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Smith Barney
Exchange
Reserve Fund
------------------
SEMI-ANNUAL REPORT
------------------
January 31, 1999
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day(R).
<PAGE>
Smith Barney
Exchange
Reserve Fund
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. MCLENDON PHYLLIS M. ZAHORODNY
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Exchange
Reserve Fund ("Fund") for the period ended January 31, 1999. In this report, we
summarize the period's prevailing economic and market conditions and outline our
portfolio strategy. A summary of performance and more detailed financial
information can be found in the appropriate sections that follow.
Please note that your investment in the Smith Barney Exchange Reserve Fund is
neither insured, nor guaranteed, by the Federal Deposit Insurance Corporation or
any other government agency. Although the Fund seeks to preserve the value of
your investment at $l.00 per share, it is possible to lose money by investing in
the Fund.
As of January 31, 1999, the Fund's average annual yield was 4.22% and the
average annual effective yield, which assumes the reinvestment of dividends, was
4.30%.
Market Update and Outlook
The effects of the global events in Russia, Japan and Asia have finally reached
the U.S. Many U.S. financial institutions have suffered losses due to their
exposure to Russia and a widening spread on debt instruments from emerging
markets. In fact, the widening spread of debt instruments has even occurred
among "AA"-rated banks and brokerage firms as their future earnings continue to
be questioned. Moreover, the near default of a major hedge fund caused spreads
to widen even further as it began to liquidate its portfolio.
Instability in the capital markets and the downturn in the U.S. stock market
prompted the Federal Reserve Board ("Fed") to take three pre-emptive moves
lowering the federal-funds rate from 5.50% to 4.75%. (The federal-funds rate is
the interest rate banks charge each other for overnight loans and a closely
watched indicator of the direction of interest
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Smith Barney Exchange Reserve Fund 1
<PAGE>
rates.) In our view, this 75-basis point ease in the Fed's monetary policy has
enabled the financial markets to function once again in an orderly, yet still
cautious fashion. A full-blown credit crunch and recession probably has been
avoided due to decisive Fed action.
The U.S. economy, which was projected by many economists to slow, has remained
robust. Gross Domestic Product ("GDP") for the fourth quarter of 1998 was
reported at 5.6%. Several factors such as low interest rates, a healthy housing
market, strong consumer spending, recent lows in oil prices, a rebound in stock
prices, great strides in research and technology and a bottoming out in Asia
have all helped support domestic economic growth. In our view, the current
negatives weighing on the U.S. economy are the weakness in U.S. manufacturing
and Brazil's poor fiscal and monetary state. The Fed will probably opt to keep
monetary policy unchanged over the next several months and then possibly raise
interest rates toward the latter part of 1999 if GDP, money supply and commodity
prices rise too fast.
Investment Update
During the reporting period, the Fund grew over 49% in asset size and the Fund's
investment parameters remained conservative. We are committed to our belief that
managing for interest rates and buying value on the yield curve can be more
successful over the long term than purchasing securities with higher risks. (The
yield curve shows the difference in yields between short-term and long-term
fixed-income securities.)
The Fund remains well diversified with 38 different issuers and the largest
exposure in any one issuer is 3.7%. As of January 31, 1999, Fund assets were
invested 50% in corporate commercial paper and 50% in bank obligations. The
average maturity for the Fund has ranged from 20 to 44 days throughout the
reporting period. At the end of the Fund's fiscal year end, the average maturity
was 22 days.
In closing, thank you for investing in the Smith Barney Exchange Reserve Fund.
We encourage you to visit our Web site at www.smithbarney.com. We look forward
to continuing to help you pursue your financial goals in the years ahead.
Sincerely,
/s/ Heath B. McLendon /s/ Phyllis M. Zahorodny
Heath B. McLendon Phyllis M. Zahorodny
Chairman Vice President and
Investment Officer
February 26, 1999
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2 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1999
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<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
========================================================================================
<S> <C> <C> <C>
BANK NOTES -- 2.2%
$3,000,000 NationsBank matures 04/15/99
(Cost -- $3,000,000) 5.05% $3,000,000
========================================================================================
COMMERCIAL PAPER -- 94.1%
2,000,000 Abbey National North America matures 2/4/99 4.85 1,999,195
4,000,000 Alliance & Leicester Building Society
matures 2/12/99 4.84 3,994,097
3,000,000 American Express Credit Corp. matures 2/10/99 4.84 2,996,385
3,000,000 ANZ Delaware Inc. matures 2/11/99 4.87 2,995,958
3,000,000 Associates Corp. of North America
matures 3/16/99 4.87 2,982,693
5,000,000 Bank Austriaengesellschaft matures 2/1/99 4.81 5,000,000
4,775,000 Bank of New York mature 2/12/99 to 2/22/99 4.87 to 5.15 4,763,480
3,000,000 Banque Nationale de Paris matures 2/18/99 5.34 2,992,492
5,000,000 BCI Funding Corp. mature 3/8/99 to 3/16/99 4.91 to 4.92 4,973,060
3,000,000 Canadian Imperial Bank Commerce
matures 2/4/99 5.25 2,998,705
3,000,000 Canadian Wheat Board matures 2/12/99 4.82 2,995,600
2,002,000 Daimler-Benz North America Corp.
matures 3/19/99 4.87 1,989,644
4,000,000 Dresdner US Finance Inc. matures 2/4/99 4.87 3,998,380
5,000,000 E.I. du Pont de Nemours mature
2/4/99 to 3/25/99 4.85 to 4.86 4,978,392
5,000,000 Ford Motor Credit mature 2/4/99 to 2/25/99 4.87 to 5.22 4,992,259
5,000,000 General Electric Capital Corp. mature
2/8/99 to 3/24/99 4.84 to 5.30 4,983,349
2,150,000 General Motors Acceptance Corp.
matures 3/19/99 4.89 2,136,676
3,000,000 Generale Bank matures 2/10/99 5.30 2,996,078
3,000,000 GTE Corp matures 2/11/99 5.48 2,995,500
5,000,000 Goldman Sachs mature 2/25/99 to 2/26/99 4.82 to 4.91 4,983,573
4,450,000 International Lease Finance mature
3/12/99 to 3/19/99 4.83 to 4.85 4,425,474
4,000,000 J.P. Morgan & Co. matures 3/15/99 4.87 3,977,460
5,000,000 Lucent Technologies mature
2/12/99 to 3/23/99 4.83 to 4.85 4,982,239
2,000,000 Merrill Lynch matures 4/5/99 4.84 1,983,235
2,000,000 Morgan Stanley Dean Witter & Co.
matures 2/11/99 5.42 1,997,033
3,000,000 National Australia Funding Delaware
matures 2/9/99 4.85 2,996,780
4,000,000 Nestle Capital Corp. matures 2/1/99 4.77 4,000,000
2,175,000 Oesterreichsche Kontrollbank matures 2/16/99 5.34 2,170,197
5,000,000 Paribas SA matures 2/1/99 4.81 5,000,000
3,000,000 Pfizer Inc. matures 2/10/99 4.84 2,996,385
1,950,000 San Paolo US Finance Inc. matures 2/23/99 4.83 1,944,268
3,000,000 Shell Oil matures 2/12/99 4.82 2,995,600
</TABLE>
See Notes to Financial Statements.
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Smith Barney Exchange Reserve Fund 3
<PAGE>
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Schedule of Investments (unaudited) (continued) January 31, 1999
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<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
========================================================================================
<S> <C> <C> <C>
COMMERCIAL PAPER -- 94.1% (continued)
$ 4,000,000 United Bank of Switzerland matures 2/16/99 4.88% $ 3,991,900
5,000,000 USAA Capital Corp. matures 2/1/99 4.80 5,000,000
2,000,000 Walt Disney Co. matures 2/26/99 to 3/26/99 4.82 to 5.14 1,989,435
3,000,000 Westdeutsche Landesbank matures 2/10/99 4.92 2,996,325
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TOTAL COMMERCIAL PAPER
(Cost -- $126,191,847) 126,191,847
========================================================================================
TIME DEPOSITS -- 3.7%
4,905,000 First Chicago (National Bank) matures 2/1/99
(Cost -- $4,905,000) 4.81 4,905,000
========================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $134,096,847*) $134,096,847
========================================================================================
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
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4 1999 Semi-Annual Report to Shareholders
<PAGE>
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Statement of Assets and Liabilities (unaudited) January 31, 1999
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ASSETS:
Investments, at amortized cost $134,096,847
Cash 91
Interest receivable 26,393
Prepaid registration fees 280,070
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Total Assets 134,403,401
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LIABILITIES:
Dividends payable 292,730
Distribution fees payable 94,600
Administration fees payable 36,078
Investment advisory fees payable 36,402
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Total Liabilities 459,810
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Total Net Assets $133,943,591
===============================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 133,964
Capital paid in excess of par value 133,830,044
Accumulated net realized loss from security transactions (20,417)
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Total Net Assets $133,943,591
===============================================================================
Shares Outstanding:
Class B 119,628,316
---------------------------------------------------------------------------
Class L 14,335,692
---------------------------------------------------------------------------
Net Asset Value, Per Class $1.00
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See Notes to Financial Statements.
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Smith Barney Exchange Reserve Fund 5
<PAGE>
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Statement of Operations (unaudited)
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For the Six Months Ended January 31, 1999
INVESTMENT INCOME:
Interest $3,848,066
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EXPENSES:
Distribution fees (Note 3) 358,123
Investment advisory fees (Note 3) 214,874
Administration fees (Note 3) 143,249
Shareholder and system servicing fees 38,720
Registration fees 30,871
Audit and legal 28,677
Custody fees 11,980
Shareholder communications 7,024
Trustees' fees 4,509
Other 6,169
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Total Expenses 844,196
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Net Investment Income 3,003,870
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Net Realized Gain From Security Transactions 13,532
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $3,017,402
================================================================================
See Notes to Financial Statements.
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6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1999 (unaudited)
and the Year Ended July 31, 1998
1999 1998
===============================================================================
OPERATIONS:
Net investment income $ 3,003,870 $ 4,831,392
Net realized gain 13,532 4,628
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Increase in Net Assets From Operations 3,017,402 4,836,020
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DIVIDENDS TO SHAREHOLDERS (NOTE 2) (3,003,870) (4,831,392)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 443,630,892 430,187,888
Net asset value of shares issued for
reinvestment of dividends 2,470,393 4,209,538
Cost of shares reacquired (395,672,499) (473,623,461)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 50,428,786 (39,226,035)
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Increase (Decrease) in Net Assets 50,442,318 (39,221,407)
NET ASSETS:
Beginning of period 83,501,273 122,722,680
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End of period $ 133,943,591 $ 83,501,273
===============================================================================
See Notes to Financial Statements.
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Smith Barney Exchange Reserve Fund 7
<PAGE>
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Notes to Financial Statements (unaudited)
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1. Significant Accounting Policies
The Smith Barney Exchange Reserve Fund ("Fund"), a separate investment fund of
the Smith Barney Income Funds ("Trust"), a Massachusetts business trust, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust consists of this
Fund and seven other separate investment funds: Smith Barney Convertible Fund,
Smith Barney Diversified Strategic Income Fund, Smith Barney High Income Fund,
Smith Barney Premium Total Return Fund, Smith Barney Municipal High Income Fund,
Smith Barney Balanced Fund and Smith Barney Total Return Bond Fund. The
financial statements and financial highlights for the other Funds are presented
in separate semi-annual reports.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) the Fund uses the
amortized cost method for valuing investments; accordingly, the cost of
securities plus accreted discount, or minus amortized premium, approximates
value; (c) interest income is recorded on an accrual basis; (d) direct expenses
are charged to each class; management fees and general Fund expenses are
allocated on the basis of the relative net assets of each class; (e) dividends
and distributions to shareholders are recorded on the ex-dividend date; (f)
gains or losses on the sale of securities are calculated by using the specific
identification method; (g) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
and (h) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
2. Dividends
The Fund declares and records a dividend of substantially all of its net
investment income on each business day. Such dividends are paid or reinvested
monthly on the payable date. Net realized gains, if any, are distributed
annually.
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8 1999 Semi-Annual Report to Shareholders
<PAGE>
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Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
3. Investment Advisory Agreement, Administration Agreement and Other
Transactions
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
adviser to the Fund. The Fund pays SSBC an advisory fee calculated at an annual
rate of 0.30% of the average daily net assets. SSBC also acts as the Fund's
administrator for which the Fund pays a fee calculated at an annual rate of
0.20% of the average daily net assets. These fees are calculated daily and paid
monthly.
On October 8, 1998, CFBDS, Inc. became the fund's distributor. Prior to that
date Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as members of the selling group.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B shares,
which applies if redemption occurs within one year from purchase. This CDSC
declines by 0.50% the first year after purchase and thereafter declines by 1.00%
per year until no CDSC is incurred. For the six months ended January 31, 1999,
CDSCs paid to SSB were approximately:
Class B
================================================================================
CDSCs $349,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a distribution fee with respect
to Class B and L shares calculated at an annual rate of 0.50% of the average
daily net assets for each class, respectively. For the six months ended January
31, 1999, total Distribution Plan fees incurred were:
Class B Class L
================================================================================
Distribution Plan Fees $317,236 $40,887
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
4. Capital Loss Carryforward
At July 31, 1998, the Fund had, for Federal income tax purposes, a capital loss
carryforward of approximately $33,900, available to offset future capital gains
through July 31, 1999. To the extent that these carryforward losses are used to
offset capital gains, it is probable that any gains so offset will not be
distributed.
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Smith Barney Exchange Reserve Fund 9
<PAGE>
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Notes to Financial Statements (unaudited) (continued)
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5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Fund requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
6. Shares of Beneficial Interest
The Fund may issue an unlimited number of shares of beneficial interest with a
par value of $0.001 per share. The Fund has the ability to issue multiple
classes of shares. Each share of a class represents an identical interest and
has the same rights, except that each class bears certain direct expenses,
including those specifically related to the distribution of its shares. Because
the Fund has sold shares, issued shares as reinvestments of dividends and
redeemed shares only at a constant net asset value of $1.00 per share, the
number of shares represented by such sales, reinvestments and redemptions is the
same as the amounts shown below for such transactions.
Transactions in shares of beneficial interest of the Fund were as follows:
Six Months Ended Year Ended
January 31, 1999 July 31, 1998
===============================================================================
Class B
Shares sold 339,266,333 319,546,146
Shares issued on reinvestment 2,202,170 3,892,738
Shares reacquired (296,061,161) (366,172,777)
- -------------------------------------------------------------------------------
Net Increase (Decrease) 45,407,342 (42,733,893)
===============================================================================
Class L+
Shares sold 104,364,559 110,641,742
Shares issued on reinvestment 268,223 316,800
Shares reacquired (99,611,338) (107,450,684)
- -------------------------------------------------------------------------------
Net Increase 5,021,444 3,507,858
===============================================================================
+ On June 12, 1998, Class C shares were renamed Class L shares.
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10 1999 Semi-Annual Report to Shareholders
<PAGE>
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Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1999(1)(2) 1998 1997 1996 1995 1994
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------------
Net investment income 0.021 0.044 0.043 0.044 0.044 0.022
Dividends from net
investment income (0.021) (0.044) (0.043) (0.044) (0.044) (0.022)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return 2.13%++ 4.51% 4.43% 4.53% 4.49% 2.18%
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $119,605 $74,186 $116,915 $150,421 $160,432 $252,246
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.17%+ 1.21% 1.16% 1.17% 1.24% 1.26%
Net investment income 4.17+ 4.43 4.34 4.45 4.35 2.24
===================================================================================================================================
<CAPTION>
Class L Shares 1999(1)(2) 1998(3) 1997 1996 1995(4)
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------
Net investment income 0.021 0.044 0.043 0.044 0.035
Dividends from net
investment income (0.021) (0.044) (0.043) (0.044) (0.035)
- ------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------
Total Return 2.13%++ 4.52% 4.42% 4.51% 3.52%++
- ------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $14,339 $9,315 $5,808 $9,444 $2,850
- ------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.17%+ 1.21% 1.16% 1.17% 1.21%+
Net investment income 4.17+ 4.43 4.34 4.39 4.76+
==================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) On June 12, 1998, Class C shares were renamed Class L shares.
(4) For the period from November 7, 1994 (inception date) to July 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
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Smith Barney Exchange Reserve Fund 11
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<PAGE>
SALOMON SMITH BARNEY
- ---------------------------
A member of citigroup[LOGO]
Trustees
Lee Abraham
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
President and Investment Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Phyllis M. Zahorodny
Vice President and
Investment Officer
Irving P. David
Controller
Christina T. Sydor
Secretary
Investment Adviser
and Administrator
SSBC Fund Management Inc.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing
Agent
First Data Investor Services
Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Income Funds -- Smith Barney Exchange Reserve Fund. It is not
authorized for distribution to prospective investors unless accompanied or
preceded by a current Prospectus for the Fund, which contains information
concerning the Fund's investment policies, fees and expenses as well as other
pertinent information.
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney
Exchange Reserve Fund
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD2388 3/99
[PHOTO OMITTED]
Smith Barney
Convertible
Fund
[PHOTO OMITTED]
------------------
SEMI-ANNUAL REPORT
------------------
January 31, 1999
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day(R).
<PAGE>
Smith Barney
Convertible Fund
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The Smith Barney Convertible Fund seeks current income and capital appreciation
by investing in convertible securities. Convertible securities are bonds or
preferred stocks that can be converted into a predetermined number of shares of
common stocks after a predetermined date.
Smith Barney Convertible Fund
Average Annual Total Returns
January 31, 1999
Without Sales Charges(1)
-------------------------------------------------------
Class A Class B Class L Class O
================================================================================
Six-Month+ (2.90)% (3.16)% (3.17)% (3.09)%
- --------------------------------------------------------------------------------
One-Year (0.92) (1.34) N/A (1.26)
- --------------------------------------------------------------------------------
Five-Year 7.48 6.96 N/A N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 8.10 N/A N/A
- --------------------------------------------------------------------------------
Since Inception++ 9.00 8.11 (3.88)+ 9.87
================================================================================
With Sales Charges(2)
-------------------------------------------------------
Class A Class B Class L Class O
================================================================================
Six-Month+ (7.76)% (7.78)% (5.05)% (4.01)%
- --------------------------------------------------------------------------------
One-Year (5.86) (5.95) N/A (2.19)
- --------------------------------------------------------------------------------
Five-Year 6.38 6.81 N/A N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 8.10 N/A N/A
- --------------------------------------------------------------------------------
Since Inception++ 8.11 8.11 (5.73)+ 9.87
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B, L and
O shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 5.00% and 1.00%,
respectively; and Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed within one year from purchase.
Thereafter, the CDSC declines by 1.00% per year until no CDSC is incurred.
Class L and O shares reflect the deduction of a 1.00% CDSC which applies
if shares are redeemed within the first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Inception dates for Class A, B, L and O shares are November 6, 1992,
September 9, 1986, June 15, 1998 and November 7, 1994, respectively.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
The primary objective of the Convertible Fund has not changed during the
reporting period. We seek to provide investors with current income and capital
appreciation by investing in convertible securities. Our strategy is to combine
fundamentally strong companies with attractively priced convertible securities.
We continue to focus on high-quality convertible issues that offer attractive
total return opportunities with the potential for lower volatility and less
risk.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SCRAX
Class B SCVSX
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WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter ....................................................... 1
Historical Performance ................................................... 5
Smith Barney Convertible Fund at a Glance ................................ 8
Schedule of Investments .................................................. 9
Statement of Assets and Liabilities ...................................... 14
Statement of Operations .................................................. 15
Statements of Changes in Net Assets ...................................... 16
Notes to Financial Statements ............................................ 17
Financial Highlights ..................................................... 21
<PAGE>
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Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. MCLENDON ROBERT E. SWAB
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney
Convertible Fund ("Fund") for the period ended January 31, 1999. In this report,
we summarize the period's prevailing economic and market conditions, and outline
the Fund's strategy. Detailed summaries of performance and current holdings can
be found in the appropriate sections that follow. We hope you find this report
to be useful and informative.
A Special Discipline Series Fund
The Smith Barney Convertible Fund is part of the Special Discipline Series of
Smith Barney Mutual Funds. The Special Discipline Series Funds are mutual funds
that explore opportunities in a narrower sector of the market or by using a
narrower investment focus.
Performance and Strategy Overview
For the six months period ended January 31, 1999, the Smith Barney Convertible
Fund returned a negative 2.90% for its Class A shares without sales charges.
This compared with its Lipper Inc. convertible securities peer group average of
3.09% over the same period. (Lipper is a major fund - tracking organization.)
The Fund underperformed its Lipper peer group average for several reasons. The
Convertible Fund is a well diversified portfolio that invests primarily in
convertible securities and avoids investing in other asset classes such as
common stock. During the past six months, common stocks rose in excess of
roughly 14% as measured by the S&P 500 Index, a capitalization-weighted measure
of 500 widely held common stocks. Many of the funds within the Lipper
convertible fund category invest in common stocks and have directly benefited
from the stock market's recent strength. We believe our conservative investment
approach tends to offer more downside protection and reduced volatility compared
to many convertible funds that invest in stocks. However, in rising markets, the
Fund may underperform.
Moreover, the Fund's relative performance also suffered due to some of our
holdings in the energy and real estate sectors. Although we believe the
long-term fundamentals of the companies in these two sectors remain favorable,
over the past six months both sectors were, for the most part, shunned by the
investment community.
Economic and Market Overview
At the risk of stating the obvious, the past six months have truly been a
remarkable period for the U.S. economy and world financial markets. Since our
last report, economic growth in the U.S. has been surprisingly strong, further
extending the business cycle expansion that began in 1991. In addition,
inflation, as measured by the Consumer Price Index ("CPI"), remained relatively
stable in the 11 1/42 -2% range. Inflation has rarely been this low this late in
the business cycle. During the reporting period, stocks benefited from a growing
U.S. economy, continued growth in corporate earnings and most importantly, lower
interest rates. Subsequently, the bond market performed well as interest rates
drifted lower in response to the continued good news on inflation. During the
past six months, the yield on the 30-year U.S. Treasury bond dropped from 5.72%
to 5.09%.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund
1
<PAGE>
These statistics suggest that all was well for the financial markets during the
reporting period. However, several global events this past summer heightened
investor uncertainty and led to more volatility in both the U.S. and world
financial markets. In fact there was a period between August and early October
of last year that investors became extremely nervous and day-to-day market
volatility was considerable.
Following a relatively uneventful first half of 1998 (a period where the economy
and financial markets behaved well) several events during the summer helped
shift investor psychology dramatically to the negative. Heightened concerns
regarding the emerging markets, Japan's anemic economy, Russia's default, the
Clinton impeachment, major hedge fund liquidations and a Federal Reserve Board
("Fed") hands-off monetary policy helped to contribute to a significant sell-off
in the world stock markets between July and early October of 1998. The Dow Jones
Industiral Average actually was down about 13% from July 31, 1998 through
October 8, 1998, the day Fed took decisive action. Many investment professionals
were worried that a global credit crunch could materialize once Russia defaulted
on its debt. (A credit crunch is generally defined as when banks tighten their
lending standards.)
The Fed, sensing a quasi-state of investor panic following the huge decline in
global stock markets, provided much needed liquidity to the financial system
through three interest-rate cuts. This change in its monetary policy, coupled
with some aggressive fiscal policy changes in Japan and other troubled emerging
market countries, helped to stabilize the global markets and ease investor
concerns. We believe the Fed will continue to be the "lender of last resort" if
pressures on the world financial system re-emerge. By this we mean the Fed
should continue to provide liquidity by lowering interest rates further in order
to keep the global financial system stable.
The widening of credit spreads (i.e., the difference in interest rate levels)
between corporate debt securities and U.S. Government Treasuries following the
Russian debt default had a negative impact on the convertible securities market.
(Convertible securities are essentially corporate debt securities that have an
equity conversion feature.) Most fixed income securities not backed by the U.S.
government sold off sharply prior to the Fed's action in early October.
Investors were convinced a credit crunch was inevitable. However the lowering of
interest rates by the Fed helped to narrow the interest rate spread between
corporate and U.S. government securities. As long as the U.S. economy continues
to grow and progress is made on solving some of the problems in emerging market
economies, "spreads" should continue to contract. This would bode well for the
convertible securites market and the Fund going forward.
Portfolio Transactions
The primary objective of the Convertible Fund has not changed during the
reporting period. We seek to provide investors with current income and capital
appreciation by investing in convertible securities. Our strategy is to combine
fundamentally strong companies with attractively priced convertible securities.
We continue to focus on high-quality convertible issues that offer attractive
total return opportunities with the potential for lower volatility and less
risk.
As previously noted, we rarely invest in other asset classes. We believe
investing in other asset classes such as common stocks would increase the Fund's
risk and volatility. In additon, we usually do not invest in securities that are
not rated by at least one of the major credit reporting and bond rating agencies
such as Moody's Investors Service, Inc. or Standard & Poor's Ratings Service.
We further attempt to reduce volatility and risk through broad diversification.
Over 20 different industries are now represented in the Convertifble Fund. Some
of the more heavily weighted sectors include health care, retail and
manufacturing. Although no guarantees can be made, we believe these sectors have
outstanding long-term capital apprecication potential. Since our last report,
the Fund established new positions in:
- --------------------------------------------------------------------------------
2 1999 Semi-Annual Report to Shareholders
<PAGE>
o AES Corp., the world's largest global power company.
o Cable and Wireless Communications PLC, an integrated telecom mu ni ca
tions company operating throughout the United Kingdom.
o Mail-Well, Inc., a manufacturer and printer of en velopes and high-impact
color materials.
We also added to previously established positions in ...
o Elan, a company that develops delivery systems de signed to control the
absorption and utilization of pharmaceutical compounds
o U.S. Filter, one of the world's leading producers of water treatment and
recycling equipment.
o Waste Management, a company that provides waste managaement and services
domestically and in selected international markets.
During the past six months, we sold our positions in Parker Drilling, Phycor,
Men's Wearhouse Inc., Saks Holdings Inc., and Central Parking because the
convertible pricing characteristics had changed for these issues.
Over the past few months, the number of companies issuing new convertble
securities has declined relative to the past few years. We believe this trend
will change over the next year as corporate interest rate spreads relative to
Treasuries go back toward more historical levels. We think that the new issue
market offers attractive opportunities.
Market Outlook
We believe the U.S. economy should continue to grow at a moderate pace in 1999
with Gross Domestic Product ("GDP") increasing 2% to 3%. This will be the eighth
consecutive year the economy has expanded. Interest rates should remain
relatively stable as inflation expectations remain low and world economic growth
continues to moderate. However, a more meaningful slowdown in economic growth
later this year coupled with export restraints brought on by global economic
problems could impact U.S. corporate profit growth. Corporate earnings growth
rates have already declined over the past year.
During the last four years, the stock market has provided investors with returns
in excess of 20% annually. The fundamentals are still strong enough to support
further gains; however, the decline in the growth rate of corporate earnings
recently suggests that it may be difficult to match those returns generated by
the market in the period 1995 through 1998. We think investors should anticipate
more historical returns of 10% to 12% for the stock market over the next several
years.
We also believe small- and mid-capitalization companies should finally begin to
show stronger relative performance compared to large-capitalization companies.
For four years, the large-capitalizaion companies seem to have been the only
game in town. However, valuation levels are now quite high for many of these
large multi-national companies. We think small- and mid-capitalization companies
may finally play catch up. This should benefit the convertible securies market
as the majority of companies that issue convertible securities are typically
smaller- and mid-sized companies. If our expectations come true, the Convertible
Fund should provide attractive, competitive, risk-adjusted returns for
shareholders in the years ahead.
Thank you for your investment in the Smith Barney Convertible Fund. We encourage
you to visit our web site at www.smithbarney.com. We look forward to continuing
to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Robert E. Swab
Heath B. McLendon Robert E. Swab
Chairman Vice President and
Investment Officer
March 1, 1999
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Top Five Stock Holdings* As of January 31, 1999
- --------------------------------------------------------------------------------
1. Kmart Financing 2.0%
- --------------------------------------------------------------------------------
2. Bethlehem Steel Corp. 1.9
- --------------------------------------------------------------------------------
3. American General Corp. 1.7
- --------------------------------------------------------------------------------
4. Unocal Capital Trust 1.6
- --------------------------------------------------------------------------------
5. International Paper Co. 1.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top Five Bond Holdings* As of January 31, 1999
- --------------------------------------------------------------------------------
1. Athena Neurosciences Inc. 3.8%
- --------------------------------------------------------------------------------
2. Bell Atlantic Financial Services Corp. 3.2
- --------------------------------------------------------------------------------
3. Waste Management Inc. 2.9
- --------------------------------------------------------------------------------
4. Rite Aid Corp. 2.8
- --------------------------------------------------------------------------------
5. Alpharma Inc. 2.7
- --------------------------------------------------------------------------------
* As a percentage of total investments.
- --------------------------------------------------------------------------------
4 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $16.90 $15.61 $0.33 $0.44 $0.00 (2.90)%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/98 18.61 16.90 0.79 1.26 0.00 1.97
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 15.66 18.61 0.75 0.36 0.00 26.94
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 15.27 15.66 0.73 0.00 0.00 7.41
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 14.56 15.27 0.73 0.00 0.00 10.35
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 14.99 14.56 0.73 0.00 0.00 1.99
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/93 13.82 14.99 0.51 0.03 0.00 12.63+
====================================================================================================================================
Total $4.57 $2.09 $0.00
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $16.89 $15.59 $0.30 $0.44 $0.00 (3.16)%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/98 18.60 16.89 0.71 1.26 0.00 1.51
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 15.66 18.60 0.67 0.36 0.00 26.29
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 15.27 15.66 0.66 0.00 0.00 6.91
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/95 14.56 15.27 0.66 0.00 0.00 9.80
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/94 14.99 14.56 0.66 0.00 0.00 1.50
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/93 13.84 14.99 0.62 0.04 0.00 13.40
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/92 12.51 13.84 0.64 0.00 0.02 16.25
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/91 12.21 12.51 0.68 0.00 0.03 8.86
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/90 13.80 12.21 0.83 0.11 0.04 (4.53)
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/89 13.04 13.80 0.86 0.01 0.00 13.09
====================================================================================================================================
Total $7.29 $2.22 $0.09
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $16.90 $15.61 $0.29 $0.44 $0.00 (3.17)%+
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/98 17.14 16.90 0.12 0.00 0.00 (0.74)+
====================================================================================================================================
Total $0.41 $0.44 $0.00
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class O Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $16.87 $15.58 $0.31 $0.44 $0.00 (3.09)%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/98 18.58 16.87 0.71 1.26 0.00 1.53
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 15.64 18.58 0.68 0.36 0.00 26.37
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/96 15.27 15.64 0.67 0.00 0.00 6.82
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/95 14.09 15.27 0.49 0.00 0.00 12.17+
- ------------------------------------------------------------------------------------------------------------------------------------
Total $2.86 $2.06 $0.00
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $16.98 $15.70 $0.36 $0.44 $0.00 (2.66)%+
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/98 18.66 16.98 0.84 1.26 0.00 2.42
- ------------------------------------------------------------------------------------------------------------------------------------
7/31/97 15.68 18.66 0.80 0.36 0.00 27.44
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/96 16.15 15.68 0.39 0.00 0.00 (0.56)+
====================================================================================================================================
Total $2.39 $2.06 $0.00
====================================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charges(1)
--------------------------------------------------------------------------------
Class A Class B Class L Class O Class Y
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/99+ (2.90)% (3.16)% (3.17)% (3.09)% (2.66)%
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 1/31/99 (0.92) (1.34) N/A (1.26) (0.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/99 7.48 6.96 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 1/31/99 N/A 8.10 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 1/31/99 9.00 8.11 (3.88)+ 9.87 8.15
====================================================================================================================================
<CAPTION>
With Sales Charges(1)
--------------------------------------------------------------------------------
Class A Class B Class L Class O Class Y
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/99+ (7.76)% (7.78)% (5.05)% (4.01)% (2.66)%
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 1/31/99 (5.86) (5.95) N/A (2.19) (0.41)
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/99 6.38 6.81 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 1/31/99 N/A 8.10 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 1/31/99 8.11 8.11 (5.73)+ 9.87 8.15
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (Inception* through 1/31/99) 71.11%
- --------------------------------------------------------------------------------
Class B (1/31/89 through 1/31/99) 117.87
- --------------------------------------------------------------------------------
Class L (Inception* through 1/31/99) (3.88)+
- --------------------------------------------------------------------------------
Class O (Inception* through 1/31/99) 48.98
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/99) 26.34
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B, L and O shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum sales charge of 5.00% and 1.00%, respectively;
Class B shares reflect the deduction of a 5.00% CDSC, which applies if
shares are redeemed within one year from purchase. Thereafter, this CDSC
declines by 1.00% per year until no CDSC is incurred. Class L and O shares
reflect the deduction of a 1.00% CDSC, which applies if shares are
redeemed within the first year of purchase.
* Inception dates for Class A, B, L, O and Y shares are November 6, 1992,
September 9, 1986, June 15, 1998, November 7, 1994 and February 7, 1996,
respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the Smith Barney Convertible
Fund vs. Standard &Poor's 500 Index and Lipper Convertible Securities Fund Peer
Group Average+
- --------------------------------------------------------------------------------
January 1989 -- January 1999
[GRAPHIC OMITTED]
[The following table was depicted as a line chart in the printed material.]
Lipper Convertible
Smith Barney Standard & Poor's Securities Fund
Convertible Fund 500 Index Peer Group Average
---------------- --------- ------------------
Jan\1989 10000 10000 10000
July\1989 10750 11525 11840
July\1990 10263 11688 12610
July\1991 11173 12829 14220
July\1992 12988 15024 16038
July\1993 14729 17744 17440
July\1994 14950 18351 18339
July\1995 16415 20775 23127
July\1996 17549 22555 26956
July\1997 22163 26892 37831
July\1998 22498 28716 45133
Jan\1999 21787 29603 51912
+ Hypothetical illustration of $10,000 invested in Class B shares on January
31, 1989, assuming reinvestment of dividends and capital gains, if any, at
net asset value through January 31, 1999. The Standard & Poor's 500 Index
is composed of widely held common stocks listed on the New York Stock Ex
change, American Stock Exchange and the over-the-counter market. Figures
for the index include reinvestment of dividends. The Lipper Con vertible
Securities Fund Peer Group Average is composed of the Fund's peer group of
59 mutual funds, as of January 31, 1999, investing in convertible
securities. The index is unmanaged and is not subject to the same
management and trading expenses as a mutual fund. The per formance 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*
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
[The following table was depicted as a bar chart in the printed material.]
3.9% Communications
4.8% Diversified and Conglomerate Mfg.
6.7% Environmental Control
4.7% Finance Companies - Consumer Credit
10.7% Health Care, Drugs & Hospital Supp.
4.1% Lodging
5.8% Metals and Mining
4.1% Oil and Natural Gas
4.1% Restaurants - Food Services
10.0% Retail
41.1% Other
Investment Breakdown*
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
[The following table was depicted as a pie chart in the printed material.]
5.8% Repurchase Agreement
61.2% Convertible Bonds and Notes
33.0% Convertible Preferred Stock
* As a percentage of total investments.
- --------------------------------------------------------------------------------
8 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C>
CONVERTIBLE PREFERRED STOCK -- 33.0%
Building and Construction -- 2.2%
40,000 Beazer Homes USA, Series A, Exchange 8.000% $1,420,000
40,000 Fleetwood Capital Trust, Exchange 6.000%+ 1,920,000
- ----------------------------------------------------------------------------------------------------------------------------------
3,340,000
- ----------------------------------------------------------------------------------------------------------------------------------
Electronics and Military -- 1.4%
50,000 Coltec Capital Trust, Exchange 5.250%+ 2,125,000
- ----------------------------------------------------------------------------------------------------------------------------------
Finance Companies - Consumer Credit -- 4.7%
30,000 American General Delaware LLC, Series A, Exchange 6.000% 2,677,500
50,000 CNB Capital Trust I, Exchange 6.000% 1,328,125
30,000 St. Paul Captial LLC, Exchange 6.000% 1,740,000
30,000 Tosco Financing Trust, Exchange 5.750% 1,398,750
- ----------------------------------------------------------------------------------------------------------------------------------
7,144,375
- ----------------------------------------------------------------------------------------------------------------------------------
Home Furnishings -- 1.1%
30,000 Newell Financial Trust I, Exchange 5.250%+ 1,612,500
- ----------------------------------------------------------------------------------------------------------------------------------
Lodging -- 1.0%
40,000 Host Marriot Financial Trust, Exchange 6.750% 1,595,000
- ----------------------------------------------------------------------------------------------------------------------------------
Metals and Mining -- 4.1%
Bethlehem Steel Corp.:
30,000 Exchange $3.50 1,200,000
32,000 Exchange $5.00 1,738,000
30,000 Kinam Gold Inc., Series B, Exchange $3.75 1,040,625
30,000 Timet Capital Trust I, Exchange 6.625%++ 753,750
40,000 WHX Corp., Series A, Exchange 6.500% 1,610,000
- ----------------------------------------------------------------------------------------------------------------------------------
6,342,375
- ----------------------------------------------------------------------------------------------------------------------------------
Oil and Natural Gas -- 2.8%
40,000 El Paso Energy Capital Trust I, Exchange 4.750% 1,920,000
50,000 Unocal Capital Trust, Exchange 6.250% 2,393,750
- ----------------------------------------------------------------------------------------------------------------------------------
4,313,750
- ----------------------------------------------------------------------------------------------------------------------------------
Packaging and Containers -- 1.0%
20,000 Corning Delaware LP, Exchange 6.000% 1,493,750
- ----------------------------------------------------------------------------------------------------------------------------------
Paper, Forest Products and Printing -- 1.5%
50,000 International Paper Capital Trust, Exchange 5.250% 2,325,000
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate Development - REITS -- 3.7%
50,000 Archstone Communities Trust, Series A, Exchange $1.75 1,318,750
40,000 Equity Office Properties Trust, Exchange 5.250%+ 1,730,000
50,000 Felcor Lodging Trust Inc., Series A, Exchange $1.95 1,012,500
40,000 Glenborough Realty Trust, Series A, Exchange 7.750% 720,000
40,000 Tanger Factory Outlet Centers Inc., Depository Shares,
Series A, Exchange $2.16 820,000
- ----------------------------------------------------------------------------------------------------------------------------------
5,601,250
- ----------------------------------------------------------------------------------------------------------------------------------
Rental Auto/Equipment -- 0.7%
30,000 Budget Group Capital Trust, Exchange 6.250%+ 1,155,000
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C>
Restaurants - Food Service -- 2.4%
50,000 Suiza Capital Trust II, Exchange 5.500% $1,875,000
35,000 Wendy's Financing I, Series A, Exchange 5.000% 1,876,875
- ----------------------------------------------------------------------------------------------------------------------------------
3,751,875
- ----------------------------------------------------------------------------------------------------------------------------------
Retail -- 2.0%
50,000 Kmart Financing I, Exchange 7.750% 3,137,500
- ----------------------------------------------------------------------------------------------------------------------------------
Telecommunications Equipment -- 1.2%
30,000 Loral Space & Communications, Exchange 6.000%+ 1,818,750
- ----------------------------------------------------------------------------------------------------------------------------------
Transportation Services -- 2.0%
25,000 CNF Trust I, Series A, Exchange 5.000% 1,528,125
30,000 Union Pacific Capital Trust, Exchange 6.250%+ 1,477,500
- ----------------------------------------------------------------------------------------------------------------------------------
3,005,625
- ----------------------------------------------------------------------------------------------------------------------------------
Utilities -- 1.2%
40,000 Calenergy Capital Trust III, Exchange 6.500%++ 1,875,000
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost -- $54,493,200) 50,636,750
==================================================================================================================================
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
CONVERTIBLE BONDS AND NOTES -- 61.2%
Aerospace and Defense -- 0.7%
$1,000,000 B- Kellstrom Industries, Inc., 5.750% due 10/15/02+ 1,022,500
- ----------------------------------------------------------------------------------------------------------------------------------
Automobile Parts -- 2.7%
2,500,000 AA+ Deutsche Bank Finance B.V., zero coupon due 2/12/17+++ 1,521,875
2,500,000 A- Magna International Inc., 4.875% due 2/15/05 2,556,250
- ----------------------------------------------------------------------------------------------------------------------------------
4,078,125
- ----------------------------------------------------------------------------------------------------------------------------------
Building and Construction -- 1.0%
3,200,000 BBB- Lenar Corp., zero coupon due 7/29/18 1,468,000
- ----------------------------------------------------------------------------------------------------------------------------------
Communications -- 3.9%
Bell Atlantic Financial Services Corp.:
2,500,000 A+ 5.750% due 4/1/03+ 2,668,750
2,000,000 A+ 4.250% due 9/15/05+ 2,310,000
1,500,000 B California Microwave, 5.250% due 12/15/03 1,012,500
- ----------------------------------------------------------------------------------------------------------------------------------
5,991,250
- ----------------------------------------------------------------------------------------------------------------------------------
Data Processing -- 1.9%
2,500,000 BB- National Data Corp., 5.000% due 11/1/03 2,850,000
- ----------------------------------------------------------------------------------------------------------------------------------
Diversified and Conglomerate Manufacturing -- 4.8%
Mark IV Industries:
1,000,000 BB- 4.750% due 11/1/04 835,000
3,000,000 BB- 4.750% due 11/1/04+ 2,505,000
5,000,000 BB+ MascoTech, Inc., 4.500% due 12/15/03 3,975,000
- ----------------------------------------------------------------------------------------------------------------------------------
7,315,000
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Diversified and Conglomerate Services -- 2.0%
$1,000,000 B- Getty Images, Inc., 4.750% due 6/1/03+ $ 903,750
2,250,000 B+ Mail-Well, Inc., 5.000% due 11/1/02 2,140,313
- ----------------------------------------------------------------------------------------------------------------------------------
3,044,063
- ----------------------------------------------------------------------------------------------------------------------------------
Electronics - Computers and Software -- 3.4%
1,000,000 B Micron Technology, Inc., 7.000% due 7/1/04 1,295,000
3,000,000 Ba2* National Semiconductor Corp., 6.500% due 10/1/02+ 2,606,250
2,500,000 NR Network Associates Inc., zero coupon due 2/13/18+ 1,281,250
- ----------------------------------------------------------------------------------------------------------------------------------
5,182,500
- ----------------------------------------------------------------------------------------------------------------------------------
Environmental Control -- 6.7%
1,000,000 NR Imax Corp., Series AI, 5.750% due 4/1/03 1,191,250
2,000,000 NR Thermo Electron Corp., 4.250% due 4/1/03 1,815,000
3,000,000 Ba3* U.S. Filter Corp., 4.500% due 12/15/01 2,876,250
3,500,000 Ba1* Waste Management Inc., 4.000% due 2/1/02 4,392,500
- ----------------------------------------------------------------------------------------------------------------------------------
10,275,000
- ----------------------------------------------------------------------------------------------------------------------------------
Health Care, Drugs and Hospital Supplies -- 10.7%
2,000,000 Ba2* AES Corp., 4.500% due 8/15/05 1,847,500
3,000,000 B Alpharma Inc., 5.750% due 4/1/05+ 4,113,750
1,500,000 BBB- ALZA Corp., 5.000% due 5/1/06 2,103,750
Athena Neurosciences, Inc.:
2,000,000 BBB- 4.750% due 11/15/04+ 2,330,000
3,000,000 BBB- 4.750% due 11/15/04 3,495,000
1,000,000 B Concentra Managed Care, Inc., 4.500% due 3/15/03+ 806,250
2,000,000 BB- Tenet Healthcare Corp., 6.000% due 12/1/05 1,730,000
- ----------------------------------------------------------------------------------------------------------------------------------
16,426,250
- ----------------------------------------------------------------------------------------------------------------------------------
Human Resources -- 1.8%
1,000,000 B2* Data Processing Resources Corp., 5.250% due 4/1/05+ 1,038,750
2,000,000 BB+ Interim Services Inc., 4.500% due 6/1/05 1,782,500
- ----------------------------------------------------------------------------------------------------------------------------------
2,821,250
- ----------------------------------------------------------------------------------------------------------------------------------
Insurance -- 0.8%
1,250,000 BB+ Penn Treaty American Corp., 6.250% due 12/1/03 1,262,500
- ----------------------------------------------------------------------------------------------------------------------------------
Leisure, Amusement and Motion Picture -- 0.3%
500,000 NR Scholastic Corp., 5.000% due 8/15/05 492,500
- ----------------------------------------------------------------------------------------------------------------------------------
Lodging -- 3.1%
3,000,000 BBB- Hilton Hotels Corp., 5.000% due 5/15/06 2,913,750
2,500,000 B Signature Inns, Inc., 5.750% due 1/15/07 1,800,000
- ----------------------------------------------------------------------------------------------------------------------------------
4,713,750
- ----------------------------------------------------------------------------------------------------------------------------------
Metals and Mining -- 1.7%
3,000,000 Baa3* Inco Ltd., 7.750% due 3/15/16 2,670,000
- ----------------------------------------------------------------------------------------------------------------------------------
Oil and Natural Gas -- 1.3%
2,000,000 A- Diamond Offshore Drilling, Inc. 3.750% due 2/15/07 1,925,000
- ----------------------------------------------------------------------------------------------------------------------------------
Pharmacy Services -- 1.3%
2,000,000 BBB- Omnicare, Inc., 5.000% due 12/1/07 2,032,500
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Printing -- 0.9%
$1,500,000 BB- World Color Press, Inc., 6.000% due 10/1/07 $ 1,417,500
- ----------------------------------------------------------------------------------------------------------------------------------
Radio and Television -- 2.5%
2,000,000 BBB- Clear Channel Communications, Inc., 2.625% due 4/1/03 2,347,500
3,000,000 B Jacor Communications, Inc., zero coupon due 2/9/18 1,530,000
- ----------------------------------------------------------------------------------------------------------------------------------
3,877,500
- ----------------------------------------------------------------------------------------------------------------------------------
Restaurants Food Service -- 1.7%
3,000,000 B1* CKE Restaurants, Inc., 4.250% due 3/15/04 2,636,250
- ----------------------------------------------------------------------------------------------------------------------------------
Retail -- 8.0%
1,000,000 A3* Costco Cos. Inc., zero coupon due 8/19/17 960,000
1,000,000 B- HomeBase, Inc., 5.250% due 11/1/04+ 861,250
4,000,000 A- Koninklijke Ahold NV, 3.000% due 9/30/03 2,638,495
Rite Aid Corp.:
1,500,000 BBB 5.250% due 9/15/02+ 2,178,750
1,500,000 BBB 5.250% due 9/15/02 2,178,750
2,000,000 B- The Sports Authority, Inc., 5.250% due 9/15/01++ 1,257,500
Whole Foods Market, Inc.:
3,400,000 BB- Zero coupon due 3/2/18+ 1,062,500
3,600,000 BB- Zero coupon due 3/2/18 1,125,000
- ----------------------------------------------------------------------------------------------------------------------------------
12,262,245
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS AND NOTES
(Cost -- $94,115,348) 93,763,683
==================================================================================================================================
REPURCHASE AGREEMENT -- 5.8%
8,875,000 Goldman, Sachs & Co., 4.710% due 2/1/99;
Proceeds at maturity -- $8,878,483; (Fully collateralized
by U.S. Treasury Notes and Bonds, 5.625% to 11.125%
due 11/30/99 to 8/15/25; Market value -- $9,052,502)
(Cost -- $8,875,000) 8,875,000
==================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $157,483,548**) $153,275,433
==================================================================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service, except that those
identified by an asterisk (*) are rated by Moody's Investors Service, Inc.
+ 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.
++ All or a portion of this security is on loan (See Note 6).
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 13 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
The definition of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AA" to
"B" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in
higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
BB -- Bonds rated "BB" and "B" are regarded, on balance, as predominantly
and B speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation and "B" the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
Moody's Investors Service, Inc. ("Moody's") -- Numerical modifiers 1, 2, and 3
may be applied to each generic rating from "Aa" to "B", where 1 is the highest
and 3 the lowest rating within its generic category.
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities, or
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds rated "Baa" are considered to be medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba -- Bonds rated "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safe
guarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds rated "B" generally lack characteristics of desirable investments.
Assurance of interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be small.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $157,483,548) $153,275,433
Collateral for securities loaned (Note 6) 3,073,700
Cash 203
Receivable for securities sold 2,418,789
Dividends and interest receivable 1,192,212
Receivable for Fund shares sold 243,055
- -------------------------------------------------------------------------------
Total Assets 160,203,392
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 4,192,292
Payable for securities loaned (Note 6) 3,073,700
Dividends payable 541,902
Investment advisory fees payable 58,606
Administration fees payable 23,442
Distribution fees payable 1,438
Accrued expenses 65,386
- -------------------------------------------------------------------------------
Total Liabilities 7,956,766
- -------------------------------------------------------------------------------
Total Net Assets $152,246,626
===============================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 9,721
Capital paid in excess of par value 159,379,992
Overdistributed net investment income (16,881)
Accumulated net realized loss on security transactions (2,917,426)
Net unrealized depreciation of investments (4,208,780)
- -------------------------------------------------------------------------------
Total Net Assets $152,246,626
===============================================================================
Shares Outstanding:
Class A 2,038,661
--------------------------------------------------------------------------
Class B 1,842,267
--------------------------------------------------------------------------
Class L 24,597
--------------------------------------------------------------------------
Class O 67,292
--------------------------------------------------------------------------
Class Y 5,748,649
--------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $15.61
--------------------------------------------------------------------------
Class B * $15.59
--------------------------------------------------------------------------
Class L ** $15.61
--------------------------------------------------------------------------
Class O (and redemption price) $15.58
--------------------------------------------------------------------------
Class Y (and redemption price) $15.70
--------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value) $16.43
--------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value) $15.77
===============================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if
shares are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L and O shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited) For the Six Months Ended January 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 2,485,712
Dividends 1,667,458
- -------------------------------------------------------------------------------
Total Investment Income 4,153,170
- -------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 357,601
Distribution fees (Note 2) 161,594
Administration fees (Note 2) 143,041
Registration fees 60,191
Shareholder and system servicing fees 44,449
Audit and legal 18,070
Shareholder communications 12,437
Trustees' fees 7,366
Custody 3,117
Other 4,804
- -------------------------------------------------------------------------------
Total Expenses 812,670
- -------------------------------------------------------------------------------
Net Investment Income 3,340,500
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 16,647,857
Cost of securities sold 19,565,237
- -------------------------------------------------------------------------------
Net Realized Loss (2,917,380)
- -------------------------------------------------------------------------------
Change in Net Unrealized Depreciation of Investments:
Beginning of period (164,387)
End of period (4,208,780)
- -------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (4,044,393)
- -------------------------------------------------------------------------------
Net Loss on Investments (6,961,773)
- -------------------------------------------------------------------------------
Decrease in Net Assets From Operations $(3,621,273)
===============================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1999 (unaudited)
and the Year Ended July 31, 1998
<TABLE>
<CAPTION>
1999 1998
==================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 3,340,500 $ 5,477,773
Net realized gain (loss) (2,917,380) 7,697,282
Increase in net unrealized depreciation (4,044,393) (11,026,016)
- --------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (3,621,273) 2,149,039
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,172,366) (5,935,316)
Net realized gains (4,074,097) (9,092,705)
- --------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (7,246,463) (15,028,021)
- --------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 25,225,888 57,487,605
Net asset value of shares issued for reinvestment of dividends 2,459,377 7,328,412
Cost of shares reacquired (10,558,054) (18,012,365)
- --------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 17,127,211 46,803,652
- --------------------------------------------------------------------------------------------------
Increase in Net Assets 6,259,475 33,924,670
NET ASSETS:
Beginning of period 145,987,151 112,062,481
- --------------------------------------------------------------------------------------------------
End of period* $152,246,626 $145,987,151
==================================================================================================
* Includes overdistributed net investment income of: $(16,881) $(185,015)
==================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Convertible Fund ("Fund"), a separate investment fund of Smith
Barney Income Funds ("Trust"), a Massachusetts business trust, is registered
under the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Trust consists of the Fund and seven other
separate investment funds: Smith Barney Ex change Reserve Fund, Smith Barney
Premium Total Return Fund, Smith Barney High Income Fund, Smith Barney Municipal
High Income Fund, Smith Barney Diversified Strategic Income Fund, Smith Barney
Balanced Fund and Smith Barney Total Return Bond Fund. The financial statements
and financial highlights for the other funds are presented in separate
semi-annual reports.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing price on such markets;
securities for which no sales price were reported are valued at bid price, or in
the absence of a recent bid price, at the bid equivalent obtained from one or
more of the major market makers; (c) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates value; (d) dividend income is re corded on ex-dividend date and
interest income, adjusted for accretion of original discount, is recorded on an
accrual basis; (e) gains or losses on the sale of securities are calculated
using the specific identification method; (f) dividends and distributions to
share holders are recorded on the ex-dividend date; (g) direct expenses are
charged to each class; management fees and general fund expenses are allocated
on the basis of relative net assets; (h) the Fund intends to comply with the
applicable provisions of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies and to make distributions of
taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (i) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At July 31, 1998, reclassifications
were made to undistributed net investment income and accumulated net realized
gains to reflect book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, a portion of net
investment income amounting to $108,166 was reclassified to paid-in capital. Net
investment income, net realized gains and net assets were not affected by this
change; and (j) estimates and assumptions are required to be made regarding
assets, liabilities and changes in net assets resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates
could cause actual results to differ.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
adviser to the Fund. The Fund pays SSBC an advisory fee calculated at an annual
rate of 0.50% of the average daily net assets. This fee is calculated daily and
paid monthly.
SSBC also acts as the Trust's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to the
date, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
public as members of the selling group. For the six months ended January 31,
1999, SSB received no brokerage commissions.
For the six months ended January 31, 1999, SSB received sales charges of
approximately $13,000 and $1,000 on sales of the Fund's Class A and L shares,
respectively.
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 L and O
shares have a 1.00% CDSC, which applies if redemption occurs within the first
year of purchase. For the six months ended January 31, 1999, CDSCs paid to SSB
were approximately $15,000 for Class B shares.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B, L and O 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, L and O shares calculated at the annual rate of 0.50%,
0.75% and 0.45% of the average daily net assets of each class, respectively. For
the six months ended January 31, 1999, total Distribution Plan fees incurred
were:
Distribution
Plan Fees
================================================================================
Class A $ 40,874
- --------------------------------------------------------------------------------
Class B 114,692
- --------------------------------------------------------------------------------
Class L 1,629
- --------------------------------------------------------------------------------
Class O 4,399
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the six months ended January 31, 1999, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $29,953,524
- --------------------------------------------------------------------------------
Sales 16,647,857
================================================================================
At January 31, 1999, aggregate gross unrealized appreciation and depreciation of
investments for Federal in come tax purposes were substantially as follows:
===============================================================================
Gross unrealized appreciation $ 10,508,805
Gross unrealized depreciation (14,716,920)
- -------------------------------------------------------------------------------
Net unrealized depreciation $ (4,208,115)
===============================================================================
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Fund requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. Options Contracts
Premiums paid when put or call options are purchased by the Fund represent
investments, which are marked-to-market daily and are included in the schedule
of investments. When a purchased option expires, the Fund will realize a loss in
the amount of the premium paid. When the Fund enters into a closing sales
transaction, the Fund will realize a gain or loss de pending on whether the
proceeds from the closing sales transaction are greater or less than the premium
paid for the option. When the Fund exer-
- --------------------------------------------------------------------------------
18 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
cises a put option, it will realize a gain or loss from the sale of the
underlying security and the proceeds from such sale will be decreased by the
premium originally paid. When the Fund exercises a call option, the cost of the
security which the Fund purchases upon exercise will be increased by the premium
originally paid.
At January 31, 1999, the Fund had no open purchased put or call options
contracts.
When a Fund writes a covered call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the closing purchase
transaction exceeds the premium received when the option was sold) without
regard to any unrealized gain or loss on the underlying security, and the
liability related to such option is eliminated. When a written call option is
exercised, the cost of the security sold will be decreased by the premium
originally received. When a put option is exercised, the amount of the premium
originally received will reduce the cost of the security which the Fund
purchased upon exercise. When written index options are exercised, settlement is
made in cash.
The risk associated with purchasing options is limited to the premium originally
paid. The Fund enters into options for hedging purposes. The risk in writing a
covered call option is that the Fund gives up the opportunity to participate in
any increase in the price of the underlying security beyond the exercise price.
The risk in writing a put option is that the Fund is exposed to the risk of a
loss if the market price of the underlying security declines.
During the six months ended January 31, 1999, the Fund did not write any
options.
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 in come. 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 securities loaned, 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 January 31, 1999, the Fund loaned common stocks having a value of $2,982,063
and holds the following collateral for loaned securities:
Security Description
================================================================================
Time Deposits:
Bank of Brussels Lambert, 4.843% due 2/1/99 $1,406,986
Bank of Montreal, 4.812% due 2/1/99 285,379
Deutsche Bank, 4.843% due 2/1/99 1,036,492
Societe Generale, 4.750% due 2/1/99 344,843
- --------------------------------------------------------------------------------
Total $3,073,700
================================================================================
7. Shares of Beneficial Interest
At January 31, 1999, the Trust had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At January 31, 1999, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class L Class O Class Y
==============================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $29,353,488 $30,851,169 $404,482 $1,133,273 $97,647,301
==============================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1999 July 31, 1998
------------------------ ------------------------
Shares Amount Shares Amount
========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 85,585 $ 1,321,372 187,183 $ 3,373,179
Shares issued on reinvestment 83,137 1,273,918 211,208 3,642,177
Shares reacquired (246,878) (3,827,236) (366,561) (6,468,130)
- ----------------------------------------------------------------------------------------
Net Increase (Decrease) (78,156) $(1,231,946) 31,830 $ 547,226
========================================================================================
Class B
Shares sold 67,190 $ 1,033,723 215,590 $ 3,822,846
Shares issued on reinvestment 73,216 1,120,114 205,341 3,534,856
Shares reacquired (404,718) (6,210,241) (622,216) (11,110,774)
- ----------------------------------------------------------------------------------------
Net Decrease (264,312) $(4,056,404) (201,285) $(3,753,072)
========================================================================================
Class L*
Shares sold 11,721 $ 181,524 15,235 $ 263,764
Shares issued on reinvestment 924 14,132 63 1,070
Shares reacquired (484) (7,477) (2,862) (48,369)
- ----------------------------------------------------------------------------------------
Net Increase 12,161 $ 188,179 12,436 $ 216,465
========================================================================================
Class O++
Shares sold 130 $ 1,994 37,643 $ 677,932
Shares issued on reinvestment 3,349 51,213 8,745 150,309
Shares reacquired (28,502) (443,659) (21,450) (385,092)
- ----------------------------------------------------------------------------------------
Net Increase (Decrease) (25,023) $ (390,452) 24,938 $ 443,149
========================================================================================
Class Y
Shares sold 1,461,336 $22,687,275 2,733,387 $49,349,884
Shares issued on reinvestment -- -- -- --
Shares reacquired (4,432) (69,441) -- --
- ----------------------------------------------------------------------------------------
Net Increase 1,456,904 $22,617,834 2,733,387 $49,349,884
========================================================================================
</TABLE>
* For Class L shares, transactions are for the period from June 15, 1998
(inception date) to July 31, 1998.
++ On June 12, 1998, Class C shares were renamed Class O shares.
- --------------------------------------------------------------------------------
20 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1999(1)(2) 1998 1997 1996(2) 1995 1994
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 16.90 $ 18.61 $ 15.66 $ 15.27 $ 14.56 $ 14.99
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.35 0.73 0.78 0.74 0.74 0.72
Net realized and unrealized gain (loss) (0.87) (0.39) 3.28 0.38 0.70 (0.42)
- ----------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.52) 0.34 4.06 1.12 1.44 0.30
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.33) (0.79) (0.75) (0.73) (0.73) (0.73)
Net realized gains (0.44) (1.26) (0.36) -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.77) (2.05) (1.11) (0.73) (0.73) (0.73)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 15.61 $ 16.90 $ 18.61 $ 15.66 $ 15.27 $ 14.56
- ----------------------------------------------------------------------------------------------------------------------
Total Return (2.90)%++ 1.97% 26.94% 7.41% 10.35% 1.99%
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $31,834 $35,780 $38,803 $34,888 $35,238 $ 2,294
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.30%+ 1.25% 1.27% 1.40% 1.40% 1.40%
Net investment income 4.52+ 4.09 4.61 4.68 5.13 4.80
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 12% 49% 57% 59% 48% 54%
======================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1999(1)(2) 1998 1997 1996(2) 1995 1994
======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 16.89 $ 18.60 $ 15.66 $ 15.27 $ 14.56 $ 14.99
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.31 0.64 0.69 0.66 0.67 0.65
Net realized and unrealized gain (loss) (0.87) (0.38) 3.28 0.39 0.70 (0.42)
- ----------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.56) 0.26 3.97 1.05 1.37 0.23
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.30) (0.71) (0.67) (0.66) (0.66) (0.66)
Net realized gains (0.44) (1.26) (0.36) -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.74) (1.97) (1.03) (0.66) (0.66) (0.66)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 15.59 $ 16.89 $ 18.60 $ 15.66 $ 15.27 $ 14.56
- ----------------------------------------------------------------------------------------------------------------------
Total Return (3.16)%++ 1.51% 26.29% 6.91% 9.80% 1.50%
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $28,728 $35,570 $42,927 $42,420 $45,524 $85,190
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.76%+ 1.74% 1.77% 1.90% 1.90% 1.88%
Net investment income 4.08+ 3.60 4.12 4.18 4.63 4.32
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 12% 49% 57% 59% 48% 54%
======================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized
- --------------------------------------------------------------------------------
22 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
Class L Shares 1999(1)(2) 1998(3)
============================================================================
Net Asset Value, Beginning of Period $16.90 $17.14
- ----------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.30 0.05
Net realized and unrealized loss (0.86) (0.17)
- ----------------------------------------------------------------------------
Total Loss From Operations (0.56) (0.12)
- ----------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.12)
Net realized gains (0.44) --
- ----------------------------------------------------------------------------
Total Distributions (0.73) (0.12)
- ----------------------------------------------------------------------------
Net Asset Value, End of Period $15.61 $16.90
- ----------------------------------------------------------------------------
Total Return++ (3.17)% (0.74)%
- ----------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 384 $ 210
- ----------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 1.87% 1.98%
Net investment income 3.90 2.51
- ----------------------------------------------------------------------------
Portfolio Turnover Rate 12% 49%
============================================================================
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) For the period from June 15, 1998 (inception date) to July 31, 1998.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class O Shares 1999(1)(2) 1998(3) 1997 1996(2) 1995(4)(5)
=======================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $16.87 $18.58 $15.64 $15.27 $14.09
- -------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.32 0.63 0.67 0.67 0.50
Net realized and unrealized gain (loss) (0.86) (0.37) 3.31 0.37 1.17
- -------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.54) 0.26 3.98 1.04 1.67
- -------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) (0.71) (0.68) (0.67) (0.49)
Net realized gains (0.44) (1.26) (0.36) -- --
- -------------------------------------------------------------------------------------------------------
Total Distributions (0.75) (1.97) (1.04) (0.67) (0.49)
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $15.58 $16.87 $18.58 $15.64 $15.27
- -------------------------------------------------------------------------------------------------------
Total Return (3.09)%++ 1.53% 26.37% 6.82% 12.17%++
- -------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $1,048 $1,557 $1,252 $ 641 $ 83
- -------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.71%+ 1.70% 1.74% 1.86% 1.87%+
Net investment income 4.15+ 3.63 4.14 4.17 4.77+
- -------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 12% 49% 57% 59% 48%
=======================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) On June 12, 1998, Class C shares were renamed Class O shares.
(4) On November 7, 1994, the former Class D shares were renamed Class C
shares.
(5) For the period from November 7, 1994 (inception date) to July 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
24 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class Y Shares 1999(1)(2) 1998 1997 1996(2)(3)
============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 16.98 $ 18.66 $ 15.68 $ 16.15
- --------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.39 0.77 0.83 0.38
Net realized and unrealized gain (loss) (0.87) (0.35) 3.31 (0.46)
- --------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.48) 0.42 4.14 (0.08)
- --------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.36) (0.84) (0.80) (0.39)
Net realized gains (0.44) (1.26) (0.36) --
- --------------------------------------------------------------------------------------------
Total Distributions (0.80) (2.10) (1.16) (0.39)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 15.70 $ 16.98 $ 18.66 $ 15.68
- --------------------------------------------------------------------------------------------
Total Return (2.66)%++ 2.42% 27.44% (0.56)%++
- --------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $90,253 $72,870 $29,080 $ 9,189
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.81%+ 0.83% 0.85% 1.00%+
Net investment income 4.97+ 4.49 5.04 4.98+
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 12% 49% 57% 59%
============================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) For the period from February 7, 1996 (inception date) to July 31, 1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 25
<PAGE>
Smith Barney
Convertible Fund
Trustees
Lee Abraham
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
President and Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
Robert E. Swab
Vice President and Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser
SSBC Fund Management Inc.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Convertible Fund. It is not for distribution to prospective
investors unless accompanied by a current Prospectus for the Fund, which
contains information concerning the Fund's investment policies and expenses as
well as other pertinent information.
SALOMON SMITH BARNEY
- ---------------------------
A member of citigroup[LOGO]
Salomon Smith Barney is a Service mark of Salomon Smith Barney Inc.
Smith Barney Convertible Fund
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD2170 3/99
[PHOTO OMITTED]
Smith Barney
Total Return
Bond Fund
[PHOTO OMITTED]
------------------
SEMI-ANNUAL REPORT
------------------
January 31, 1999
[LOGO] Smith Barney Mutual Funds
Investing in your future.
Every day(R).
<PAGE>
Smith Barney Total
Return Bond Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Smith Barney Total Return Bond Fund seeks to maximize total return
consisting of income and capital appreciation by investing in a diversified
portfolio of U.S. fixed-income securities of varying maturities.
Smith Barney Total Return Bond Fund
Average Annual Total Returns
January 31, 1999
Without Sales Charges(1)
----------------------------------
Class A Class B Class L
================================================================================
Six-Month++ 4.26% 4.00% 4.03%
- --------------------------------------------------------------------------------
Since Inception+++ 7.01 6.57 6.62
================================================================================
Without Sales Charges(2)
----------------------------------
Class A Class B Class L
================================================================================
Six-Month++ (0.41)% (0.50)% 1.95%
- --------------------------------------------------------------------------------
Since Inception+++ 2.20 2.07 4.51
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 4.50% and 1.00%,
respectively; and Class B shares reflect the deduction of a 4.50% CDSC,
which applies if shares are redeemed within one year from purchase. This
CDSC declines by 0.50% the first year after purchase and thereafter by
1.00% per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed within the
first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Inception date for Class A, B and L shares is February 27, 1998.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
Our two main areas for investment during the reporting period have been
high-grade corporate bonds and taxable municipal bonds. Together, they represent
approximately 85% of Fund assets (with smaller investments in generic mortgage
bonds and several "AAA-rated" asset backed securities). We think that this is a
blend that should provide a solid income stream with a little less market
volatility than if we had owned straight long-term U.S. government securities.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A TRBAX
Class B TRBBX
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter ........................................................ 1
Historical Performance .................................................... 3
Smith Barney Total Return Bond Fund
at a Glance ............................................................... 4
Schedule of Investments ................................................... 5
Statement of Assets and Liabilities ....................................... 10
Statement of Operations ................................................... 11
Statements of Changes in Net Assets ....................................... 12
Notes to Financial Statements ............................................. 13
Financial Highlights ...................................................... 17
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. MCLENDON JOSEPH P. DEANE
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Total
Return Bond Fund ("Fund"). In this report, we discuss general bond market
conditions and briefly 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. We hope you find this report
informative and useful.
A Classic Investor Series Fund
The Total Return Bond Fund is part of the Classic Investor Series Funds of Smith
Barney Mutual Funds. The Classic Investor Series funds are mutual funds, whose
investment decisions are determined by experienced portfolio managers, based on
each fund's investment objectives and guidelines. Funds in the Smith Barney
Classic Investor Series invest across asset classes and sectors, utilizing a
range of strategies in order to achieve their objectives.
Performance Overview
For the period ended January 31, 1999, the Fund had a total return of 4.26% for
its Class A shares without sales charges. The Fund significantly outperformed
the average total return of 3.53% for general bond funds during the same period
according to Lipper Inc. (Lipper is a major fund-tracking organization.)
Investment Strategy
Our aim is to provide our shareholders with high total return potential by
investing primarily in taxable U.S. bonds. Our investment process involves:
1. Reflecting on key market factors such as:
-- U.S. economic indicators
-- Inflation
-- Federal Reserve Board policy
-- The relative strength of the U.S. dollar
2. Projecting the direction of interest rates as a foundation for structuring
the Fund's portfolio's average maturity. (Average maturity is a
dollar-weighted average maturity of bonds contained in the portfolio.)
3. Selecting bonds likely to either experience significant price appreciation
when interest rates fall or sustain less-than-average price depreciation
when interest rates rise.
As of January 31, 1999, 100% of the Fund's holdings were rated investment-grade
(BBB/Baa and higher) by either Standard & Poor's Ratings Service or Moody's
Investors Service Inc., with about 56% of the Fund invested in AAA/Aaa-rated
bonds, the highest possible rating. (Standard & Poor's and Moody's are two major
credit-reporting and bond-rating agencies). The Smith Barney Total Return Bond
Fund's largest holdings were concentrated in corporate bonds (41%), taxable
municipal bonds (35%) and U.S. government bonds (15%).
Market Overview
The past six months in the bond markets have not been dull. Beginning with the
Asian crisis, Russia's default and the problems with a major hedge fund we have
certainly seen some turbulence. The bottom line though is that inflation is near
historic lows, the U.S. economy is quite solid and the Federal Reserve Board
("Fed") has adopted a more accommodative stance for short-term rates. It all
adds up to a positive backdrop for bonds. Foreign exchange markets are also a
positive factor because the U.S. dollar has been
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 1
<PAGE>
strengthening versus the yen and new euro, making U.S. based fixed assets more
attractive to foreign investors. (The euro is the new, single currency of eleven
European Union countries that began on January 1, 1999).
Our two main areas for investment during the reporting period have been
high-grade corporate bonds and taxable municipal bonds. Together, they represent
approximately 76% of the Fund assets with smaller investments in generic
mortgage bonds and several "AAA-rated" asset backed securities. We think that
this is a blend that should provide a solid income stream with a little less
market volatility than if we had owned straight long-term U.S. government
securities.
Market Outlook
As we have noted, the fundamentals continue to be positive for the bond markets:
low inflation and a benign Fed monetary policy. We think these positive
conditions will be with us for the next three to six months. As you get closer
to a presidential election year, the economy may pick-up (and it usually does
historically). At that point we may take a more conservative stance than we
pursue at the moment. We believe that the economy should be our guide, because
it will be the key factor affecting future Fed monetary policy.
In closing, thank you for your investment in Smith Barney Total Return Bond
Fund. We encourage you to visit our Web site at www.smithbarney.com. We look
forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Joseph P. Deane
Heath B. McLendon Joseph P. Deane
Chairman Vice President and
Investment Officer
February 22, 1999
- --------------------------------------------------------------------------------
2 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------------
Beginning End Income Total
Period Ended of Period of Period Dividends Returns(1)
================================================================================
1/31/99 $11.53 $11.67 $ 0.35 4.26%+
- --------------------------------------------------------------------------------
Inception* through 7/31/98 11.46 11.53 0.23 2.64+
================================================================================
Total 0.58
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------------
Beginning End Income Total
Period Ended of Period of Period Dividends Returns(1)
================================================================================
1/31/99 $11.53 $11.67 $0.32 4.00%+
- --------------------------------------------------------------------------------
Inception* through 7/31/98 11.46 11.53 0.21 2.48+
================================================================================
Total 0.53
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------------
Beginning End Income Total
Period Ended of Period of Period Dividends Returns(1)
================================================================================
1/31/99 $11.53 $11.67 $0.32 4.03%+
- --------------------------------------------------------------------------------
Inception* through 7/31/98 11.46 11.53 0.21 2.49+
================================================================================
Total 0.53
================================================================================
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
---------------------------------
Class A Class B Class L
================================================================================
Six Months Ended 1/31/99+ 4.26% 4.00% 4.03%
- --------------------------------------------------------------------------------
Inception* through 1/31/99+ 7.01 6.57 6.62
================================================================================
Without Sales Charges(2)
---------------------------------
Class A Class B Class L
================================================================================
Six Months Ended 1/31/99+ (0.41)% (0.50)% 1.95%
- --------------------------------------------------------------------------------
Inception* through 1/31/99+ 2.20% 2.07% 4.51%
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum sales charge of 4.50% and 1.00%, respectively;
and Class B shares reflect the deduction of a 4.50% CDSC, which applies if
shares are redeemed within one year from initial purchase. This CDSC
declines by 0.50% the first year after purchase and thereafter by 1.00%
per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed within the
first year of purchase.
* Inception date for Class A, B and L shares is February 27, 1998.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A, B and L Shares of the Smith Barney Total
Return Bond vs. Merrill Lynch U.S. Corporate & Government 10+ Years Index+
- --------------------------------------------------------------------------------
[The following table was depicted as a line graph in the printed material.]
February 1998 - January 1999
Smith Barney Smith Barney Smith Barney Merrill Lynch
Total Return Total Return Total Return U.S. Corporate
Bond Fund -- Bond Fund -- Bond Fund -- & Government
Class A Class B Class L 10+ Years
Shares Shares Shares Index
2/27/98 9550 10000 9896 10000
3/98 9583 9585 9832 10037
4/98 9615 9614 9861 10075
5/98 9756 9748 9993 10269
6/98 9889 9883 10127 10467
7/98 9803 9798 10044 10521
8/98 10014 10014 10258 10791
9/98 10166 10160 10403 11189
10/98 9993 9975 10229 10988
11/98 10121 10113 10357 11166
12/98 10120 10098 10343 11181
1/31/99 10220 10207 10452 11303
+ The chart above represents a hypothetical illustration of $10,000 invested
in Class A, B and L shares on February 27, 1998 (inception date), assuming
deduction of the maximum 4.50% and 1.00% sales charge at the time of
investment for Class A and L shares, respectively; the deduction of the
maximum 4.50% for Class B shares and the deduction of the 1.00% CDSC for
Class L shares. It also assumes reinvestment of dividends and capital
gains, if any, at the net asset value through January 31, 1999. The
Merrill Lynch U.S. Corporate & Government 10+ Years Index is a total
return index consisting of U.S. Government agencies, Treasury securities
and all investment grade corporate debt securities with maturities of ten
years or more. The index is unmanaged and is not subject to the same
management and trading expenses as a mutual fund.
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*
- ------------------------------------------------------------------------------
[The following table was depicted as a bar graph in the printed material.]
Airlines 0.9%
Automotive 10.3%
Chemicals 15.3%
Financial Services 7.5%
Food 7.5%
Hotel/Casino 5.3%
Insurance 23.0%
Oil & Gas Production 7.4%
Retail 8.5%
Tobacco 5.7%
Utilities 8.6%
* As a percentage of total coporate bonds and notes
Investment Breakdown**
- ------------------------------------------------------------------------------
[The following table was depicted as a pie graph in the printed material.]
Municipal Bonds 31.1%
Repurchse Agreement 0.4%
Asset-Backed Securities 6.0%
Government Agencies and Obligtion 15.0%
Corporate Bonds and Notes 40.8%
Collateralized Mortgage-Backed Securities 2.7%
** As a percentage of total investments
- --------------------------------------------------------------------------------
4 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
========================================================================================================
<S> <C> <C> <C> <C>
GOVERNMENT AGENCIES AND OBLIGATIONS -- 15.0%
$14,700,000 AAA Federal Home Loan Mortgage Bank, 6.910% due 5/13/13 $ 14,760,270
9,700,000 Aaa* Federal National Mortgage Association, 6.730% due 3/10/08 9,704,947
4,127,813 Aaa* Federal National Mortgage Association, 7.000% due 11/1/12 4,227,139
- --------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES AND OBLIGATIONS
(Cost -- $28,620,699) 28,692,356
========================================================================================================
ASSET-BACKED SECURITIES -- 6.0%
Finance -- 6.0%
6,000,000 AAA Emergent Home Equity Loan Trust, 7.080% due 12/15/28 6,399,180
5,000,000 AAA Residential Asset Securities Corp., 6.980% due 12/25/27 5,115,700
- --------------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost-- $11,025,069) 11,514,880
========================================================================================================
COLLATERALIZED MORTGAGE-BACKED SECURITIES -- 2.7%
Finance -- 2.7%
5,000,000 AAA Residential Accredit Loans, Inc., 6.750% due 6/25/28
(Cost-- $4,898 938) 5,229,000
========================================================================================================
CORPORATE BONDS AND NOTES -- 40.8%
Airlines -- 0.4%
700,000 AA+ Continental Airlines, Inc., 6.820% due 5/1/18 707,770
- --------------------------------------------------------------------------------------------------------
Automotive -- 4.2%
4,700,000 A Ford Motor Co., 8.875% due 1/15/22 6,104,125
1,400,000 A General Motors Corp., 9.400% due 7/15/21 1,900,500
- --------------------------------------------------------------------------------------------------------
8,004,625
- --------------------------------------------------------------------------------------------------------
Chemicals -- 6.2%
5,000,000 BBB+ ARCO Chemical Co., 9.800% due 2/1/20 5,131,250
6,670,000 Baa2* FMC Corp., 7.000% due 5/15/08 6,753,375
- --------------------------------------------------------------------------------------------------------
11,884,625
- --------------------------------------------------------------------------------------------------------
Financial Services -- 3.1%
700,000 A Hartford Financial Services Group, Inc., 7.300% due 11/1/15 761,250
5,000,000 AA- Merrill Lynch & Co., Inc., 6.750% due 6/1/28 5,118,750
- --------------------------------------------------------------------------------------------------------
5,880,000
- --------------------------------------------------------------------------------------------------------
Foods -- 3.1%
5,700,000 A- Tyson Foods, Inc., 7,000% due 5/1/18 5,849,625
- --------------------------------------------------------------------------------------------------------
Hotel/Casino -- 2.1%
4,000,000 AAA Mashantucket Pequot Tribal Nation, 6.570% due 9/1/13(b) 4,085,000
- --------------------------------------------------------------------------------------------------------
Insurance -- 9.4%
Aetna Services Inc.:
1,000,000 A 7.250% due 8/15/23 986,250
6,650,000 A 7.625% due 8/15/26 6,733,125
7,700,000 A- CNA Financial Corp., 6.950% due 1/15/18 7,931,000
2,200,000 A- Lincoln National Corp., 7.000 due 3/15/18 2,241,250
- --------------------------------------------------------------------------------------------------------
17,891,625
- --------------------------------------------------------------------------------------------------------
Oil & Gas Products -- 3.0%
6,000,000 A- Enterprise Oil PLC, 7.000% due 5/1/18 5,790,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
========================================================================================================
<S> <C> <C> <C> <C>
Retail -- 3.5%
$ 750,000 A J.C. Penney Co., Inc., 7.650% due 8/15/16 $ 812,813
5,300,000 A- Sears Roebuck Acceptance Corp., 7.500% due 10/15/27 5,823,375
- --------------------------------------------------------------------------------------------------------
6,636,188
- --------------------------------------------------------------------------------------------------------
Tobacco -- 2.3%
Philip Morris Co.:
1,500,000 A 7.650% due 7/1/08 1,698,750
2,400,000 A 7.750% due 1/15/27 2,763,000
- --------------------------------------------------------------------------------------------------------
4,461,750
- --------------------------------------------------------------------------------------------------------
Utilities -- 3.5%
4,700,000 AA Northern Illinois Gas Co., 7.375% due 10/15/27 5,023,125
1,700,000 A ONEOK Inc., 6.875% due 10/1/28 1,700,000
- --------------------------------------------------------------------------------------------------------
6,723,125
- --------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $77,602,516) 77,914,333
========================================================================================================
MUNICIPAL BONDS -- 35.1%
Arizona -- 2.6%
4,700,000 AAA Phoenix, AZ IDA, America West Arena,
AMBAC-Insured, 7.125% due 12/1/21 4,987,875
- --------------------------------------------------------------------------------------------------------
California -- 17.4%
California Housing Finance Agency Revenue:
5,500,000 AAA Single Family Mortgage, FHA-Insured,
Series B-4 Class I, 6.970% due 8/1/29 5,720,000
1,000,000 AAA Taxable Home Mortgage, MBIA-Insured,
Series H, 7.250% due 8/1/22 1,051,250
California Rural Home Mortgage Finance Authority,
Single-Family Mortgage Revenue, GNMA/FNMA/FHLMC-
Collateralized:
1,000,000 AAA Series A, 7.000% due 6/1/22 1,065,000
2,150,000 AAA Series B-3, 7.000% due 6/1/21 2,241,375
6,200,000 AAA Los Angeles, CA Convention and Exhibition Center Authority
Lease Revenue, MBIA-Insured, Series A, 7.125% due 8/15/24 6,440,250
8,580,000 AAA Monrovia, CA Redevelopment Agency, Tax Allocation (Center
Redevelopment Project), Series A, 7.050% due 5/1/29 8,912,475
1,275,000 AAA Montclair, CA Redevelopment Agency, Tax Allocation
(Redevelopment Area No. III), 6.900% due 12/1/27 1,284,562
2,040,000 AAA Pinole, CA Redevelopment Agency, Tax Allocation,
MBIA-Insured 6.750% due 8/1/17 2,103,750
1,850,000 AAA San Dieguito, CA Public Facilities Authority Revenue,
AMBAC-Insured, Series B, 7.000% due 8/1/18 1,930,938
2,500,000 AAA Torrance, CA Redevelopment Agency, Tax Allocation,
Senior Lien, MBIA-Insured, 6.810% due 9/1/28 2,505,850
- --------------------------------------------------------------------------------------------------------
33,255,450
- --------------------------------------------------------------------------------------------------------
Georgia -- 2.3%
4,250,000 AAA DeKalb County, GA Development Authority Revenue
(Regional Office Project), 6.875% due 3/1/20 4,308,437
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
- --------------------------------------------------------------------------------
6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
========================================================================================================
<S> <C> <C> <C> <C>
Illinois -- 0.9%
$1,700,000 AA Illinois Housing Development Authority Revenue, Homeowner
Mortgage, Series C, 7.000% due 8/1/29 $ 1,759,500
- --------------------------------------------------------------------------------------------------------
Maryland -- 1.1%
2,000,000 Aa2* Montgomery County, MD Housing Opportunities, Community
Single-Family Mortgage Revenue, Series C, 7.000%
due 7/1/30 2,090,000
- --------------------------------------------------------------------------------------------------------
Massachusetts -- 3.4%
6,200,000 AAA Northeastern University, Massachusetts Revenue, MBIA-Insured,
Series A, 7.040% due 10/1/28 6,517,750
- --------------------------------------------------------------------------------------------------------
New York -- 3.1%
New York State Housing Finance Agency Revenue, Multi-Family
Housing, SONYMA-Insured, Series A:
1,730,000 Aa1* 6.875% due 8/15/18 1,816,500
3,845,000 Aa1* 6.920% due 8/15/29 4,046,862
- --------------------------------------------------------------------------------------------------------
5,863,362
- --------------------------------------------------------------------------------------------------------
Pennsylvania -- 1.5%
York County, PA IDA, Economic Development Revenue,
FGIC-Insured:
2,295,000 AAA 6.875% due 10/1/18 2,389,669
425,000 AAA 7.000% due 10/1/23 442,000
- --------------------------------------------------------------------------------------------------------
2,831,669
- --------------------------------------------------------------------------------------------------------
Texas -- 1.4%
2,500,000 AAA Dallas/Fort Worth, TX International Airport Facility,
MBIA-Insured, 7.070% due 11/1/24 2,625,000
- --------------------------------------------------------------------------------------------------------
Virginia -- 1.4%
2,735,000 AAA Virginia State Housing Development Authority, Multi-
Family Housing Revenue, MBIA-Insured, Series A,
6.510% due 5/1/19 2,721,325
- --------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost -- $64,452,198) 66,960,368
========================================================================================================
REPURCHASE AGREEMENT -- 0.4%
705,000 Morgan Stanley Dean Witter & Co., 4.700% due 2/1/99;
Proceeds at maturity -- $705,276; (Fully collateralized by U.S.
Treasury Notes, 5.375% to 6.000% due 6/30/99 through 5/31/03;
Market value-- $722,626) (Cost-- $705,000) 705,000
========================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $187,304,420**) $191,015,937
========================================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service except that those
which are identified by an asterisk (*) are rated by Moody's Investors
Service Inc..
(b) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be sold in transactions that are exempt from
registration, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 8 and 9 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AA" to
"BB" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
bonds in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in
higher rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability to default than
other speculative issues. However, they face major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to meet
timely interest and principal payments.
Moody's Investors Service Inc. ("Moody's") -- Numerical modifiers 1, 2, and 3
may be applied to each generic rating from "Aa" to "Baa", where 1 is the highest
and 3 the lowest rating within its generic category.
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as
can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
Aa -- Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in "Aaa"
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Baa -- Bonds rated "Baa" are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
- --------------------------------------------------------------------------------
8 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Security Descriptions (unaudited)
- --------------------------------------------------------------------------------
ABAG -- Association of Bay Area Governments
AIG -- American International Guaranty
AMBAC -- AMBAC Indemnity Corporation
BAN -- Bond Anticipation Notes
BIG -- Bond Investors Guaranty
CGIC -- Capital Guaranty Insurance Company
CHFCLI -- California Health Facility Construction Loan Insurance
COP -- Certificate of Participation
EDA -- Economic Development Authority
ETM -- Escrowed To Maturity
FAIRS -- Floating Adjustable Interest Rate Securities
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
FRTC -- Floating Rate Trust Certificates
FSA -- Federal Savings Association
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage Association
GO -- General Obligation
HDC -- Housing Development Corporation
HFA -- Housing Finance Authority
IDA -- Industrial Development Authority
IDB -- Industrial Development Board
IDR -- Industrial Development Revenue
INFLOS -- Inverse Floaters
ISD -- Independent School District
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
MVRICS -- Municipal Variable Rate Inverse Coupon Security
PCR -- Pollution Control Revenue
PSFG -- Permanent School Fund Guaranty
RAN -- Revenue Anticipation Notes
RIBS -- Residual Interest Bonds
RITES -- Residual Interest Tax-Exempt Security
SONYMA -- State of New York Mortgage Agency
SYCC -- Structured Yield Curve Certificate
TAN -- Tax Anticipation Notes
TECP -- Tax Exempt Commercial Paper
TOB -- Tender Option Bonds
TRAN -- Tax and Revenue Anticipation Notes
VAN -- Veterans Administration
VRDD -- Variable Rate Daily Demand
VRWE -- Variable Rate Wednesday Demand
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $187,304,420) $ 191,015,937
Cash 677
Interest receivable 3,407,062
Receivable for Fund shares sold 726,836
Receivable from manager 110,301
- --------------------------------------------------------------------------------------
Total Assets 195,260,813
======================================================================================
LIABILITIES:
Dividends payable 860,846
Distribution fees payable 25,548
Accrued expenses 87,477
- --------------------------------------------------------------------------------------
Total Liabilities 973,871
- --------------------------------------------------------------------------------------
Total Net Assets $ 194,286,942
======================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 16,648
Capital paid in excess of par value 191,783,636
Overdistributed net investment income (12,864)
Accumulated net realized loss from investments and futures contracts (1,211,995)
Net unrealized appreciation of investments 3,711,517
- --------------------------------------------------------------------------------------
Total Net Assets $ 194,286,942
======================================================================================
Shares Outstanding:
Class A 5,625,096
------------------------------------------------------------------------------------
Class B 8,577,212
------------------------------------------------------------------------------------
Class L 2,445,519
------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 11.67
------------------------------------------------------------------------------------
Class B * $ 11.67
------------------------------------------------------------------------------------
Class L ** $ 11.67
------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $ 12.22
------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $ 11.79
======================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if
shares are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
10 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 6,042,765
- -------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 586,442
Distribution fees (Note 2) 516,931
Registration fees 66,106
Shareholder and system servicing fees 61,307
Audit and legal 24,296
Shareholder communications 12,582
Trustees' fees 5,560
Custody 3,517
Pricing service fees 1,977
Other 511
- -------------------------------------------------------------------------------
Total Expenses 1,279,229
Less: Management fee waiver (Note 2) (85,635)
- -------------------------------------------------------------------------------
Net Expenses 1,193,594
- -------------------------------------------------------------------------------
Net Investment Income 4,849,171
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FUTURES CONTRACTS (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 470,083
Futures contracts (1,215,016)
- -------------------------------------------------------------------------------
Net Realized Loss (744,933)
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Futures Contracts:
Beginning of period 883,575
End of period 3,711,517
- -------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 2,827,942
- -------------------------------------------------------------------------------
Net Gain on Investments 2,083,009
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 6,932,180
===============================================================================
See Notes to Financial Statements
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1999 (unaudited)
and the Period Ended July 31, 1998(a)
<TABLE>
<CAPTION>
1999 1998
=====================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 4,849,171 $ 2,969,782
Net realized loss (744,933) (467,062)
Increase in net unrealized appreciation 2,827,942 883,575
- -----------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 6,932,180 3,386,295
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (5,113,605) (2,772,994)
- -----------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (5,113,605) (2,772,994)
- -----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 46,873,216 158,252,495
Net asset value of shares issued for reinvestment of dividends 3,179,260 2,115,250
Cost of shares reacquired (14,441,383) (4,123,772)
- -----------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 35,611,093 156,243,973
- -----------------------------------------------------------------------------------------------------
Increase in Net Assets 37,429,668 156,857,274
NET ASSETS:
Beginning of period 156,857,274 --
- -----------------------------------------------------------------------------------------------------
End of period* 194,286,942 $ 156,857,274
=====================================================================================================
*Includes undistributed (overdistributed) net investment income of: ($12,864) $251,570
=====================================================================================================
</TABLE>
(a) For the period February 27, 1998 (commencement of operations) to July 31,
1998.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Total Return Bond Fund ("Fund"), a separate investment fund of
the Smith Barney Income Funds ("Trust"), a Massachusetts business trust, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust consists of this
Fund and seven other separate investment funds: Smith Barney Diversified
Strategic Income Fund, Smith Barney Exchange Reserve Fund, Smith Barney
Convertible Fund, Smith Barney High Income Fund, Smith Barney Municipal High
Income Fund, Smith Barney Premium Total Return Fund and Smith Barney Balanced
Fund. The financial statements and financial highlights for the other funds are
presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing price on such markets;
securities for which no sales price were reported are valued at bid price, or in
the absence of a recent bid price, at the bid equivalent obtained from one or
more of the major market makers; (c) securities for which market quotations are
not available will be valued in good faith at fair value by or under the
direction of the Board of Trustees; (d) securities that have a maturity of more
than 60 days are valued at prices based on market quotations for securities of
similar type, yield and maturity; (e) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates value; (f) dividend income is recorded on ex-dividend date and
interest income is recorded on an accrual basis; (g) gains or losses on the sale
of securities are calculated by using the specific identification method; (h)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (i) direct expenses are charged to each class; management fees and general
portfolio expenses are allocated on the basis of relative net assets; (j) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At July 31, 1998, reclassifications were made to the Fund's capital
accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Accordingly, for a
portion of net investment loss amounting to $54,782 was reclassified to paid-in
capital. Net investment income, net realized gains and net assets were not
affected by this change; (k) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
and (l) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
2. Investment Management Agreement and Other Transactions
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
manager to the Trust. The Fund pays SSBC a management fee calculated at an
annual rate of 0.65% of the average daily net assets. This fee is calculated
daily and paid monthly. As of January 31, 1999, a portion of the management fee
amounting to $85,635 was waived.
On October 8, 1998, CFBDS, Inc. became the Trust's distributor. Prior to that
date, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Trust's distributor. SSB, as well as certain other broker-dealers, continues to
sell Trust shares to the public as members of the selling group.
There is a contingent deferred sales charge ("CDSC") of
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
4.50% on Class B shares, which applies if redemption occurs within one year from
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred. Class L shares also have
a 1.00% CDSC, which applies if redemption occurs within the first year of
purchase. In certain cases, Class A shares also have a 1.00% CDSC, which applies
if redemption occurs within the first year of purchase. This CDSC only applies
to those purchases of Class A shares, which, when combined with current holdings
of Class A shares, equal or exceed $500,000 in the aggregate. These purchases do
not incur an initial sales charge.
For the six months ended January 31, 1999, SSB received sales charges of
approximately $177,000 and $79,000 on sales of the Fund's Class A and Class L
shares, respectively. In addition, CDSCs paid to SSB were approximately:
Class A Class B Class L
================================================================================
CDSCs $ 6,000 $105,000 $ 10,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B and L shares calculated at an annual rate of 0.25% of the average
daily net assets for each respective class. The Fund also pays a distribution
fee with respect to Class B and L shares calculated at an annual rate of 0.50%
and 0.45% of the average daily net assets for each class, respectively. For the
six months ended January 31, 1999, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $ 76,719 $352,104 $ 88,108
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the six months ended January 31, 1999, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $53,340,946
- --------------------------------------------------------------------------------
Sales 13,779,713
================================================================================
At January 31, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 5,693,909
Gross unrealized depreciation (1,982,392)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 3,711,517
================================================================================
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Fund requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. The initial margin is segregated by the custodian and is noted in the
schedule of investments. During the period the futures contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking to market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or received
and recognized as assets due from or liabilities due to broker, depending upon
whether unrealized gains or losses are incurred. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transactions and the Fund's basis in the
contract.
The Fund enters into such contracts to hedge a portion of its portfolio. The
Fund bears the market risk that arises from changes in the value of the
finan-
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
cial instruments and securities indices (futures contracts).
At January 31, 1999, the Fund had no open futures contracts.
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 securities loaned, 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 January 31, 1999, the Fund had no securities on loan.
7. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreement transactions for leveraging
purposes. A reverse repurchase agreement involves a sale by the Fund of
securities that it holds with an agreement by the Fund to repurchase the same
securities at an agreed upon price and date. A reverse repurchase agreement
involves the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of the securities. The Fund will establish a
segregated account with its custodian, in which the Fund will maintain cash,
U.S. government securities or other liquid high-grade debt obligations.
At January 31, 1999, the Fund had no open reverse repurchase agreements.
8. When-Issued Securities and Delayed Delivery Transactions
The Fund may purchase or sell securities offered on a when-issued or
delayed-delivery basis. In such transactions, delivery of the securities occurs
beyond the normal settlement period but no payment or delivery is made by the
Fund prior to the actual delivery or payment by the other party to the
transaction. Due to fluctuations in the value of the securities purchased or
sold on a when-issued or delayed delivery basis, the yields obtained on such
securities may be higher or lower than the yields available in the market on the
dates when the investments are actually delivered to the buyers. The Fund will
establish a segregated account with the Fund's custodian consisting of cash,
U.S. government securities, debt securities of any grade or equity securities
having a value equal to or greater than the Fund's purchase commitments.
At January 31, 1999, the Fund had no when-issued securities and had not entered
into any delayed delivery transactions.
9. Shares of Beneficial Interest
At January 31, 1999, the Trust had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At January 31, 1999, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class L
===========================================================================================
<S> <C> <C> <C>
Total Paid-in Capital $64,774,743 $98,792,313 $28,233,228
===========================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Period Ended
January 31, 1999 July 31, 1998+
-------------------------- -------------------------
Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,230,396 $ 14,403,031 4,839,711 $ 55,583,555
Shares issued on reinvestment 99,595 1,156,078 70,212 812,189
Shares reacquired (445,057) (5,191,777) (169,761) (1,968,679)
- --------------------------------------------------------------------------------------------
Net Increase 884,934 $ 10,367,332 4,740,162 $ 54,427,065
============================================================================================
Class B
Shares sold 1,921,864 $ 22,465,052 7,159,431 $ 82,222,890
Shares issued on reinvestment 131,924 1,530,638 87,577 1,012,757
Shares reacquired (571,582) (6,653,081) (152,002) (1,757,296)
- --------------------------------------------------------------------------------------------
Net Increase 1,482,206 $ 17,342,609 7,095,006 $ 81,478,351
============================================================================================
Class L*
Shares sold 857,993 $ 10,005,133 1,777,314 $ 20,446,050
Shares issued on reinvestment 42,454 492,544 25,102 290,304
Shares reacquired (223,144) (2,596,525) (34,200) (397,797)
- --------------------------------------------------------------------------------------------
Net Increase 677,303 $ 7,901,152 1,768,216 $ 20,338,557
============================================================================================
</TABLE>
+ For the period from February 27, 1998 (inception date) to July 31, 1998.
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares Class B Shares Class L Shares
------------------------- ------------------------- ------------------------
1999(1)(2) 1998(3) 1999(1)(2) 1998(3) 1999(1)(2) 1998(3)
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.53 $11.46 $11.53 $11.46 $11.53 $11.46
- ------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(4) 0.33 0.25 0.30 0.23 0.31 0.22
Net realized and unrealized gain 0.16 0.05 0.16 0.05 0.15 0.06
- ------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.49 0.30 0.46 0.28 0.46 0.28
- ------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.35) (0.23) (0.32) (0.21) (0.32) (0.21)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.23) (0.32) (0.21) (0.32) (0.21)
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $11.67 $11.53 $11.67 $11.53 $11.67 $11.53
- ------------------------------------------------------------------------------------------------------------------------------
Total Return++ 4.26% 2.64% 4.00% 2.48% 4.03% 2.49%
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $65,668 $54,674 $100,082 $81,797 $28,537 $20,386
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses(4) 1.00% 1.00% 1.50% 1.50% 1.45% 1.45%
Net investment income 5.69 5.39 5.19 4.90 5.24 4.97
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 8% 0% 8% 0% 8% 0%
==============================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the average shares method.
(3) For the period from February 27, 1998 (inception date) to July 31, 1998.
(4) The manager waived part of its fees for the periods ended January 31, 1999
and July 31, 1998. If such fees were not waived, the per share effect on
net investment income and the expense ratios would have been as follows:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers+
------------------------ --------------------
1999 1998 1999 1998
------ ------- -------- --------
Class A $0.01 $0.01 1.09% 1.21%
Class B 0.01 0.01 1.59 1.71
Class L 0.01 0.01 1.54 1.66
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 17
<PAGE>
Smith Barney
Total Return Bond Fund
Trustees
Lee Abraham
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
Joseph P. Deane
Vice President and Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Manager
SSBC Fund Management Inc.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of shareholders of Smith
Barney Total Return Bond Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
SALOMON SMITH BARNEY
- ---------------------------
A member of citigroup[LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney
Total Return Bond Fund
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD01627 3/99
[PHOTO OMITTED]
Smith Barney
Municipal High
Income Fund
[PHOTO OMITTED]
------------------
SEMI-ANNUAL REPORT
------------------
January 31, 1999
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day(R).
<PAGE>
Smith Barney Municipal
High Income Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Smith Barney Municipal High Income Fund seeks maximum current income that is
exempt from federal income taxes by investing primarily in intermediate- and
long-term municipal bonds and municipal leases, rated A, Baa or Ba by Moody's
Investor Service Inc. or A, BBB or BB by Standard & Poor's Ratings Group.
Smith Barney Municipal High Income Fund
Average Annual Total Returns
January 31, 1999
Without Sales Charges(1)
-------------------------------------------------
Class A Class B Class L
================================================================================
Six Month+ 3.28% 2.97% 2.94%
- --------------------------------------------------------------------------------
One-Year 5.29 4.76 4.66
- --------------------------------------------------------------------------------
Five-Year 5.67 5.14 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 7.08 N/A
- --------------------------------------------------------------------------------
Since Inception++ 7.07 8.08 8.96
================================================================================
With Sales Charges(2)
-------------------------------------------------
Class A Class B Class L
================================================================================
Six Month+ (0.86)% (1.45)% 0.95%
- --------------------------------------------------------------------------------
One-Year 1.05 0.37 2.66
- --------------------------------------------------------------------------------
Five-Year 4.81 4.98 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 7.08 N/A
- --------------------------------------------------------------------------------
Since Inception++ 6.37 8.08 8.70
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 4.00% and 1.00%,
respectively; and Class B shares reflect the deduction of a 4.50% CDSC,
which applies if shares are redeemed within one year from initial purchase
and thereafter declines by 0.50% the first year after purchase and by
1.00% per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC which applies if shares are redeemed within the
first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Total return is not annualized as it may not be representative of the
total return for the year.
++ Inception dates for Class A, B and L shares are November 6, 1992,
September 16, 1985 and November 17, 1994.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
We are pleased to announce that Peter Coffey assumed management of the Smith
Barney Municipal High Income Fund on February 3, 1999. Mr. Coffey began his
career at Salomon Smith Barney more than 30 years ago and is responsible for
over $2.3 billion in assets.
In addition to the Municipal High Income Fund, Mr. Coffey also manages the
Florida Portfolio, Georgia Portfolio, Limited Term Portfolio, Massachusetts
Municipals Fund, National Portfolio, New York Portfolio, Oregon Municipals Fund
and the Pennsylvania Portfolio.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A STXAX
Class B SXMTX
Class L FMHLX
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter........................................................... 1
Historical Performance....................................................... 3
Smith Barney Municipal High
Income Fund at a Glance...................................................... 5
Schedule of Investments...................................................... 6
Statement of Assets and Liabilities.......................................... 20
Statement of Operations...................................................... 21
Statements of Changes in Net Assets.......................................... 22
Notes to Financial Statements................................................ 23
Financial Highlights......................................................... 26
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. MCLENDON PETER M. COFFEE
Chairman Vice President
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Municipal
High Income Fund ("Fund") for the period ended January 31, 1999. Please note
that on February 2, 1999, Peter Coffey assumed management responsibilities for
the Fund. Mr. Coffey has over 30 years of investment experience and currently
manages the Smith Barney Muni Funds - National Portfolio among many others.
In this report, we summarize the period's prevailing economic and market
conditions and outline our portfolio strategy. A detailed summary of performance
can be found in the appropriate sections that follow. We hope you find this
report to be useful and informative.
Performance Update
For the six months ended January 31, 1999, the Fund's Class A shares posted a
total return of 3.28%, excluding sales charges, slightly lagging its Lipper,
Inc. peer group average of 4.00% for the same period. (Lipper is an independent
fund-tracking organization.) Based on its Class A share net asset value of
$17.64 and current dividend rate of $0.075 per share as of January 31, 1999, the
Fund provided shareholders with a tax-free yield of 5.10%. To match this yield,
investors in the 36% federal tax bracket would have to earn 7.97% on a taxable
bond alternative.
A Style Pure Fund
The Smith Barney Municipal High Income Fund is a Style Pure Fund. Style Pure
Series mutual funds are Smith Barney Mutual Funds that are the basic building
blocks of asset allocation. Other than maintaining minimal cash or under
extraordinary market conditions, each Style Pure Series Fund is totally invested
100% of the time within its designated asset classes and its investment style.
Market and Economic Overview
The municipal bond market remained quite stable in the past six months while
many other financial markets experienced significant volatility. The sudden
collapse of Russia's economy and the near-failure of a prominent leveraged hedge
fund last summer heightened credit-quality concerns for many investors.
Moreover, Brazil, a major Latin American economy, appeared to be facing a
currency crisis of its own, which added to the uncertainty and volatility in
financial markets. These doubts led investors to shun most corporate bonds,
particularly high-yield bonds, in favor of U.S. Treasury bonds, considered to be
the global benchmark for credit quality.
The surging demand for U.S. Treasury bonds caused their yields, which move in
the opposite direction of its price, to plummet while municipal bond yields
remained largely unchanged. As a result, the spread between municipal bond
yields and U.S. Treasury bond yields narrowed. During the reporting period,
long-term municipal bonds yielded as much as 100% of long-term U.S. Treasury
bonds. Under typical market conditions, municipal bonds yield roughly 85% of
similar-maturity U.S. Treasury bonds.
Faced with a potential credit crunch and the possibility that financial
instability could trigger an U.S. recession, the Federal Reserve Board ("Fed")
lowered its federal-funds target rate from 5.50% to 4.75% over the course of
several weeks. (The federal-funds rate is the rate banks charge each other for
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 1
<PAGE>
overnight loans and an indication of the future direction of interest rates.)
This action helped to calm jittery investors and provided more liquidity in the
banking system. The Fed's efforts may have also helped the U.S. economy maintain
its momentum. Despite recessionary trends abroad, the domestic unemployment rate
declined from 4.7% to 4.4% in 1998 and consumer demand remained robust.
A buoyant U.S. economy also contributed to the massive issuance of municipal
bonds in 1998, totaling some $284 billion--the second highest issuance volume in
history. The ability of the municipal bond market to absorb such a heavy
issuance is an indication of steady demand for tax-exempt investments, unlike
the radical shift in investor sentiment experienced by their taxable
counterparts during the reporting period.
Investment Strategy
As previously noted, the Fund seeks maximum current income that is exempt from
federal income taxes* by investing primarily in intermediate- and long-term
municipal bonds and municipal leases, rated A, Baa or Ba by Moody's Investors
Service Inc or A, BBB or BB by Standard & Poor's Ratings Group. (Standard &
Poor's Corporation and Moody's Investors Service Inc. are two major credit
reporting and bond-rating agencies.) As of January 31, 1999, 73.4% of the Fund's
holdings were rated investment grade or better.
The Fund's largest holdings were concentrated in transportation bonds (16.8%),
hospital bonds (14.9%) and utilities bonds (11.5%). As long-term interest rates
rebound from their historical lows, the yield differential between stronger and
weaker credits has widened. We believe this development may provide additional
opportunities for the Fund. Although some hospitals have come under pressure
recently, we have continued to emphasize this market segment on a selective
basis because of the additional income these bonds offer.
Municipal Bond Market Outlook
Looking ahead, we believe that the U.S. economy should remain strong in the
coming months with muted inflationary pressures. Despite the surprising
resilience in many areas of the economy, we believe that ongoing financial
weakness abroad should help dampen overall price increases.
In recent weeks, long-term interest rates have spiked upward, partly in response
to unexpected strength in the U.S. economy. However, we believe that after
aggressively cutting short-term rates last fall, the Fed will likely adopt a
wait-and-see approach before adjusting interest rates again. Moreover, we
believe that a slight rise in interest rates could create buying opportunities
for the Fund. In our view, these conditions should provide a supportive backdrop
for municipal bonds over the medium term.
In closing, we thank you for your investment in the Municipal High Income Fund
Inc. We encourage you to visit our Web site at www.smithbarney.com. We look
forward to continuing to help you pursue your financial goals in the years to
come.
Sincerely,
/s/ Heath B. McLendon /s/ Peter Coffey
Heath B. McClendon Peter Coffey
Chairman Vice President
February 24, 1999
- ----------
* Please note that a portion of the income from this Fund may be subject to
the Alternative Minimum Tax ("AMT").
- --------------------------------------------------------------------------------
2 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $17.96 $17.64 $0.47 $0.43 $0.00 3.28%+
- -------------------------------------------------------------------------------------------------------------
7/31/98 18.07 17.96 0.98 0.27 0.00 6.54
- -------------------------------------------------------------------------------------------------------------
7/31/97 17.31 18.07 0.98 0.00 0.00 10.40
- -------------------------------------------------------------------------------------------------------------
7/31/96 17.25 17.31 1.00 0.00 0.00 6.28
- -------------------------------------------------------------------------------------------------------------
7/31/95 17.26 17.25 1.00 0.02 0.04 6.42
- -------------------------------------------------------------------------------------------------------------
7/31/94 18.24 17.26 1.06 0.13 0.00 1.14
- -------------------------------------------------------------------------------------------------------------
Inception*- 7/31/93 17.45 18.24 0.83 0.16 0.00 10.24+
=============================================================================================================
Total $6.32 $1.01 $0.04
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $17.98 $17.65 $0.43 $0.43 $0.00 2.97%+
- -------------------------------------------------------------------------------------------------------------
7/31/98 18.09 17.98 0.89 0.27 0.00 6.01
- -------------------------------------------------------------------------------------------------------------
7/31/97 17.32 18.09 0.89 0.00 0.00 9.89
- -------------------------------------------------------------------------------------------------------------
7/31/96 17.26 17.32 0.92 0.00 0.00 5.74
- -------------------------------------------------------------------------------------------------------------
7/31/95 17.26 17.26 0.91 0.02 0.04 5.91
- -------------------------------------------------------------------------------------------------------------
7/31/94 18.24 17.26 0.96 0.13 0.00 0.60
- -------------------------------------------------------------------------------------------------------------
7/31/93 18.00 18.24 1.02 0.17 0.00 8.28
- -------------------------------------------------------------------------------------------------------------
7/31/92 16.97 18.00 1.04 0.14 0.00 13.50
- -------------------------------------------------------------------------------------------------------------
7/31/91 16.98 16.97 1.10 0.11 0.00 7.40
- -------------------------------------------------------------------------------------------------------------
7/31/90 17.31 16.98 1.12 0.03 0.00 4.95
- -------------------------------------------------------------------------------------------------------------
7/31/89 16.44 17.31 1.13 0.01 0.00 12.68
=============================================================================================================
Total $10.41 $1.31 $0.04
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $17.95 $17.62 $0.42 $0.43 $0.00 2.94%+
- -------------------------------------------------------------------------------------------------------------
7/31/98 18.07 17.95 0.88 0.27 0.00 5.91
- -------------------------------------------------------------------------------------------------------------
7/31/97 17.31 18.07 0.89 0.00 0.00 9.79
- -------------------------------------------------------------------------------------------------------------
7/31/96 17.25 17.31 0.91 0.00 0.00 5.69
- -------------------------------------------------------------------------------------------------------------
Inception*- 7/31/95 15.83 17.25 0.62 0.02 0.04 13.45+
=============================================================================================================
Total $3.72 $0.72 $0.04
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
------------------------------------------
Class A Class B Class L
================================================================================
Six Months Ended 1/31/99+ 3.28% 2.97% 2.94%
- --------------------------------------------------------------------------------
Year Ended 1/31/99 5.29 4.76 4.66
- --------------------------------------------------------------------------------
Five Years Ended 1/31/99 5.67 5.14 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 1/31/99 N/A 7.08 N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/99 7.07 8.08 8.96
================================================================================
With Sales Charges(1)
------------------------------------------
Class A Class B Class L
================================================================================
Six Months Ended 1/31/99+ (0.86)% (1.45)% 0.95%
- --------------------------------------------------------------------------------
Year Ended 1/31/99 1.05 0.37 2.66
- --------------------------------------------------------------------------------
Five Years Ended 1/31/99 4.81 4.98 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 1/31/99 N/A 7.08 N/A
- --------------------------------------------------------------------------------
Inception* through 1/31/99 6.37 8.08 8.70
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (Inception* through 1/31/99) 53.16%
- --------------------------------------------------------------------------------
Class B (1/31/89 through 1/31/99) 98.19
- --------------------------------------------------------------------------------
Class L (Inception* through 1/31/99) 43.50
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 4.00% and 1.00%
respectively; Class B shares reflect the deduction of a 4.50% CDSC, which
applies if shares are redeemed within one year from purchase. This CDSC
declines by 0.50% the first year after purchase and thereafter by 1.00%
per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed within the
first year of purchase.
* Inception dates for Class A, B and L shares are November 6, 1992,
September 16, 1985 and November 17, 1994, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
4 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the Smith Barney Municipal High
Income Fund vs. Lehman Brothers Municipal Bond Index+
- --------------------------------------------------------------------------------
January 1989 -- January 1999
[GRAPHIC OMITTED]
Smith Barney Municipal High Income Fund
Lehman Brothers Municipal Bond Index
+ Hypothetical illustration of $10,000 invested in Class B shares on January
31, 1989, assuming reinvestment of dividends and capital gains, if any, at
net asset value through January 31, 1999. The Lehman Brothers Municipal
Bond Index is a broad-based, total return index comprised of bonds which
are all investment grade, fixed rate, long-term maturities (greater than
one year) and are selected from issues larger than $50 million dated since
January 1991. The index is unmanaged and is not subject to the same
management and trading expenses as a mutual fund. The performance of the
Fund's other classes may be greater or less than the Class B shares'
performance indicated on this chart, depending on whether greater or
lesser sales charges and fees were incurred by shareholders investing in
other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
Industry Diversification*
- --------------------------------------------------------------------------------
[The following table was depicted as a bar chart in the printed material.]
Education 4.3%
General Obligation 4.5%
Healthcare Systems 2.5%
Hospital 14.9%
Housing 7.4%
Industrial Development 10.0%
Pollution Control 11.3%
Transportation 16.8%
Utility 11.5%
Water & Sewer 4.9%
Other 11.9%
Summary of Investments by Combined Ratings*
- --------------------------------------------------------------------------------
Standard Percentage
Moody's & Poor's of Total Investments
-----------------------------------------------------
Aaa AAA 28.8%
Aa AA 4.6
A A 13.6
Baa BBB 26.4
Ba BB 10.0
B B 3.4
NR NR 13.2
--------
100.0%
========
* As a percentage of total investments.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- 100%
Alabama -- 1.4%
$4,000,000 Baa3* Alabama IDA (Boise Cascade Project), 6.450% due 12/1/23(b) $ 4,320,000
3,000,000 AAA Huntsville, AL Healthcare Facilities Authority, Series A,
MBIA-Insured, 6.375% due 6/1/12 3,285,000
2,500,000 AAA Morgan County-Decatur, AL Healthcare Authority
Hospital Revenue, Decatur General Hospital,
CONNIE LEE-Insured, 6.250% due 3/1/13 2,784,375
- ----------------------------------------------------------------------------------------------------------------------------------
10,389,375
- ----------------------------------------------------------------------------------------------------------------------------------
Arizona -- 5.0%
2,500,000 B Apache County, AZ Industrial Development Authority, PCR,
Tucson Electric Power Co., 5.875% due 3/1/33 2,503,125
1,000,000 Aa* Arizona Educational Loan Marketing Corp.,
Sr. Series, 6.375% due 9/1/05(b) 1,061,250
2,500,000 NR Flagstaff, AZ IDA, (Living Community Northern Community Project),
6.300% due 9/1/38 2,553,125
2,750,000 A Maricopa County, AZ IDA, Health Facilities Revenue,
(Catholic Healthcare West Project), Series A, 5.000% due 7/1/21 2,705,312
5,000,000 BB+ Maricopa County, AZ PCR, Public Service Co., Palo Verde,
Series A, 6.375% due 8/15/23(c) 5,312,500
7,650,000 A- Navajo County, AZ PCR, Arizona Public Service Co., Series A,
5.875% due 8/15/28 7,984,688
274,000 NR Peoria, AZ IDA, Sierra Winds Life Care Inc., 6.500% due 11/1/17 274,000
2,150,000 AAA Phoenix, AZ Civic Improvement Corp., Water Systems Revenue,
FGIC-Insured, 5.000% due 7/1/19 2,152,688
Pima County, AZ Industrial Development Authority,Tuscon Electric Power Co.:
6,500,000 B Series A, 6.100% due 9/1/25(b) 6,508,125
2,250,000 B Series B, 6.000% due 9/1/29 2,255,625
2,500,000 B Series C, 6.000% due 9/1/29 2,506,250
- ----------------------------------------------------------------------------------------------------------------------------------
35,816,688
- ----------------------------------------------------------------------------------------------------------------------------------
Arkansas -- 0.1%
815,000 AAA Arkansas State Development Authority, Single-Family Mortgage Revenue,
Series A, GNMA/FNMA-Collateralized, 6.200% due 7/1/15 871,031
- ----------------------------------------------------------------------------------------------------------------------------------
California -- 4.1%
3,100,000 AAA Alameda, CA Corridor Transportation Authority Revenue,
Sr. Lien, Series A, MBIA-Insured, 5.000% due 10/1/29 3,088,375
3,940,000 A- Burbank, CA Redevelopment Agency, Series A, (Golden
State Redevelopment Project), 6.250% due 12/1/24 4,255,200
2,500,000 Baa3* California Educational Facilities Authority Revenue Pooled College &
University Projects, Series A, 5.625% due 7/1/23 2,615,625
2,500,000 AAA California Statewide Community Development Authority Revenue,
COP, Sutter Health, AMBAC-Insured, 6.125% due 8/15/22 2,709,375
3,000,000 Baa1* Duarte, CA Hope Medical Center, 6.250% due 4/1/23 3,176,250
5,500,000 BBB Long Beach, CA (Aquarium of the Pacific Project), Series A,
6.125% due 7/1/15(c) 5,905,625
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
California -- 4.1% (continued)
$ 4,000,000 A- Los Angeles, CA Regional Airports Improvement, Corporate Lease
Revenue, LA International Airport, 6.800% due 1/1/27(b) $ 4,280,000
2,850,000 AAA Northern California Power Agency, Multiple Capital Facilities Revenue,
Series A, AMBAC-Insured, 5.000% due 8/1/25 2,846,438
1,150,000 AAA Richmond, CA Redevelopment Agency Tax Allocation Capital Appreciation,
Harbour, Series A, MBIA-Insured, zero coupon due 7/1/23 337,813
- ----------------------------------------------------------------------------------------------------------------------------------
29,214,701
- ----------------------------------------------------------------------------------------------------------------------------------
Colorado -- 2.3%
Colorado Health Facilities Authority Revenue,
National Jewish Medical Research Center:
1,500,000 BBB 5.375% due 1/1/16 1,524,375
2,500,000 NR Volunteers, Series A, 5.875% due 7/1/28 2,525,000
4,750,000 BBB+ Colorado Springs, CO Airport Revenue, Series A, 7.000% due 1/1/22(b) 5,201,250
Denver, CO City and County Airport Revenue:
205,000 BBB+ Series A, 7.500% due 11/15/23(b) 237,800
1,715,000 BBB+ Series C, 6.750% due 11/15/22(b) 1,858,631
10,000,000 AAA E-470 Public Highway Authority, CO, Series B, MBIA-Insured,
zero coupon due 9/1/26 2,487,500
2,250,000 AAA Jefferson County, CO COP, MBIA-Insured, 6.650% due 12/1/08 2,497,500
- ----------------------------------------------------------------------------------------------------------------------------------
16,332,056
- ----------------------------------------------------------------------------------------------------------------------------------
Connecticut -- 2.6%
2,000,000 AAA Connecticut State Airport Revenue, Bradley International
Airport, FGIC-Insured, 7.650% due 10/1/12 2,370,000
4,125,000 Ba3* Connecticut State Development Pollution Control Revenue,
Connecticut Light and Power, Series A, 5.850% due 9/1/28 4,166,250
Connecticut State Health and Educational Facilities:
1,200,000 BBB- Quinnipiac College, Series D, 6.000% due 7/1/23 1,335,000
University of Hartford, Series D:
1,655,000 BBB- 6.750% due 7/1/12 1,758,437
1,450,000 BBB- 6.800% due 7/1/22 1,537,000
Mashantucket Western Pequot Tribe, CT, Series B:
3,000,000 Baa3* 5.750% due 9/1/18 3,093,750
4,500,000 Baa3* 5.750% due 9/1/27 4,612,500
- ----------------------------------------------------------------------------------------------------------------------------------
18,872,937
- ----------------------------------------------------------------------------------------------------------------------------------
District of Columbia -- 1.7%
District of Columbia:
6,500,000 BB- COP, 7.300% due 1/1/13 7,263,750
5,000,000 Ba1* GO, 5.250% due 6/1/27 4,968,750
- ----------------------------------------------------------------------------------------------------------------------------------
12,232,500
- ----------------------------------------------------------------------------------------------------------------------------------
Florida -- 1.9%
Boca Raton, FL Community Redevelopment Agency, Tax Increment Revenue,
Capital Appreciation, (Mizner Park Project), FSA-Insured:
2,100,000 AAA Zero coupon due 12/1/28 787,500
1,200,000 AAA Zero coupon due 3/1/27 498,000
2,800,000 BBB+ Hillsborough County, FL Utility Revenue, Series A, 7.000% due 8/1/14 3,038,000
3,440,000 AAA Jacksonville, FL Health Facilities Revenue,
University Medical Center, CONNIE LEE-Insured, 6.600% due 2/1/21 3,741,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Florida -- 1.9% (continued)
$ 2,000,000 A+ Jacksonville, FL Sewer & Solid Waste Disposal Facilities Revenue,
(Anheuser-Busch Project), 5.875% due 2/1/36(b) $ 2,117,500
1,250,000 AAA Martin County, FL Health Facilities Authority Hospital Revenue,
(Martin Memorial Medical Center Project), AMBAC-Insured,
5.000% due 11/15/28 1,251,562
1,900,000 AAA Tampa, FL Utility Tax and Special Revenue, AMBAC-Insured,
6.900% due 10/1/09 2,097,125
- ----------------------------------------------------------------------------------------------------------------------------------
13,530,687
- ----------------------------------------------------------------------------------------------------------------------------------
Georgia -- 3.2%
4,000,000 A Atlanta, GA Airport Facilities Revenue, 7.250% due 1/1/17(b)(c) 4,275,000
4,750,000 AAA George L. Smith, GA World Congress Center Authority Revenue,
(Domed Stadium Project), 7.875% due 7/1/20(b) 5,135,937
7,000,000 AAA Georgia Municipal Electric Authority Power Revenue,
Series EE, AMBAC-Insured, 6.400% due 1/1/23 7,770,000
5,000,000 AAA Medical Center Hospital Authority, GA Columbus Healthcare,
Series C, MBIA-Insured, 6.400% due 8/1/06 5,518,750
- ----------------------------------------------------------------------------------------------------------------------------------
22,699,687
- ----------------------------------------------------------------------------------------------------------------------------------
Hawaii -- 1.1%
Hawaii State Department of Budget and Finance,
Special Purpose Mortgage Revenue:
2,000,000 AAA Hawaiian Electric Co. Project, Series B, MBIA-Insured,
5.875% due 12/1/26(b) 2,190,000
2,000,000 A Kapiolani Healthcare Systems, 6.400% due 7/1/13 2,167,500
Honolulu, HI City and County Wastewater Systems Revenue,
Capital Appreciation, FGIC-Insured:
6,000,000 Aaa* Zero coupon due 7/1/17 2,407,500
2,000,000 Aaa* Zero coupon due 7/1/18 762,500
2,000,000 Aaa* Zero coupon due 7/1/19 725,000
- ----------------------------------------------------------------------------------------------------------------------------------
8,252,500
- ----------------------------------------------------------------------------------------------------------------------------------
Illinois -- 2.6%
20,000,000 AAA Chicago, IL Board of Education, Capital Appreciation, School Reform,
Series B-1, FGIC-Insured, zero coupon due 12/1/29 4,100,000
1,540,000 AA Chicago, IL HDC, Section 8, Series A, FHA-Insured, 6.700% due 7/1/12 1,643,950
2,000,000 B+ East Chicago, IL Industrial Exempt Facilities Revenue, (Ispat Inland
Income Project No. 16), 7.000% due 1/1/14 2,025,000
3,000,000 BB East Chicago, IL Industrial PCR, Inland Steel Co., (Project 10),
6.800% due 6/1/13 3,071,250
1,300,000 NR Illinois Education Facilities Authority Revenue, Northern Illinois
Medical Center, 6.000% due 9/1/19 1,444,625
2,000,000 A- Illinois Health Facilities Authority Revenue, Victory Health Services,
Series A, 5.750% due 8/15/27 2,060,000
1,500,000 A+ Illinois Housing and Development Authority, Multi-Family Housing,
Series A, 6.125% due 7/1/25 1,582,500
2,750,000 AAA Illinois State Toll Highway Authority, Series A, FGIC-Insured,
6.200% due 1/1/16 3,049,062
- ----------------------------------------------------------------------------------------------------------------------------------
18,976,387
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Indiana -- 2.9%
$ 5,000,000 Baa2* Indiana State Development Finance Authority Environmental Revenue,
(USX Corp. Project), 5.600% due 12/1/32 $ 5,050,000
3,000,000 B+ Indiana State Development Finance Authority Revenue,
(Inland Steel Project), 5.750% due 10/1/11 2,861,250
Indianapolis, IN Airport Authority Revenue, Special Facility,
Federal Express Corporate Project:
5,245,000 BBB 7.100% due 1/15/17(b) 5,900,625
3,000,000 BBB 5.500% due 5/1/29 3,011,250
3,970,000 Baa2* United Airlines Project, Series A, 6.500% due 11/15/31(b) 4,292,562
- ----------------------------------------------------------------------------------------------------------------------------------
21,115,687
- ----------------------------------------------------------------------------------------------------------------------------------
Kentucky -- 1.9%
4,250,000 BBB- Kenton County, KY Airport Board Revenue, Delta Airlines,
Project A, 7.500% due 2/1/20(b) 4,659,062
1,500,000 BBB Kentucky Economic Development Finance Authority
Hospital Systems Revenue, Appalachian Regional Healthcare,
5.875% due 10/1/22 1,558,125
590,000 NR Kentucky Multi-County Residential Mortgage, 10.500% due 10/1/00 596,637
4,000,000 A Pendleton County, KY Multi-County Lease Revenue, Series A,
6.500% due 3/1/19 4,350,000
2,605,000 Aa2* Trimble County, KY PCR, Series B, 6.550% due 11/1/20(b) 2,819,913
- ----------------------------------------------------------------------------------------------------------------------------------
13,983,737
- ----------------------------------------------------------------------------------------------------------------------------------
Louisiana -- 3.0%
2,500,000 AA- Calcasieu Parish Inc., LA IDB Exempt Facility Revenue,
(Conoco Inc. Project), 5.750% due 12/1/26(b) 2,634,375
5,000,000 NR Hodge, LA Utility Revenue, 9.000% due 3/1/10(b) 5,285,500
4,000,000 BB+ Iberville Parish, LA PCR, 5.700% due 1/1/14 4,075,000
2,600,000 A3* Lake Charles, LA Harbor and Terminal District, (Trunkline Liquid
Natural Gas Co. Project), 7.750% due 8/15/22 2,954,250
2,000,000 B+ Port of New Orleans, LA IDR, (Continential Grain Co.), 7.500% due 7/1/13 2,140,000
1,210,000 AAA State Tammany Parish, LA Hospital Revenue, District 2,
CONNIE LEE-Insured, 6.250% due 10/1/14 1,343,100
3,000,000 BB+ West Feliciana Parish, LA PCR, Gulf State Utilities, 7.700% due 12/1/14 3,322,500
- ----------------------------------------------------------------------------------------------------------------------------------
21,754,725
- ----------------------------------------------------------------------------------------------------------------------------------
Maryland -- 2.0%
3,000,000 AAA Baltimore County, MD Mortgage Revenue, Series A,
Dunfield Townhouses, FHA-Insured, 6.900% due 8/1/28 3,258,750
Maryland State Community Development Administration,
Department of Housing & Community Development:
1,280,000 Aa3* Multi-Family Housing, Insured Mortgage, Series A,
FHA-Insured, 6.625% due 5/15/23 1,395,200
1,000,000 Aa2* Single-Family Program, Fourth Series, 6.450% due 4/1/14 1,080,000
Northeast, MD Waste Disposal Authority, Recovery Revenue,
MBIA-Insured, Southwest Resource Recovery:
3,000,000 AAA 7.200% due 1/1/06 3,495,000
3,000,000 AAA 7.200% due 1/1/07 3,483,750
2,500,000 Caa3* Prince Georges County, MD Greater Southeast Healthcare
System, 6.375% due 1/1/23 1,550,000
- ----------------------------------------------------------------------------------------------------------------------------------
14,262,700
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Massachusetts -- 7.5%
Massachusetts State Health and Educational Facilities Authority Revenue:
$ 6,750,000 AAA Boston Medical Center, Series A, MBIA-Insured, 5.000% due 7/1/29 $ 6,665,625
3,500,000 AAA New England Medical Center Hospitals, Series F,
FGIC-Insured, 6.625% due 7/1/25 3,823,750
3,005,000 B1* Saint Memorial Medical Center, Series A, 6.000% due 10/1/23 3,023,781
2,000,000 AAA University of Massachussetts Memorial Issue, Series A, 5.000% due 7/1/28 1,975,000
Massachusetts State HFA, Housing Projects,
Residential Development, FNMA-Collateralized:
2,445,000 A+ Series A, 6.375% due 4/1/21 2,634,487
2,000,000 AAA Series C, 6.875% due 11/15/11 2,190,000
3,000,000 AAA Series D, 6.800% due 11/15/12 3,255,000
2,500,000 Aa3* Massachusetts State Housing Finance Agency, Single-Family,
Series 41, 6.300% due 12/1/14 2,693,750
1,000,000 Baa1* Massachusetts State IFA, Concord Academy, 5.500% due 9/1/27 1,012,500
Massachusetts State Industrial IFA, Resource Recovery Revenue,
(Semass Project):
2,345,000 BBB- Bradford College, GO of Institution Insured, 5.625% due 11/1/28 2,362,587
2,700,000 NR Series A, 9.000% due 7/1/15 3,017,250
4,305,000 NR Series B, 9.250% due 7/1/15(b) 4,826,981
Massachusetts State Port Authority Revenue:
2,750,000 AA- 5.000% due 7/1/27 2,725,937
1,300,000 AAA Series A, MBIA-Insured, 5.875% due 9/1/23(b) 1,392,625
2,700,000 AA- Series D, 5.000% due 7/1/28 2,676,375
32,505,000 Aaa* Massachusetts State Turnpike Authority,
Metropolitan Highway System Revenue, Series C,
MBIA-Insured, zero coupon due 1/1/23 9,710,869
- ----------------------------------------------------------------------------------------------------------------------------------
53,986,517
- ----------------------------------------------------------------------------------------------------------------------------------
Michigan -- 4.2%
6,000,000 BB- Detroit, MI Local Development Finance Authority, Tax Increment,
Series A, 5.500% due 5/1/21 5,955,000
3,000,000 AAA Detroit, MI Water Supply System, FGIC-Insured, 6.375% due 7/1/22(d) 3,262,500
Michigan State Hospital Finance Authority Revenue:
3,000,000 BBB Detroit Medical Center, Series A, 5.250% due 8/15/28 2,760,000
5,000,000 AAA FSA-Insured, 6.300% due 2/15/22(c)(d) 5,337,500
3,500,000 Ba3* Michigan State Strategic Fund Limited Obligation Revenue,
Michigan Sugar Co., Series A, 6.250% due 11/1/15 3,513,125
5,000,000 NR Michigan State Strategic Fund Reserve Recovery
Limited Obligation Revenue, Central Wayne Energy, 7.000% due 7/1/27 5,087,500
3,750,000 AAA Western Townships, MI Utilities Authority, Sewer Disposal
Systems, FSA-Insured, 6.750% due 1/1/15 4,035,938
- ----------------------------------------------------------------------------------------------------------------------------------
29,951,563
- ----------------------------------------------------------------------------------------------------------------------------------
Minnesota -- 0.9%
St. Paul, MN Housing and Redevelopment Authority,
(Healtheast Project), Series A:
2,250,000 BBB 5.700% due 11/1/15 2,190,938
3,900,000 BBB 6.625% due 11/1/17 4,056,000
- ----------------------------------------------------------------------------------------------------------------------------------
6,246,938
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Mississippi -- 1.7%
$ 2,250,000 AAA Gulfport, MS Hospital Facilities Revenue, Memorial Hospital
Gulfport, Series A, MBIA-Insured, 6.200% due 7/1/18 $ 2,477,812
2,500,000 A3* Jones County, MS Solid Waste Disposal Revenue,
(International Paper Co. Project), Series A, 5.800% due 10/1/21(b) 2,600,000
5,100,000 BBB- Mississippi Business Finance Corp., Mississippi PCR System,
(Energy Reserve Inc. Project), 5.875% due 4/1/22 5,112,750
2,000,000 Aaa* Mississippi Home Corp., Single-Family Mortgage Revenue,
GNMA-Collateralized, 6.550% due 4/1/21(b) 2,137,500
- ----------------------------------------------------------------------------------------------------------------------------------
12,328,062
- ----------------------------------------------------------------------------------------------------------------------------------
Montana -- 1.9%
7,000,000 BBB- Lewis & Clark County, MT Environmental Revenue Facilities,
(Asarco Inc. Project), 5.850% due 10/1/33 7,017,500
6,500,000 NR Montana State Board Resource Recovery, (Yellowstone
Energy LP Project), 7.000% due 12/31/19(b)(c) 6,329,375
- ----------------------------------------------------------------------------------------------------------------------------------
13,346,875
- ----------------------------------------------------------------------------------------------------------------------------------
Nebraska -- 0.2%
1,490,000 AAA Nebraska Investment Finance Authority, Single-Family
Housing Revenue, Series C, GNMA/FNMA-Collateralized,
Remarketed 5/1/97, 6.300% due 9/1/28(b) 1,584,988
- ----------------------------------------------------------------------------------------------------------------------------------
Nevada -- 1.7%
4,000,000 BBB- Clark County, NV IDR, (Nevada Power Co. Project),
Series A, 5.900% due 11/1/32(b) 4,060,000
Henderson, NV Health Care Facilities Revenue, Catholic Healthcare West:
4,000,000 A 5.250% due 7/1/18 4,010,000
4,500,000 A 5.125% due 7/1/28 4,398,750
- ----------------------------------------------------------------------------------------------------------------------------------
12,468,750
- ----------------------------------------------------------------------------------------------------------------------------------
New Hampshire -- 1.4%
3,340,000 BBB- New Hampshire Business Financing Authority, PCR, United
Illuminating Co., Series A, 5.875% due 10/1/33 3,436,025
1,250,000 BB- New Hampshire Higher Educational and Health Facilities
Authority Revenue, Littleton Hospital,
Series A, 6.000% due 5/1/28 1,273,438
5,000,000 BB- New Hampshire State Business Finance Authority, PCR,
6.000% due 5/1/21(b) 5,125,000
- ----------------------------------------------------------------------------------------------------------------------------------
9,834,463
- ----------------------------------------------------------------------------------------------------------------------------------
New Jersey -- 2.5%
775,000 B1* Atlantic County, NJ Utilities Authority, Solid Waste Revenue, 7.125% due 3/1/16 792,437
5,000,000 Ba2* Camden County, NJ Improvement Authority Revenue, (Health Care
Redevelopment Project), Cooper Health, 6.000% due 2/15/27 4,525,000
2,500,000 AAA Hoboken, Union City, Weehawken, NJ Sewer Authority Revenue,
MBIA-Insured, 6.200% due 8/1/19 2,718,750
885,000 NR Hudson County, NJ Improvement Authority, Solid Waste Revenue,
7.100% due 1/1/20 966,862
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
New Jersey -- 2.5% (continued)
New Jersey EDA:
$ 1,000,000 NR Keswick Pines, 5.750% due 1/1/24 $ 1,001,250
2,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27 2,125,000
2,500,000 AAA RWJ Health Care Corp., FSA-Insured, 6.500% due 7/1/24 2,796,875
3,000,000 AAA New Jersey State Housing & Mortgage Finance Agency, Multi-Family
Housing Revenue, Presidential Plaza, FHA-Insured, 7.000% due 5/1/30 3,258,750
- ----------------------------------------------------------------------------------------------------------------------------------
18,184,924
- ----------------------------------------------------------------------------------------------------------------------------------
New Mexico -- 0.0%
48,171 Aaa* Santa Fe, NM Single-Family Mortgage Revenue, 8.450% due 12/1/11 51,664
- ----------------------------------------------------------------------------------------------------------------------------------
New York -- 8.7%
1,500,000 NR Erie County, NY IDA, Civic Facilities Revenue, (Depaul
Properties Inc. Project), Series A, 5.750% due 9/1/28 1,486,875
Long Island Power Authority, NY Electric Systems Revenue,
Capital Appreciation, Series A:
8,500,000 AAA FSA-Insured, zero coupon due 12/1/19 3,028,125
9,160,000 AAA FSA-Insured, zero coupon due 12/1/21 2,942,650
1,720,000 AAA FSA-Insured, zero coupon due 12/1/25 449,350
4,095,000 AAA Zero coupon due 12/1/24 1,126,125
1,595,000 NR Monroe County, NY IDR, Depaul Community Facilities A, 5.875% due 2/1/28 1,606,963
New York, NY GO Bonds:
195,000 A- Pre-Refunded, Series A-1, 6.500% due 8/1/19 226,688
4,500,000 A- Series A, 6.250% due 8/1/17 5,006,250
5,000,000 A- Series C, 6.660% due 8/1/09 5,312,500
2,750,000 A- Series H, 6.125% due 8/1/25 3,038,750
1,975,000 A- Unrefunded balance, Series A-1, 6.500% due 8/1/19 2,219,406
4,045,000 A- Unrefunded balance, Series F, 6.125% due 2/1/25 4,424,219
2,850,000 NR New York, NY IDA, Community Hospital Brooklyn, 6.875% due 11/1/10 2,878,500
3,085,000 BBB+ New York State COP, (Hanson Redevelopment Project), 8.375% due 5/1/08 3,794,550
New York State Dormitory Authority Revenue:
2,150,000 BBB+ Interfaith Medical Center, 5.400% due 2/15/28 2,195,688
4,500,000 BBB+ Upstate Community College, Series A, 6.250% due 7/1/25 4,983,750
1,500,000 AA Wesley Garden Nursing Home, FHA-Insured, 6.125% due 8/1/35 1,616,250
New York State Energy, Research and Development Authority,
Long Island Lighting Co.:
3,000,000 A- 7.150% due 6/1/20(b) 3,296,250
1,150,000 A- 7.150% due 12/1/20(b) 1,256,375
New York State Medical Care Facilities Finance Agency Revenue:
2,895,000 AAA Series C, Long-Term Healthcare, FSA-Insured, 6.400% due 11/1/14 3,166,406
715,000 A- Series F, Mental Improvement, 6.500% due 2/15/19 776,669
New York State Urban Development Corp.,
2,500,000 BBB+ Correctional Facilities, Service Contract, 5.000% due 1/1/28 2,456,250
2,000,000 NR Onondaga County, NY IDA, Solid Waste Disposal Facilities Revenue,
(Solvay Paperboard LLC Project), 7.000% due 11/1/30 2,042,500
2,000,000 AAA St. Lawrence County, NY Industrial Development Civic Facilities
Revenue, (St. Lawrence University Project), Series A,
MBIA-Insured, 5.000% due 7/1/28 2,002,500
1,000,000 A2* United Nations Development Corp., NY Revenue
Refunding, Sr. Lien, Series B, 5.500% due 7/1/17 1,004,680
- ----------------------------------------------------------------------------------------------------------------------------------
62,338,269
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
North Carolina -- 3.0%
$ 8,250,000 NR Charlotte, NC SPL Facilities Revenue, Charlotte/Douglas
International Airport, 5.600% due 7/1/27 $ 8,198,437
8,700,000 Baa1* North Carolina Eastern Municipal Power Agency, Power
System Revenue, Series B, 7.000% due 1/1/08(c) 10,233,375
2,600,000 Baa1* North Carolina Medical Care Community Hospital Revenue,
Halifax Regional Medical Center, 5.000% due 8/15/18 2,509,000
2,750,000 AA North Carolina University, Chapel Hill, zero coupon due 8/1/20 948,750
- ----------------------------------------------------------------------------------------------------------------------------------
21,889,562
- ----------------------------------------------------------------------------------------------------------------------------------
North Dakota -- 0.5%
3,000,000 AAA Mercer County, ND PCR, Basin Electric Power, Second Series,
AMBAC-Insured, 6.050% due 1/1/19 3,311,250
- ----------------------------------------------------------------------------------------------------------------------------------
Ohio -- 3.2%
Cleveland, OH Airport Special Revenue, Continental Airlines Inc.:
4,000,000 NR 9.000% due 12/1/19(b)(c) 4,265,640
4,000,000 BB 5.375% due 9/15/27 3,870,000
5,000,000 BB+ Ohio State Air Quality Development Authority, Pollution
Control-Toledo Edison, 6.875% due 7/1/23(b)(c) 5,325,000
Ohio State Water Development Authority Revenue, Series A:
4,000,000 NR Bayshore Power Project, 5.875% due 9/1/20 4,055,000
3,475,000 BB+ Cleveland Electric, 8.000% due 10/1/23(b)(c) 3,996,250
1,500,000 BB+ Toledo Edison, 8.000% due 10/1/23(b)(c) 1,725,000
- ----------------------------------------------------------------------------------------------------------------------------------
23,236,890
- ----------------------------------------------------------------------------------------------------------------------------------
Oklahoma -- 1.0%
3,630,000 AAA Oklahoma HFA, Single-Family Mortgage, Series B,
GNMA-Collateralized, 7.997% due 8/1/18(b) 4,210,800
2,400,000 Baa1* Tulsa, OK Municipal Airport Revenue, American Airlines,
7.350% due 12/1/11 2,679,000
- ----------------------------------------------------------------------------------------------------------------------------------
6,889,800
- ----------------------------------------------------------------------------------------------------------------------------------
Pennsylvania -- 11.4%
4,000,000 AAA Allegheny County, PA Airport Revenue, Greater Pittsburgh International
Airport, Series B, FSA-Insured, 6.625% due 1/1/22(b) 4,345,000
2,500,000 Baa2* Allegheny County, PA, Series A, 6.700% due 12/1/20 2,746,875
4,500,000 BBB Allentown, PA Hospital Authority Revenue, Sacred Heart
Hospital of Allentown, Series B, 6.750% due 11/15/15 4,899,375
Dauphin County, PA General Authority:
3,100,000 NR Hotel and Conference Center - Hyatt Regency, 6.200% due 1/1/29 3,115,500
6,000,000 NR Riverfront Office, 6.000% due 1/1/25 6,037,500
2,000,000 A- Delaware County, PA IDA, Resource Recovery Facilities, Series A,
6.200% due 7/1/19 2,160,000
2,000,000 AAA Erie, PA School Distict, zero coupon due 9/1/25 530,000
3,500,000 NR Harrisburg, PA Authority Office, 6.000% due 5/1/19 3,543,750
7,500,000 AAA Lehigh County, PA IDA, PCR, MBIA-Insured, 6.400% due 9/1/29 8,371,875
Luzerne County, PA IDA, Pennsylvania Gas and Water Co., Series A:
2,500,000 A 7.200% due 10/1/17(b) 2,762,500
2,250,000 A- 6.050% due 1/1/19 2,373,750
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Pennsylvania -- 11.4% (continued)
McKeesport, PA School District, MBIA-Insured:
$ 4,875,000 AAA Zero coupon due 10/1/24 $ 1,352,813
4,875,000 AAA Zero coupon due 10/1/25 1,285,781
4,500,000 A- Montgomery County, PA IDA, Retirement Community Revenue,
5.250% due 11/15/28 4,359,375
6,750,000 BBB+++ Montgomery County, PA Redevelopment Authority,
Multi-Family Housing, Series A, 6.500% due 7/1/25 7,197,188
Pennsylvania EDA:
4,500,000 BBB- Resource Recovery Revenue, (Colver Project), Series D,
7.125% due 12/1/15 4,995,000
4,000,000 BBB WasteWater Treatment Revenue, Sun Co. Inc., (RTM Project),
Series A, 7.600% due 12/1/24(b) 4,610,000
6,000,000 NR Pennsylvania Economic Development Fingauth Exempt Facilities
Revenue, National Gypsum Co., Series B, 6.125% due 11/1/27 6,022,500
5,000,000 AAA Pennsylvania State Higher Education, Student Loan Revenue,
Series D, AMBAC-Insured, 6.050% due 1/1/19(b) 5,250,000
Philadelphia, PA Municipal Authority Gas Works Lease Revenue:
2,500,000 BBB- 7.625% due 5/1/14 2,569,775
970,000 Baa* Series B, 6.400% due 11/15/16 1,024,563
2,250,000 AAA Philadelphia, PA Parking Authority and Revenue, AMBAC-Insured,
5.000% due 2/1/27 2,250,000
- ----------------------------------------------------------------------------------------------------------------------------------
81,803,120
- ----------------------------------------------------------------------------------------------------------------------------------
Puerto Rico -- 0.2%
1,250,000 BBB- Puerto Rico, Mennonite General Hospital, 5.625% due 7/1/27 1,276,563
- ----------------------------------------------------------------------------------------------------------------------------------
Rhode Island -- 1.4%
9,500,000 AA+ Rhode Island Housing and Mortgage Finance Authority,
7.100% due 4/1/24(b)(c)(d) 10,188,750
- ----------------------------------------------------------------------------------------------------------------------------------
South Carolina -- 2.7%
1,500,000 BBB+ Greenville County, SC IDR, (Lockheed Aeromod Center Project),
7.200% due 11/1/21(b) 1,631,250
Greenville, SC Connector, 2000 Association:
11,250,000 BBB- 5.375% due 1/1/38 10,321,875
20,250,000 BBB- Zero coupon due 1/1/30 3,240,000
4,000,000 A2* Richland County, SC PCR, (Union Camp Corp. Project), 6.625% due 5/1/22 4,335,000
- ----------------------------------------------------------------------------------------------------------------------------------
19,528,125
- ----------------------------------------------------------------------------------------------------------------------------------
South Dakota -- 0.3%
Oglala Sioux, SD Tribal Revenue Bond:
35,000 NR 7.000% due 7/1/99 35,339
1,865,000 NR 7.500% due 7/1/13 1,909,294
- ----------------------------------------------------------------------------------------------------------------------------------
1,944,633
- ----------------------------------------------------------------------------------------------------------------------------------
Tennessee -- 1.2%
3,150,000 BBB Memphis-Shelby County, TN Airport Authority,
Federal Express Corp., 6.750% due 9/1/12 3,441,375
5,000,000 AAA Metropolitan Nashville Airport Authority, TN Airport Revenue,
Special Facilities, Series C, FGIC-Insured, 6.600% due 7/1/15 5,406,250
- ----------------------------------------------------------------------------------------------------------------------------------
8,847,625
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Texas -- 3.7%
$ 3,000,000 NR Abilene, TX Health Facilities Development Corp., Retirement Facilities
Revenue, Sears Methodist Retirement, Series A, 5.900% due 11/15/25 $ 2,996,250
2,000,000 AAA Brazos River Authority, TX PCR, Houston Lighting &
Power Co., Series A, AMBAC-Insured, 6.700% due 3/1/17 2,180,000
2,000,000 NR Denton County, TX Reclamation and Road District,
8.500% due 6/1/16 2,016,160
970,000 AAA Harris County, TX Refunding Toll Road Authority,
Series A, AMBAC-Insured, 6.500% due 8/15/17 1,067,000
3,000,000 Ba1* Houston, TX Airport Systems Revenue, Special Facilities,
Series B, 5.700% due 7/15/29 2,981,250
2,100,000 AAA Matagorda County, TX PCR, Navajo District No. 1,
Houston Light & Power Co. Project, Series E,
FGIC-Insured, 7.200% due 12/1/18 2,203,698
Sam Rayburn, TX Municipal Power Agency, Power Supply System Revenue:
2,645,000 BB Series A, 6.750% due 10/1/14 2,800,394
3,165,000 BB Series B, 6.125% due 10/1/13 3,252,038
San Antonio, TX Airport System Revenue, AMBAC-Insured:
3,000,000 AAA 7.125% due 7/1/06 3,442,500
1,000,000 AAA 7.125% due 7/1/08 1,150,000
2,000,000 AAA 7.375% due 7/1/13 2,320,000
- ----------------------------------------------------------------------------------------------------------------------------------
26,409,290
- ----------------------------------------------------------------------------------------------------------------------------------
Virgin Islands -- 0.4%
Virgin Islands Public Finance Authority Revenue, Subordinate Lien, Series E:
2,000,000 NR 5.750% due 10/1/13 2,112,500
1,000,000 NR 6.000% due 10/1/22 1,052,500
- ----------------------------------------------------------------------------------------------------------------------------------
3,165,000
- ----------------------------------------------------------------------------------------------------------------------------------
Virginia -- 0.7%
2,435,000 AAA Fairfax County, VA Redevelopment and Housing Authority
Revenue, Multi-Family Housing, Series A, Kingsley,
FHA-Insured, 7.000% due 5/1/26 2,641,975
2,000,000 NR Virginia Beach, VA Ramada on the Beach, 7.000% due 12/1/15 2,115,000
- ----------------------------------------------------------------------------------------------------------------------------------
4,756,975
- ----------------------------------------------------------------------------------------------------------------------------------
Washington -- 2.0%
5,000,000 AAA Central Puget Sound, WA Regional Transportation Authority,
FGIC-Insured, 4.750% due 2/1/28 4,781,250
11,345,000 AAA Chelan County, WA Public Utility District No. 1,
Columbia River Rock, Capital Appreciation,
Series A, MBIA-Insured, zero coupon due 6/1/19 4,055,837
2,000,000 BBB Port Moses Lake, WA PCR, Union Carbide, 7.875% due 8/1/06(b) 2,037,120
3,315,000 BBB- Spokane, WA Downtown Foundation Parking Revenue,
(River Park Square Project), 5.600% due 8/1/19 3,327,431
- ----------------------------------------------------------------------------------------------------------------------------------
14,201,638
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
West Virginia -- 1.1%
$ 2,000,000 A Beckley, WV IDR, (Water Commission Project),
7.000% due 10/1/17(b) $ 2,187,500
2,000,000 A Braxton County, WV, Solid Waste Disposal Revenue,
(Weyerhaeuser Co. Project), 5.800% due 6/1/27(b) 2,112,500
Marion County, WV, Solid Waste Disposal Revenue:
3,295,043 NR Adirondack Recycling A, 8.000% due 12/1/25 2,965,539
445,696 NR Adirondack Recycling B, 10.000% due 12/1/25 401,127
- ----------------------------------------------------------------------------------------------------------------------------------
7,666,666
- ----------------------------------------------------------------------------------------------------------------------------------
Wisconsin -- 0.5%
1,670,000 A3* Racine County, WI Health Center Revenue, 8.125% due 8/1/21 1,723,190
1,600,000 NR Wisconsin State Health and Educational Facilities Authority Revenue,
(Benchmark Healthcare Inc. Project), Series A, 6.750% due 12/1/28 1,542,000
- ----------------------------------------------------------------------------------------------------------------------------------
3,265,190
- ----------------------------------------------------------------------------------------------------------------------------------
Wyoming -- 0.2%
1,250,000 AA Wyoming Community Development Authority Housing
Revenue, 7.100% due 6/1/17 1,354,688
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $677,353,409**) $718,364,176
==================================================================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service, except those which
are identified by an asterisk (*) are rated by Moody's Investors Service
Inc. and those identified by a double dagger (++) are rated by Fitch
Investor Services, Inc.
(b) Income from this issue is considered a preference item for purposes of
calculating the alternative minimum tax.
(c) Security segregated by custodian for open purchase committments.
(d) Residual interest bonds -- coupon varies inversely with level of
short-term tax-exempt interest rates.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 17 through 19 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Rating Service ("Standard & Poor's") -- Ratings from "AA" to
"B" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA"' have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay
interest and repay principal and differ from the highest rated
issue only in a small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely
to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than in higher rated
categories.
BB -- Bonds rated "BB" have less near-term vulnerability to
default than other speculative issues. However, they face
major ongoing uncertainties of exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments.
B -- Bonds rated "B" have a greater vulnerability to default but
currently have the capacity to meet interest payments and
principal payments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied "BB" or "BB-" rating.
Moody's Investors Service Inc. ("Moody's") -- Numerical modifiers 1, 2, and 3
may be applied to each generic rating from "Aa" to "B", where 1 is the highest
and 3 the lowest rating within its generic category.
Aaa -- Bonds rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in "Aaa" securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear
somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor
poorly secured. Interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited) (continued)
- --------------------------------------------------------------------------------
Ba -- Bonds rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long
period of time may be small.
Fitch Investors Services, Inc. ("Fitch") -- Rating may be modified by the
addition of a plus (+) or minus (-) sign to show relative standings with the
major ratings categories.
BBB -- Bonds rated "BBB" are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay
interest or dividends and repay principal is considered to be
adequate. Adverse changes in economic conditions and
circumstances, however, are more likeoy to have adverse impact
on these securities and, therefore, impair timely payment. The
likelihood that the ratings of these bonds will fall below
investment grade is higher than for securities with higher
ratings.
NR -- Indicates that the bond is not rated by Standard & Poor's,
Moody's or Fitch.
- --------------------------------------------------------------------------------
Short-Term Security Ratings (unaudited)
- --------------------------------------------------------------------------------
SP-1 -- Standard & Poor's highest rating indicating very strong or
strong capacity to pay principal and interest; those issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign.
A-1 -- Standard & Poor's highest commercial paper and variable-rate
demand obligation (VRDO) rating indicating that the degree of
safety regarding timely payment is either overwhelming or very
strong; those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign.
VMIG 1 -- Moody's highest rating for issues having demand feature --
VRDO.
P-1 -- Moody's highest rating for commercial paper and for VRDO prior
to the advent of the VMIG 1 rating.
- --------------------------------------------------------------------------------
18 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Security Descriptions (unaudited)
- --------------------------------------------------------------------------------
ABAG -- Association of Bay Area Governments
AIG -- American International Guaranty
AMBAC -- AMBAC Indemnity Corporation
BAN -- Bond Anticipation Notes
BIG -- Bond Investors Guaranty
CGIC -- Capital Guaranty Insurance Company
CHFCLI -- California Health Facility Construction Loan Insurance
CONNIE LEE -- College Construction Loan Association
COP -- Certificate of Participation
EDA -- Economic Development Authority
ETM -- Escrowed to Maturity
FAIRS -- Floating Adjustable Interest Rate Securities
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FHLMC -- Federal Home Loan Mortgage Corporation
FNMA -- Federal National Mortgage Association
FRTC -- Floating Rate Trust Certificates
FSA -- Federal Savings Association
GIC -- Guaranteed Investment Contract
GNMA -- Government National Mortgage Association
GO -- General Obligation
HDC -- Housing Development Corporation
HFA -- Housing Finance Authority
IDA -- Industrial Development Agency
IDB -- Industrial Development Board
IDR -- Industrial Development Revenue
IFA -- Industrial Finance Authority
INFLOS -- Inverse Floaters
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
MVRICS -- Municipal Variable Rate Inverse Coupon Security
PCR -- Pollution Control Revenue
RAN -- Revenue Anticipation Notes
RIBS -- Residual Interest Bonds
RITES -- Residual Interest Tax-Exempt Securities
SYCC -- Structured Yield Curve Certificate
TAN -- Tax Anticipation Notes
TECP -- Tax-Exempt Commercial Paper
TOB -- Tender Option Bonds
TRAN -- Tax and Revenue Anticipation Notes
VA -- Veterans Administration
VRWE -- Variable Rate Wednesday Demand
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $677,353,409) $718,364,176
Interest receivable 9,325,047
Receivable for securities sold 3,608,681
Receivable for Fund shares sold 289,624
- --------------------------------------------------------------------------------------
Total Assets 731,587,528
- --------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 9,330,697
Dividends payable 2,874,948
Investment advisory fee payable 267,056
Administration fee payable 120,652
Payable for Fund shares redeemed 104,622
Distribution fees payable 51,893
Payable to bank 1,994
Accrued expenses 190,353
- --------------------------------------------------------------------------------------
Total Liabilities 12,942,215
- --------------------------------------------------------------------------------------
Total Net Assets $718,645,313
======================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 40,724
Capital paid in excess of par value 677,265,386
Overdistributed net investment income (1,897,523)
Accumulated net realized gain on security transactions 2,225,959
Net unrealized appreciation of investments 41,010,767
- --------------------------------------------------------------------------------------
Total Net Assets $718,645,313
======================================================================================
Shares Outstanding:
Class A 16,195,857
---------------------------------------------------------------------------------
Class B 24,361,747
---------------------------------------------------------------------------------
Class L 166,436
---------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $17.64
---------------------------------------------------------------------------------
Class B * $17.65
---------------------------------------------------------------------------------
Class L ** $17.62
---------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.17% of net asset value per share) $18.38
---------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $17.80
======================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if
shares are redeemed within one year from purchase (See Note 3).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
20 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited) For the Six Months Ended January 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 21,605,538
- -------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 1,679,616
Investment advisory fees (Note 3) 1,462,521
Administration fees (Note 3) 731,260
Shareholder and system servicing fees 135,853
Registration fees 41,132
Custody 21,938
Shareholder communications 21,794
Audit and legal 19,927
Pricing service fees 16,617
Trustees' fees 7,098
Other 2,388
- -------------------------------------------------------------------------------
Total Expenses 4,140,144
- -------------------------------------------------------------------------------
Net Investment Income 17,465,394
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 4):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 260,829,260
Cost of securities sold 255,523,147
- -------------------------------------------------------------------------------
Net Realized Gain 5,306,113
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 41,414,188
End of period 41,010,767
- -------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (403,421)
- -------------------------------------------------------------------------------
Net Gain on Investments 4,902,692
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 22,368,086
===============================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1999 (unaudited)
and the Year Ended July 31, 1998
<TABLE>
<CAPTION>
1999 1998
====================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 17,465,394 $ 38,125,389
Net realized gain 5,306,113 19,192,567
Decrease in net unrealized appreciation (403,421) (10,697,596)
- ----------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 22,368,086 46,620,360
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (Note 2):
Net investment income (18,070,058) (39,414,101)
Net realized gains (17,386,302) (11,871,835)
- ----------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (35,456,360) (51,285,936)
- ----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 47,030,747 52,382,528
Net asset value of shares issued for reinvestment of dividends 19,775,793 29,453,809
Cost of shares reacquired (76,307,740) (152,494,853)
- ----------------------------------------------------------------------------------------------------
Decrease in Net Assets From Fund Share Transactions (9,501,200) (70,658,516)
- ----------------------------------------------------------------------------------------------------
Decrease in Net Assets (22,589,474) (75,324,092)
NET ASSETS:
Beginning of period 741,234,787 816,558,879
- ----------------------------------------------------------------------------------------------------
End of period* $ 718,645,313 $ 741,234,787
- ----------------------------------------------------------------------------------------------------
* Includes overdistributed net investment income of: $ (1,897,523) $ (1,292,859)
====================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
22 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Municipal High Income Fund ("Fund"), a separate investment fund
of the Smith Barney Income Funds ("Trust"), a Massachusetts business trust, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust consists of this
Fund and seven other separate investment funds: Smith Barney Exchange Reserve
Fund, Smith Barney Premium Total Return Fund, Smith Barney High Income Fund,
Smith Barney Convertible Fund, Smith Barney Diversified Strategic Income Fund,
Smith Barney Balanced Fund and Smith Barney Total Return Bond Fund. The
financial statements and financial highlights for the other funds are presented
in separate semi-annual reports.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities are valued
at the mean between the bid and asked price provided by an independent pricing
service that are based on transactions in municipal obligations, quotations from
municipal bond dealers, market transactions in comparable securities and various
relationships between securities; (c) securities for which market quotations are
not available will be valued in good faith at fair value by or under the
direction of the Board of Trustees; (d) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates value; (e) interest income, adjusted for amortization of premium
and accretion of original issue discount, is recorded on an accrual basis; (f)
gains or losses on the sale of securities are calculated by using the specific
identification method; (g) direct expenses are charged to each class; management
fees and general Fund expenses are allocated on the basis of relative net assets
of each class; (h) dividends and distributions to shareholders are recorded on
the ex-dividend date; (i) the character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accepted accounting principles; (j) the Fund intends to
comply with the applicable provisions of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; and (k) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. Exempt-Interest Dividends and Other Distributions
The Fund intends to satisfy requirements that allow interest from municipal
securities, which is exempt from regular Federal income tax and from certain
states' income taxes, to retain its exempt-interest status when distributed to
the shareholders of the Fund.
Capital gain distributions, if any, are taxable to shareholders, and are
declared and paid at least annually. Additional taxable distributions may be
made if necessary to avoid a Federal excise tax.
3. Investment Advisory Agreement, Administration Agreement and Other
Transactions
SSBC Fund Management Inc. ("SSBC") formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
adviser to the Fund. The Fund pays SSBC an advisory fee calculated at an annual
rate of 0.40% of the average daily net assets. This fee is calculated daily and
paid monthly.
SSBC also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
0.20% of the average daily net assets. This fee is calculated daily and paid
monthly.
On October 8, 1998, CFBDS, Inc. became the Trust's distributor. Prior to that
date salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Trust's distributor. SSB, as well as certain other broker dealers, continues to
sell Fund shares to the public as a member of the selling group.
There is also a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs within one year from purchase and
thereafter declines by 0.50% the first year after purchase and by 1.00% per year
until no CDSC is incurred. Class L shares also have a 1.00% charge CDSC, which
applies if redemption occurs within the first year of purchase.
For the six months ended January 31, 1999, SSB received sales charges of $52,000
and $12,000 on sales of the Fund's Class A and Class L shares, respectively. In
addition, CDSCs paid to SSB were approximately $57,000 and $1,000 for Class B
and Class L shares, respectively.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B and L shares calculated at the annual rate of 0.15% of the average
daily net assets of each respective class. The Fund also pays a distribution fee
with respect to Class B and L shares calculated at the annual rates of 0.50% and
0.55% of the average daily net assets of each class, respectively. For the six
months ended January 31, 1999, total Distribution Plan fees incurred were:
Class A Class B Class L
===============================================================================
Distribution Plan Fees $209,273 $1,461,980 $8,363
===============================================================================
All officers and one Trustee of the Trust are employees of SSB.
4. Investments
During the six months ended January 31, 1999, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
===============================================================================
Purchases $260,829,260
- -------------------------------------------------------------------------------
Sales 225,843,468
===============================================================================
At January 31, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $43,777,872
Gross unrealized depreciation (2,767,105)
- --------------------------------------------------------------------------------
Net unrealized appreciation $41,010,767
================================================================================
5. Shares of Beneficial Interest
At January 31, 1999, the Trust had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
At January 31, 1999, total paid-in capital amounted to the following for each
class:
Class A Class B Class L
================================================================================
Total Paid-in Capital $280,565,621 $393,782,319 $2,958,170
================================================================================
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1999 July 31, 1998
---------------------------- ----------------------------
Shares Amount Shares Amount
======================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,977,965 $ 35,521,190 2,045,273 $ 36,791,410
Shares issued on reinvestment 446,617 7,924,984 599,605 10,757,575
Shares reacquired (1,151,539) (20,636,263) (1,752,808) (31,542,922)
- ------------------------------------------------------------------------------------------------------
Net Increase 1,273,043 $ 22,809,911 892,070 $ 16,006,063
======================================================================================================
Class B
Shares sold 576,678 $ 10,340,791 798,147 $ 14,386,588
Shares issued on reinvestment 663,363 11,772,990 1,039,421 18,653,146
Shares reacquired (3,090,160) (55,537,669) (6,710,099) (120,826,967)
- ------------------------------------------------------------------------------------------------------
Net Decrease (1,850,119) $ (33,423,888) (4,872,531) $ (87,787,233)
======================================================================================================
Class L*
Shares sold 65,490 $ 1,168,766 67,008 $ 1,204,530
Shares issued on reinvestment 4,396 77,819 2,404 43,088
Shares reacquired (7,562) (133,808) (6,936) (124,964)
- ------------------------------------------------------------------------------------------------------
Net Increase 62,324 $ 1,112,777 62,476 $ 1,122,654
======================================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1999(1)(2) 1998 1997 1996 1995 1994
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 17.96 $ 18.07 $ 17.31 $ 17.25 $ 17.26 $ 18.24
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.46 0.95 0.97 1.00 1.04 1.06
Net realized and unrealized gain (loss) 0.12 0.19 0.77 0.06 0.01* (0.85)
- -----------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.58 1.14 1.74 1.06 1.05 0.21
- -----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.47) (0.98) (0.98) (1.00) (1.00) (1.06)
Net realized gains (0.43) (0.27) -- -- (0.02) (0.13)
Capital -- -- -- -- (0.04) --
- -----------------------------------------------------------------------------------------------------------------
Total Distributions (0.90) (1.25) (0.98) (1.00) (1.06) (1.19)
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 17.64 $ 17.96 $ 18.07 $ 17.31 $ 17.25 $ 17.26
- -----------------------------------------------------------------------------------------------------------------
Total Return 3.28%++ 6.54% 10.40% 6.28% 6.42% 1.14%
- -----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $ 286 $ 268 $ 254 $ 232 $ 238 $ 18
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.82%+ 0.83% 0.83% 0.84% 0.84% 0.84%
Net investment income 5.03+ 5.24 5.52 5.74 6.04 5.83
- -----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 31% 84% 51% 44% 38% 39%
=================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
* Includes the per share effect of shareholder sales and redemption activity
during the period, most of which occurred at net asset values less than
the beginning of the period.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
26 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1999(1)(2) 1998 1997 1996 1995 1994
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 17.98 $ 18.09 $ 17.32 $ 17.26 $ 17.26 $ 18.24
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.41 0.86 0.89 0.92 0.95 0.96
Net realized and unrealized gain (loss) 0.12 0.19 0.77 0.06 0.02* (0.85)
- --------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.53 1.05 1.66 0.98 0.97 0.11
- --------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.43) (0.89) (0.89) (0.92) (0.91) (0.96)
Net realized gains (0.43) (0.27) -- -- (0.02) (0.13)
Capital -- -- -- -- (0.04) --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (0.86) (1.16) (0.89) (0.92) (0.97) (1.09)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 17.65 $ 17.98 $ 18.09 $ 17.32 $ 17.26 $ 17.26
- --------------------------------------------------------------------------------------------------------------------
Total Return 2.97%++ 6.01% 9.89% 5.74% 5.91% 0.60%
- --------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $ 430 $ 471 $ 562 $ 653 $ 737 $ 1,069
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.31%+ 1.32% 1.32% 1.33% 1.35% 1.33%
Net investment income 4.54+ 4.75 5.04 5.23 5.61 5.34
- --------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 31% 84% 51% 44% 38% 39%
====================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
* Includes the per share effect of shareholder sales and redemption activity
during the period, most of which occurred at net asset values less than
the beginning of the period.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 27
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class L Shares 1999(1)(2) 1998(3) 1997 1996 1995(4)
======================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 17.95 $ 18.07 $ 17.31 $ 17.25 $ 15.83
- ------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.41 0.87 0.88 0.89 0.60
Net realized and unrealized gain 0.11 0.16 0.77 0.08 1.50*
- ------------------------------------------------------------------------------------------------------
Total Income From Operations 0.52 1.03 1.65 0.97 2.10
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.42) (0.88) (0.89) (0.91) (0.62)
Net realized gains (0.43) (0.27) -- -- (0.02)
Capital -- -- -- -- (0.04)
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.85) (1.15) (0.89) (0.91) (0.68)
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 17.62 $ 17.95 $ 18.07 $ 17.31 $ 17.25
- ------------------------------------------------------------------------------------------------------
Total Return 2.94%++ 5.91% 9.79% 5.69% 13.45%++
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 2,933 $ 1,869 $ 752 $ 546 $ 211
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.39%+ 1.42% 1.40% 1.39% 1.18%+
Net investment income 4.47+ 4.64 4.94 5.18 5.56+
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 31% 84% 51% 44% 38%
======================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) On June 12, 1998, Class C shares were renamed Class L shares.
(4) For the period from November 17, 1994 (inception date) to July 31, 1995.
* Includes the per share effect of shareholder sales and redemption activity
during the period, most of which occurred at net asset values less than
the beginning of the period.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
28 1999 Semi-Annual Report to Shareholders
<PAGE>
Smith Barney
Municipal High
Income Fund
Trustees
Lee Abraham
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
President and Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
Peter M. Coffey
Vice President
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser
SSBC Fund Management Inc.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Municipal High Income Fund. It is not for distribution to
prospective investors unless accompanied by a current Prospectus for the Fund,
which contains information concerning the Fund's investment policies and
expenses as well as other pertinent information.
SALOMON SMITH BARNEY
- ---------------------------
A member of citigroup[LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney, Inc.
Smith Barney Municipal
High Income Fund
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD2170 3/99
<PAGE>
[PHOTO]
Smith Barney
Diversified
Strategic
Income Fund
[GRAPHIC] ------------------
SEMI-ANNUAL REPORT
------------------
January 31, 1999
[LOGO] Smith Barney Mutual Funds
Investing for your future
Every day. (R)
<PAGE>
Smith Barney
Diversified Strategic
Income Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Smith Barney Diversified Income Fund ("Fund") seeks high current income
through investments in bonds issued by the U.S. government and its agencies,
high-yield corporate bonds and foreign government bond issues.
Smith Barney Diversified Strategic Income Fund
Average Annual Total Returns
January 31, 1999
Without Sales Charges(1)
-------------------------------------------------
Class A Class B Class L
================================================================================
Six-Month+ 2.72% 2.48% 2.49%
- --------------------------------------------------------------------------------
One-Year 5.72 5.09 5.23
- --------------------------------------------------------------------------------
Five-Year 6.85 6.36 6.36
- --------------------------------------------------------------------------------
Since Inception++ 8.10 8.68 7.15
================================================================================
With Sales Charges(2)
-------------------------------------------------
Class A Class B Class L
================================================================================
Six-Month+ (1.96)% (1.98)% 0.49%
- --------------------------------------------------------------------------------
One-Year 0.94 0.67 3.22
- --------------------------------------------------------------------------------
Five-Year 5.87 6.22 6.14
- --------------------------------------------------------------------------------
Since Inception++ 7.31 8.68 6.97
================================================================================
(1) Assumes reinvestment of all dividend and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charges with respect to Class A and L shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and L
shares.
(2) Assumes reinvestment of all dividend and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum sales charge of 4.50% and 1.00%, respectively;
and Class B shares reflect the deduction of a 4.50% CDSC, which applies if
shares are redeemed within one year from initial purchase. This CDSC
declines by 0.50% the first year after purchase and thereafter by 1.00%
per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed within the
first year of purchase. All figures represent past performance and are not
a guarantee of future results. Investment returns and principal value will
fluctuate, and redemption value may be more or less than the original
cost.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Inception dates for Class A, B and L shares are November 6, 1992, December
28, 1989 and March 19, 1993, respectively.IFC-1
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
Our main emphasis during the reporting period was to reduce our exposure to
foreign securities. While our security selection continues to focus on the
European financial markets and not the countries so prevalent in the media, we
believe that the U.S. markets should provide a better safe haven. The unforeseen
spread widening experienced in mortgage-backed securities and corporate bonds
from October creates what we believe are tremendous opportunities.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SDSAX
Class B SLDSX
Class L SDSIX
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter ......................................................... 1
Historical Performance ..................................................... 5
Smith Barney Diversified Strategic Income
Fund at a Glance ........................................................... 8
Schedule of Investments .................................................... 9
Statement of Assets and Liabilities ........................................ 20
Statement of Operations .................................................... 21
Statements of Changes in Net Assets ........................................ 22
Notes to Financial Statements .............................................. 23
Financial Highlights ....................................................... 29
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO] [PHOTO]
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President and
Investment Officer
[PHOTO] [PHOTO]
JOHN C. SIMON
BIANCHI, CFA HILDRETH
Vice President and Vice President and
Investment Officer Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for Smith Barney Diversified
Strategic Income Fund ("Fund") for the period ended January 31, 1999. In this
report, we summarize the period's prevailing economic and market conditions and
briefly outline our portfolio strategy. A detailed summary of performance and
current holdings can be found in the appropriate sections that follow. We hope
you find this report to be useful and informative.
The Fund seeks to provide investors with a high current income while attempting
to minimize the risk of interest rate and currency fluctuations. We follow a
flexible investment approach that emphasizes both diversification and balance.
Based on our analysis of current economic and market conditions, we allocate
assets across three classes of bonds: U.S. government and mortgage securities,
high-yield corporate bonds and foreign government securities.
A Classic Investor Series Fund
The Diversified Strategic Income Fund is part of the Classic Investor Series of
Smith Barney Mutual Funds. The Classic Investor Series funds are mutual funds
whose investment decisions are determined by experienced portfolio managers
based on each fund's investment objectives and guidelines. Funds in the Smith
Barney Classic Investor Series invest across asset classes and sectors,
utilizing a range of strategies in order to achieve their objectives.
Performance Update
For the six months ended January 31, 1999, the Fund's Class A, B and L shares
had total returns of 2.72%, 2.48% and 2.49%, without sales charge, and
underperformed the Lehman Brothers Aggregate Bond Index return of 5.10% for the
same period. (The Lehman Brothers Aggregate Bond Index is made up of U.S.
Treasury bonds, government agency bonds, mortgage-backed securities and
corporate bonds.)
As you know, the success of the Fund has been based on our ability to manage the
Fund's asset allocation in light of rapidly changing global events. Our goal is
to provide you with a dividend level consistent with maintaining a relatively
stable net asset value ("NAV").
Our main emphasis during the reporting period was to reduce our exposure to
foreign securities. While our security selection continues to focus on the
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 1
<PAGE>
European financial markets and not the countries so prevalent in the media, we
believe that the U.S. markets should provide a better safe haven. The unforeseen
spread widening experienced in mortgage-backed securities and corporate bonds
from October creates what we believe are tremendous opportunities.
As of January 31, 1999, the Fund's allocation was approximately 18% in foreign
government bonds, 29% in corporate securities, 1% in preferred stock, 44% in
U.S. government and mortgage-backed securities and 8% in cash equivalents.
Following are brief summaries of the economic and market conditions that
affected the Fund's three major sectors during the period under review.
U.S. Government and
Mortgage-Backed Securities
The U.S. government securities portion of the Fund continued to emphasize income
by investing in mortgage-backed securities. To the extent that conditions
suggest lower interest rates, we bought intermediate-term U.S. Treasuries during
the reporting period to help boost the Fund's appreciation potential. We intend
to closely monitor mortgage prepayment possibilities if interest rates decline
further.
The key events during the period under review were predominantly mergers and
acquisitions, the ongoing overseas economic crisis and the resiliency of the
U.S. economy and financial markets. The broad range in interest rates and the
associated higher market volatility reflected those conditions. Below are the
levels of rates on July 31, 1998 and February 1, 1999:
2/1/99 7/31/98
------ -------
3-Month U.S. Treasury Bill 4.509% 5.080%
6-Month U.S. Treasury Bill 4.486 5.187
1 Year U.S. Treasury Bill 4.551 5.351
2 Year U.S. Treasury Note 4.633 5.484
5 Year U.S. Treasury Note 4.628 5.499
10 Year U.S. Treasury Note 4.741 5.494
30 Year U.S. Treasury Bond 5.177 5.714
The historically low level of interest rates in October 1998 was precipitated by
the first Federal Reserve Board ("Fed") interest-rate cut since 1996. While
further cuts ensued, concerns surrounding hedge fund losses took center stage,
prompting spreads between corporate bonds and mortgage-backed securities to
widen versus U.S. Treasuries. Compounding the problem was considerable corporate
financing. Corporate debt issuance for 1998 on a net basis was more than the
prior two years combined.
High-Yield Corporate Bonds
The high-yield bond market generated relatively weak results during the third
quarter of 1998, underperforming all other domestic bond market sectors. By the
end of September, the Fed began taking aggressive actions to restore investor
confidence in the financial markets. The Fed began to realize that the financial
markets were beginning to freeze up with overall liquidity disappearing. Many
companies were finding it increasingly more difficult to borrow money through
the fixed income capital markets. Investors had become increasingly reluctant to
invest in new bond issues, especially from high-yield companies. Their fear was
that an economic recession was becoming a more likely possibility given the
increased turmoil in the emerging economies such as Korea, Russia and Indonesia.
Their concern was that a worldwide credit crunch in the financial markets could
throw the U.S. economy into a meaningful recession. By acting swiftly and
lowering short-term interest rates three times, the Fed was able to stabilize
the domestic financial markets and restore investor confidence.
In the fourth quarter, as investors slowly became more comfortable with the
economic outlook and the Fed's resolve to keep the economy out of a recession,
the high-yield bond market stabilized and outperformed the other sectors of the
domestic fixed-income markets. Because of a lingering uncertainty over the
economic outlook, the high-yield market is still trading at undervalued levels.
It is our belief as more
- --------------------------------------------------------------------------------
2 1999 Semi-Annual Report to Shareholders
<PAGE>
investors become convinced the domestic economy is still fundamentally sound,
the high-yield bond market will continue to stabilize and improve in price with
performance returns exceeding the other sectors of the fixed-income markets.
Foreign Government Securities
Starting with currency devaluations in East Asia, followed shortly by the
500-point fall in the Dow Jones Industrial Average in October 1997, continuing
with the period of complacency in the first half of this year (during which U.S.
stock market rallied roughly 20% and European market even more), through the
massive dislocations in financial markets this summer and fall, the world has
rarely seen such disorder and disarray compressed into such a short time.
The principal effect on bond markets was the dramatic rally in major government
bond prices over the summer, bringing 10-year German yields below 4% and 30-year
U.S. Treasury bond yields below 5%. This rally was in conjunction with and
partly due to, the sell-off in emerging markets over the late spring and early
summer, as well as the drastic widening of credit spreads of all natures over
the same period. Many investors fled to the highest-quality markets and divested
themselves of anything that could be construed as a "yield spread" product over
the safest of government bond markets. (The term "yield spread" used here refers
to those bonds with yields that exceed those of similar maturity U.S. Treasury
bonds.)
We sold all of our Japanese bond holdings during the summer because:
o Japanese government bonds were then yielding below 1%, and further price
rises were unlikely to exceed those in other developed world bond markets;
and
o With a Japanese weighting of 14% in the J.P. Morgan Global Bond Index,
such a low yielding asset made it difficult at that time to achieve our
dividend target.
We reinvested some of our U.S. Treasury bond holdings into Canadian and
Australian government bonds to take advantage of the spread widening in those
markets that took place this summer. Yields on both Canadian and Australian
bonds have widened significantly versus comparable U.S. Treasury securities and
we expect that difference to narrow in the coming months.
During the early part of the reporting period, we benefited from our German bond
holdings that have generally outperformed other non-U.S. government bonds during
the reporting period due to the flight-to-quality that followed the Russian debt
default and the widely publicized troubles of large speculators. In order to
preserve those gains, we sold some of our German bonds and bought some Danish
issues, where we believed good values existed.
Market Outlook
We believe that the dominant issues in 1999 will be the advent of the euro, the
prospects for economic recovery throughout Asia and other less developed
countries, the future sustainability of U.S. economic growth and the ongoing
resiliency of U.S. financial markets. (The euro is the new, single currency of
11 European Union countries that began on January 1, 1999.)
We think that the euro introduces a new variable to macroeconomic analysis that
has not been seen since the demise of the Soviet empire and the advent of true
global competition. Opportunities should abound in the financial markets as
corporate financing expands in creative new ways. However, the implications for
the U.S. dollar as the world's premier currency has now been brought into
question by the euro's introduction.
The economic picture throughout Asia and Russia remains critically unclear.
Rising unemployment, the need to dump finished goods in the face of uncertain
currencies and fiscal policies that are slow to change and less than dramatic,
do not bode well for the financial markets of less developed countries.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 3
<PAGE>
In our view, the U.S. economy and the financial markets will continue to soul
search as to the prospects for continued good fortune. The positives include
such variables as low unemployment, strong productivity and the dramatic
increase in defined contribution plans (i.e., 401(k) plans) and estate planning
as key market influences. However, historically low savings (the traditional
standard) being redefined as the "wealth effect" as measured by investment
growth remains an ever present shadow that can change with the ups and downs of
the financial markets.
With respect to the Fund's high-yield bonds, we viewed the recent correction in
the market as a buying opportunity and carefully redeployed our excess cash
reserves during this time. However, given the continued problems in Asia, we
remained underweighted in basic commodity industries such as steel, forest
products, energy and petrochemicals, industries that have been negatively
affected by worldwide deflationary trends in recent months. (Deflation is when
prices actually fall. Deflation should not be confused with disinflation, which
is the slowing down of the rate at which prices increase).
The Fund's high-yield bond portion is still cautiously positioned with a heavy
emphasis in better-quality, intermediate-maturity "B" and "BB" rated high-yield
bonds. In addition, the Fund continued to emphasize telecommunications issues as
well as cable and media issues.
The performance of the Fund's foreign government securities suffered from our
several emerging markets bond holdings, in particular our Russian holdings, over
the summer. Recently, several emerging markets have begun to recover, and have
outperformed developed world bond markets. As a result, we have begun to
cautiously rebuild some of our holdings in this asset class, but only in the
safest, most highly rated bonds of emerging markets.
In closing, thank you for investing in the Smith Barney Diversified Strategic
Income Fund. We encourage you to visit our web site at www.smithbarney.com and
we look forward to continuing to help you pursue your financial goals in the
coming years.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McClendon James E. Conroy
Chairman Vice President and
Investment Officer
/s/ John C. Bianchi, CFA /s/ Simon Hildreth
John C. Bianchi, CFA Simon Hildreth
Vice President and Portfolio Manager
Investment Officer
February 19, 1999
- --------------------------------------------------------------------------------
4 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $7.96 $7.89 $0.28 $0.00 $0.00 2.72%+
- -------------------------------------------------------------------------------------------------------------
7/31/98 8.01 7.96 0.58 0.05 0.00 7.47
- -------------------------------------------------------------------------------------------------------------
7/31/97 7.82 8.01 0.67 0.00 0.00 11.36
- -------------------------------------------------------------------------------------------------------------
7/31/96 7.85 7.82 0.62 0.00 0.05 8.39
- -------------------------------------------------------------------------------------------------------------
7/31/95 7.76 7.85 0.48 0.00 0.19 10.35
- -------------------------------------------------------------------------------------------------------------
7/31/94 8.41 7.76 0.62 0.10 0.04 1.16
- -------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/93 8.24 8.41 0.45 0.12 0.00 9.30+
=============================================================================================================
Total $3.70 $0.27 $0.28
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $7.98 $7.91 $0.26 $0.00 $0.00 2.48%+
- -------------------------------------------------------------------------------------------------------------
7/31/98 8.03 7.98 0.54 0.05 0.00 6.93
- -------------------------------------------------------------------------------------------------------------
7/31/97 7.83 8.03 0.62 0.00 0.00 10.89
- -------------------------------------------------------------------------------------------------------------
7/31/96 7.86 7.83 0.57 0.00 0.05 7.80
- -------------------------------------------------------------------------------------------------------------
7/31/95 7.76 7.86 0.44 0.00 0.18 10.00
- -------------------------------------------------------------------------------------------------------------
7/31/94 8.41 7.76 0.60 0.10 0.03 0.66
- -------------------------------------------------------------------------------------------------------------
7/31/93 8.55 8.41 0.58 0.14 0.00 7.28
- -------------------------------------------------------------------------------------------------------------
7/31/92 7.98 8.55 0.68 0.00 0.07 17.12
- -------------------------------------------------------------------------------------------------------------
7/31/91 8.06 7.98 0.71 0.06 0.09 10.42
- -------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/90 8.00 8.06 0.40 0.00 0.00 6.00+
=============================================================================================================
Total $5.40 $0.35 $0.42
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $7.97 $7.90 $0.26 $0.00 $0.00 2.49%+
- -------------------------------------------------------------------------------------------------------------
7/31/98 8.01 7.97 0.54 0.05 0.00 7.08
- -------------------------------------------------------------------------------------------------------------
7/31/97 7.81 8.01 0.62 0.00 0.00 10.92
- -------------------------------------------------------------------------------------------------------------
7/31/96 7.84 7.81 0.57 0.00 0.05 7.82
- -------------------------------------------------------------------------------------------------------------
7/31/95 7.76 7.84 0.44 0.00 0.18 9.73
- -------------------------------------------------------------------------------------------------------------
7/31/94 8.41 7.76 0.60 0.10 0.03 0.66
- -------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/93 8.36 8.41 0.20 0.03 0.00 3.41+
=============================================================================================================
Total $3.23 $0.18 $0.26
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $7.96 $7.89 $0.29 $0.00 $0.00 2.88%+
- -------------------------------------------------------------------------------------------------------------
7/31/98 8.00 7.96 0.60 0.05 0.00 7.96
- -------------------------------------------------------------------------------------------------------------
7/31/97 7.82 8.00 0.70 0.00 0.00 11.64
- -------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/96 7.89 7.82 0.53 0.00 0.05 6.65+
=============================================================================================================
Total $2.12 $0.05 $0.05
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $7.96 $7.90 $0.29 $0.00 $0.00 3.01%+
- -------------------------------------------------------------------------------------------------------------
7/31/98 8.01 7.96 0.60 0.05 0.00 7.78
- -------------------------------------------------------------------------------------------------------------
7/31/97 7.82 8.01 0.69 0.00 0.00 11.69
- -------------------------------------------------------------------------------------------------------------
7/31/96 7.85 7.82 0.63 0.00 0.06 8.72
- -------------------------------------------------------------------------------------------------------------
7/31/95 7.76 7.85 0.49 0.00 0.20 10.94
- -------------------------------------------------------------------------------------------------------------
7/31/94 8.41 7.76 0.65 0.10 0.04 1.43
- -------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/93 8.24 8.41 0.47 0.12 0.00 9.47+
=============================================================================================================
Total $3.82 $0.27 $0.30
=============================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charges(1)
---------------------------------------------------------
Class A Class B Class L Class Y Class Z
===========================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/99+ 2.72% 2.48% 2.49% 2.88% 3.01%
- -------------------------------------------------------------------------------------------
Year Ended 1/31/99 5.72 5.09 5.23 6.03 6.03
- -------------------------------------------------------------------------------------------
Five Years Ended 1/31/99 6.85 6.36 6.36 N/A 7.24
- -------------------------------------------------------------------------------------------
Inception* through 1/31/99 8.10 8.68 7.15 8.80 8.47
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
---------------------------------------------------------
Class A Class B Class L Class Y Class Z
===========================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/99+ (1.96)% (1.98)% 0.49% 2.88% 3.01%
- -------------------------------------------------------------------------------------------
Year Ended 1/31/99 0.94 0.67 3.22 6.03 6.03
- -------------------------------------------------------------------------------------------
Five Years Ended 1/31/99 5.87 6.22 6.14 N/A 7.24
- -------------------------------------------------------------------------------------------
Inception* through 1/31/99 7.31 8.68 6.97 8.80 8.47
===========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (Inception* through 1/31/99) 62.60%
- --------------------------------------------------------------------------------
Class B (Inception* through 1/31/99) 113.29
- --------------------------------------------------------------------------------
Class L (Inception* through 1/31/99) 50.00
- --------------------------------------------------------------------------------
Class Y (Inception* through 1/31/99) 32.25
- --------------------------------------------------------------------------------
Class Z (Inception* through 1/31/99) 66.06
================================================================================
(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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividend and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 4.50% and 1.00%,
respectively; and Class B shares reflect the deduction of a 4.50% CDSC,
which applies if shares are redeemed within one year from purchase. This
CDSC declines by 0.50% the first year after purchase and thereafter by
1.00% per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed within the
first year of purchase.
* Inception dates for Class A, B, L, Y and Z shares are November 6, 1992,
December 28, 1989, March 19, 1993, October 10, 1995 and November 6, 1992,
respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the
Smith Barney Diversified Strategic Income Fund vs.
Lehman Brothers Aggregate Bond Index+
- --------------------------------------------------------------------------------
December 1989 -- January 1999
[GRAPHIC]
Smith Barney
Diversified Lehman Brothers
Strategic Income Aggregate Bond
Fund Index
Dec. 28, 1989 10000 10000
July 1990 10150 10425
July 1991 11305 11541
July 1992 13407 13247
July 1993 14505 14595
July 1994 14704 14609
July 1995 16281 16086
July 1996 17551 16976
July 1997 19463 18804
July 1998 20813 20283
July 31, 1998 21329 21318
+ Hypothetical illustration of $10,000 invested in Class B shares at
inception on December 28, 1989, assuming reinvestment of dividends and
capital gains, if any, at net asset value through January 31, 1999. The
Lehman Brothers Aggregate Bond Index is composed of the Government
Corporate Bond Index, the Asset-Backed Securities Index and the
Mortgage-Backed Securities Index and includes treasury issues, agency
issues, corporate bond issues and mortgage-backed issues. The index is
unmanaged and it is not subject to the same management and trading
expenses as a mutual fund. The performance of the Fund's other classes may
be greater or less than the Class B shares' performance indicated on this
chart, depending on whether greater or lesser sales charges and fees were
incurred by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
Top Ten Holdings* As of January 31, 1999
- --------------------------------------------------------------------------------
1. Government National Mortgage Association 19.6%
- --------------------------------------------------------------------------------
2. Federal National Mortgage Association 17.4
- --------------------------------------------------------------------------------
3. CIBC Wood Gundy Securities Corp. 8.4
- --------------------------------------------------------------------------------
4. Federal Home Loan Mortgage Corp. 5.6
- --------------------------------------------------------------------------------
5. Kingdom of Sweden 2.3
- --------------------------------------------------------------------------------
6. Kingdom of Denmark 2.1
- --------------------------------------------------------------------------------
7. U.K. Treasury 1.6
- --------------------------------------------------------------------------------
8. Queensland Treasury Corp. 1.6
- --------------------------------------------------------------------------------
9. Government of Canada 1.3
- --------------------------------------------------------------------------------
10. France Oat. 1.1
- --------------------------------------------------------------------------------
Investment Breakdown*
- --------------------------------------------------------------------------------
[GRAPHIC]
Preferred Stock and Warrants 1.5%
Repurchase Agreement 8.4%
U.S. Government Agencies & Obligations 43.7%
Corporate Bonds and Notes 28.9%
International Bonds 17.5%
* As a percentage of total investments.
- --------------------------------------------------------------------------------
8 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===========================================================================================================
<S> <C> <C>
U.S. GOVERNMENT SECTOR -- 43.7%
U.S. Government Agencies & Obligations -- 43.7%
$ 25,000,000 U.S. Treasury Principal Strip, zero coupon due 5/15/04 $ 19,598,250
75,000,000 Federal Home Loan Bank, zero coupon due 3/16/23 12,577,500
5,871,542 Federal Home Loan Mortgage Corp.:
5.500% due 3/1/13 through 4/1/13 5,807,308
26,981,364 7.000% due 2/1/22 through 6/1/28 27,596,816
39,122,452 8.000% due 1/1/22 through 1/1/23 40,638,447
87,173,059 Gold, 9.000% due 5/1/03 through 4/15/25 92,103,564
Federal National Mortgage Association:
222,000,000 Zero coupon due 10/9/19 67,610,325
174,650,187 6.000% due 9/1/03 through 8/1/28 175,072,964
271,888,267 6.500% due 1/1/26 through 12/1/28 274,435,863
271,010,438 Government National Mortgage Association:
6.500% due 1/15/26 through 8/15/28 274,311,340
292,588,506 7.000% due 3/15/01 through 5/15/28 300,084,629
2,029,303 8.000% due 6/15/26 through 1/15/27 2,115,551
5,177,795 9.000% due 6/15/16 through 7/15/26 5,527,295
- -----------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR
(Cost -- $1,279,923,042) 1,297,479,852
===========================================================================================================
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
HIGH-YIELD SECTOR -- 30.4%
CORPORATE BONDS AND NOTES -- 28.9%
Aerospace and Defense -- 0.2%
3,165,000 B1* BE Aerospace, Sr. Sub. Notes, 9.500% due 11/1/08(b) 3,346,988
3,075,000 B+ Hexcel Corp., Sr. Sub. Notes, 9.750% due 1/15/09(b) 3,113,438
- -----------------------------------------------------------------------------------------------------------
6,460,426
- -----------------------------------------------------------------------------------------------------------
Airlines -- 0.7%
16,050,000 BB Airplanes Pass Through Trust, Corporate Collateralized
Mortgage Obligation, Series D, 10.875% due 3/15/20 17,042,051
2,630,000 Ba2* Continental Airlines, Notes, 8.000% due 12/15/05(f) 2,626,713
- -----------------------------------------------------------------------------------------------------------
19,668,764
- -----------------------------------------------------------------------------------------------------------
Automobile/Auto Parts/Truck Manufacturing -- 0.5%
5,570,000 B+ Breed Technologies, 9.250% due 4/15/08(b) 3,787,600
10,040,000 B1* Exide Corp., Sr. Notes, 10.000% due 4/15/05 10,065,100
1,225,000 Ba3* Westinghouse Air-Brake, Sr. Notes, 9.375% due 6/15/05 1,274,000
- -----------------------------------------------------------------------------------------------------------
15,126,700
- -----------------------------------------------------------------------------------------------------------
Banks/Savings & Loans -- 0.7%
125,000,000 AAA International Bank Reconstruction & Development,
zero coupon due 3/11/31 20,000,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Broadcasting - TV, Cable, and Radio -- 4.5%
CSC Holdings Inc.:
$ 1,000,000 BB+ Sr. Debentures, 7.625% due 7/15/18 $ 1,042,500
Sr. Sub. Debentures:
12,435,000 BB- 9.875% due 2/15/13(f) 13,958,288
6,650,000 BB- 10.500% due 5/15/16 7,963,375
5,675,000 BB- 9.875% due 4/1/23 6,370,188
1,440,000 BB+ Sr. Unsecured Debenture, 7.875% due 2/15/18 1,537,200
1,925,000 B- Capstar Broadcasting, step bond to yield 12.750% due 2/1/09 1,636,250
7,000,000 BB- Century Communications, Sr. Notes, 8.750% due 10/1/07 7,752,500
12,000,000 B1* Chancellor Media, Sr. Sub. Notes, 9.000% due 10/1/08(b)(f) 13,260,000
Citadel Broadcasting, Sr. Sub. Notes:
725,000 B- 10.250% due 7/1/07 799,313
2,995,000 B- 9.250% due 11/15/08(b) 3,219,625
6,475,000 B2* Comcast UK Cable Ltd., Sr. Discount Debentures, step bond to yield
11.200% due 11/15/07 5,698,000
NTL Inc., Sr. Notes:
3,000,000 B- 11.500% due 10/1/08(b) 3,442,500
7,265,000 B- Step bond to yield 12.375% due 10/1/08(f) 5,085,500
RCN Corp.:
4,750,000 B3* 10.000% due 10/15/07(f) 4,536,250
9,375,000 B3* Step bond to yield 11.125% due 10/15/07 5,484,375
Rogers Cablesystems Ltd.:
Sr. Secured Debentures:
5,900,000 BB+ 10.000% due 12/1/07 6,755,500
5,700,000 BB- 11.000% due 12/1/15 6,811,500
3,150,000 BB+ Sr. Notes, 10,000% due 3/15/05 3,638,250
2,500,000 BB- Rogers Communications, Sr. Notes, 9.125% due 1/15/06 2,631,250
3,475,000 CCC+ Telemundo Holdings Inc., Sr. Discount Notes, step bond to yield
11.500% due 8/15/08(b) 1,998,125
3,650,000 B+ Telewest Communications PLC, 11.250% due 11/1/08(b) 4,325,250
3,075,000 B+ TV Azteca S.A., Sr. Notes, Series A, 10.125% due 2/15/04 2,552,250
36,945,000 B United International Holdings Inc., Sr. Discount Notes,
step bond to yield 10.750% due 2/15/08 24,568,425
- -----------------------------------------------------------------------------------------------------------
135,066,414
- -----------------------------------------------------------------------------------------------------------
Building/Construction -- 0.5%
Building Material Corp. Sr. Notes:
1,250,000 BB 7.750% due 7/15/05 1,237,500
2,925,000 BB 8.000% due 12/1/08(b) 2,946,938
2,100,000 BB Step bond to yield 11.750% due 7/1/04 2,157,750
4,595,000 B Columbus Mckinnon Corp., Unsecured Sr. Sub. Notes,
8.500% due 4/1/08 4,376,738
Nortex Inc. Sr. Notes:
1,000,000 B+ 9.250% due 3/15/07 1,035,000
4,085,000 B+ 9.125% due 9/1/07 4,207,550
- -----------------------------------------------------------------------------------------------------------
15,961,476
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Cellular and Other Wireless -- 2.6%
$ 4,435,000 CCC+ Centennial Cellular, Sr. Sub. Notes, 10.750% due 12/15/08(b) $ 4,712,188
13,600,000 B3* Clearnet Communications, Sr. Discount Notes, step bond to yield
14.750% due 12/15/05 11,900,000
8,425,000 B- Dolphin Telecom PLC, Sr. Discount Notes, step bond to yield
11.500% due 6/1/08(f) 3,707,000
14,845,000 B- Iridium LLC/Capital Corp., Sr. Notes, Series B,
14.000% due 7/15/05(f) 14,102,750
14,000,000 B- Millicom International Cellular S.A., Sr. Discount Notes,
step bond to yield 13.500% due 6/1/06 10,080,000
9,300,000 Ba3* Orange PLC, Sr. Notes, 8.000% due 8/1/08 9,695,250
6,025,000 B3* Pagemart Nationwide Inc., Sr. Discount Notes,
step bond to yield 15.000% due 2/1/05 5,362,250
11,075,000 NR Pagemart Wireless, Sr. Discount Notes, step bond to yield
11.250% due 2/1/08 5,316,000
Telesystem International Wireless, Sr. Discount Notes:
18,675,000 CCC+ Step bond to yield 13.250% due 6/30/07 8,590,500
6,250,000 CCC+ Step bond to yield 10.500% due 11/1/07 2,343,750
- -----------------------------------------------------------------------------------------------------------
75,809,688
- -----------------------------------------------------------------------------------------------------------
Chemicals -- 0.1%
1,265,000 NR Huntsman Corp., Sr. Sub. Notes, 9.500% due 7/1/07(b) 1,287,138
- -----------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 1.0%
350,000 B- Eagle-Picher Industries, Sr. Sub. Notes, 9.375% due 3/1/08(f) 336,875
5,430,000 B- Fisher Scientific, Sr. Sub. Notes, 9.000% due 2/1/08(b) 5,538,600
6,155,000 B- Fisher Scientific International, Sr. Sub. Notes, 9.000% due 2/1/08 6,278,100
5,320,000 B3* Interlake Corp., Sr. Sub. Debentures, 12.125% due 3/1/02 5,439,700
8,550,000 B Outboard Marine Corp., Sr. Notes, 10.750% due 6/1/08(b)(f) 8,208,000
4,725,000 B+ Park-Ohio Holdings Corp., Sr. Sub. Notes, 9.250% due 12/1/07(b) 4,819,500
- -----------------------------------------------------------------------------------------------------------
30,620,775
- -----------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Services -- 0.5%
1,625,000 BB- Cia Latino Americana, Company Guaranteed Notes,
11.625% due 6/1/04(b) 1,023,750
4,940,000 B Group Maintenance, American Corp., Sr. Sub. Notes,
9.750% due 1/15/09(f) 5,063,500
2,210,000 B+ Integrated Electrical Services, 9.375% due 2/1/09(f) 2,270,775
2,180,000 B Nationsrent Inc., Sr. Sub Notes, 10.375% due 12/15/08(b) 2,289,000
1,500,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes, 11.000% due 11/1/06 1,483,125
3,630,000 BB- United Rentals Inc., Sr. Sub Notes, 9.250% due 1/15/09(b) 3,702,600
- -----------------------------------------------------------------------------------------------------------
15,832,750
- -----------------------------------------------------------------------------------------------------------
Electric Utilities -- 1.3%
AES Corp., Sr. Sub. Notes:
3,650,000 Ba1* 10.250% due 7/15/06 3,896,375
11,900,000 Ba1* 8.500% due 11/1/07 11,959,500
Calpine Corp., Sr. Notes:
7,775,000 Ba2* 10.500% due 5/15/06 8,591,375
7,250,000 Ba2* 8.750% due 7/15/07 7,630,625
4,995,000 BB CMS Energy, Sr. Notes, 7.500% due 1/15/09 5,101,144
847,000 BB Midland Cogeneration Venture, Sr. Secured Lease Obligation Bond,
10.330% due 7/23/02 909,467
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Electric Utilities -- 1.3% (continued)
$ 1,050,000 NR Niagara Mohawk Power, Sr. Discount Notes, Series H, step bond to yield
8.500% due 7/1/10(f) $ 834,750
- -----------------------------------------------------------------------------------------------------------
38,923,236
- -----------------------------------------------------------------------------------------------------------
Electronics/Computers -- 2.0%
5,050,000 B3* Axiohm Transaction Solutions Inc., Sr. Sub. Notes,
9.750% due 10/1/07 4,696,500
4,235,000 B+ Celestica International, Sr. Sub. Notes, 10.500% due 12/31/06 4,626,738
7,325,000 B Fairchild Semiconductor Inc., Sr. Sub. Notes, 10.125% due 3/15/07 7,306,688
Unisys Corp., Sr. Notes:
11,250,000 BB- 12.000% due 4/15/03 12,557,813
16,175,000 BB- 11.750% due 10/15/04 18,803,438
Viasystems Inc., Sr. Sub. Notes:
11,475,000 B- 9.750% due 6/1/07 10,843,875
980,000 B- Series B, 9.750% due 6/1/07 926,100
- -----------------------------------------------------------------------------------------------------------
59,761,152
- -----------------------------------------------------------------------------------------------------------
Finance Companies/Consumer Credit -- 0.4%
Amresco Inc., Sr. Sub. Notes:
3,640,000 CCC+ 10.000% due 3/15/04 2,948,400
975,000 CCC+ 9.875% due 3/15/05 799,500
4,000,000 BB- Ocwen Asset Investment, Sr. Notes, 11.500% due 7/1/05(b) 3,080,000
4,100,000 NR Ocwen Capital Trust Inc., Company Guaranteed Notes,
10.875% due 8/1/27 3,167,250
2,500,000 B2* Ocwen Financial Corp., Notes, 11.875% due 10/1/03 2,237,500
- -----------------------------------------------------------------------------------------------------------
12,232,650
- -----------------------------------------------------------------------------------------------------------
Food -- 1.0%
5,775,000 B- B&G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07 5,601,750
7,255,000 B2* Carrols Corp., Sr. Sub. Notes, 9.500% due 12/1/08(b) 7,381,963
8,900,000 B Imperial Holly Corp., Sr. Sub. Notes, 9.750% due 12/15/07 8,944,500
6,460,000 B SC International Services, 9.250% due 9/1/07 6,540,750
- -----------------------------------------------------------------------------------------------------------
28,468,963
- -----------------------------------------------------------------------------------------------------------
Healthcare/Drugs/Hospital Supplies -- 2.4%
Columbia/HCA Healthcare:
5,000,000 BBB 7.000% due 7/1/07(f) 4,837,500
1,000,000 BBB 7.250% due 5/20/08 981,250
1,000,000 BBB 8.700% due 2/10/10 1,077,500
2,000,000 BBB 6.630% due 7/15/45 1,955,000
3,295,000 Ba3* Fresenius Medical Cap Trust, Company Guaranteed Notes,
7.875% due 2/1/08 3,295,000
4,075,000 BBB+ Graphic Controls Corp., Sr. Sub. Notes, 12.000% due 9/15/05 4,691,344
10,950,000 BB ICN Pharmaceuticals Inc., Sr. Notes, 9.250% due 8/15/05 11,196,375
Integrated Health Services, Inc., Sr. Sub. Notes:
4,500,000 B2* 9.500% due 9/15/07 4,297,500
8,075,000 B2* 9.250% due 1/15/08(f) 7,701,531
18,150,000 B- Magellan Health Services, Sr. Sub. Notes, 9.000% due 2/15/08 16,108,125
8,800,000 B- Mariner Post Acute Network Services, Sr. Sub. Notes,
9.500% due 11/1/07 6,820,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Healthcare/Drugs/Hospital Supplies -- 2.4% (continued)
Sun Healthcare Inc., Sr. Sub. Notes:
$ 5,100,000 B2* 9.500% due 7/1/07(f) $ 3,927,000
5,400,000 B2* 9.375% due 5/1/08(b) 4,104,000
- -----------------------------------------------------------------------------------------------------------
70,992,125
- -----------------------------------------------------------------------------------------------------------
Hotel/Gaming -- 1.4%
390,000 BB+ Circus Circus Enterprises, Sr. Sub. Notes, 9.250% due 12/1/05 395,850
5,375,000 B- Courtyard By Marriott, Sr. Secured Notes, 10.750% due 2/1/08 5,536,250
4,470,000 BB+ Harrahs Operating Inc., Company Guaranteed Notes,
7.875% due 12/15/05 4,525,875
HMH Properties Inc.:
1,735,000 BB 7.875% due 8/1/05 1,704,638
7,280,000 BB 7.875% due 8/1/08 7,079,800
8,045,000 BB 8.450% due 12/1/08 8,065,113
5,275,000 Ba1* Mohegan Tribal Gaming Authority, Sr. Secured Notes,
13.500% due 11/15/02 6,395,938
4,425,000 BB+ Park Place Entertainment, 7.875% due 12/15/05(b) 4,447,125
Station Casinos, Sr. Sub. Notes:
1,100,000 B+ 10.125% due 3/15/06 1,166,000
3,000,000 B+ 8.875% due 12/1/08(b) 3,082,500
- -----------------------------------------------------------------------------------------------------------
42,399,089
- -----------------------------------------------------------------------------------------------------------
Insurance -- 0.2%
2,175,000 BB+ Sig Capital Trust I, Notes, 9.500% due 8/15/27 1,832,438
4,350,000 BB- Veritas Capital Trust, Trust Certificates, 10.000% due 1/1/28 3,969,375
- -----------------------------------------------------------------------------------------------------------
5,801,813
- -----------------------------------------------------------------------------------------------------------
Leisure/Amusement/Motion Pictures -- 0.7%
1,320,000 B Carmike Cinemas Inc., Sr. Sub. Notes, 9.375% due 2/1/09(b) 1,339,800
1,645,000 B+ Intrawest Corp., Sr. Notes, 9.750% due 8/15/08 1,682,013
6,870,000 B Regal Cinemas Inc., Sr. Sub. Notes, 9.500% due 6/1/08(b) 7,007,400
9,025,000 B- SFX Entertainment Inc., Sr. Sub. Notes, 9.125% due 2/1/08 9,295,750
- -----------------------------------------------------------------------------------------------------------
19,324,963
- -----------------------------------------------------------------------------------------------------------
Machinery -- 0.1%
2,434,000 B- Alvey Systems, Sr. Sub. Notes, 11.375% due 1/31/03 2,494,850
- -----------------------------------------------------------------------------------------------------------
Metals/Mining -- 0.1%
1,750,000 B- Haynes International Inc., Sr. Notes, 11.625% due 9/1/04 1,566,250
- -----------------------------------------------------------------------------------------------------------
Miscellaneous -- 0.2%
1,900,000 B2* Intertek Finance PLC, 10.250% due 11/1/06 1,767,000
2,760,000 B- Oglebay Norton Co., Sr. Sub. Notes, 10.000% due 2/1/09 2,691,000
- -----------------------------------------------------------------------------------------------------------
4,458,000
- -----------------------------------------------------------------------------------------------------------
Oil Services -- 0.1%
2,750,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07 2,543,750
1,215,000 BB+ J Ray McDermott S.A., Sr. Sub. Notes, 9.375% due 7/15/06 1,293,975
- -----------------------------------------------------------------------------------------------------------
3,837,725
- -----------------------------------------------------------------------------------------------------------
Oil/Natural Gas -- 0.9%
910,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes, 8.750% due 9/15/07 837,200
9,500,000 B+ Clark USA, Sr. Notes, 10.875% due 12/1/05 8,740,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Oil/Natural Gas -- 0.9% (continued)
Ocean Energy, Inc.:
$ 2,100,000 BB- Sr. Sub. Debentures, 9.750% due 10/1/06 $ 2,163,000
10,400,000 BB- Sr. Sub. Notes, 10.375% due 10/15/05 10,920,000
3,875,000 B2* Stone Energy Corp., Sr. Sub. Notes, 8.750% due 9/15/07(f) 3,778,125
- -----------------------------------------------------------------------------------------------------------
26,438,325
- -----------------------------------------------------------------------------------------------------------
Packaging/Containers -- 0.4%
1,120,000 B AEP Industries Inc., 9.875% due 11/15/07 1,131,200
2,200,000 B Bway Corp., Company Guaranteed Notes, 10.250% due 4/15/07 2,315,500
3,490,000 B Huntsman Packaging Corp., Sr. Sub. Notes, 9.125% due 10/1/07 3,551,075
4,110,000 B- Tekni-Plex Inc., Sr. Sub. Notes, 9.250% due 3/1/08 4,294,950
- -----------------------------------------------------------------------------------------------------------
11,292,725
- -----------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.6%
7,105,000 B Ainworth Lumber, Sr. Notes, 12.500% due 7/15/07 7,087,238
4,900,000 BB Malette Inc., Sr. Notes, 12.250% due 7/15/04 5,316,500
Riverwood International:
3,815,000 B- Company Guaranteed Notes, 10.625% due 8/1/07(f) 3,881,763
1,175,000 CCC+ Sr. Sub. Notes, 10.875% due 4/1/08 1,069,250
1,435,000 B+ SD Warren Co., Sr. Sub. Notes, 12.000% due 12/15/04 1,558,769
- -----------------------------------------------------------------------------------------------------------
18,913,520
- -----------------------------------------------------------------------------------------------------------
Personal Care Products/Cosmetics -- 0.1%
3,400,000 B- Revlon Consumer Products, Sr. Sub. Notes, 8.625% due 2/1/08 3,043,000
- -----------------------------------------------------------------------------------------------------------
Pollution Control/Waste Removal -- 0.1%
4,000,000 BB Allied Waste Inc., Sr. Sub. Notes, 7.875% due 1/1/09(b) 4,130,000
- -----------------------------------------------------------------------------------------------------------
Publishing -- 0.1%
3,900,000 B+ Mail-Well Corp., Sr. Sub. Notes, 8.750% due 12/15/08(b) 3,987,750
- -----------------------------------------------------------------------------------------------------------
Real Estate Development/Investment -- 0.1%
3,716,000 Baa3* Trizec Finance Ltd., Sr. Notes, 10.875% due 10/15/05 4,087,600
- -----------------------------------------------------------------------------------------------------------
Retail -- 0.3%
4,500,000 B- Advance Holdings Corp., Sr. Discount Notes,
step bond to yield 12.875% due 4/15/09(f) 2,700,000
3,600,000 B- Advance Stores Co., Sr. Sub. Notes, 10.250% due 4/15/08 3,654,000
3,230,000 BB Dr. Structured Finance, Pass Through Certificates,
8.375% due 8/15/15 3,308,683
- -----------------------------------------------------------------------------------------------------------
9,662,683
- -----------------------------------------------------------------------------------------------------------
Telephone/Communications -- 4.9%
E. Spire Communications Inc., Sr. Notes:
750,000 NR 13.750% due 7/15/07 780,000
14,850,000 NR Step bond to yield 10.625% due 7/1/08 5,197,500
Espirit Telecom Group PLC, Sr. Notes:
3,950,000 B- 11.500% due 12/15/07(f) 4,157,375
2,250,000 B- 10.875% due 6/15/08(f) 2,306,250
8,505,000 NR Facilicom International, Sr. Notes, 10.500% due 1/15/08 6,889,050
Hermes Europe Railtel, Sr. Notes:
7,250,000 B 11.500% due 8/15/07(b) 7,902,500
2,675,000 B 10.375% due 1/15/09(b)(f) 2,842,188
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Telephone/Communications -- 4.9% (continued)
Impsat Corp., Sr. Notes:
$ 950,000 BB- 12.125% due 7/15/03 $ 802,750
3,500,000 B+ 12.375% due 6/15/08 2,870,000
9,350,000 B Intermedia Communications of Florida, Sr. Discount Notes,
step bond to yield 12.500% due 5/15/06 7,526,750
2,845,000 B Level 3 Communications Inc., Sr. Notes, 9.125% due 5/1/08 2,845,000
9,490,000 B Metromedia Fiber Network, Sr. Notes, 10.000% 11/15/08(b) 10,059,400
Metronet Communications Corp.:
18,375,000 B Sr. Discount Notes, step bond to yield 9.950% due 6/15/08 12,357,188
Sr. Notes:
6,425,000 B 12.000% due 8/15/07 7,163,875
3,375,000 B 10.625% due 11/1/08 3,577,500
Nextel Communications, Sr. Discount Notes, step bond to yield:
3,310,000 B2* 10.650% due 9/15/07 2,275,625
1,870,000 B2* 9.950% due 2/15/08(f) 1,206,150
10,000,000 B Nextlink Communications, Sr. Notes, 12.500% due 4/15/06 11,000,000
10,600,000 B- Primus Telecom Group, Sr. Notes, 11.750% due 8/1/04 10,971,000
PSINet, Sr. Notes:
7,000,000 B- 10.000% due 2/15/05 7,315,000
5,990,000 B- 11.500% due 11/1/08(b) 6,484,175
6,975,000 NR Splitrock Services Inc., 11.750% due 7/15/08 6,277,500
Verio Inc., Sr. Notes:
3,090,000 B- 10.375% due 4/1/05 3,151,800
3,765,000 B- 11.250% due 12/1/08(b) 4,037,963
5,935,000 NR Versatel Telecom, Sr. Notes, 13.250% due 5/15/08 6,202,075
6,665,000 Caa* Viatel Inc., Sr. Notes, 11.250% due 4/15/08 6,731,650
4,150,000 NR WAM!Net Inc., Company Guaranteed Notes, step bond to yield
13.250% due 3/1/05 2,075,000
- -----------------------------------------------------------------------------------------------------------
145,005,264
- -----------------------------------------------------------------------------------------------------------
Transportation -- 0.2%
1,650,000 B+ American Reefer Co. Ltd., First Mortgage Notes, 10.250% due 3/1/08 998,250
2,055,000 BB- Sea Containers Ltd., Sr. Sub. Debenture, 12.500% due 12/1/04 2,250,225
3,025,000 B+ Stena Line AB, Sr. Notes, 10.625% due 6/1/08 2,631,750
2,400,000 B+ TBS Shipping International Ltd., First Mortgage Notes,
10.000% due 5/1/05 1,032,000
- -----------------------------------------------------------------------------------------------------------
6,912,225
- -----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $877,076,590) 859,568,039
===========================================================================================================
<CAPTION>
SHARES SECURITY VALUE
===========================================================================================================
PREFERRED STOCK -- 1.4%
<S> <C> <C>
Banking -- 0.2%
221,000 California Federal Preferred Capital Corp., Series A,
Exchangeable 9.125% 5,828,875
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
===========================================================================================================
<S> <C> <C>
Industrial -- 0.3%
35,000 Capstar Communications, 12.625% due 10/31/06 $ 4,252,500
16,000 Fresenius Medical Care, 9.000% due 12/1/06 1,688,000
2,067 Intermedia Communication, 13.500% due 3/31/09 2,075,253
- -----------------------------------------------------------------------------------------------------------
8,015,753
- -----------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.0%
5,000 SD Warren Holdings Corp., Exchangeable 14.000% 255,000
- -----------------------------------------------------------------------------------------------------------
Other -- 0.9%
1,000,000 Tennessee Valley Authority, Series D, Exchangeable 6.750% 25,750,000
- -----------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $38,710,122) 39,849,628
===========================================================================================================
WARRANTS(c) -- 0.1%
Broadcasting - TV, Cable, and Radio -- 0.0%
6,775 Australis Holdings, Expire 10/30/01(b) 0
6,000 Wireless One Inc., Expire 10/19/00 1,500
- -----------------------------------------------------------------------------------------------------------
1,500
- -----------------------------------------------------------------------------------------------------------
Cellular and Other Wireless -- 0.0%
56,595 Clearnet Communications Inc., Expire 9/15/05 226,380
2,500 Globalstar Telecom, Expire 2/15/04(b) 175,000
6,775 Nextel Communications, Inc., Expire 4/25/99(b) 68
19,250 Page Wireless Equipment, Expire 1/17/99 134,750
42,090 Pagemart Nationwide Inc., Expire 12/31/03 210,450
- -----------------------------------------------------------------------------------------------------------
746,648
- -----------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.0%
8,500 SD Warren Co., Expire 12/15/06(b) 149,600
- -----------------------------------------------------------------------------------------------------------
Telephone/Communications -- 0.1%
6,350 Allegiance Telecom Inc., Expire 2/3/08 69,850
7,600 Colt Telecom Group, Expire 12/31/06(b) 2,660,000
5,000 Iridium World Communications, Expire 7/15/05(b) 694,900
6,425 Metronet Communications, Expire 8/15/07(b) 224,875
5,100 Primus Telecom Group, Expire 8/1/04 31,875
7,800 RSL Communications Ltd., Expire 11/15/06 304,200
12,450 WAM!Net Inc., Expire 3/1/05 99,600
5,935 Versatel Telecom, Expire 5/15/08 59,350
- -----------------------------------------------------------------------------------------------------------
4,144,650
- -----------------------------------------------------------------------------------------------------------
Other -- 0.0%
12,325 UIH Australia, Expire 5/15/06 12,325
6,975 Splitrock Service, Expire 7/15/08 76,725
- -----------------------------------------------------------------------------------------------------------
89,050
- -----------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $644,978) 5,131,448
===========================================================================================================
TOTAL HIGH-YIELD SECTOR
(Cost -- $916,431,690) 904,549,115
===========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ SECURITY VALUE
===========================================================================================================
<S> <C> <C>
INTERNATIONAL SECTOR -- 17.5%
BONDS -- 17.5%
Australia -- 1.6%
66,000,000 Queensland Treasury Corp., 8.000% due 5/14/03 $ 46,131,993
- -----------------------------------------------------------------------------------------------------------
Canada -- 1.3%
Government of Canada:
20,000,000 7.000% due 9/1/01 13,921,096
30,000,000 9.000% due 12/1/04 23,974,581
- -----------------------------------------------------------------------------------------------------------
37,895,677
- -----------------------------------------------------------------------------------------------------------
Denmark -- 2.0%
NYKREDIT:
198,622,000 6.000% due 10/1/19 30,357,074
197,857,000 7.000% due 10/1/29 30,602,672
- -----------------------------------------------------------------------------------------------------------
60,959,746
- -----------------------------------------------------------------------------------------------------------
Germany -- 0.5%
Colt Telecom Group PLC:
1,390,000 8.875% due 11/30/07 847,463
12,450,000 7.625% due 7/31/08 7,301,417
4,000,000 Esprit Telecom Group PLC, 11.500% due 12/15/07 2,467,774
8,250,000 Texon International PLC, 10.000% due 2/1/08(f) 4,215,538
- -----------------------------------------------------------------------------------------------------------
14,832,192
- -----------------------------------------------------------------------------------------------------------
Sweden -- 2.3%
500,000,000 Kingdom of Sweden, 5.500% due 4/12/02 68,173,374
- -----------------------------------------------------------------------------------------------------------
United Kingdom -- 4.8%
10,000,000 Bank Nederlandse Gemeenten, 7.375% due 8/6/07 19,023,525
2,125,000 Colt Telecom Group PLC, 10.125% due 11/30/07 3,665,478
European Investment Bank:
4,500,000 8.500% due 11/6/01 8,023,147
8,000,000 8.000% due 6/10/03 14,682,613
13,000,000 Inter-American Development Bank, 7.125% due 11/26/04 23,671,310
4,775,000 Middleweb PLC, Sr. Notes, 10.500% due 5/30/08(b) 7,373,669
10,296,000 Nippon Telephone, 7.375% due 12/2/03 18,275,772
27,000,000 U.K. Treasury, 8.000% due 12/7/00 46,830,398
- -----------------------------------------------------------------------------------------------------------
141,545,912
- -----------------------------------------------------------------------------------------------------------
Europe -- 4.6%
14,000,000 Depfa., zero coupon due 2/8/99 15,885,868
8,050,000 Dolphin Telecom, step bond to yield 11.625% due 6/1/03 3,611,259
10,000,000 Export - Import Japan, 4.625% due 7/23/03 11,879,479
25,000,000 France Oat., 5.250% due 4/25/08 31,757,163
20,000,000 Kingdom of Spain, 6.000% due 1/31/08 26,337,009
10,000,000 Republic of Finland, 8.750% due 10/17/01 12,993,606
9,000,000 Republic of Italy, 6.000% due 4/2/04 11,439,734
10,000,000 Republic of Portugal, 6.000% due 2/16/04 12,672,201
8,500,000 Soc Nat Chemins De Fra Discount Bank, 9.375% due 3/12/01 10,860,183
- -----------------------------------------------------------------------------------------------------------
137,436,502
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ SECURITY VALUE
===========================================================================================================
<S> <C> <C>
United States -- 0.4%
$ 3,000,000 Argentina, 6.0625% due 3/31/23(d) $ 2,088,750
Banco Centrl Del Uruguay:
1,684,211 6.000% due 2/18/07(d) 1,557,895
4,500,000 6.750% due 2/19/21 3,915,000
United Mexican States:
5,000,000 Series B, 6.250% due 12/31/19 3,834,376
2,000,000 Value Recovery Rights 0
3,000,000 Venezuela, 6.375% due 12/31/03(d) 1,315,890
- -----------------------------------------------------------------------------------------------------------
12,711,911
- -----------------------------------------------------------------------------------------------------------
TOTAL INTERNATIONAL SECTOR
(Cost -- $508,500,491) 519,687,307
===========================================================================================================
REPURCHASE AGREEMENT -- 8.4%
250,000,000 CIBC Wood Gundy Securities Corp., 4.550% due 2/1/99;
Proceeds at maturity -- $250,094,791; (Fully collateralized by
U.S. Treasury Notes, 5.250% to 5.875% due 8/31/99 to 8/15/03)
Market value -- $255,000,583) (Cost -- $250,000,000) 250,000,000
===========================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $2,954,855,223**) $2,971,716,274
===========================================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service, except those
identified by an asterisk (*) are rated by Moody's Investors Service, Inc.
(b) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(c) Non-income producing security.
(d) Variable rate security.
(e) Security is traded with value recovery rights.
(f) All or a portion of its security is on loan (See Note 10).
+ Represents local currency.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 19 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's") letter ratings may be
modified by the addition of a plus (+) or minus (-) sign, which is used to show
relative standing within the major rating categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB, B, CCC, -- Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on
CC and C balance, as predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. "BB" indicates
the lowest degree of speculation and "C" the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
Moody's Investors Service, Inc. ("Moody's") applies the numerical modifiers 1,
2, and 3 in each generic rating classification from "Baa" through "Caa". The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic category.
Baa -- Bonds rated "Baa" are considered to be medium grade
obligations; that is they are neither highly protected nor
poorly secured. Interest payment and principal security appear
adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any
great length of time. These bonds lack outstanding investment
characteristics and may have speculative characteristics as
well.
Ba -- Bonds that are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both
good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds that are rated "B" generally lack characteristics of
desirable investments. Assurance of interest and principal
payment or of maintenance of other terms of the contract over
any long period of time may be small.
Caa -- Bonds that are rated "Caa" are of poor standing. Such issues
may be in default, or present elements of danger may exist
with respect to principal or interest.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's. Smith Barney Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost-- $2,954,855,223) $ 2,971,716,274
Dividends and interest receivable 44,681,599
Collateral for securities on loan (Note 10) 35,884,990
Receivable for securities sold 7,557,919
Receivable for Fund shares sold 4,936,018
Receivable for open forward foreign currency contracts (Note 6) 8,734,822
- ----------------------------------------------------------------------------------------
Total Assets 3,073,511,622
- ----------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 10) 35,884,990
Dividends payable 15,259,063
Payable for securities purchased 13,925,484
Payable for open forward foreign currency contracts (Note 6) 5,347,314
Payable to bank 3,138,282
Management fees payable 1,076,730
Distribution fees payable 608,287
Administration fees payable 478,547
Payable for Fund shares purchased 105,042
Accrued expenses 563,026
- ----------------------------------------------------------------------------------------
Total Liabilities 76,386,765
- ----------------------------------------------------------------------------------------
Total Net Assets $ 2,997,124,857
========================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 379,093
Capital paid in excess of par value 3,010,277,273
Overdistributed net investment income (46,745,977)
Accumulated net realized gain on security transactions,
futures contracts and foreign currencies 10,648,894
Net unrealized appreciation of investments and foreign currencies 22,565,574
- ----------------------------------------------------------------------------------------
Total Net Assets $ 2,997,124,857
========================================================================================
Shares Outstanding:
Class A 54,963,080
-----------------------------------------------------------------------------------
Class B 278,942,985
-----------------------------------------------------------------------------------
Class L 21,422,185
-----------------------------------------------------------------------------------
Class Y 19,901,010
-----------------------------------------------------------------------------------
Class Z 3,863,991
-----------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $7.89
-----------------------------------------------------------------------------------
Class B * $7.91
-----------------------------------------------------------------------------------
Class L ** $7.90
-----------------------------------------------------------------------------------
Class Y (and redemption price) $7.89
-----------------------------------------------------------------------------------
Class Z (and redemption price) $7.90
-----------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $8.26
-----------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $7.98
========================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if
shares are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase. See Notes to
Financial Statements. 1999 Semi-Annual Report to Shareholders
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
20 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited) For the Six Months Ended January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 104,911,361
Dividends 1,162,249
Less: Foreign tax withholding (27,957)
- ---------------------------------------------------------------------------------
Total Investment Income 106,045,653
- ---------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 9,389,247
Investment advisory fees (Note 2) 6,630,184
Administration fees 2,946,749
Shareholder and system servicing fees 912,463
Custody 214,338
Shareholder communications 81,900
Registration fees 49,726
Audit and legal 25,687
Pricing service fees 14,919
Trustees' fees 9,493
Other 14,292
- ---------------------------------------------------------------------------------
Total Expenses 20,288,998
- ---------------------------------------------------------------------------------
Net Investment Income 85,756,655
- ---------------------------------------------------------------------------------
REALIZED AND UNREALIZED Gain (LOSS) ON INVESTMENTS,
FUTURES CONTRACTS AND FOREIGN CURRENCIES (NOTES 3, 4 AND6):
Net Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 9,954,927
Futures contracts 488,339
Foreign currency transactions (21,111,472)
- ---------------------------------------------------------------------------------
Net Realized Loss (10,668,206)
- ---------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments and Foreign Currencies:
Beginning of period 21,902,801
End of period 22,565,574
- ---------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 662,773
- ---------------------------------------------------------------------------------
Net Loss on Investments, Futures Contracts and Foreign Currencies (10,005,433)
- ---------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 75,751,222
=================================================================================
</TABLE>
See Notes to Financial Statements
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1999 (unaudited) and the Year Ended July
31, 1998
<TABLE>
<CAPTION>
1999 1998
========================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 85,756,655 $ 182,369,731
Net realized gain (loss) (10,668,206) 77,462,489
Increase (decrease) in net unrealized appreciation 662,773 (59,024,199)
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 75,751,222 200,808,021
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (100,137,655) (200,850,543)
Net realized gain -- (17,444,264)
- --------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (100,137,655) (218,294,807)
- --------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares 424,341,254 856,904,340
Net asset value of shares issued for reinvestment of dividends 52,959,819 113,810,216
Cost of shares reacquired (414,905,421) (885,917,734)
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 62,395,652 84,796,822
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets 38,009,219 67,310,036
NET ASSETS:
Beginning of period 2,959,115,638 2,891,805,602
- --------------------------------------------------------------------------------------------------------
End of period* $ 2,997,124,857 $ 2,959,115,638
========================================================================================================
* Includes overdistributed net investment of: $ (46,745,977) $ (11,253,505)
========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
22 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Diversified Strategic Income Fund ("Fund"), a separate
investment fund of the Smith Barney Income Funds ("Trust"), a Massachusetts
business trust, is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company. The Trust
consists of this Fund and seven other separate investment funds: Smith Barney
Exchange Reserve Fund, Smith Barney Convertible Fund, Smith Barney High Income
Fund, Smith Barney Municipal High Income Fund, Smith Barney Premium Total Return
Fund, Smith Barney Balanced Fund and Smith Barney Total Return Bond Fund. The
financial statements and financial highlights for the other funds are presented
in separate semi-annual reports.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded in
national securities markets are valued at the closing prices in the primary
exchange on which they are traded; securities listed or traded on certain
foreign exchanges or other markets whose operations are similar to the U.S.
over-the-counter market (including securities listed on exchanges where the
primary market is believed to be over-the-counter) and securities for which no
sales were reported on that date are valued at the mean between the bid and ask
prices. Securities which are listed or traded on more than one exchange or
market are valued at the quotations on the exchange or market determined to be
the primary market for such securities; (c) securities maturing within 60 days
are valued at cost plus accreted discount, or minus amortized premium, which
approximates value; (d) dividend income is recorded on ex-dividend date; foreign
dividends are recorded on the ex-dividend date or as soon as practical after the
Fund determines the existence of a dividend declaration after exercising
reasonable due diligence; (e) interest income, adjusted for accretion of
original issue discount, is recorded on an accrual basis; (f) gains or losses on
the sale of securities are calculated by using the specific identification
method; (g) dividends and distributions to shareholders are recorded on the
ex-dividend date; (h) the accounting records are maintained in U.S. dollars. All
assets and liabilities denominated in foreign currencies are translated into
U.S. dollars based on the rate of exchange of such currencies against U.S.
dollars on the date of valuation. Purchases and sales of securities and income
and expenses are translated at the rate of exchange quoted on the respective
date that such transactions are recorded. Differences between income or expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (i) direct expenses are charged to each class; management fees
and general fund expenses are allocated on the basis of relative net assets; (j)
the Fund intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; (k) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
July 31, 1998, reclassifications are made to the Fund's capital accounts to
reflect permanent book/tax differences and income and gains available for
distributions under income tax regulations. Accordingly, a portion of
accumulated net investment loss amounting to $15,587,251 has been reclassified
to paid-in capital. Net investment income, net realized gains and net assets
were not affected by this adjustment; and (l) estimates and assumptions are
required to be made regarding assets, liabilities and changes in net assets
resulting from operations
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
when financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates
could cause actual results to differ.
In addition, the Fund may enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked to market daily,
by recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
SSBC Fund Management Inc. ("SSBC") formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
adviser to the Trust. The Fund pays SSBC an investment advisory fee calculated
at an annual rate of 0.45% of the average daily net assets. The Fund has also
entered into a sub-advisory agreement with Smith Barney Global Capital
Management ("Global Capital Management"), a subsidiary of SSBH. From its fee,
SSBC pays Global Capital Management a sub-advisory fee calculated at an annual
rate of 0.10% of the Fund's average daily net assets. These fees are calculated
daily and paid monthly.
SSBC also acts as the Trust's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to the
date, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as members of the selling group.
For the six months ended January 31, 1999, SSB received sales charges of
approximately $567,000 and $533,000 on sales of the Fund's Class A and L shares,
respectively.
There is also CDSC of 4.50% on Class B shares, which applies if redemption
occurs within one year from initial purchase. This CDSC declines by 0.50% the
first year after purchase and thereafter by 1.00% per year until no CDSC is
incurred. Class L shares have a 1.00% contingent deferred sales charge ("CDSC"),
which applies if redemption occurs within the first year of purchase. In certain
cases, Class A shares also have a 1.00% CDSC, which applies if redemption occurs
within the first year of purchase. This CDSC only applies to those purchases of
Class A shares, which when combined with current holdings of Class A shares,
equal or exceed $500,000 in the aggregate. These purchases do not incur an
initial sales charge.
In addition, CDSCs paid to SSB for the six months ended January 31, 1999 were:
Class A Class B
================================================================================
CDSCs $3,000 $995,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B and L shares calculated at the annual rate of 0.25% of the average
daily net assets for each respective class. The Fund also pays a distribution
fee with respect to Class B and L shares calculated at the annual rates of 0.50%
and 0.45% of the average daily net assets of each class, respectively. For the
six months ended January 31, 1999, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $514,127 $8,340,971 $534,149
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
- --------------------------------------------------------------------------------
24 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
3. Investments
During the six months ended January 31, 1999, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
===============================================================================
Purchases $1,292,249,025
- -------------------------------------------------------------------------------
Sales 1,412,024,503
===============================================================================
At January 31, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
===============================================================================
Gross unrealized appreciation $ 63,511,808
Gross unrealized depreciation (46,650,757)
- -------------------------------------------------------------------------------
Net unrealized appreciation $ 16,861,051
===============================================================================
4. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by the
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of the futures contracts. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking-to-market" on a daily basis to reflect
the market value of the contract at the end of each day's trading. Variation
margin payments are received or made and recognized as assets due from or
liabilities due to broker, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transactions and the Fund's basis in the contract. The Fund enters into such
contracts to hedge a portion of its portfolio. The Fund bears the market risk
that arises from changes in the value of the financial instruments and
securities indices (futures contracts) and the credit risk should a counterparty
fail to perform under such contracts.
At January 31, 1999, the Fund had no open futures contracts.
5. Fund Concentration
The Fund's investment in foreign securities may involve risks not present in
domestic investments. Since securities may be denominated in a foreign currency
and may require settlement in foreign currencies and pay interest and or
dividends in foreign currencies, changes in the relationship of these foreign
currencies to the U.S. dollar can significantly affect the value of the
investments and earnings of the Fund. Foreign investments may also subject the
Fund to foreign government exchange restrictions, expropriation, taxation or
other political, social or economic developments, all of which could affect the
market and/or credit risk of the investments.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
6. Forward Foreign Currency Contracts
At January 31, 1999, the Fund had the following open forward foreign currency
contracts:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
========================================================================================
<S> <C> <C> <C> <C>
To Sell:
Australian Dollar 71,000,000 $ 44,613,759 2/17/99 $ 763,761
German Deutschemark 4,039,667 2,349,284 3/3/99 78,692
German Deutschemark 7,147,708 4,156,777 3/3/99 139,236
Danish Krone 970,000,000 148,198,321 2/17/99 1,489,572
European Currency Unit 3,174,920 3,610,889 2/17/99 70,113
European Currency Unit 225,925,607 256,806,551 2/17/99 6,193,448
Great British Pound 80,600,000 132,346,620 2/17/99 (1,621,481)
Great British Pound 2,387,703 3,919,873 2/25/99 (51,794)
Swedish Krona 553,300,000 70,943,658 2/17/99 (729,705)
- ----------------------------------------------------------------------------------------
6,331,842
- ----------------------------------------------------------------------------------------
To Buy:
Danish Krone 546,200,000 83,449,405 2/17/99 (1,159,307)
European Currency Unit 112,240,000 127,581,674 2/17/99 (1,785,027)
- ----------------------------------------------------------------------------------------
(2,944,334)
- ----------------------------------------------------------------------------------------
Total Unrealized Gain on Open
Forward Foreign Currency Contracts $ 3,387,508
========================================================================================
</TABLE>
7. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
8. Reverse Repurchase Agreement
The Fund may enter into reverse repurchase agreement transactions for leveraging
purposes. A reverse repurchase agreement involves a sale by the Fund of
securities that it holds with an agreement by the Fund to repurchase the same
securities at an agreed upon price and date. A reverse repurchase agreement
involves the risk that the market value of the securities sold by the Fund may
decline below the repurchase price of the securities. The Fund will establish a
segregated account with its custodian, in which the Fund will maintain cash,
U.S. government securities or other liquid high grade debt obligations equal in
value to its obligations with respect to reverse repurchase agreements.
During the six months ended January 31, 1999, the Fund did not have any reverse
repurchase agreement.
- --------------------------------------------------------------------------------
26 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
9. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly the
face amount and maturity date in FNMA/GNMA transactions. Securities purchased on
a TBA basis are not settled until they are delivered to the Fund, normally 15 to
45 days later. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other securities.
At January 31, 1999, the Fund did not hold any TBA securities.
10. 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 January 31, 1999, the Fund loaned common stocks having a value of $35,243,410
and holds the following collateral for loaned securities:
Security Description Value
================================================================================
Time Deposits:
ING Tokyo, 4.9375% due 2/1/99 $1,739,929
Societe Generale, G.C., 4.875% due 2/1/99 1,739,929
Banque National de Paris, G.C., 4.875% due 2/1/99 1,739,929
Banco Bilbao Nassau, 4.875% due 2/1/99 1,739,929
Rabobank, Grand Cayman, 4.875% due 2/1/99 1,739,929
Bank of America G.C., 4.875% due 2/1/99 1,739,929
Caisse de Depots et Consign., Paris, 4.8438% due 2/1/99 1,739,929
Bayerische Hypo-Und Vereinsbk, G.C., 4.8438% due 2/1/99 1,739,929
Repurchase Agreement:
Merrill Lynch Pierce Fenner Securities, 4.8925% due 2/1/99 6,186,416
Morgan Stanley Dean Witter & Co., 4.8125% due 2/1/99 221,843
NationsBanc Montgomery Securities Inc., 4.8625% due 2/1/99 1,739,930
Commercial Paper:
Concord Minutemen Capital, 4.9534% due 2/2/99 1,738,733
Ford Motor Credit Corp., 4.842% due 2/1/99 1,739,227
General Electric Credit Corp., 4.902% due 2/1/99 1,739,219
Lehman Brothers Holdings, Inc., 5.0151% due 2/1/99 1,642,580
New Center Asset Trust, 4.8319% due 2/1/99 1,739,229
Sheffield Receivable Corp., 4.882% due 2/1/99 1,739,222
Variable Funding Capital Corp., 4.8219% due 2/1/99 1,739,230
Money Market Fund:
Janus Institutional Money Market Fund, 4.9177% due 2/1/99 1,739,929
- --------------------------------------------------------------------------------
Total 35,884,990
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 27
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
11. Shares of Beneficial Interest
At January 31, 1999, the Trust had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
At January 31, 1999, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class L Class Y Class Z
===========================================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $429,668,274 $2,226,033,460 $167,922,794 $156,493,476 $30,538,362
===========================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1999 July 31, 1998
--------------------------------- --------------------------------
Shares Amount Shares Amount
===========================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 14,439,417 $ 113,350,633 35,840,369 $ 286,903,611
Shares issued on reinvestment 1,046,325 8,209,584 1,840,380 14,697,639
Shares reacquired (10,435,027) (81,887,790) (21,154,188) (169,264,458)
- -----------------------------------------------------------------------------------------------------------
Net Increase 5,050,715 $ 39,672,427 16,526,561 $132,336,792
===========================================================================================================
Class B
Shares sold 21,693,454 $ 170,643,303 55,482,798 $ 445,398,765
Shares issued on reinvestment 5,151,903 40,531,892 11,463,425 91,837,518
Shares reacquired (33,696,693) (265,443,161) (85,170,973) (683,731,364)
- -----------------------------------------------------------------------------------------------------------
Net Decrease (6,851,336) $ (54,267,966) (18,224,750) $(146,495,081)
===========================================================================================================
Class L*
Shares sold 12,310,251 $ 96,783,811 9,669,210 $ 77,498,478
Shares issued on reinvestment 433,514 3,404,940 693,017 5,540,434
Shares reacquired (8,327,397) (65,481,549) (3,784,006) (30,324,154)
- -----------------------------------------------------------------------------------------------------------
Net Increase 4,416,368 $ 34,707,202 6,578,221 $ 52,714,758
===========================================================================================================
Class Y
Shares sold 4,279,564 $ 33,564,469 5,598,158 $ 44,807,089
Shares issued on reinvestment 1,412 11,083 2,869 22,907
Shares reacquired (36,758) (289,653) -- --
- -----------------------------------------------------------------------------------------------------------
Net Increase 4,244,218 $ 33,285,899 5,601,027 $ 44,829,996
===========================================================================================================
Class Z
Shares sold 1,270,233 $ 9,999,038 286,159 $ 2,296,397
Shares issued on reinvestment 102,151 802,320 214,133 1,711,718
Shares reacquired (229,925) (1,803,268) (324,497) (2,597,758)
- -----------------------------------------------------------------------------------------------------------
Net Increase 1,142,459 $ 8,998,090 175,795 $ 1,410,357
===========================================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
28 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1999(1)(2) 1998(2) 1997 1996 1995 1994
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.96 $ 8.01 $ 7.82 $ 7.85 $ 7.76 $ 8.41
- --------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.25 0.53 0.62 0.61 0.94 0.63
Net realized and unrealized gain (loss) (0.04) 0.05 0.24 0.03 (0.18) (0.52)
- --------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.21 0.58 0.86 0.64 0.76 0.11
- --------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (0.58) (0.67) (0.62) (0.48) (0.62)
Net realized gains -- (0.05) -- -- -- (0.10)
Capital -- -- -- (0.05) (0.19) (0.04)
- --------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.28) (0.63) (0.67) (0.67) (0.67) (0.76)
- --------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.89 $ 7.96 $ 8.01 $ 7.82 $ 7.85 $ 7.76
- --------------------------------------------------------------------------------------------------------------------------------
Total Return 2.72%++ 7.47% 11.36% 8.39% 10.35% 1.16%
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $433,528 $397,127 $267,272 $202,700 $177,336 $ 76,019
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.21%+ 6.51% 7.75% 7.85% 8.15% 7.67%
Interest expense -- 0.06 0.06 0.01 -- --
Other expenses(3) 1.02+ 1.01 1.03 1.04 1.09 1.10
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 44% 128% 85% 90% 83% 93%
================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) The manager waived part of its fees for the years ended July 31, 1995 and
1994. If such fees were not waived, the per share effect on net investment
income and the expense ratios would have been as follows:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class A $0.01 $0.00* 1.14% 1.12%
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 29
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1999(1)(2) 1998(2) 1997 1996 1995 1994
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.98 $ 8.03 $ 7.83 $ 7.86 $ 7.76 $ 8.41
- --------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.22 0.49 0.59 0.58 0.70 0.59
Net realized and unrealized gain (loss) (0.03) 0.05 0.23 0.01 0.02 (0.51)
- --------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.19 0.54 0.82 0.59 0.72 0.08
- --------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.54) (0.62) (0.57) (0.44) (0.60)
Net realized gains -- (0.05) -- -- -- (0.10)
Capital -- -- -- (0.05) (0.18) (0.03)
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.26) (0.59) (0.62) (0.62) (0.62) (0.73)
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.91 $ 7.98 $ 8.03 $ 7.83 $ 7.86 $ 7.76
- --------------------------------------------------------------------------------------------------------------------------
Total Return 2.48%++ 6.93% 10.89% 7.80% 10.00% 0.66%
- --------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $ 2,207 $ 2,280 $ 2,440 $ 2,380 $ 2,367 $ 2,469
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.66%+ 6.12% 7.34% 7.36% 6.82% 7.20%
Interest expense -- 0.06 0.06 0.01 -- --
Other expenses(3) 1.49+ 1.50 1.51 1.52 1.56 1.57
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 44% 128% 85% 90% 83% 93%
==========================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) The manager waived part of its fees for the years ended July 31, 1995 and
1994. If such fees were not waived, the per share effect on net investment
income and the expense ratios would have been as follows:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class B $0.00* $0.00* 1.61% 1.59%
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
30 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class L Shares 1999(1)(2) 1998(2)(3) 1997 1996 1995(4) 1994
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.97 $ 8.01 $ 7.81 $ 7.84 $ 7.76 $ 8.41
- ----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(5) 0.23 0.49 0.58 0.52 1.16 0.55
Net realized and unrealized gain (loss) (0.04) 0.06 0.24 0.07 (0.46) (0.47)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.19 0.55 0.82 0.59 0.70 0.08
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.54) (0.62) (0.57) (0.44) (0.60)
Net realized gains -- (0.05) -- -- -- (0.10)
Capital -- -- -- (0.05) (0.18) (0.03)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.26) (0.59) (0.62) (0.62) (0.62) (0.73)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.90 $ 7.97 $ 8.01 $ 7.81 $ 7.84 $ 7.76
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 2.49%++ 7.08% 10.92% 7.82% 9.73% 0.66%
- ----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $169,248 $135,485 $ 83,543 $42,222 $12,730 $ 1,065
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.91%+ 6.09% 7.19% 7.61% 10.23% 7.20%
Interest expense -- 0.06 0.06 0.01 -- --
Other expenses(5) 1.44+ 1.45 1.46 1.47 1.46 1.57
- ----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 44% 128% 85% 90% 83% 93%
==================================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) 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.
(4) On November 7, 1994, the former Class D shares were renamed Class C
shares.
(5) The manager waived part of its fees for the years ended July 31, 1995 and
1994. If such fees were not waived, the per share effect on net investment
income and the expense ratios would have been as follows:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class L $0.00* $0.00* 1.51% 1.58%
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 31
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class Y Shares 1999(1)(2) 1998(2) 1997 1996(3)
=======================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.96 $ 8.00 $ 7.82 $ 7.89
- -------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.26 0.55 0.64 0.50
Net realized and unrealized gain (loss) (0.04) 0.06 0.24 0.01
- -------------------------------------------------------------------------------------------------------
Total Income From Operations 0.22 0.61 0.88 0.51
- -------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.60) (0.70) (0.53)
Net realized gains -- (0.05) -- --
Capital -- -- -- (0.05)
- -------------------------------------------------------------------------------------------------------
Total Distributions (0.29) (0.65) (0.70) (0.58)
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.89 $ 7.96 $ 8.00 $ 7.82
- -------------------------------------------------------------------------------------------------------
Total Return 2.88%++ 7.96% 11.64% 6.65%++
- -------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $157,005 $124,559 $ 80,479 $ 26,940
- -------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.68%+ 6.88% 7.84% 8.54%+
Interest expense -- 0.06 0.06 0.01
Other expenses 0.68+ 0.66 0.70 0.69+
- -------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 44% 128% 85% 90%
=======================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) For the period from October 10, 1995 (inception date) to July 31, 1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
32 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class Z Shares 1999(1)(2) 1998(2) 1997 1996 1995(3) 1994
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 7.96 $ 8.01 $ 7.82 $ 7.85 $ 7.76 $ 8.41
- ---------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(4) 0.26 0.55 0.65 0.64 0.84 0.68
Net realized and unrealized gain (loss) (0.03) 0.05 0.23 0.02 (0.06) (0.54)
- ---------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.23 0.60 0.88 0.66 0.78 0.14
- ---------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.60) (0.69) (0.63) (0.49) (0.65)
Net realized gains -- (0.05) -- -- -- (0.10)
Capital -- -- -- (0.06) (0.20) (0.04)
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.29) (0.65) (0.69) (0.69) (0.69) (0.79)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 7.90 $ 7.96 $ 8.01 $ 7.82 $ 7.85 $ 7.76
- ---------------------------------------------------------------------------------------------------------------------------
Total Return 3.01%++ 7.78% 11.69% 8.72% 10.94% 1.43%
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $30,515 $21,670 $20,397 $16,270 $14,361 $11,552
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.69%+ 6.85% 8.08% 8.19% 8.30% 8.02%
Interest expense -- 0.06 0.06 0.01 -- --
Expenses(4) 0.68+ 0.74 0.69 0.70 0.75 0.75
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 44% 128% 85% 90% 83% 93%
===========================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) On November 7, 1994, the former Class C shares were renamed Class Z
shares.
(4) The manager waived part of its fees for the years ended July 31, 1995 and
1994. If such fees were not waived, the per share effect on net investment
income and the expense ratios would have been as follows:
Per Share Decreases Expense Ratios
in Net Investment Income Without Fee Waivers
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
Class Z $0.00* $0.00* 0.80% 0.77%
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 33
<PAGE>
Smith Barney
Diversified Strategic
Income Fund
Trustees
Lee Abraham
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
James E. Conroy
Vice President and Investment Officer
John C. Bianchi
Vice President and Investment Officer
Victor S. Filatov
Vice President and Investment Officer
Irving P. David
Controller
Christina T. Sydor
Secretary
Investment Adviser
SSBC Fund Management Inc.
Distributor
CFBDS, Inc.
Custodian
The Chase Manhattan Bank
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of shareholders of Smith
Barney Diversified Strategic Income Fund. It is not authorized for distribution
to prospective investors unless accompanied or preceded by a current Prospectus
for the Fund, which contains information concerning the Fund's investment
policies and expenses as well as other pertinent information.
SALOMON SMITH BARNEY
- ----------------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney Diversified
Strategic Income Fund
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD2174 3/99
<PAGE>
[PHOTO]
Smith Barney
Balanced Fund
------------------
[GRAPHIC] SEMI-ANNUAL REPORT
------------------
January 31, 1999
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(R)
<PAGE>
Smith Barney
Balanced Fund
The Smith Barney Balanced Fund ("Fund") seeks current income and long-term
capital appreciation by investing in equity and debt securities. The Fund will
maintain a target asset allocation of approximately 60% of its total assets in
equity securities and 40% of its total assets in fixed-income securities.
Smith Barney Balanced Fund
Average Annual Total Returns
January 31, 1999
Without Sales Charge(1)
------------------------------------------
Class A Class B Class L Class O
================================================================================
Six-Months+ 11.22% 10.99% 10.83% 10.98%
- --------------------------------------------------------------------------------
One-Year 16.74 16.21 N/A 16.20
- --------------------------------------------------------------------------------
Five-Year 11.11 10.57 N/A 10.60
- --------------------------------------------------------------------------------
Ten-Year N/A 11.44 N/A N/A
- --------------------------------------------------------------------------------
Since Inception++ 11.51 11.31 8.31+ 10.07
================================================================================
With Sales Charge(2)
------------------------------------------
Class A Class B Class L Class O
================================================================================
Six-Months+ 5.66% 6.78% 8.87% 10.14%
- --------------------------------------------------------------------------------
One-Year 10.93 11.92 N/A 15.34
- --------------------------------------------------------------------------------
Five-Year 9.97 10.44 N/A 10.60
- --------------------------------------------------------------------------------
Ten-Year N/A 11.44 N/A N/A
- -------------------------------------------------------------------------------
Since Inception++ 10.59 11.31 6.44+ 10.07
- --------------------------------------------------------------------------------
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B, L and O shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 5.00% and 1.00%,
respectively; Class B shares reflect the deduction of a 5.00% CDSC, which
applies if shares are redeemed within one year from purchase. Thereafter,
the CDSC declines by 1.00% per year until no CDSC is incurred. Class L and
O shares also reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within the first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Inception dates for Class A, B, L and O shares are November 6, 1992, March
28, 1988, June 15, 1998 and February 4, 1993, respectively.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
The strong fourth quarter of 1998 capped another strong year for financial
assets with stocks posting a better than 20% return for the fourth year in a
row. The equity portion of the Balanced Fund entered the latest reporting period
defensively postured with approximately 11% in cash and an overweight position
in utility stocks. Early in the reporting period, market volatility provided us
with opportunities to put cash to work and we also moved assets from some
utility stocks into market sectors that we believed had greater long-term
appreciation potential.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SUTAX
Class B SLSUX
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter ........................................................ 1
Historical Performance .................................................... 4
Smith Barney Balanced Fund at a Glance .................................... 7
Schedule of Investments ................................................... 8
Statement of Assets and Liabilities ....................................... 18
Statement of Operations ................................................... 19
Statements of Changes in Net Assets ....................................... 20
Notes to Financial Statements ............................................. 21
Financial Highlights ...................................................... 26
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO] [PHOTO]
HEATH B. MCLENDON JOHN C. BIANCHI, CFA
Chairman Vice President and
Investment Officer
[PHOTO] [PHOTO]
CHARLES P. GRAVES III, CPA JAMES E. CONROY
Vice President and Vice President and
Investment Officer Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Balanced
Fund ("Fund"), for the period ended January 31, 1999. A detailed summary of
performance and current holdings can be found in the appropriate sections that
follow. We hope you find this report to be useful and informative.
A Classic Investor Series Fund
The Fund is part of the Classic Investor Series of Smith Barney Mutual Funds.
The Classic Investor Series funds are mutual funds whose investment decisions
are determined by experienced portfolio managers based on each fund's investment
objectives and guidelines. Funds in the Smith Barney Classic Investor Series
invest across asset classes and sectors, utilizing a range of strategies in
order to achieve their objectives.
Performance Update
For the six-months ended January 31, 1999, the Fund generated a total return of
11.22% (before the deduction of any sales charges) for its Class A shares,
significantly outperforming its Lipper, Inc. balanced fund peer group average of
7.39% for the same period. (Lipper is a major independent fund-tracking
organization.)
During the same period, the S&P 500 Index ("S&P 500"), a common measure of broad
stock market performance, gained 15.02% and the Lehman Brothers
Government/Corporate Bond Index, which tracks the performance of the overall
bond market, rose 5.75%. As of January 31, 1999, stocks represented
approximately 62% of the Fund's total net assets and bonds made up roughly 38%.
For information on the Fund's other share classes, please refer to page four.
Investment Strategy Update
In selecting stocks for the Fund, we employ an investing approach emphasizing a
portfolio broadly diversified across a wide range of industries. Generally, the
stock portion of the Fund will be comprised of mostly mid- to
large-capitalization companies. However, the Fund may also invest in
smaller-capitalization companies if they otherwise meet the same investment
criteria.
Stock Market Update*
Over the last six months, investors experienced the worst and best the stock
market has to offer. Throughout the summer, political and economic uncertainty
shook world markets and exposed investors to higher levels of volatility.
Investors had to endure another financial meltdown in emerging market economies,
a President being impeached and renewed tension in the Middle East, to name just
a few. The resulting summer market decline was severe in magnitude but
thankfully short in duration. As the year came to a close, subsiding fears of
global economic collapse, interest rate cuts at home and abroad,
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 1
<PAGE>
continued strength in consumer spending and strong earnings gains at many
companies all helped stocks (as measured by the S&P 500) record their best
single quarterly return since the first quarter of 1987.
The strong fourth quarter of 1998 capped another strong year for financial
assets with stocks posting a better than 20% return for the fourth year in a
row. The equity portion of the Balanced Fund entered the latest reporting period
defensively postured with approximately 11% in cash and an overweight position
in utility stocks. Early in the reporting period, market volatility provided us
with opportunities to put cash to work and we also moved assets from some
utility stocks to market sectors that we believed had greater long-term
appreciation potential. Specifically, in the technology sector, we added to our
positions in Cisco Systems, Compaq Computer, Sun Microsystems and Xerox. We also
took advantage of volatility in financial service stocks and added to our
holdings in Chase Manhattan and Associates First Capital.
We also attempted to take advantage of weakness in the oil service sector and
increased our holdings in Halliburton. Unfortunately, the weakness in the oil
industry is not yet over. Yet we believe that this sector offers compelling
value although there appears to be no immediate catalyst on the horizon.
For the last six months, the biggest positive contributors to the Balanced
Fund's performance were Sun Microsystems, EMC Corp., MCI/Worldcom, Cisco Systems
and Xerox. The stocks detracting most from the Fund's performance were
Schlumberger, Halliburton, PPG Industries, Dollar General and NationsBank.
Bond Market Update*
During the six months ended January 31, 1999, the U.S. bond markets were
volatile and highlighted by a flight to quality on the part of bond investors.
This massive flight to quality proved to be a temporary liquidity drain on
virtually all sectors of the bond market with the lone exception being U.S.
Treasury benchmark issues. In our view, this flight to quality and resulting
spread widening was ignited by the Russian default and sustained by Brazilian
economic concerns in addition to massive hedge fund liquidations of
over-leveraged positions across a wide spectrum of bonds. As January drew to a
close, the resilience of the U.S. economy once again asserted itself and the
performance of the U.S. bond market proved that foreign crises and resulting
market turmoil often create buying opportunities.
The last six months were a period of transition for the Fund's fixed-income
holdings. We migrated out of long-term utility bonds and moved our assets into a
more diversified portfolio of investment grade bonds, high-yield corporate bonds
and limited U.S. Treasury, agency and agency mortgage-backed securities.
During the reporting period, we took advantage of the U.S. Treasury bond market
rally to systematically shorten the Fund's average maturity. Later on in the
reporting period, we increased our exposure to quality investment grade and
high-yield corporate issues as corporate spreads widened to attractive levels
and market liquidity returned. The fixed income portion of the Fund is
structured to provide investors with the highest income available consistent
with prudent management.
Outlook
So far in 1999, we believe the consensus among investors is that inflation and
interest rates are as low as they can go and that corporate earnings will at
best be up 3% to 4% and at worst be down, and that stocks are way too expensive.
While the first two points are highly debatable, we agree that stocks look
expensive by many historical measures. Where we differ from the consensus is
that we think stocks should trade at the high end of their valuation range in
this environment.
There are many reasons why stocks are trading at these high levels today. In our
opinion, the most important factor has been the relentless growth in earnings.
Since
- ----------
* Please note the Fund's holdings are subject to change, and stocks and bonds
held by the portfolio as of a date are subject to change.
- --------------------------------------------------------------------------------
2 1999 Semi-Annual Report to Shareholders
<PAGE>
1982 earnings for companies represented in the S&P 500 have grown at a 10%
compound annual rate, which is significantly higher than average growth
experienced since the end of World War II. From this perspective, more stock
market appreciation will depend in large part on continued strong growth in
earnings.
The current consensus expectation for 1999 corporate earnings growth is 4%.
There are two reasons why we think this number and expectations for long-term
future earnings growth may be too modest. First, demographic trends continue to
favorably influence domestic economic growth. Aging baby boomers remain active
consumers and they are expected to stay a potent force in the economy for many
years to come. Second, we firmly believe that many companies have yet to fully
realize the benefits and business potential created from the revolution in
technology of the last twenty years. The first phase of technological
application focused on cost reduction. The second phase of technological
innovation will be business redesign as a means to improve sales. Companies in
the first phase are running today's businesses better while companies in phase
two are creating a better business model. Phase one was a primary driver of
earnings growth up until now; phase two should be a primary driver of growth in
the future.
And while it is not likely that we will experience a fifth year of 20% gains in
the stock market, we do see ample opportunity to identify individual stocks with
great appreciation potential.
With respect to our views on the bond market, we anticipate that interest rates
will move sideways to marginally higher over the next six months. We plan to
retain our overweight position in corporate bonds and keep a limited allocation
to U.S. agency mortgage backed securities. The Fund's maturity structure can
best be described as neutral, which means that we expect corporate yields to
provide the bulk of the returns over the next few months. If, as expected, rates
go up and corporate spreads move tighter, we will upgrade our holdings to
include higher quality corporate issues along with more U.S. government and
agency issues. If the economy also shows signs of peaking, we also plan to move
into a longer and more aggressive maturity structure.
In closing, thank you for investing in the Smith Barney Balanced Fund. We
encourage you to visit our Web site at www.smithbarney.com. We look forward to
helping you pursue your investment goals in the years ahead.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi, CFA
Heath B. McLendon John C. Bianchi, CFA
Chairman Vice President and
Investment Officer
/s/ Charles P. Graves III, CFA /s/ James E. Conroy
Charles P. Graves III, CFA James E. Conroy
Vice President and Vice President and
Investment Officer Investment Officer
February 19, 1999
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $16.52 $13.93 $0.17 $3.66 $0.00 11.22%+
- ---------------------------------------------------------------------------------------------------------------
7/31/98 15.53 16.52 0.68 0.83 0.00 16.70
- ---------------------------------------------------------------------------------------------------------------
7/31/97 14.51 15.53 0.82 0.32 0.00 15.48
- ---------------------------------------------------------------------------------------------------------------
7/31/96 14.03 14.51 0.82 0.00 0.00 9.21
- ---------------------------------------------------------------------------------------------------------------
7/31/95 13.28 14.03 0.82 0.08 0.02 13.24
- ---------------------------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.83 0.50 0.00 (8.99)
- ---------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/93 14.36 15.97 0.64 0.13 0.00 17.01+
===============================================================================================================
Total $4.78 $5.52 $0.02
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $16.49 $13.89 $0.15 $3.66 $0.00 10.99%+
- ---------------------------------------------------------------------------------------------------------------
7/31/98 15.52 16.49 0.62 0.83 0.00 16.17
- ---------------------------------------------------------------------------------------------------------------
7/31/97 14.51 15.52 0.75 0.32 0.00 14.88
- ---------------------------------------------------------------------------------------------------------------
7/31/96 14.02 14.51 0.75 0.00 0.00 8.78
- ---------------------------------------------------------------------------------------------------------------
7/31/95 13.28 14.02 0.76 0.08 0.02 12.62
- ---------------------------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.75 0.50 0.00 (9.52)
- ---------------------------------------------------------------------------------------------------------------
7/31/93 14.83 15.97 0.80 0.15 0.00 14.69
- ---------------------------------------------------------------------------------------------------------------
7/31/92++ 13.95 14.83 0.35 0.00 0.01 8.98+
- ---------------------------------------------------------------------------------------------------------------
2/28/92 13.21 13.95 0.84 0.15 0.03 13.63
- ---------------------------------------------------------------------------------------------------------------
2/28/91 12.93 13.21 0.90 0.10 0.00 10.46
- ---------------------------------------------------------------------------------------------------------------
2/28/90 12.09 12.93 0.90 0.21 0.00 16.34
- ---------------------------------------------------------------------------------------------------------------
Inception * -- 2/28/89 12.00 12.09 0.57 0.15 0.00 6.80+
===============================================================================================================
Total $8.14 $6.15 $0.06
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $16.52 $13.91 $0.14 $3.66 $0.00 10.83%+
- ---------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/98 17.14 16.52 0.00 0.23 0.00 (2.28)+
===============================================================================================================
Total $0.14 $3.89 $0.00
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
4 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class O Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $16.50 $13.90 $0.15 $3.66 $0.00 10.98%+
- ---------------------------------------------------------------------------------------------------------------
7/31/98 15.53 16.50 0.63 0.83 0.00 16.19
- ---------------------------------------------------------------------------------------------------------------
7/31/97 14.51 15.53 0.75 0.32 0.00 15.01
- ---------------------------------------------------------------------------------------------------------------
7/31/96 14.02 14.51 0.75 0.00 0.00 8.80
- ---------------------------------------------------------------------------------------------------------------
7/31/95 13.28 14.02 0.76 0.08 0.02 12.62
- ---------------------------------------------------------------------------------------------------------------
7/31/94 15.97 13.28 0.75 0.50 0.00 (9.52)
- ---------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/93 15.17 15.97 0.39 0.02 0.00 8.08+
===============================================================================================================
Total $4.18 $5.41 $0.02
===============================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge(1)
-------------------------------------------------------
Class A Class B Class L Class O
==============================================================================================================
<S> <C> <C> <C> <C>
Six Months Ended 1/31/99+ 11.22% 10.99% 10.83% 10.98%
- --------------------------------------------------------------------------------------------------------------
Year Ended 1/31/99 16.74 16.21 N/A 16.20
- --------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/99 11.11 10.57 N/A 10.60
- --------------------------------------------------------------------------------------------------------------
Ten Years Ended 1/31/99 N/A 11.44 N/A N/A
- --------------------------------------------------------------------------------------------------------------
Inception* through 1/31/99 11.51 11.31 8.31+ 10.07
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
-------------------------------------------------------
Class A Class B Class L Class O
==============================================================================================================
<S> <C> <C> <C> <C>
Six Months Ended 1/31/99+ 5.66% 6.78% 8.87% 10.14%
- --------------------------------------------------------------------------------------------------------------
Year Ended 1/31/99 10.93 11.92 N/A 15.34
- --------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/99 9.97 10.44 N/A 10.60
- --------------------------------------------------------------------------------------------------------------
Ten Years Ended 1/31/99 N/A 11.44 N/A N/A
- --------------------------------------------------------------------------------------------------------------
Inception* through 1/31/99 10.59 11.31 6.44+ 10.07
==============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 1/31/99) 97.35%
- --------------------------------------------------------------------------------
Class B (1/31/89 through 1/31/99) 195.39
- --------------------------------------------------------------------------------
Class L (Inception* through 1/31/99) 8.31
- --------------------------------------------------------------------------------
Class O (Inception* through 1/31/99) 77.67
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B, L and O shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 5.00% and 1.00%,
respectively; Class B shares reflect the deduction of a 5.00% CDSC, which
applies if shares are redeemed within one year from purchase and declines
thereafter by 1.00% per year until no CDSC charge is incurred. Class L and
O shares also reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within the first year of purchase.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ For the period from March 1, 1992 to July 31, 1992, which reflects a
change in the fiscal year end of the Fund.
* Inception dates for Class A, B, L and O shares are November 6, 1992, March
28, 1988, June 15, 1998 and February 4, 1993, respectively.
- --------------------------------------------------------------------------------
6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the
Smith Barney Balanced Fund vs. Standard & Poor's 500 Index and
Lehman Brothers Government/Corporate Bond Index+
- --------------------------------------------------------------------------------
January 1989 -- January 1999
[GRAPHIC]
Lehman Brothers
Smith Barney Government/Corporate
Balanced Fund Bond Index S&P 500 Index
Jan 1989 10000 10000 10000
July 1989 10870 11003 11837
July 1990 11501 11689 12607
July 1991 13057 12885 14211
July 1992 15589 14899 16026
July 1993 17994 16543 17423
July 1994 16279 16522 18320
July 1995 18333 18196 23094
July 1996 19942 19161 26918
July 1997 22910 21227 40945
July 1998 26613 22941 48848
Jan 1999 29539 24260 56185
+ Hypothetical illustration of $10,000 invested in Class B shares on January
31, 1989, assuming reinvestment of dividends and capital gains, if any, at
net asset value through January 31, 1999. The Standard & Poor's 500 Index
is composed of widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market. The Lehman
Brothers Government/Corporate Bond Index is a combination of publicly
issued intermediate and long-term U.S. government bonds and corporate
bonds. Figures for the indices include reinvestment of dividends. The
indices are unmanaged and are not subject to the same management and
trading expenses of a mutual fund. The performance of the Fund's other
classes may be greater or less than the Class B shares' performance
indicated on this chart, depending on whether greater or lesser sales
charges and fees were incurred by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
Top Five Equity Holdings*
- --------------------------------------------------------------------------------
1. MCI WorldCom, Inc. 2.5%
- --------------------------------------------------------------------------------
2. EMC Corp. 2.4
- --------------------------------------------------------------------------------
3. Cisco Systems, Inc. 2.1
- --------------------------------------------------------------------------------
4. Chase Manhattan Corp. 2.1
- --------------------------------------------------------------------------------
5. Merck & Co., Inc. 2.0
- --------------------------------------------------------------------------------
Top Five Bond Holdings*
- --------------------------------------------------------------------------------
1. CSC Holdings Inc. 0.9%
- --------------------------------------------------------------------------------
2. United International Holdings, Series B 0.8
- --------------------------------------------------------------------------------
3. Metronet Communications 0.7
- --------------------------------------------------------------------------------
4. Unisys Corp. 0.6
- --------------------------------------------------------------------------------
5. Rogers Cablesystems Ltd. 0.5
- --------------------------------------------------------------------------------
* As a percentage of total investments as of January 31, 1999.
[GRAPHIC]
Investment Breakdown
- --------------------------------------------------------------------------------
Collateralized Mortgage Obligation 0.5%
U.S. Government and Agency Obligations 5.0%
Common and Preferred Stock 62.2%
Corporate Bonds and Notes 32.3%
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
==========================================================================================================
<C> <S> <C>
COMMON STOCK -- 62.1%
Capital Goods -- 3.2%
145,000 General Electric Co. $15,206,875
119,000 PPG Industries, Inc. 6,396,250
125,000 Textron, Inc.+ 9,304,687
- ----------------------------------------------------------------------------------------------------------
30,907,812
- ----------------------------------------------------------------------------------------------------------
Consumer Durables -- 1.2%
135,000 General Motors Corp. 12,116,250
- ----------------------------------------------------------------------------------------------------------
Consumer Non-Durables -- 10.1%
122,000 Colgate-Palmolive Co. 9,813,375
252,500 Dollar General Corp. 6,296,719
148,000 Gillette Co. 8,695,000
203,000 Lowe's Cos., Inc. 11,837,437
305,000 Newell Co.+ 12,676,562
275,000 PepsiCo, Inc. 10,742,188
80,000 Proctor & Gamble Co. 7,270,000
177,000 Rite Aid Corp.+ 8,695,125
307,500 Staples, Inc.++ 8,802,188
173,000 Unilever NV 13,234,500
- ----------------------------------------------------------------------------------------------------------
98,063,094
- ----------------------------------------------------------------------------------------------------------
Consumer Services -- 2.0%
250,000 Kroger Co.+ 15,875,000
128,700 Norfolk Southern Corp. 3,547,294
- ----------------------------------------------------------------------------------------------------------
19,422,294
- ----------------------------------------------------------------------------------------------------------
Electric and Gas -- 2.8%
100,000 AES Corp. 3,368,750
200,000 Edison International 5,562,500
150,000 NIPSCO Ind. Inc.+ 4,068,750
150,000 PECO Energy Co. 5,728,125
130,000 Texas Utilities Co. 5,711,875
73,000 Unicom Corp. 2,600,625
- ----------------------------------------------------------------------------------------------------------
27,040,625
- ----------------------------------------------------------------------------------------------------------
Energy -- 3.2%
100,000 Allegheny Energy, Inc. 3,162,500
78,000 BP Amoco Plc, Sponsored ADR 6,327,750
200,000 Coastal Corp. 5,962,500
195,000 El Paso Energy Corp. 6,435,000
180,000 Halliburton Co. 5,343,750
85,000 Schlumberger Ltd. 4,048,125
- ----------------------------------------------------------------------------------------------------------
31,279,625
- ----------------------------------------------------------------------------------------------------------
Financial Services -- 13.1%
273,000 Allstate Corp. 10,254,562
115,000 American Express Co. 11,830,625
95,000 American International Group, Inc. 9,779,062
482,000 Associates First Capital, Class A Shares 19,551,125
120,000 BankAmerica Corp. 8,025,000
200,000 BankBoston Corp. 7,387,500
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
==========================================================================================================
<C> <S> <C>
Financial Services -- 13.1% (continued)
268,000 Chase Manhattan Corp. $ 20,619,250
186,000 Freddie Mac 11,532,000
200,000 St. Paul Cos., Inc. 5,875,000
130,000 State Street Corp. 9,295,000
100,000 Wells Fargo Co. 3,493,750
150,000 XL Capital Ltd., Class A Shares 9,571,875
- ----------------------------------------------------------------------------------------------------------
127,214,749
- ----------------------------------------------------------------------------------------------------------
Healthcare -- 4.8%
124,300 Baxter International Inc. 8,817,531
214,000 Johnson & Johnson 18,190,000
135,000 Merck & Co, Inc. 19,811,250
- ----------------------------------------------------------------------------------------------------------
46,818,781
- ----------------------------------------------------------------------------------------------------------
Technology -- 17.4%
50,000 AT&T Corp.+ 4,537,500
188,000 Cisco Systems, Inc. 20,815,125
300,000 Compaq Computer Corp. 14,287,500
80,000 Electronic Data Systems Corp. 4,195,000
210,000 EMC Corp.+ 22,863,750
175,000 Infinity Broadcasting Corp., Class A Shares++ 4,845,313
75,000 Intel Corp. 10,570,313
110,000 Lucent Technologies Inc. 12,381,875
308,000 MCI WorldCom, Inc.++ 24,524,500
200,000 Motorola, Inc. 14,450,000
139,000 Sun Microsystems, Inc.++ 15,559,313
161,000 Xerox Corp. 19,964,000
- ----------------------------------------------------------------------------------------------------------
168,994,189
- ----------------------------------------------------------------------------------------------------------
Telecommunications -- 4.3%
250,000 Ameritech Corp. 16,281,250
100,000 CBS Corp.++ 3,400,000
121,000 GTE Corp. 8,167,500
200,000 SBC Communications Inc. 10,800,000
100,000 Williams Cos., Inc. 3,300,000
- ----------------------------------------------------------------------------------------------------------
41,948,750
- ----------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $486,177,175) 603,806,169
==========================================================================================================
PREFERRED STOCK -- 0.1%
Banking -- 0.0%
600 California Federated Capital, 9.125% 15,825
- ----------------------------------------------------------------------------------------------------------
Industrial -- 0.1%
7,000 Capstar Communications Inc., 12.625% 850,500
- ----------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $830,362) 866,325
==========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==========================================================================================================
<C> <S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 5.0%
U.S. Treasury Securities -- 1.9%
$ 4,500,000 U.S. Treasury Notes, 5.500% due 5/31/00 $ 4,547,745
5,000,000 U.S. Treasury Bonds, 5.125% due 8/31/00 5,034,700
8,000,000 U.S. Treasury Bonds, 6.250% due 8/15/23 8,988,960
- ----------------------------------------------------------------------------------------------------------
18,571,405
- ----------------------------------------------------------------------------------------------------------
U.S. Government Agencies -- 3.1%
5,000,000 Federal Home Loan Bank, 5.880% due 4/15/08 5,190,150
5,000,000 Federal Home Loan Mortgage Corp., 5.750% due 7/15/03 5,147,950
5,000,000 Federal National Mortgage Association, 4.625% due 10/15/01 4,970,200
14,279,897 Federal National Mortgage Association, 6.000% due 6/1/13 14,342,301
- ----------------------------------------------------------------------------------------------------------
29,650,601
- ----------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost -- $47,496,464) 48,222,006
==========================================================================================================
COLLATERALIZED MORTGAGE OBLIGATION -- 0.5%
4,250,000 Airplanes Pass-Through Trust, 10.875% due 3/15/19
(Cost -- $4,696,250) 4,512,692
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT RATING# SECURITY VALUE
==========================================================================================================
<C> <C> <S> <C>
CORPORATE BONDS AND NOTES -- 32.3%
Aerospace/Defense -- 0.5%
1,125,000 NR BE Aerospace, 9.500% due 11/1/08@ 1,189,688
685,000 B+ Hexcel Corp., 9.750% due 1/15/09@ 693,562
2,500,000 Baa1* Raytheon Co., 6.450% due 8/15/02 2,571,875
- -----------------------------------------------------------------------------------------------------------
4,455,125
- ----------------------------------------------------------------------------------------------------------
Airline -- 0.4%
605,000 Ba2* Continental Airlines, 8.000% due 12/15/05 604,244
2,500,000 Baa3* United Air Lines, 9.750% due 8/15/21 3,112,500
- ----------------------------------------------------------------------------------------------------------
3,716,744
- ----------------------------------------------------------------------------------------------------------
Automobile/Auto Parts -- 0.6%
1,475,000 B Breed Technologies Inc., 9.250% due 4/15/08@ 1,003,000
2,175,000 B1* Exide Corp., 10.000% due 4/15/05 2,180,438
2,500,000 A1* Ford Motor Co., 7.400% due 11/1/46 2,837,500
275,000 Ba3* Westinghouse Air Brake, 9.375% due 6/15/05@ 286,000
- ----------------------------------------------------------------------------------------------------------
6,306,938
- ----------------------------------------------------------------------------------------------------------
Banking -- 0.3%
2,500,000 Aa3* NationsBank Corp, 6.500% due 8/15/03 2,603,125
- ----------------------------------------------------------------------------------------------------------
Broadcasting -- 4.3%
260,000 B- Capstar Broadcasting, step bond to yield 11.002% due 2/1/09 221,000
2,000,000 BB- Century Communications, 8.875% due 1/15/07 2,240,000
3,200,000 B1* Chancellor Media Corp., 9.000% due 10/1/08 3,536,000
Citadel Broadcasting:
195,000 B- 10.250% due 7/1/07 214,987
625,000 B- 9.250% due 11/15/08@ 671,875
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING# SECURITY VALUE
==========================================================================================================
<C> <C> <S> <C>
Broadcasting -- 4.3% (continued)
$ 2,500,000 B2* Comcast UK Cable, step bond to yield 9.839% due 11/15/07 $ 2,200,000
CSC Holdings Inc.:
204,000 BB- 9.875% due 2/15/13 228,990
2,250,000 B1* 10.500% due 5/15/16 2,694,375
330,000 BB+ 7.875% due 2/15/18 352,275
4,500,000 BB- 9.875% due 4/1/23 5,051,250
610,000 NR Diamond Holding Inc., 10.000% due 2/1/08 1,031,539
NTL Inc.:
1,905,000 B- Step bond to yield 12.375% due 10/1/08@ 1,333,500
900,000 B- 11.500% due 10/1/08@ 1,032,750
RCN Corp.:
2,500,000 B3* Step bond to yield 13.040% due 10/15/07 1,462,500
1,250,000 B3* 10.000% due 10/15/07 1,193,750
Roger Cablesystems Ltd.:
500,000 BB+ Series B, 10.000% due 3/15/05 577,500
750,000 BB+ 10.000% due 12/1/07 858,750
3,250,000 BB- 11.000% due 12/1/15 3,883,750
1,000,000 CCC+ Telemundo Holdings Inc., step bond to yield 11.500% due 8/15/08@ 575,000
1,500,000 B+ Telewest Communication PLC, 11.250% due 11/1/08@ 1,777,500
2,500,000 BBB Time Warner Inc., 7.950% due 2/1/00 2,565,625
750,000 B+ TV Azteca SA DE CV, Series B, 10.500% due 2/15/07 600,000
11,055,000 B United International Holdings, Series B, step bond to yield
11.194% due 2/15/08 7,351,575
- ----------------------------------------------------------------------------------------------------------
41,654,491
- ----------------------------------------------------------------------------------------------------------
Building/Construction -- 0.6%
1,280,000 B Ainsworth Lumber, 12.500% due 7/15/07 1,276,800
Building Materials Corp:
350,000 BB Series B, step bond to yield 9.862% due 7/1/04 359,625
1,000,000 BB Series B, 7.750% due 7/15/05 990,000
790,000 BB 8.000% due 12/1/08@ 795,925
1,335,000 B Columbus McKinnon Corp., 8.500% due 4/1/08 1,271,588
Nortex Inc., Series B:
250,000 B+ 9.250% due 3/15/07 258,750
750,000 B+ 9.125% due 9/1/07 772,500
- ----------------------------------------------------------------------------------------------------------
5,725,188
- ----------------------------------------------------------------------------------------------------------
Chemicals -- 0.0%
340,000 NR Huntsman Corp., 9.500% due 7/1/07@ 345,950
- ----------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing/Services -- 1.2%
Fisher Scientific International:
2,880,000 B- 9.000% due 2/1/08+ 2,937,600
1,400,000 B- 9.000% due 2/1/08@ 1,428,000
2,500,000 Baa2* FMC Corp., 7.000% due 5/15/08 2,531,250
1,115,000 B Group Maintenance America, 9.750% due 1/15/09+@ 1,142,875
745,000 B+ Integrated Electrical Services, 9.375% due 2/1/09@ 765,487
500,000 NR Nationsrent Inc., 10.375% due 12/15/08@ 525,000
1,500,000 B+ Park-Ohio Industries, 9.250% due 12/1/07 1,530,000
1,070,000 BB- United Rentals, 9.250% due 1/15/09@ 1,091,400
- ----------------------------------------------------------------------------------------------------------
11,951,612
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING# SECURITY VALUE
==========================================================================================================
<C> <C> <S> <C>
Electronics -- 1.3%
$ 2,000,000 B+ Celestica International, 10.500% due 12/31/06 $ 2,185,000
2,000,000 B Fairchild Semiconductor, 10.125% due 3/15/07 1,995,000
5,000,000 BB- Unisys Corp., 11.750% due 10/15/04 5,812,500
3,000,000 B- ViaSystems Inc., 9.750% due 6/1/07 2,835,000
- ----------------------------------------------------------------------------------------------------------
12,827,500
- ----------------------------------------------------------------------------------------------------------
Finance -- 2.8%
2,265,000 CCC+ Amresco Inc., Series 98-A, 9.875% due 3/15/05 1,857,300
2,790,000 AA- Associates Corp. NA, 5.750% due 10/15/03 2,835,338
1,225,000 Aa3* CIT Group Inc., 6.800% 4/17/00 1,246,474
2,500,000 BBB Conseco Inc., 6.400% due 2/10/03 2,359,375
2,525,000 A Countrywide Home Loan, 7.200% due 10/30/06 2,660,719
Donaldson, Lufkin & Jenrette:
2,000,000 A- 6.375% due 5/26/00 2,020,160
2,500,000 A- 6.170% due 7/15/03 2,506,250
2,000,000 A Household Finance Corp., 6.750% due 6/1/00 2,030,100
2,500,000 A+ International Lease Finance Corp., 5.950% due 6/1/01 2,528,125
750,000 B2* Intertek Financial Plc., Series B, 10.250% due 11/1/06 697,500
900,000 NR Ocwen Asset Investment, 11.500% due 7/1/05@ 693,000
1,250,000 B2* Ocwen Capital Trust I, 10.875% due 8/1/27 965,625
615,000 B- Oglebay Norton Co., 10.000% due 2/1/09@ 599,625
1,000,000 BBB+ PaineWebber Group Inc., 7.000% due 3/1/00 1,009,700
1,300,000 AAA SunAmerica Inc., 6.580% due 1/15/02 1,342,250
2,000,000 A- TransAmerica Financial Corp., 6.750% due 6/1/00 2,019,400
- ----------------------------------------------------------------------------------------------------------
27,370,941
- ----------------------------------------------------------------------------------------------------------
Food/Beverage -- 1.3%
1,945,000 B2* Carrols Corp., 9.500% due 12/1/08@ 1,979,038
2,500,000 A+ Coca-Cola Enterprises, 6.750% due 1/15/38 2,640,625
1,015,000 BBB+ Conagra Inc., 5.500% due 10/15/02 1,001,044
2,000,000 B Imperial Holly, 9.750% due 12/15/07 2,010,000
1,000,000 BBB+ Quaker Oats, 7.440% due 3/2/26 1,093,750
1,200,000 B SC International Services Inc., 9.250% due 9/1/07 1,215,000
2,500,000 A- Tyson Foods Inc., 7.000% due 1/15/28 2,553,125
- ----------------------------------------------------------------------------------------------------------
12,492,582
- ----------------------------------------------------------------------------------------------------------
Healthcare -- 2.2%
Columbia/HCA Healthcare:
2,500,000 BB+ Zero coupon due 6/1/02 1,925,000
1,300,000 BBB 7.000% due 7/1/07 1,257,750
500,000 BBB 7.250% due 5/20/08 490,625
300,000 BBB 6.630% due 7/15/45 293,250
1,225,000 Ba3* Fresenius Medical, 7.875% due 2/1/08 1,225,000
2,850,000 BB ICN Pharmaceuticals Inc., Series B, 9.250% due 8/15/05 2,914,125
Integrated Health Services, Series A:
1,200,000 B2* 9.500% due 9/15/07 1,146,000
3,600,000 B2* 9.250% due 1/15/08 3,433,500
5,300,000 B- Magellan Health Services, 9.000% due 2/15/08 4,703,750
1,500,000 B- Mariner Post-Acute Network, Series B, 9.500% due 11/1/07 1,162,500
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING# SECURITY VALUE
==========================================================================================================
<C> <C> <S> <C>
Healthcare -- 2.2% (continued)
Sun Healthcare Group Inc.:
$ 1,400,000 B2* Series B, 9.500% due 7/1/07 $ 1,078,000
2,000,000 B2* 9.375% due 5/1/08@ 1,520,000
- ----------------------------------------------------------------------------------------------------------
21,149,500
- ----------------------------------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 0.6%
105,000 BB+ Circus Circus Enterprises, 9.250% due 12/1/05 106,575
2,500,000 B- Courtyard by Marriott, Series B, 10.750% due 2/1/08 2,575,000
1,175,000 BB+ Harrahs Operating Inc., 7.875% due 12/15/05 1,189,688
1,000,000 BB+ Park Place Entertainment, 7.875% due 12/15/05@ 1,005,000
Station Casinos Inc.:
250,000 B+ 10.125% due 3/15/06 265,000
955,000 B+ 8.875% due 12/1/08@ 981,263
- ----------------------------------------------------------------------------------------------------------
6,122,526
- ----------------------------------------------------------------------------------------------------------
Industrial -- 2.2%
250,000 B AEP Industries Inc., 9.875% due 11/15/07 252,500
1,000,000 BB Allied Waste NA, 7.875% due 1/1/09@ 1,032,500
3,000,000 Baa2* Black & Decker, 6.625% due 11/15/00 3,056,250
2,500,000 A Carnival Corp., 6.150% due 4/15/08 2,553,125
2,000,000 A Hasbro Inc., 6.600% due 7/15/28 2,075,000
500,000 B3* Interlake Corp., 12.125%, due 3/1/02 511,250
2,500,000 BBB- News America Holdings, 7.750% due 2/1/24 2,793,750
1,500,000 B Outboard Marine Corp., 10.750% due 6/1/08@ 1,440,000
2,500,000 BBB Solutia Inc., 7.375% due 10/15/27 2,509,375
2,500,000 A- Tyco International Group., 6.125% due 6/15/01 2,534,375
2,500,000 BBB+ USA Waste Services, 6.500% due 12/15/02 2,562,500
- ----------------------------------------------------------------------------------------------------------
21,320,625
- ----------------------------------------------------------------------------------------------------------
Insurance -- 0.4%
2,000,000 AA Mass Mutual Life, 7.625% due 11/15/23@ 2,282,500
1,750,000 BB+ SIG Capital Trust I, 9.500% due 8/15/27 1,474,375
- -----------------------------------------------------------------------------------------------------------
3,756,875
- ----------------------------------------------------------------------------------------------------------
Leisure/Amusement -- 0.5%
295,000 B Carmike Cinema Inc., 9.375% due 2/1/09@ 299,425
375,000 B+ Intrawest Corp., 9.750% due 8/15/08@ 383,437
1,785,000 B Regal Cinemas Inc., 9.500% due 6/1/08@ 1,820,700
2,500,000 B- SFX Entertainment Inc., Series B, 9.125% due 2/1/08 2,575,000
- ----------------------------------------------------------------------------------------------------------
5,078,562
- ----------------------------------------------------------------------------------------------------------
Machinery -- 0.0%
339,000 B- Alvey Systems Inc., 11.375% due 1/31/03 347,475
- ----------------------------------------------------------------------------------------------------------
Metals/Mining -- 0.3%
1,500,000 BBB+ Enron Corp., 6.450% due 11/15/01 1,533,750
1,000,000 B- Haynes International Inc., 11.625% due 9/1/04 895,000
- ----------------------------------------------------------------------------------------------------------
2,428,750
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING# SECURITY VALUE
==========================================================================================================
<C> <C> <S> <C>
Oil/Natural Gas -- 0.7%
$ 930,000 B Canadian Forest Oil Ltd., 8.750% due 9/15/07 $ 855,600
3,000,000 B+ Clark USA Inc., Series B, 10.875% due 12/1/05 2,760,000
2,750,000 BB- Ocean Energy Inc., 10.375% due 10/15/05 2,887,500
- ----------------------------------------------------------------------------------------------------------
6,503,100
- ----------------------------------------------------------------------------------------------------------
Oil Services -- 0.1%
650,000 BB+ J. Ray McDermott SA, 9.375% due 7/15/06 692,250
- ----------------------------------------------------------------------------------------------------------
Packaging -- 0.2%
1,000,000 B Huntsman Packaging Corp., 9.125% due 10/1/07 1,017,500
505,000 B- Tekni-Plex, Series B, 9.250% due 3/1/08 527,725
- ----------------------------------------------------------------------------------------------------------
1,545,225
- ----------------------------------------------------------------------------------------------------------
Paper/Forest Products -- 0.3%
1,325,000 BB Malette Inc., 12.250% due 7/15/04 1,437,625
Riverwood International:
340,000 CCC+ 10.875% due 4/1/08 309,400
780,000 B- 10.650% due 8/1/07 793,650
- ----------------------------------------------------------------------------------------------------------
2,540,675
- ----------------------------------------------------------------------------------------------------------
Personal Care Products/Cosmetics -- 0.2%
2,750,000 B- Revlon Consumer Products, 8.625% due 2/1/08 2,461,250
- ----------------------------------------------------------------------------------------------------------
Publishing -- 0.1%
900,000 B+ Mail-well Corp., 8.750% due 12/15/08@ 920,250
- ----------------------------------------------------------------------------------------------------------
Real Estate Development/REITs -- 0.5%
HMH Properties:
460,000 BB Series A, 7.875% due 8/1/05 451,950
2,545,000 BB Series B, 7.875% due 8/1/08 2,475,013
1,830,000 BB Series C, 8.450% due 12/1/08 1,834,575
320,000 Baa3* Trizec Finance Ltd., 10.875% due 10/15/05 352,000
- ----------------------------------------------------------------------------------------------------------
5,113,538
- ----------------------------------------------------------------------------------------------------------
Retail -- 1.3%
500,000 B- Advance Holding Corp., step bond to yield 12.592% due 4/15/09 300,000
2,000,000 B- Advance Stores Co. Inc., Series B, 10.250% due 4/15/08 2,030,000
2,500,000 A- Autozone Inc., 6.500% due 7/15/08 2,562,500
2,000,000 A- Dayton Hudson Corp., 6.750% due 1/1/28 2,120,000
865,000 BB DR Structured Finance, Series A-2, 8.375% due 8/15/15 886,071
2,000,000 BBB+ Rite Aid Corp., 7.125% due 1/15/07 2,150,000
2,500,000 Baa2* Staples Inc., 7.125% due 8/15/07 2,625,000
- ----------------------------------------------------------------------------------------------------------
12,673,571
- ----------------------------------------------------------------------------------------------------------
Telecommunications -- 7.4%
2,500,000 BBB+ Airtouch Communications, 6.650% due 5/1/08 2,681,250
1,010,000 CCC+ Centennial Cellular, 10.750% due 12/15/08@ 1,073,125
4,000,000 B3* Clearnet Communications, step bond to yield 12.020% due 12/15/05 3,500,000
4,785,000 B1* Colt Telecom Group PLC, 7.625% due 7/31/08 2,806,206
1,375,000 B- Dolphin Telecomm PLC, step bond to yield 11.666% due 6/1/08 605,000
3,775,000 NR E. Spire Communications, step bond to yield 10.987% due 7/1/08 1,321,250
Esprit Telecom Group PLC:
1,500,000 B- 11.500% due 12/15/07 1,578,750
750,000 B- 10.875% due 6/15/08 768,750
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING# SECURITY VALUE
==========================================================================================================
<C> <C> <S> <C>
Telecommunications -- 7.4% (continued)
$ 2,375,000 NR Facilicom International, Series B, 10.500% due 1/15/08 $ 1,923,750
Hermes Europe Railtel BV:
2,250,000 B 11.500% due 8/15/07 2,452,500
600,000 B 10.375% due 1/15/09@+ 637,500
Impsat Corp:
250,000 BB- 12.125% due 7/15/03 211,250
1,250,000 B+ 12.375% due 6/15/08 1,025,000
4,000,000 B Intermedia Comm of Florida, step bond to yield 10.086% due 5/15/06 3,220,000
4,340,000 B- Iridium LLC/Capital Corp., 14.000% due 7/15/05 4,123,000
525,000 B Level 3 Communications, 9.125% due 5/1/08 525,000
2,045,000 B Metromedia Fiber Network, 10.000% due 11/15/08@ 2,167,700
Metronet Communications:
4,850,000 B Step bond to yield 10.149% due 6/15/08 3,261,625
2,205,000 B 12.000% due 8/15/07 2,458,575
895,000 B 10.625% due 11/1/08 948,700
4,350,000 B- Millicom International Cellular, step bond to yield 12.605% due 6/1/06 3,132,000
985,000 B2* Nextel Communications, step bond to yield 11.247% due 9/15/07 677,188
4,000,000 B Nextlink Communications, 12.500% due 4/15/06 4,400,000
2,640,000 Ba3* Orange PLC, 8.000% due 8/1/08 2,752,200
2,500,000 A- Panamsat Corp., 6.000% due 1/15/03 2,509,375
2,000,000 B- Primus Telecomm Group, 11.750% due 8/1/04 2,070,000
Psinet Inc:
1,500,000 B- Series B, 10.000% due 2/15/05 1,567,500
2,300,000 B- 11.500% due 11/1/08@ 2,489,750
1,950,000 NR Splitrock Services Inc., Series B, 11.750% due 7/15/08 1,755,000
2,500,000 AA- Tele-Communication Inc., 7.250% due 8/1/05 2,709,375
2,500,000 BBB Telephone and Data Systems, 7.000% due 8/1/06 2,609,375
1,800,000 CCC+ Telesystem International Wireless, step bond to yield 11.335%
due 11/1/07 675,000
2,875,000 CCC+ Telesystem International Wireless, Series B, step bond to yield
11.768% due 6/30/07 1,322,500
Verio Inc:
695,000 B- 10.375% due 4/1/05 708,900
1,915,000 B- 11.250% due 12/1/08@ 2,053,837
1,655,000 NR Versatel Telecom BV., 13.250% due 5/15/08 1,729,475
1,065,000 Caa1* Viatel Inc., 11.250% due 4/15/08 1,075,650
1,830,000 NR Wam!Net Inc., Series B, step bond to yield 12.590% due 3/1/05 915,000
- ----------------------------------------------------------------------------------------------------------
72,441,056
- ----------------------------------------------------------------------------------------------------------
Textiles/Apparel -- 0.0%
700,000 B Texon International PLC, 10.000% due 2/1/08 357,682
- ----------------------------------------------------------------------------------------------------------
Transportation -- 0.9%
3,000,000 BBB+ Norfolk Southern Corp., 7.875% due 2/15/04 3,300,000
325,000 B+ Stena Line AB, 10.625% due 6/1/08 282,750
1,450,000 B+ TBS Shipping International Ltd., 10.000% due 5/1/05 623,500
Union Pacific:
2,000,000 BBB- 7.875% due 2/15/02 2,095,000
2,500,000 BBB 7.150% due 5/15/28 2,331,250
- ----------------------------------------------------------------------------------------------------------
8,632,500
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING# SECURITY VALUE
==========================================================================================================
<C> <C> <S> <C>
Utilities -- 1.1%
AES Corp.:
$ 500,000 Ba1* 10.250% due 7/15/06 $ 533,750
3,675,000 Ba1* 8.500% due 11/1/07 3,693,375
Calpine Corp.:
2,000,000 Ba2* 10.500% due 5/15/06 2,210,000
2,000,000 Ba2* 8.750% due 7/15/07 2,105,000
1,140,000 BB CMS Energy Corp., 7.500% due 1/15/09 1,164,225
Niagara Mohawk Power Corp.:
500,000 BB+ Series G, 7.750% due 10/1/08 559,375
1,000,000 BB+ Series H, step bond to yield 8.398% due 7/1/10 795,000
- ----------------------------------------------------------------------------------------------------------
11,060,725
- ----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $321,137,554) 314,596,331
==========================================================================================================
<CAPTION>
SHARES SECURITY VALUE
==========================================================================================================
<S> <C> <C>
WARRANTS -- 0.0%
1,950 SplitRock Service, Expire 7/15/08++ 21,450
1,655 Versatel Telecommunications, Expire 5/15/08++ 16,550
10,980 Wam!Net Inc., Expire 3/1/05++ 87,840
==========================================================================================================
TOTAL WARRANTS
(Cost -- $91,926) 125,840
==========================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $860,429,731**) $972,129,363
==========================================================================================================
</TABLE>
+ All or a portion of this security is on loan (See Note 5).
++ Non-income producing security.
@ 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.
# All ratings are by Standard & Poor's Ratings Service with the exception of
those identified by an asterisk (*), which are rated by Moody's Investor
Services, Inc.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 17 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AAA" to
"CCC" may be modified by the addition of a plus (+) or a minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this
category than for bonds in higher rated categories.
BB, B -- Bonds rated "BB" and "B" are regarded, on balance, as
and CCC predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation.
"BB" represents a lower degree of speculation than "B", and "CCC"
the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
Moody's Investor Service, Inc. ("Moody's") -- Numerical modifiers 1, 2, and 3
may be applied to each generic rating from "Aaa" to "Caa", where 1 is the
highest and 3 the lowest rating within its generic category.
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of these bonds.
Aa -- Bonds rated "Aa" are judged to be of the high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities, or fluctuation of protective elements may be of
greater amplitude, or there may be other elements present that make
the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present that suggest a susceptibility to
impairment some time in the future.
Baa -- Bonds rated "Baa" are considered to be medium grade obligations;
that is they are neither highly protected nor poorly secured.
Interest payment and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and may have
speculative characteristics as well.
Ba -- Bonds rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby may
not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payment or of
maintenance of other terms of the contract over any long period of
time may be small.
Caa -- Bonds rated "Caa" are of poor standing. These issues may be in
default, or present elements of danger may exist with respect to
principal or interest.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost -- $860,429,731) $ 972,129,363
Collateral for securities on loan (Note 5) 43,834,600
Receivable for securities sold 2,049,801
Receivable for Fund shares sold 203,191
Dividends and interest receivable 7,743,667
Receivable for open forward foreign currency contracts (Note 8) 11,814
- ----------------------------------------------------------------------------------------------------------
Total Assets 1,025,972,436
- ----------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 5) 43,834,600
Payable to bank 8,248,250
Payable for securities purchased 7,689,450
Investment advisory fees payable 321,448
Administration fees payable 142,562
Payable for Fund shares purchased 80,155
Distribution fees payable 26,555
Accrued expenses 290,405
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 60,633,425
- ----------------------------------------------------------------------------------------------------------
Total Net Assets $ 965,339,011
==========================================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 69,459
Capital paid in excess of par value 849,381,430
Undistributed net investment income 2,047,373
Accumulated net realized gain from security transactions and foreign currencies 2,132,754
Net unrealized appreciation of investments and foreign currencies 111,707,995
- ----------------------------------------------------------------------------------------------------------
Total Net Assets $ 965,339,011
==========================================================================================================
Shares Outstanding:
Class A 20,736,990
-----------------------------------------------------------------------------------------------------
Class B 47,969,509
-----------------------------------------------------------------------------------------------------
Class L 243,184
-----------------------------------------------------------------------------------------------------
Class O 509,811
-----------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.93
-----------------------------------------------------------------------------------------------------
Class B * $13.89
-----------------------------------------------------------------------------------------------------
Class L ** $13.91
-----------------------------------------------------------------------------------------------------
Class O ** $13.90
-----------------------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value per share) $14.66
-----------------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $14.05
=====================================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if
shares are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L and O shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited) For the Six Months Ended January 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 15,611,891
Dividends 4,216,692
- --------------------------------------------------------------------------------
Total Investment Income 19,828,583
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 2,838,873
Investment advisory fees (Note 2) 2,125,984
Administration fees (Note 2) 944,882
Shareholder and system servicing fees 468,437
Shareholder communications 93,040
Registration fees 52,782
Audit and legal 20,315
Custody 20,972
Trustees' fees 7,480
Pricing service fees 7,488
Other 716
- --------------------------------------------------------------------------------
Total Expenses 6,580,969
- --------------------------------------------------------------------------------
Net Investment Income 13,247,614
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 2,809,601
Foreign currency transactions (102,682)
- --------------------------------------------------------------------------------
Net Realized Gain 2,706,919
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period 32,931,647
End of period 111,707,995
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 78,776,348
- --------------------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies 81,483,267
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 94,730,881
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1999 (unaudited)
and the Year Ended July 31, 1998
<TABLE>
<CAPTION>
1999 1998
=============================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 13,247,614 $ 45,244,177
Net realized gain 2,706,919 253,609,314
Increase (decrease) in net unrealized appreciation 78,776,348 (125,861,240)
- ---------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 94,730,881 172,992,251
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (11,175,528) (44,867,630)
Net realized gains (222,778,798) (56,366,253)
- ---------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (233,954,326) (101,233,883)
- ---------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sales 44,264,896 94,564,340
Net asset value of shares issued for
reinvestment of dividends 191,499,283 79,782,511
Cost of shares reacquired (171,225,904) (453,502,479)
- ---------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 64,538,275 (279,155,628)
- ---------------------------------------------------------------------------------------------
Decrease in Net Assets (74,685,170) (207,397,260)
NET ASSETS:
Beginning of period 1,040,024,181 1,247,421,441
- ---------------------------------------------------------------------------------------------
End of period* $ 965,339,011 $ 1,040,024,181
=============================================================================================
* Includes undistributed net investment income of: $ 2,047,373 $ 73,401
=============================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
20 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Balanced Fund ("Fund"), a separate investment fund of the Smith
Barney Income Funds ("Trust"), a Massachusetts business trust, is registered
under the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Trust consists of the Fund and seven other
separate investment funds: Smith Barney Convertible Fund, Smith Barney
Diversified Strategic Income Fund, Smith Barney High Income Fund, Smith Barney
Premium Total Return Fund, Smith Barney Municipal High Income Fund, Smith Barney
Exchange Reserve Fund and Smith Barney Total Return Bond Fund. The financial
statements and financial highlights for the other funds are presented in
separate semi-annual reports.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing price on such markets;
securities for which no sales price were reported and U.S. government and agency
obligations are valued at bid price, or in the absence of a recent bid price, at
the bid equivalent obtained from one or more of the major market makers; (c)
securities maturing within 60 days are valued at cost plus accreted discount, or
minus amortized premium, which approximates value; (d) dividend income is
recorded on ex-dividend date and interest income is recorded on an accrual
basis; (e) dividends and distributions to shareholders are recorded on the
ex-dividend date; (f) gains or losses on the sale of securities are recorded on
the identified cost basis; (g) direct expenses are charged to each class;
management fees and general fund expenses are allocated on the basis of relative
net assets of each class; (h) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
(i) the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At July 31, 1998, reclassifications were made to the
Fund's capital accounts to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations. Net investment
income, net realized gains and net assets were not affected by this change; and
(j) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
In addition, the Fund may enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked to market daily
by recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled. The Fund from time to time may also enter
into options and/or futures contracts to hedge market risk.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
adviser to the Trust. The Fund pays SSBC an investment advisory fee calculated
at an annual rate of 0.45% of the average daily net assets. This fee is
calculated daily and paid monthly.
SSBC also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net asset. This fee
is calculated daily and paid monthly.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
On October 8, 1998, CFBDS, Inc., became the Fund's distributor. Prior to that
date Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as members of the selling group.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares,
which applies if redemption occurs within one year from purchase and declines
thereafter by 1.00% per year until no CDSC is incurred. Class L and O shares
also have a 1.00% CDSC, which applies if redemption occurs within the first year
of purchase.
For the six months ended January 31, 1999, SSB received brokerage commissions of
$6,600 and sales charges of $102,000 and $19,000 on sales of the Fund's Class A
and L shares, respectively. In addition, CDSCs paid to SSB were approximately:
Class B Class O
================================================================================
CDSCs $342,000 $ 1,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B, L and O shares calculated at the annual rate of 0.25% of the average
daily net assets for each respective class. In addition, the Fund pays a
distribution fee with respect to Class B, L and O shares calculated at the
annual rate of 0.50%, 0.75% and 0.45% of the average daily net assets for each
class, respectively. For the six months ended January 31, 1999, total
Distribution Plan fees incurred were as follows:
Distribution
Plan Fees
================================================================================
Class A $ 333,612
- --------------------------------------------------------------------------------
Class B 2,470,959
- --------------------------------------------------------------------------------
Class L 9,057
- --------------------------------------------------------------------------------
Class O 25,245
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the six months ended January 31, 1999, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $310,869,194
- --------------------------------------------------------------------------------
Sales 415,400,570
================================================================================
At January 31, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
================================================================================
Gross unrealized appreciation $ 142,860,969
Gross unrealized depreciation (31,161,337)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 111,699,632
================================================================================
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Fund requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. Lending of Portfolio Securities
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations. Fees earned by the Fund on securities lending are recorded as
interest income. Loans of securities by the Fund are collateralized by cash,
U.S. government securities or high quality money market instruments that are
maintained at all times in an amount at least equal to the current market value
of the loaned securities, plus a margin which may vary depending on the type of
securities loaned. The custodian establishes and maintains the collateral in a
segregated account. The Fund maintains exposure for the risk of any losses in
the investment of amounts received as collateral.
- --------------------------------------------------------------------------------
22 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At January 31, 1999, the Fund loaned common stocks having a value of
approximately $42,834,996 and holds the following collateral for loaned
securities:
Security Description Value
================================================================================
Time Deposits:
Bank of Brussels Lambert, 4.843% due 2/1/99 $ 20,065,289
Deutsche Bank London, 4.843% due 2/1/99 14,781,600
Bank of Montreal, 4.812% due 2/1/99 4,069,846
Societe Generale, 4.750% due 2/1/99 4,917,865
- -------------------------------------------------------------------------------
Total $ 43,834,600
================================================================================
Interest income earned by the Fund from securities loaned for the six months
ended January 31, 1999 was $55,738.
6. Option Contracts
Premiums paid when put or call options are purchased by the Fund represent
investments which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into closing sales transaction, the Fund will realize a gain or loss
depending on whether the sales proceeds from the closing sales transaction are
greater or less than the premium paid for the option. When the Fund exercises a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Fund exercises a call option, the cost of the security
which the Fund purchases upon exercise will be increased by the premium
originally paid.
At January 31, 1999, the Fund had no open purchased call or put options.
When a Fund writes a call or put option, an amount equal to the premium received
by the Fund is recorded as a liability, the value of which is marked-to-market
daily. When a written option expires, the Fund realizes a gain equal to the
amount of the premium received. When the Fund enters into a closing purchase
transaction, the Fund realizes a gain (or loss if the cost of the closing
purchase transaction exceeds the premium received when the option was written)
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is eliminated. When a written call option
is exercised, the cost of the security sold will be reduced by the premium
originally received. When a written put option is exercised, the amount of the
premium received will reduce the cost of the security which the Fund purchased
upon exercise. When written index options are exercised, settlement is made in
cash.
The risk associated with purchasing options is limited to the premium originally
paid. The Fund enters into options for hedging purposes. The risk in writing a
call option is that the Fund gives up the opportunity to participate in any
decrease in the price of the underlying security beyond the exercise price. The
risk in writing a put option is that the Fund is exposed to the risk of loss if
the market price of the underlying security declines.
During the year ended January 31, 1999, the Fund did not write any options.
7. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. The initial margin is segregated by the custodian and is noted in the
schedule of investments. During the period the futures contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking-to-market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or received
and recognized as assets due from or liabilities due to broker, depending upon
whether unrealized gains or losses are incurred. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transactions and the
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Fund's basis in the contract. The Fund enters into such contracts to hedge a
portion of its portfolio. The Fund bears the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts) and the credit risk should a counterparty fail to perform
under such contracts.
At January 31, 1999, the Fund had no open futures contracts.
8. Forward Foreign Currency Contracts
At January 31, 1999, the Fund had forward foreign currency contracts open as
described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized gain on the contracts reflected
in the accompanying financial statements were as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain
=========================================================================================================
<S> <C> <C> <C> <C>
German Mark 606,472 $352,696 3/3/99 $11,814
=========================================================================================================
</TABLE>
9. Shares of Beneficial Interest
At January 31, 1999, the Trust had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
expenses, specifically related to the distribution of its share.
At January 31, 1999, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class L Class O
============================================================================================================
<S> <C> <C> <C> <C>
Total Paid-in Capital $277,443,777 $561,264,656 $3,334,176 $7,408,280
============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
24 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1999 July 31, 1998+
---------------------------- ----------------------------
Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 2,081,060 $ 28,091,718 4,158,346 $ 68,447,899
Shares issued on reinvestment 4,351,975 52,997,478 1,183,103 19,093,402
Shares reacquired (2,570,633) (34,701,329) (4,466,979) (72,675,822)
- ------------------------------------------------------------------------------------------------
Net Increase 3,862,402 $ 46,387,867 874,470 $ 14,865,479
================================================================================================
Class B
Shares sold 955,908 $ 12,652,274 1,252,896 $ 20,430,852
Shares issued on reinvestment 11,044,531 133,902,686 3,656,015 58,779,979
Shares reacquired (8,874,486) (120,188,839) (21,346,134) (345,126,976)
- ------------------------------------------------------------------------------------------------
Net Increase (Decrease) 3,125,953 $ 26,366,121 (16,437,223) $(265,916,145)
================================================================================================
Class L
Shares sold 235,002 $ 3,130,010 29,433 $ 498,115
Shares issued on reinvestment 21,709 265,180 22 371
Shares reacquired (42,975) (559,389) (7) (111)
- ------------------------------------------------------------------------------------------------
Net Increase 213,736 $ 2,835,801 29,448 $ 498,375
================================================================================================
Class O++
Shares sold 2,765 $ 37,048 94,371 $ 1,556,344
Shares issued on reinvestment 129,202 1,567,282 44,849 722,317
Shares reacquired (157,609) (2,236,524) (207,817) (3,407,687)
- ------------------------------------------------------------------------------------------------
Net Decrease (25,642) $ (632,194) (68,597) $ (1,129,026)
================================================================================================
Class Y(1)
Shares sold -- -- 129,563 $ 2,010,810
Shares issued on reinvestment 27 $ 332 8 132
Shares reacquired (118) (1,535) (1,715,009) (27,257,942)
- ------------------------------------------------------------------------------------------------
Net Decrease (91) $ (1,203) (1,585,438) $ (25,247,000)
================================================================================================
Class Z(2)
Shares sold 26,802 $ 353,846 99,768 $ 1,620,320
Shares issued on reinvestment 225,868 2,766,325 73,490 1,186,310
Shares reacquired (989,658) (13,538,288) (314,158) (5,033,941)
- ------------------------------------------------------------------------------------------------
Net Decrease (736,988) $ (10,418,117) (140,900) $ (2,227,311)
================================================================================================
</TABLE>
+ Transactions for Class L shares are for the period from June 15, 1998
(inception date) to July 31, 1998.
++ On June 12, 1998, Class C shares were renamed Class O shares.
(1) At January 31, 1999, all Class Y shares were fully redeemed.
(2) At January 31, 1999, all Class Z shares were fully redeemed.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1999(1)(2) 1998 1997 1996 1995 1994
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $16.52 $15.53 $14.51 $14.03 $13.28 $15.97
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.21 0.70 0.80 0.83 0.85 0.56
Net realized and unrealized gain (loss) 1.03 1.80 1.36 0.47 0.82 (1.92)
- ----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.24 2.50 2.16 1.30 1.67 (1.36)
- ----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.17) (0.68) (0.82) (0.82) (0.82) (0.83)
Net realized gains (3.66) (0.83) (0.32) -- (0.08) (0.50)
Capital -- -- -- -- (0.02) --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (3.83) (1.51) (1.14) (0.82) (0.92) (1.33)
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.93 $16.52 $15.53 $14.51 $14.03 $13.28
- ----------------------------------------------------------------------------------------------------------------------------
Total Return 11.22%++ 16.70% 15.48% 9.21% 13.24% (8.99)%
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $289 $279 $248 $266 $169 $41
- ----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.06%+ 1.05% 1.06% 1.04% 1.07% 1.07%
Net investment income 3.13+ 4.29 5.29 5.55 6.36 5.54
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 33% 110% 45% 58% 36% 28%
============================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
26 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1999(1)(2) 1998 1997 1996 1995 1994
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $16.49 $15.52 $14.51 $14.02 $13.28 $15.97
- -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.18 0.62 0.73 0.77 0.78 0.75
Net realized and unrealized gain (loss) 1.03 1.80 1.35 0.47 0.82 (2.19)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.21 2.42 2.08 1.24 1.60 (1.44)
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.62) (0.75) (0.75) (0.76) (0.75)
Net realized gains (3.66) (0.83) (0.32) -- (0.08) (0.50)
Capital -- -- -- -- (0.02) --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (3.81) (1.45) (1.07) (0.75) (0.86) (1.25)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.89 $16.49 $15.52 $14.51 $14.02 $13.28
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 10.99%++ 16.17% 14.88% 8.78% 12.62% (9.52)%
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (millions) $666 $740 $951 $1,310 $1,573 $1,823
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.54%+ 1.52% 1.52% 1.55% 1.56% 1.54%
Net investment income 2.67+ 3.87 4.85 5.13 5.82 5.07
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 33% 110% 45% 58% 36% 28%
=============================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 27
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
Class L Shares 1999(1)(2) 1998(3)
================================================================================
Net Asset Value, Beginning of Period $16.52 $17.14
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.15 0.02
Net realized and unrealized gain (loss) 1.04 (0.41)
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.19 (0.39)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.14) --
Net realized gains (3.66) (0.23)
- --------------------------------------------------------------------------------
Total Distributions (3.80) (0.23)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $13.91 $16.52
- --------------------------------------------------------------------------------
Total Return++ 10.83% (2.28)%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $3,382 $486
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 1.76% 1.74%
Net investment income 2.27 2.51
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 33% 110%
================================================================================
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) For the period from June 15, 1998 (inception date) to July 31, 1998.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
28 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class O Shares 1999(1)(2) 1998(2)(3) 1997(2) 1996 1995(4) 1994
=============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $16.50 $15.53 $14.51 $14.02 $13.28 $15.97
- -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.19 0.64 0.73 0.77 0.78 0.73
Net realized and unrealized gain (loss) 1.02 1.79 1.36 0.47 0.82 (2.17)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.21 2.43 2.09 1.24 1.60 (1.44)
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.63) (0.75) (0.75) (0.76) (0.75)
Net realized gains (3.66) (0.83) (0.32) -- (0.08) (0.50)
Capital -- -- -- -- (0.02) --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (3.81) (1.46) (1.07) (0.75) (0.86) (1.25)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $13.90 $16.50 $15.53 $14.51 $14.02 $13.28
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 10.98%++ 16.19% 15.01% 8.80% 12.62% (9.52)%
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $7,085 $8,838 $9,381 $11,441 $3,925 $1,894
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.49%+ 1.48% 1.47% 1.50% 1.51% 1.48%
Net investment income 2.73+ 3.89 4.89 5.19 5.77 5.13
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 33% 110% 45% 58% 36% 28%
=============================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) On June 12, 1998, Class C shares were renamed Class O shares.
(4) On November 7, 1994, the former Class D shares were renamed Class C
shares.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 29
<PAGE>
Smith Barney
Balanced Fund
Trustees
Lee Abraham
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Officers
Heath B. McLendon
Chairman and Investment Officer
Lewis E. Daidone
Senior Vice President and Treasurer
John C. Bianchi
Vice President and Investment Officer
James E. Conroy
Vice President and Investment Officer
Charles P. Graves III
Vice President and Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser
SSBC Fund Management Inc.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investors Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Income Funds --Smith Barney Balanced Fund. It is not authorized for
distribution to prospective investors unless accompanied or preceded by a
current Prospectus for the Fund, which contains information concerning the
Fund's investment policies and expenses as well as other pertinent information.
SALOMON SMITH BARNEY
- --------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney
Balanced Fund
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD2175 3/99
<PAGE>
[PHOTO]
Smith Barney
High Income
Fund
------------------
[GRAHPIC] SEMI-ANNUAL REPORT
------------------
January 31, 1999
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(R)
<PAGE>
Smith Barney
High Income Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Smith Barney High Income Fund ("Fund") seeks high current income by
investing in high-yielding corporate bonds, debentures and notes denominated in
U.S. dollars or foreign currencies.
Smith Barney High Income Fund
Average Annual Total Returns
January 31, 1999
Without Sales Charges(1)
--------------------------------------
Class A Class B Class L
================================================================================
Six-Months+ (3.01)% (3.27)% (3.24)%
- --------------------------------------------------------------------------------
One-Year 0.22 (0.19) (0.14)
- --------------------------------------------------------------------------------
Five-Year 7.38 6.86 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 8.30 N/A
- --------------------------------------------------------------------------------
Since Inception++ 9.85 8.64 9.48
================================================================================
With Sales Charges(2)
--------------------------------------
Class A Class B Class L
================================================================================
Six-Months+ (7.35)% (7.43)% (5.13)%
- --------------------------------------------------------------------------------
One-Year (4.28) (4.30) (2.04)
- --------------------------------------------------------------------------------
Five-Year 6.40 6.72 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 8.30 N/A
- --------------------------------------------------------------------------------
Since Inception++ 9.05 8.64 9.23
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 4.50% and 1.00%,
respectively. Class B shares reflect the deduction of a 4.50% CDSC, which
applies if shares are redeemed within one year from purchase. This CDSC
declines by 0.50% the first year after purchase and thereafter by 1.00%
per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed within the
first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Inception dates for Class A, B and L shares are November 6, 1992,
September 2, 1986 and August 24, 1994, respectively.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
We viewed the third quarter 1998 correction in the high-yield bond market as a
buying opportunity and carefully redeployed excess cash reserves into the market
during that time. However, given the continued problems in Asia and Latin
America, we remained underweighted in basic commodity industries such as steel,
forest products, energy and petrochemicals, industries that continue to be
negatively affected by worldwide deflationary trends.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SHIAX
Class B SHIBX
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter ................................................... 1
Historical Performance ............................................... 4
Smith Barney High Income Fund
at a Glance .......................................................... 7
Schedule of Investments .............................................. 8
Statement of Assets and Liabilities .................................. 17
Statement of Operations .............................................. 18
Statements of Changes in Net Assets .................................. 19
Notes to Financial Statements ........................................ 20
Financial Highlights ................................................. 25
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO] [PHOTO]
HEATH B. MCLENDON JOHN C. BIANCHI
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney High
Income Fund ("Fund") for the period ended January 31, 1999. In this report, we
summarize the period's prevailing economic and market conditions and outline our
portfolio strategy. A detailed summary of performance and current holdings can
be found in the appropriate sections that follow. We hope you find this report
to be useful and informative.
A Style Pure Fund
The Fund is a Style Pure Fund. Style Pure Series mutual funds are Smith Barney
Mutual Funds that are the basic building blocks of asset allocation. Other than
maintaining minimal cash or under extraordinary market conditions, each Style
Pure Series Fund is totally invested 100% of the time within its designated
asset classes and its designated investment style.
Performance Update
For the period ended January 31, 1999, the Fund generated a total return of a
negative 3.01% for Class A shares, excluding the effects of sales charges. In
comparison, the average six-month total return for open-end high-yield funds as
reported by Lipper Inc., a major independent fund performance tracking
organization, was a negative 3.84%. While we were disappointed in our results
over the past six months, our relatively more conservative investment approach
did enable us to outperform our Lipper peer group average as the financial
markets encountered considerable price volatility. We believe our general
cautiousness remains warranted given the increasing uncertainty over future
world economic growth and financial market performance.
In addition, during the past six months, the Fund paid income dividends totaling
$0.51 for Class A shares. Based on a net asset value ("NAV") of $10.86 per share
and a current monthly income dividend of $0.082 as of January 31, 1999, this
equates to an annual distribution rate of 9.06%. Given our more conservative
investment approach that emphasizes higher-quality issues with less yield, we
slightly reduced the Fund's dividend in January. Given current market
conditions, we believe that the Fund is now in a stronger position to weather
any economic or market dislocations that may occur over the short term.
Market and Economic Overview
The high-yield bond market generated relatively weak results during the third
quarter of 1998, underperforming all other domestic bond market sectors. By the
end of September, the Federal Reserve Board ("Fed") began taking aggressive
actions to restore investor confidence in the financial markets. The Fed had
realized that the financial markets were beginning to freeze up with overall
liquidity disappearing. Many companies were finding it increasingly more
difficult to borrow money through the fixed income capital markets. Investors
had become increasingly reluctant to invest in new bond issues, especially from
companies that issue high yield bonds. Their fears were that an economic
recession was becoming a more likely possibility given the increased turmoil in
emerging market economies such as Korea, Russia and Indonesia.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 1
<PAGE>
Moreover, the Fed was also concerned that a worldwide credit crunch in the
financial markets could throw the U.S. economy into a meaningful recession. By
acting swiftly and lowering short-term interest rates three times, the Fed was
able to stabilize U.S. financial markets and restore investor confidence.
As investors slowly became more comfortable with the economic outlook and the
Fed's resolve to keep the economy out of a recession, the high-yield bond market
stabilized and outperformed other types of U.S. bonds in the fourth quarter of
1998. However, because of lingering uncertainty over the economic outlook, the
high-yield bond market is still trading at undervalued levels. We think that as
more investors become convinced that the U.S. economy is still fundamentally
sound, the high-yield bond market should continue to stabilize and prices should
improve and high-yield bonds should do better than other kinds of domestic
bonds.
Portfolio Strategy and Market Outlook
The Fund remains cautiously positioned with a heavy emphasis in better quality,
intermediate maturity "B" and "BB" rated high-yield bonds. As of January 31,
1999, the Fund's average maturity was approximately 8.5 years. In addition, the
Fund continued to emphasize telecommunications issues as well as cable and media
issues.
We viewed the third quarter 1998 correction in the high-yield bond market as a
buying opportunity and carefully redeployed excess cash reserves into the market
during that time. However, given the continued problems in Asia and Latin
America, we remained underweighted in basic commodity industries such as steel,
forest products, energy and petrochemicals, industries that continue to be
negatively affected by worldwide deflationary trends. (Deflation is when prices
actually fall. Deflation should not be confused with disinflation, which is the
slowing down of the rate at which prices increase.)
Conclusion
We believe that the financial markets will remain choppy as investors continue
to sort out the potential negative impact on world economic growth from the
large declines in both currencies and financial assets, particularly in the
emerging markets of Asia and Latin America. We will therefore continue to be
more selective in our investment strategy and we intend to maintain a meaningful
percentage of stronger "BB"-rated issues in the Fund's portfolio.
We will also remain focused on companies that should be less vulnerable to the
crisis in Asia as well as other emerging markets that are experiencing financial
difficulties. We believe that economic growth could slow worldwide and general
interest rates may still decline from current levels. If our expectations come
true, better quality high-yield bonds should do better than other types of
domestic bonds. And despite our general cautiousness, we will continue to take
advantage of select high growth opportunities, especially in the
telecommunications and media sectors as they become available.
- --------------------------------------------------------------------------------
2 1999 Semi-Annual Report to Shareholders
<PAGE>
We encourage you to visit our Web site at www.smithbarney.com and we look
forward to continuing to help you pursue your investment goals. Thank you for
your investment in the Smith Barney High Income Fund.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi
Heath B. McLendon John C. Bianchi, CFA
Chairman and Vice President and
Chief Executive Officer Investment Officer
February 22, 1999
- --------------------------------------------------------------------------------
Top Ten Holdings* As of January 31, 1999
- --------------------------------------------------------------------------------
1. Unisys Corp. 3.5%
- -------------------------------------------------------------------------------
2. CSC Holdings Inc. 3.1
- -------------------------------------------------------------------------------
3. United International Holdings Inc. 2.9
- -------------------------------------------------------------------------------
4. Magellan Health 2.1
- -------------------------------------------------------------------------------
5. Integrated Health Services 1.9
- -------------------------------------------------------------------------------
6. HMH Properties Inc. 1.9
- -------------------------------------------------------------------------------
7. ViaSystems Inc. 1.6
- -------------------------------------------------------------------------------
8. ACE Corp. 1.6
- -------------------------------------------------------------------------------
9. Clearnet Communications Inc. 1.5
- -------------------------------------------------------------------------------
10. Millicom International Cellular SA 1.4
- -------------------------------------------------------------------------------
* As a percentage of total corporate bonds and notes.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $11.74 $10.86 $0.51 $0.00 $0.00 (3.01)%+
- ----------------------------------------------------------------------------------------------------------------
7/31/98 11.82 11.74 1.09 0.00 0.00 8.85
- ----------------------------------------------------------------------------------------------------------------
7/31/97 10.98 11.82 1.08 0.00 0.00 18.31
- ----------------------------------------------------------------------------------------------------------------
7/31/96 11.10 10.98 1.08 0.00 0.00 8.95
- ----------------------------------------------------------------------------------------------------------------
7/31/95 11.16 11.10 1.05 0.00 0.07 10.28
- ----------------------------------------------------------------------------------------------------------------
7/31/94 12.01 11.16 1.12 0.00 0.00 2.11
- ----------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/93 11.03 12.01 0.86 0.00 0.00 17.29+
================================================================================================================
Total $6.79 $0.00 $0.07
================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $11.75 $10.87 $0.48 $0.00 $0.00 (3.27)%+
- ---------------------------------------------------------------------------------------------------------------
7/31/98 11.83 11.75 1.03 0.00 0.00 8.34
- ---------------------------------------------------------------------------------------------------------------
7/31/97 10.99 11.83 1.02 0.00 0.00 17.72
- ---------------------------------------------------------------------------------------------------------------
7/31/96 11.11 10.99 1.02 0.00 0.00 8.41
- ---------------------------------------------------------------------------------------------------------------
7/31/95 11.16 11.11 0.99 0.00 0.07 9.77
- ---------------------------------------------------------------------------------------------------------------
7/31/94 12.01 11.16 1.06 0.00 0.00 1.60
- ---------------------------------------------------------------------------------------------------------------
7/31/93 11.15 12.01 1.10 0.00 0.00 18.55
- ---------------------------------------------------------------------------------------------------------------
7/31/92 10.05 11.15 1.11 0.00 0.06 23.86
- ---------------------------------------------------------------------------------------------------------------
7/31/91 10.59 10.05 1.27 0.00 0.02 8.82
- ---------------------------------------------------------------------------------------------------------------
7/31/90 13.36 10.59 1.61 0.00 0.01 (8.66)
- ---------------------------------------------------------------------------------------------------------------
7/31/89 14.01 13.36 1.53 0.00 0.00 6.60
===============================================================================================================
Total $12.22 $0.00 $0.16
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $11.76 $10.88 $0.49 $0.00 $0.00 (3.24)%+
- ---------------------------------------------------------------------------------------------------------------
7/31/98 11.84 11.76 1.04 0.00 0.00 8.38
- ---------------------------------------------------------------------------------------------------------------
7/31/97 11.00 11.84 1.03 0.00 0.00 17.77
- ---------------------------------------------------------------------------------------------------------------
7/31/96 11.11 11.00 1.03 0.00 0.00 8.56
- ---------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/95 10.90 11.11 0.90 0.00 0.07 11.50+
===============================================================================================================
Total $4.49 $0.00 $0.07
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
4 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $11.77 $10.89 $0.53 $0.00 $0.00 (2.86)%+
- ---------------------------------------------------------------------------------------------------------------
7/31/98 11.84 11.77 1.11 0.00 0.00 9.18
- ---------------------------------------------------------------------------------------------------------------
7/31/97 10.99 11.84 1.11 0.00 0.00 18.68
- ---------------------------------------------------------------------------------------------------------------
7/31/96 11.10 10.99 0.92 0.00 0.00 9.32
- ---------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/95 10.88 11.10 0.03 0.00 0.07 2.91+
===============================================================================================================
Total $3.70 $0.00 $0.07
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1/31/99 $11.74 $10.85 $0.53 $0.00 $0.00 (2.97)%+
- ---------------------------------------------------------------------------------------------------------------
7/31/98 11.80 11.74 1.11 0.00 0.00 9.33
- ---------------------------------------------------------------------------------------------------------------
7/31/97 10.99 11.80 1.11 0.00 0.00 18.29
- ---------------------------------------------------------------------------------------------------------------
7/31/96 11.09 10.99 1.11 0.00 0.00 9.42
- ---------------------------------------------------------------------------------------------------------------
7/31/95 11.16 11.09 1.08 0.00 0.07 10.55
- ---------------------------------------------------------------------------------------------------------------
7/31/94 12.01 11.16 1.15 0.00 0.00 2.37
- ---------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/93 11.03 12.01 0.88 0.00 0.00 17.47+
===============================================================================================================
Total $6.97 $0.00 $0.07
===============================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge(1)
-------------------------------------------------------------------
Class A Class B Class L Class Y Class Z
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/99+ (3.01)% (3.27)% (3.24)% (2.86)% (2.97)%
- ---------------------------------------------------------------------------------------------------------------
Year Ended 1/31/99 0.22 (0.19) (0.14) 0.57 0.92
- ---------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/99 7.38 6.86 N/A N/A 7.66
- ---------------------------------------------------------------------------------------------------------------
Ten Years Ended 1/31/99 N/A 8.30 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Inception* through 1/31/99 9.85 8.64 9.48 8.46 10.13
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
-------------------------------------------------------------------
Class A Class B Class L Class Y Class Z
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 1/31/99+ (7.35)% (7.43)% (5.13)% (2.86)% (2.97)%
- ---------------------------------------------------------------------------------------------------------------
Year Ended 1/31/99 (4.28) (4.30) (2.04) 0.57 0.92
- ---------------------------------------------------------------------------------------------------------------
Five Years Ended 1/31/99 6.40 6.72 N/A N/A 7.66
- ---------------------------------------------------------------------------------------------------------------
Ten Years Ended 1/31/99 N/A 8.30 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Inception* through 1/31/99 9.05 8.64 9.23 8.46 10.13
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge(1)
===============================================================================================================
<S> <C>
Class A (Inception* through 1/31/99) 79.73%
- ---------------------------------------------------------------------------------------------------------------
Class B (1/31/89 through 1/31/99) 121.93
- ---------------------------------------------------------------------------------------------------------------
Class L (Inception* through 1/31/99) 49.49
- ---------------------------------------------------------------------------------------------------------------
Class Y (Inception* through 1/31/99) 27.48++
- ---------------------------------------------------------------------------------------------------------------
Class Z (Inception* through 1/31/99) 82.54
===============================================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 4.50% and 1.00%,
respectively; Class B shares reflect the deduction of a 4.50% CDSC, which
applies if shares are redeemed within one year from purchase. This CDSC
declines by 0.50% the first year after purchase and thereafter by 1.00%
per year until no CDSC occurs. Class L shares also reflect the deduction
of a 1.00% CDSC, which applies if shares are redeemed within the first
year of purchase.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ For the purpose of calculating Class Y shares' cumulative total return, an
inception date of February 5, 1996 is recognized.
* Inception dates for Class A, B, L, Y and Z shares are November 6, 1992,
September 2, 1986, August 24, 1994, April 28, 1995 and November 6, 1992,
respectively.
- --------------------------------------------------------------------------------
6 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney High Income Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the Smith Barney High Income
Fund vs. Salomon Smith Barney High-Yield Market (7-10 year) Index+
January 1989 -- January 1999
[GRAPHIC]
Smith Barney High
Income Fund Salomon Bros
January 1989 10,000 10,000
July 1989 9,905 10,529
July 1990 9,158 10,053
July 1991 10,060 9,248
July 1992 12,550 13,390
July 1993 14,878 15,673
July 1994 15,116 18,264
July 1995 16,593 17,785
July 1996 17,988 21,339
July 1997 21,177 23,812
July 1998 22,943 27,357
January 1999 22,193 27,334
+ Hypothetical illustration of $10,000 invested in Class B shares on January
31, 1989, assuming reinvestment of dividends and capital gains, if any, at
net asset value through January 31, 1999. The Salomon Smith Barney
High-Yield Market (7-10 year) Index includes cash-pay and
deferred-interest bonds with a remaining maturity of at least seven years,
but less than ten years. This index is unmanaged and is not subject to the
same management and trading expenses as a mutual fund. The performance of
the Fund's other classes may be greater or less than the Class B shares'
performance indicated on this chart, depending on whether greater or
lesser sales charges and fees were incurred by shareholders investing in
other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost. No adjustment has been made
for shareholder tax liability on dividends or capital gains.
Industry Diversification*
- --------------------------------------------------------------------------------
[GRAPHIC]
Broadcasting 12.7%
Cellular and Other Wireless 8.5%
Diversified Conglomerates Services 2.5%
Diversified Conglomerate/Manufacturing 3.5%
Electric/Utilities 4.8%
Electronic/Computers 6.9%
Food and Beverages 3.2%
Healthcare 9.2%
Hotel, Casinos and Gaming 4.5%
Telephone/Communications 19.4%
Other 24.8%
- --------------------------------------------------------------------------------
* As a percentage of total corporate bonds and notes.
Investment Breakdown
- --------------------------------------------------------------------------------
[GRAPHIC]
Common Stock, Preferred Stock, Convertible Preferred Stock
and Warrants 2.8%
Cash Equivalent 3.2%
Foreign Bonds 3.7%
Corporate Bonds and Notes 90.3%
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
============================================================================================================
CORPORATE BONDS AND NOTES -- 90.3%
Aerospace and Defense -- 0.3%
<S> <C> <C> <C>
$ 5,325,000 B1 BE Aerospace, Sr. Sub. Notes, 9.500% due 11/1/08(b) $ 5,631,189
- ------------------------------------------------------------------------------------------------------------
Airlines -- 0.5%
4,240,000 Ba2* Continental Airlines, Notes, 8.000% due 12/15/05 4,234,700
4,980,000 B+ Hexcel Corp., Sr. Sub. Notes, 9.750% due 1/15/09(b) 5,042,250
- ------------------------------------------------------------------------------------------------------------
9,276,950
- ------------------------------------------------------------------------------------------------------------
Airplanes -- 1.2%
19,025,000 Ba2* Airplanes Pass-Through Trust, Corporate Collateralized Mortgage
Obligation, Series D, 10.875% due 3/15/19 20,200,935
- ------------------------------------------------------------------------------------------------------------
Automobile/Autoparts -- 2.1%
16,815,000 B+ Breed Technologies, 9.250% due 4/15/08(b) 11,434,200
20,720,000 B1* Exide Corp., Sr. Notes, 10.000% due 4/15/05 20,771,800
2,675,000 Ba3* Westinghouse Air, Sr. Notes, 9.375% due 6/15/05 2,782,000
- ------------------------------------------------------------------------------------------------------------
34,988,000
- ------------------------------------------------------------------------------------------------------------
Broadcasting -- 11.5%
4,830,000 B- Capstar Broadcasting, Sr. Discount Notes, step bond to yield
10.944% due 2/1/09 4,105,500
10,300,000 BB- Century Communications Inc., Sr. Notes, 8.750% due 10/1/07 11,407,250
7,835,000 B1* Chancellor Media, Sr. Sub Notes, 9.000% due 10/1/08 8,001,494
5,035,000 B- Citadel Broadcast, Sr. Sub Notes, 9.250% due 11/15/08 5,412,625
3,995,000 B- Citadel Broadcasting, Sr. Sub. Notes, 10.250% due 7/1/07 4,404,489
12,025,000 B2* Comcast UK Cable, Sr. Discount Debentures, step bond to yield
11.481% due 11/15/07 10,582,000
CSC Holdings Inc.:
2,270,000 BB+ Sr. Unsecured Debentures, 7.875% due 2/15/18 2,423,225
18,483,000 BB- Sr. Sub. Notes, 9.875% due 2/15/13(c) 20,747,179
14,430,000 BB- Sr. Sub. Notes, 10.500% due 5/15/16 17,279,939
4,975,000 BB- Sr. Sub. Notes, 9.875% due 4/1/23 5,584,449
2,000,000 BB+ 7.625% due 7/15/18 2,085,000
NTL Inc. Sr. Notes:
12,395,000 B- Step bond to yield 12.375% due 10/1/08 8,676,500
5,000,000 B- 11.500% due 10/1/08 5,737,500
Roger Cablesystems Inc.:
451,000 BB+ Sr. Notes, 10.000% due 3/15/05 520,905
12,750,000 BB+ Sr. Secured Debenture, 10.000% due 12/1/07 14,598,750
12,490,000 BB- Sr. Sub. Debenture, 11.000% due 12/1/15 14,925,550
4,000,000 BB- Rogers Communications, Sr. Notes, 9.125% due 1/15/06 4,210,000
6,625,000 CCC+ Telemundo Holdings, Sr. Discount Notes, 10.500% due 8/15/08 3,809,379
TV Azteca SA:
1,550,000 B+ Guaranteed Sr. Notes, 10.500% due 2/15/07 1,240,000
6,350,000 B+ Sr. Notes, 10.125% due 2/15/04 5,270,500
66,455,000 B United International Holdings Inc., Sr. Discount Notes, step
bond to yield 11.026% due 2/15/08 44,192,579
- ------------------------------------------------------------------------------------------------------------
195,214,813
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
============================================================================================================
<S> <C> <C> <C>
Building/Construction -- 1.8%
Building Material Corp., Sr. Notes:
$ 4,000,000 BB Step bond to yield 9.922% due 7/15/05 $ 3,960,000
3,800,000 BB 9.922 due 7/1/04 3,904,500
5,440,000 BB 8.000% due 12/1/08 5,480,800
8,280,000 B Columbus McKinnon Corp., Unsecured Sr. Sub. Notes, 8.500% due 4/1/08 7,886,700
Nortek Inc., Sr. Notes:
1,500,000 B+ 9.250% due 3/15/07 1,552,500
7,425,000 B+ 9.125% due 9/1/07 7,647,750
- ------------------------------------------------------------------------------------------------------------
30,432,250
- ------------------------------------------------------------------------------------------------------------
Cellular and Other Wireless -- 7.7%
1,000,000 Caa Cellular Communications International Inc., Sub. Notes, 6.000%
due 4/1/05 1,673,750
8,095,000 CCC+ Centennial Cellular, Sr. Sub. Notes, 10.750%, due 12/15/08 8,600,939
25,540,000 B3* Clearnet Communications Inc., Sr. Discount Notes, step bond to yield
12.228% due 12/15/05 22,347,500
16,550,000 B- Dolphin Telecom PLC, Sr. Discount Notes, step bond to yield
11.365 due 6/1/03 7,282,000
19,885,000 B- Iridum LLC/Capital Corp., Company Guaranteed, 14.000% due 7/15/05 18,890,750
29,950,000 B Millicom International Cellular SA, Sr. Sub. Discount Notes, step bond
to yield 13.856% due 6/1/06 21,564,000
14,200,000 Ba3* Orange PLC, Sr. Notes, 8.000% due 8/1/08 14,803,500
10,475,000 B3* Pagemart Nationwide Inc., Sr. Discount Notes, step bond to yield
12.930% due 2/1/05 9,322,750
17,825,000 NR Pagemart Wireless Inc., Sr. Discount Notes, step bond to yield
11.250% due 2/1/08 8,556,000
Telesystem International Wireless Inc., Sr. Discount Notes:
28,750,000 CCC+ 12.434% due 6/30/07 13,225,000
12,100,000 CCC+ 11.178% due 11/1/07 4,537,500
- ------------------------------------------------------------------------------------------------------------
130,803,689
- ------------------------------------------------------------------------------------------------------------
Chemicals -- 0.1%
2,370,000 NR Huntsman Corp., Sr. Sub. Notes, 9.500% due 7/1/07 2,411,475
- ------------------------------------------------------------------------------------------------------------
Diversified Conglomerate Services -- 2.3%
6,675,000 BB- CIA Latino Americana, Company Guaranteed Notes,
11.625% due 6/1/04(b) 4,205,250
7,835,000 B Group Maintenance America Corp, Sr. Sub. Notes, 9.750% due 1/15/09 8,030,875
4,515,000 B+ Integrated Electrical Services, Sr. Sub. Notes, 9.375% due 2/1/09 4,639,173
3,540,000 B Nationsrent Inc., Sr. Sub. Notes, 10.375% due 12/15/08 3,717,000
10,450,000 B- Outsourcing Solutions Inc., Sr. Sub Notes, 11.000% due 11/1/06 10,332,449
7,240,000 BB- United Rentals Inc., Sr. Sub Notes, 9.250% due 1/15/09 7,384,800
- ------------------------------------------------------------------------------------------------------------
38,309,547
- ------------------------------------------------------------------------------------------------------------
Diversified Conglomerate/Manufacturing -- 3.2%
575,000 B- Eagle-Picher Industries Inc., Sr. Sub. Notes, 9.375% due 3/1/08 553,439
Fisher Scientific International Inc., Sr. Sub. Notes,
19,405,000 B- 9.000% due 2/1/08 19,793,100
5,100,000 B3* Interlake Corp., Sr. Sub. Debentures, 12.125% due 3/1/02 5,214,750
7,950,000 B2* Intertek Finance PLC, Sr. Sub. Notes, 10.250% due 11/1/06 7,393,500
14,400,000 B Outboard Marine Corp., Sr. Note, 10.750% due 6/1/08 13,824,000
7,440,000 B+ Park-Ohio Industries, Sr. Sub. Notes, 9.250% due 12/1/07 7,588,800
- ------------------------------------------------------------------------------------------------------------
54,367,589
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
============================================================================================================
<S> <C> <C> <C>
Electric/Utilities -- 4.3%
ACE Corp., Sr. Sub. Notes:
$ 4,775,000 Ba1* 10.250% due 7/15/06 $ 5,097,320
19,575,000 Ba1* 8.500% due 11/1/07 19,672,875
Calpine Corp., Sr. Notes:
9,085,000 BB- 10.500% due 5/15/06 10,038,925
10,405,000 BB- 8.750% due 7/15/07 10,951,269
21,000,000 BB CMS Energy, Sr. Notes, 7.500% due 1/15/09 23,205,000
1,173,663 BB- Midland Cogeneration Venture Ltd. Partnership, Midland Funding,
Sr. Secured Lease Bond, Series C, 10.330% due 7/23/00 1,260,220
1,840,665 BB- Midland Cogeneration Venture, Sr. Secured Lease Obligation Bond,
10.330% due 7/23/02 1,976,414
1,900,000 Ba3* Niagara Mohawk Power Corp., Sr. Discount Note, step bond to yield
8.237% due 7/1/10 1,510,500
- ------------------------------------------------------------------------------------------------------------
73,712,523
- ------------------------------------------------------------------------------------------------------------
Electronics/Computers -- 6.2%
8,500,000 B3* Axiohm Transaction Solution Inc., 9.750% due 10/1/07 7,905,000
6,763,000 B+ Celestica International Inc., Sr. Sub. Notes, 10.500% due 12/31/06 7,388,585
12,265,000 B Fairchild Semiconductor, Sr. Sub. Notes, 10.125% due 3/15/07 12,234,350
Unisys Corp., Sr. Notes:
17,850,000 BB- 12.000% due 4/15/03 19,925,070
28,500,000 BB 11.750% due 10/15/04 33,131,250
ViaSystems Inc., Sr. Sub. Notes:
8,925,000 B- 9.750% due 6/1/07 8,434,135
17,440,000 B- 9.750% due 6/1/07 16,480,800
- ------------------------------------------------------------------------------------------------------------
105,499,190
- ------------------------------------------------------------------------------------------------------------
Entertainment/Leisure -- 2.0%
2,125,000 B Carmike Cinemas, Sr. Sub Notes, 9.375% due 2/1/09 2,156,879
2,655,000 B+ Intrawest Corp., Sr. Notes, 9.750% due 8/15/08 2,714,749
11,705,000 B Regal Cinemas Inc., Sr. Sub Notes, 9.500% due 6/1/08 11,939,100
17,050,000 B- SFX Entertainment, Unsecured Sr. Sub. Notes, 9.125% due 2/1/08 17,561,500
- ------------------------------------------------------------------------------------------------------------
34,372,228
- ------------------------------------------------------------------------------------------------------------
Finance -- 1.8%
Amresco Inc., Sr. Sub. Notes:
3,300,000 CCC+ 10.000% due 3/15/04 2,673,000
5,935,000 CCC+ 9.875% due 3/15/05 4,866,700
7,500,000 NR Ocwen Asset Investment, Sr. Notes, 11.500% due 7/1/05 5,775,000
8,100,000 B2* Ocwen Capital Trust, Company Guaranteed, 10.875% due 8/1/27 6,257,260
4,000,000 BB- Ocwen Federal Bank, Sub. Debenture, 12.000% due 6/15/05 3,720,000
7,550,000 BB- Ocwen Financial Corp., Notes, 11.875% due 10/1/03 6,757,250
- ------------------------------------------------------------------------------------------------------------
30,049,210
- ------------------------------------------------------------------------------------------------------------
Food and Beverages -- 2.9%
6,950,000 B- B&G Foods Inc., Company Guaranteed, 9.625% due 8/1/07 6,741,500
13,230,000 B2* Carrols Corp., Sr. Sub Notes, 9.500% due 12/1/08 13,461,529
16,975,000 B2* Imperial Holly Corp., Company Guaranteed, 9.750% due 12/15/07 17,059,875
12,325,000 B2* SC International Systems, Company Guaranteed, 9.250% due 9/1/07 12,479,073
- ------------------------------------------------------------------------------------------------------------
49,741,977
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
============================================================================================================
<S> <C> <C> <C>
Healthcare -- 8.3%
Columbia/HCA Services, Notes:
$ 9,850,000 BBB 7.000% due 7/1/07 $ 9,529,889
2,500,000 BBB 7.250% due 5/20/08 2,453,125
2,250,000 BBB 8.700% due 2/10/10 2,424,387
4,000,000 BBB 6.630% due 7/15/45 3,910,000
6,450,000 Ba3* Fresenius Medical Care, Company Guaranteed Notes, 7.875% due 2/1/08 6,450,000
6,375,000 BBB+ Graphic Controls Corp., Sr. Sub. Notes, 12.000% due 9/15/05 7,339,229
20,950,000 B2* ICN Pharmaceuticals Inc., Sr. Notes, 9.250% due 8/15/05 21,421,389
Integrated Health Services, Sr. Sub. Notes:
9,775,000 B2* 9.500% due 9/15/07 9,335,135
21,125,000 B- 9.250% due 1/15/08 20,147,969
36,850,000 B- Magellan Health Services, Sr. Sub. Notes, 9.000% due 2/15/08 32,704,379
16,475,000 B- Mariner Post-Acute, Sr. Sub. Notes, 9.500% due 11/1/07 12,768,129
Sun Healthcare Group Inc., Sr. Sub. Notes:
7,350,000 B2* 9.500% due 7/1/07 5,659,500
9,275,000 B2* 9.375% due 5/1/08 7,049,000
- ------------------------------------------------------------------------------------------------------------
141,192,131
- ------------------------------------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 4.1%
740,000 BB+ Circus Circus, Sr. Sub Notes, 9.250% due 12/1/05 751,100
6,300,000 B- Courtyard by Marriott, Sr. Notes, 10.750% due 2/1/08 6,489,000
8,375,000 BB+ Harrahs Operating Co. Inc., Company Guaranteed Notes, 7.875%
due 12/15/05 8,479,699
HMH Properties Inc.:
11,575,000 BB Sr. Notes, 8.450% due 12/1/08 11,603,949
17,370,000 BB 7.875%, due 8/1/08 16,892,329
3,160,000 Ba2 HMH Properties, Company Guaranteed Notes, 7.875% due 8/1/05 3,104,700
6,025,000 Ba1* Mohegan Tribal Gaming, Sr. Notes, 13.500% due 11/15/02 7,305,313
7,000,000 BB+ Park Place Entertainment, 7.875% due 12/15/05 7,035,000
Station Casinos, Sr. Sub Notes:
1,755,000 B+ 10.125% due 12/1/08 1,860,300
5,400,000 B+ 8.875% due 12/1/08 5,548,500
- ------------------------------------------------------------------------------------------------------------
69,069,890
- ------------------------------------------------------------------------------------------------------------
Insurance -- 1.0%
12,125,000 BB+ SIG Capital Trust, Company Guaranteed, 9.500% due 8/15/27 10,215,316
6,700,000 BB- Veritas Capital Trust, Company Guaranteed, 10.000% due 1/1/28 6,113,750
- ------------------------------------------------------------------------------------------------------------
16,329,066
- ------------------------------------------------------------------------------------------------------------
Machinery -- 0.4%
6,315,000 B- Alvey Systems Inc., Sr. Sub. Notes, 11.375% due 1/31/03 6,472,895
- ------------------------------------------------------------------------------------------------------------
Metal/Mining -- 0.5%
10,040,000 B- Haynes International Inc., Sr. Notes, 11.625% due 9/1/04 8,985,800
- ------------------------------------------------------------------------------------------------------------
Miscellaneous -- 0.3%
4,400,000 B- Oglebay Norton, Sr. Sub. Notes, 10.000% due 2/1/09 4,290,000
- ------------------------------------------------------------------------------------------------------------
Oil and Gas -- 2.1%
14,365,000 B+ Clark USA Inc., Sr. Notes, 10.875% due 12/1/05 13,215,800
Ocean Energy Inc.:
6,400,000 BB- Company Guaranteed Notes, 9.750% due 10/1/06 6,592,000
11,225,000 BB- Sr. Sub. Notes, 10.375% due 10/15/05 11,786,250
4,525,000 B2* Stone Energy Corp., Company Guaranteed, 8.750% due 9/15/07 4,411,876
- ------------------------------------------------------------------------------------------------------------
36,005,926
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Oil Services -- 0.5%
$ 7,600,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07 $ 7,030,000
1,850,000 BB+ J Ray McDermott SA, Sr. Sub. Notes, 9.375% due 7/15/06 1,970,250
- ------------------------------------------------------------------------------------------------------------
9,000,250
- ------------------------------------------------------------------------------------------------------------
Packaging/Containers -- 1.4%
1,805,000 B AEP Industries Inc., 9.875% due 11/15/07 1,823,050
5,000,000 B Bway Corp., Company Guaranteed Notes, 10.250% due 4/15/07 5,262,500
5,300,000 B Huntsman Packaging Corp., Company Guaranteed, 9.125% due 10/1/07 5,392,750
10,500,000 B- Tekni Plex Inc., Sr. Sub. Notes, 9.250% due 3/1/08 10,972,500
- ------------------------------------------------------------------------------------------------------------
23,450,800
- ------------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 1.7%
8,590,000 B Ainsworth Lumber, Sr. Notes, 12.500% due 7/15/07 8,568,538
9,000,000 BB Malette Inc., Sr. Notes, 12.250% due 7/15/04 9,765,000
Riverwood International Corp.:
5,485,000 B- Company Guaranteed Notes, 10.625% due 8/1/07 5,580,998
1,170,000 CCC+ Sr. Sub Notes, 10.875% due 4/1/08 1,064,700
2,840,000 B+ SD Warren Co., Sr. Sub. Notes, 12.000% due 12/15/04 3,084,950
- ------------------------------------------------------------------------------------------------------------
28,064,186
- ------------------------------------------------------------------------------------------------------------
Personal Care Products/Cosmetics -- 0.7%
13,650,000 B- Revlon Consumer Products, Sr. Sub. Notes, 8.625% due 2/1/08 12,216,750
- ------------------------------------------------------------------------------------------------------------
Pollution Control/Waste Removal -- 0.4%
6,400,000 BB Allied Waste, Sr. Unsecured Notes, 7.875% due 1/1/09(b) 6,608,000
- ------------------------------------------------------------------------------------------------------------
Publishing -- 0.4%
6,300,000 B+ Mail-Well Corp., Sr. Sub. Notes, 8.750% due 12/15/08 6,441,750
- ------------------------------------------------------------------------------------------------------------
Real Estate Development/REITs -- 0.6%
8,690,000 BB+ Trizec Finance, Sr. Notes, 10.875% due 10/15/05 9,559,000
- ------------------------------------------------------------------------------------------------------------
Retail -- 1.5%
8,500,000 B- Advance Holding Corp., Debentures, 12.742% due 4/15/09 5,100,000
12,250,000 B- Advance Stores Co., Company Guaranteed Notes, 10.250% due 4/15/08 12,433,766
5,950,000 BB DR Structured Finance, Pass Through Certificates, 8.750% due 8/15/15 6,094,959
2,000,000 Ba2* Nine West Group, Company Guaranteed Notes, 8.750% due 8/15/05 1,970,000
- ------------------------------------------------------------------------------------------------------------
25,598,725
- ------------------------------------------------------------------------------------------------------------
Telephone/Communications -- 17.5%
E. Spire Communications Inc.:
27,250,000 NR Sr. Discount Notes, 10.901% due 7/1/08 9,537,500
1,250,000 NR Sr. Notes, 13.750% due 7/15/07 1,300,000
Esprit Telecom Group PLC, Sr. Notes:
5,950,000 B- 11.500% due 12/15/07 6,262,375
1,900,000 B- 10.875% due 6/15/08 1,947,500
17,290,000 NR Facilicom International Inc., Sr. Note, 10.500% due 1/15/08 14,004,900
Hermes Europe Railtel BV, Sr. Notes:
14,775,000 B 11.500% due 8/15/07 16,104,750
4,200,000 B 10.375% due 1/15/09 4,462,500
Impsat Corp., Sr. Notes:
5,750,000 BB- 12.125% due 7/15/03 4,858,750
5,650,000 B+ 12.380% due 6/15/08 4,633,000
15,300,000 B Intermedia Communications of Florida, Sr. Discount Notes,
step bond to yield 11.752% due 5/15/06 12,316,500
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
============================================================================================================
<S> <C> <C> <C>
Telephone/Communications -- 17.5% (continued)
$ 6,095,000 B Level 3 Communications, Sr. Notes, 9.125% due 5/1/08 $ 6,095,000
18,645,000 B Metromedia Fiber, Sr. Notes, 10.000% due 11/15/08 19,763,700
Metronet Communications:
5,970,000 B Sr. Discount Notes, 10.625% due 11/1/08 6,328,200
18,925,000 B Sr. Notes, 12.000% due 8/15/07 21,101,375
36,150,000 B Sr. Sub Notes, 10.049% due 6/15/08 24,310,879
Nextel Communications Sr. Discount Notes:
5,405,000 B2* 11.093% due 9/15/07 3,715,942
3,000,000 B2* 10.870% due 2/15/08 1,935,000
19,725,000 B Nextlink Communications, Sr. Notes, 12.500% due 4/15/06 21,697,500
17,905,000 B- Primus Telecomm Group, Sr. Notes, 11.750% due 8/1/04 18,531,679
Psinit Inc., Sr. Notes:
11,060,000 B- 10.000% due 2/15/05 11,557,700
11,265,000 B- 11.500% due 11/1/08 12,194,369
RNC Corp.:
10,185,000 B3* Sr. Discount Notes, step bond to yield 10.931% due 10/15/07 5,958,229
7,375,000 B3* Sr. Notes, 10.000% due 10/15/07 7,043,129
Splitrock Services Inc.:
9,105,000 NR Company Guaranteed Notes, 11.750% due 7/15/08 8,194,500
5,300,000 NR 11.750% due 7/15/08 4,664,000
6,550,000 B+ Telewest Communications PLC, Sr. Notes, 11.250% due 11/1/08 7,761,750
Verio Inc., Sr. Notes:
4,940,000 B- 10.375% due 4/1/05 5,038,800
10,185,000 B3* 11.250% due 12/1/08 10,923,419
10,945,000 NR Versatel Telecom BV, Sr. Notes, 13.250% due 5/15/08 11,437,529
7,425,000 Caa Viatel Inc., Sr. Notes, 11.250% due 4/15/08 7,499,250
11,325,000 NR Wam!Net Inc., Company Guaranteed, step bond to yield 12.921%
due 3/01/05 5,662,500
- ------------------------------------------------------------------------------------------------------------
296,842,225
- ------------------------------------------------------------------------------------------------------------
Transportation -- 1.0%
3,500,000 B+ America Reefer Co. Ltd., 1st Mortgage Notes, 10.250% due 3/1/08 2,117,500
3,775,000 BB- Sea Containers Ltd., Sr. Sub. Debentures, 12.500% due 12/1/04 4,133,625
8,575,000 B+ Stena Line AB, Sr. Notes, 10.625% due 6/1/08 7,460,250
7,550,000 B+ TBS Shipping International Ltd., 1st Mortgage, 10.000% due 5/1/05 3,246,500
- ------------------------------------------------------------------------------------------------------------
16,957,875
- ------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $1,581,766,949) 1,532,096,834
- ------------------------------------------------------------------------------------------------------------
FOREIGN BONDS -- 3.7%
Broadcasting -- 0.3%
2,975,000+ B- Diamond Holdings, Company Guaranteed, 10.000% due 2/1/08 5,030,872
- ------------------------------------------------------------------------------------------------------------
Cellular and Other Wireless -- 0.4%
15,150,000++ CCC+ Dolphin Telecom PLC, Sr. Discount Notes, step bond to yield
11.365% due 6/1/08(c) 6,796,348
- ------------------------------------------------------------------------------------------------------------
Containers/Packaging -- 0.3%
8,425,000# B Impress Metal, Sr. Sub. Notes, 9.875% due 5/29/07(c) 5,405,659
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
============================================================================================================
<S> <C> <C> <C>
Publishing -- 0.9%
$ 9,350,000+ B MiddleWeb PLC, Sr. Notes, 10.500% due 5/30/08 $14,438,499
- ------------------------------------------------------------------------------------------------------------
Telecommunications -- 1.3%
Colt Telecom Bonds:
18,950,000++ B 7.625% due 7/31/08 11,113,402
4,035,000++ B 7.625% due 7/31/08 2,366,369
4,439,000+ B Colt Telecom, Sr. Notes, 10.125% due 11/30/07(c) 5,076,291
5,000,000++ B- Espirit Telecom, Sr. Notes, 11.500% due 12/15/07(c) 3,084,717
- ------------------------------------------------------------------------------------------------------------
21,640,779
- ------------------------------------------------------------------------------------------------------------
Textiles/Apparel -- 0.5%
16,850,000++ B Texon International, Sr. Notes, 10.000% due 2/1/08(c) 8,609,918
- ------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost -- $63,850,184) 61,922,075
============================================================================================================
<CAPTION>
SHARES SECURITY VALUE
============================================================================================================
<S> <C> <C>
COMMON STOCK -- 0.3%
Cellular and Other Wireless -- 0.0%
18,375 Pagemart Nationwide Inc. 128,625
- ------------------------------------------------------------------------------------------------------------
Healthcare -- 0.3%
56,172 Tyco International Ltd. 4,328,755
- ------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $2,051,401) 4,457,380
============================================================================================================
CONVERTIBLE PREFERRED STOCK -- 0.5%
Diversified Conglomerate/Manufacturing -- 0.2%
60,000 Eagle-Picher Holdings, 11.750% 2,940,000
- ------------------------------------------------------------------------------------------------------------
Food and Beverages -- 0.0%
2,383 Ameriking Inc., Sr. Preferred Exchangeable, 13.000% 63,150
- ------------------------------------------------------------------------------------------------------------
Forest/Products/Printing -- 0.2%
50,000 SD Warren & Co., 14.000% 2,550,000
- ------------------------------------------------------------------------------------------------------------
Telephone/Communications -- 0.2%
3,101 Intermedia Communications Inc., Pay-in-kind 3,112,880
- ------------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost -- $9,119,957) 8,666,030
============================================================================================================
PREFERRED STOCK -- 1.5%
Banks -- 0.8%
491,300 California Federal Bank Preferred Capital, 9.125% 12,958,039
- ------------------------------------------------------------------------------------------------------------
Broadcasting -- 0.4%
62,000 Capstar Communications, 12.625% 7,533,000
- ------------------------------------------------------------------------------------------------------------
Electronics/Computers -- 0.2%
187,964 ViaSystems Inc., Series B 2,631,497
- ------------------------------------------------------------------------------------------------------------
Healthcare -- 0.1%
16,600 Fresensius Medical Care 1,751,300
- ------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $25,096,702) 24,873,836
============================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
============================================================================================================
<S> <C> <C>
WARRANTS(d) -- 0.5%
Broadcasting -- 0.0%
13,350 Australis Holdings Ltd., Expire 10/30/01 $ 0
1,000 Australis Media Ltd., Expire 5/15/03 0
21,675 UIH Australia Pacific Inc., Expire 5/15/06 21,675
5,925 Wireless One Inc., Expire 10/15/03 1,482
- ------------------------------------------------------------------------------------------------------------
23,157
- ------------------------------------------------------------------------------------------------------------
Cellular and Other Wireless -- 0.2%
65,340 Clearnet Communications Inc., Expire 9/15/05 261,360
10,375 Globalstar Telecommunications, Expire 2/15/04 726,250
10,475 Iridium World Communications Ltd., Expire 7/15/05 1,455,816
37,490 Pagemart Inc., Expire 12/31/03 187,450
10,945 Versatel Warrants, Expire 5/15/08 109,450
33,975 Wam!net Inc. Warrants, Expire 3/1/05 271,800
- ------------------------------------------------------------------------------------------------------------
3,012,126
- ------------------------------------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 0.0%
213,479 Trump Castle Hotel & Casino Inc., Expire 9/15/00 0
- ------------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.0%
8,025 SDW Holdings Corp., Expire 12/15/06 141,240
- ------------------------------------------------------------------------------------------------------------
Telecommunications -- 0.3%
15,250 Allegiance Telecom Inc., Expire 2/3/08 167,750
13,100 Colt Telecom Group PLC, Expire 12/31/06 4,585,000
154,250 Metronet Communications Corp, Class B, Expire 8/15/07 539,875
6,950 Nextel Communications Inc., Expire 4/25/99 69
12,405 Primus Telecommunications, Expire 8/1/04 77,531
9,550 RSL Communications Ltd., Expire 11/15/06 372,450
14,405 Splitrock Services, Expire 7/15/08 158,455
- ------------------------------------------------------------------------------------------------------------
5,901,130
- ------------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $4,236,958) 9,077,653
============================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
============================================================================================================
<S> <C> <C>
REPURCHASE AGREEMENT -- 3.2%
$ 54,754,000 Morgan Stanley Dean Witter & Co., 4.700% due 2/1/99;
Proceeds at maturity -- 54,775,445; (Fully collateralized by
U.S. Treasury Notes, 5.375 to 7.875% due 4/15/99 to 2/15/26;
Market value -- 56,122,935) (Cost -- 54,754,000) 54,754,000
============================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $1,740,876,151**) $1,695,847,808
============================================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Rating Service, except those
identified by an asterisk(*), which are rated by Moody's Investor
Services, Inc.
(b) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers.
(c) Security is segregated by Custodian for open forward foreign currency
contracts.
(d) Non-income producing security.
+ Face amount indicated denominated in British Pounds.
# Face amount indicated denominated in European Currency Units.
++ Face amount indicated denominated in German Marks.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 16 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Rating Service ("Standard & Poor's") -- Ratings from "BBB" to
"D" may be modified by the addition of a plus (+) or minus (-) sign, which is
used to show relative standing within the major rating categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB, B and CCC -- Bonds rated "BB" and "B" are regarded, on balance, as
predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of
the obligation. BB represents a lower degree of speculation
than B, and CCC the highest degree of speculation. While such
bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
D -- Bonds rated "D" are in default, and payment of interest and/or
repayment of principal is in arrears.
Moody's Investor Services, Inc. ("Moody's") -- Numerical modifiers 1, 2, and 3
may be applied to each generic rating from "Baa" through "Caa", where 1 is the
highest and 3 the lowest rating within its generic category.
Baa -- Bonds rated "Baa" are considered to be medium grade
obligations; that is they are neither highly protected nor
poorly secured. Interest payment and principal security appear
adequate for the present but certain protective elements may
be lacking or may be characteristically unreliable over any
great length of time. These bonds lack outstanding investment
characteristics and may have speculative characteristics as
well.
Ba -- Bonds rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby may not well characterize bonds in this
class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payment or of
maintenance of other terms of the contract over any long
period of time may be small.
Caa -- Bonds rated "Caa" are of poor standing. These issues may be in
default, or present elements of danger may exist with respect
to principal or interest.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $1,740,876,151) $1,695,847,808
Receivable for Fund shares sold 4,747,172
Dividends and interest receivable 35,098,242
Receivable for open forward foreign currency contracts (Note 8) 696,175
- ------------------------------------------------------------------------------------------------------------
Total Assets 1,736,389,397
- ------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 13,462,731
Dividends payable 12,267,246
Investment advisory fees payable 637,670
Payable to bank 256,024
Administration fees payable 255,068
Distribution fees payable 53,318
Payable for open forward foreign currency contracts (Note 8) 51,794
Payable for Fund shares purchased 49,788
Accrued expenses 146,938
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 27,180,577
- ------------------------------------------------------------------------------------------------------------
Total Net Assets $1,709,208,820
============================================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 157,270
Capital paid in excess of par value 1,918,427,065
Overdistributed net investment income (10,689,285)
Accumulated net realized loss from security transactions
and foreign currencies (154,013,500)
Net unrealized depreciation of investments and foreign currencies (44,672,730)
- ------------------------------------------------------------------------------------------------------------
Total Net Assets $1,709,208,820
============================================================================================================
Shares Outstanding:
Class A 46,743,658
--------------------------------------------------------------------------------------------------------
Class B 77,439,568
--------------------------------------------------------------------------------------------------------
Class L 11,525,266
--------------------------------------------------------------------------------------------------------
Class Y 21,552,545
--------------------------------------------------------------------------------------------------------
Class Z 9,301
--------------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $10.86
--------------------------------------------------------------------------------------------------------
Class B * $10.87
--------------------------------------------------------------------------------------------------------
Class L ** $10.88
--------------------------------------------------------------------------------------------------------
Class Y (and redemption price) $10.89
--------------------------------------------------------------------------------------------------------
Class Z (and redemption price) $10.85
--------------------------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $11.37
--------------------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $10.99
============================================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if
shares are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase (See Note 2).
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited) For the Six Months Ended January 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 80,738,158
Dividends 890,358
- ------------------------------------------------------------------------------------------------------------
Total Investment Income 81,628,516
- ------------------------------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 3,990,554
Investment advisory fees (Note 2) 3,955,995
Administration fees (Note 2) 1,582,398
Shareholder and system servicing fees 513,701
Registration fees 89,753
Shareholder communications 38,261
Custody 22,737
Audit and legal 18,948
Trustees' fees 12,465
Other 13,443
- ------------------------------------------------------------------------------------------------------------
Total Expenses 10,238,255
- ------------------------------------------------------------------------------------------------------------
Net Investment Income 71,390,261
- ------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 8):
Realized Loss From:
Security transactions (excluding short-term securities) (21,811,913)
Foreign currency transactions (1,613,200)
- ------------------------------------------------------------------------------------------------------------
Net Realized Loss (23,425,113)
- ------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of Investments
and Foreign Currencies:
Beginning of period 49,012,499
End of period (44,672,730)
- ------------------------------------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (93,685,229)
- ------------------------------------------------------------------------------------------------------------
Net Loss on Investments and Foreign Currencies (117,110,342)
- ------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (45,720,081)
============================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended January 31, 1999 (unaudited)
and the Year Ended July 31, 1998
<TABLE>
<CAPTION>
1999 1998
============================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 71,390,261 $ 122,877,981
Net realized gain (loss) (23,425,113) 10,647,989
Increase in net unrealized depreciation (93,685,229) (14,279,687)
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (45,720,081) 119,246,283
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (72,823,010) (132,554,109)
- ------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (72,823,010) (132,554,109)
- ------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sales 545,364,175 885,478,695
Net asset value of shares issued for
reinvestment of dividends 19,975,071 57,783,246
Cost of shares reacquired (414,187,374) (542,173,702)
- ------------------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 151,151,872 401,088,239
- ------------------------------------------------------------------------------------------------------------
Increase in Net Assets 32,608,781 387,780,413
- ------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of period 1,676,600,039 1,288,819,626
- ------------------------------------------------------------------------------------------------------------
End of period* $1,709,208,820 $1,676,600,039
============================================================================================================
* Includes overdistributed net investment income of: $(10,689,285) $(7,643,362)
============================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney High Income Fund ("Fund"), a separate investment fund of the
Smith Barney Income Funds ("Trust"), a Massachusetts business trust, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust consists of this
Fund and seven other separate investment funds: Smith Barney Exchange Reserve
Fund, Smith Barney Premium Total Return Fund, Smith Barney Convertible Fund,
Smith Barney Municipal High Income Fund, Smith Barney Diversified Strategic
Income Fund, Smith Barney Balanced Fund and Smith Barney Total Return Bond Fund.
The financial statements and financial highlights for the other funds are
presented in separate semi-annual reports.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing price on such markets;
securities traded in the over-the-counter market and securities for which no
sales price was reported are valued at bid price, or in the absence of a recent
bid price, at the bid equivalent obtained from one or more of the major market
makers; (c) securities that have a maturity of more than 60 days are valued at
prices based on market quotations for securities of similar type, yield and
maturity; (d) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, approximates value; (e) the
accounting records are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income or expense amounts
recorded and collected or paid are adjusted when reported by the custodian bank;
(f) interest income, adjusted for amortization of premium and accretion of
discount, is recorded on an accrual basis; (g) dividend income is recorded on
ex-dividend date; foreign dividend income is recorded on the ex-dividend date or
as soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (h) gains or losses on
the sale of securities are recorded by using the specific identification method;
(i) dividends and distributions to shareholders are recorded on the ex-dividend
date; (j) direct expenses are charged to each class; management fees and general
fund expenses are allocated on the basis of the relative net assets; (k) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At July 31, 1998, reclassifications were made to the Fund's capital
accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Accordingly, a portion
of accumulated net realized loss and overdistributed net investment income
amounting to $55,847,557 and $2,310,494, respectively, was reclassified to paid
in capital. Net investment income, net realized gains and net assets were not
affected by this change; (l) the Fund intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
and (m) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
In addition, the Fund may enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked to market daily
by recognizing the difference between the contract exchange rate and the current
market rate as an
- --------------------------------------------------------------------------------
20 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
unrealized gain or loss. Realized gains or losses are recognized when contracts
are settled. The Fund from time to time may also enter into options and/or
futures contracts to hedge market risk.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
adviser to the Fund. The Fund pays SSBC an investment advisory fee calculated at
an annual rate of 0.50% of the average daily net assets. This fee is calculated
daily and paid monthly.
SSBC 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.
On October 8, 1998, CFBDS, Inc., became the Fund's distributor. Prior to that
date Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well certain other broker-dealers, continues to sell
Fund shares to the public as members of the selling group.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B shares,
which applies if redemption occurs within one year from purchase. This CDSC
declines by 0.50% the first year after purchase and thereafter by 1.00% per year
until no CDSC is incurred. Class L shares also have a 1.00% CDSC, which applies
if redemption occurs within the first year of purchase. In certain cases, Class
A shares have a 1.00% CDSC, which applies if redemption occurs within the first
year of purchase. This CDSC only applies to those purchases of Class A shares,
which, when combined with current holdings of Class A shares, equal or exceed
$500,000 in the aggregate. These purchases do not incur an initial sales charge.
For the six months ended January 31, 1999, SSB received sales charges of
$791,000 and $415,000 on sales of the Fund's Class A and L shares, respectively.
In addition, CDSCs paid to SSB were approximately:
Class A Class B Class L
================================================================================
CDSCs $ 2,000 $539,000 $ 26,000
================================================================================
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B and L shares calculated at the annual rate of 0.25% of the average
daily net assets of each respective class. In addition, the Fund pays a
distribution fee with respect to Class B and L shares calculated at an annual
rate of 0.50% and 0.45% of the average daily net assets for each class,
respectively. For the six months ended January 31, 1999, total Distribution Plan
fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $ 598,869 $3,031,637 $ 360,048
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the six months ended January 31, 1999, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $795,595,644
- --------------------------------------------------------------------------------
Sales 719,927,363
================================================================================
At January 31, 1999, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 66,571,285
Gross unrealized depreciation (111,599,628)
- --------------------------------------------------------------------------------
Net unrealized depreciation $ (45,028,343)
================================================================================
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
4. Capital Loss Carryforward
At July 31, 1998, the Fund had, for Federal income tax purposes, capital loss
carryforwards of approximately $131,281,000 available, to offset future realized
capital gains. To the extent that these capital carryforward losses are used to
offset realized capital gains, it is probable that the gains so offset will not
be distributed. The following capital loss carryforward amounts expire on July
31 in the year indicated below:
Carryforward
Year Amounts
================================================================================
1999 $84,656,000
2000 9,861,000
2003 13,404,000
2004 23,360,000
================================================================================
5. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by the
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of the futures contracts. During the period the
futures contract is open, changes in the value of the contract are recognized as
unrealized gains or losses by "marking-to-market" on a daily basis to reflect
the market value of the contract at the end of each day's trading. Variation
margin payments are received or made and recognized as assets due from or
liabilities due to broker, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transactions and the Fund's basis in the contract.
The Fund enters into such contracts to hedge a portion of its portfolio. The
Fund bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At January 31, 1999, the Fund had no open futures contracts.
6. Option Contracts
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily and are included in the schedule
of investments. When a purchased option expires, the Fund will realize a loss in
the amount of the premium paid. When the Fund enters into closing sales
transaction, the Fund will realize a gain or loss depending on whether the
proceeds from the closing sales transaction are greater or less than the premium
paid for the option. When the Fund exercises a put option, it will realize a
gain or loss from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid. When the Fund exercises a
call option, the cost of the security which the Fund purchases upon exercise
will be increased by the premium originally paid.
At January 31, 1999, the Fund had no open purchased call or put options
contracts.
When a Fund writes a covered call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised, the cost of the security sold will be
decreased by the premium originally received. When a put option is exercised,
the amount of the premium originally received will reduce the cost of the
security which the Fund purchased upon exercise. When written index options are
exercised, settlement is made in cash.
- --------------------------------------------------------------------------------
22 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
The risk associated with purchasing options is limited to the premium originally
paid. The Fund enters into options for hedging purposes. The risk in writing a
covered call option is that the Fund gives up the opportunity to participate in
any increase in the price of the underlying security beyond the exercise price.
The risk in writing a put option is that the Fund is exposed to the risk of a
loss if the market price of the underlying security declines.
For the six months ended January 31, 1999, the Fund did not write any options.
7. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
8. Forward Foreign Currency Contracts
At January 31, 1999, the Fund had open forward foreign currency contracts as
described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The net unrealized gain (loss) on the contracts
reflected in the accompanying financial statements were as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
============================================================================================================
<S> <C> <C> <C> <C>
To Sell:
British Pound 2,387,703 $ 3,919,873 2/25/99 $ (51,794)
European Currency Unit 5,975,160 6,795,649 3/1/99 131,951
German Mark 5,049,583 2,936,605 3/3/99 98,365
German Mark 9,316,236 5,417,894 3/3/99 181,479
German Mark 14,598,653 8,489,904 3/3/99 284,380
- ------------------------------------------------------------------------------------------------------------
Net Unrealized Gain on
Forward Foreign Currency Contracts $644,381
============================================================================================================
</TABLE>
9. Shares of Beneficial Interest
At July 31, 1998, the Trust had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses specifically related to the distribution of its shares.
At January 31, 1999, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class L Class Y Class Z
============================================================================================================
<S> <C> <C> <C> <C> <C>
Total Paid-in Capital $528,639,799 $1,027,164,088 $128,202,502 $232,220,524 $2,357,422
============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statement (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
January 31, 1999 July 31, 1998
-------------------------------- --------------------------------
Shares Amount Shares Amount
============================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 15,985,552 $ 172,883,466 22,998,211 $272,808,591
Shares issued on reinvestment 752,938 7,922,211 1,971,340 23,294,812
Shares reacquired (13,614,623) (148,980,223) (17,215,562) (204,302,817)
- ------------------------------------------------------------------------------------------------------------
Net Increase 3,123,867 $ 31,825,454 7,753,989 $ 91,800,586
============================================================================================================
Class B
Shares sold 12,809,376 $ 138,913,744 23,102,567 $274,466,045
Shares issued on reinvestment 953,902 10,053,535 2,391,943 28,277,649
Shares reacquired (9,489,517) (102,793,687) (9,879,005) (117,285,811)
- ------------------------------------------------------------------------------------------------------------
Net Increase 4,273,761 $ 46,173,592 15,615,505 $185,457,883
============================================================================================================
Class L+
Shares sold 5,220,269 $ 56,455,943 4,744,290 $ 56,357,614
Shares issued on reinvestment 157,727 1,670,271 256,182 3,031,246
Shares reacquired (1,754,206) (19,000,701) (851,853) (10,130,212)
- ------------------------------------------------------------------------------------------------------------
Net Increase 3,623,790 $ 39,125,513 4,148,619 $ 49,258,648
============================================================================================================
Class Y
Shares sold 16,515,177 $ 177,111,020 23,695,209 $281,845,996
Shares issued on reinvestment 33,118 326,862 267,423 3,174,314
Shares reacquired (12,990,654) (143,412,715) (17,734,768) (210,452,176)
- ------------------------------------------------------------------------------------------------------------
Net Increase 3,557,641 $ 34,025,167 6,227,864 $ 74,568,134
============================================================================================================
Class Z
Shares sold -- -- 37 $ 449
Shares issued on reinvestment 204 $ 2,194 445 5,225
Shares reacquired (5) (48) (225) (2,686)
- ------------------------------------------------------------------------------------------------------------
Net Increase 199 $ 2,146 257 $ 2,988
============================================================================================================
</TABLE>
+ On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
24 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1999(1)(2) 1998 1997 1996 1995 1994
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.74 $ 11.82 $ 10.98 $ 11.10 $ 11.16 $ 12.01
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.50 1.02 1.09 1.08 1.08 1.08
Net realized and unrealized gain (loss) (0.87) (0.01) 0.83 (0.12) (0.02) (0.81)
- --------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.37) 1.01 1.92 0.96 1.06 0.27
- --------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.51) (1.09) (1.08) (1.08) (1.05) (1.12)
Capital -- -- -- -- (0.07) --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (0.51) (1.09) (1.08) (1.08) (1.12) (1.12)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.86 $ 11.74 $ 11.82 $ 10.98 $ 11.10 $ 11.16
- --------------------------------------------------------------------------------------------------------------------
Total Return (3.01)%++ 8.85% 18.31% 8.95% 10.28% 2.11%
- --------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $507,655 $512,294 $424,087 $341,040 $316,716 $233,678
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.04%+ 1.05% 1.06% 1.10% 1.11% 1.11%
Net investment income 9.16+ 8.61 9.57 9.65 10.03 9.27
- --------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 46% 102% 78% 72% 60% 98%
====================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1999(1)(2) 1998 1997 1996 1995 1994
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.75 $ 11.83 $ 10.99 $ 11.11 $ 11.16 $ 12.01
- --------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.47 0.96 1.03 1.02 1.03 1.02
Net realized and unrealized gain (loss) (0.87) (0.01) 0.83 (0.12) (0.02) (0.81)
- --------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.40) 0.95 1.86 0.90 1.01 0.21
- --------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.48) (1.03) (1.02) (1.02) (0.99) (1.06)
Capital -- -- -- -- (0.07) --
- --------------------------------------------------------------------------------------------------------------------
Total Distributions (0.48) (1.03) (1.02) (1.02) (1.06) (1.06)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.87 $ 11.75 $ 11.83 $ 10.99 $ 11.11 $ 11.16
- --------------------------------------------------------------------------------------------------------------------
Total Return (3.27)%++ 8.34% 17.72% 8.41% 9.77% 1.60%
- --------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $841,402 $859,472 $680,916 $560,031 $478,499 $509,608
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.53%+ 1.55% 1.55% 1.59% 1.61% 1.60%
Net investment income 8.68+ 8.11 9.07 9.16 9.52 8.77
- --------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 46% 102% 78% 72% 60% 98%
====================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
26 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class L Shares 1999(1)(2) 1998(3) 1997 1996 1995(4)(5)
==================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.76 $11.84 $11.00 $11.11 $10.90
- --------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.48 0.97 1.04 1.03 0.95
Net realized and unrealized gain (loss) (0.87) (0.01) 0.83 (0.11) 0.23
- --------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.39) 0.96 1.87 0.92 1.18
- --------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.49) (1.04) (1.03) (1.03) (0.90)
Capital -- -- -- -- (0.07)
- --------------------------------------------------------------------------------------------------
Total Distributions (0.49) (1.04) (1.03) (1.03) (0.97)
- --------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.88 $11.76 $11.84 $11.00 $11.11
- --------------------------------------------------------------------------------------------------
Total Return (3.24)%++ 8.38% 17.77% 8.56% 11.50%++
- --------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $125,415 $92,946 $44,444 $21,049 $6,011
- --------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.46%+ 1.48% 1.48% 1.51% 1.56%+
Net investment income 8.75+ 8.15 9.14 9.23 9.58+
- --------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 46% 102% 78% 72% 60%
==================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) On June 12, 1998, Class C shares were renamed Class L shares.
(4) On November 7, 1994, the former Class D shares were renamed Class C
shares.
(5) For the period from August 24, 1994 (inception date) to July 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 27
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class Y Shares 1999(1)(2) 1998 1997 1996 1995(3)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.77 $ 11.84 $ 10.99 $ 11.10 $ 10.88
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.49 1.05 1.12 0.92 0.09
Net realized and unrealized gain (loss) (0.84) (0.01) 0.84 (0.11) 0.23
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.35) 1.04 1.96 0.81 0.32
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.53) (1.11) (1.11) (0.92) (0.03)
Capital -- -- -- -- (0.07)
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.53) (1.11) (1.11) (0.92) (0.10)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.89 $ 11.77 $ 11.84 $ 10.99 $ 11.10
- --------------------------------------------------------------------------------------------------------
Total Return (2.86)%++ 9.18% 18.68% 9.32% 2.91%++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $234,636 $211,781 $139,269 $35,097 $10,306
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.71%+ 0.72% 0.73% 0.76% 0.86%+
Net investment income 9.40+ 8.83 9.90 9.98 10.28+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 46% 102% 78% 72% 60%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) For the period from April 28, 1995 (inception date) to July 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
28 1999 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class Z Shares 1999(1)(2) 1998(2) 1997(2) 1996 1995(3) 1994
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $11.74 $11.80 $10.99 $11.09 $11.16 $12.01
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.51 1.04 1.12 1.11 1.11 1.10
Net realized and unrealized gain (loss) (0.87) 0.01 0.80 (0.10) (0.03) (0.80)
- -----------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.36) 1.05 1.92 1.01 1.08 0.30
- -----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.53) (1.11) (1.11) (1.11) (1.08) (1.15)
Capital -- -- -- -- (0.07) --
- -----------------------------------------------------------------------------------------------------------------
Total Distributions (0.53) (1.11) (1.11) (1.11) (1.15) (1.15)
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $10.85 $11.74 $11.80 $10.99 $11.09 $11.16
- -----------------------------------------------------------------------------------------------------------------
Total Return (2.97)%++ 9.33% 18.29% 9.42% 10.55% 2.37%
- -----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 101 $ 107 $ 104 $7,158 $9,917 $11,370
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.80%+ 0.85% 0.75% 0.77% 0.86% 0.77%
Net investment income 9.18+ 8.82 9.88 9.98 10.28 9.61
- -----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 46% 102% 78% 72% 60% 98%
=================================================================================================================
</TABLE>
(1) For the six months ended January 31, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method,
because it more accurately reflects the per share data for the period.
(3) On November 7, 1994, the former Class C shares were renamed Class Z
shares.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 29
<PAGE>
Smith Barney
High Income Fund
Trustees
Lee Abraham
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
President and Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
John C. Bianchi
Vice President and Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser
SSBC Fund Management Inc.
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for general information of the shareholders of Smith
Barney Income Funds -- Smith Barney High Income Fund. It is not authorized for
distribution to prospective investors unless accompanied or preceded by a
current Prospectus for the Fund, which contains information concerning the
Fund's investment policies and expenses as well as other pertinent information.
SALOMON SMITH BARNEY
- --------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney
High Income Fund
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD2172 3/99
