(a) $ 2,102,500
3,000,000 BBB- Putnam County, FL Development Authority, PCR, Georgia Pacific,
7.000% due 12/1/05 3,371,250
1,900,000 AAA Tampa, FL Utility Tax and Special Revenue, AMBAC-Insured,
6.900% due 10/1/09 2,118,500
- --------------------------------------------------------------------------------------------------------------------------------
20,707,556
- --------------------------------------------------------------------------------------------------------------------------------
Georgia -- 3.4%
4,000,000 A Atlanta, GA Airport Facilities Revenue, 7.250% due 1/1/17(a)(b) 4,370,000
4,000,000 AAA Fulco, GA Hospital Authority Revenue, Catholic Health System,
Series A, MBIA-Insured, 5.000% due 11/15/28 3,915,000
4,750,000 AA- George L. Smith, GA World Congress Center Authority Revenue,
(Domed Stadium Project), 7.875% due 7/1/20(a) 5,201,250
7,000,000 AAA Georgia Municipal Electric Authority Power Revenue, Series EE,
AMBAC-Insured, 6.400% due 1/1/23 7,813,750
5,000,000 AAA Medical Center Hospital Authority, Columbus Healthcare, Series C,
MBIA-Insured, 6.400% due 8/1/06 5,518,750
- --------------------------------------------------------------------------------------------------------------------------------
26,818,750
- --------------------------------------------------------------------------------------------------------------------------------
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) 2,122,500
2,000,000 A2* Kapiolani Health Care Systems, 6.400% due 7/1/13 2,150,000
- --------------------------------------------------------------------------------------------------------------------------------
4,272,500
- --------------------------------------------------------------------------------------------------------------------------------
Idaho -- 0.1%
1,030,000 NR Idaho Housing Agency, Single-Family Mortgage, Series C,
7.875% due 1/1/21(a) 1,073,775
- --------------------------------------------------------------------------------------------------------------------------------
Illinois -- 3.0%
1,635,000 NR Chicago, IL HDC, Section 8, Series A, FHA-Insured, 6.700% due 7/1/12 1,749,450
Chicago, IL O'Hare International Airport, Special Facilities:
1,800,000 AAA Lufthansa German Airlines Project, 7.125% due 5/1/18(a) 1,962,000
United Airlines:
1,345,000 BB+ 8.250% due 5/1/99(a) 1,402,163
3,180,000 BB+ Series B, 8.950% due 5/1/18(a) 3,629,175
3,755,000 BB+ Series C, 8.200% due 5/1/18 4,027,238
3,000,000 BB- East Chicago, IL Industrial PCR, Inland Steel Co., (Project 10),
6.800% due 6/1/13 3,270,000
1,300,000 NR Illinois Education Facilities Authority Revenue, Northern Illinois Medical
Center, 6.000% due 9/1/19 1,352,000
2,000,000 A- Illinois Health Facilities Authority Revenue, Victory Health Services,
Series A, 5.750% due 8/15/27 2,047,500
1,500,000 A+ Illinois Housing and Development Authority, Multi-Family Housing,
Series A, 6.125% due 7/1/25 1,565,625
2,750,000 AAA Illinois State Toll Highway Authority, Series A, FGIC-Insured,
6.200% due 1/1/16 2,983,750
- --------------------------------------------------------------------------------------------------------------------------------
23,988,901
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
Indiana -- 1.7%
$3,000,000 B+ Indiana State Development Finance Authority Revenue,
(Inland Steel Project), 5.750% due 10/1/11 $ 3,168,750
Indianapolis, IN Airport Authority Revenue, Special Facility:
5,245,000 BBB Federal Express Corporate Project, 7.100% due 1/15/17(a) 5,953,075
3,970,000 BB+ United Airlines Project, Series A, 6.500% due 11/15/31(a) 4,357,075
- --------------------------------------------------------------------------------------------------------------------------------
13,478,900
- --------------------------------------------------------------------------------------------------------------------------------
Kentucky -- 3.1%
5,000,000 AAA Jefferson County, KY Hospital Revenue, MBIA-Insured,
6.436% due 10/23/14(b)(c) 5,431,250
Kenton County, KY Airport Board Revenue, Delta Airlines:
1,230,000 A 8.250% due 3/1/15(a) 1,258,118
4,250,000 BBB- Project A, 7.500% due 2/1/20(a) 4,760,000
1,500,000 NR Kentucky Economic Development Finance Authority Hospital Systems
Revenue, Appalachian Regional Healthcare, 5.875% due 10/1/22 1,548,750
590,000 NR Kentucky Multi-County Residential Mortgage, 10.500% due 10/1/00 598,113
3,750,000 AAA Lexington-Lafayette Urban County Project, (University of Kentucky Alumni
Assoc. Inc. Project), MBIA-Insured, 6.750% due 11/1/24 4,218,750
4,000,000 NR Pendleton County, KY Multi-County Lease Revenue,
Series A, 6.500% due 3/1/19 4,405,000
2,605,000 Aa2* Trimble County, KY PCR, Series B, 6.550% due 11/1/20(a) 2,832,938
- --------------------------------------------------------------------------------------------------------------------------------
25,052,919
- --------------------------------------------------------------------------------------------------------------------------------
Louisiana -- 3.4%
2,500,000 AA- Calcasieu Parish Inc., LA IDB Exempt Facility Revenue,
(Conoco Inc. Project), 5.750% due 12/1/26(a) 2,618,750
5,000,000 NR Hodge, LA Utility Revenue, 9.000% due 3/1/10(a) 5,450,000
2,600,000 NR Lake Charles, LA Harbor and Terminal District, (Trunkline
Liquid Natural Gas Co. Project), 7.750% due 8/15/22 3,019,250
2,500,000 NR Louisiana Public Facilities, Association of Independent
Colleges and Universities, 7.000% due 12/1/17 2,843,750
3,000,000 AAA Louisiana Public Facility Authority Revenue, Tulane University of LA,
Series A-2, MBIA-Insured, 5.000% due 11/15/27 2,966,250
2,000,000 NR Port of New Orleans, LA IDR, (Continential Grain Co. Project),
7.500% due 7/1/13 2,230,000
3,000,000 NR Shreveprot, LA Airport Systems Revenue, Series B, FSA-Insured,
5.375% due 1/1/24(a) 3,045,000
1,210,000 NR State Tammany Parish, LA Hospital Revenue, District 2,
CONNIE LEE-Insured, 6.250% due 10/1/14 1,326,463
3,000,000 BB+ West Feliciana Parish, LA PCR, Gulf State Utilities,
7.700% due 12/1/14 3,431,250
- --------------------------------------------------------------------------------------------------------------------------------
26,930,713
- --------------------------------------------------------------------------------------------------------------------------------
Maryland -- 2.2%
3,000,000 NR Baltimore County, MD Mortgage Revenue, Series A,
Dunfield Townhouses, FHA-Insured, 6.900% due 8/1/28 3,236,250
1,980,000 AAA Howard County, MD Mortgage Revenue, Howard Hills
Townhouses, Series A, MBIA-Insured, 6.400% due 7/1/24 2,093,850
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
Maryland -- 2.2% (continued)
Maryland State Community Development Administration,
Department of Housing & Community Development:
$1,280,000 NR Multi-Family Housing, Insured Mortgage, Series A,
FHA-Insured, 6.625% due 5/15/23 $ 1,380,800
1,000,000 NR Single-Family Program, Fourth Series, 6.450% due 4/1/14 1,076,250
Northeast Maryland Waste Disposal Authority, Recovery
Revenue, MBIA-Insured, Southwest Resource Recovery:
3,000,000 AAA 7.200% due 1/1/06 3,506,250
3,000,000 AAA 7.200% due 1/1/07 3,487,500
2,500,000 NR Prince Georges County, MD Greater Southeast Healthcare
System, 6.375% due 1/1/23 2,634,375
- --------------------------------------------------------------------------------------------------------------------------------
17,415,275
- --------------------------------------------------------------------------------------------------------------------------------
Massachusetts -- 6.3%
Massachusetts Bay Transportation Authority, General
Transportation System:
4,800,000 A1* Series A, 5.625% due 3/1/26 5,016,000
3,625,000 A1* Series C, 5.000% due 3/1/24 3,538,906
Massachusetts State Health and Educational Facilities
Authority Revenue:
2,000,000 AAA Caregroup Issue, Series A, MBIA-Insured, 5.000% due 7/1/25 1,950,000
735,000 NR Community College Program, Series A,
CONNIE LEE-Insured, 6.600% due 10/1/22 806,663
3,500,000 AAA New England Medical Center Hospitals, Series F,
FGIC-Insured, 6.625% due 7/1/25 3,850,000
2,685,000 NR Saint Memorial Medical Center, Series A,
6.000% due 10/1/23 2,698,425
Massachusetts State HFA, Housing Projects:
Residental Development, FNMA-Collateralized:
2,445,000 A+ Series A, 6.375% due 4/1/21 2,597,813
2,000,000 AAA Series C, 6.875% due 11/15/11 2,185,000
3,000,000 AAA Series D, 6.800% due 11/15/12 3,277,500
2,500,000 A+ Massachusetts State Housing Finance Agency,
Single-Family, Series 41, 6.300% due 12/1/14 2,696,875
1,000,000 NR Massachusetts State IFA, Concord Academy, 5.500% due 9/1/27 1,012,500
Massachusetts State IFA, Resource Recovery Revenue,
(Semass Project):
2,700,000 NR Series A, 9.000% due 7/1/15 3,081,375
4,335,000 NR Series B, 9.250% due 7/1/15(a) 4,963,575
1,300,000 AAA Massachusetts State Port Authority Revenue, (U.S. Air
Project), Series A, MBIA-Insured, 5.875% due 9/1/23(a) 1,373,125
32,505,000 NR Massachusetts State Turnpike Authority, Metropolitan Highway
System Revenue, Series C, MBIA-Insured, zero coupon due 1/1/23 9,142,031
2,000,000 AAA Massachusetts State Waters, Series A, FSA-Insured, 4.750% due 8/1/37 1,855,000
- --------------------------------------------------------------------------------------------------------------------------------
50,044,788
- --------------------------------------------------------------------------------------------------------------------------------
Michigan -- 2.7%
2,000,000 AAA Detroit, MI, Series A, MBIA-Insured, 5.000% due 4/1/18 1,990,000
3,000,000 AAA Detroit, MI Water Supply System, FGIC-Insured, 6.375% due 7/1/22(c) 3,232,500
5,000,000 AAA Michigan State Hospital Finance Authority Revenue, FSA-Insured,
6.300% due 2/15/22(b)(c) 5,337,500
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
Michigan -- 2.7% (continued)
$2,000,000 A- Michigan State Strategic Fund, PCR, General Motors Corp.,
6.200% due 9/1/20 $ 2,182,500
4,500,000 AAA Monroe County, MI PCR, Detroit Edison Monroe, Series 1,
MBIA-Insured, 6.875% due 9/1/22(a) 4,927,500
3,750,000 AAA Western Townships, MI Utilities Authority, Sewer Disposal Systems,
FSA-Insured, 6.750% due 1/1/15 4,031,250
- --------------------------------------------------------------------------------------------------------------------------------
21,701,250
- --------------------------------------------------------------------------------------------------------------------------------
Minnesota -- 0.8%
St. Paul, MN Housing and Redevelopment Authority,
(Healtheast Project), Series A:
2,250,000 Baa3* 5.700% due 11/1/15 2,325,938
4,000,000 Baa3* 6.625% due 11/1/17 4,350,000
- --------------------------------------------------------------------------------------------------------------------------------
6,675,938
- --------------------------------------------------------------------------------------------------------------------------------
Mississippi -- 2.1%
9,000,000 Ba1* Claireborne County, MS PCR, (System Energy Resource Inc. Project),
6.200% due 2/1/26 9,292,500
2,250,000 AAA Gulfport, MS Hospital Facilities Revenue, Memorial Hospital
Gulfport, Series A, MBIA-Insured, 6.200% due 7/1/18 2,463,750
2,500,000 A- Jones County, MS Solid Waste Disposal Revenue, (International Paper
Co. Project), Series A, 5.800% due 10/1/21(a) 2,587,500
2,000,000 NR Mississippi Home Corp., Single-Family Mortgage Revenue,
GNMA-Collateralized, 6.550% due 4/1/21(a) 2,160,000
- --------------------------------------------------------------------------------------------------------------------------------
16,503,750
- --------------------------------------------------------------------------------------------------------------------------------
Montana -- 0.7%
5,500,000 NR Montana State Board Resource Recovery, (Yellowstone
Energy LP Project), 7.000% due 12/31/19(a) 5,520,625
- --------------------------------------------------------------------------------------------------------------------------------
Nebraska -- 0.2%
1,500,000 AAA Nebraska Investment Finance Authority, Single-Family
Housing Revenue, Series C, GNMA/FNMA-Collateralized,
Remarketed 5/1/97, 6.300% due 9/1/28(a) 1,606,875
- --------------------------------------------------------------------------------------------------------------------------------
Nevada -- 0.8%
4,000,000 NR Clark County, NV Industrial Development Revenue, (Nevada Power Co.
Project), Series A, 5.900% due 11/1/32(a) 4,090,000
2,000,000 AAA Humboldt County, NV PCR, (Sierra Pacific Project), AMBAC-Insured,
6.550% due 10/1/13 2,192,500
- --------------------------------------------------------------------------------------------------------------------------------
6,282,500
- --------------------------------------------------------------------------------------------------------------------------------
New Hampshire -- 0.4%
3,340,000 BBB- New Hampshire Business Financing Authority, PCR, United Illuminating
Company, Series A, 5.875% due 10/1/33 3,406,800
- --------------------------------------------------------------------------------------------------------------------------------
New Jersey -- 4.9%
775,000 NR Atlantic County, NJ Utilities Authority, Solid Waste Revenue, 7.125% due 3/1/16 797,281
5,000,000 NR Camden County, NJ Improvement Authority Revenue, (Health Care
Redevelopment Project), Cooper Health, 6.000% due 2/15/27 5,206,250
2,500,000 AAA Hoboken, Union City, Weehawken, NJ Sewer Authority Revenue,
MBIA-Insured, 6.200% due 8/1/19 2,693,750
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
New Jersey -- 4.9% (continued)
$ 905,000 NR Hudson County, NJ Improvement Authority, Solid Waste Revenue,
7.100% due 1/1/20 $ 934,413
New Jersey EDA:
2,500,000 AAA Irvington General Hospital, FHA-Insured, 6.375% due 8/1/15 2,765,625
2,950,000 A- Kennedy Memorial University Medical Center, Series D,
7.875% due 7/1/09 3,058,560
1,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27 1,098,750
2,500,000 AAA RWJ Health Care Corporation, FSA-Insured, 6.500% due 7/1/24 2,768,750
2,400,000 Ba3* Zurbrugg Memorial Hospital, Series C, 8.500% due 7/1/12 2,460,120
1,000,000 AAA New Jersey Economic Development Authority, American Water Co. Inc.,
Series B, FGIC-Insured, 5.375% due 5/1/32(a) 1,021,250
3,000,000 NR New Jersey State Housing & Mortgage Finance Agency,
Multi-Family Housing Revenue, Presidental Plaza,
FHA-Insured, 7.000% due 5/1/30 3,270,000
2,500,000 AAA Perth Amboy, NJ Board of Education COP, FSA-Insured,
6.125% due 12/15/17 2,675,000
2,500,000 A1* Port Authority New York & New Jersey, 5.000% due 10/1/22 2,471,875
Union County, NJ Utility Authority, Solid Waste Revenue:
1,090,000 NR Series A, 7.100% due 6/15/06(a) 1,095,450
4,725,000 NR Series A, 7.200% due 6/15/14(a) 4,748,625
2,000,000 AA+ Series D, 6.850% due 6/15/14(a) 2,165,000
- --------------------------------------------------------------------------------------------------------------------------------
39,230,699
- --------------------------------------------------------------------------------------------------------------------------------
New Mexico -- 0.0%
72,176 NR Santa Fe, NM Single-Family Mortgage Revenue,
8.450% due 12/1/11 78,131
- --------------------------------------------------------------------------------------------------------------------------------
New York -- 10.4%
5,000,000 BBB+ New York, NY GO, Series C, 6.660% due 8/1/09 5,293,750
New York, NY GO Bonds:
4,500,000 BBB+ Series A, 6.250% due 8/1/17 4,938,750
2,500,000 BBB+ Series A-1, 6.500% due 8/1/19 2,687,500
5,500,000 BBB+ Series F, 6.125% due 2/1/25 5,905,625
2,750,000 BBB+ Series H, 6.125% due 8/1/25 2,970,000
New York, NY GO, Series B:
235,000 BBB+ 7.000% due 10/1/12 262,319
3,940,000 BBB+ Pre-Refunded-- Escrowed with U.S. Government Securities 4,476,825
to 10/1/02 Call @ 101.5, 7.000% due 10/1/12
New York, NY IDA:
3,950,000 BBB- Brooklyn Navy Yard, 5.750% due 10/1/36(a) 4,078,375
3,000,000 BB+ United Air Lines Project, 5.650% due 10/1/32(a) 3,052,500
New York, NY Municipal Waters Finance Authority,
Water & Sewer System, Series A:
3,875,000 A- 5.500% due 6/15/24 4,015,469
5,000,000 A- 5.125% due 6/15/21 4,993,750
3,085,000 NR New York State COP, (Hanson Redevelopment Project),
8.375% due 5/1/08 3,759,844
New York State Dormitory Authority Revenue:
4,500,000 BBB Upstate Community College, Series A, 6.250% due 7/1/25 4,854,375
1,500,000 NR Wesley Garden Nursing Home, FHA-Insured,
6.125% due 8/1/35 1,610,625
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
New York -- 10.4% (continued)
New York State Dormitory Authority Revenue, AMBAC-Insured:
$ 3,000,000 AAA 5.000% due 2/1/19 $ 2,955,000
52,895,000 AAA Series A, zero coupon due 8/15/36 6,942,469
New York State Energy, Research and Development
Authority, Long Island Lighting Company:
3,000,000 Ba3* 7.150% due 6/1/20(a) 3,288,750
1,150,000 Ba3* 7.150% due 12/1/20(a) 1,260,688
New York State Medical Care Facilities Finance Agency Revenue:
430,000 BBB+ 7.750% due 2/15/20 467,625
2,895,000 Baa1* Series C, Long-Term Health Care, FSA-Insured, 3,170,025
6.400% due 11/1/14
4,500,000 AAA Series F, Mental Health Services Facilities,
6.500% due 2/15/19 4,803,750
New York State Power Authority Revenue, Series Z, MBIA-Insured:
1,930,000 NR Unrefunded, 6.500% due 1/1/19 2,101,288
3,570,000 NR Pre-Refunded -- Escrowed with U.S. government securities
to 1/1/02 Call @ 102, 6.500% due 1/1/19 3,944,850
1,000,000 NR United Nations Development Corp., NY Revenue
Refunding, Sr. Lien, Series B, 5.500% due 7/1/17 1,005,000
- --------------------------------------------------------------------------------------------------------------------------------
82,839,152
- --------------------------------------------------------------------------------------------------------------------------------
North Carolina -- 2.1%
3,000,000 Aa3* Charlotte, NC Mecklenberg Hospital, Healthcare System
Revenue, Series A, 5.125% due 1/1/22 2,996,250
2,675,000 B- Charlotte, NC Special Facilities Revenue, (Piedmont Aviation
Inc. Project), 9.000% due 7/1/17(a) 2,768,010
8,700,000 BBB North Carolina Eastern Municipal Power Agency, Power
System Revenue, Series B, 7.000% due 1/1/08(b) 10,211,625
2,750,000 Aa2* North Carolina University, Chapel Hill, zero coupon due 8/1/20 897,188
- --------------------------------------------------------------------------------------------------------------------------------
16,873,073
- --------------------------------------------------------------------------------------------------------------------------------
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 3,281,250
4,710,000 A2* Series E, 7.000% due 1/1/19 4,950,822
- --------------------------------------------------------------------------------------------------------------------------------
8,232,072
- --------------------------------------------------------------------------------------------------------------------------------
Ohio -- 2.4%
4,000,000 NR Cleveland, OH Airport Special Revenue, Continental Airlines Inc.,
9.000% due 12/1/19(a)(b) 4,360,000
Ohio State Air Quality Development Auhtority:
3,500,000 AAA Columbus and Southern Ohio, Series A, FGIC-Insured,
6.375% due 12/1/20(b) 3,850,000
5,000,000 Ba2* Pollution Control-Toledo Edison, 6.875% due 7/1/23(a)(b) 5,393,750
Ohio State Water Development Authority Revenue:
Series A:
3,475,000 Ba2* Cleveland Electric, 8.000% due 10/1/23(a)(b) 4,022,313
1,500,000 Ba2* Toledo Edison, 8.000% due 10/1/23(a)(b) 1,736,250
- --------------------------------------------------------------------------------------------------------------------------------
19,362,313
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
Oklahoma -- 1.0%
$4,460,000 NR Oklahoma HFA, Single-Family Mortgage, Series B,
GNMA-Collateralized, 7.997% due 8/1/18(a) $ 5,251,650
2,400,000 BBB- Tulsa, OK Municipal Airport Revenue, American Airlines,
7.350% due 12/1/11 2,700,000
- --------------------------------------------------------------------------------------------------------------------------------
7,951,650
- --------------------------------------------------------------------------------------------------------------------------------
Pennsylvania -- 9.2%
4,000,000 AAA Allegheny County, PA Airport Revenue, Greater Pittsburg International Airport,
Series B, FSA-Insured, 6.625% due 1/1/22(a) 4,365,000
2,500,000 BBB- Allegheny County, PA, Series A, 6.700% due 12/1/20 2,737,500
4,500,000 NR Allentown, PA Hospital Authority Revenue, Sacred Heart
Hospital of Allentown, Series B, 6.750% due 11/15/15 4,944,375
1,250,000 AAA Beaver County, PA Hospital Authority, Beaver Medical
Center, Series A, AMBAC-Insured, 6.250% due 7/1/22 1,350,000
1,000,000 AAA Cambria County, PA GO, FGIC-Insured, 5.000% due 8/15/23 981,250
2,000,000 Baa1* Delaware County, PA IDA, Resource Recovery Facilities, Series A,
6.200% due 7/1/19 2,162,500
3,000,000 AAA Franklin, PA IDA, (Chamberburgs Hospital Project), FGIC-Insured,
6.250% due 7/1/12 3,247,500
1,330,000 NR Grove City, PA Area Hospital Authority Revenue, United
Community Hospital, 8.125% due 7/1/12 1,344,470
Lehigh County, PA IDA, PCR, MBIA-Insured:
7,500,000 AAA 6.400% due 9/1/29 8,371,875
1,750,000 AAA Series A, 6.400% due 11/1/21 1,918,438
Luzerne County, PA IDA, Pennsylvania Gas and Water Co., Series A:
2,500,000 A- 7.200% due 10/1/17(a) 2,765,625
2,250,000 A- 6.050% due 1/1/19 2,351,250
McKeesport, PA School District, MBIA-Insured:
4,875,000 AAA Zero coupon due 10/1/24 1,285,781
4,875,000 AAA Zero coupon due 10/1/25 1,224,844
3,380,000 AAA Montgomery County, PA IDA, PCR, Series B, MBIA-Insured,
6.700% due 12/1/21 3,713,775
6,750,000 NR Montgomery County, PA Redevelopment Authority,
Multi-Family Housing, Series A, 6.500% due 7/1/25 7,045,313
Pennsylvania EDA:
4,500,000 NR Resource Recovery Revenue, (Colver Project), Series D,
7.125% due 12/1/15 5,045,625
4,000,000 BBB WasteWater Treatment Revenue, Sun Co. Inc., (RTM Project),
Series A, 7.600% due 12/1/24(a) 4,625,000
5,000,000 AAA Pennsylvania State Higher Education, Student Loan Revenue,
Series D, AMBAC-Insured, 6.050% due 1/1/19(a) 5,256,250
Philadelphia, PA Hospitals & Highered Facility
Authority, Series A, FHA-Insured:
1,600,000 NR 5.300% due 1/1/18 1,622,000
3,500,000 NR 5.375% due 1/1/28 3,561,250
Philadelphia, PA Municipal Authority Gas Works Lease Revenue:
2,500,000 BBB- 7.625% due 5/1/14 2,643,750
980,000 BBB- Series B, 6.400 % due 11/15/16 1,042,475
- --------------------------------------------------------------------------------------------------------------------------------
73,605,846
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
Puerto Rico -- 0.6%
Commonwealth of Puerto Rico, GO:
$ 455,000 Baa1* 8.000% due 7/1/08 $ 471,248
3,000,000 Baa1* 5.000% due 7/1/26 2,947,500
1,250,000 NR Puerto Rico Mennonite General Hospital, 5.625% due 7/1/27 1,271,875
- --------------------------------------------------------------------------------------------------------------------------------
4,690,623
- --------------------------------------------------------------------------------------------------------------------------------
Rhode Island -- 1.3%
9,500,000 Aa* Rhode Island Housing and Mortgage Finance Authority,
7.100% due 4/1/24(a)(b)(c) 10,129,375
- --------------------------------------------------------------------------------------------------------------------------------
South Carolina -- 1.8%
2,345,000 NR Fairfield County, SC IDR, Rite Aid Corp., 7.900% due 12/1/16(a) 2,407,471
Greenville, SC Connector, 2000 Association:
2,500,000 NR 5.375% due 1/1/38 2,431,250
20,250,000 NR Zero coupon due 1/1/30 3,240,000
1,500,000 NR Greenville County, SC IDR, (Lockheed Aeromod Center Project),
7.200% due 11/1/21(a) 1,653,750
4,000,000 A- Richland County, SC PCR, (Union Camp Corp. Project),
6.625% due 5/1/22 4,350,000
- --------------------------------------------------------------------------------------------------------------------------------
14,082,471
- --------------------------------------------------------------------------------------------------------------------------------
South Dakota -- 0.3%
Ogalala Sioux, SD Tribal Revenue Bonds:
1,865,000 NR 7.500% due 7/1/13 1,925,613
115,000 NR 7.000% due 7/1/99 116,581
- --------------------------------------------------------------------------------------------------------------------------------
2,042,194
- --------------------------------------------------------------------------------------------------------------------------------
Tennessee -- 3.1%
7,000,000 AA- Humphreys County, TN IDB, 6.700% due 5/1/24(a) 7,796,250
7,100,000 A- Maury County, TN IDB, PCR, (Saturn Corp. Project),
6.500% due 9/1/24 7,872,125
3,150,000 BBB Memphis-Shelby County, TN Airport Authority, Federal Express Corp.,
6.750% due 9/1/12 3,468,938
5,000,000 AAA Metropolitan Nashville Airport Authority, TN Airport Revenue,
Special Facilities, Series C, FGIC-Insured, 6.600% due 7/1/15 5,462,500
- --------------------------------------------------------------------------------------------------------------------------------
24,599,813
- --------------------------------------------------------------------------------------------------------------------------------
Texas -- 6.1%
5,100,000 BBB Alliance Airport Authority Inc., Special Federal Express
Corp. Project, 6.375% due 4/1/21(a) 5,552,625
Brazos River Authority, TX PCR, Houston Lighting & Power Co.:
2,000,000 AAA Series A, AMBAC-Insured, 6.700% due 3/1/17 2,210,000
1,900,000 AAA Series B, FGIC-Insured, 7.200% due 12/1/18 2,037,750
4,000,000 AAA Dallas-Fort Worth, TX International Airport Facilities,
UPS Services, Inc., 6.600% due 5/1/32(a) 4,385,000
2,000,000 NR Denton County, TX Reclamation and Road District,
8.500% due 6/1/16 2,015,860
970,000 AAA Harris County, TX Refunding Toll Road Authority. Series A,
AMBAC-Insured, 6.500% due 8/15/17 1,068,213
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
Texas -- 6.1% (continued)
Matagorda County, TX PCR, Navajo District No. 1,
Houston Light & Power Co. Project:
$ 500,000 A- Series B, 7.700% due 2/1/19 $ 510,640
2,100,000 AAA Series E, FGIC-Insured, 7.200% due 12/1/18 2,257,500
Matagorda County, TX PCR, Navajo District No. 1, MBIA-Insured:
2,000,000 AAA 5.250% due 11/1/29(a) 1,972,500
3,000,000 AAA Series B, 5.150% due 11/1/29 2,981,250
4,000,000 A2* Port Corpus Christi, TX IDR, (Hoeschst Celanese Corp. Project),
6.875% due 4/1/17(a) 4,375,000
Sam Rayburn, TX Municipal Power Agency, Power
Supply System Revenue:
2,645,000 Ba* Series A, 6.750% due 10/1/14 2,790,475
3,165,000 Ba* Series B, 6.125% due 10/1/13 3,220,388
San Antonio, TX Airport System Revenue, AMBAC-Insured:
3,000,000 AAA 7.125% due 7/1/06 3,450,000
1,000,000 AAA 7.125% due 7/1/08 1,148,750
2,000,000 AAA 7.375% due 7/1/13 2,320,000
3,010,000 AAA Texas Municipal Power Agency Revenue Bonds, Series A,
AMBAC-Insured, 6.750% due 9/1/12 3,318,525
2,605,000 A2* Texas State Veterans Housing Assistance, Single-Family
Mortgage Revenue, 6.800% due 12/1/23(a) 2,819,899
- --------------------------------------------------------------------------------------------------------------------------------
48,434,375
- --------------------------------------------------------------------------------------------------------------------------------
Utah -- 0.6%
4,000,000 AAA Utah Municipal Power System Revenue, (San Juan Project),
MBIA-Insured, 6.375% due 6/1/22 4,420,000
260,000 NR Utah State HFA, Single-Family Mortgage, Series D1,
6.200% due 7/1/16 269,100
- --------------------------------------------------------------------------------------------------------------------------------
4,689,100
- --------------------------------------------------------------------------------------------------------------------------------
Virginia -- 2.1%
2,435,000 NR Fairfax County, VA Redevelopment and Housing Authority Revenue,
Multi-Family Housing, Series A, Kingsley, FHA-Insured,
7.000% due 5/1/26 2,635,888
8,000,000 A- Isle Wight County, VA IDA, Solid Waste Disposal Revenue,
6.550% due 4/1/24(a) 8,870,000
3,000,000 NR Prince William County, VA Industrial Development Authority
Hospital Revenue, FSA-Insured, 5.000% due 10/1/25 2,958,750
2,000,000 NR Virginia Beach, VA Ramada on the Beach, 7.000% due 12/1/15 2,055,000
- --------------------------------------------------------------------------------------------------------------------------------
16,519,638
- --------------------------------------------------------------------------------------------------------------------------------
Washington -- 1.3%
11,345,000 AAA Chelan County, WA Public Utility District No. 1, Columbia River Rock,
Capital Appreciation, Series A, MBIA-Insured,
Zero coupon due 6/1/19 3,914,025
2,000,000 BBB Port Moses Lake, WA PCR, Union Carbide, 7.875% due 8/1/06(a) 2,045,560
2,000,000 AAA Port of Seattle, WA Subordinated Lien, MBIA-Insured, 6.625% due 8/1/17 2,205,000
2,000,000 AA- Washington Public Power Supply System, (Nuclear Project) No. 1,
Series A, 5.125% due 7/1/17 1,980,000
- --------------------------------------------------------------------------------------------------------------------------------
10,144,585
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
================================================================================================================================
<C> <C> <C> <S> <C>
West Virginia -- 1.1%
$ 2,000,000 NR Beckley, WV IDR, (Water Commission Project), 7.000% due 10/1/17(a) $ 2,202,500
2,000,000 A2* Braxton County, WV, Solid Waste Disposal Revenue,
(Weyerhaeuser Co. Project), 5.800% due 6/1/24(a) 2,092,500
Marion County, WV, Solid Waste Disposal Revenue,
American Power, Paper Recycling:
2,500,000 NR 7.750% due 12/1/11(a)(d) 1,400,000
5,000,000 NR 9.000% due 12/1/11(a)(d) 2,800,000
500,000 AAA West Virginia State Water Development Authority, Series A,
7.000% due 11/1/25 548,750
- --------------------------------------------------------------------------------------------------------------------------------
9,043,750
- --------------------------------------------------------------------------------------------------------------------------------
Wisconsin -- 0.2%
1,670,000 BBB Racine County, WI Health Center Revenue, 8.125% due 8/1/21 1,729,185
- --------------------------------------------------------------------------------------------------------------------------------
Wyoming -- 0.2%
1,250,000 Aa2* Wyoming Community Development Authority Housing Revenue,
7.100% due 6/1/17 1,371,876
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS AND NOTES
(Cost-- $729,399,837) 786,172,131
================================================================================================================================
SHORT-TERM INVESTMENTS(e) -- 1.4%
1,600,000 VMIG 1* Brazos River, TX PCR, MBIA-Insured, 3.650% due 2/1/32(a) 1,600,000
New York, NY GO:
1,500,000 VMIG 1* Subseries E5, 5.000% due 8/1/17 1,500,000
5,100,000 VMIG 1* Subseries A-7, 3.900% due 8/1/20 5,100,000
2,900,000 VMIG 1* Port Authority NY & NJ, Special Obligation Revenue,
Versatile Structure Obligation, Series 2, 5.100% due 5/1/19 2,900,000
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost-- $11,100,000) 11,100,000
================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $740,499,837**) $797,272,131
================================================================================================================================
</TABLE>
(a) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(b) Security segregated by custodian for open purchase committments.
(c) Residual interest bonds -- coupon varies inversely with level of
short-term tax-exempt interest rates.
(d) Security is in default.
(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 21 and 22 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
20 1998 Semi-Annual Report to Shareholders
<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
Service, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "AA" to "B" may be modified by the addition of
a plus (+) or minus (-) sign to show relative standings within the major rating
categories.
AAA -- Bonds rated "AAA"' have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ from the highest rated issue only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
bonds in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and re pay 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 in higher rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability to default than
other speculative issues. However, they face 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 -- Bonds 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.
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.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Short-Term Security 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 VMIG1 rating.
- --------------------------------------------------------------------------------
Security Descriptions
- --------------------------------------------------------------------------------
ABAG -- Association of Bay Area Governments
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
IFA -- Industrial Finance Authority
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
- --------------------------------------------------------------------------------
22 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $740,499,837) $ 797,272,131
Cash 67,387
Receivable for Fund shares sold 139,490
Interest receivable 10,673,332
Other assets 10,000
- ----------------------------------------------------------------------------
Total Assets 808,162,340
- ----------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 22,240,883
Dividends payable 3,327,501
Investment advisory fees payable 296,686
Administration fees payable 135,468
Distribution fees payable 79,721
Payable for Fund shares purchased 22,509
Accrued expenses 241,370
- ----------------------------------------------------------------------------
Total Liabilities 26,344,138
- ----------------------------------------------------------------------------
Total Net Assets $ 781,818,202
============================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 43,177
Capital paid in excess of par value 721,668,681
Overdistributed net investment income (554,801)
Accumulated net realized gain on security transactions 3,888,851
Net unrealized appreciation of investments 56,772,294
- ----------------------------------------------------------------------------
Total Net Assets $ 781,818,202
============================================================================
Shares Outstanding:
Class A 14,523,902
------------------------------------------------------------------------
Class B 28,604,920
------------------------------------------------------------------------
Class C 47,936
------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 18.10
------------------------------------------------------------------------
Class B* $ 18.11
------------------------------------------------------------------------
Class C** $ 18.09
------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.17% of net asset value per share) $ 18.85
============================================================================
* 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.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited) For the Six Months Ended January 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 24,271,377
- ----------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 1,937,038
Investment advisory fees (Note 3) 1,588,183
Administration fees (Note 3) 794,092
Shareholder and system servicing fees 145,476
Registration fees 38,724
Audit and legal 29,302
Shareholder communications 21,397
Custody 20,447
Pricing service fees 20,055
Trustees' fees 8,354
Other 8,130
- ----------------------------------------------------------------------------
Total Expenses 4,611,198
- ----------------------------------------------------------------------------
Net Investment Income 19,660,179
- ----------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE4):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 366,764,756
Cost of securities sold 357,989,486
- ----------------------------------------------------------------------------
Net Realized Gain 8,775,270
- ----------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 52,111,784
End of period 56,772,294
- ----------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 4,660,510
- ----------------------------------------------------------------------------
Net Gain on Investments 13,435,780
- ----------------------------------------------------------------------------
Increase in Net Assets From Operations $ 33,095,959
============================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
24 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1998 (unaudited)
and the Year Ended July 31, 1997
<TABLE>
<CAPTION>
1998 1997
=============================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 19,660,179 $ 43,944,658
Net realized gain 8,775,270 10,114,509
Increase in net unrealized appreciation of investments 4,660,510 26,295,426
- ---------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 33,095,959 80,354,593
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (Note 2):
Net investment income (20,210,833) (44,020,626)
Net realized gains (11,871,835) (146,695)
- ---------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (32,082,668) (44,167,321)
- ---------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 25,467,119 64,943,500
Net asset value of shares issued for reinvestment
of dividends 16,895,779 24,165,462
Cost of shares reacquired (78,116,866) (194,060,215)
- ---------------------------------------------------------------------------------------------
Decrease in Net Assets From Fund Share Transactions (35,753,968) (104,951,253)
- ---------------------------------------------------------------------------------------------
Decrease in Net Assets (34,740,677) (68,763,981)
NET ASSETS:
Beginning of period 816,558,879 885,322,860
- ---------------------------------------------------------------------------------------------
End of period* $ 781,818,202 $ 816,558,879
=============================================================================================
* Includes overdistributed net investment income of: $ (554,801) $ (4,147)
=============================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Municipal High Income Fund ("Fund"), formerly known as the
Smith Barney Tax-Exempt Income 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 this Fund and seven 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, Smith Barney
Utilities Fund and Smith Barney Total Return Bond Fund. The financial statements
and financial highlights for the other funds are presented in separate
semi-annual reports except for the Smith Barney Premium Total Return Fund which
will have a semi-annual report dated June 30, 1998.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities are valued
at the mean between the bid and asked price provided 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 value; (d) interest income, adjusted for amortization of premium
and accretion of original issue discount, is recorded on an accrual basis; (e)
gains or losses on the sale of securities are calculated by 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 character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accepted accounting principles. At July 31, 1997,
reclassifications were made to undistributed net investment income and
accumulated net realized gains to reflect book/tax differences and income and
gains available for distributions under income tax regulations. Net investment
income, net realized gains and net assets were not affected by this adjustment;
(i) 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 (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.
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.
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
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management Inc., a subsidiary of Salomon Smith Barney Holdings
- --------------------------------------------------------------------------------
26 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Inc. ("SSBH"), acts as investment adviser to the Fund. The Fund pays MMC 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.
MMC 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 SSBH, acts as distributor of
Trust shares. For the six months ended January 31, 1998, SB received sales
charges of approximately $26,000 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. For the six months ended
January 31, 1998, CDSCs paid to SB were approximately $144,000 for Class
B Shares.
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, 1998, total Distribution Plan fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $193,189 $1,741,016 $2,833
================================================================================
All officers and one Trustee of the Trust are employees of SB.
4. Investments
During the six months ended January 31, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $313,073,300
- --------------------------------------------------------------------------------
Sales 366,764,756
================================================================================
At January 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 60,241,082
Gross unrealized depreciation (3,468,788)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 56,772,294
================================================================================
5. Shares of Beneficial Interest
At January 31, 1998, 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, 1998, total paid-in capital amounted to the following for each
class:
Class A Class B Class C
================================================================================
Total Paid-in Capital $250,553,985 $470,321,839 $836,034
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 27
<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, 1998 July 31, 1997
---------------------- -------------------
Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 980,820 $ 17,631,798 2,790,664 $ 48,988,072
Shares issued on reinvestment 324,106 5,801,163 447,061 7,854,117
Shares redeemed (811,768) (14,628,623) (2,583,632) (45,394,525)
- -------------------------------------------------------------------------------------------------
Net Increase 493,158 $ 8,804,338 654,093 $ 11,447,664
=================================================================================================
Class B
Shares sold 426,915 $ 7,694,239 895,576 $ 15,762,835
Shares issued on reinvestment 618,402 11,071,526 926,744 16,286,642
Shares redeemed (3,524,794) (63,437,366) (8,446,167) (148,626,196)
- -------------------------------------------------------------------------------------------------
Net Decrease (2,479,477) $ (44,671,601) (6,623,847) $(116,576,719)
=================================================================================================
Class C
Shares sold 7,834 $ 141,082 10,961 $ 192,593
Shares issued on reinvestment 1,291 23,090 1,406 24,703
Shares redeemed (2,825) (50,877) (2,269) (39,494)
- -------------------------------------------------------------------------------------------------
Net Increase 6,300 $ 113,295 10,098 $ 177,802
=================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
28 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996 1995 1994 1993(2)
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.07 $ 17.31 $ 17.25 $ 17.26 $ 18.24 $ 17.45
- ---------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.48 0.97 1.00 1.04 1.06 0.78
Net realized and unrealized gain (loss) 0.31 0.77 0.06 0.01* (0.85) 1.00
- ---------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.79 1.74 1.06 1.05 0.21 1.78
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.49) (0.98) (1.00) (1.00) (1.06) (0.83)
Net realized gains (0.27) -- -- (0.02) (0.13) (0.16)
Capital -- -- -- (0.04) -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.76) (0.98) (1.00) (1.06) (1.19) (0.99)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 18.10 $ 18.07 $ 17.31 $ 17.25 $ 17.26 $ 18.24
- ---------------------------------------------------------------------------------------------------------------------
Total Return 4.51%++ 10.40% 6.28% 6.42% 1.14% 10.24%++
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $ 263 $ 254 $ 232 $ 238 $ 18 $ 14
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.83%+ 0.83% 0.84% 0.84% 0.84% 0.86%+
Net investment income 5.29+ 5.52 5.74 6.04 5.83 6.03+
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 39% 51% 44% 38% 39% 34%
=====================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
(2) For the period from November 6, 1992 (inception date) to July 31, 1993.
* Includes the 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.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 29
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1998(1) 1997 1996 1995 1994 1993
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 18.09 $ 17.32 $ 17.26 $ 17.26 $ 18.24 $ 18.00
- ---------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.44 0.89 0.92 0.95 0.96 0.98
Net realized and unrealized gain (loss) 0.30 0.77 0.06 0.02* (0.85) 0.45
- ---------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.74 1.66 0.98 0.97 0.11 1.43
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.45) (0.89) (0.92) (0.91) (0.96) (1.02)
Net realized gains (0.27) -- -- (0.02) (0.13) (0.17)
Capital -- -- -- (0.04) -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.72) (0.89) (0.92) (0.97) (1.09) (1.19)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 18.11 $ 18.09 $ 17.32 $ 17.26 $ 17.26 $ 18.24
- ---------------------------------------------------------------------------------------------------------------------
Total Return 4.19%++ 9.89% 5.74% 5.91% 0.60% 8.28%
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $ 518 $ 562 $ 653 $ 737 $ 1,069 $ 1,108
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.32%+ 1.32% 1.33% 1.35% 1.33% 1.38%
Net investment income 4.79+ 5.04 5.23 5.61 5.34 5.52
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 39% 51% 44% 38% 39% 34%
=====================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1998 (unaudited).
* Includes the 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.
- --------------------------------------------------------------------------------
30 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
Class C Shares 1998(1) 1997 1996 1995(2)
================================================================================
Net Asset Value, Beginning of Period 18.07 $ 17.31 $ 17.25 $ 15.83
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.42 0.88 0.89 0.60
Net realized and unrealized gain 0.31 0.77 0.08 1.50*
- --------------------------------------------------------------------------------
Total Income From Operations 0.73 1.65 0.97 2.10
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.44) (0.89) (0.91) (0.62)
Net realized gains (0.27) -- -- (0.02)
Capital -- -- -- (0.04)
- --------------------------------------------------------------------------------
Total Distributions (0.71) (0.89) (0.91) (0.68)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 18.09 $ 18.07 $ 17.31 $ 17.25
- --------------------------------------------------------------------------------
Total Return 4.17%++ 9.79% 5.69% 13.45%++
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 867 $ 752 $ 546 $ 211
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.42%+ 1.40% 1.39% 1.18%+
Net investment income 4.69+ 4.94 5.18 5.56+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 39% 51% 44% 38%
================================================================================
(1) For the six months ended January 31, 1998 (unaudited).
(2) For the period from November 17, 1994 (inception date) to July 31, 1995.
* Includes the 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.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 31
<PAGE>
Smith Barney
Municipal High
Income Fund
Trustees
Lee Abraham
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
President and Chief Executive Officer
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
Mutual Management Corp.
Distributor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Municipal High Income Fund. It is not for distribution to
prospective investors unless accompanied 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
A Member of TravelersGroup[LOGO]
Smith Barney Municipal
High Income Fund
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD2170 3/98
