<PAGE>
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[GRAPHIC]
Smith Barney
Premium Total
Return Fund
[GRAPHIC]
-------------
ANNUAL REPORT
-------------
December 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(sm)
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<PAGE>
Smith Barney
Premium Total Return Fund
================================================================================
The Smith Barney Premium Total Return Fund ("Fund") seeks total return
consisting of long-term capital appreciation and income by investing primarily
in a diversified portfolio of dividend-paying common stocks.
Smith Barney Premium Total Return Fund's Average Annual Total Returns Ended
December 31, 1997
<TABLE>
<CAPTION>
Without Sales Charges*
------------------------------------------------
Class A Class B Class C
===============================================================================
<S> <C> <C> <C>
One-Year 25.19% 24.55% 24.60%
- -------------------------------------------------------------------------------
Five-Year 16.41 15.83 N/A
- -------------------------------------------------------------------------------
Ten-Year N/A 16.38 N/A
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Since Inception++ 16.66 14.27 16.52
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<CAPTION>
With Sales Charges**
----------------------------------------------
Class A Class B Class C
===============================================================================
<S> <C> <C> <C>
One-Year 18.91% 19.55% 23.60%
- -------------------------------------------------------------------------------
Five-Year 15.22 15.72 N/A
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Ten-Year N/A 16.38 N/A
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Since Inception++ 15.50 14.27 16.52
===============================================================================
</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 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
16, 1985 and June 1, 1993, respectively.
================================================================================
FUND HIGHLIGHT
================================================================================
Portfolio activity in the Fund was robust during the period under review. We
continue to follow a disciplined value investment approach that focuses on
buying companies with low valuations, sound business fundamentals and favorable
business momentum. This approach continues to generate new investment ideas.
================================================================================
NASDAQ SYMBOL
================================================================================
Class A SOPAX
Class B SOPTX
Class C SPTCX
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WHAT'S INSIDE
================================================================================
Shareholder Letter ........................................................ 1
Distributions ............................................................. 4
Historical Performance .................................................... 5
Smith Barney Premium Total Return Fund
at a Glance ............................................................... 7
Schedule of Investments ................................................... 8
Statement of Assets and Liabilities ....................................... 14
Statement of Operations ................................................... 15
Statements of Changes in Net Assets ....................................... 16
Notes to Financial Statements ............................................. 17
Financial Highlights ...................................................... 22
Independent Auditors' Report .............................................. 26
Tax Information ........................................................... 27
<PAGE>
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Shareholder Letter
================================================================================
[PHOTO] [PHOTO]
HEATH B. HARRY J.
MCLENDON ROSENBLUTH
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to present the annual report for the Smith Barney Premium Total
Return Fund ("Fund") for the year ended December 31, 1997. In this report we
discuss stock market conditions and review our investment strategy during the
reporting period. A more detailed summary of performance and current holdings
can be found in the appropriate sections that follow.
Performance Overview
For the year ended December 31, 1997, the Fund had a total return of 25.19% for
Class A shares without sales charges. During this time the U.S. stock market, as
measured by the Standard & Poor's 500 Composite Stock Index ("S&P 500 Index"),
had a total return of 33.35%. In addition, the Fund paid income dividends that
totalled $0.38 and distributed capital gains of $1.25 per Class A share over the
same time period. Additional performance information regarding the Fund's other
share classes can be found on page five. Morningstar, Inc. assigned the Fund a
four-star* rating for its risk-adjusted performance among 3,821 stock funds as
of December 31, 1997.
The Fund invests primarily in dividend-paying common stocks and employs an
investment strategy that may cause it to underperform in a rising market.
However, the Fund should experience smaller losses when the stock market
declines. One of the key elements of the Fund's investment strategy involves the
use of S&P 500 Index call options that should help to reduce the volatility of
the Fund's net asset value ("NAV").
Market Overview and Outlook
With the S&P 500 Index rising more than 125% over the last three years, our
concerns regarding the valuation level of the stock market and the
sustainability and quality of future corporate earnings growth have never been
greater. We have therefore maintained a defensive posture in the Fund throughout
1997. S&P 500 Index call options were sold to reduce market exposure and to take
advantage of higher stock price volatility. In addition, cash reserve levels in
the Fund averaged about 11% in 1997.
The defensive positioning of the Fund had a negative impact and hurt its
relative performance versus the S&P 500 Index in 1997. As you may know, advances
in the S&P 500 Index were driven primarily by the market's largest companies.
Large-capitalization stocks outperformed small- and mid-capitalization stocks by
a wide margin in 1997. The Russell 2000 Index (an index made up of 2,000
smaller-capitalized U.S.-based companies whose common stocks trade on either the
New York, American or NASDAQ stock exchanges) returned 22.36% for the year. The
average stock mutual fund has a much larger allocation of assets in small- and
mid-capitalization stocks then does a large capitalization stock market index
such as the S&P 500 Index. This holds true for the Smith Barney Premium Total
Return Fund as well. (The average weighted
- ----------
* Morningstar's proprietary ratings reflect historical, risk-adjusted
performance. Ratings are subject to change monthly and are calculated from
the Fund's three-, five- and ten-year average annual returns in excess of
90-day Treasury bill returns with appropriate fee and sales charge
adjustments, and a risk factor that reflects Fund performance below 90-day
T-bill returns. Different classes within a fund share a common portfolio of
securities. In an investment category, the top 10% of funds receive five
stars and the next 22.5% receive four stars. The Fund received a four-star
rating for the three- and five- year periods among 262 and 159 funds,
respectively. Star ratings for individual classes may vary. Past
performance is no guarantee of future results.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 1
<PAGE>
market capitalization of the Fund as of December 31, 1997 was roughly $19.7
billion versus the S&P 500 average weighted market capitalization of more than
$50 billion. Market capitalization is the value of a company's outstanding
shares of common stock calculated by multiplying the number of shares
outstanding by the share price.) While our selection of stocks in the Fund
remained strong in 1997, the invested position of the portfolio, coupled with
its lower market capitalization, are the main reasons why the Fund had a
performance shortfall relative to the S&P 500 during 1997.
Portfolio activity in the Fund was robust during the period under review. We
continue to follow a disciplined value investment approach that focuses on
buying companies with low valuations, sound business fundamentals and favorable
business momentum. This approach continues to generate new investment ideas.
There were only four changes made in the Fund's ten-largest holdings during the
reporting period. We began the year with an international flavor in the
portfolio's largest holdings, as three of the Fund's top-ten largest positions
were foreign stocks held in American Depository Receipt ("ADR") form. (An
American Depository Receipt is a certificate that trades on a U.S. stock market
but represents a non-U.S. stock.) These stocks were Alcatel Alshom, Inc.
(France's second largest company engaged in varied businesses including
telecommunications, energy, nuclear power and transportation, which remained a
0.9% portfolio position as of December 31, 1997); Telefonica de Espana S.A.
(Spanish national telecommunications and cable television service provider. This
remained a 0.5% holding as of December 31, 1997); and Repsol, S.A.
At the end of the year, the Fund's top-ten list counted Ace Ltd. (a
Bermuda-based reinsurance company) as its only foreign holding. In addition, the
Fund was extremely well diversified and owned some 150 securities, representing
a wide range of companies and industries. During the reporting period, we
emphasized tobacco, insurance, pharmaceutical and retail stocks. The Fund was
underweighted in technology, basic industries and capital goods stocks in 1997.
Investment Strategy
The Fund's main investment objective is to provide investors with long-term
total return by investing primarily in dividend-paying stocks. Our goal is to
give people exposure to the stock market -- a market that has historically
produced the highest returns relative to other investment classes -- with less
risk to principal than if they had invested in the stock market on their own. We
believe the best way to accumulate and build wealth is to compound absolute
returns.
We are "bottom up" investors who take a total return approach to investing. We
look for undervalued stocks and select them one at a time because of each
stock's characteristics. In our view the best way to find these undervalued
stocks is through a bottom-up approach combining qualitative and quantitative
techniques. Our starting point is always individual stocks, never "big picture"
economic forecasting.
The stock selection process for the Smith Barney Premium Total Return Fund
remained unchanged during the reporting period. The ideal candidate for
inclusion in the portfolio would possess three broadly defined characteristics:
1. Inexpensive valuation (e.g., low price/earnings ratio, price-to-book
ratio, price to net asset value)
2. Sound long-term business fundamentals (e.g., high operating returns
relative to invested capital, balance sheet strength, a strong
competitive position)
3. Positive near-term business momentum (e.g., improving business trends)
First of all, the Fund's portfolio exhibits excellent value characteristics --
the price paid for a stock is always the primary consideration. In addition, the
portfolio's companies display strong business fundamentals and have better than
average business momentum.
- --------------------------------------------------------------------------------
2 1997 Annual Report to Shareholders
<PAGE>
Our risk management strategies involve several different aspects. Historically,
dividend-paying stocks have proven less volatile than the overall stock market.
Beyond that, careful stock selection should help to further reduce risk. We
periodically use options, primarily S&P 500 Index calls, as part of our hedging
strategy to minimize volatility. (An option is the right to buy or sell a
security that is granted in exchange for an agreed upon sum.) We adjust the
Fund's overall hedge exposure based on our analysis of current market
conditions.
The Fund's option program is designed to help reduce portfolio volatility. We
never engage in random options writing. Investors in the Fund want exposure to
stocks but are typically uncomfortable with volatility. We believe our job is to
manage a fully diversified portfolio that seeks to control risk and maximize
investment returns over the long run.
With respect to risk control and compounding absolute returns over time, we
believe that what you do not own is often more important than what you do own.
If we do our job correctly, we avoid owning two kinds of stocks: 1) those of
very good companies that are overpriced; and 2) statistically inexpensive stocks
that either have very poor long-term business prospects or poor near-term
business momentum. Given our value orientation, it's usually easy for us to
avoid owning the first kind of company. Our extensive fundamental research and
investment discipline normally keep us from owning the second type of company.
We view the Fund as ideal for investors who realize they need to be in stocks
because of their long-term capital appreciation potential but do not have a
strong tolerance for market volatility. Moreover, as noted, because we
periodically use options in an attempt to reduce the Fund's volatility over
time, the Fund tends to be less risky than the average stock fund.
In light of greater stock market volatility and higher investor uncertainty of
late, we believe that diversification is one of the keys to control risk. We
think the Smith Barney Premium Total Return Fund is well positioned for the
market conditions we expect in the coming year.
Thank you for your investment in the Smith Barney Premium Total Return Fund. We
look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Harry J. Rosenbluth
Heath B. McLendon Harry J. Rosenbluth
Chairman Vice President and
Investment Officer
January 30, 1998
<TABLE>
<CAPTION>
================================================================================
Top Ten Holdings* As of December 31, 1997
================================================================================
<S> <C>
1. Loews Corp. 5.9%
- --------------------------------------------------------------------------------
2. Student Loan Marketing Association 5.5
- --------------------------------------------------------------------------------
3. Lehman Brothers Holdings, Inc. 3.7
- --------------------------------------------------------------------------------
4. Bristol-Myers Squibb & Co. 3.6
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5. MCI Communications Corp. 3.5
- --------------------------------------------------------------------------------
6. Philip Morris Cos., Inc. 3.2
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7. Republic of New York Corp. 2.5
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8. Long Island Lighting Co. 2.2
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9. Morgan Stanley, Dean Witter Discover & Co. 2.0
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10. Ace Ltd. 2.0
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</TABLE>
* As a percentage of total common stock.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 3
<PAGE>
Smith Barney Premium Total
Return Fund Distributions
Smith Barney Premium Total Return Fund's distribution practice has been to
provide an attractive level of monthly distributions. As in the past, during
1997 the Fund paid out approximately $0.10 per share each month. This practice
takes into account the long-term total return potential of the Fund's investment
in equities. Over time the Fund has been able to distribute income as well as
provide its shareholders with moderate growth of principal. Smith Barney Premium
Total Return Fund meets its distribution objective by paying out to shareholders
substantially all dividends, interest and net capital gains earned over the
course of the year. In certain years, the Fund's distributions may also
supplement this income with a return of capital to maintain the fixed payout.
Each year, shareholders of the Fund receive a 1099 federal tax form indicating
the amount of the distributions that represented ordinary income (dividends,
interest and short-term capital gains), long-term capital gains and return of
capital. The Fund's Board of Trustees monitors and evaluates the distribution
practice to ensure that its continuation remains in the best interest of
shareholders.
- --------------------------------------------------------------------------------
4 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Historical Performance -- Class A Shares
===================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/97 $19.14 $22.19 $0.38 $1.25 $0.00 25.19%
- -----------------------------------------------------------------------------------------------------------------------------------
12/31/96++ 17.40 19.14 0.16 0.47 0.00 13.80+
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/96 16.33 17.40 0.37 0.91 0.00 14.76
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/95 15.69 16.33 0.43 0.14 0.71 12.92
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/94 15.65 15.69 0.55 0.52 0.21 8.65
- -----------------------------------------------------------------------------------------------------------------------------------
Inception*-- 7/31/93 15.15 15.65 0.20 0.49 0.33 10.31+
===================================================================================================================================
Total $2.09 $3.78 $1.25
===================================================================================================================================
<CAPTION>
===================================================================================================================================
Historical Performance -- Class B Shares
===================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/97 $19.14 $22.17 $0.29 $1.25 $0.00 24.55%
- -----------------------------------------------------------------------------------------------------------------------------------
12/31/96++ 17.40 19.14 0.12 0.47 0.00 13.57+
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/96 16.33 17.40 0.29 0.91 0.00 14.21
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/95 15.69 16.33 0.34 0.14 0.72 12.36
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/94 15.65 15.69 0.49 0.52 0.20 8.12
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/93 15.21 15.65 0.19 0.63 0.44 11.68
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/92 14.26 15.21 0.22 0.00 0.98 15.68
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/91 13.30 14.26 0.24 0.00 0.96 17.53
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/90 13.98 13.30 0.22 0.00 1.06 4.62
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/89 12.90 13.98 0.89 0.26 0.33 21.49
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/88 14.47 12.90 0.18 1.28 0.00 0.21
===================================================================================================================================
Total $3.47 $5.46 $4.69
===================================================================================================================================
<CAPTION>
===================================================================================================================================
Historical Performance -- Class C Shares
===================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/97 $19.15 $22.18 $0.30 $1.25 $0.00 24.60%
- -----------------------------------------------------------------------------------------------------------------------------------
12/31/96++ 17.41 19.15 0.12 0.47 0.00 13.58+
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/96 16.33 17.41 0.29 0.91 0.00 14.30
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/95 15.69 16.33 0.35 0.14 0.71 12.36
- -----------------------------------------------------------------------------------------------------------------------------------
7/31/94 15.65 15.69 0.49 0.52 0.20 8.12
- -----------------------------------------------------------------------------------------------------------------------------------
Inception*-- 7/31/93 15.45 15.65 0.04 0.09 0.07 2.60+
===================================================================================================================================
Total $1.59 $3.38 $0.98
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 5
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
Historical Performance -- Class Y Shares
===================================================================================================================================
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/97 $19.17 $22.24 $0.44 $1.25 $0.00 25.61%
- -----------------------------------------------------------------------------------------------------------------------------------
12/31/96++ 17.42 19.17 0.18 0.47 0.00 13.95+
- -----------------------------------------------------------------------------------------------------------------------------------
Inception*-- 7/31/96 17.57 17.42 0.21 0.46 0.00 2.93+
===================================================================================================================================
Total $0.83 $2.18 $0.00
===================================================================================================================================
</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
===================================================================================================================================
<S> <C> <C> <C> <C>
Year Ended 12/31/97 25.19% 24.55% 24.60% 25.61%
- -----------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/97 16.41 15.83 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/97 N/A 16.38 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/97 16.66 14.27 16.52 22.64
===================================================================================================================================
<CAPTION>
With Sales Charge(2)
--------------------------------------------------------------
Class A Class B Class C Class Y
===================================================================================================================================
<S> <C> <C> <C> <C>
Year Ended 12/31/97 18.91% 19.55% 23.60% 25.61%
- -----------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/97 15.22 15.72 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/97 N/A 16.38 N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/97 15.50 14.27 16.52 22.64
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
===================================================================================================================================
Cumulative Total Return
===================================================================================================================================
Without Sales Charge(1)
===================================================================================================================================
<S> <C>
Class A (Inception* through 12/31/97) 121.25%
- -----------------------------------------------------------------------------------------------------------------------------------
Class B (12/31/87 through 12/31/97) 355.77
- -----------------------------------------------------------------------------------------------------------------------------------
Class C (Inception* through 12/31/97) 101.64
- -----------------------------------------------------------------------------------------------------------------------------------
Class Y (Inception* through 12/31/97) 47.33
===================================================================================================================================
</TABLE>
(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 ("CDSC") 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 5.00% and Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed within one
year from initial purchase and declines thereafter by 1.00% per year until
no CDSC occurs. Class C shares reflect the deduction of a 1.00% CDSC, which
applies if shares are redeemed within the first year of purchase.
++ For the period from August 1, 1996 to December 31, 1996, which reflects a
change in the fiscal year end of the Fund.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B, C and Y shares are November 6, 1992,
September 16, 1985, June 1, 1993 and February 7, 1996, respectively.
- --------------------------------------------------------------------------------
6 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Smith Barney Premium Total Return Fund at a Glance (unaudited)
================================================================================
Growth of $10,000 Invested in Class B Shares of the Smith Barney Premium Total
Return Fund vs. Standard &Poor's 500 Index+
- --------------------------------------------------------------------------------
December 1987--December 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Premium Total
Return Portfolio S&P 500
---------------- -------
<S> <C> <C>
12/87 $10,000 $10,000
12/88 $12,075 $11,657
12/89 $14,458 $15,344
12/90 $14,861 $14,867
12/91 $19,310 $19,388
12/92 $21,855 $20,864
12/93 $24,300 $22,961
12/94 $25,010 $23,263
12/95 $30,471 $31,995
12/96 $36,593 $36,879
12/97 $45,577 $49,181
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1987, assuming reinvestment of dividends and capital gains, if any, at
net asset value through December 31, 1997, compared to the Standard &
Poor's 500 Index. The index is composed of 500 widely held common stocks
listed on the New York Stock Exchange, American Stock Exchange and
over-the-counter market. 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.
Industry Diversification of Common Stock*
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A BAR GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Banking and Financial Services 15.1%
Capital Goods 3.6%
Consumer Non-durables 15.5%
Consumer Services 14.3%
Energy 9.7%
Health Care 8.8%
Insurance 10.4%
Miscellaneous 1.8%
Real Estate 3.3%
Steel Producers 1.6%
Transportation 1.4%
Utilities 14.5%
</TABLE>
Investment Breakdown
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED AS A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Preferred Stock 3.0%
Corporate Bonds 1.6%
Convertible Bonds 0.1%
Investment Breakdown Pie Chart
Repurchase Agreements 10.7%
Common Stocks 84.6%
</TABLE>
* As a percentage of total common stock.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 7
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
Schedule of Investments December 31, 1997
==================================================================================================================================
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
COMMON STOCK -- 84.6%
Banking and Financial Services -- 12.8%
100,000 Cal Fed BanCorp Inc.+ $ 2,850,000
176,800 FBR Asset Investment 3,536,000
571,600 Federal Home Loan Mortgage Corp. 23,971,475
143,700 JSB Financial Inc. 7,193,981
2,566,300 Lehman Brothers Holdings, Inc.# 130,881,300
990,800 Local Financial+ 11,518,050
1,200,000 Morgan Stanley, Dean Witter Discover & Co. 70,950,000
766,900 Republic of New York Corp.# 87,570,394
1,382,500 Student Loan Marketing Association 192,340,313
- ----------------------------------------------------------------------------------------------------------------------------------
530,811,513
- ----------------------------------------------------------------------------------------------------------------------------------
Capital Goods -- 3.0%
1,528,900 Alcatel Alsthom CGE -- Sponsored ADR++ 38,700,281
500,000 Allegheny Teledyne Inc. 12,937,500
697,400 Fluor Corp. 26,065,325
245,938 Lockheed Martin Corp.++ 24,224,893
258,100 Lubrizol Corp. 9,517,438
291,500 Raytheon Co.++ 14,720,750
- ----------------------------------------------------------------------------------------------------------------------------------
126,166,187
- ----------------------------------------------------------------------------------------------------------------------------------
Consumer Durables -- 0.6%
140,000 Borg-Warner Automotive Inc.++ 7,280,000
689,510 Volvo Aktie Bolget, Sponsored ADR 18,616,770
- ----------------------------------------------------------------------------------------------------------------------------------
25,896,770
- ----------------------------------------------------------------------------------------------------------------------------------
Consumer Non-Durables -- 13.1%
420,000 Alberto-Culver Co., Class A Shares 11,340,000
900,000 B.A.T. Industries PLC -- Sponsored ADR++ 16,875,000
750,000 Fortune Brands, Inc. 27,796,875
275,000 Gallaher Group PLC ADR 5,878,125
904,500 Harcourt General, Inc.++ 49,521,375
1,968,400 Loews Corp.# 208,896,450
658,600 Nestle S.A., Sponsored ADR 49,148,025
18,260 Nestle S.A., Sponsored ADR@ 1,374,065
394,300 Premark International, Inc. 11,434,700
2,471,100 Philip Morris Cos., Inc.# 111,971,719
1,150,000 RJR Nabisco Holdings Corp. 43,125,000
273,700 UST, Inc. 10,109,794
- ----------------------------------------------------------------------------------------------------------------------------------
547,471,128
- ----------------------------------------------------------------------------------------------------------------------------------
Consumer Services -- 12.1%
308,900 Bowne & Co., Inc.++ 12,317,387
606,700 Deluxe Corp. 20,931,150
1,189,100 Dun & Bradstreet Corp. 36,787,781
950,000 Electronic Data Systems Corp. 41,740,625
1,148,600 H & R Block Inc.++ 51,471,638
1,107,250 Hasbro Inc.++ 34,878,375
675,000 J.C. Penney Co., Inc.++ 40,710,937
949,378 Limited Inc.++ 24,209,139
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
Schedule of Investments (continued) December 31, 1997
==================================================================================================================================
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Consumer Services -- 12.1% (continued)
268,312 Luby's Cafeterias Inc. $ 4,712,229
885,000 McDonald's Corp. 42,258,750
570,300 Mercantile Stores Co., Inc.++ 34,717,012
500,000 Moore Corp., Ltd.++ 7,562,500
250,000 Pittston Burlington Group Inc. 10,062,500
221,500 Sbarro Inc. 5,828,219
1,775,000 Toys "R" Us Inc.+++ 55,801,563
1,000,000 Viad Corp. 19,312,500
400,000 Wal-Mart Stores, Inc.++ 15,775,000
2,147,500 Woolworth Corp.+ 43,755,313
- ----------------------------------------------------------------------------------------------------------------------------------
502,832,618
- ----------------------------------------------------------------------------------------------------------------------------------
Diamonds/Precious Stones -- 0.3%
598,000 De Beers Cons Mines ADR++ 12,221,625
- ----------------------------------------------------------------------------------------------------------------------------------
Energy -- 8.2%
283,502 British Petroleum PLC ADR++ 22,591,565
1,049,653 EEX Corp. 9,512,480
600,000 Elf Aquitaine -- Sponsored ADR++ 35,175,000
200,000 Eni SPA -- Sponsored ADR++ 11,412,500
480,200 Mobil Oil Corp.++# 34,664,438
1,242,800 Repsol S.A., Sponsored ADR++ 52,896,675
840,000 Sun Co., Inc. 35,332,500
400,000 Texaco Inc.++ 21,750,000
1,144,300 Tosco Corp.++ 43,268,844
450,000 Total S.A. -- Sponsored ADR++ 24,975,000
964,448 Ultramar Diamond Shamrock CP++ 30,741,780
925,000 Union Texas Petroleum Holdings, Inc. 19,251,562
- ----------------------------------------------------------------------------------------------------------------------------------
341,572,344
- ----------------------------------------------------------------------------------------------------------------------------------
Gold Mining -- 0.1%
650,000 Homestake Mining Co.++ 5,768,750
- ----------------------------------------------------------------------------------------------------------------------------------
Healthcare -- 7.5%
253,700 Abbott Labs, Inc. 16,633,206
2,425,600 Astra AB, Class A Shares ADR 41,690,000
1,349,000 Bristol-Myers Squibb & Co. 127,649,125
766,900 Columbia/HCA Healthcare Corp. 22,719,413
430,000 Merck & Co., Inc. 45,687,500
333,000 Pharmacia & Upjohn Inc. 12,196,125
705,600 Schering-Plough Corp. 43,835,400
- ----------------------------------------------------------------------------------------------------------------------------------
310,410,769
- ----------------------------------------------------------------------------------------------------------------------------------
Insurance -- 8.8%
731,300 Ace Ltd. 70,570,450
1,145,668 Allmerica Financial Corp. 57,211,796
299,750 Allstate Corp. 27,239,781
525,675 Aon Corp. 30,817,697
319,000 Everest Reinsurance Holdings 13,158,750
581,600 Exel Ltd. 36,858,900
215,000 Financial Security Assurance Holdings Inc.++ 10,373,750
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 9
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
Schedule of Investments (continued) December 31, 1997
==================================================================================================================================
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Insurance -- 8.8% (continued)
22,300 General Re Corp.++ $ 4,727,600
201,200 Horace Mann Educators Co. 5,721,625
349,200 IPC Holdings Ltd. 11,239,875
453,300 Mid Ocean Ltd. 24,591,525
251,600 Partnerre Ltd. 11,667,950
335,000 Terra Nova Holdings Ltd. (Bermuda) 8,793,750
603,500 TIG Holdings Inc. 20,028,656
334,800 Transatlantic Holdings Inc.++ 23,938,200
348,100 Western National Corp. 10,312,463
- ----------------------------------------------------------------------------------------------------------------------------------
367,252,768
- ----------------------------------------------------------------------------------------------------------------------------------
Miscellaneous -- 0.4%
1,300,000 Agrium, Inc. 15,843,750
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate -- 2.8%
200,000 Ambassador Apartments Inc. 4,112,500
250,000 American General Hospitality 6,687,500
89,200 Associated Estates Realty Corp. 2,112,925
120,700 Avalon Properties Inc. 3,734,156
142,433 Camden Property Trust 4,415,423
480,000 Captec Net Lease Realty, Inc.++ 8,250,000
154,800 Charles E. Smith Residential Realty, Inc. 5,495,400
328,800 Equity Inns Inc. 4,849,800
286,300 Mid-America Apartment Communities 8,177,443
400,000 Prime Retail Inc. 5,675,000
304,900 RFS Hotels Investment Inc. 6,078,944
291,800 Storage Trust Realty 7,677,987
160,000 Summit Properties Inc. 3,380,000
1,466,200 TrizecHahn Corp. 33,997,512
400,000 Walden Residential Properties Inc.# 11,800,000
62,650 Wellsford Real Properties Inc.+ 978,906
- ----------------------------------------------------------------------------------------------------------------------------------
117,423,496
- ----------------------------------------------------------------------------------------------------------------------------------
Steel Producers -- 1.4%
2,615,700 British Steel PLC -- Sponsored ADR++ 56,074,069
- ----------------------------------------------------------------------------------------------------------------------------------
Technology -- 0.1%
70,100 NCR Corp.+ 1,949,656
- ----------------------------------------------------------------------------------------------------------------------------------
Transportation -- 1.2%
1,670,900 Canadian Pacific Ltd.++ 45,532,025
94,400 Stolt Nielson S.A. 2,000,100
127,400 Stolt Nielson S.A. ADR++ 2,786,875
- ----------------------------------------------------------------------------------------------------------------------------------
50,319,000
- ----------------------------------------------------------------------------------------------------------------------------------
Utilities -- 12.2%
835,500 CMS Energy Corp.# 36,814,219
300,000 Columbia Gas System Inc. 23,568,750
1,564,700 Entergy Corp.++ 46,843,206
1,268,557 FirstEnergy Corp. 36,788,153
1,464,600 Illinova Corp. 39,452,662
2,556,400 Long Island Lighting Co.++ 77,011,550
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
Schedule of Investments (continued) December 31, 1997
==================================================================================================================================
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Utilities -- 12.2% (continued)
2,847,000 MCI Communications Corp. $ 121,887,188
539,300 Pinnacle West Capital Corp. 22,852,838
572,300 Public Service New Mexico 13,556,356
1,400,000 Tele Danmark A/S -- Sponsored ADR++ 43,137,500
213,900 Telefonica Espana S.A. ADR++ 19,478,269
192,300 Telephone and Data Systems, Inc. 8,953,969
630,100 Unicom Corp. 19,375,575
- ----------------------------------------------------------------------------------------------------------------------------------
509,720,235
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $2,411,234,281) 3,521,734,678
==================================================================================================================================
PREFERRED STOCK -- 3.1%
Banking and Financial Services -- 2.4%
100,000 Allstate Corp., Exchangeable 6.765%# 6,000,000
4,500 BankUnited Capital Trust, 10.250% due 12/31/26 4,635,000
80,000 Criimi Mae Inc., Series B, Exchangeable 10.875%# 2,735,000
760,000 Golden State Bancorp, Exchangeable 8.750% 69,255,000
304,767 Riggs National Corp., Washington, D.C., Series B,
Exchangeable 10.750%# 8,609,668
250,000 Salomon Inc., Exchangeable 7.625%# 10,250,000
- ----------------------------------------------------------------------------------------------------------------------------------
101,484,668
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate -- 0.7%
160,000 Crown American Realty Trust, Series A, Exchangeable 11.000%@ 8,360,000
200,000 First Washington Realty Inc., Series A, Exchangeable 9.750% @ 6,575,000
243,000 Prime Retail Inc., Series A, Exchangeable 10.500%# 6,561,000
77,700 Security Capital Pacific Trust# 2,544,675
200,000 Walden Residential Properties Inc., Series B, Exchangeable 9.160%# 5,125,000
- ----------------------------------------------------------------------------------------------------------------------------------
29,165,675
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost-- $69,388,212) 130,650,343
==================================================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
CORPORATE BONDS -- 1.5%
Banking and Financial Services -- 0.3%
$ 4,000,000 Hawthorne Financial Corp., 12.500% due 12/31/04 4,000,000
2,000,000 Mego Mortgage, 12.500% due 12/1/01 1,670,000
2,000,000 Mego Mortgage, 12.500% due 12/1/01++@ 1,670,000
3,000,000 Wilshire Financial Services, 13.000% due 1/1/04 3,112,500
- ----------------------------------------------------------------------------------------------------------------------------------
10,452,500
- ----------------------------------------------------------------------------------------------------------------------------------
Food Retail -- 0.5%
11,300,000 P&C Food Markets, 11.500% due 10/15/01 10,551,375
11,860,000 Penn Traffic Co., 8.625% due 12/15/03 10,155,125
- ----------------------------------------------------------------------------------------------------------------------------------
20,706,500
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 11
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
Schedule of Investments (continued) December 31, 1997
==================================================================================================================================
FACE
AMOUNT SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Gas Transmission -- 0.1%
Columbia Gas Systems Inc., Debentures:
$ 774,000 6.390% due 11/28/00 $ 778,838
771,000 6.610% due 11/28/02 783,529
771,000 6.800% due 11/28/05 790,275
771,000 7.050% due 11/28/07 789,311
771,000 7.320% due 11/28/10 795,094
771,000 7.420% due 11/28/15 811,477
771,000 7.620% due 11/28/25 806,659
- ----------------------------------------------------------------------------------------------------------------------------------
5,555,183
- ----------------------------------------------------------------------------------------------------------------------------------
Industrial -- 0.6%
5,635,000 Comcast Corp., 9.375% due 5/15/05 6,029,450
4,915,000 Paging Network, 8.875% due 2/1/06 4,816,700
3,000,000 Riveria Holdings Corp., First Mortgage, 11.000% due 12/31/02 3,067,500
6,000,000 Rogers Cable Systems Inc., 10.000% due 3/15/05 6,645,000
6,000,000 Tenet Healthcare Corp., 10.125% due 3/1/05 6,555,000
- ----------------------------------------------------------------------------------------------------------------------------------
27,113,650
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost-- $61,785,764) 63,827,833
==================================================================================================================================
CONVERTIBLE BONDS -- 0.1%
2,500,000 Ashanti Capital, 5.500% due 3/15/03++ 1,868,750
1,500,000 Pacific Concord Financial, 4.750% due 12/10/98@ 1,365,000
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost-- $4,000,000) 3,233,750
==================================================================================================================================
<CAPTION>
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
WARRANTS -- 0.0%
5,509 Security Cap Group, Expire 9/18/98 (Cost-- $34,668) 28,922
==================================================================================================================================
SUB-TOTAL INVESTMENTS
(Cost-- $2,546,442,925) 3,719,475,526
==================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================================
Schedule of Investments (continued) December 31, 1997
==================================================================================================================================
FACE
AMOUNT SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
REPURCHASE AGREEMENTS -- 10.7%
$ 25,000,000 Chase Manhattan Bank, 5.897% due 1/2/98;
Proceeds at maturity-- $25,008,190; (Fully collateralized
by U.S. Treasury Notes, 5.625% due 12/15/02;
Market value-- $25,500,189) $ 25,000,000
144,943,000 Goldman, Sachs & Co., 6.348% due 1/2/98
Proceeds at maturity -- $144,994,117; (Fully collateralized
by U.S. Treasury Notes, 5.625% due 12/31/99;
Market value-- $147,905,689) 144,943,000
275,000,000 Morgan Stanley, Dean Witter Discover & Co., 6.196% due 1/2/98;
Proceeds at maturity -- $275,094,661; (Fully collateralized
by U.S. Treasury Notes, 6.125% due 9/30/00;
Market value-- $280,600,230) 275,000,000
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost-- $444,943,000) 444,943,000
==================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $(2,991,385,925*) $4,164,418,526
==================================================================================================================================
</TABLE>
+ Non-income producing security.
++ A portion of this security is on loan (See Note 6).
# Security segregrated by Custodian to cover written call options.
@ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 13
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Statement of Assets and Liabilities December 31, 1997
================================================================================
<S> <C>
ASSETS:
Investments, at value (Cost-- $2,546,442,925) $3,719,475,526
Repurchase agreements, at value (Cost-- $444,943,000) 444,943,000
Cash 62,502,131
Collateral for securities loaned (Note 6) 489,121,735
Receivable for Fund shares sold 8,143,956
Receivable for securities sold 5,344,487
Dividends and interest receivable 10,467,823
- --------------------------------------------------------------------------------
Total Assets 4,739,998,658
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 6) 489,121,735
Options written (Note 4) 82,760,000
Dividends payable 11,740,301
Payable for securities purchased 3,526,174
Investment advisory fees payable 1,898,984
Payable for Fund shares purchased 1,209,659
Distribution fees payable 863,938
Administration fees payable 702,494
Accrued expenses 429,941
- --------------------------------------------------------------------------------
Total Liabilities 592,253,226
- --------------------------------------------------------------------------------
Total Net Assets $4,147,745,432
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 187,029
Capital paid in excess of par value 2,901,244,651
Undistributed net investment income 2,451,865
Accumulated net realized gain
from security transactions and options 33,267,800
Net unrealized appreciation of investments and options 1,210,594,087
- --------------------------------------------------------------------------------
Total Net Assets $4,147,745,432
================================================================================
Shares Outstanding:
Class A 37,557,037
---------------------------------------------------------------------------
Class B 142,960,574
---------------------------------------------------------------------------
Class C 4,223,155
---------------------------------------------------------------------------
Class Y 2,287,922
---------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $22.19
---------------------------------------------------------------------------
Class B * $22.17
---------------------------------------------------------------------------
Class C ** $22.18
---------------------------------------------------------------------------
Class Y (and redemption price) $22.24
---------------------------------------------------------------------------
Class A Maximium Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $23.36
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1997 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
==================================================================================
Statement of Operations For the Year Ended December 31, 1997
==================================================================================
<S> <C>
INVESTMENT INCOME:
Interest $ 31,517,880
Dividends 79,513,484
Less: Foreign withholding tax (2,833,827)
- ----------------------------------------------------------------------------------
Total Investment Income 108,197,537
- ----------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 23,133,097
Investment advisory fees (Note 2) 19,865,936
Administration fees (Note 2) 7,223,977
Shareholder and system servicing fees 3,044,073
Shareholder communications 262,783
Registration fees 219,713
Custody 117,258
Audit and legal 49,864
Insurance 35,262
Trustees' fees 16,713
Other 9,158
- ----------------------------------------------------------------------------------
Total Expenses 53,977,834
- ----------------------------------------------------------------------------------
Net Investment Income 54,219,703
- ----------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND OPTIONS (NOTES 3 AND 4):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 417,403,866
Options written (171,086,465)
- ----------------------------------------------------------------------------------
Net Realized Gain 246,317,401
- ----------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of
Investments and Options:
Beginning of year 719,437,307
End of year 1,210,594,087
- ----------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 491,156,780
- ----------------------------------------------------------------------------------
Net Gain on Investments and Options 737,474,181
- ----------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 791,693,884
==================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 15
<PAGE>
<TABLE>
<CAPTION>
================================================================================================
Statements of Changes in Net Assets For the Years Ended December 31,
================================================================================================
1997 1996(a)
================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 54,219,703 $ 19,165,114
Net realized gain 246,317,401 26,435,044
Increase in net unrealized appreciation 491,156,780 313,273,170
- ------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 791,693,884 358,873,328
- ------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM :
Net investment income (53,130,328) (18,736,290)
Net realized gains (220,180,678) (73,502,296)
- ------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (273,311,006) (92,238,586)
- ------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 836,715,233 245,247,901
Net asset value of shares issued for reinvestment
of dividends 204,886,682 68,372,367
Cost of shares reacquired (444,981,969) (146,875,918)
- ------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 596,619,946 166,744,350
- ------------------------------------------------------------------------------------------------
Increase in Net Assets 1,115,002,824 433,379,092
NET ASSETS:
Beginning of year 3,032,742,608 2,599,363,516
- ------------------------------------------------------------------------------------------------
End of year* $ 4,147,745,432 $ 3,032,742,608
================================================================================================
* Includes undistributed net investment income of: $ 2,451,865 $ 1,192,859
================================================================================================
</TABLE>
(a) For the period from August 1, 1996 to December 31, 1996.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
The Smith Barney Premium Total Return 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 this
Fund and six other separate investment funds: Smith Barney Exchange Reserve
Fund, Smith Barney Convertible Fund, Smith Barney High Income Fund, Smith Barney
Municipal High Income Fund, Smith Barney Diversified Strategic Income Fund and
Smith Barney Utilities Fund. The financial statements and financial highlights
for the other Funds are presented in separate annual reports dated July 31,
1997.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) investments are
valued at market value or, in the absence of market value with respect to any
portfolio securities, at fair value as determined by or under the direction of
the Board of Trustees. Portfolio securities that are traded primarily on a
domestic or foreign exchange are valued at the last sale price on that exchange
or, if there were no sales during the day, at the current quoted bid price.
Over-the-counter securities are valued on the basis of the bid price at the
close of business each day. Options are generally valued at the last sale price
or, in the absence of the last price, the last offer price. Investments in U.S.
government securities (other than short-term securities) are valued at the mean
of the quoted bid and asked price; (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 discount, is recorded on the accrual basis; (e) dividend income
is recorded on the 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; (f)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (g) gains or losses on the sale of securities calculated by using the
specific identification method; (h) the accounting records are maintained in
U.S. dollars. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars based on the rate of exchange of such currencies
against U.S. dollars on the date of valuation. Purchases and sales of
securities, and income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income and expense amounts recorded and 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 of each class; (j) the character of income and gains
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. At December 31, 1997,
reclassifications were made to the Portfolio's capital accounts to reflect
permanent book/tax differences and income and gains available for distributions
under income tax regulations. Net investment income, net realized gains and net
assets were not affected by this change; (k) the Fund intends to comply with the
applicable provisions of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies and to make distributions of
taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; and (l) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
In addition, the Fund may from time to time enter into options and/or futures
contracts in order to hedge market risk.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 17
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
2. Investment Advisory Agreement,
Administration Agreement and
Other Transactions
Smith Barney Strategy Advisers Inc. ("SBSA"), a subsidiary of Mutual Management
Corp. ("MMC"), formerly known as Smith Barney Mutual Funds Management Inc.
which, in turn, is a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"),
acts as investment adviser to the Trust. The Fund pays SBSA an advisory fee
calculated at an annual rate of 0.55% of the average daily net assets. This fee
is calculated daily and paid monthly.
SBSA has entered into a sub-advisory agreement with Boston Partners Asset
Management, L.P. ("Boston Partners"). Pursuant to the sub-advisory agreement,
Boston Partners is responsible for the day-to-day portfolio operations and
investment decisions for the Fund. SBSA pays Boston Partners a monthly fee
calculated at an annual rate of 0.15% of the average daily net assets of the
Fund. This fee is 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
Fund shares and primary broker for its portfolio agency transactions. For the
year ended December 31, 1997, SB received brokerage commissions of $936,326 and
sales charges of approximately $1,746,000 for sales of the Fund's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares,
which applies if redemption occurs within one year from initial purchase and
declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares
have a 1.00% CDSC, which applies if redemption occurs within the first year of
purchase. In addition, Class A shares have a 1.00% CDSC, which applies if
redemption occurs in the first year of purchase. This CDSC applies only 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 year ended December 31, 1997, CDSCs paid
to SB were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
CDSCs $3,000 $2,318,000 $17,000
================================================================================
</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. 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 year
ended December 31, 1997, total Distribution Plan fees incurred were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $1,813,203 $20,846,887 $473,007
================================================================================
</TABLE>
All officers and one Trustee of the Trust are employees of SB.
3. Investments
During the year ended December 31, 1997, 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 $1,579,872,562
- --------------------------------------------------------------------------------
Sales 1,393,480,290
================================================================================
</TABLE>
At December 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
===============================================================================
<S> <C>
Gross unrealized appreciation $1,209,837,963
Gross unrealized depreciation (36,805,362)
- -------------------------------------------------------------------------------
Net unrealized appreciation $1,173,032,601
===============================================================================
</TABLE>
4. Option Contracts
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-
- --------------------------------------------------------------------------------
18 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
to-market daily. When a purchased option expires, the Fund will realize a loss
in the amount of the premium paid. When the Fund enters into a closing sales
transaction, the Fund will realize a gain or loss depending on whether the
proceeds from the closing sales transaction are greater or less than the premium
paid for the option. When the Fund exercises a put option, it will realize a
gain or loss from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid. When the Fund exercises a
call option, the cost of the security which the Fund purchases upon exercise
will be increased by the premium originally paid.
At December 31, 1997, the Fund had no open purchased call or put options.
When a Fund writes a call or put option, an amount equal to the premium received
by the Fund is recorded as a liability, the value of which is marked-to-market
daily. When a written option expires, the Fund realizes a gain equal to the
amount of the premium received. When the Fund enters into a closing purchase
transaction, the Fund realizes a gain or loss 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 written put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the Fund
purchased upon exercise. When written index options are exercised, settlement is
made in cash.
The risk associated with purchasing options is limited to the premium originally
paid. The Fund enters into options for hedging purposes. The risk in writing a
covered call option is that the Fund gives up the opportunity to participate in
any increase in the price of the underlying security beyond the exercise price.
The risk in writing a put option is that the Fund is exposed to the risk of loss
if the market price of the underlying security declines.
The following written call option transactions occurred during the year ended
December 31, 1997:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
==========================================================================================
<S> <C> <C>
Options written, outstanding at December 31, 1996 12,700 $55,564,456
Options written during the year ended December 31, 1997 70,100 347,562,563
Options cancelled in closing purchase transactions (61,300) (282,805,533)
- ------------------------------------------------------------------------------------------
Options written, outstanding at December 31, 1997 21,500 $120,321,486
==========================================================================================
</TABLE>
The following table represents the written call option contracts open at
December 31, 1997:
<TABLE>
<CAPTION>
Number of Strike
Contracts Expiration Price Value
===========================================================================================================
<S> <C> <C> <C> <C>
10,700 S&P 500 Index 3/21/98 $975 $(42,800,000)
10,800 S&P 500 Index 3/21/98 980 (39,960,000)
- -----------------------------------------------------------------------------------------------------------
Total Call Options Written
(Premiums received-- $120,321,486) $(82,760,000)
===========================================================================================================
</TABLE>
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 19
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
6. 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, and receives a lenders fee. Fees earned by the Fund on securities
lending are recorded in 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.
At December 31, 1997, the Fund had loaned common stocks having a value of
approximately $477,385,466 and holds the following collateral for loaned
securities:
<TABLE>
<CAPTION>
Security Description Value
================================================================================
<S> <C>
Bank of Tokyo Time Deposit, 10,000% due 1/2/98 $ 7,571,509
Instituto Bancario San Paolo Time Deposit, 7.000% due 1/2/98 21,200,226
Keycorp Bank, N.A. Time Deposit, 4.000% due 1/2/98 12,252,428
Goldman, Sachs & Co. Repurchase Agreement, 6.800% due 1/2/98 75,327,973
Merrill Lynch Repurchase Agreement, 7.000% due 1/2/98 14,385,868
Corporate Receivable Commercial Paper, 5.875% due 1/7/98 129,391,962
Mercantile Time Deposit, 4.500% due 1/2/98 5,838,659
Dakota Certificate Program Commercial Paper, 5.750% due 1/6/98 148,745,653
CXC, Inc. Commercial Paper, 5.850% due 1/5/98 24,864,514
CXC, Inc. Commercial Paper, 5.840% due 2/13/98 49,542,943
- --------------------------------------------------------------------------------
Total $489,121,735
================================================================================
</TABLE>
7. Shares of Beneficial Interest
At December 31, 1997, the Trust had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses specifically related to the distribution of its shares.
At December 31, 1997, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
=============================================================================================
<S> <C> <C> <C> <C>
Total Paid-in Capital $601,792,851 $2,177,020,201 $79,123,505 $43,495,123
=============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
20 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996*
---------------------------- ---------------------------
Shares Amount Shares Amount
====================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 7,107,852 $ 148,102,037 1,879,826 $ 34,394,839
Shares issued on reinvestment 2,132,100 45,150,021 826,867 15,241,668
Shares redeemed (3,453,293) (72,491,471) (1,636,594) (29,718,184)
- ----------------------------------------------------------------------------------------------------
Net Increase 5,786,659 $ 120,760,587 1,070,099 $ 19,918,323
====================================================================================================
Class B
Shares sold 29,688,917 $ 617,410,878 10,374,378 $ 189,390,976
Shares issued on reinvestment 7,330,304 155,323,915 2,825,089 52,114,744
Shares redeemed (17,135,886) (357,356,107) (6,245,730) (114,229,669)
- ----------------------------------------------------------------------------------------------------
Net Increase 19,883,335 $ 415,378,686 6,953,737 $ 127,276,051
====================================================================================================
Class C
Shares sold 2,288,586 $ 47,815,009 548,279 $ 10,029,903
Shares issued on reinvestment 206,937 4,412,593 54,950 1,015,955
Shares redeemed (498,841) (10,416,117) (159,786) (2,928,065)
- ----------------------------------------------------------------------------------------------------
Net Increase 1,996,682 $ 41,811,485 443,443 $ 8,117,793
====================================================================================================
Class Y
Shares sold 1,113,070 $ 23,387,309 629,645 $ 11,432,183
Shares issued on reinvestment 7 153 -- --
Shares redeemed (212,175) (4,718,274) -- --
- ----------------------------------------------------------------------------------------------------
Net Increase 900,902 $ 18,669,188 629,645 $ 11,432,183
====================================================================================================
</TABLE>
* For the period from August 1, 1996 to December 31, 1996.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 21
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1996(1)(2) 1996 1995 1994 1993(3)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $19.14 $17.40 $16.33 $15.69 $15.65 $15.15
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.39 0.16 0.37 0.44 0.33 0.19
Net realized and unrealized gain 4.29 2.21 1.98 1.48 0.99 1.33
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 4.68 2.37 2.35 1.92 1.32 1.52
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.38) (0.16) (0.37) (0.43) (0.55) (0.20)
Net realized gains (1.25) (0.47) (0.91) (0.14) (0.52) (0.49)
Capital -- -- -- (0.71) (0.21) (0.33)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.63) (0.63) (1.28) (1.28) (1.28) (1.02)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $22.19 $19.14 $17.40 $16.33 $15.69 $15.65
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 25.19% 13.80%++ 14.76% 12.92% 8.65% 10.31%++
Net Assets, End of Year (000s) $833,540 $608,203 $534,329 $471,578 $67,699 $39,677
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.11% 1.12%+ 1.12% 1.16% 1.19% 1.20%+
Net investment income 1.89 2.05+ 2.16 2.81 2.05 1.64+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 30% 58% 63% 34% 55%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $0.06 $0.06 $0.06 -- -- --
====================================================================================================================================
</TABLE>
(1) 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.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
22 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class B Shares 1997(1) 1996(1)(2) 1996 1995 1994 1993
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $19.14 $17.40 $16.33 $15.69 $15.65 $15.21
- ----------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.29 0.12 0.28 0.36 0.25 0.23
Net realized and unrealized gain 4.28 2.21 1.99 1.48 1.00 1.47
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 4.57 2.33 2.27 1.84 1.25 1.70
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.12) (0.29) (0.34) (0.49) (0.19)
Net realized gains (1.25) (0.47) (0.91) (0.14) (0.52) (0.63)
Capital -- -- -- (0.72) (0.20) (0.44)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.54) (0.59) (1.20) (1.20) (1.21) (1.26)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $22.17 $19.14 $17.40 $16.33 $15.69 $15.65
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 24.55% 13.57%++ 14.21% 12.36% 8.12% 11.68%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $3,170 $2,355 $2,021 $1,655 $1,697 $1,231
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.60% 1.54%+ 1.62% 1.66% 1.66% 1.69%
Net investment income 1.39 1.63+ 1.66 2.31 1.58 1.16
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 30% 58% 63% 34% 55%
- ----------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.06 $0.06 $0.06 -- -- --
==================================================================================================================================
</TABLE>
(1) 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.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 23
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class C Shares 1997(1) 1996(1)(2) 1996 1995 1994(3) 1993(4)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $19.15 $17.41 $16.33 $15.69 $15.65 $15.45
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations From:
Net investment income 0.30 0.12 0.29 0.36 0.23 0.05
Net realized and unrealized gain 4.28 2.21 1.99 1.48 1.02 0.35
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 4.58 2.33 2.28 1.84 1.25 0.40
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.30) (0.12) (0.29) (0.35) (0.49) (0.04)
Net realized gains (1.25) (0.47) (0.91) (0.14) (0.52) (0.09)
Capital -- -- -- (0.71) (0.20) (0.07)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.55) (0.59) (1.20) (1.20) (1.21) (0.20)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $22.18 $19.15 $17.41 $16.33 $15.69 $15.65
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 24.60% 13.58%++ 14.30% 12.36% 8.12% 2.60%++
Net Assets, End of Year (000s) $93,676 $42,637 $31,044 $12,937 $1,878 $357
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.56% 1.55%+ 1.59% 1.62% 1.60% 1.31%+
Net investment income 1.41 1.61+ 1.68 2.35 1.65 1.54+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 30% 58% 63% 34% 55%
====================================================================================================================================
Average commissions per share
paid on equity transactions(5) $0.06 $0.06 $0.06 -- -- --
====================================================================================================================================
</TABLE>
(1) 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.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) On November 7, 1994 the former Class D shares were renamed Class C shares.
(4) For the period from June 1, 1993 (inception date) to July 31, 1993.
(5) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
24 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
year:
<TABLE>
<CAPTION>
Class Y Shares 1997(1) 1996(1)(2) 1996(3)
===================================================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $19.17 $17.42 $17.57
- -----------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.47 0.17 0.19
Net realized and unrealized gain 4.29 2.23 0.33
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 4.76 2.40 0.52
- -----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.44) (0.18) (0.21)
Net realized gains (1.25) (0.47) (0.46)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.69) (0.65) (0.67)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $22.24 $19.17 $17.42
Total Return 25.61% 13.95%++ 2.93%++
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $50,882 $26,585 $13,192
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.76% 0.80%+ 0.87%+
Net investment income 2.22 2.36+ 2.24+
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 30% 58%
- -----------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(4) $0.06 $0.06 $0.06
===================================================================================================================================
</TABLE>
(1) 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.
(2) For the period from August 1, 1996 to December 31, 1996.
(3) For the period from February 7, 1996 (inception date) to July 31, 1996.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 25
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
The Shareholders and Board of Trustees of
Smith Barney Income Funds:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Premium Total Return Fund
of Smith Barney Income Funds as of December 31, 1997, and the related statement
of operations for the year then ended, the statements of changes in net assets
for the year ended December 31, 1997 and for the period from August 1, 1996 to
December 31, 1996, and the financial highlights for the year ended December 31,
1997, the period from August 1, 1996 to December 31, 1996 and for each of the
years in the two-year period ended July 31, 1996. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for each of
the years in the two-year period ended July 31, 1994, were audited by other
auditors whose report thereon, dated September 19, 1994, expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Smith Barney Premium Total Return Fund of Smith Barney Income Funds as of
December 31, 1997, and the results of its operations for the year then ended,
the changes in its net assets for the year ended December 31, 1997 and for the
period from August 1, 1996 to December 31, 1996 and the financial highlights for
the year ended December 31, 1997, the period from August 1, 1996 to December 31,
1996 and each of the years in the two-year period ended July 31, 1996, in
conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 10, 1998
- --------------------------------------------------------------------------------
26 1997 Annual Report to Shareholders
<PAGE>
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 1997:
o 100.00% of the ordinary dividends paid as qualifying for the corporate
dividends received deduction.
o The Taxpayer Relief Act of 1997 enacted differing rates of tax on
various long-term capital gain transactions. As a result, the Fund
designates:
o Total long-term capital gain distributions paid of $220,180,678.
$100,728,079 are considered "28 percent rate gains".
$119,452,599 are considered "20 percent rate gains".
- --------------------------------------------------------------------------------
Smith Barney Premium Total Return Fund 27
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney
Premium Total
Return Fund
Trustees Investment Adviser
Lee Abraham Smith Barney Strategy Advisers Inc.
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman Distributor
Smith Barney Inc.
Officers
Heath B. McLendon Custodian
President and PNC Bank, N.A.
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
Harry J. Rosenbluth
Vice President and Investment Officer This report is submitted for the general
information of shareholders of Smith
Thomas M. Reynolds Barney Premium Total Return Fund. It is
Controller not authorized for distribution to
prospective investors unless accompanied
Christina T. Sydor by a current Prospectus for the Fund,
Secretary which contains information concerning
the Fund's investment policies and
expenses as well as other pertinent
information.
SMITH BARNEY
------------
A Member of TraverlersGroup[LOGO]
Smith Barney Premium
Total Return Fund
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD0420 2/98
