<PAGE>
[PHOTO]
Smith Barney
Balanced Fund
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[GRAPHIC] ANNUAL REPORT
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July 31, 1999
[LOGO] Smith Barney
Mutual Funds
<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. Up to
25% of the Fund's assets may be invested in below investment grade securities.
Smith Barney Balanced Fund
Average Annual Total Returns
July 31, 1999
Without Sales Charge(1)
------------------------------------------
Class A Class B Class L Class O
================================================================================
One-Year 12.27% 11.78% 11.43% 11.79%
- --------------------------------------------------------------------------------
Five-Year 13.35 12.82 N/A 12.85
- --------------------------------------------------------------------------------
Ten-Year N/A 10.19 N/A N/A
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Since Inception++ 10.78 10.86 7.85 9.39
================================================================================
With Sales Charge(2)
------------------------------------------
Class A Class B Class L Class O
================================================================================
One-Year 6.65% 7.59% 9.46% 10.95%
- --------------------------------------------------------------------------------
Five-Year 12.19 12.69 N/A 12.85
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Ten-Year N/A 10.19 N/A N/A
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Since Inception++ 9.93 10.86 6.91 9.39
================================================================================
(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.
++ 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.
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FUND HIGHLIGHT
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We are pleased to report that the equity portion of the Fund enjoyed good
returns since broadening its mandate to a diversified stock portfolio from its
previous utility fund emphasis. For the last year the Fund's equity component
slightly outperformed the S&P 500. Performance was helped by strong returns from
our technology holdings.
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NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SUTAX
Class B SLSUX
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WHAT'S INSIDE
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Shareholder Letter ........................................................ 1
Historical Performance .................................................... 5
Smith Barney Balanced Fund at a Glance .................................... 8
Schedule of Investments ................................................... 9
Statement of Assets and Liabilities ....................................... 22
Statement of Operations ................................................... 23
Statements of Changes in Net Assets ....................................... 24
Notes to Financial Statements ............................................. 25
Financial Highlights ...................................................... 30
Independent Auditors' Report .............................................. 34
Tax Information ........................................................... 35
Additional Shareholder Information ........................................ 36
<PAGE>
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Shareholder Letter
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[PHOTO] [PHOTO]
HEATH B. MCLENDON JOHN C. BIANCHI, CFA
Chairman Vice President and
Investment Officer
[PHOTO] [PHOTO]
CHARLES P. GRAVES III, CFA JAMES E. CONROY
Vice President and Vice President and
Investment Officer Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Balanced Fund
("Fund"), for the year ended July 31, 1999. We hope you find this report to be
useful and informative. A detailed summary of performance and current holdings
can be found in the appropriate sections that follow.
Performance Update
For the year ended July 31, 1999, the Smith Barney Balanced Fund's ("Fund")
Class A shares returned 12.27%, without sales charges, versus the Lipper, Inc.
balanced fund peer group average of 10.40% for the same period. (Lipper is a
major independent fund-tracking organization.)
During the same period, the Standard & Poor's 500 Index ("S&P 500"), a common
measure of broad stock market performance, returned 20.20% and the Lehman
Brothers Government/Corporate Bond Index, which tracks the performance of the
overall bond market, posted a return of 2.33%. As of July 31, 1999, stocks
represented roughly 59.5% of the Fund's total net assets, bonds made up
approximately 40%, and cash made up 0.5%. For additional performance information
about the Fund's other classes of shares, please refer to page five.
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 composed 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*
The last twelve months were a very rewarding time to be invested in stocks.
Driven by continued strong domestic economic growth, little or no inflation, low
interest rates and strong corporate profit growth, stocks, as measured by the
S&P 500, returned more than 20%. But it was also a year in which we witnessed
the two faces of the market. Late last summer political and economic uncertainty
shook world markets and exposed investors to increased levels of volatility.
Stocks fell sharply going
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* Please note that the Fund's holdings are as of July 31, 1999 and are
subject to change.
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Smith Barney Balanced Fund 1
<PAGE>
into October but, as has so often been the case during this bull market,
rebounded shortly thereafter.
The stock market continued to reach new highs in early 1999 but did so in a
manner very different from what investors experienced in 1998. After spending
much of the last year in the shadow of large-cap growth stocks, large-cap value
stocks are finally starting to provide good relative returns. Fueled by a
growing consensus that the world is on the edge of prolonged period of
synchronized global growth, many stocks in the chemical, transportation, paper,
metal and other cyclical industries moved up more in price in the month of April
than they had in the previous year and a half. We expect the remainder of 1999
to be characterized by a better balance of returns between growth and value
stocks.
We are pleased to report that the equity portion of the Fund enjoyed good
returns since broadening its mandate to a diversified stock portfolio from its
previous utility fund emphasis. For the last year the Fund's equity component
slightly outperformed the S&P 500. Performance was helped by strong returns from
our technology holdings.
In fact, four out of the five top performing stocks for the year were technology
related -- Sun Microsystems, EMC Corp, Cisco Systems and Motorola. The second
best performing sector was energy. Although we started to add to positions in
this sector earlier in 1999, we should have been more aggressive. Our oil
service stocks Haliburton and Schlumberger responded well as oil prices doubled
from their January 1999 levels. Also helping was our overweighted position in
telecommunication stocks MCI/Worldcom, Lucent Technologies and Ameritech.
One decision that did not generate particularly good performance was our
decision to overweight finance stocks. While there were periods of strong
performance for this group, overall returns for the last year are just a little
better than flat. This sector, made up mostly of large bank stocks, initially
suffered from last summer's emerging markets financial crisis and is now the
victim of rising interest rates. Yet even in a difficult interest rate
environment, many financial companies continue to produce impressive results.
For example, our largest holding, Chase Manhattan Bank, was, at the beginning of
the year, expected to earn $5.13 for all of 1999. Today the company is expected
to earn $5.49 for all of 1999, a 7% improvement in expectations even as rates
were on the rise. We continue to believe that many finance stocks, with solid
double-digit growth rates and P/E multiples in the mid teens, represent very
good investment value.
Bond Market Update*
It was a difficult year for fixed income investments. A strong economy, tight
labor markets and the persistent fear of accelerating inflation fueled concerns
of restrictive Federal Reserve Board ("Fed") monetary policy. In this "good news
is bad news" year, fixed income investment returns were generally disappointing
i.e., 2.31% for the Salomon Government/Corporate Bond Index for the year ended
July 31, 1999. (The Salomon Government/Corporate Bond Index is a broad measure
of the performance of U.S. Treasury and U.S. Government Agency securities with
fixed-rate coupons and weighted average maturities of at least one year). Longer
maturity U.S. Treasury yields ended 40 basis points higher while intermediate
maturity Treasuries ended 20 basis points higher. Short-term rates actually
finished lower as Fed action throughout the year resulted in a 50 basis point
net reduction in overnight lending rates.
Although U.S. Treasury securities did not do well, other fixed income
investments provided even less return. In addition to negative macro economic
events, non-treasury fixed income securities such as corporate
- ----------
* Please note that the Fund's holdings are as of July 31, 1999 and are
subject to change.
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2 1999 Annual Report to Shareholders
<PAGE>
bonds, mortgage-backed securities and high yield bonds were hurt by:
o The financial crisis in emerging markets that precipitated a flight to
quality. That is, in the turbulent global economic conditions of last fall
and earlier this year, investors had a preference for U.S. government
securities rather than corporate issues.
o A massive supply of new corporate issues as companies rushed to lock in
low rates and issue bonds in advance of the beginning of the year 2000.
More specifically, in corporate bonds and mortgage backed securities, yields
rose approximately 85 basis points and 100 basis points respectively. The
underperformance of mortgage-backed securities has been particularly perplexing
as these securities typically do relatively well in rising interest rate
environments.
In the high yield market the better quality segments of the high yield bond
market continued to underperform lower quality CCC/Caa rated issues during the
past seven months. Although higher quality issues have a lower risk of default,
these issues tend to be more sensitive to the movements of the U.S. Treasury
market. At the same time, the lower quality high yield issues have a higher risk
of default but tend to react more closely to stock market trends. The lower
quality segment of the high yield market clearly benefited from strong domestic
economic growth so far in 1999 and the strong performance returns generated by
the U.S. stock market.
The strongest performing industry sectors were basic materials (i.e., forest
products, metals, mining etc.) and energy. This was not surprising given the
increasing risk of higher inflation caused by stronger than expected economic
growth both domestically and abroad. The weakest industry sectors included media
(i.e., cable TV and broadcasting) and telecommunications. A number of media and
telecommunications companies rushed new issues into the markets in the second
quarter of 1999, putting further pressure on the existing issues in these
sectors.
Markets Outlook
We expect the remainder of the year to be an uphill battle for stocks. That is
not to say we are expecting a correction similar to what ocurred in the summer
of 1998, but rather that returns are not likely to come as easily in the second
half of the year as they did in the first half. Our research now suggests that
stocks are fully valued relative to the current level of interest rates. Stocks
should begin to look more attractive if one of three things happen: first, the
market corrects (i.e., prices decline), interest rates come down or earnings
growth improves.
Already, the interest rate environment has moved from negative to neutral. Also,
corporate profit growth appears to be slowly improving, with many analysts
recently increasing their 1999 and 2000 earnings estimates for the S&P 500. Our
two largest equity sector exposures continue to be in finance and technology and
we have recently increased our exposure in healthcare sector. Our increased
interest in healthcare stocks is a result of the significant declines in the
prices of many of these stocks due to concerns about the potential impact of
prescription drug coverage through Medicare. We believe the concerns, while
serious, are overblown and have created attractive buying opportunities.
In the fixed income markets, we believe the relative underperformance of
investment grade and mortgage backed bonds relative to U.S. Treasury bonds has
also created investment opportunity. Although we have elected not to alter our
maturity structure from neutral, we did increase our allocation to mortgage
backed bonds. Also, we anticipate an improvement in the relative performance of
the high yield bond
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Smith Barney Balanced Fund 3
<PAGE>
market and, in particular, in the middle quality segment of the market and
select commodity sectors such as paper, energy and steel.
In closing, thank you for investing in the Smith Barney Balanced Fund. We look
forward to helping you pursue your financial 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
August 23, 1999
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4 1999 Annual Report to Shareholders
<PAGE>
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Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $16.52 $13.86 $0.37 $3.66 $0.00 12.27%
- -----------------------------------------------------------------------------------------------------------------
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 $4.98 $5.52 $0.02
=================================================================================================================
</TABLE>
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Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $16.49 $13.82 $0.32 $3.66 $0.00 11.78%
- -----------------------------------------------------------------------------------------------------------------
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
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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
=================================================================================================================
Total $7.74 $6.00 $0.06
=================================================================================================================
</TABLE>
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Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $16.52 $13.83 $0.29 $3.66 $0.00 11.43%
- -----------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/98 17.14 16.52 0.00 0.23 0.00 (2.28)+
=================================================================================================================
Total $0.29 $3.89 $0.00
=================================================================================================================
</TABLE>
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Smith Barney Balanced Fund 5
<PAGE>
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Historical Performance -- Class O Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $16.50 $13.83 $0.32 $3.66 $0.00 11.79%
- -----------------------------------------------------------------------------------------------------------------
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 $4.35 $5.41 $0.02
=================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends quarterly and capital gains, if
any, annually.
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Average Annual Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge(1)
-------------------------------------------------------
Class A Class B Class L Class O
==============================================================================================================
<S> <C> <C> <C> <C>
Year Ended 7/31/99 12.27% 11.78% 11.43% 11.79%
- --------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/99 13.35 12.82 N/A 12.85
- --------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/99 N/A 10.19 N/A N/A
- --------------------------------------------------------------------------------------------------------------
Inception* through 7/31/99 10.78 10.86 7.85 9.39
==============================================================================================================
<CAPTION>
With Sales Charge(2)
-------------------------------------------------------
Class A Class B Class L Class O
==============================================================================================================
<S> <C> <C> <C> <C>
Year Ended 7/31/99 6.65% 7.59% 9.46% 10.95%
- --------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/99 12.19 12.69 N/A 12.85
- --------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/99 N/A 10.19 N/A N/A
- --------------------------------------------------------------------------------------------------------------
Inception* through 7/31/99 9.93 10.86 6.91 9.39
==============================================================================================================
</TABLE>
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6 1999 Annual Report to Shareholders
<PAGE>
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Cumulative Total Return
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Without Sales Charge(1)
================================================================================
Class A (Inception* through 7/31/99) 99.20%
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Class B (7/31/89 through 7/31/99) 163.97
- --------------------------------------------------------------------------------
Class L (Inception* through 7/31/99) 8.89
- --------------------------------------------------------------------------------
Class O (Inception* through 7/31/99) 78.97
================================================================================
(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.
++ For the period from March 1, 1992 to July 31, 1992, which reflects a
change in the fiscal year end of the Fund.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* Inception dates for Class A, B, L and O shares are November 6, 1992, March
28, 1988, June 15, 1998 and February 4, 1993, respectively.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 7
<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+
- --------------------------------------------------------------------------------
July 1989 -- July 1999
[LINE CHART]
<TABLE>
<CAPTION>
Smith Barney Lehman Brothers Standard & Poors
Balanced Fund Class B Government/Corporate Bond Index 500 Index
<S> <C> <C> <C>
July 1989 10000 10000 10000
July 1990 9990 10623 10651
July 1991 11363 11711 12006
July 1992 13721 13541 13539
July 1993 15866 15035 14719
July 1994 14445 15016 15476
July 1995 16267 16537 19510
July 1996 17695 17414 22741
July 1997 20328 19292 34591
July 1998 23614 20850 41267
July 1999 26396 21334 49601
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class B shares on July
31, 1989, assuming reinvestment of dividends and capital gains, if any, at
net asset value through July 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*
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1. Chase Manhattan Corp. 2.3%
- --------------------------------------------------------------------------------
2. EMC Corp. 2.2
- --------------------------------------------------------------------------------
3. Cisco Systems, Inc. 2.1
- --------------------------------------------------------------------------------
4. Merck & Co., Inc. 2.1
- --------------------------------------------------------------------------------
5. MCI WorldCom, Inc. 1.8
- --------------------------------------------------------------------------------
Top Five Bond Holdings*
- --------------------------------------------------------------------------------
1. Nextlink Communications 0.6%
- --------------------------------------------------------------------------------
2. United International Holdings 0.6
- --------------------------------------------------------------------------------
3. PSINet 0.6
- --------------------------------------------------------------------------------
4. Unisys Corp. 0.6
- --------------------------------------------------------------------------------
5. Allied Waste NA 0.6
- --------------------------------------------------------------------------------
* As a percentage of total investments.
Investment Breakdown
- --------------------------------------------------------------------------------
[PIE CHART]
Collateralized Mortgage Obligation 0.3%
U.S. Government and Agency Obligations 5.9%
Common and Preferred Stock 60.2%
Corporate Bonds and Notes 33.5%
Warrants 0.1%
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8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
======================================================================================================
<S> <C> <C>
COMMON STOCK -- 60.0%
Aerospace/Defense -- 0.7%
129,000 Boeing Co. $ 5,853,375
- -------------------------------------------------------------------------------------------------------
Broadcasting -- 1.7%
240,000 CBS Corp.(a)@ 10,545,000
175,000 Infinity Broadcasting Corp.(a)@ 4,823,438
- -------------------------------------------------------------------------------------------------------
15,368,438
- -------------------------------------------------------------------------------------------------------
Capital Goods -- 3.4%
157,000 Deere & Co. 6,005,250
125,000 General Electric Co. 13,625,000
60,000 Illinois Tool Works Inc. 4,458,750
72,000 Textron, Inc. 5,922,000
- -------------------------------------------------------------------------------------------------------
30,011,000
- -------------------------------------------------------------------------------------------------------
Consumer Durables -- 1.1%
50,000 Black & Decker Corp. 2,887,500
115,000 General Motors Corp. 7,007,813
- -------------------------------------------------------------------------------------------------------
9,895,313
- -------------------------------------------------------------------------------------------------------
Consumer Non-Durables -- 9.5%
228,000 Colgate-Palmolive Co. 11,257,500
315,625 Dollar General Corp.@ 8,344,336
10,100 eToys, Inc.(a)@ 403,367
148,000 Gillette Co. 6,484,250
100,000 Interface Inc. 893,750
203,000 Lowe's Cos., Inc. 10,708,250
285,000 Newell Rubbermaid, Inc.@ 12,326,250
240,000 Pepsi Bottling Group, Inc. 5,670,000
85,000 PepsiCo, Inc. 3,325,625
70,000 Procter & Gamble Co. 6,335,000
186,000 Rite Aid Corp.@ 3,940,875
292,500 Staples, Inc.(a) 8,445,937
87,464 Unilever NV(a) 6,111,547
- -------------------------------------------------------------------------------------------------------
84,246,687
- -------------------------------------------------------------------------------------------------------
Consumer Services -- 1.3%
454,000 Kroger Co.(a) 11,945,875
- -------------------------------------------------------------------------------------------------------
Electric and Gas -- 3.0%
154,000 AES Corp.(a)@ 9,240,000
100,000 Allegheny Energy, Inc. 3,375,000
200,000 Edison International 5,062,500
112,000 Nisource, Inc. 2,905,000
77,000 PECO Energy Co. 3,262,875
73,000 Unicom Corp. 2,865,250
- -------------------------------------------------------------------------------------------------------
26,710,625
- -------------------------------------------------------------------------------------------------------
Energy -- 3.7%
78,626 BP Amoco PLC, Sponsored ADR@ 9,110,788
177,000 Coastal Corp. 7,002,563
86,000 El Paso Energy Corp. 3,079,875
180,000 Halliburton Co. 8,302,500
</TABLE>
See Notes to Financial Statements.
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Smith Barney Balanced Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
======================================================================================================
<S> <C> <C>
Energy -- 3.7% (continued)
85,000 Schlumberger Ltd.@ $ 5,147,812
- ------------------------------------------------------------------------------------------------------
32,643,538
- ------------------------------------------------------------------------------------------------------
Financial Services -- 10.8%
51,000 Allstate Corp. 1,810,500
99,000 American Express Co. 13,043,250
95,000 American International Group, Inc. 11,031,875
323,000 Associates First Capital 12,374,937
120,000 BankAmerica Corp. 7,965,000
105,000 BankBoston Corp. 4,928,437
268,000 Chase Manhattan Corp. 20,602,500
5,200 Donaldson, Lufkin & Jenrette, Inc. - DLJ Direct(a)@ 112,125
169,000 Freddie Mac 9,696,375
118,000 St. Paul Cos., Inc. 3,672,750
107,000 State Street Corp. 7,583,625
47,000 XL Capital Ltd., Class A Shares 2,467,500
- ------------------------------------------------------------------------------------------------------
95,288,874
- ------------------------------------------------------------------------------------------------------
Healthcare -- 5.2%
118,000 Amgen, Inc.(a) 9,071,250
35,300 Baxter International Inc. 2,424,669
123,000 Johnson & Johnson 11,331,375
74,000 Medtronic, Inc. 5,332,625
270,000 Merck & Co., Inc. 18,275,625
- ------------------------------------------------------------------------------------------------------
46,435,544
- ------------------------------------------------------------------------------------------------------
Technology -- 13.7%
294,000 Cisco Systems, Inc.(a) 18,264,750
100,000 Compaq Computer Corp. 2,400,000
99,000 Electronic Data Systems Corp. 5,970,938
314,000 EMC Corp.(a) 19,016,625
150,000 Intel Corp. 10,350,000
5,000 Juniper Networks Inc.(a) 812,188
94,300 Koninklijke Philips Electronics NV 9,536,088
220,000 Lucent Technologies Inc. 14,313,750
125,000 Motorola, Inc. 11,406,250
35,000 N2H2, Inc.(a) 448,437
191,000 Sun Microsystems, Inc.(a) 12,964,125
322,000 Xerox Corp.@ 15,697,500
- ------------------------------------------------------------------------------------------------------
121,180,651
- ------------------------------------------------------------------------------------------------------
Telecommunications -- 5.9%
155,500 Ameritech Corp. 11,390,375
140,000 AT&T Corp. 7,271,250
78,000 GTE Corp. 5,747,625
190,000 MCI WorldCom, Inc. 15,675,000
132,000 SBC Communications Inc.@ 7,548,750
25,000 Time Warner Telecom Inc.(a) 778,125
100,000 Williams Cos., Inc. 4,206,250
- ------------------------------------------------------------------------------------------------------
52,617,375
- ------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $415,580,927) 532,197,295
======================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
======================================================================================================
<S> <C> <C>
PREFERRED STOCK -- 0.2%
Banking -- 0.0%
600 California Federated Capital, 9.125% $ 15,525
- ------------------------------------------------------------------------------------------------------
Broadcasting -- 0.1%
7,910 Capstar Communications Inc., 12.625% 968,975
- ------------------------------------------------------------------------------------------------------
Healthcare -- 0.1%
7,200 Fresenius Medical Care, 9.000% 718,200
- ------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $1,687,326) 1,702,700
======================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
======================================================================================================
<S> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATION -- 0.3%
$ 2,785,000 Airplanes Pass-Through Trust, 10.875% due 3/15/19
(Cost -- $3,077,425) 2,785,891
======================================================================================================
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 5.9%
U.S. Treasury Securities -- 2.3%
U.S. Treasury Notes:
6,700,000 6.500% due 8/15/05 6,860,532
2,500,000 6.125% due 8/15/07 2,506,975
11,000,000 U.S. Treasury Bonds, 6.250% due 8/15/23 10,918,490
- ------------------------------------------------------------------------------------------------------
20,285,997
- ------------------------------------------------------------------------------------------------------
U.S. Government Agencies -- 3.6%
5,000,000 Federal Home Loan Bank (FHLB), 5.880% due 4/15/08 4,767,100
5,000,000 Federal Home Loan Mortgage Corp. (FHLMC),
5.750% due 7/15/03 4,891,250
Federal National Mortgage Association (FNMA):
5,000,000 4.625% due 10/15/01 4,853,650
14,894,907 6.500% due 5/1/29 14,187,400
3,000,000 Government National Mortgage Association (GNMA),
7.000% due 7/15/29 2,923,110
- ------------------------------------------------------------------------------------------------------
31,622,510
- ------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost -- $54,355,704) 51,908,507
======================================================================================================
<CAPTION>
FACE
AMOUNT(b) RATINGS(c) SECURITY VALUE
======================================================================================================
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 33.5%
Aerospace -- 0.5%
1,125,000 B1* BE Aerospace, 9.500% due 11/1/08 1,143,281
575,000 B- Dunlop Stand Aero Holdings, 11.875% due 5/15/09(d) 585,781
550,000 B- Fairchild Corp., 10.750% due 4/15/09(d)@ 541,063
2,500,000 Baa1* Raytheon Co., 6.450% due 8/15/02 2,487,500
- ------------------------------------------------------------------------------------------------------
4,757,625
- ------------------------------------------------------------------------------------------------------
Air Freight/Delivery Services -- 0.0%
385,000 B- Atlas Air Inc., 9.250% due 4/15/08 372,969
- ------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(b) RATINGS(c) SECURITY VALUE
======================================================================================================
<S> <C> <C> <C>
Aluminum -- 0.1%
Kaiser Aluminum & Chemicals:
250,000 B1* Series B, 10.875% due 10/15/06 $ 255,625
220,000 B1* Series D, 10.875% due 10/15/06 224,950
675,000 B3* 12.750% due 2/1/03 683,438
- ------------------------------------------------------------------------------------------------------
1,164,013
- ------------------------------------------------------------------------------------------------------
Auto Parts -- 0.2%
1,275,000 B Collins & Aikman Products, 11.500% due 4/15/06 1,300,500
385,000 B Dura Operating Corp., 9.000% due 5/1/09(d) 370,562
- ------------------------------------------------------------------------------------------------------
1,671,062
- ------------------------------------------------------------------------------------------------------
Automotive Aftermarket -- 0.1%
945,000 B1* Exide Corp., 10.000% due 4/15/05@ 946,181
- ------------------------------------------------------------------------------------------------------
Banking -- 0.3%
2,500,000 Aa3* NationsBank Corp., 6.500% due 8/15/03 2,468,750
- ------------------------------------------------------------------------------------------------------
Beverages - Soft Drinks -- 0.3%
2,500,000 A+ Coca-Cola Enterprises, 6.750% due 1/15/38 2,253,125
- ------------------------------------------------------------------------------------------------------
Broadcasting -- 0.5%
260,000 B Capstar Broadcasting, step bond to yield 11.002% due 2/1/09 223,275
1,630,000 B1* Chancellor Media Corp., 9.000% due 10/1/08 1,646,300
Citadel Broadcasting:
195,000 B- 10.250% due 7/1/07 210,112
625,000 B- 9.250% due 11/15/08 642,187
1,160,000GBP NR Diamond Holding Inc., 10.000% due 2/1/08 1,911,245
- ------------------------------------------------------------------------------------------------------
4,633,119
- ------------------------------------------------------------------------------------------------------
Building Materials -- 0.1%
580,000 B Atrium Companies, Inc., 10.500% due 5/1/09(d) 569,850
- ------------------------------------------------------------------------------------------------------
Building Materials Chains -- 0.0%
350,000 BB Building Materials Corp., Series B, 11.750% due 7/1/04 372,313
- ------------------------------------------------------------------------------------------------------
Building Products -- 0.4%
555,000 B Amatek Industries, 12.000% due 2/15/08(d) 539,044
300,000 B NCI Building Systems Inc., 9.250% due 5/1/09(d) 297,000
Nortek Inc., Series B:
1,150,000 B+ 9.250% due 3/15/07 1,161,500
1,485,000 B+ 9.125% due 9/1/07 1,488,712
250,000 B+ 8.875% due 8/1/08(d) 254,687
- ------------------------------------------------------------------------------------------------------
3,740,943
- ------------------------------------------------------------------------------------------------------
Cable Television -- 2.8%
2,500,000 A- Cable & Wireless Communications, 6.750% due 12/1/08 2,415,625
1,250,000 BB- Century Communications, zero coupon due 3/15/03 550,000
Charter Communications Holdings Inc.:
1,345,000 B+ Step bond to yield 9.920% due 4/1/04(d) 827,175
405,000 B+ 8.625% due 4/1/09(d) 392,850
2,250,000 BB- CSC Holdings Inc., 10.500% due 5/15/16 2,531,250
1,650,000 B Echostar DBS Corp., 9.375% due 2/1/09(d) 1,674,750
NTL Inc.:
1,205,000 B- Step bond to yield 12.375% due 10/1/08 837,475
2,370,000 B- 11.500% due 10/1/08 2,595,150
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(b) RATINGS(c) SECURITY VALUE
==========================================================================================================
<S> <C> <C> <C>
Cable Television -- 2.8% (continued)
1,760,000 BB- Roger Cablesystems Ltd., 11.000% due 12/1/15 $ 2,030,600
TeleWest Comunication PLC:
490,000(GBP) B+ Step bond to yield 9.875% due 4/15/09(d) 492,159
1,500,000 B+ 11.250% due 11/1/08 1,695,000
8,290,000 B United Internationall Holdings, Series B, step bond
to yield 11.348% due 2/15/08 4,849,650
6,600,000 B2* United Pan-Europe Communications, step bond to yield
12.500% due 8/1/09 3,613,500
- ----------------------------------------------------------------------------------------------------------
24,505,184
- ----------------------------------------------------------------------------------------------------------
Casinos/Gambling -- 0.6%
205,000 BB+ Circus Circus Enterprises, 7.6250% due 7/15/13 182,450
1,085,000 B Harvey Casinos Resorts, 10.625% due 6/1/06 1,129,756
Hollywood Park Inc.:
1,230,000 B 9.250% due 2/15/07 1,208,475
105,000 B 9.500% due 8/1/07 104,213
965,000 B+ Horseshoe Gaming Holding, 8.625% due 5/15/09(d) 933,638
705,000 B Isle of Capri Casinos Inc., 8.750% due 4/15/09(d) 648,600
Station Casinos Inc.:
350,000 B+ 10.125% due 3/15/06 364,875
955,000 B+ 8.875% due 12/1/08(d) 943,063
- ----------------------------------------------------------------------------------------------------------
5,515,070
- ----------------------------------------------------------------------------------------------------------
Chemicals - Major -- 0.3%
Huntsman ICI Chemicals:
5,165,000 B+ Zero coupon due 12/31/09 1,355,813
1,000,000 B+ 10.125% due 7/1/09(d) 1,005,000
- ----------------------------------------------------------------------------------------------------------
2,360,813
- ----------------------------------------------------------------------------------------------------------
Chemicals - Specialty -- 0.2%
Lyondell Chemical Co.:
485,000 BB 9.625% due 5/1/07(d) 492,275
970,000 BB 9.875% due 5/1/07 979,700
- ----------------------------------------------------------------------------------------------------------
1,471,975
- ----------------------------------------------------------------------------------------------------------
Coal Mining -- 0.1%
1,100,000 B AEI Holding, 10.500% due 12/15/05(d) 1,089,000
- ----------------------------------------------------------------------------------------------------------
Construction/AG Equipment/Trucks -- 0.2%
1,335,000 B Columbus McKinnon Corp., 8.500% due 4/1/08 1,291,612
- ----------------------------------------------------------------------------------------------------------
Consumer Electronics/Appliances -- 0.3%
3,000,000 Baa* Black & Decker, 6.625% due 11/15/00 3,015,000
- ----------------------------------------------------------------------------------------------------------
Containers/Packaging -- 0.7%
740,000 B AEP Industries Inc., 9.875% due 11/15/07 732,600
750,000(EUR) NR BSN Financing, 10.750% due 8/1/09 802,722
205,000 B Consolidated Container Co., 10.125% due 7/15/09(d) 208,075
1,000,000 B Huntsman Packaging Corp., 9.125% due 10/1/07 981,250
1,610,000 B Stone Container Finance, 11.500% due 8/15/06(d) 1,714,650
Tekni-Plex:
1,480,000 B- Series B, 11.250% due 4/1/07 1,585,450
325,000 B- Series B, 9.250% due 3/1/08 322,562
- ----------------------------------------------------------------------------------------------------------
6,347,309
- ----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(b) RATINGS(c) SECURITY VALUE
======================================================================================================
<S> <C> <C> <C>
Contract Drilling -- 0.3%
1,495,000 BB Pride International Inc., 10.000% due 6/1/09 $1,532,375
95,000 BB Pride Petroleum, 9.375% due 5/1/07 96,425
900,000 BB- RBF Finance Co., 11.375% due 3/15/09(d) 936,000
- ------------------------------------------------------------------------------------------------------
2,564,800
- ------------------------------------------------------------------------------------------------------
Discount Stores -- 0.6%
1,860,000 B+ Ames Dept. Stores, 10.000% due 4/15/06(d) 1,827,450
2,000,000 A- Dayton Hudson Corp., 6.750% due 1/1/28 1,837,500
865,000 BB DR Structured Finance, Series A-2, 8.375% due 8/15/15 846,316
850,000 BB+ KMart Corp., 12.500% due 3/1/05 1,022,125
- ------------------------------------------------------------------------------------------------------
5,533,391
- ------------------------------------------------------------------------------------------------------
Diversified Commercial Services -- 0.1%
750,000 B2* Intertek Financial PLC, Series B, 10.250% due 11/1/06 722,813
- ------------------------------------------------------------------------------------------------------
Diversified Financial Services -- 0.3%
Amresco Inc.:
600,000 CCC+ Series 97-A, 10.000% due 3/15/04 486,000
2,265,000 CCC+ Series 98-A, 9.875% due 3/15/05 1,812,000
- ------------------------------------------------------------------------------------------------------
2,298,000
- ------------------------------------------------------------------------------------------------------
Diversified Manufacture -- 0.7%
2,500,000 Baa2* FMC Corp., 7.000% due 5/15/08 2,315,625
1,500,000 B+ Park-Ohio Industries, 9.250% due 12/1/07 1,458,750
2,000,000 A- Tyco International Group, 6.125% due 6/15/01 1,987,500
- ------------------------------------------------------------------------------------------------------
5,761,875
- ------------------------------------------------------------------------------------------------------
Drugs/Generic -- 0.3%
2,850,000 BB ICN Pharmaceuticals Inc., Series B, 9.250% due 8/15/05 2,860,688
- ------------------------------------------------------------------------------------------------------
Electronic Components -- 0.5%
2,000,000 B+ Celestica International Inc., 10.500% due 12/31/06 2,175,000
2,395,000 B- ViaSystems Inc., 9.750% due 6/1/07 2,071,675
- ------------------------------------------------------------------------------------------------------
4,246,675
- ------------------------------------------------------------------------------------------------------
Electronic Data Processing -- 0.6%
5,000,000 BB+ Unisys Corp., 11.750% due 10/15/04 5,600,000
- ------------------------------------------------------------------------------------------------------
Engineering and Construction -- 0.3%
660,000 B- American Plumbing & Mechanical, 11.625% due 10/15/08(d) 636,900
1,115,000 NR Group Maintenance America Corp., 9.750% due 1/15/09(d)@ 1,092,700
745,000 B+ Integrated Electrical Services, 9.375% due 2/1/09(d) 739,412
- ------------------------------------------------------------------------------------------------------
2,469,012
- ------------------------------------------------------------------------------------------------------
Environmental Services -- 1.1%
5,425,000 B+ Allied Waste NA, 10.000% due 8/1/09(d) 5,357,188
795,000 B+ IT Group Inc., 11.250% due 4/1/09(d) 764,194
745,000 B+ URS Corp., 12.250% due 5/1/09(d) 758,969
2,500,000 BBB+ USA Waste Services, 6.500% due 12/15/02 2,468,750
- ------------------------------------------------------------------------------------------------------
9,349,101
- ------------------------------------------------------------------------------------------------------
Finance Companies -- 1.7%
2,790,000 AA- Associates Corp. NA, 5.750% due 10/15/03 2,674,913
2,500,000 BBB AT&T Capital Corp., 6.250% due 5/15/01 2,468,750
1,225,000 Aa3* CIT Group Inc., 6.800% due 4/17/00 1,235,180
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(b) RATINGS(c) SECURITY VALUE
=========================================================================================================
<S> <C> <C> <C>
Finance Companies -- 1.7% (continued)
2,525,000 A Countrywide Home Loan, 7.200% due 10/30/06 $ 2,537,625
2,000,000 A Household Finance Corp., 6.750% due 6/1/00 2,008,640
2,500,000 A+ International Lease Finance Corp., 5.950% due 6/1/01 2,484,375
2,000,000 A- TransAmerica Financial Corp., 6.750% due 6/1/00 2,013,100
- ---------------------------------------------------------------------------------------------------------
15,422,583
- ---------------------------------------------------------------------------------------------------------
Food Distributors -- 0.9%
1,945,000 B2* Carrols Corp., 9.500% due 12/1/08 1,855,044
2,400,000 A+ Diageo PLC, 8.625% due 8/15/01 2,502,000
2,000,000 B Imperial Holly, 9.750% due 12/15/07 1,905,000
780,000 B- Purina Mills Inc., 9.000% due 3/15/10 430,950
985,000 B SC International Services Inc., 9.250% due 9/1/07 1,015,781
- ---------------------------------------------------------------------------------------------------------
7,708,775
- ---------------------------------------------------------------------------------------------------------
Food - Specialty/Candy -- 0.1%
855,000 B+ Chiquita Brands International, Inc., 10.000% due 6/15/09 846,450
- ---------------------------------------------------------------------------------------------------------
Forest Products -- 0.2%
1,280,000 B Ainsworth Lumber, 12.500% due 7/15/07 1,435,200
- ---------------------------------------------------------------------------------------------------------
Home Furnishings -- 0.1%
610,000 B Falcon Products Inc., 11.375% due 6/15/09(d) 612,288
200,000 B- Simmons Co., 10.250% due 3/15/09(d) 204,250
- ---------------------------------------------------------------------------------------------------------
816,538
- ---------------------------------------------------------------------------------------------------------
Homebuilding -- 0.3%
1,180,000 Ba1* DR Horton, Inc., 8.000% due 2/1/09 1,118,050
1,320,000 BB- US Home Corp., 8.875% due 2/15/09 1,252,350
- ---------------------------------------------------------------------------------------------------------
2,370,400
- ---------------------------------------------------------------------------------------------------------
Hospital/Nursing Management -- 0.4%
2,500,000 BB+ Columbia/HCA Healthcare, zero coupon due 6/1/02 1,961,250
1,675,000 B- Magellan Health Services, 9.000% due 2/15/08 1,465,625
- ---------------------------------------------------------------------------------------------------------
3,426,875
- ---------------------------------------------------------------------------------------------------------
Hotels/Resorts -- 1.1%
2,500,000 A Carnival Corp., 6.150% due 4/15/08 2,325,000
2,500,000 B- Courtyard by Marriott, Series B, 10.750% due 2/1/08 2,550,000
HMH Properties:
1,800,000 BB Series B, 7.875% due 8/1/08 1,656,000
1,830,000 BB Series C, 8.450% due 12/1/08 1,738,500
1,075,000 B+ Intrawest Corp., 9.750% due 8/15/08 1,089,781
- ---------------------------------------------------------------------------------------------------------
9,359,281
- ---------------------------------------------------------------------------------------------------------
Industrial Specialties -- 0.3%
2,500,000 A+ IBM Corp., 7.000% due 10/30/25 2,440,625
500,000(EUR) B1* Leica Geosystems Finance, 9.875% due 12/15/09(d) 543,175
- ---------------------------------------------------------------------------------------------------------
2,983,800
- ---------------------------------------------------------------------------------------------------------
Insurance - Life -- 0.6%
2,500,000 BBB+ Conseco Inc., 6.400% due 2/10/03 2,384,375
2,000,000 AA Mass Mutual Life, 7.625% due 11/15/23 2,007,500
1,300,000 AAA SunAmerica Inc., 6.580% due 1/15/02 1,306,500
- ---------------------------------------------------------------------------------------------------------
5,698,375
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(b) RATINGS(c) SECURITY VALUE
======================================================================================================
<S> <C> <C> <C>
Insurance - Multi-line -- 0.2%
1,750,000 BB+ SIG Captial Trust I, 9.500% due 8/15/27 $ 1,312,500
- ------------------------------------------------------------------------------------------------------
Internet Services -- 1.3%
505,000 NR Cybernet Internet Services, 14.000% due 7/1/09 518,888
PSINet Inc.:
2,000,000 B- 10.000% due 2/15/05 1,930,000
2,500,000 B- 11.500% due 11/1/08 2,562,500
1,205,000 B- 11.000% due 8/1/09 1,205,000
1,950,000 NR Splitrock Services Inc., Series B, 11.750% due 7/15/08 1,842,750
Verio Inc.:
695,000 B- 10.375% due 4/1/05 691,525
1,915,000 B- 11.250% due 12/1/08 1,958,087
1,225,000 NR Wam!Net Inc., Series B, step bond to yield
13.724% due 3/1/05 725,812
- ------------------------------------------------------------------------------------------------------
11,434,562
- ------------------------------------------------------------------------------------------------------
Investment Bankers/Brokers/Services -- 0.6%
Donaldson, Lufkin & Jenrette:
2,000,000 A- 6.375% due 5/26/00 2,007,200
2,500,000 A- 6.170% due 7/15/03 2,440,625
1,000,000 BBB+ Paine Webber Group Inc., 7.000% due 3/1/00 1,005,670
- ------------------------------------------------------------------------------------------------------
5,453,495
- ------------------------------------------------------------------------------------------------------
Leisure/Movies/Entertainment -- 0.3%
2,500,000 B- SFX Entertainment Inc., Series B, 9.125% due 2/1/08 2,425,000
- ------------------------------------------------------------------------------------------------------
Machinery - Industrial/Components -- 0.0%
339,000 B- Alvey Systems Inc., 11.375% due 1/31/03 348,323
- ------------------------------------------------------------------------------------------------------
Media Conglomerates -- 0.5%
2,500,000 BBB- News America Holdings, 7.750% due 2/1/24 2,393,750
2,500,000 BBB Time Warner Inc., 7.950% due 2/1/00 2,518,750
- ------------------------------------------------------------------------------------------------------
4,912,500
- ------------------------------------------------------------------------------------------------------
Medical Specialties -- 0.1%
590,000 B- Hanger Orthopedic Group, 11.250% due 6/15/09(d) 602,538
- ------------------------------------------------------------------------------------------------------
Metals/Minerals -- 0.1%
1,000,000 B- Haynes International Inc., 11.625% due 9/1/04 947,500
- ------------------------------------------------------------------------------------------------------
Miscellaneous -- 0.0%
240,000 B Key Plastics Inc., 10.250% due 3/15/07 233,400
- ------------------------------------------------------------------------------------------------------
Motor Vehicles -- 0.3%
2,500,000 A1* Ford Motor Co., 7.400% due 11/1/46 2,384,375
- ------------------------------------------------------------------------------------------------------
Multi-Sector Companies -- 0.1%
1,315,000 B- Triarc Consumer Beverage, 10.250% due 2/15/09(d) 1,278,838
- ------------------------------------------------------------------------------------------------------
Newspapers -- 0.1%
485,000 B+ Garden State Newspapers, 8.625% due 7/1/11(d) 460,144
- ------------------------------------------------------------------------------------------------------
Oil and Gas Production -- 1.2%
635,000 B1* Belco Oil & Gas Corp., 8.875% due 9/15/07 622,300
Canadian Forest Oil Ltd.:
75,000 B 10.500% due 1/15/06 77,250
930,000 B 8.750% due 9/15/07 913,725
1,750,000 B+ Clark USA Inc., Series B, 10.875% due 12/1/05 1,546,563
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(b) RATINGS(c) SECURITY VALUE
========================================================================================================
<S> <C> <C> <C>
Oil and Gas Production -- 1.2% (continued)
350,000 B1* Coda Energy Inc., 10.500% due 4/1/06 $ 366,187
245,000 B+ Nuevo Energy Co., 9.500% due 4/15/06@ 250,512
500,000 B+ Parker Drilling Co., 9.750% due 11/15/06 460,000
2,500,000 BBB- Union Pacific, 7.150% due 5/15/28 2,187,500
2,750,000 BB- Ocean Energy Inc., 10.375% due 10/15/05 2,897,812
1,000,000 Ba3* R&B Falcon Corp., 12.250% due 3/15/06(d) 1,040,000
445,000 B+ Vintage Petroleum, 9.750% due 6/30/09 462,244
- --------------------------------------------------------------------------------------------------------
10,824,093
- --------------------------------------------------------------------------------------------------------
Oil/Gas Transmission -- 0.2%
1,500,000 BBB+ Enron Corp., 6.450% due 11/15/01 1,500,000
665,000 BB- Leviathan Gas Pipelines, 10.375% due 6/1/09(d) 684,950
- --------------------------------------------------------------------------------------------------------
2,184,950
- --------------------------------------------------------------------------------------------------------
Package Goods/Cosmetics -- 0.2%
2,005,000 B- Revlon Consumer Products, 8.625% due 2/1/08 1,694,225
- --------------------------------------------------------------------------------------------------------
Packaged Foods -- 0.3%
2,265,000 BBB+ Conagra Inc., 5.500% due 10/15/02 2,188,556
1,000,000 BBB+ Quaker Oats, 7.440% due 3/2/26 956,250
- --------------------------------------------------------------------------------------------------------
3,144,806
- --------------------------------------------------------------------------------------------------------
Paper -- 0.7%
1,260,000(EUR) B Kappa Beheer BV, 10.625% due 7/15/09 1,335,088
1,285,000 CCC+ Repap New Brunswick, 10.625% due 4/15/05 1,111,525
Riverwood International:
880,000 B- 10.625% due 8/1/07 913,000
1,380,000 CCC+ 10.875% due 4/1/08 1,362,750
Tembec Industries Inc.:
1,110,000 BB+ 9.875% due 9/30/05 1,159,950
790,000 BB+ 8.625% due 6/30/09 790,000
- --------------------------------------------------------------------------------------------------------
6,672,313
- --------------------------------------------------------------------------------------------------------
Pharmaceuticals - Other -- 0.0%
80,000 B King Pharmaceutical Inc., 10.750% due 2/15/09 82,900
- --------------------------------------------------------------------------------------------------------
Photographic Products -- 0.1%
1,075,000 BB- Polaroid Corp., 11.500% due 2/15/06 1,131,438
- --------------------------------------------------------------------------------------------------------
Printing/Forms -- 0.1%
415,000 BB- World Color Press Inc., 7.750% due 2/15/09 406,181
- --------------------------------------------------------------------------------------------------------
Railroads -- 0.6%
3,000,000 BBB+ Norfolk Southern Corp., 7.875% due 2/15/04 3,123,750
2,000,000 BBB- Union Pacific Co., 7.875% due 2/15/02 2,047,500
- --------------------------------------------------------------------------------------------------------
5,171,250
- --------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts -- 0.1%
900,000 NR Ocwen Asset Investment, 11.500% due 7/1/05(d) 783,000
320,000 Baa3* Trizec Finance Ltd., 10.875% due 10/15/05 348,800
- --------------------------------------------------------------------------------------------------------
1,131,800
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(b) RATINGS(c) SECURITY VALUE
========================================================================================================
<S> <C> <C> <C>
Recreational Products/Toys -- 0.3%
2,000,000 A Hasbro Inc., 6.600% due 7/15/28 $ 1,797,500
500,000(EUR) NR Head Holding, 10.750% due 7/15/06 529,797
- --------------------------------------------------------------------------------------------------------
2,327,297
- --------------------------------------------------------------------------------------------------------
Rental/Leasing Companies -- 0.3%
1,035,000 BB- Avis Rent a Car, Inc., 11.000% due 5/1/09(d) 1,063,462
500,000 B Nationsrent Inc., 10.375% due 12/15/08 505,000
1,285,000 BB- United Rentals Inc., 9.250% due 1/15/09 1,270,543
- --------------------------------------------------------------------------------------------------------
2,839,005
- --------------------------------------------------------------------------------------------------------
Restaurants -- 0.1%
1,180,000 B Advantica Restaurant, 11.250% due 1/15/08 1,097,400
- --------------------------------------------------------------------------------------------------------
Retail - Drug Store Chains -- 0.2%
2,000,000 BBB Rite Aid Corp., 7.125% due 1/15/07 1,940,000
- --------------------------------------------------------------------------------------------------------
Retail - Other Specialty Stores -- 0.2%
2,000,000 B- Advance Stores Co. Inc., Series B, 10.250% due 4/15/08 1,905,000
- --------------------------------------------------------------------------------------------------------
Savings and Loan Associations -- 0.1%
1,250,000 B2* Ocwen Capital Trust I, 10.875% due 8/1/27 875,000
- --------------------------------------------------------------------------------------------------------
Semiconductors -- 0.2%
2,000,000 B Fairchild Semiconductor, 10.125% due 3/15/07 1,960,000
- --------------------------------------------------------------------------------------------------------
Steel/Iron -- 0.4%
570,000 Ba3* National Steel Corp., 9.875% due 3/1/09 585,675
1,025,000 B+ Russel Metals Inc., 10.000% due 6/1/09 1,028,844
920,000 B+ WCI Steel Inc., 10.000% due 12/1/04 952,200
940,000 B- WHX Corp., 10.500% due 4/15/05 909,450
- --------------------------------------------------------------------------------------------------------
3,476,169
- --------------------------------------------------------------------------------------------------------
Telecommunications - Other -- 3.7%
2,675,000 NR E. Spire Communications, step bond to yield 11.223% due 7/1/08 1,203,750
Esprit Telecom Group PLC:
1,500,000 B- 11.500% due 12/15/07 1,620,000
750,000 B- 10.875% due 6/15/08 787,500
2,375,000 NR Facilicom International, Series B, 10.500% due 1/15/08 1,674,375
Hermes Europe Railtel BV:
2,250,000 B 11.500% due 8/15/07 2,340,000
600,000 B 10.375% due 1/15/09 603,000
ICG Holding Inc.:
460,000 B- Step bond to yield 12.952% due 9/15/05 414,000
850,000 B- Step bond to yield 12.608% due 5/1/06 694,875
90,000 BB- Impsat Corp., 12.125% due 7/15/03 80,100
Intermedia Communications of Florida:
965,000 B Step bond to yield 10.121% due 5/15/06 791,300
540,000 B Step bond to yield 11.213% due 7/15/07 380,700
810,000 B 9.500% due 3/1/09 777,600
450,000 B3* IXC Communications, Inc., 9.000% due 4/15/08 453,375
1,290,000 B- KMC Telecom Holdings Inc., 13.500% due 5/15/09(d) 1,290,000
2,700,000 B Level 3 Communications, step bond to yield 11.050% due 12/1/08 1,566,000
1,430,000 BBB Metronet Communications, 12.000% due 8/15/07 1,665,950
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(b) RATINGS(c) SECURITY VALUE
======================================================================================================
<S> <C> <C> <C>
Telecommunications -- Other -- 3.7% (continued)
Microcell Telecommunication:
475,000 B3* Step bond to yield 11.843% due 6/1/06 $ 388,312
520,000 B- Step bond to yield 11.923% due 6/1/09(d) 310,700
Nextlink Communications :
2,030,000 B Step bond yield 12.053% due 6/1/09 1,167,250
2,400,000 B 12.500% due 4/15/06 2,637,000
1,285,000 B 10.750% due 6/1/09 1,307,488
1,215,000 BB- Orange PLC, 9.000% due 6/1/09(d) 1,218,038
2,000,000 B- Primus Telecomm Group, 11.750% due 8/1/04 2,010,000
Tele 1 Euripe B.V.:
490,000 B- 13.000% due 5/15/09(d) 519,400
500,000EUR B- 13.000% due 5/15/09 564,581
2,500,000 BBB Telephone and Data Systems, 7.000% due 8/1/06 2,415,625
1,655,000 NR Versatel Telecom BV, 13.250% due 5/15/08(d) 1,721,200
1,065,000 Caa1* Viatel Inc., 11.250% due 4/15/08 1,067,663
925,000 B Worldwide Fiber Inc., 12.000% due 8/1/09 931,938
- ------------------------------------------------------------------------------------------------------
32,601,720
- ------------------------------------------------------------------------------------------------------
Telephone - Cellular -- 1.6%
2,500,000 A AirTouch Communications, 6.650% due 5/1/08 2,421,875
1,355,000 CCC+ Centennial Cellular, 10.750% due 12/15/08(d) 1,409,200
Crown Castle International Corp.:
1,420,000 B Step bond to yield 10.836% due 5/15/11 834,250
740,000 B Step bond to yield 11.250% due 8/1/11 431,975
505,000 NR Dobson/Sygnet Communications, 12.250% due 12/15/08(d) 527,725
1,375,000 CCC+ Dolphin Telecomm PLC, step bond to yield 11.666% due 6/1/08 660,000
3,250,000 B- Millicom International Cellular, step bond to yield
13.062% due 6/1/06 2,400,937
Nextel communications:
950,000 B2* Step bond to yield 11.071% due 9/15/07 698,250
925,000 B2* Step bond to yield 10.615% due 2/15/08 659,063
1,210,000 NR Spectrasite Holdings Inc., step bond to yield 11.198%
due 4/15/09(d) 665,500
770,000 B3* Telecorp PCS Inc., step bond to yield 12.371% due 4/15/09(d) 435,050
Telesystem International Wireless:
2,635,000 CCC+ Series B, step bond to yield 11.791% due 6/30/07 819,000
1,800,000 CCC+ Step bond to yield 11.335% due 11/1/07 1,383,375
940,000 B3* Triton PCS, Inc., step bond to yield 11.771% due 5/1/08 620,400
- ------------------------------------------------------------------------------------------------------
13,966,600
- ------------------------------------------------------------------------------------------------------
Textiles -- 0.0%
700,000GER B Texon International PLC, 10.000% due 2/1/08 342,818
- ------------------------------------------------------------------------------------------------------
Transportation - Marine -- 0.1%
615,000 B- Oglebay Norton Co., 10.000% due 2/1/09 599,625
- ------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(b) RATINGS(c) SECURITY VALUE
======================================================================================================
<S> <C> <C> <C>
Unregulated Power Generation -- 0.9%
AES Corp.:
1,345,000 Ba3* 10.250% due 7/15/06 $ 1,385,350
2,265,000 Ba1* 9.500% due 6/1/09 2,332,950
770,000 BB Caithness Coso Fund Corp., 9.050% due 12/15/09(d) 770,000
Calpine Corp.:
2,000,000 BB 10.500% due 5/15/06 2,160,000
1,030,000 BB 8.750% due 7/15/07 1,039,013
- ------------------------------------------------------------------------------------------------------
7,687,313
- ------------------------------------------------------------------------------------------------------
Wholesale Distributors -- 0.1%
980,000 B- Fisher Scientific International, 9.000% due 2/1/08 943,250
- ------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $308,718,034) 296,818,873
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
======================================================================================================
<S> <C> <C> <C>
WARRANTS(a) -- 0.1%
1,950 SplitRock Service, Expire 7/15/08 136,500
1,655 Versatel Telecommunications, Expire 5/15/08 273,075
5,490 Wam!Net Inc., Expire 3/1/05 124,898
- ------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $91,926) 534,473
======================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $783,511,342**) $885,947,739
======================================================================================================
</TABLE>
@ All or a portion of this security is on loan (See Note 5).
(a) Non-income producing security.
(b) Face amount in U.S. dollars unless otherwise indicated.
(c) 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.
(d) Security is exempt from registration under Rule 144A of the Securities Act
of 1993. This security may be sold in transaction that are exempt from
registration, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same
Currency abbreviations:
-----------------------
GBP -- British Pounds
EUR -- Euro
GER -- German Mark
See page 21 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
20 1999 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 "AA" 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 predominantly
and CCC 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 "Aa" 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 21
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $783,511,342) $885,947,739
Collateral for securities on loan (Note 5) 65,818,320
Receivable for securities sold 13,071,733
Receivable for Fund shares sold 216,988
Dividends and interest receivable 8,040,526
Receivable for open forward foreign currency contracts (Note 8) 28,674
- ----------------------------------------------------------------------------------------------------------
Total Assets 973,123,980
- ----------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 5) 65,818,320
Payable to bank 9,666,515
Payable for securities purchased 3,066,138
Payable for Fund shares purchased 730,643
Investment advisory fees payable 320,705
Administration fees payable 142,232
Distribution fees payable 101,169
Payable for open forward foreign currency contracts (Note 8) 141,161
Accrued expenses 199,370
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 80,186,253
- ----------------------------------------------------------------------------------------------------------
Total Net Assets $892,937,727
==========================================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 64,567
Capital paid in excess of par value 781,251,289
Undistributed net investment income 4,537,718
Accumulated net realized gain from security transactions and foreign currencies 4,764,264
Net unrealized appreciation of investments and foreign currencies 102,319,889
- ----------------------------------------------------------------------------------------------------------
Total Net Assets $892,937,727
==========================================================================================================
Shares Outstanding:
Class A 22,425,238
-----------------------------------------------------------------------------------------------------
Class B 41,121,027
-----------------------------------------------------------------------------------------------------
Class L 542,819
-----------------------------------------------------------------------------------------------------
Class O 477,686
-----------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.86
-----------------------------------------------------------------------------------------------------
Class B * $13.82
-----------------------------------------------------------------------------------------------------
Class L ** $13.83
-----------------------------------------------------------------------------------------------------
Class O ** $13.83
-----------------------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value per share) $14.59
-----------------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $13.97
==========================================================================================================
</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.
- --------------------------------------------------------------------------------
22 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 31,932,925
Dividends 9,046,991
Less: Foreign withholding tax (352,445)
- ----------------------------------------------------------------------------------------------------------
Total Investment Income 40,627,471
- ----------------------------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 5,578,812
Investment advisory fees (Note 2) 4,222,260
Administration fees (Note 2) 1,876,560
Shareholder and system servicing fees 939,872
Shareholder communications 285,450
Registration fees 96,000
Custody 61,545
Audit and legal 56,460
Trustees' fees 16,240
Pricing service fees 14,166
Other 23,698
- ----------------------------------------------------------------------------------------------------------
Total Expenses 13,171,063
- ----------------------------------------------------------------------------------------------------------
Net Investment Income 27,456,408
- ----------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 8):
Realized Gain From:
Security transactions (excluding short-term securities) 5,448,887
Foreign currency transactions 51,784
- ----------------------------------------------------------------------------------------------------------
Net Realized Gain 5,500,671
- ----------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments and
Foreign Currencies:
Beginning of year 32,931,647
End of year 102,319,889
- ----------------------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 69,388,242
- ----------------------------------------------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies 74,888,913
- ----------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $102,345,321
==========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
=================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 27,456,408 $ 45,244,177
Net realized gain 5,500,671 253,609,314
Increase (decrease) in net unrealized appreciation 69,388,242 (125,861,240)
- -------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 102,345,321 172,992,251
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (23,023,939) (44,867,630)
Net realized gains (222,811,078) (56,366,253)
- -------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (245,835,017) (101,233,883)
- -------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sales of shares 119,334,482 94,564,340
Net asset value of shares issued for
reinvestment of dividends 201,028,376 79,782,511
Cost of shares reacquired (323,959,616) (453,502,479)
- -------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (3,596,758) (279,155,628)
- -------------------------------------------------------------------------------------------------
Decrease in Net Assets (147,086,454) (207,397,260)
NET ASSETS:
Beginning of year 1,040,024,181 1,247,421,441
- -------------------------------------------------------------------------------------------------
End of year* $ 892,937,727 $1,040,024,181
=================================================================================================
* Includes undistributed net investment income of: $4,537,718 $73,401
=================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
24 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 shareholder 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, 1999, 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"), 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 assets. This fee
is calculated daily and paid monthly.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
On October 8, 1998, CFBDS, Inc. ("CFBDS") 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 a member of the selling group.
SSB acts as the primary broker for its portfolio agency transactions. For the
year ended July 31, 1999, SSB received total brokerage commissions of $13,080.
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. In addition, 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 year ended July 31, 1999, CFBDS and SSB received sales charges of
$140,000 and $59,000 on sales of the Fund's Class A and Class L shares,
respectively. In addition, CDSCs paid SSB were approximately:
Class A Class B
================================================================================
CDSCs $1,000 $255,000
================================================================================
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 year ended July 31, 1999, total Distribution Plan
fees incurred were as follows:
Distribution
Plan Fees
================================================================================
Class A $ 713,479
- --------------------------------------------------------------------------------
Class B 4,777,007
- --------------------------------------------------------------------------------
Class L 39,563
- --------------------------------------------------------------------------------
Class O 48,763
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the year ended July 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $560,942,248
- --------------------------------------------------------------------------------
Sales 742,217,670
================================================================================
At July 31, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were approximately as follows:
================================================================================
Gross unrealized appreciation $128,962,188
Gross unrealized depreciation (26,525,791)
- --------------------------------------------------------------------------------
Net unrealized appreciation $102,436,397
================================================================================
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
- --------------------------------------------------------------------------------
26 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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.
At July 31, 1999, the Fund loaned common stocks having a value of approximately
$63,576,016 and holds the following collateral for loaned securities:
Security Description Value
================================================================================
Time Deposits:
Bank Brussels Lambert, 5.156% due 8/2/99 $13,414,651
Bank of Montreal, 5.125% due 8/2/99 8,684,802
Barclays Bank PLC, 5.125% due 8/2/99 8,663,384
Chase, 5.125% due 8/2/99 14,099,233
Chase Manhattan Bank, 5.125% due 8/2/99 8,663,384
Toronto Dominion Bank, 5.125% due 8/2/99 8,663,384
Commercial Paper:
Corporate Receivable Corp., 5.136% due 8/24/99 943,720
Moriarty LLC, 5.177% due 9/20/99 2,685,762
- --------------------------------------------------------------------------------
Total $65,818,320
================================================================================
Income earned by the Fund from securities loaned for the year ended July 31,
1999 was $87,914.
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 July 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 July 31, 1999, the Fund did not write any options.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 27
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. The initial margin is segregated by the custodian and is noted in the
schedule of investments. During the period the futures contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking-to-market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or received
and recognized as assets due from or liabilities due to broker, depending upon
whether unrealized gains or losses are incurred. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transactions and the Fund's basis in the
contract. The Fund enters into such contracts to hedge a portion of its
portfolio. The Fund bears the market risk that arises from changes in the value
of the financial instruments and securities indices (futures contracts) and the
credit risk should a counterparty fail to perform under such contracts.
At July 31, 1999, the Fund had no open futures contracts.
8. Forward Foreign Currency Contracts
At July 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 (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:
European Currency Unit 521,196 $ 559,793 9/15/99 $ (1,738)
European Currency Unit 2,015,675 2,164,947 9/15/99 (39,821)
European Currency Unit 508,958 546,649 9/15/99 (26,494)
European Currency Unit 758,542 814,716 9/15/99 (6,277)
European Currency Unit 1,279,338 1,374,080 9/15/99 (51,309)
British Pound 691,659 1,120,647 9/22/99 6,667
British Pound 302,614 490,305 9/22/99 (5,426)
British Pound 596,292 966,130 9/22/99 (10,096)
- ----------------------------------------------------------------------------------------------
(134,494)
- ----------------------------------------------------------------------------------------------
To Buy:
European Currency Unit 750,000 802,723 8/5/99 5,698
European Currency Unit 1,166,134 1,252,493 9/15/99 16,309
- ----------------------------------------------------------------------------------------------
22,007
- ----------------------------------------------------------------------------------------------
Net Unrealized Loss on Forward
Foreign Currency Contracts $ (112,487)
==============================================================================================
</TABLE>
9. Shares of Beneficial Interest
At July 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.
- --------------------------------------------------------------------------------
28 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At July 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 $300,800,693 $466,062,040 $7,491,725 $6,961,398
============================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1999 July 31, 1998+
---------------------------- ----------------------------
Shares Amount Shares Amount
==========================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 5,919,283 $ 81,549,199 4,158,346 $ 68,447,899
Shares issued on reinvestment 4,606,069 56,520,992 1,183,103 19,093,402
Shares reacquired (4,974,702) (68,325,408) (4,466,979) (72,675,822)
- ----------------------------------------------------------------------------------------------------------
Net Increase 5,550,650 $ 69,744,783 874,470 $ 14,865,479
==========================================================================================================
Class B
Shares sold 2,154,517 $ 29,356,635 1,252,896 $ 20,430,852
Shares issued on reinvestment 11,468,647 139,771,603 3,656,015 58,779,979
Shares reacquired 17,345,693) (237,964,734) (21,346,134) (345,126,976)
- ----------------------------------------------------------------------------------------------------------
Net Decrease (3,722,529) $ (68,836,496) (16,437,223) $(265,916,145)
==========================================================================================================
Class L
Shares sold 577,934 $ 7,896,903 29,433 $ 498,115
Shares issued on reinvestment 26,724 334,662 22 371
Shares reacquired (91,287) (1,238,215) (7) (111)
- ----------------------------------------------------------------------------------------------------------
Net Increase 513,371 $ 6,993,350 29,448 $ 498,375
==========================================================================================================
Class O++
Shares sold 12,802 $ 177,899 94,371 $ 1,556,344
Shares issued on reinvestment 134,052 1,634,462 44,849 722,317
Shares reacquired (204,621) (2,891,437) (207,817) (3,407,687)
- ----------------------------------------------------------------------------------------------------------
Net Decrease (57,767) $ (1,079,076) (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) (13,538,287) (314,158) (5,033,941)
- ----------------------------------------------------------------------------------------------------------
Net Decrease (736,988) $ (10,418,116) (140,900) $ (2,227,311)
==========================================================================================================
</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.
(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 29
<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) 1998 1997 1996 1995
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $16.52 $15.53 $14.51 $14.03 $13.28
- -------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.45 0.70 0.80 0.83 0.85
Net realized and unrealized gain 0.92 1.80 1.36 0.47 0.82
- -------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.37 2.50 2.16 1.30 1.67
- -------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.68) (0.82) (0.82) (0.82)
Net realized gains (3.66) (0.83) (0.32) -- (0.08)
Capital -- -- -- -- (0.02)
- -------------------------------------------------------------------------------------------------------------
Total Distributions (4.03) (1.51) (1.14) (0.82) (0.92)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.86 $16.52 $15.53 $14.51 14.03
- -------------------------------------------------------------------------------------------------------------
Total Return 12.27% 16.70% 15.48% 9.21% 13.24%
- -------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $310 $279 $248 $266 $169
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.08% 1.05% 1.06% 1.04% 1.07%
Net investment income 3.26 4.29 5.29 5.55 6.36
- -------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 60% 110% 45% 58% 36%
=============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
- --------------------------------------------------------------------------------
30 1999 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) 1998 1997 1996 1995
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $16.49 $15.52 $14.51 $14.02 $13.28
- -------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.38 0.62 0.73 0.77 0.78
Net realized and unrealized gain 0.93 1.80 1.35 0.47 0.82
- -------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.31 2.42 2.08 1.24 1.60
- -------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.32) (0.62) (0.75) (0.75) (0.76)
Net realized gains (3.66) (0.83) (0.32) -- (0.08)
Capital -- -- -- -- (0.02)
- -------------------------------------------------------------------------------------------------------------
Total Distributions (3.98) (1.45) (1.07) (0.75) (0.86)
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.82 $16.49 $15.52 $14.51 $14.02
- -------------------------------------------------------------------------------------------------------------
Total Return 11.78% 16.17% 14.88% 8.78% 12.62%
- -------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $568 $740 $951 $1,310 $1,573
- -------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.56% 1.52% 1.52% 1.55% 1.56%
Net investment income 2.81 3.87 4.85 5.13 5.82
- -------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 60% 110% 45% 58% 36%
=============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
- --------------------------------------------------------------------------------
Smith Barney Balanced 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:
Class L Shares 1999(1) 1998(2)
================================================================================
Net Asset Value, Beginning of Year $ 16.52 $ 17.14
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.35 0.02
Net realized and unrealized gain (loss) 0.91 (0.41)
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.26 (0.39)
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) --
Net realized gains (3.66) (0.23)
- --------------------------------------------------------------------------------
Total Distributions (3.95) (0.23)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.83 $ 16.52
- --------------------------------------------------------------------------------
Total Return 11.43% (2.28)%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 7,508 $ 486
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.85% 1.74%+
Net investment income 2.54 2.51+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 60% 110%
================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) 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.
- --------------------------------------------------------------------------------
32 1999 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) 1998(1)(2) 1997(1) 1996 1995(3)
===========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $16.50 $15.53 $14.51 $14.02 $13.28
- -----------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.39 0.64 0.73 0.77 0.78
Net realized and unrealized gain 0.92 1.79 1.36 0.47 0.82
- -----------------------------------------------------------------------------------------------------------
Total Income From Operations 1.31 2.43 2.09 1.24 1.60
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.32) (0.63) (0.75) (0.75) (0.76)
Net realized gains (3.66) (0.83) (0.32) -- (0.08)
Capital -- -- -- -- (0.02)
- -----------------------------------------------------------------------------------------------------------
Total Distributions (3.98) (1.46) (1.07) (0.75) (0.86)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.83 $16.50 $15.53 $14.51 $14.02
- -----------------------------------------------------------------------------------------------------------
Total Return 11.79% 16.19% 15.01% 8.80% 12.62%
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $6,606 $8,838 $9,381 $11,441 $3,925
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.50% 1.48% 1.47% 1.50% 1.51%
Net investment income 2.83 3.89 4.89 5.19 5.77
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 60% 110% 45% 58% 36%
===========================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On June 12, 1998, Class C shares were renamed Class O shares.
(3) On November 7, 1994, the former Class D shares were renamed Class C
shares.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 33
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
of the Smith Barney Income Funds:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Balanced Fund of Smith Barney
Income Funds as of July 31, 1999, the related statement of operations for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period then ended and financial highlights for each of the years
in the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1999, by correspondence with the custodian. As to securities purchased or
sold but not yet received or delivered, we performed other appropriate auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Balanced Fund of Smith Barney Income Funds, as of July 31, 1999, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended and financial highlights
for each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
New York, New York
September 14, 1999
- --------------------------------------------------------------------------------
34 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
July 31, 1999:
o A corporate dividends recieved deduction of 30.33%.
o Total long-term capital gain distributions paid of $204,518,241.
A total of 2.38% of the ordinary dividends paid by the Fund from net investment
income are derived from Federal obligations and may be exempt from taxation at
the state level.
- --------------------------------------------------------------------------------
Smith Barney Balanced Fund 35
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On May 12, 1999, a special meeting of shareholders of the Trust was held for the
purpose of electing Trustees to the Trust.
The results of the vote were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Names of Trustees For Shares Voted Against Shares Voted
=================================================================================================================================
<S> <C> <C> <C> <C>
Lee Abraham 62,342,951.572 98.630% 865,940.611 1.370%
Allan J. Bloostein 62,384,540.377 98.696 824,351.806 1.304
Jane F. Dasher 62,392,002.787 98.708 816,889.396 1.292
Donald R. Foley 62,322,262.500 98.595 886,629.683 1.403
Richard E. Hanson Jr. 62,380,877.618 98.690 828,014.565 1.310
Paul Hardin 62,379,975.324 98.689 828,916.859 1.311
Heath B. McLendon 62,370,291.215 98.673 838,630.968 1.327
Roderick C. Rasmussen 62,346,471.848 98.636 862,420.335 1.364
John P. Toolan 62,396,377.832 98.715 812,514.351 1.285
=================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
36 1999 Annual Report to Shareholders
<PAGE>
Smith Barney
Balanced Fund
Trustees
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald R. Foley
Richard E. Hanson, Jr.
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
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 9699
Providence, RI 02940-9699
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
FD04026 9/99
[PHOTO]
Smith Barney
High Income
Fund
-------------
[GRAHPIC] ANNUAL REPORT
-------------
July 31, 1999
[LOGO] Smith Barney
Mutual Funds
<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
July 31, 1999
Without Sales Charges(1)
--------------------------------------
Class A Class B Class L
================================================================================
One-Year (3.65)% (4.15)% (4.08)%
- --------------------------------------------------------------------------------
Five-Year 8.31 7.79 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 7.99 N/A
- --------------------------------------------------------------------------------
Since Inception++ 8.99 8.21 8.29
================================================================================
With Sales Charges(2)
--------------------------------------
Class A Class B Class L
================================================================================
One-Year (7.97)% (8.10)% (5.92)%
- --------------------------------------------------------------------------------
Five-Year 7.31 7.65 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 7.99 N/A
- --------------------------------------------------------------------------------
Since Inception++ 8.25 8.21 8.07
================================================================================
(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 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.
++ Inception dates for Class A, B and L shares are November 6, 1992,
September 2, 1986 and August 24, 1994, respectively.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
As mentioned in our last report, the Fund's management team has begun a
multi-pronged strategy of rebalancing the Fund to better reflect strong economic
conditions.
- --------------------------------------------------------------------------------
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..........................................20
Statement of Operations......................................................21
Statements of Changes in Net Assets..........................................22
Notes to Financial Statements................................................23
Financial Highlights.........................................................28
Independent Auditors' Report.................................................33
Tax Information..............................................................34
Additional Shareholder Information...........................................35
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO] [PHOTO]
HEATH B. MCLENDON JOHN C. BIANCHI
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney High
Income Fund ("Fund") for the year ended July 31, 1999. We hope that you find
this report useful and informative.
The Fund generated a negative total return of 3.65% for Class A shares,
excluding the effects of sales charges, for the past 12 months. In comparison,
the Lipper Inc. peer group average posted a negative 1.91% for the same period.
(Lipper is a major fund-tracking organization.) Over the past 12 months, the
Fund paid income dividends totaling $0.99 per Class A share. We were
disappointed by the Fund's performance over the past twelve months because our
relatively more conservative credit emphasis caused the Fund to be more
negatively affected by the increase in general interest rates versus many of its
peers.
However, we believe our overall cautiousness was warranted given higher market
volatility during the reporting period. Also, given our conservative strategy
that focuses on higher quality issues with less yield, we needed to slightly
reduce the Fund's dividend payout in January and July. Yet, with rates on the
rise, we believe there are now numerous opportunities in the market to increase
the Fund's yield and we remain focused on meeting the income needs of our
shareholders.
Market and Economic Overview
During 1999, the high-yield bond market declined as U.S. Treasury rates
continued to move higher on fears that the Federal Reserve Board ("Fed") would
raise short-term interest rates in response to U.S. economic growth and
inflationary pressures. On June 30, 1999, the Fed raised short-term interest
rates by 25 basis points and recently indicated that it may increase rates again
later in 1999.
The high-yield bond market and the investment grade corporate bond market were
not only negatively affected by the increase in general interest rates, but also
by the rush on the part of corporations to issue additional debt before interest
rates went higher. This added supply caused the high-yield bond market to fall
as investors retreated from the market.
With the rise in general interest rates, including those of U.S. Treasury bonds,
compounded by heavy new issuance of corporate bonds, the better quality segments
of the high-yield bond market continued to underperform lower quality CCC/Caa
rated issues during the past seven months. Although higher quality issues have a
lower risk of default, these issues tend to be more sensitive to the movements
of the U.S. Treasury market. At the same time, the lower quality high yield
issues have a higher risk of default but tend to react more closely to stock
market trends. The lower quality segment of the high-yield market clearly
benefited from strong domestic economic growth so far in 1999 and the strong
performance returns generated by the U.S. stock market.
Compared to other segments of the fixed income markets such as U.S. Treasury
bonds and investment grade corporate bonds, the high-yield bond market modestly
outperformed in 1999. Thirty-year U.S. Treasuries generated the worst
performance with a negative 11.45% total return for the period. Ten-year
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 1
<PAGE>
Treasuries generated a negative 6.73% total return for the past seven months.
The domestic high-yield market generated a modestly positive total return for
the same time period.
The strongest performing industry sectors were basic materials (i.e., forest
products, metals, mining etc.) and energy. This was not surprising given the
increasing risk of higher inflation caused by stronger than expected economic
growth both domestically and abroad. The weakest industry sectors included media
(i.e., cable TV and broadcasting) and telecommunications. A number of media and
telecommunications companies rushed new issues into the markets in the second
quarter of 1999, putting further pressure on the existing issues in these
sectors.
The Fund's performance lagged the various high-yield indices for the year, with
total returns below that of the U.S. high-yield market overall. We were held
back by our underweight in basic materials and our overweight in the
telecommunications sector. Yet, despite adverse short-term market conditions,
and as previously noted, we are committed to our long-term investment style --
to maintain style purity in the funds we manage with a meaningful emphasis on
better quality issues.
Portfolio Strategy & Update
As mentioned in our last report, the Fund's management team has begun a
multi-pronged strategy of rebalancing the Fund to better reflect strong economic
conditions. We have therefore been slowly increasing the Fund's exposure to the
basis industry sector and eliminating sectors such as healthcare. Also, we have
modestly increased our energy exposure by investing in higher quality energy
credits. Given the increased volatility in the fixed-income markets, this
rebalancing strategy has taken longer than expected. In terms of quality, we
have been increasing our exposure to the middle B-rated segment of the market
where we have continued to find attractive yields.
Some of our recent additions include AES Corporation, an independent power
producer; Nextlink, a Competitive Local Exchange telecommunications provider;
Allied Waste, one of the largest waste reclamation companies in the U.S.;
Lyondell Chemical and Huntsman Chemical, two of the largest specialty chemical
companies in the world; and Ames Department Stores, a middle market retailer.*
We believe the middle B rated segment of the high yield bond market represents
the best value given the continued economic strength. We believe our current
investment strategy makes the most sense in this environment where economic
growth continues to be strong. The Fund's average maturity of approximately six
to seven years on a call-adjusted basis should continue to limit the impact of
rising rates on the portfolio.
Conclusion
For the remainder of 1999, we expect a continuation of solid economic growth
with a modest upward bias to inflation. We anticipate that both the equity
markets and the high-yield bond market should do better than U.S. Treasuries and
the middle quality high-yield bonds should outperform other types of high-yield
issues. Moreover, we will continue to focus closely on some of the stronger
companies in select commodity sectors such as paper, energy and steel.
- ----------
* Please note that the Fund's holdings are as of July 31, 1999 and are subject
to change.
- --------------------------------------------------------------------------------
2 1999 Annual Report to Shareholders
<PAGE>
Thank you for your investment in the Smith Barney High Income Fund. We look
forward to continuing to help you pursue your long-term financial goals in the
years ahead.
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
August 23, 1999
- --------------------------------------------------------------------------------
Top Ten Holdings* As of July 31, 1999
- --------------------------------------------------------------------------------
1. Unisys Corp. 2.7%
- --------------------------------------------------------------------------------
2. Allied Waste North America 2.5
- --------------------------------------------------------------------------------
3. PSINet Inc. 2.0
- --------------------------------------------------------------------------------
4. CSC Holdings Inc. 1.9
- --------------------------------------------------------------------------------
5. United International Holdings, Inc. 1.9
- --------------------------------------------------------------------------------
6. AES Corp. 1.8
- --------------------------------------------------------------------------------
7. United Pan-Europe Communications 1.7
- --------------------------------------------------------------------------------
8. HMH Properties Inc. 1.5
- --------------------------------------------------------------------------------
9. Huntsman ICI Chemical 1.4
- --------------------------------------------------------------------------------
10. ICN Pharmaceuticals Inc. 1.3
- --------------------------------------------------------------------------------
* 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
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $11.74 $10.30 $0.99 $0.00 $0.01 (3.65)%
- -------------------------------------------------------------------------------------------------------------
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 $7.27 $0.00 $0.08
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $11.75 $10.31 $0.94 $0.00 $0.01 (4.15)%
- -------------------------------------------------------------------------------------------------------------
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)
=============================================================================================================
Total $11.15 $0.00 $0.17
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $11.76 $10.32 $0.94 $0.00 $0.01 (4.08)%
- -------------------------------------------------------------------------------------------------------------
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 $4.94 $0.00 $0.08
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
4 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $11.77 $10.33 $1.03 $0.00 $0.01 (3.33)%
- -------------------------------------------------------------------------------------------------------------
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 $4.20 $0.00 $0.08
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $11.74 $10.29 $1.02 $0.00 $0.01 (3.49)%
- -------------------------------------------------------------------------------------------------------------
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 $7.46 $0.00 $0.08
=============================================================================================================
</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>
Year Ended 7/31/99 (3.65)% (4.15)% (4.08)% (3.33)% (3.49)%
- -------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/99 8.31 7.79 N/A N/A 8.59
- -------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/99 N/A 7.99 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------
Inception* through 7/31/99 8.99 8.21 8.29 7.07 9.26
=============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
-----------------------------------------------------------------
Class A Class B Class L Class Y Class Z
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 7/31/99 (7.97)% (8.10)% (5.92)% (3.33)% (3.49)%
- -------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/99 7.31 7.65 N/A N/A 8.59
- -------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/99 N/A 7.99 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------
Inception* through 7/31/99 8.25 8.21 8.07 7.07 9.26
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 7/31/99) 78.54%
- --------------------------------------------------------------------------------
Class B (7/31/89 through 7/31/99) 115.72
- --------------------------------------------------------------------------------
Class L (Inception* through 7/31/99) 48.19
- --------------------------------------------------------------------------------
Class Y (Inception* through 7/31/99) 26.87++
- --------------------------------------------------------------------------------
Class Z (Inception* through 7/31/99) 81.55
================================================================================
(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 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+
July 1989 -- July 1999
[GRAPHIC]
Smith Barney High
Income Fund Salomon Bros
July 1989 10000 10000
July 1990 8777 9548
July 1991 9864 8783
July 1992 12311 12717
July 1993 14595 14885
July 1994 14828 17346
July 1995 16277 16892
July 1996 17646 20267
July 1997 20774 22616
July 1998 22506 25983
July 1999 21572 26199
+ Hypothetical illustration of $10,000 invested in Class B shares on July
31, 1989, assuming reinvestment of dividends and capital gains, if any, at
net asset value through July 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]
Cable Television 10.7%
Casinos/Gambling 3.0%
Container/Packaging 4.1%
Environmental Services 3.3%
Internet Services 4.0%
Oil and Gas Production 3.6%
Paper 3.3%
Telecommunications/Other 12.8%
Telephone/Cellular 5.8%
Unregulated Power Generation 2.9%
Other 46.5%
- --------------------------------------------------------------------------------
* As a percentage of total corporate bonds and notes.
Investment Breakdown
- --------------------------------------------------------------------------------
[GRAPHIC]
Preferred Stock and Warrants 1.7%
Cash Equivalent 1.0%
Corporate Bonds and Notes 97.3%
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(a) RATING(b) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 97.3%
Advertising -- 0.1%
2,000,000EUR B- Go Outdoor Systems Holdings S.A., Sr. Sub. Notes,
10.500% due 7/15/09(c)(d) $ 2,145,946
- ----------------------------------------------------------------------------------------------------------------------------------
Aerospace -- 0.9%
5,325,000 B1* BE Aerospace, Inc., Sr. Sub. Notes, Series B, 9.500% due 11/1/08 5,411,531
4,380,000 B- Dunlop Standard Aero Holdings, Sr. Notes, 11.875% due 5/15/09(c) 4,462,125
4,200,000 B- Fairchild Corp., Guaranteed Sr. Sub. Notes, 10.750% due 4/15/09(c) 4,131,750
- ----------------------------------------------------------------------------------------------------------------------------------
14,005,406
- ----------------------------------------------------------------------------------------------------------------------------------
Air Freight/Delivery Services -- 0.3%
Atlas Air Inc.:
2,855,000 B- Sr. Notes, 9.250% due 4/15/08 2,765,781
2,750,000 BBB- Pass-Through Certificates, Series 1999-1, Class C, 8.770% due 1/2/11 2,676,300
- ----------------------------------------------------------------------------------------------------------------------------------
5,442,081
- ----------------------------------------------------------------------------------------------------------------------------------
Airlines -- 0.5%
8,830,000 BB Airplanes Pass-Through Trust, Corporate Asset-Backed Securities,
Series 1, Class D, 10.875% due 3/15/19 8,832,826
- ----------------------------------------------------------------------------------------------------------------------------------
Aluminum -- 0.7%
Kaiser Aluminum & Chemical Corp.:
Sr. Notes:
2,090,000 B1* Series B, 10.875% due 10/15/06 2,137,025
1,640,000 B1* Series D, 10.875% due 10/15/06 1,676,900
7,055,000 B3* Sr. Sub. Notes, 12.750% due 2/1/03 7,143,188
- ----------------------------------------------------------------------------------------------------------------------------------
10,957,113
- ----------------------------------------------------------------------------------------------------------------------------------
Auto Parts: O.E.M. -- 0.7%
8,710,000 B Collins & Aikman Products Co., Guaranteed Sr. Sub. Notes,
11.500% due 4/15/06 8,884,200
2,910,000 B Dura Operating Corp., Sr. Sub. Notes, 9.000% due 5/1/09(c) 2,800,875
- ----------------------------------------------------------------------------------------------------------------------------------
11,685,075
- ----------------------------------------------------------------------------------------------------------------------------------
Automotive Aftermarket -- 0.2%
3,870,000 B1* Exide Corp., Sr. Exchange Notes, 10.000% due 4/15/05 3,874,838
- ----------------------------------------------------------------------------------------------------------------------------------
Broadcasting -- 1.5%
4,830,000 B- Capstar Broadcasting Partners, Inc., Sr. Discount Notes,
step bond to yield 11.364% due 2/1/09 4,147,763
9,315,000 B1* Chancellor Media Corp., Guaranteed Sr. Sub. Notes, 9.000% due 10/1/08 9,408,150
Citadel Broadcasting Co.:
5,035,000 B- Guaranteed Sr. Sub. Notes, 9.250% due 11/15/08 5,173,463
3,995,000 B- Sr. Sub. Notes, 10.250% due 7/1/07 4,304,613
1,475,000 B+ TV Azteca S.A. de C.V., Guaranteed Sr. Notes, Series B,
10.500% due 2/15/07 1,073,063
- ----------------------------------------------------------------------------------------------------------------------------------
24,107,052
- ----------------------------------------------------------------------------------------------------------------------------------
Building Materials -- 0.3%
4,320,000 B Atrium Companies Inc., Sr. Sub. Notes, 10.500% due 5/1/09(c) 4,244,400
- ----------------------------------------------------------------------------------------------------------------------------------
Building Materials Chains -- 0.2%
3,800,000 BB Building Materials Corp. of America, Sr. Deferred Coupon Notes,
Series B, 11.750% due 7/1/04 4,042,250
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(a) RATING(b) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Building Products -- 1.5%
4,135,000 B Amatek Industries Pty Ltd., Sr. Sub. Notes, 12.000% due 2/15/08(c) $ 4,016,119
3,450,000 B NCI Building Systems, Inc., Sr. Sub. Notes, Series B, 9.250% due 5/1/09 3,415,500
Nortek Inc., Sr. Notes, Series B:
1,500,000 B+ 9.250% due 3/15/07 1,515,000
12,935,000 B+ 9.125% due 9/1/07 12,967,338
1,785,000 B+ 8.875% due 8/1/08 1,818,469
- ----------------------------------------------------------------------------------------------------------------------------------
23,732,426
- ----------------------------------------------------------------------------------------------------------------------------------
Cable Television -- 10.5%
Century Communications Corp.:
9,150,000 BB- Sr. Discount Notes, Series B, zero coupon bond to yield 9.325%
due 1/15/08 4,026,000
3,535,000 BB- Sr. Notes, 8.750% due 10/1/07 3,481,975
Charter Communications Holdings LLC/Charter Communications
Capital Corp.:
10,090,000 B+ Sr. Discount Notes, step bond to yield 9.651% due 4/1/11(c) 6,205,350
5,345,000 B+ Sr. Notes, 8.625% due 4/1/09(c) 5,184,650
CSC Holdings Inc., Sr. Sub. Debentures:
13,077,000 BB- 9.875% due 2/15/13 13,927,005
14,430,000 BB- 10.500% due 5/15/16 16,233,750
4,975,000GBP B- Diamond Holdings PLC, Guaranteed Notes, 10.000% due 2/1/08(d) 8,204,729
7,810,000 B Echostar DBS Corp., Sr. Notes, 9.375% due 2/1/09(c) 7,927,150
NTL Communications Corp.:
5,595,000 B- Sr. Deferred Coupon Notes, Series B, step bond to yield 11.867%
due 10/1/08 3,888,525
15,480,000 B- Sr. Notes, 11.500% due 10/1/08 16,950,600
10,955,000 BB- Rogers Cablesystems Ltd., Guaranteed Sr. Sub. Debentures,
11.000% due 12/1/15 12,639,331
4,000,000 BB- Rogers Communications, Inc., Sr. Notes, 9.125% due 1/15/06 4,080,000
TeleWest Communications PLC:
3,630,000GBP B+ Sr. Discount Notes, step bond to yield 9.669% due 4/15/09(c)(d) 3,645,995
6,550,000 B+ Sr. Notes, 11.250% due 11/1/08 7,401,500
50,200,000 B United International Holdings, Inc., Sr. Secured Discount Notes,
Series B, step bond to yield 11.990% due 2/15/08 29,367,000
50,000,000 B2* United Pan-Europe Communications NV, Sr. Discount Notes,
step bond to yield 12.335% due 8/1/09(c) 27,375,000
- ----------------------------------------------------------------------------------------------------------------------------------
170,538,560
- ----------------------------------------------------------------------------------------------------------------------------------
Casinos/Gambling -- 2.9%
8,650,000 BB+ Harrah's Operating Co., Inc., Guaranteed Sr. Sub. Notes,
7.875% due 12/15/05 8,304,000
7,845,000 B Harveys Casino Resorts, Guaranteed Sr. Sub. Notes, 10.625% due 6/1/06 8,168,606
9,180,000 B Hollywood Park, Inc., Guaranteed Sr. Sub. Notes, Series B,
9.250% due 2/15/07 9,019,350
740,000 B Hollywood Park, Inc./Hollywood Park Operating Co., Sr. Sub. Notes,
Series B, 9.500% due 8/1/07 734,450
7,500,000 B+ Horseshoe Gaming, L.L.C., Sr. Sub. Notes, 8.625% due 5/15/09(c) 7,256,250
5,200,000 B Isle of Capris Casinos, Inc., Sr. Sub. Notes, 8.750% due 4/15/09(c) 4,784,000
1,495,000 BB+ Mandalay Resort Group, Sr. Sub. Debentures, 7.625% due 7/15/13 1,330,550
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(a) RATING(b) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Casinos/Gambling -- 2.9% (continued)
Station Casinos, Inc., Sr. Sub. Notes:
2,425,000 B+ 10.125% due 3/15/06 $ 2,528,063
5,400,000 B+ 8.875% due 12/1/08 5,332,500
- ----------------------------------------------------------------------------------------------------------------------------------
47,457,769
- ----------------------------------------------------------------------------------------------------------------------------------
Chemicals - Major -- 1.3%
Huntsman ICI Chemicals LLC:
38,450,000 B+ Sr. Discount Notes, zero coupon bond to yield 12.122% due 12/31/09(c) 10,093,125
Sr. Sub. Notes:
520,000 NR 9.500% due 7/1/07(c) 495,950
8,375,000 B+ 10.125% due 7/1/09(c) 8,416,875
2,525,000EUR B+ 10.125% due 7/1/09(d) 2,695,744
- ----------------------------------------------------------------------------------------------------------------------------------
21,701,694
- ----------------------------------------------------------------------------------------------------------------------------------
Chemicals - Specialty -- 0.7%
Lyondell Chemical Co., Sr. Secured Notes:
3,595,000 BB Series A, 9.625% due 5/1/07(c) 3,648,925
7,410,000 BB Series B, 9.875% due 5/1/07(c) 7,484,100
- ----------------------------------------------------------------------------------------------------------------------------------
11,133,025
- ----------------------------------------------------------------------------------------------------------------------------------
Coal Mining -- 0.5%
7,930,000 B AEI Resources Inc., Guaranteed Sr. Notes, 10.500% due 12/15/05(c) 7,850,700
- ----------------------------------------------------------------------------------------------------------------------------------
Construction/AG Equipment/Trucks -- 0.5%
8,280,000 B Columbus McKinnon Corp., Guaranteed Sr. Sub. Notes, 8.500% due 4/1/08 8,010,900
- ----------------------------------------------------------------------------------------------------------------------------------
Containers/Packaging -- 3.9%
9,025,000 B AEP Industries Inc., Sr. Sub. Notes, 9.875% due 11/15/07 8,934,750
5,600,000EUR B1* BSN Financing Co., Guaranteed Sr. Notes, 10.250% due 8/1/09(c)(d) 5,993,664
5,000,000 B BWAY Corp., Sr. Sub. Notes, Series B, 10.250% due 4/15/07 5,218,750
2,780,000 B Consolidated Container Co., LLC/Consolidated Container Capital, Inc.,
Sr. Sub. Notes, 10.125% due 7/15/09(c) 2,821,700
5,300,000 B Huntsman Packaging Corp., Guaranteed Sr. Sub. Notes,
9.125% due 10/1/07 5,200,625
8,425,000GER B Impress Metal Packaging Holdings, Sr. Sub. Notes,
9.875% due 5/29/07(c)(d) 5,025,034
4,490,000 B Packaging Corp. of America, Sr. Sub. Notes, 9.625% due 4/1/09(c) 4,557,350
15,155,000 B Stone Container Finance Corp., Guaranteed Sr. Notes,
11.500% due 8/15/06(c) 16,140,075
Tekni-Plex, Inc.:
5,190,000 B- Guaranteed Sr. Sub. Notes, Series B, 9.250% due 3/1/08 5,151,075
4,930,000 B- Sr. Sub. Notes, Series B, 11.250% due 4/1/07 5,281,263
- ----------------------------------------------------------------------------------------------------------------------------------
64,324,286
- ----------------------------------------------------------------------------------------------------------------------------------
Contract Drilling -- 1.3%
Pride International, Inc., Sr. Notes:
755,000 BB 9.375% due 5/1/07 766,325
6,125,000 BB 10.000% due 6/1/09 6,278,125
7,190,000 Ba3* R&B Falcon Corp., Sr. Notes, 12.250% due 3/15/06 7,477,600
6,705,000 BB- RBF Finance Co., Guaranteed Sr. Secured Notes, 11.375% due 3/15/09 6,973,200
- ----------------------------------------------------------------------------------------------------------------------------------
21,495,250
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(a) RATING(b) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Discount Stores -- 1.6%
13,710,000 B+ Ames Department Stores, Inc., Sr. Notes, 10.000% due 4/15/06(c) $ 13,470,075
5,950,000 BB+ DR Structured Finance Securitized Lease Trust,
Pass-Through Certificates, Series A-2, 8.375% due 8/15/15 5,821,480
6,205,000 BB+ Kmart Corp., Debentures, 12.500% due 3/1/05 7,461,513
- ----------------------------------------------------------------------------------------------------------------------------------
26,753,068
- ----------------------------------------------------------------------------------------------------------------------------------
Diversified Commercial Services -- 1.3%
5,675,000 BB- Cia. Latino Americana de Infraestructura & Services S.A.,
Guaranteed Sr. Notes, 11.625% due 6/1/04(c) 3,178,000
7,950,000 B2* Intertek Finance PLC., Guaranteed Sr. Sub. Notes, Series B,
10.250% due 11/1/06 7,661,813
10,450,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes, Series B,
11.000% due 11/1/06 10,306,313
- ----------------------------------------------------------------------------------------------------------------------------------
21,146,126
- ----------------------------------------------------------------------------------------------------------------------------------
Diversified Financial Services -- 0.5%
Amresco, Inc., Sr. Sub. Notes:
4,510,000 CCC+ Series 1997-A, 10.000% due 3/15/04 3,653,100
5,935,000 CCC+ Series 1998-A, 9.875% due 3/15/05 4,748,000
- ----------------------------------------------------------------------------------------------------------------------------------
8,401,100
- ----------------------------------------------------------------------------------------------------------------------------------
Diversified Manufacturing -- 0.4%
7,440,000 B+ Park-Ohio Industries, Inc., Sr. Sub. Notes, 9.250% due 12/1/07 7,235,400
- ----------------------------------------------------------------------------------------------------------------------------------
Drugs - Generic -- 1.3%
20,950,000 BB ICN Pharmaceuticals Inc., Sr. Notes, Series B, 9.250% due 8/15/05 21,028,563
- ----------------------------------------------------------------------------------------------------------------------------------
Electronic Components -- 1.1%
6,763,000 B+ Celestica International Inc., Sr. Sub. Notes, 10.500% due 12/31/06 7,354,763
ViaSystems, Inc., Sr. Sub. Notes:
1,025,000 B- Series B, 9.750% due 6/1/07 886,625
10,665,000 B- 9.750% due 6/1/07 9,225,225
- ----------------------------------------------------------------------------------------------------------------------------------
17,466,613
- ----------------------------------------------------------------------------------------------------------------------------------
Electronic Data Processing -- 2.6%
Unisys Corp., Sr. Notes:
9,635,000 BB- Series B, 12.000% due 4/15/03 10,526,238
28,500,000 BB- 11.750% due 10/15/04 31,920,000
- ----------------------------------------------------------------------------------------------------------------------------------
42,446,238
- ----------------------------------------------------------------------------------------------------------------------------------
Engineering and Construction -- 1.5%
4,310,000 B- American Plumbing & Mechanical, Inc., Guaranteed
Sr. Sub. Notes, 11.625% due 10/15/08(c) 4,159,150
7,835,000 B Group Maintenance America Corp., Sr. Sub. Notes, 9.750% due 1/15/09(c) 7,678,300
4,515,000 B+ Integrated Electrical Services, Inc., Guaranteed Sr. Sub. Notes,
9.375% due 2/1/09(c) 4,481,138
7,395,000 B Metromedia Fiber Network, Inc., Sr. Notes, Series B,
10.000% due 11/15/08 7,515,169
- ----------------------------------------------------------------------------------------------------------------------------------
23,833,757
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(a) RATING(b) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Environmental Services -- 3.2%
40,500,000 B+ Allied Waste North America, Sr. Sub. Notes, 10.000% due 8/1/09(c) $ 39,993,750
6,620,000 B+ IT Group, Inc., Sr. Sub. Notes, 11.250% due 4/1/09(c) 6,363,475
5,435,000 B+ URS Corp., Sr. Sub. Notes, 12.250% due 5/1/09(c) 5,536,906
- ----------------------------------------------------------------------------------------------------------------------------------
51,894,131
- ----------------------------------------------------------------------------------------------------------------------------------
Food Distributors -- 2.6%
12,230,000 B2* Carrols Corp., Sr. Sub. Notes, 9.500% due 12/1/08 11,664,363
16,975,000 B Imperial Holly Corp., Guaranteed Sr. Sub. Notes, 9.750% due 12/15/07 16,168,688
5,220,000 B- Purina Mills, Inc., Sr. Sub. Notes, 9.000% due 3/15/10 2,884,050
10,690,000 B SC International Services, Inc., Guaranteed Sr. Sub. Notes, Series B,
9.250% due 9/1/07 11,024,063
- ----------------------------------------------------------------------------------------------------------------------------------
41,741,164
- ----------------------------------------------------------------------------------------------------------------------------------
Foods - Specialty/Candy -- 0.8%
7,000,000 B- B&G Foods Inc., Guaranteed Sr. Sub. Notes, 9.625% due 8/1/07 6,615,000
6,345,000 B+ Chiquita Brands International, Inc., Sr. Notes, 10.000% due 6/15/09 6,281,550
- ----------------------------------------------------------------------------------------------------------------------------------
12,896,550
- ----------------------------------------------------------------------------------------------------------------------------------
Forest Products -- 0.7%
9,770,000 B Ainsworth Lumber Co. Ltd., Sr. Secured Notes, 12.500% due 7/15/07 10,954,613
- ----------------------------------------------------------------------------------------------------------------------------------
Home Furnishings -- 0.4%
4,545,000 B Falcon Products Inc., Sr. Sub. Notes, 11.375% due 6/15/09(c) 4,562,044
1,475,000 B- Simmons Co., Sr. Sub. Notes, 10.250% due 3/15/09(c) 1,506,344
- ----------------------------------------------------------------------------------------------------------------------------------
6,068,388
- ----------------------------------------------------------------------------------------------------------------------------------
Homebuilding -- 0.8%
5,040,000 Ba1* D.R. Horton Inc., Guaranteed Sr. Notes, 8.000% due 2/1/09 4,775,400
9,440,000 BB- U.S. Home Corp., Sr. Sub. Notes, 8.875% due 2/15/09 8,956,200
- ----------------------------------------------------------------------------------------------------------------------------------
13,731,600
- ----------------------------------------------------------------------------------------------------------------------------------
Hospital/Nursing Management -- 0.9%
6,693,000 Ba3* Fresenius Medical Care Capital Trust I, Guaranteed Trust Preferred Securities,
9.000% due 12/1/06 6,676,268
8,275,000 B- Magellan Health Services, Inc., Sr. Sub. Notes, Series A,
9.000% due 2/15/08 7,240,625
- ----------------------------------------------------------------------------------------------------------------------------------
13,916,893
- ----------------------------------------------------------------------------------------------------------------------------------
Hotel/Resort -- 2.5%
6,300,000 B- Courtyard By Marriott II LP/Courtyard Finance Co., Sr. Secured Notes,
Series B, 10.750% due 2/1/08 6,426,000
HMH Properties, Inc., Guaranteed Sr. Notes:
12,570,000 BB Series B, 7.875% due 8/1/08 11,564,400
12,625,000 BB Series C, 8.450% due 12/1/08 11,993,750
10,680,000 B+ Intrawest Corp., Sr. Notes, 9.750% due 8/15/08 10,826,850
- ----------------------------------------------------------------------------------------------------------------------------------
40,811,000
- ----------------------------------------------------------------------------------------------------------------------------------
Industrial Specialties -- 0.4%
6,750,000EUR B1* Leica Geosystems Finance B.V., Guaranteed Sr. Sub. Notes,
9.875% due 12/15/08(c)(d) 7,332,873
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(a) RATING(b) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Insurance - Multi-Line -- 0.9%
12,125,000 BB+ SIG Capital Trust I, Guaranteed Trust Preferred Securities,
9.500% due 8/15/27 $ 9,093,750
6,700,000 B Veritas Capital Trust, Guaranteed Trust Preferred Securities,
10.000% due 1/1/28 5,351,625
- ----------------------------------------------------------------------------------------------------------------------------------
14,445,375
- ----------------------------------------------------------------------------------------------------------------------------------
Internet Services -- 3.9%
3,650,000 NR Cybernet Internet Services International, Inc., Units, 14.000% due 7/1/09 3,750,375
PSINet Inc., Sr. Notes:
11,060,000 B- Series B, 10.000% due 2/15/05 10,672,900
8,565,000 B- 11.500% due 11/1/08 8,779,125
8,860,000 B- 11.000% due 8/1/09(c) 8,860,000
3,000,000EUR B- 11.000% due 8/1/09(c)(d) 3,210,891
9,805,000 NR Splitrock Services, Inc., Guaranteed Sr. Notes, Series B,
11.750% due 7/15/08 9,265,725
Verio Inc., Sr. Notes:
4,940,000 B- 10.375% due 4/1/05 4,915,300
10,185,000 B- 11.250% due 12/1/08 10,414,163
6,955,000 CCC+ Wam!Net Inc., Guaranteed Sr. Discount Notes, Series B,
step bond to yield 14.851% due 3/1/05 4,120,838
- ----------------------------------------------------------------------------------------------------------------------------------
63,989,317
- ----------------------------------------------------------------------------------------------------------------------------------
Leisure/Movies/Entertainment -- 1.0%
17,050,000 B- SFX Entertainment, Inc., Guaranteed Sr. Sub. Notes, Series B,
9.125% due 2/1/08 16,538,500
- ----------------------------------------------------------------------------------------------------------------------------------
Machinery - Industrial/Components -- 0.4%
6,315,000 B- Alvey Systems Inc., Sr. Sub. Notes, 11.375% due 1/31/03 6,488,663
- ----------------------------------------------------------------------------------------------------------------------------------
Media Conglomerates -- 0.5%
5,150,000GBP B Polestar Corp. PLC, Sr. Notes, 10.500% due 5/30/08(d) 8,259,623
- ----------------------------------------------------------------------------------------------------------------------------------
Medical Specialties -- 0.3%
4,360,000 B- Hanger Orthopedic Group, Inc., Sr. Sub. Notes, 11.250% due 6/15/09(c) 4,452,650
- ----------------------------------------------------------------------------------------------------------------------------------
Metal/Minerals - Other -- 0.6%
10,040,000 B- Haynes International Inc., Sr. Notes, 11.625% due 9/1/04 9,512,900
- ----------------------------------------------------------------------------------------------------------------------------------
Miscellaneous -- 0.1%
1,520,000 B- Key Plastics, Inc., Guaranteed Sr. Sub. Notes, Series B,
10.250% due 3/15/07 1,478,200
- ----------------------------------------------------------------------------------------------------------------------------------
Multi-Sector Companies -- 0.5%
8,155,000 B- Triarc Consumer Beverage, Sr. Sub. Notes, 10.250% due 2/15/09(c) 7,930,738
- ----------------------------------------------------------------------------------------------------------------------------------
Newspapers -- 0.3%
4,845,000 B+ Garden State Newspapers Inc., Sr. Sub. Notes, 8.625% due 7/1/11(c) 4,596,694
- ----------------------------------------------------------------------------------------------------------------------------------
Oil and Gas Production -- 3.5%
Belco Oil & Gas Corp.:
4,700,000 B1* Guaranteed Sr. Sub. Notes, Series B, 10.500% due 4/1/06 4,917,375
4,910,000 B1* Sr. Sub. Notes, Series B, 8.875% due 9/15/07 4,811,800
16,090,000 B+ Clark USA Inc., Sr. Notes, Series B, 10.875% due 12/1/05 14,219,538
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(a) RATING(b) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Oil and Gas Production -- 3.5% (continued)
575,000 B Forest Oil Corp., Guaranteed Sr. Sub. Notes 10.500% due 1/15/06 $ 592,250
3,340,000 B+ Nuevo Energy Co., Guaranteed Sr. Sub. Notes, 9.500% due 4/15/06 3,415,150
Ocean Energy Inc.:
6,400,000 BB- Guaranteed Sr. Sub. Debentures, 9.750% due 10/1/06 6,624,000
11,225,000 BB- Guaranteed Sr. Sub. Notes, 10.375% due 10/15/05 11,828,344
3,420,000 B+ Parker Drilling Co., Guaranteed Sr. Notes, Series D, 9.750% due 11/15/06 3,146,400
4,525,000 B2* Stone Energy Corp., Guaranteed Sr. Sub. Notes, 8.750% due 9/15/07 4,513,688
3,305,000 B+ Vintage Petroleum, Inc., Sr. Sub. Notes, 9.750% due 6/30/09 3,433,069
- ----------------------------------------------------------------------------------------------------------------------------------
57,501,614
- ----------------------------------------------------------------------------------------------------------------------------------
Oil and Gas Transmission -- 0.3%
4,950,000 BB- Leviathan Gas Pipeline Partners, L.P./Leviathan Finance Corp.,
Sr. Sub. Notes, 10.375% due 6/1/09(c) 5,098,500
- ----------------------------------------------------------------------------------------------------------------------------------
Packaged Goods/Cosmetics -- 0.2%
4,465,000 B- Revlon Consumer Products Corp., Sr. Sub. Exchange Notes,
8.625% due 2/1/08 3,772,925
- ----------------------------------------------------------------------------------------------------------------------------------
Paper -- 3.2%
9,265,000EUR B Kappa Beheer BV, Guaranteed Sr. Sub. Notes, 10.625% due 7/15/09(c)(d) 9,817,542
9,790,000 CCC+ Repap New Brunswick Inc., Second Priority Mortgage Notes,
10.625% due 4/15/05 8,468,350
Riverwood International Corp.:
6,830,000 B- Guaranteed Sr. Notes, 10.625% due 8/1/07 7,086,125
9,060,000 CCC+ Guaranteed Sr. Sub. Notes, 10.875% due 4/1/08 8,946,750
2,317,499 NR S.D. Warren Co., Debentures, 14.000% due 12/15/06 2,653,536
8,790,000 BB+ Tembec Finance Corp., Guaranteed Sr. Notes, 9.875% due 9/30/05 9,185,550
5,780,000 BB+ Tembec Industries, Inc., Guaranteed Sr. Notes, 8.625% due 6/30/09 5,780,000
- ----------------------------------------------------------------------------------------------------------------------------------
51,937,853
- ----------------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals -- 0.1%
1,045,000 B King Pharmaceuticals, Inc., Guaranteed Sr. Sub. Notes,
10.750% due 2/15/09 1,082,881
- ----------------------------------------------------------------------------------------------------------------------------------
Photographic Products -- 0.6%
9,065,000 BB- Polaroid Corp., Sr. Notes, 11.500% due 2/15/06 9,540,913
- ----------------------------------------------------------------------------------------------------------------------------------
Printing/Forms -- 0.3%
4,990,000 BB- World Color Press, Inc., Sr. Sub. Notes, 7.750% due 2/15/09 4,883,963
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts -- 1.0%
7,500,000 NR Ocwen Asset Investment Corp., Redeemable Notes, 11.500% due 7/1/05 6,525,000
8,690,000 Baa3* Trizec Finance Ltd., Guaranteed Sr. Notes, 10.875% due 10/15/05 9,472,100
- ----------------------------------------------------------------------------------------------------------------------------------
15,997,100
- ----------------------------------------------------------------------------------------------------------------------------------
Recreational Products/Toys -- 0.4%
5,500,000EUR B2* Head Holding GMBH, Sr. Notes, 10.750% due 7/15/06(c)(d) 5,827,768
- ----------------------------------------------------------------------------------------------------------------------------------
Rental/Leasing Companies -- 1.2%
7,645,000 BB- Avis Rent a Car, Inc., Sr. Sub. Notes, 11.000% due 5/1/09(c) 7,855,238
3,540,000 B NationsRent, Inc., Guaranteed Sr. Sub. Notes, 10.375% due 12/15/08 3,575,400
8,820,000 BB- United Rentals (North America), Inc., Guaranteed Sr. Sub. Notes,
Series B, 9.250% due 1/15/09 8,720,775
- ----------------------------------------------------------------------------------------------------------------------------------
20,151,413
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(a) RATING(b) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Restaurants -- 0.5%
8,740,000 B Advantica Restaurant Group, Inc., Sr. Notes, 11.250% due 1/15/08 $ 8,128,200
- ----------------------------------------------------------------------------------------------------------------------------------
Retail - Food Chains -- 0.0%
700,000 CCC+ Pathmark Stores, Inc., Sub. Notes, 12.625% due 6/15/02 717,500
- ----------------------------------------------------------------------------------------------------------------------------------
Retail - Other Specialty Stores -- 0.7%
12,250,000 B- Advance Stores Co., Inc., Guaranteed Sr. Sub. Notes, Series B,
10.250% due 4/15/08 11,668,125
- ----------------------------------------------------------------------------------------------------------------------------------
Savings and Loan Associations -- 1.0%
8,100,000 B2* Ocwen Capital Trust I, Guaranteed Capital Securities, 10.875% due 8/1/27 5,670,000
4,000,000 B+ Ocwen Federal Bank FSB, Sub. Debentures, 12.000% due 6/15/05 3,730,000
7,550,000 BB- Ocwen Financial Corp., Notes, 11.875% due 10/1/03 7,097,000
- ----------------------------------------------------------------------------------------------------------------------------------
16,497,000
- ----------------------------------------------------------------------------------------------------------------------------------
Semiconductors -- 0.7%
12,265,000 B Fairchild Semiconductor Corp., Sr. Sub. Notes, 10.125% due 3/15/07 12,019,700
- ----------------------------------------------------------------------------------------------------------------------------------
Steel/Iron Ore -- 1.7%
5,110,000 Ba3* National Steel Corp., First Mortgage Bonds, Series D, 9.875% due 3/1/09 5,250,525
6,745,000 B+ Russel Metals Inc., 10.000% due 6/1/09 6,770,294
6,200,000 B+ WCI Steel, Inc., Sr. Secured Notes, Series B, 10.000% due 12/1/04 6,417,000
9,960,000 B WHX Corp., Sr. Exchange Notes, 10.500% due 4/15/05 9,636,300
- ----------------------------------------------------------------------------------------------------------------------------------
28,074,119
- ----------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Other -- 12.5%
2,125,000GBP B1* COLT Telecommunications Group PLC, Sr. Notes, 10.125% due 11/30/07(d) 3,511,372
E.Spire Communications, Inc.:
14,895,000 NR Sr. Discount Notes, step bond to yield 12.043% due 7/1/08 6,702,750
1,250,000 NR Sr. Notes, 13.750% due 7/15/07 1,129,688
Esprit Telecom Group PLC, Sr. Notes:
5,950,000 B- 11.500% due 12/15/07 6,426,000
5,000,000GER B- 11.500% due 12/15/07(d) 2,927,497
1,900,000 B- 10.875% due 6/15/08 1,995,000
17,390,000 NR FaciliCom International, Inc., Sr. Notes, Series B, 10.500% due 1/15/08 12,259,950
Hermes Europe Railtel BV, Sr. Notes:
14,775,000 B 11.500% due 8/15/07 15,366,000
4,200,000 B 10.375% due 1/15/09 4,221,000
ICG Holdings, Inc.:
3,390,000 B- Guaranteed Sr. Discount Notes, step bond to yield 12.508% due 9/15/05 3,051,000
5,920,000 B- Guaranteed Sr. Secured Discount Notes, step bond to yield
12.293% due 5/1/06 4,839,600
4,525,000 BB- IMPSAT Corp., Guaranteed Sr. Notes, 12.125% due 7/15/03 4,027,250
Intermedia Communications Inc.:
Sr. Discount Notes:
5,215,000 B Series B, step bond to yield 11.237% due 7/15/07 3,676,575
595,000 B Step bond to yield 12.132% due 5/15/06 487,900
3,145,000 B Sr. Notes, Series B, 9.500% due 3/1/09 3,019,200
4,800,000 B3* IXC Communications Inc., Sr. Sub. Notes, 9.000% due 4/15/08 4,836,000
8,450,000 B- KMC Telecom Holdings, Inc., Sr. Notes, 13.500% due 5/15/09(c) 8,450,000
21,260,000 B Level 3 Communications, Inc., Sr. Discount Notes,
step bond to yield 10.936% due 12/1/08 12,330,800
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(a) RATING(b) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Telecommunications - Other -- 12.5% (continued)
13,650,000 B Metronet Communications Corp., Sr. Notes, 12.000% due 8/15/07 $ 15,902,250
Microcell Telecommunications Inc., Sr. Discount Notes:
3,470,000 B Series B, step bond to yield 11.709% due 6/1/06 2,836,725
6,760,000 B- Step bond to yield 11.824% due 6/1/09(c) 4,039,100
NEXTLINK Communications, Inc.:
17,300,000 B Sr. Discount Notes, step bond to yield 12.030% due 6/1/09 9,947,500
8,395,000 B Sr. Notes, 10.750% due 6/1/09 8,541,913
6,635,000 B NEXTLINK Communications, L.L.C./NEXTLINK Capital Inc.,
Sr. Notes, 12.500% due 4/15/06 7,290,206
9,055,000 BB- Orange PLC, Sr. Notes, 9.000% due 6/1/09(c) 9,077,638
10,140,000 B- Primus Telecommunications Group, Inc., Sr. Notes, 11.750% due 8/1/04 10,190,700
Tele1 Europe B.V.:
3,555,000 B- 13.000% due 5/15/09(c) 3,768,300
3,600,000EUR B- 13.000% due 5/15/09(c)(d) 4,064,988
10,945,000 NR VersaTel Telecom International NV, Sr. Notes, 13.250% due 5/15/08 11,382,800
Viatel, Inc., Sr. Notes:
7,425,000 Caa1* 11.250% due 4/15/08 7,443,563
2,825,000 B- 11.500% due 3/15/09(c) 2,839,125
7,100,000 B Worldwide Fiber Inc., Sr. Notes, 12.000% due 8/1/09(c) 7,153,250
- ----------------------------------------------------------------------------------------------------------------------------------
203,735,640
- ----------------------------------------------------------------------------------------------------------------------------------
Telephone - Cellular -- 5.7%
3,170,000 CCC+ Centennial Cellular Corp., Sr. Sub. Notes, 10.750% due 12/15/08(c) 3,296,800
7,155,000 B Clearnet Communications Inc., Sr. Discount Notes,
Step bond to yield 13.626% due 12/15/05 6,511,050
Crown Castle International Corp., Sr. Discount Notes:
5,120,000 B Step bond to yield 10.739% due 5/15/11 3,008,000
5,525,000 B Step bond to yield 11.152% due 8/1/11(c) 3,225,219
3,270,000 NR Dobson/Sygnet Communications Co., Sr. Notes,
12.250% due 12/15/08 3,417,150
Dolphin Telecom PLC, Sr. Discount Notes:
13,550,000 CCC+ Step bond to yield 12.672% due 6/1/08 6,504,000
10,150,000EUR CCC+ Step bond to yield 10.882% due 6/1/08(d) 4,942,900
24,300,000 B- Millicom International Cellular S.A., Sr. Discount Notes,
Step bond to yield 16.214% due 6/1/06 17,951,625
Nextel Communications, Inc.:
2,900,000 B2* Sr. Redeemable Discount Notes, step bond to yield
10.677% due 9/15/07 2,131,500
11,345,000 B2* Sr. Serial Redeemable Discount Notes, step bond to yield
10.765% due 2/15/08 8,083,313
14,095,000 NR Spectrasite Holdings Inc., Sr. Discount Notes, step bond to yield
11.029% due 4/15/09(c) 7,752,250
5,910,000 B3* Telecorp PCS Inc., Sr. Discount Notes, step bond to yield
12.165% due 4/15/09(c) 3,339,150
Telesystem International Wireless Inc., Sr. Discount Notes:
22,010,000 CCC+ Series B, step bond to yield 14.501% due 6/30/07 11,555,250
12,100,000 CCC+ Series C, step bond to yield 12.193% due 11/1/07 5,505,500
7,795,000 B3* Triton PCS, Inc., Guaranteed Sr. Sub. Discount Notes,
step bond to yield 11.620% due 5/1/08 5,144,700
- ----------------------------------------------------------------------------------------------------------------------------------
92,368,407
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT(a) RATING(b) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Textiles -- 0.4%
11,850,000GER B3* Texon International PLC, Sr. Notes, 10.000% due 2/1/08(c)(d) $ 5,803,420
- ----------------------------------------------------------------------------------------------------------------------------------
Transportation - Marine -- 0.3%
4,400,000 B- Oglebay Norton Co., Sr. Sub. Notes, 10.000% due 2/1/09 4,290,000
1,075,000 BB- Sea Containers Ltd., Sr. Sub. Debentures, Series A,
12.500% due 12/1/04 1,159,656
- ----------------------------------------------------------------------------------------------------------------------------------
5,449,656
- ----------------------------------------------------------------------------------------------------------------------------------
Unregulated Power Generation -- 2.8%
AES Corp.:
17,655,000 Ba1* Sr. Notes, 9.500% due 6/1/09 18,184,650
9,635,000 Ba3* Sr. Sub. Notes, 10.250% due 7/15/06 9,924,050
5,035,000 BB Caithness Coso Funding Corp., Sr. Secured Notes,
9.050% due 12/15/09(c) 5,035,000
Calpine Corp., Sr. Notes:
9,085,000 BB 10.500% due 5/15/06 9,811,800
3,090,000 BB 8.750% due 7/15/07 3,117,038
- ----------------------------------------------------------------------------------------------------------------------------------
46,072,538
- ----------------------------------------------------------------------------------------------------------------------------------
Wholesale Distributors -- 0.6%
9,930,000 B- Fisher Scientific International Inc., Sr. Sub. Notes,
9.000% due 2/1/08 9,557,625
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $1,642,008,867) 1,586,819,194
==================================================================================================================================
<CAPTION>
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C>
COMMON STOCK -- 0.0%
Telecommunications -- Other -- 0.0%
18,375 Pagemart Nationwide Inc.(c) (Cost -- $0) 128,625
==================================================================================================================================
PREFERRED STOCK -- 1.4%
Broadcasting -- 0.5%
70,074 Capstar Broadcasting Partners, Inc., 12.625% Cumulative Exchangeable,
Series E 8,584,076
- ----------------------------------------------------------------------------------------------------------------------------------
Diversified Manufacture -- 0.2%
60,000 Eagle-Picher Holdings, Inc., 11.750% Cumulative Redeemable Exchangeable,
Series B 3,090,000
- ----------------------------------------------------------------------------------------------------------------------------------
Electronic Components -- 0.1%
195,332 ViaSystems Inc., Payment-in-Kind, Series B 1,757,991
- ----------------------------------------------------------------------------------------------------------------------------------
Food Distributors -- 0.0%
2,459 AmeriKing, Inc., 13.000% Exchangeable 56,557
- ----------------------------------------------------------------------------------------------------------------------------------
Savings and Loan Associations -- 0.6%
357,500 California Federal Preferred Capital Corp., 9.125% Noncumulative
Exchangeable, Series A 9,250,313
- ----------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Other -- 0.0%
109 Intermedia Communications Inc., 13.500% Exchangeable, Series B 909
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $24,627,715) 22,739,846
==================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C>
WARRANTS(e) -- 0.3%
Broadcasting -- 0.0%
21,675 UIH Australia/Pacific Inc., Expire 5/15/06 $ 650,250
- ----------------------------------------------------------------------------------------------------------------------------------
Cable -- 0.0%
5,925 Wireless One Inc., Expire 10/19/00 1,481
- ----------------------------------------------------------------------------------------------------------------------------------
Internet Services -- 0.1%
14,405 Splitrock Services, Inc., Expire 7/15/08 1,008,350
33,975 Wam!Net Inc., Expire 3/1/05 772,931
- ----------------------------------------------------------------------------------------------------------------------------------
1,781,281
- ----------------------------------------------------------------------------------------------------------------------------------
Paper -- 0.0%
8,025 SDW Holdings Corp., Expire 12/15/06(c) 141,240
- ----------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Other -- 0.2%
37,490 Pagemart, Inc., Expire 12/31/03 112,470
9,550 RSL Communications, Ltd., Expire 11/15/06 382,000
10,945 VersaTel Telecom International NV, Expire 5/15/08(c) 1,805,925
- ----------------------------------------------------------------------------------------------------------------------------------
2,300,395
- ----------------------------------------------------------------------------------------------------------------------------------
Telephone - Cellular -- 0.0%
6,575 Globalstar Telecommunications Ltd., Expire 2/15/04(c) 598,325
10,475 Iridium World Communications Ltd., Expire 7/15/05(c) 105
- ----------------------------------------------------------------------------------------------------------------------------------
598,430
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $2,155,969) 5,473,077
==================================================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==================================================================================================================================
<S> <C> <C>
REPURCHASE AGREEMENT -- 1.0%
$ 15,435,000 J.P. Morgan Securities, Inc., 5.050% due 8/2/99;
Proceeds at maturity -- $15,441,496;
(Fully collateralized by U.S. Treasury Notes, 3.625% due 1/15/08;
Market value -- $15,743,731) (Cost -- $15,435,000) 15,435,000
==================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $1,684,227,551**) $1,630,595,742
==================================================================================================================================
</TABLE>
(a) Face amount in U.S. dollars unless otherwise indicated.
(b) All ratings are by Standard & Poor's Rating Service with the exception of
those identified by an asterisk(*), which are rated by Moody's Investor
Services, Inc.
(c) 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.
(d) Security is segregated by Custodian for open forward foreign currency
contracts.
(e) Non-income producing security.
# Securities issued with attached warrants.
** Aggregate cost for Federal income tax purposes is substantially the same.
Currency abbreviations:
EUR -- Euro
GBP -- British Pounds
GER -- German Mark
See page 19 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 1999 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 "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.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $1,684,227,551) $1,630,595,742
Receivable for Fund shares sold 8,414,748
Receivable for securities sold 25,874,444
Interest receivable 37,844,911
Receivable for open forward foreign currency contracts (Note 8) 133,387
Other assets 310,269
- ----------------------------------------------------------------------------------------------------------
Total Assets 1,703,173,501
- ----------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities sold 24,736,443
Dividends payable 7,425,699
Payable for Fund shares purchased 2,303,660
Payable for open forward foreign currency contracts (Note 8) 1,590,928
Investment advisory fees payable 673,083
Payable to bank 412,921
Administration fees payable 269,233
Distribution fees payable 190,577
Accrued expenses 195,000
- ----------------------------------------------------------------------------------------------------------
Total Liabilities 37,797,544
- ----------------------------------------------------------------------------------------------------------
Total Net Assets $1,665,375,957
==========================================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 161,583
Capital paid in excess of par value 1,876,544,697
Overdistributed net investment income (7,563,912)
Accumulated net realized loss from security transactions
and foreign currencies (148,632,692)
Net unrealized depreciation of investments and foreign currencies (55,133,719)
- ----------------------------------------------------------------------------------------------------------
Total Net Assets $1,665,375,957
==========================================================================================================
Shares Outstanding:
Class A 47,939,272
------------------------------------------------------------------------------------------------------
Class B 79,320,451
------------------------------------------------------------------------------------------------------
Class L 13,805,520
------------------------------------------------------------------------------------------------------
Class Y 20,508,148
------------------------------------------------------------------------------------------------------
Class Z 9,590
------------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $10.30
------------------------------------------------------------------------------------------------------
Class B * $10.31
------------------------------------------------------------------------------------------------------
Class L ** $10.32
------------------------------------------------------------------------------------------------------
Class Y (and redemption price) $10.33
------------------------------------------------------------------------------------------------------
Class Z (and redemption price) $10.29
------------------------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $10.79
------------------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $10.42
==========================================================================================================
</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.
- --------------------------------------------------------------------------------
20 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 164,957,324
Dividends 2,816,265
- ----------------------------------------------------------------------------------------------------------
Total Investment Income 167,773,589
- ----------------------------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 8,242,837
Investment advisory fees (Note 2) 8,208,808
Administration fees (Note 2) 3,283,523
Shareholder and system servicing fees 1,056,967
Registration fees 179,506
Shareholder communications 76,930
Custody 45,475
Audit and legal 37,896
Trustees' fees 24,930
Other 26,885
- ----------------------------------------------------------------------------------------------------------
Total Expenses 21,183,757
- ----------------------------------------------------------------------------------------------------------
Net Investment Income 146,589,832
- ----------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (101,509,241)
Foreign currency transactions 1,151,932
- ----------------------------------------------------------------------------------------------------------
Net Realized Loss (100,357,309)
- ----------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of Investments
and Foreign Currencies:
Beginning of year 49,012,499
End of year (55,133,719)
- ----------------------------------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (104,146,218)
- ----------------------------------------------------------------------------------------------------------
Net Loss on Investments and Foreign Currencies (204,503,527)
- ----------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (57,913,695)
==========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
===========================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 146,589,832 $ 122,877,981
Net realized gain (loss) (100,357,309) 10,647,989
Increase in net unrealized depreciation (104,146,218) (14,279,687)
- -----------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (57,913,695) 119,246,283
- -----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (147,164,256) (132,554,109)
Capital (2,010,947) --
- -----------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (149,175,203) (132,554,109)
- -----------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sales 962,304,050 885,478,695
Net asset value of shares issued for
reinvestment of dividends 62,438,522 57,783,246
Cost of shares reacquired (828,877,756) (542,173,702)
- -----------------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 195,864,816 401,088,239
- -----------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (11,224,082) 387,780,413
NET ASSETS:
Beginning of year 1,676,600,039 1,288,819,626
- -----------------------------------------------------------------------------------------------------------
End of year* $ 1,665,375,957 $ 1,676,600,039
===========================================================================================================
* Includes overdistributed net investment income of: $ (7,563,912) $ (7,643,362)
===========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
22 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 shareholder 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, which 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, 1999, reclassifications were made to the Fund's capital
accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Accordingly, a portion
of accumulated net realized loss amounting to $84,580,052 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 unrealized gain or loss. Realized gains or losses are
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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"), 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. ("CFBDS") 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 a member 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 year ended July 31, 1999, CFBDS and SSB received sales charges of
$1,302,000 and $739,000 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 $ 32,000 $1,545,000 $ 60,000
===============================================================================
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 year ended July 31, 1999, total Distribution Plan fees
incurred were:
Class A Class B Class L
===============================================================================
Distribution Plan Fees $1,227,913 $6,175,504 $ 839,420
===============================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the year ended July 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
===============================================================================
Purchases $1,671,661,254
- -------------------------------------------------------------------------------
Sales 1,521,704,790
===============================================================================
At July 31, 1999, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
===============================================================================
Gross unrealized appreciation $ 21,524,977
Gross unrealized depreciation (75,156,786)
- -------------------------------------------------------------------------------
Net unrealized depreciation $(53,631,809)
===============================================================================
- --------------------------------------------------------------------------------
24 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
4. Capital Loss Carryforward
At July 31, 1999, the Fund had, for Federal income tax purposes, capital loss
carryforwards of approximately $72,393,000 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
================================================================================
2000 $ 9,861,000
2003 13,404,000
2004 23,360,000
2007 25,768,000
================================================================================
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 July 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 July 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.
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
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 year ended July 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 July 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:
Euro 3,752,609 $ 4,030,510 9/15/99 $ (12,517)
Euro 27,024,694 29,026,020 9/15/99 (533,885)
Euro 2,578,262 2,769,196 9/15/99 (89,995)
Euro 6,364,897 6,836,252 9/15/99 (331,328)
Euro 5,663,778 6,083,211 9/15/99 (46,870)
Euro 12,454,859 13,377,209 9/15/99 (499,508)
British Pounds 2,332,719 3,779,543 9/22/99 22,485
British Pounds 3,373,253 5,465,450 9/22/99 32,515
British Pounds 5,421,233 8,783,650 9/22/99 52,255
British Pounds 2,241,815 3,632,259 9/22/99 (40,198)
British Pounds 2,163,333 3,505,100 9/22/99 (36,627)
- -----------------------------------------------------------------------------------------------------------
(1,483,673)
- -----------------------------------------------------------------------------------------------------------
To Buy:
Euro Dollar 1,863,513 2,006,886 9/15/99 26,132
- -----------------------------------------------------------------------------------------------------------
Net Unrealized Loss on Forward
Foreign Currency Contracts $(1,457,541)
===========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
26 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
9. Shares of Beneficial Interest
At July 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 specifically related to the distribution of its shares.
At July 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 $515,410,832 $1,004,109,843 $146,307,996 $208,522,460 $2,355,149
===============================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1999 July 31, 1998
------------------------------ -----------------------------
Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 30,693,460 $ 329,457,614 22,998,211 $ 272,808,591
Shares issued on reinvestment 2,320,067 24,728,133 1,971,340 23,294,812
Shares reacquired (28,694,046) (309,682,580) (17,215,562) (204,302,817)
- ------------------------------------------------------------------------------------------------
Net Increase 4,319,481 $ 44,503,167 7,753,989 $ 91,800,586
================================================================================================
Class B
Shares sold 22,658,578 $ 243,905,277 23,102,567 $ 274,466,045
Shares issued on reinvestment 2,881,204 30,722,603 2,391,943 28,277,649
Shares reacquired (19,385,138) (208,080,670) (9,879,005) (117,285,811)
- ------------------------------------------------------------------------------------------------
Net Increase 6,154,644 $ 66,547,210 15,615,505 $ 185,457,883
================================================================================================
Class L+
Shares sold 10,088,505 $ 108,547,108 4,744,290 $ 56,357,614
Shares issued on reinvestment 542,331 5,780,852 256,182 3,031,246
Shares reacquired (4,726,792) (50,764,189) (851,853) (10,130,212)
- ------------------------------------------------------------------------------------------------
Net Increase 5,904,044 $ 63,563,771 4,148,619 $ 49,258,648
================================================================================================
Class Y
Shares sold 26,317,750 $ 280,394,051 23,695,209 $ 449
Shares issued on reinvestment 112,305 1,201,686 267,423 5,225
Shares reacquired (23,916,811) (260,350,270) (17,734,768) (2,686)
- ------------------------------------------------------------------------------------------------
Net Increase 2,513,244 $ 21,245,467 6,227,864 $ 2,988
================================================================================================
Class Z
Shares sold -- -- 37 $ 449
Shares issued on reinvestment 492 $ 5,248 445 5,225
Shares reacquired (4) (47) (225) (2,686)
- ------------------------------------------------------------------------------------------------
Net Increase 488 $ 5,201 257 $ 2,988
================================================================================================
</TABLE>
+ On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 27
<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) 1998 1997 1996 1995
========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.74 $ 11.82 $ 10.98 $ 11.10 $ 11.16
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 1.00 1.02 1.09 1.08 1.08
Net realized and unrealized gain (loss) (1.44) (0.01) 0.83 (0.12) (0.02)
- ------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.44) 1.01 1.92 0.96 1.06
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.99) (1.09) (1.08) (1.08) (1.05)
Capital (0.01) -- -- -- (0.07)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.00) (1.09) (1.08) (1.08) (1.12)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.30 $ 11.74 $ 11.82 $ 10.98 $ 11.10
- ------------------------------------------------------------------------------------------------------------------------
Total Return (3.65)% 8.85% 18.31%%++ 8.95% 10.28%
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $493,725 $512,294 $424,087 $341,040 $316,716
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.05% 1.05% 1.06% 1.10% 1.11%
Net investment income 9.24 8.61 9.57 9.65 10.03
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 96% 102% 78% 72% 60%
========================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
- --------------------------------------------------------------------------------
28 1999 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) 1998 1997 1996 1995
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.75 $ 11.83 $ 10.99 $ 11.11 $ 11.16
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.95 0.96 1.03 1.02 1.03
Net realized and unrealized gain (loss) (1.44) (0.01) 0.83 (0.12) (0.02)
- ---------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.49) 0.95 1.86 0.90 1.01
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.94) (1.03) (1.02) (1.02) (0.99)
Capital (0.01) -- -- -- (0.07)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.95) (1.03) (1.02) (1.02) (1.06)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.31 $ 11.75 $ 11.83 $ 10.99 $ 11.11
- ---------------------------------------------------------------------------------------------------------------------
Total Return (4.15)% 8.34% 17.72% 8.41% 9.77%
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $817,382 $859,472 $680,916 $560,031 $478,499
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.55% 1.55% 1.55% 1.59% 1.61%
Net investment income 8.75 8.11 9.07 9.16 9.52
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 96% 102% 78% 72% 60%
=====================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
- --------------------------------------------------------------------------------
Smith Barney High 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 L Shares 1999(1) 1998(2) 1997 1996 1995(3)(4)
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.76 $ 11.84 $ 11.00 $ 11.11 $ 10.90
- -------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.96 0.97 1.04 1.03 0.95
Net realized and unrealized gain (loss) (1.45) (0.01) 0.83 (0.11) 0.23
- -------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.49) 0.96 1.87 0.92 1.18
- -------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.94) (1.04) (1.03) (1.03) (0.90)
Capital (0.01) -- -- -- (0.07)
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.95) (1.04) (1.03) (1.03) (0.97)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.32 $ 11.76 $ 11.84 $ 11.00 $ 11.11
- -------------------------------------------------------------------------------------------------------------------------
Total Return (4.08)% 8.38% 17.77% 8.56% 11.50%++
- -------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $142,477 $ 92,946 $ 44,444 $ 21,049 $ 6,011
- -------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.48% 1.48% 1.48% 1.51% 1.56%+
Net investment income 8.84 8.15 9.14 9.23 9.58+
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 96% 102% 78% 72% 60%
=========================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) On November 7, 1994, the former Class D shares were renamed Class C
shares.
(4) For the period from August 24, 1994 (inception date) to July 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
30 1999 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) 1998 1997 1996 1995(2)
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.77 $ 11.84 $ 10.99 $ 11.10 $ 10.88
- -----------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 1.02 1.05 1.12 0.92 0.09
Net realized and unrealized gain (loss) (1.42) (0.01) 0.84 (0.11) 0.23
- -----------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.40) 1.04 1.96 0.81 0.32
- -----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.03) (1.11) (1.11) (0.92) (0.03)
Capital (0.01) -- -- -- (0.07)
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions (1.04) (1.11) (1.11) (0.92) (0.10)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.33 $ 11.77 $ 11.84 $ 10.99 $ 11.10
- -----------------------------------------------------------------------------------------------------------------------
Total Return (3.33)% 9.18% 18.68% 9.32% 2.91%++
- -----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $211,693 $211,781 $139,269 $ 35,097 $ 10,306
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.72% 0.72% 0.73% 0.76% 0.86%+
Net investment income 9.52 8.83 9.90 9.98 10.28+
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 96% 102% 78% 72% 60%
=======================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) For the period from April 28, 1995 (inception date) to July 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 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 Z Shares 1999(1) 1998(1) 1997(1) 1996 1995(2)
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.74 $ 11.80 $ 10.99 $ 11.09 $ 11.16
- -------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 1.01 1.04 1.12 1.11 1.11
Net realized and unrealized gain (loss) (1.43) 0.01 0.80 (0.10) (0.03)
- -------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.42) 1.05 1.92 1.01 1.08
- -------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.02) (1.11) (1.11) (1.11) (1.08)
Capital (0.01) -- -- -- (0.07)
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.03) (1.11) (1.11) (1.11) (1.15)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.29 $ 11.74 $ 11.80 $ 10.99 $ 11.09
- -------------------------------------------------------------------------------------------------------------------------
Total Return (3.49)% 9.33% 18.29% 9.42% 10.55%
- -------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 99 $ 107 $ 104 $ 7,158 $ 9,917
- -------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.89% 0.85% 0.75% 0.77% 0.86%
Net investment income 9.28 8.82 9.88 9.98 10.28
- -------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 96% 102% 78% 72% 60%
=========================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On November 7, 1994, the former Class C shares were renamed Class Z
shares.
- --------------------------------------------------------------------------------
32 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Income Funds:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney High Income Fund of Smith Barney
Income Funds as of July 31, 1999, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1999, by correspondence with the custodian. As to securities purchased and
sold but not yet received or delivered, we performed other appropriate auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney High Income Fund of Smith Barney Income Funds as of July 31, 1999, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
September 14, 1999
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 33
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes, the Fund hereby designates for the fiscal year
ended July 31, 1999:
o A corporate dividends received deduction of 1.84%.
- --------------------------------------------------------------------------------
34 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On May 12, 1999, a special meeting of shareholders of the Trust was held for the
purpose of electing Trustees to the Trust.
The results of the vote were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Names of Trustees For Shares Voted Against Shares Voted
===========================================================================================================
<S> <C> <C> <C> <C>
Lee Abraham 62,342,951.572 98.630% 865,940.611 1.370%
Allan J. Bloostein 62,384,540.377 98.696 824,351.806 1.304
Jane F. Dasher 62,392,002.787 98.708 816,889.396 1.292
Donald R. Foley 62,322,262.500 98.595 886,629.683 1.403
Richard E. Hanson Jr. 62,380,877.618 98.690 828,014.565 1.310
Paul Hardin 62,379,975.324 98.689 828,916.859 1.311
Heath B. McLendon 62,370,291.215 98.673 838,630.968 1.327
Roderick C. Rasmussen 62,346,471.848 98.636 862,420.335 1.364
John P. Toolan 62,396,377.832 98.715 812,514.351 1.285
===========================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney High Income Fund 35
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney
High Income Fund
Trustees
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald R. Foley
Richard E. Hanson, Jr.
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
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 9699
Providence, RI 02940-9699
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
FD0429 9/99
<PAGE>
[PHOTO]
Smith Barney
Diversified
Strategic
Income Fund
[GRAPHIC] -------------
ANNUAL REPORT
-------------
July 31, 1999
[LOGO] Smith Barney
Mutual Funds
<PAGE>
Smith Barney
Diversified Strategic
Income Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Smith Barney Diversified Income Fund ("Fund") seeks high current income
through investment in fixed-income securities by investing primarily in
mortgage-backed securities 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
July 31, 1999
Without Sales Charges(1)
-------------------------------------------------
Class A Class B Class L
================================================================================
One-Year 0.41% (0.06)% 0.08%
- --------------------------------------------------------------------------------
Five-Year 7.53 7.04 7.07
- --------------------------------------------------------------------------------
Since Inception+ 7.12 7.93 6.18
- --------------------------------------------------------------------------------
With Sales Charges(2)
-------------------------------------------------
Class A Class B Class L
================================================================================
One-Year (4.17)% (4.27)% (1.85)%
- --------------------------------------------------------------------------------
Five-Year 6.53 6.90 6.85
- --------------------------------------------------------------------------------
Since Inception+ 6.39 7.93 6.02
- --------------------------------------------------------------------------------
(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.
+ Inception dates for Class A, B and L shares are November 6, 1992, December
28, 1989 and March 19, 1993, respectively.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
The Fund seeks to provide investors with a high current income while attempting
to minimize the risk of interest rate and currency fluctuations. The team
follows a flexible investment approach that emphasizes both diversification and
balance. Based on their analysis of current economic and market conditions, the
team allocates assets across three classes of bonds: U.S. government and
mortgage securities, high-yield corporate bonds and foreign government
securities.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SDSAX
Class B SLDSX
Class L SDSIX
- --------------------------------------------------------------------------------
What's Inside
- --------------------------------------------------------------------------------
Shareholder Letter ....................................................... 1
Historical Performance ................................................... 4
Smith Barney Diversified Strategic Income
Fund at a Glance ......................................................... 7
Schedule of Investments .................................................. 8
Statement of Assets and Liabilities ...................................... 21
Statement of Operations .................................................. 22
Statements of Changes in Net Assets ...................................... 23
Notes to Financial Statements ............................................ 24
Financial Highlights ..................................................... 30
Independent Auditors' Report ............................................. 35
Tax Information .......................................................... 36
Additional Shareholder Information ....................................... 36
<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 Investment Officer
Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for Smith Barney Diversified
Strategic Income Fund ("Fund") for the year ended July 31, 1999. We hope you
find this report to be useful and informative. In it, we summarize the period's
prevailing economic and market conditions and briefly outline our portfolio
strategy. A detailed summary of performance and current holdings can be found in
the appropriate sections that follow.
The Fund seeks to provide investors with a high current income while attempting
to minimize the risk of interest rate and currency fluctuations. The team
follows a flexible investment approach that emphasizes both diversification and
balance. Based on their analysis of current economic and market conditions, the
team allocates assets across three classes of bonds: U.S. government and
mortgage securities, high-yield corporate bonds and foreign government
securities.
Performance Update
For the year ended July 31, 1999, the Fund's Class A, B and L shares returned
0.41%, negative 0.06% and 0.08%, without sales charges, respectively, slightly
outperforming the Lehman Brothers Aggregate Bond Index return of negative 2.49%
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 Fund relies on the portfolio managers' ability to manage the
Fund's asset allocation in light of rapidly changing global market conditions.
Our goal is to provide our shareholders with a dividend level consistent with
maintaining a relatively stable net asset value ("NAV").
As of July 31, 1999, the Fund's allocation was roughly 12.4% in foreign
government bonds, 28.1% in high-yield corporate bonds, 36.9% in U.S. Government
Securities, 3.9% in U.S. Treasuries and 18.7% in other sectors. Following are
brief summaries of the economic and market conditions that affected the Fund's
three major sectors during the past fiscal year.
Portfolio Strategy and Update
We have begun a multi-pronged strategy of rebalancing the Fund's high-yield bond
holdings to better reflect strong economic conditions. The Fund's exposure to
the basic industry (i.e., energy and paper) sector has
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 1
<PAGE>
slowly been increasing and the Fund's holdings in sectors such as healthcare
have been eliminated. Also, the Fund's energy exposure has increased through the
investment in higher quality energy credits. Given the increased volatility in
the fixed-income markets, this rebalancing strategy has taken longer than
expected. In terms of quality, we have been increasing our exposure to the
middle B-rated segment of the market where we have continued to find attractive
yields.
We are also focusing primarily on buying inexpensive mortgage-backed securities
with coupons of 7% through 7.5% at or around par because of our near-term
bullishness. We also have a small presence in intermediate treasuries. It is
likely, in our view, that interest rates will decline as the end of 1999
approaches. We believe that the potential for more moderate economic growth
should help to alleviate current inflation concerns. The economy should remain
in a period in which economic growth can co-exist with relatively low levels of
inflation.
Another issue facing the bond market is Y2K, a phrase referring to the fact that
some dates were coded into computers using only the last two digits of the year,
assuming the first two digits were "19." On or after January 1, 2000, some
computers may misread or not recognize dates and cause potential dislocations.
And while the extent of the Y2K problem is impossible to predict, it is possible
that the economy will slow modestly as a result of Y2K which could prompt
interest rates to decline.
We plan to reduce high yield and mortgage sectors and reallocate toward foreign
securities, which have underperformed in 1999. We also continue to believe that
growing concerns or perceptions about Y2K and a desire for year-end liquidity
should drive interest rates lower. In our opinion, the demand for U.S.
Treasuries at the expense of other investment products should be viewed as an
opportunity for many investors to buy other types of bonds now, remain patient
and then enjoy a competitive rate of return. (Of course, no guarantees can be
given that this proposed strategy will be successful.)
U.S. Government and Mortgage Backed Securities
In our view, the lethargic and confused mood of bond investors has been a direct
result of Federal Reserve Board ("Fed") monetary policy rhetoric. While
presumably aimed at stock market exuberance, it is the bond market that has
taken the brunt of any correction on fears of further Fed tightening. We think
that the lack of inflationary evidence defies a historically tight labor market
and reinforces the influence of technology and the power of global pricing
restraints.
High Yield Corporate Bonds
During 1999, the high-yield bond market declined as U.S. Treasury rates
continued to move higher on fears that the Fed would raise short-term interest
rates in response to U.S. economic growth and inflationary pressures. On June
30, 1999, the Fed raised short-term interest rates by 25 basis points and then
raised rates 25 basis points again in late August.
The high-yield bond market and the investment grade corporate bond market were
not only negatively affected by the increase in general interest rates, but also
by the rush on the part of corporations to issue additional debt before interest
rates went higher. This added supply caused the high-yield bond market to fall
as investors retreated from the market.
With the rise in general interest rates, including those of U.S. Treasury bonds,
compounded by heavy new issuance of corporate bonds, the better quality segments
of the high-yield bond market continued to underperform lower quality CCC/Caa
rated issues during the past seven months. Although higher quality issues have a
lower risk of default, these issues tend to be more sensitive to the movements
of the U.S. Treasury market. At the same time, the lower quality high-yield
issues have a higher risk of default but tend to react more closely to stock
market trends. The lower quality segment of the high-yield market clearly
benefited from strong domestic economic growth so far in 1999 and the strong
performance returns generated by the U.S. stock market.
- --------------------------------------------------------------------------------
2 1999 Annual Report to Shareholders
<PAGE>
The strongest performing industry sectors were basic materials (i.e., forest
products, metals, mining etc.) and energy. This was not surprising given the
increasing risk of higher inflation caused by stronger than expected economic
growth both domestically and abroad. The weakest industry sectors included media
(i.e., cable TV and broadcasting) and telecommunications. A number of media and
telecommunications companies rushed new issues into the markets in the second
quarter of 1999, putting further pressure on the existing issues in these
sectors.
Foreign Government Securities
The last few months of 1998 saw a particularly strong performance from the
majority of the world's major bond markets. Bond yields moved lower in line with
the U.S. treasury market as investors fled from the uncertainties in the
lesser-developed countries. In Europe, the shift to lower yields was
additionally supported by the advent of the single currency, the Euro. This
drove the yields on the peripheral markets such as Sweden and Italy down to
levels that more closely matched those on the core markets of Germany and
France.
However, the trend of lower interest rates reversed in the first seven months of
1999. The main concerns stemmed from the United States, where economic activity
has been more robust than many investors had earlier anticipated. This in turn
led many investors to question when the Fed would reverse the lower interest
rate policy it had authorized in the fall of 1998. At that time, the Fed's top
priority was to ensure that the financial crisis enveloping many of the world's
emerging economies did not escalate into a major global problem. As the threat
of a major crisis diminished, investors moved their attention back to domestic
issues and concluded that interest rates had fallen to levels that were
generating too much demand in the U.S. economy. Once again yields rose and U.S.
bond prices declined.
Market Outlook
We continue to believe growing concerns or perceptions with Y2K and a desire for
year-end liquidity should drive interest rates lower. In our opinion, the demand
for U.S. Treasuries at the expense of other investment arenas should be the
incentive for buying bonds now and remaining patient.
With respect to the Fund's high-yield bonds, we remain bullish on the total
return prospects of the high-yield bond market at current valuation levels,
especially given the health of the U.S. economy. Also, while the foreign
government bond market has been volatile of late, our extensive experience in
the asset class has convinced us that our patience should ultimately be rewarded
and we must be prepared to ride out any additional volatility.
In closing, we thank you for investing in the Smith Barney Diversified Strategic
Income Fund. We look forward to continuing to help you pursue your financial
goals in the years ahead.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President and
Investment Officer
/s/ John C. Bianchi, CFA /s/ Simon Hildreth
John C. Bianchi, CFA Simon Hildreth
Vice President and Investment Officer
Investment Officer
September 1, 1999
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $7.96 $7.46 $0.49 $0.01 $0.04 0.41%
- ------------------------------------------------------------------------------------------------------------------------------------
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 $3.91 $0.28 $0.32
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $7.98 $7.48 $0.46 $0.01 $0.03 (0.06)%
- ------------------------------------------------------------------------------------------------------------------------------------
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 $5.60 $0.36 $0.45
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $7.97 $7.48 $0.46 $0.01 $0.03 0.08%
- ------------------------------------------------------------------------------------------------------------------------------------
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 $3.43 $0.19 $0.29
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
4 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $7.96 $7.46 $0.51 $0.01 $0.04 0.72%
- ------------------------------------------------------------------------------------------------------------------------------------
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 $2.34 $0.06 $0.09
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $7.96 $7.47 $0.51 $0.01 $0.04 0.84%
- ------------------------------------------------------------------------------------------------------------------------------------
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 $4.04 $0.28 $0.34
====================================================================================================================================
</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>
Year Ended 7/31/99 0.41% (0.06)% 0.08% 0.72% 0.84%
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/99 7.53 7.04 7.07 N/A 7.93
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/99 7.12 7.93 6.18 7.02 7.48
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charges(2)
-------------------------------------------------------------------------------
Class A Class B Class L Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 7/31/99 (4.17)% (4.27)% (1.85)% 0.72% 0.84%
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/99 6.53 6.90 6.85 N/A 7.93
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/99 6.39 7.93 6.02 7.02 7.48
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charges(1)
====================================================================================================================================
<S> <C>
Class A (Inception* through 7/31/99) 58.94%
- ------------------------------------------------------------------------------------------------------------------------------------
Class B (Inception* through 7/31/99) 108.01
- ------------------------------------------------------------------------------------------------------------------------------------
Class L (Inception* through 7/31/99) 46.47
- ------------------------------------------------------------------------------------------------------------------------------------
Class Y (Inception* through 7/31/99) 29.47
- ------------------------------------------------------------------------------------------------------------------------------------
Class Z (Inception* through 7/31/99) 62.57
====================================================================================================================================
</TABLE>
(1) Assumes reinvestment of all dividend and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A 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.
- --------------------------------------------------------------------------------
6 1999 Annual Report to Shareholders
<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 -- July 1999
[GRAPHIC]
+ 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 July 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 July 31, 1999
- --------------------------------------------------------------------------------
1. Federal National Mortgage Association 19.7%
- --------------------------------------------------------------------------------
2. Government National Mortgage Association 15.9
- --------------------------------------------------------------------------------
3. CIBC Wood Gundy Securities Corp. 6.2
- --------------------------------------------------------------------------------
4. CS First Boston Corp. 6.1
- --------------------------------------------------------------------------------
5. Morgan Stanley Dean Witter & Co. 6.1
- --------------------------------------------------------------------------------
6. U.S. Treasury 3.9
- --------------------------------------------------------------------------------
7. New Zealand Government 2.2
- --------------------------------------------------------------------------------
8. Kingdom of Denmark 1.7
- --------------------------------------------------------------------------------
9. Queensland Treasury Corp. 1.4
- --------------------------------------------------------------------------------
10. Government of Canada 1.1
- --------------------------------------------------------------------------------
Investment Breakdown*
- --------------------------------------------------------------------------------
[GRAPHIC]
Common Stock, Preferred Stock and Warrants 0.3%
Repurchase Agreement 18.4%
U.S. Government Agencies & Obligations 40.8%
Corporate Bonds and Notes 28.1%
International Bonds 12.4%
* As a percentage of total investments.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==================================================================================================================================
<S> <C> <C>
U.S. GOVERNMENT SECTOR -- 40.8%
U.S. Government Agencies & Obligations -- 40.8%
$ 242,150,000 U.S. Treasury Principal Strip, zero coupon due 11/15/09@ $ 127,426,595
95,100,000 Federal Home Loan Bank, zero coupon due 3/16/23@ 17,363,358
Federal Home Loan Mortgage Corporation (FHLMC):
25,760,990 7.000% due 2/1/22 through 6/1/28 25,205,326
1,358,382 7.500% due 1/1/23 through 2/1/23 1,360,501
75,161 8.000% due 11/1/22 through 12/1/22 76,805
20,525 Gold, 9.000% due 2/1/20 through 12/1/20 21,706
117 Gold, 10.000% due 2/1/20 through 7/1/20 128
Federal National Mortgage Association (FNMA):
4,311,019 6.000% due 1/1/13 through 9/1/13 4,126,421
7,298,334 6.000% balloon due 4/1/05 7,083,910
1,334,551 6.500% due 8/1/28 through 9/1/28 1,271,161
92,561,743 7.000% due 7/1/15 through 2/1/29 90,507,799
557,400,000 7.000%, 30 year, TBA 544,558,794
Government National Mortgage Association (GNMA):
2,113,046 6.000% due 5/15/24 through 1/15/29 1,947,954
7,300,390 6.500% due 4/15/26 through 4/15/28 6,933,035
195,043,776 7.000% due 11/15/22 through 7/15/29 190,167,682
240,810,983 7.500% due 12/15/28 through 7/15/29 240,659,272
4,702,182 8.000% due 7/15/17 through 1/15/27 4,806,476
2,990,042 9.000% due 4/15/18 through 9/15/24 3,164,751
76,000,000 7.500%, 30 year, TBA 75,905,000
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR
(Cost-- $1,363,540,620) 1,342,586,674
==================================================================================================================================
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
HIGH YIELD SECTOR -- 28.4%
CORPORATE BONDS AND NOTES -- 28.1%
Advertising -- 0.0%
1,250,000EUR B- Go Outdoor Systems, Sr. Sub. Notes, 10.500% due 7/15/09(b) 1,341,216
- ----------------------------------------------------------------------------------------------------------------------------------
Aerospace -- 0.3%
3,165,000 B1* BE Aerospace Inc., Sr. Sub. Notes, 9.500% due 11/1/08 3,216,451
2,485,000 B- Dunlop Standard Aerospace Holdings, Sr. Notes,
11.875% due 5/15/09(b) 2,531,594
2,800,000 B- Fairchild Corp., Sr. Sub. Notes, 10.750% due 4/15/09 2,754,500
- ----------------------------------------------------------------------------------------------------------------------------------
8,502,545
- ----------------------------------------------------------------------------------------------------------------------------------
Air Freight/Delivery Services -- 0.1%
Atlas Air, Inc., Sr. Notes:
1,685,000 B- 9.250% due 4/15/08 1,632,344
2,000,000 BBB- 8.770% due 1/2/11 1,946,400
- ----------------------------------------------------------------------------------------------------------------------------------
3,578,744
- ----------------------------------------------------------------------------------------------------------------------------------
Airlines -- 0.3%
9,580,000 BB Airplanes Pass Through Trust, Corporate Collateralized
Mortgage Obligation, Series D, 10.875% due 3/15/19(c) 9,583,066
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Aluminum -- 0.1%
1,980,000 B1* Kaiser Aluminum Chemical, Sr. Notes, 10.875% due 10/15/06 $ 2,024,551
- ----------------------------------------------------------------------------------------------------------------------------------
Auto Parts -- 0.2%
5,755,000 B Collins & Aikman Products, Sr. Sub. Notes, 11.500% due 4/15/06 5,870,100
1,675,000 B Dura Operating Corp., Sr. Sub. Notes, 9.000% due 5/1/09(b) 1,612,188
- ----------------------------------------------------------------------------------------------------------------------------------
7,482,288
- ----------------------------------------------------------------------------------------------------------------------------------
Automotive Aftermarket -- 0.1%
4,665,000 B1* Exide Corp., Sr. Notes, 10.000% due 4/15/05(c) 4,670,831
- ----------------------------------------------------------------------------------------------------------------------------------
Broadcasting -- 0.3%
1,925,000 B- Capstar Broadcasting, Sr. Discount Notes, step bond to yield
12.750% due 2/1/09 1,653,094
5,290,000 B1* Chancellor Media Corp., Sr. Sub. Notes, 9.000% due 10/1/08 5,342,900
Citadel Broadcasting Co., Sr. Sub. Notes:
725,000 B- 10.250% due 7/1/07 781,188
2,995,000 B- 9.250% due 11/15/08(c) 3,077,363
- ----------------------------------------------------------------------------------------------------------------------------------
10,854,545
- ----------------------------------------------------------------------------------------------------------------------------------
Building Materials -- 0.1%
2,510,000 B Atrium Cos. Inc., Sr. Sub. Notes, 10.500% due 5/1/09(b) 2,466,075
- ----------------------------------------------------------------------------------------------------------------------------------
Building Materials Chains -- 0.1%
2,100,000 BB Building Materials Corp., Sr. Notes, step bond to yield
11.750% due 7/1/04 2,233,875
- ----------------------------------------------------------------------------------------------------------------------------------
Building Products -- 0.4%
2,480,000 B Amatek Industries Property, Sr. Sub. Notes, 12.000% due 2/15/08(b) 2,408,700
2,025,000 B NCI Building Systems Inc., Sr. Sub. Notes, Series B, 9.250% due 5/1/09 2,004,750
Nortek Inc., Sr. Notes:
1,000,000 B+ 9.250% due 3/15/07(c) 1,010,000
7,250,000 B+ 9.125% due 9/1/07 7,268,125
1,085,000 B+ 8.875% due 8/1/08 1,105,344
- ----------------------------------------------------------------------------------------------------------------------------------
13,796,919
- ----------------------------------------------------------------------------------------------------------------------------------
Cable Television -- 3.0%
Century Communications:
3,050,000 BB- Sr. Discount Notes, zero coupon due 1/15/08(b) 1,342,000
2,940,000 BB- Sr. Notes, 8.750% due 10/1/07 2,895,900
Charter Communications Holding, LLC:
5,625,000 B+ Sr. Discount Notes, step bond to yield 9.920% due 4/1/11(b) 3,459,375
3,265,000 B+ Sr. Notes, 8.625% due 4/1/09(b) 3,167,050
CSC Holdings Inc., Sr. Sub. Debentures:
10,495,000 BB- 9.875% due 2/15/13 11,177,175
6,650,000 BB- 10.500% due 5/15/16 7,481,250
5,125,000 B EchoStar DBS Corp., Sr. Notes, 9.375% due 2/1/09(b) 5,201,875
NTL Inc.:
Sr. Notes:
9,275,000 B- 11.500% due 10/1/08 10,156,125
3,120,000 B- Step bond to yield 12.375% due 10/1/08 2,168,400
500,000 B- Sr. Sub. Notes, 9.500% due 4/1/08 810,005
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Cable Television -- 3.0% (continued)
8,070,000 BB- Rogers Cablesystems Ltd., Sr. Sub. Debentures, 11.000% due 12/1/15 $ 9,310,763
2,500,000 BB- Rogers Communications, Sr. Notes, 9.125% due 1/15/06 2,550,000
Telewest Communications, PLC:
2,120,000 B+ Sr. Discount Notes, zero coupon due 4/15/09(b) 2,129,341
3,650,000 B+ Sr. Notes, 11.250% due 11/1/08 4,124,500
27,980,000 B United International Holdings Inc., Sr. Discount Notes, step bond to yield
10.750% due 2/15/08@ 16,368,300
28,000,000 B2* United Pan-Europe Comm N.V., Sr. Discount Notes, step bond to yield
12.500% due 8/1/09(b)(c)@ 15,330,000
- ----------------------------------------------------------------------------------------------------------------------------------
97,672,059
- ----------------------------------------------------------------------------------------------------------------------------------
Casinos/Gambling -- 0.8%
915,000 BB+ Circus Circus Enterprises, Sr. Sub. Debentures, 7.625% due 7/15/13 814,350
2,905,000 BB+ Harrahs Operating Co. Inc., Sr. Sub. Notes, 7.875% due 12/15/05 2,788,800
4,785,000 B Harvey Casinos Resort, Sr. Sub. Notes, 10.625% due 6/1/06 4,982,381
Hollywood Park, Sr. Sub. Notes:
5,495,000 B 9.250% due 2/15/07 5,398,838
455,000 B 9.500% due 8/1/07 451,588
4,160,000 B+ Horseshoe Gaming Holdings, Sr. Sub. Notes, 8.625% due 5/15/09 4,024,800
3,150,000 B Isle of Capri Casinos, Sr. Sub. Notes, 8.750% due 4/15/09(b) 2,898,000
Station Casinos, Sr. Sub. Notes:
1,560,000 B+ 10.125% due 3/15/06 1,626,300
3,000,000 B+ 8.875% due 12/1/08 2,962,500
- ----------------------------------------------------------------------------------------------------------------------------------
25,947,557
- ----------------------------------------------------------------------------------------------------------------------------------
Chemicals - Major -- 0.4%
Huntsman ICI Chemicals:
21,275,000 B+ Sr. Discount Notes, zero coupon due 12/31/09(b) 5,584,688
Sr. Sub. Notes:
815,000 B2* 9.500% due 7/1/07(b) 777,305
4,190,000 B+ 10.125% due 7/1/09(b) 4,210,950
1,475,000 B+ 10.125% due 7/1/09 1,574,741
- ----------------------------------------------------------------------------------------------------------------------------------
12,147,684
- ----------------------------------------------------------------------------------------------------------------------------------
Chemicals - Specialty -- 0.2%
Lyondell Chemical Co., Sr. Secured Notes:
2,090,000 BB 9.625% due 5/1/07(b) 2,121,350
5,730,000 BB 9.875% due 5/1/07(b) 5,787,300
- ----------------------------------------------------------------------------------------------------------------------------------
7,908,650
- ----------------------------------------------------------------------------------------------------------------------------------
Coal Mining -- 0.1%
4,790,000 B AEI Resources Inc., Sr. Sub. Notes, 10.500% due 12/15/05(b) 4,742,100
- ----------------------------------------------------------------------------------------------------------------------------------
Construction/Agricultural Equipment/Trucks -- 0.1%
4,595,000 B Columbus McKinnon Corp., Sr. Sub. Notes, 8.500% due 4/1/08 4,445,663
- ----------------------------------------------------------------------------------------------------------------------------------
Containers/Packaging -- 1.1%
6,325,000 B AEP Industries Inc., Sr. Sub. Notes, 9.875% due 11/15/07 6,261,750
2,925,000EUR B1* BSN Financing Co., S.A., Sr. Sub. Notes, 10.250% due 8/1/09(b) 3,130,619
2,200,000 B BWAY Corp., Sr. Sub. Notes, 10.250% due 4/15/07 2,296,250
905,000 B Consolidated Container Co. LLC, Sr. Sub. Notes,
10.125% due 7/15/09(b) 918,575
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Containers/Packaging -- 1.1% (continued)
3,490,000 B Huntsman Packaging Corp., Sr. Sub. Notes, 9.125% due 10/1/07 $ 3,424,563
9,175,000 B Stone Container, Sr. Notes, 11.500% due 8/15/06(b) 9,771,375
Tekni-Plex Inc., Sr. Sub. Notes:
6,950,000 B- 11.250% due 4/1/07 7,445,188
2,110,000 B- 9.250% due 3/1/08 2,094,175
- ----------------------------------------------------------------------------------------------------------------------------------
35,342,495
- ----------------------------------------------------------------------------------------------------------------------------------
Contract Drilling -- 0.5%
5,850,000 BB Pride International Inc., Sr. Notes, 10.000% due 6/1/09(c) 5,996,250
425,000 BB Pride Petroleum Services Inc., Sr. Notes, 9.375% due 5/1/07 431,375
RBF Finance Corp.:
4,290,000 Ba3* Sr. Notes, 12.250% due 3/15/06(c) 4,461,600
3,920,000 BB- Sr. Secured Notes, 11.375% due 3/15/09 4,076,800
- ----------------------------------------------------------------------------------------------------------------------------------
14,966,025
- ----------------------------------------------------------------------------------------------------------------------------------
Discount Stores -- 0.5%
7,870,000 B+ Ames Department Stores, Inc., Sr. Notes, 10.000% due 4/15/06(b)(c) 7,732,275
3,230,000 BB+ DR Structured Finance, Pass Through Certificates, Sr. Notes,
8.375% due 8/15/15 3,160,232
3,695,000 BB+ Kmart Corp., Sr. Notes, 12.500% due 3/1/05 4,443,238
- ----------------------------------------------------------------------------------------------------------------------------------
15,335,745
- ----------------------------------------------------------------------------------------------------------------------------------
Diversified Commercial Services -- 0.1%
1,625,000 NR Cia Latino Americana, Company Guaranteed Notes,
11.625% due 6/1/04(b) 910,000
1,900,000 B2* Intertek Finance, Sr. Sub. Notes, 10.250% due 11/1/06 1,831,125
1,500,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes, 11.000% due 11/1/06(c) 1,479,375
- ----------------------------------------------------------------------------------------------------------------------------------
4,220,500
- ----------------------------------------------------------------------------------------------------------------------------------
Diversified Financial Services -- 0.1%
Amresco Inc., Sr. Sub. Notes:
3,640,000 CCC+ 10.000% due 3/15/04 2,948,400
1,975,000 CCC+ 9.875% due 3/15/05 1,580,000
- ----------------------------------------------------------------------------------------------------------------------------------
4,528,400
- ----------------------------------------------------------------------------------------------------------------------------------
Diversified Manufacture -- 0.1%
4,725,000 B+ Park Ohio Holdings Corp., Sr. Sub. Notes, 9.250% due 12/1/07 4,595,063
- ----------------------------------------------------------------------------------------------------------------------------------
Drugs - Generic -- 0.3%
10,950,000 BB ICN Pharmaceuticals Inc., Sr. Notes, 9.250% due 8/15/05 10,991,063
- ----------------------------------------------------------------------------------------------------------------------------------
Electronic Components -- 0.4%
4,235,000 B+ Celestica International, Sr. Sub. Notes, 10.500% due 12/31/06 4,605,563
9,760,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07 8,442,400
- ----------------------------------------------------------------------------------------------------------------------------------
13,047,963
- ----------------------------------------------------------------------------------------------------------------------------------
Electronic Data Processing -- 0.8%
Unisys Corp., Sr. Notes:
8,155,000 Ba1* 12.000% due 4/15/03 8,909,338
16,175,000 Ba1* 11.750% due 10/15/04 18,116,000
- ----------------------------------------------------------------------------------------------------------------------------------
27,025,338
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Engineering & Construction -- 0.4%
2,955,000 B- American Plumbing & Mechanic, Sr. Sub. Notes,
11.625% due 10/15/08(b) $ 2,851,575
4,940,000 B- Group Maintenance American Corp., Sr. Sub. Notes,
9.750% due 1/15/09(b) 4,841,200
2,210,000 B+ Integrated Electrical Services Inc., Sr. Sub. Notes, 9.375% due 2/1/09(b)(c) 2,193,425
3,090,000 B Metromedia Fiber Network, Sr. Notes, 10.000% due 11/15/08 3,140,213
- ----------------------------------------------------------------------------------------------------------------------------------
13,026,413
- ----------------------------------------------------------------------------------------------------------------------------------
Environmental Services -- 0.9%
22,800,000 B+ Allied Waste Inc., NA, Sr. Sub. Notes, 10.000% due 8/1/09(b)@ 22,515,000
3,430,000 B+ IT Group Inc., Sr. Sub. Notes, 11.250% due 4/1/09(b) 3,297,088
3,165,000 B+ URS Corp., Sr. Sub. Notes, 12.250% due 5/1/09(b) 3,224,344
- ----------------------------------------------------------------------------------------------------------------------------------
29,036,432
- ----------------------------------------------------------------------------------------------------------------------------------
Food Distributors -- 0.7%
7,255,000 B2* Carrols Corp., Sr. Sub. Notes, 9.500% due 12/1/08 6,919,456
8,900,000 B2* Imperial Holly Corp., Sr. Sub. Notes, 9.750% due 12/15/07 8,477,250
3,395,000 B- Purina Mills Inc., Sr. Sub. Notes, 9.000% due 3/15/10(c) 1,875,738
5,500,000 B SC International Services, Sr. Sub. Notes, 9.250% due 9/1/07 5,671,875
- ----------------------------------------------------------------------------------------------------------------------------------
22,944,319
- ----------------------------------------------------------------------------------------------------------------------------------
Foods - Specialty/Candy -- 0.3%
5,775,000 B- B&G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07 5,457,375
3,690,000 B+ Chiquita Brands International Inc., Sr. Notes,
10.000% due 6/15/09 3,653,100
- ----------------------------------------------------------------------------------------------------------------------------------
9,110,475
- ----------------------------------------------------------------------------------------------------------------------------------
Forest Products -- 0.2%
7,105,000 B Ainsworth Lumber, Sr. Notes, 12.500% due 7/15/07 7,966,481
- ----------------------------------------------------------------------------------------------------------------------------------
Home Furnishings -- 0.1%
2,635,000 B Falcon Products Inc., Sr. Sub. Notes, 11.375% due 6/15/09(b) 2,644,881
925,000 B- Simmons Co., Sr. Sub. Notes, 10.250% due 3/15/09(b) 944,656
- ----------------------------------------------------------------------------------------------------------------------------------
3,589,537
- ----------------------------------------------------------------------------------------------------------------------------------
Homebuilding -- 0.2%
2,410,000 Ba1* Dr. Horton Inc., Sr. Notes, 8.000% due 2/1/09 2,283,475
5,610,000 BB- US Home Corp., Sr. Sub. Notes, 8.875% due 2/15/09 5,322,488
- ----------------------------------------------------------------------------------------------------------------------------------
7,605,963
- ----------------------------------------------------------------------------------------------------------------------------------
Hospital/Nursing Management -- 0.3%
7,495,000 Ba3* Fresenius Medical Care Preferred Capital Trust,
9.000% due 12/1/06 7,476,263
4,170,000 B- Magellan Health Services, Sr. Sub. Notes, 9.000% due 2/15/08 3,648,750
- ----------------------------------------------------------------------------------------------------------------------------------
11,125,013
- ----------------------------------------------------------------------------------------------------------------------------------
Hotels/Resorts -- 0.8%
5,375,000 B- Courtyard by Marriott, Sr. Secured Notes, 10.750% due 2/1/08 5,482,500
HMH Properties:
8,045,000 BB Sr. Notes, 8.450% due 12/1/08 7,642,750
6,700,000 BB Sr. Secured Notes, 7.875% due 8/1/08 6,164,000
5,655,000 B+ Intrawest Corp., Sr. Notes, 9.750% due 8/15/08 5,732,756
- ----------------------------------------------------------------------------------------------------------------------------------
25,022,006
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Industrial Specialties -- 0.0%
1,200,000EUR B1* Leica Geosystems Finance, Sr. Sub. Notes,
9.875% due 12/15/08(b) $ 1,303,621
- ----------------------------------------------------------------------------------------------------------------------------------
Insurance - Multi-Line -- 0.2%
2,175,000 BB+ Sig Capital Trust 1, 9.500% due 8/15/27 1,631,250
4,350,000 BB+ Veritas Capital Trust, Sr. Notes, 10.000% due 1/1/28 3,474,563
- ----------------------------------------------------------------------------------------------------------------------------------
5,105,813
- ----------------------------------------------------------------------------------------------------------------------------------
Internet Services -- 1.1%
2,095,000 NR Cybernet Internet Services International, Sr. Notes,
14.000% due 7/1/09(b) 2,152,613
PSINet, Sr. Notes:
7,000,000 B- 10.000% due 2/15/05 6,755,000
5,765,000 B- 11.500% due 11/1/08 5,909,125
4,955,000 B- 11.000% due 8/1/09(b) 4,955,000
1,675,000EUR B- 11.000% due 8/1/09(b) 1,792,747
6,975,000 NR Splitrock Services Inc., Sr. Sub. Notes, 11.750% due 7/15/08 6,591,375
Verio inc., Sr. Notes:
3,090,000 B- 10.375% due 4/1/05 3,074,550
3,765,000 B- 11.250% due 12/1/08 3,849,713
1,635,000 CCC+ WAM! Net Inc., Sr. Discount Notes, step bond to yield
13.250% due 3/1/05 968,738
- ----------------------------------------------------------------------------------------------------------------------------------
36,048,861
- ----------------------------------------------------------------------------------------------------------------------------------
Leisure/Movies/Entertainment -- 0.3%
9,025,000 B- SFX Entertainment Inc., Sr. Sub. Notes, 9.125% due 2/1/08 8,754,250
- ----------------------------------------------------------------------------------------------------------------------------------
Machinery - Industrial/Components -- 0.1%
2,434,000 B- Alvey Systems, Sr. Sub. Notes, 11.375% due 1/31/03 2,500,935
- ----------------------------------------------------------------------------------------------------------------------------------
Media Conglomerates -- 0.2%
3,575,000GBP B Polestar Corp., PLC, Sr. Notes, 10.500% due 5/30/08(c) 5,733,621
- ----------------------------------------------------------------------------------------------------------------------------------
Medical Specialties -- 0.1%
2,530,000 B- Hanger Orthopedic Group, Sr. Sub. Notes, 11.250% due 6/15/09(b) 2,583,763
- ----------------------------------------------------------------------------------------------------------------------------------
Metals/Minerals - Other -- 0.2%
1,750,000 B- Haynes International Inc., Sr. Notes, 11.625% due 9/1/04 1,658,125
4,225,000 B2* Kaiser Aluminum & Chemical Corp., Sr. Sub. Notes,
12.750% due 2/1/03(c) 4,277,813
- ----------------------------------------------------------------------------------------------------------------------------------
5,935,938
- ----------------------------------------------------------------------------------------------------------------------------------
Miscellaneous -- 0.1%
2,615,000 B- Key Plastics, Series B, Sr. Sub. Notes, 10.250% due 3/15/07 2,543,088
- ----------------------------------------------------------------------------------------------------------------------------------
Multi-Sector Companies -- 0.2%
5,920,000 B- Triarc Consumer Beverage, Sr. Sub. Notes, 10.250% due 2/15/09(b) 5,757,200
- ----------------------------------------------------------------------------------------------------------------------------------
Newspapers -- 0.1%
2,800,000 B+ Garden State Newspapers, Sr. Sub. Notes, 8.625% due 7/1/11(b) 2,656,500
- ----------------------------------------------------------------------------------------------------------------------------------
Oil & Gas Production -- 1.2%
Belco Oil And Gas, Sr. Sub. Notes:
1,500,000 B 10.500% due 4/1/06 1,569,375
2,780,000 B1* 8.875% due 9/15/07 2,724,400
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Oil & Gas Production -- 1.2% (continued)
Canadian Forest Oil Ltd., Sr. Sub. Notes:
315,000 B 10.500% due 1/15/06 $ 324,450
910,000 B 8.750% due 9/15/07 894,075
9,500,000 B+ Clark USA, Sr. Notes, 10.875% due 12/1/05 8,395,625
1,375,000 B+ Nuevo Energy Corp., Sr. Sub. Notes, 9.500% due 4/15/06(c) 1,405,938
Ocean Energy Inc., Sr. Sub. Notes:
10,400,000 BB- 10.375% due 10/15/05 10,959,000
2,100,000 BB- 9.750% due 10/1/06 2,173,500
3,970,000 B+ Parker Drilling Corp., Sr. Notes, 9.750% due 11/15/06 3,652,400
3,875,000 B2* Stone Energy Corp., Sr. Sub. Notes, 8.750% due 9/15/07(c) 3,865,313
1,925,000 B+ Vintage Petroleum, Sr. Sub. Notes, 9.750% due 6/30/09(c) 1,999,594
- ----------------------------------------------------------------------------------------------------------------------------------
37,963,670
- ----------------------------------------------------------------------------------------------------------------------------------
Oil/Gas Transmission -- 0.1%
4,645,000 BB- Leviathan Gas Pipeline Partners, LP, Sr. Sub. Notes,
10.375% due 6/1/09(b) 4,784,350
- ----------------------------------------------------------------------------------------------------------------------------------
Package Goods/Cosmetics -- 0.0%
1,750,000 B- Revlon Consumer Products, Sr. Sub. Notes, 8.625% due 2/1/08 1,478,750
- ----------------------------------------------------------------------------------------------------------------------------------
Paper -- 1.0%
5,180,000EUR B Kappa Beheer BV, Sr. Sub. Notes, 10.625% due 7/15/09(b) 5,488,697
7,475,000 CCC+ Repap New Brunswick, Sr. Secured Notes, 10.625% due 4/15/05 6,465,875
Riverwood:
4,250,000 B- Sr. Notes, 10.625% due 8/1/07 4,409,375
6,850,000 CCC+ Sr. Sub. Notes, 10.875% due 4/1/08(c) 6,764,375
231,750 NR SD Warren Co., 14.000% due 12/15/06 265,354
Tembec Industries, Sr. Notes:
5,525,000 BB+ 9.875% due 9/30/05 5,773,625
3405000 BB+ 8.625% due 6/30/09 3,405,000
- ----------------------------------------------------------------------------------------------------------------------------------
32,572,301
- ----------------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals - Other -- 0.0%
1,075,000 B King Pharmaceutical Inc., Sr. Sub. Notes, 10.750% due 2/15/09 1,113,969
- ----------------------------------------------------------------------------------------------------------------------------------
Photographic Products -- 0.2%
5,875,000 BB- Polaroid Corp., Sr. Notes, 11.500% due 2/15/06(c) 6,183,438
- ----------------------------------------------------------------------------------------------------------------------------------
Printing/Forms -- 0.1%
3,650,000 BB- World Color Press, Sr. Sub. Notes, 7.750% due 2/15/09 3,572,438
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts -- 0.2%
4,000,000 NR Ocwen Asset Investment, Sr. Notes, 11.500% due 7/1/05 3,480,000
3,716,000 Baa3* Trizac Finance, Sr. Notes, 10.875% due 10/15/05 4,050,440
- ----------------------------------------------------------------------------------------------------------------------------------
7,530,440
- ----------------------------------------------------------------------------------------------------------------------------------
Recreational Products/Toys -- 0.1%
2,075,000EUR B2* Head Holding, Sr. Notes, 10.750% due 7/15/06(b) 2,198,657
- ----------------------------------------------------------------------------------------------------------------------------------
Rental/Leasing Companies -- 0.3%
4,430,000 BB- Avis Rent A Car Inc., Sr. Sub. Notes, 11.000% due 5/1/09(b) 4,551,825
2,180,000 B Nationsrent Inc., Sr. Sub. Notes, 10.375% due 12/15/08 2,201,800
4,585,000 BB- United Rentals Inc., Sr. Sub. Notes, 9.250% due 1/15/09 4,533,419
- ----------------------------------------------------------------------------------------------------------------------------------
11,287,044
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Restaurants -- 0.2%
5,190,000 B Advantica Restaurant Group, Sr. Notes, 11.250% due 1/15/08 $ 4,826,700
- ----------------------------------------------------------------------------------------------------------------------------------
Retail - Food Chains -- 0.0%
600,000 CCC+ Pathmark Stores, Sub. Notes, 12.625% due 6/15/02 615,000
- ----------------------------------------------------------------------------------------------------------------------------------
Retail - Other Specialty Stores -- 0.1%
3,600,000 B- Advance Stores Co., Sr. Sub. Notes, 10.250% due 4/15/08 3,429,000
- ----------------------------------------------------------------------------------------------------------------------------------
Savings & Loans Associations -- 0.2%
Ocwen Capital:
4,100,000 B2* Jr. Sub. Notes, 10.875% due 8/1/27 2,870,000
2,500,000 B+ Sr. Notes, 11.875% due 10/1/03 2,350,000
- ----------------------------------------------------------------------------------------------------------------------------------
5,220,000
- ----------------------------------------------------------------------------------------------------------------------------------
Semiconductors -- 0.2%
7,325,000 B Fairchild Semiconductors Inc., Sr. Sub. Notes,
10.125% due 3/15/07(c) 7,178,500
- ----------------------------------------------------------------------------------------------------------------------------------
Steel/Iron Ore -- 0.5%
3,805,000 Ba3* National Steel Corp., First Mortgage Notes, 9.875% due 3/1/09 3,909,638
4,605,000 B+ Russel Metals Inc., Sr. Notes, 10.000% due 6/1/09 4,622,269
3,560,000 B+ WCI Steel Inc., Sr. Notes, 10.000% due 12/1/04 3,684,600
5,905,000 B- WHX Corp., Sr. Notes, 10.500% due 4/15/05 5,713,088
- ----------------------------------------------------------------------------------------------------------------------------------
17,929,595
- ----------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Other -- 3.6%
2,125,000GBP B1* COLT Telecom Group PLC, Sr. Notes, 10.125% due 11/30/07 3,511,372
E.Spire Communications Inc.:
10,235,000 NR Sr. Discount Notes, step bond to yield 10.625% due 7/1/08(c) 4,605,750
750,000 NR Sr. Notes, 13.750% due 7/15/07 677,813
Espirit Telecom Group PLC, Sr. Notes:
3,950,000 B- 11.500% due 12/15/07(c) 4,266,000
3,999,999DEM B- 11.500% due 12/15/07 2,341,997
2,250,000 B- 10.875% due 6/15/08 2,362,500
8,505,000 NR Facilicom International, Sr. Notes, 10.500% due 1/15/08 5,996,025
Hermes Europe Railtel, Sr. Notes:
7,250,000 B 11.500% due 8/15/07(c) 7,540,000
2,675,000 B 10.375% due 1/15/09(c) 2,688,375
ICG Holdings Inc., Sr. Discount Notes:
1,920,000 B- Step bond to yield 13.500% due 9/15/05 1,728,000
3,590,000 B- Step bond to yield 12.500% due 5/1/06(c) 2,934,825
240,000 BB- Impsat Corp., Sr. Notes, 12.125% due 7/15/03 213,600
Intermedia Communications of Florida:
Sr. Discount Notes:
435,000 B Step bond to yield 12.500% due 5/15/06 356,700
3,020,000 B Step bond to yield 11.250% due 7/15/07(c) 2,129,100
1,280,000 B Sr. Notes, 9.500% due 3/1/09 1,228,800
2,805,000 B3* IXC Communications Inc., Sr. Sub. Notes, 9.000% due 4/15/08 2,826,038
5,785,000 B- KMC Telecom Holdings Inc., Sr. Notes, 13.500% due 5/15/09(b) 5,785,000
13,100,000 B Level 3 Communications, step bond to yield 10.500% due 12/1/08(c) 7,598,000
3,125,000 BBB Metronet Communications Corp., Sr. Notes, 12.000% due 8/15/07(c) 3,640,625
Microcell Telecommunications, Sr. Discount Notes:
1,980,000 B3* Step bond to yield 14.000% due 6/1/06 1,618,650
2,260,000 B- Step bond to yield 12.000% due 6/1/09(b) 1,350,350
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Telecommunications -- Other -- 3.6% (continued)
Nextlink Communications:
11,010,000 B Sr. Discount Notes, step bond to yield 12.250% due 6/1/09(c) $ 6,330,750
Sr. Notes:
4,340,000 B 12.500% due 4/15/06 4,768,575
5,760,000 B 10.750% due 6/1/09 5,860,800
5,295,000 BB- Orange PLC, Sr. Notes, 9.000% due 6/1/09(b) 5,308,238
8,405,000 B- Primus Telecom Group, Sr. Notes, 11.750% due 8/1/04(c) 8,447,025
Tele1 Europe B.V., Sr. Notes:
2,195,000 B- 13.000% due 5/15/09(b) 2,326,700
2,100,000EUR B- 13.000% due 5/15/09(b) 2,371,243
5,935,000 NR Versatel Telecom, Sr. Notes, 13.250% due 5/15/08 6,172,400
Viatel Inc., Sr. Notes:
6,665,000 B3* 11.250% due 4/15/08 6,681,663
1,775,000 B- 11.500% due 3/15/09(b) 1,783,875
3,075,000 B Worldwide Fiber, Inc., Sr. Notes, 12.000% due 8/1/09(b) 3,098,063
- ----------------------------------------------------------------------------------------------------------------------------------
118,548,852
- ----------------------------------------------------------------------------------------------------------------------------------
Telephone - Cellular -- 1.8%
3,080,000 CCC+ Centennial Cellular, Sr. Sub. Notes, 10.750% due 12/15/08 3,203,200
5,360,000 B3* Clearnet Communications Inc., Sr. Discount Notes, step bond to yield
14.750% due 12/15/05 4,877,600
Crown Castle International Corp., Sr. Discount Notes:
6,090,000 B Step bond to yield 10.375% due 5/15/11 3,577,875
3,110,000 B Step bond to yield 11.250% due 8/1/11(b) 1,815,463
1,755,000 NR Dobson/sygnet Communications, Sr. Notes, 12.250% due 12/15/08(c) 1,833,975
Dolphin Telecom PLC, Sr. Discount Notes:
5,900,000 CCC+ Step bond to yield 11.500% due 6/1/08(c) 2,832,000
7,050,000EUR Caa* Zero coupon due 6/1/08(c) 3,433,245
9,090,000 B- Millicom International Cellular S.A., Sr. Discount Notes,
step bond to yield 13.500% on 6/1/06 6,715,238
Nextel Communications Inc., Sr. Discount Notes:
4,355,000 B2* Step bond to yield 10.650% due 9/15/07 3,200,925
6,645,000 B2* Step bond to yield 9.950% due 2/15/08 4,734,563
7,865,000 NR Spectrasite Holdings, Sr. Discount Notes, step bond to yield
11.250% on 4/15/09(b)(c) 4,325,750
3,445,000 B3* Telecorp. PCS Inc., Sr. Discount Notes, step bond to yield
11.625% due 4/15/09(b) 1,946,425
Telesystem International, Sr. Discount Notes:
17,630,000 CCC+ Step bond to yield 13.250% due 6/30/07 9,255,750
6,250,000 CCC+ Step bond to yield 10.500% due 11/1/07 2,843,750
4,765,000 B3* Triton PCS Inc., Sr. Discount Notes, step bond to yield
11.000% due 5/1/08 3,144,900
- ----------------------------------------------------------------------------------------------------------------------------------
57,740,659
- ----------------------------------------------------------------------------------------------------------------------------------
Textiles -- 0.1%
5,250,000DEM B Texon International PLC, Sr. Notes, 10.000% due 2/1/08(c) 2,571,135
- ----------------------------------------------------------------------------------------------------------------------------------
Transportation - Marine -- 0.1%
2,760,000 B- Oglebay Norton Co., Sr. Sub. Notes, 10.000% due 2/1/09(b) 2,691,000
555,000 BB- Sea Containers Ltd., Series A, Sr. Sub. Debentures, 12.500% due 12/1/04(c) 598,706
- ----------------------------------------------------------------------------------------------------------------------------------
3,289,706
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
Unregulated Power Generation -- 1.0%
AES Corp.:
11,320,000 Ba1* Sr. Notes, 9.500% due 6/1/09 $ 11,659,600
6,225,000 Ba3* Sr. Sub. Notes, 10.250% due 7/15/06 6,411,750
3,455,000 BB Caithness Coso Fund Corp., Sr. Notes, 9.050% due 12/15/09(b) 3,455,000
Calpine Corp., Sr. Notes:
7,775,000 BB 10.500% due 5/15/06 8,397,000
2,865,000 BB 8.750% due 7/15/07 2,890,069
- ----------------------------------------------------------------------------------------------------------------------------------
32,813,419
- ----------------------------------------------------------------------------------------------------------------------------------
Wholesale Distributors -- 0.1%
3,910,000 B- Fisher Scientific, Sr. Sub. Notes, 9.000% due 2/1/08 3,763,375
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $947,582,498) 924,412,187
==================================================================================================================================
<CAPTION>
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C>
PREFERRED STOCK -- 0.3%
Broadcasting -- 0.2%
39,558 Capstar Broadcasting, Series E, Exchangeable 12.625% 4,845,855
- ----------------------------------------------------------------------------------------------------------------------------------
Savings & Loan Associations -- 0.1%
146,000 California Federal Preferred Capital Corp., Series A, 9.125% 3,777,750
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $8,399,499) 8,623,605
==================================================================================================================================
COMMON STOCK -- 0.0%
Telecommunications - Other -- 0.0%
19,250 Pagemart Nationwide Inc. (Cost-- $0) 134,750
==================================================================================================================================
WARRANTS(d) -- 0.0%
Broadcasting -- 0.0%
6,775 Australis Media, Expire 10/30/01(b) 0
12,325 UIH Australia, Expire 5/15/06 369,750
- ----------------------------------------------------------------------------------------------------------------------------------
369,750
- ----------------------------------------------------------------------------------------------------------------------------------
Cable Television -- 0.0%
6,000 Wireless One Inc., Expire 10/19/00 1,500
- ----------------------------------------------------------------------------------------------------------------------------------
Internet Services -- 0.0%
6,975 Splitrock Services, Expire 7/15/08 488,250
12,450 WAM! Net Inc., Expire 3/1/05 283,238
- ----------------------------------------------------------------------------------------------------------------------------------
771,488
- ----------------------------------------------------------------------------------------------------------------------------------
Paper -- 0.0%
8,500 SD Warren Co., Expire 12/15/06 149,600
- ----------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Other -- 0.0%
42,090 Pagemart Nationwide Inc., Expire 12/31/03 126,270
7,800 RSL Communications Ltd., Expire 11/15/06 312,000
5,935 Versatel, Expire 5/15/08(b) 979,275
- ----------------------------------------------------------------------------------------------------------------------------------
1,417,545
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
==================================================================================================================================
<S> <C> <C>
Telephone - Cellular -- 0.0%
500 Globalstar Telecom, Expire 2/15/04(b) $ 45,500
5,000 Iridium World Communications, Expire 7/15/05(b) 50
- ----------------------------------------------------------------------------------------------------------------------------------
45,550
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $75,501) 2,755,433
==================================================================================================================================
TOTAL HIGH YIELD SECTOR
(Cost-- $956,057,498) 935,925,975
==================================================================================================================================
<CAPTION>
FACE
AMOUNT++ SECURITY VALUE
==================================================================================================================================
<S> <C> <C>
INTERNATIONAL SECTOR -- 12.4%
BONDS -- 12.4%
Australia -- 1.4%
66,000,000 Queensland Treasury Corp., 8.000% due 5/14/03 46,287,790
- ----------------------------------------------------------------------------------------------------------------------------------
Canada -- 1.1%
Government of Canada:
20,000,000 7.000% due 9/1/01 13,694,409
30,000,000 9.000% due 12/1/04 22,961,884
- ----------------------------------------------------------------------------------------------------------------------------------
36,656,293
- ----------------------------------------------------------------------------------------------------------------------------------
Denmark -- 1.7%
100,000,000 Denmark, 4.000% due 3/15/02 14,334,147
NYKREDIT:
170,866,000 6.000% due 10/1/19 23,858,892
129,344,000 7.000% due 10/1/29 18,354,547
- ----------------------------------------------------------------------------------------------------------------------------------
56,547,586
- ----------------------------------------------------------------------------------------------------------------------------------
Europe -- 3.0%
10,000,000 Export - Import Japan, 4.625% due 7/23/03 10,800,368
30,000,000 France Oat., 5.250% due 4/25/08@ 33,023,931
10,000,000 Kingdom of Spain, 6.000% due 1/31/08 11,433,984
10,000,000 Republic of Finland, 8.750% due 10/17/01 11,815,009
9,000,000 Republic of Italy, 6.000% due 4/2/04 10,253,981
10,000,000 Republic of Portugal, 6.000% due 2/16/04 11,399,734
8,500,000 Soc Nat Chemins De Fra Discount Bank, 9.375% due 3/12/01 9,891,739
- ----------------------------------------------------------------------------------------------------------------------------------
98,618,746
- ----------------------------------------------------------------------------------------------------------------------------------
New Zealand -- 2.2%
139,000,000 New Zealand Government, 5.500% due 4/15/03 72,574,248
- ----------------------------------------------------------------------------------------------------------------------------------
United Kingdom -- 3.0%
10,000,000 Bank Nederlandse Gemeenten, 7.375% due 8/6/07 17,172,109
2,375,000 Diamond Holdings, 10.000% due 2/1/08(c) 3,885,999
European Investment Bank:
4,500,000 8.500% due 11/6/01 7,627,575
8,000,000 8.000% due 6/10/03 13,645,671
13,000,000 Inter-American Development Bank, 7.125% due 11/26/04 21,721,423
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==================================================================================================================================
<S> <C> <C> <C>
United Kingdom -- 3.0% (continued)
10,296,000 Nippon Telephone, 7.375% due 12/2/03 $ 17,074,933
10,000,000 U.K. Treasury, 6.500% due 12/7/03 16,673,146
- ----------------------------------------------------------------------------------------------------------------------------------
97,800,856
- ----------------------------------------------------------------------------------------------------------------------------------
United States -- 0.0%
2,000,000 United Mexican States-- Value Recovery Rights, Expire 6/30/03(d) 0
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTERNATIONAL SECTOR
(Cost-- $429,470,954) 408,485,519
==================================================================================================================================
SUB-TOTAL INVESTMENTS
(Cost-- $2,749,069,072) 2,686,998,168
==================================================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==================================================================================================================================
<S> <C> <C>
REPURCHASE AGREEMENTS -- 18.4%
$ 205,000,000 CIBC Wood Gundy Securities Corp., 4.870% due 8/2/99;
Proceeds at maturity-- $205,083,192; (Fully collateralized by
U.S. Treasury Notes, 4.500% to 5.000% due 1/31/01 to 2/28/01;
Market value-- $209,100,415)@ 205,000,000
200,000,000 CS First Boston Corp., 4.950% due 8/2/99; Proceeds at maturity --
$200,082,500; (Fully collateralized by U.S. Treasury Bills,
0.000% due 1/13/00; Market value-- $203,999,912)@ 200,000,000
200,000,000 Morgan Stanley Dean Witter & Co., 5.000% due 8/2/99;
Proceeds at maturity -- $200,083,333; (Fully collateralized by
U.S. Treasury Notes, 7.125% to 11.750% due 2/15/10 to 2/15/23;
Market value-- $203,955,477)@ 200,000,000
==================================================================================================================================
TOTAL REPURCHASE AGREEMENTS
(Cost-- $605,000,000) 605,000,000
==================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $3,354,069,072**) $3,291,998,168
==================================================================================================================================
</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) All or a portion of its security is on loan (See Note 10).
(d) Non-income producing security.
@ Security is segregated by Custodian for open purchase commitments.
+ Face amount denominated in U.S. dollars unless otherwise indicated.
++ Represents local currency.
** Aggregate cost for Federal income tax purposes is substantially the same.
Currency abbreviations used in this schedule:
---------------------------------------------
DEM -- German Mark
EUR -- Euro
GBP -- Great Britain Pound
See page 20 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 19
<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.
- --------------------------------------------------------------------------------
20 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost-- $2,749,069,072) $ 2,686,998,168
Repurchase agreements, at value (Cost-- $605,000,000) 605,000,000
Cash 15,916,653
Foreign currency, at value (Cost-- $491,055) 495,112
Collateral for securities on loan (Note 10) 74,360,117
Receivable for Fund shares sold 2,645,169
Receivable for securities sold 211,480,093
Dividends and interest receivable 36,461,908
Receivable for open forward foreign currency contracts 3,026,276
- -------------------------------------------------------------------------------------------------------------------------
Total Assets 3,636,383,496
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 841,981,006
Payable for securities on loan (Note 10) 74,360,117
Payable for open forward foreign currency contracts 15,099,748
Dividends payable 6,942,382
Payable for Fund shares purchased 5,525,190
Investment advisory fees payable 1,009,901
Distribution fees payable 830,207
Administration fees payable 448,845
Accrued expenses 395,113
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 946,592,509
- -------------------------------------------------------------------------------------------------------------------------
Total Net Assets $ 2,689,790,987
=========================================================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 359,717
Capital paid in excess of par value 2,848,029,140
Overdistributed net investment income (896,492)
Accumulated net realized loss from security transactions, futures contracts and foreign currencies (83,533,639)
Net unrealized depreciation of investments and foreign currencies (74,167,739)
- -------------------------------------------------------------------------------------------------------------------------
Total Net Assets $ 2,689,790,987
=========================================================================================================================
Shares Outstanding:
Class A 62,270,388
--------------------------------------------------------------------------------------------------------------------
Class B 247,097,062
--------------------------------------------------------------------------------------------------------------------
Class L 24,578,803
--------------------------------------------------------------------------------------------------------------------
Class Y 21,794,345
--------------------------------------------------------------------------------------------------------------------
Class Z 3,976,319
--------------------------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 7.46
--------------------------------------------------------------------------------------------------------------------
Class B * $ 7.48
--------------------------------------------------------------------------------------------------------------------
Class L ** $ 7.48
--------------------------------------------------------------------------------------------------------------------
Class Y (and redemption price) $ 7.46
--------------------------------------------------------------------------------------------------------------------
Class Z (and redemption price) $ 7.47
--------------------------------------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $ 7.81
--------------------------------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $ 7.56
=========================================================================================================================
</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.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 212,108,685
Dividends 2,658,104
Less: Foreign tax withholding (3,512)
- --------------------------------------------------------------------------------------------
Total Investment Income 214,763,277
- --------------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 18,209,044
Investment advisory fees (Note 2) 13,056,066
Administration fees (Note 2) 5,802,695
Shareholder and system servicing fees 2,104,969
Custody 308,675
Registration fees 139,452
Shareholder communications 100,800
Audit and legal 46,374
Pricing 29,837
Trustees' fees 18,986
Other 18,720
- --------------------------------------------------------------------------------------------
Total Expenses 39,835,618
- --------------------------------------------------------------------------------------------
Net Investment Income 174,927,659
- --------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS,
FUTURES CONTRACTS AND FOREIGN CURRENCIES (NOTES 3, 4 & 6):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (83,700,990)
Futures contracts 488,339
Foreign currency transactions 11,509,045
- --------------------------------------------------------------------------------------------
Net Realized Loss (71,703,606)
- --------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of Investments:
Beginning of year 21,902,801
End of year (74,167,739)
- --------------------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (96,070,540)
- --------------------------------------------------------------------------------------------
Net Loss on Investments (167,774,146)
- --------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 7,153,513
============================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
22 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
============================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 174,927,659 $ 182,369,731
Net realized gain (loss) (71,703,606) 77,462,489
Increase in net unrealized depreciation (96,070,540) (59,024,199)
- ------------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 7,153,513 200,808,021
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (173,885,347) (200,850,543)
Net realized gains (2,720,960) (17,444,264)
Capital (12,759,570) --
- ------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (189,365,877) (218,294,807)
- ------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares 1,035,956,865 856,904,340
Net asset value of shares issued for reinvestment of dividends 98,091,915 113,810,216
Cost of shares reacquired (1,221,161,067) (885,917,734)
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Fund Share Transactions (87,112,287) 84,796,822
- ------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (269,324,651) 67,310,036
NET ASSETS:
Beginning of year 2,959,115,638 2,891,805,602
- ------------------------------------------------------------------------------------------------------------
End of year* $ 2,689,790,987 $ 2,959,115,638
============================================================================================================
* Includes overdistributed net investment income of: $ (896,492) $ (11,253,505)
============================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 shareholder 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, 1999, 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 adjustment; and (l) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
- --------------------------------------------------------------------------------
24 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
In addition, the Fund may enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked to market daily,
by recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
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 Inc. ("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 year ended July 31, 1999, SSB and CFBDS received sales charges of
approximately $1,022,000 and $977,000 on sales of the Fund's Class A and L
shares, respectively.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B shares,
which applies if redemption occurs within one year from initial purchase. This
CDSC declines by 0.50% the first year after purchase and thereafter by 1.00% per
year until no CDSC is incurred. Class 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.
In addition, CDSCs paid to SSB for the year ended July 31, 1999 were:
Class A Class B Class L
================================================================================
CDSCs $12,000 $2,298,000 $58,000
================================================================================
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
year ended July 31, 1999, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $1,077,231 $15,969,196 $1,162,617
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Investments
During the year ended July 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
===============================================================================
Purchases $4,686,161,848
- -------------------------------------------------------------------------------
Sales 4,472,167,809
===============================================================================
At July 31, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
===============================================================================
Gross unrealized appreciation $ 9,707,846
Gross unrealized depreciation (71,778,750)
- -------------------------------------------------------------------------------
Net unrealized depreciation $(62,070,904)
===============================================================================
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 July 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.
- --------------------------------------------------------------------------------
26 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
6. Forward Foreign Currency Contracts
At July 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 72,230,000 $ 47,180,125 8/20/99 $ 310,377
Danish Krone 496,250,000 71,388,035 8/20/99 (3,561,888)
Euro 95,500,000 102,371,228 8/20/99 (5,251,548)
Euro 50,000,000 53,609,329 8/23/99 (1,050,329)
Euro 50,000,000 53,609,329 8/23/99 (46,829)
Euro 2,189,021 2,351,130 9/15/99 (7,301)
Euro 9,249,609 9,934,593 9/15/99 (182,730)
Euro 1,506,113 1,617,649 9/15/99 (52,571)
Euro 2,611,129 2,804,497 9/15/99 (135,923)
Euro 2,958,312 3,177,391 9/15/99 (24,481)
British Pound 61,190,000 99,130,347 8/20/99 (3,716,780)
British Pound 2,332,718 3,779,543 9/22/99 22,485
British Pound 3,763,283 6,097,388 9/22/99 36,274
British Pound 522,563 846,672 9/22/99 5,036
British Pound 1,309,269 2,121,319 9/22/99 (23,476)
British Pound 2,574,895 4,171,926 9/22/99 (43,595)
New Zealand Dollar 139,420,000 73,962,177 8/20/99 (1,002,297)
- -----------------------------------------------------------------------------------------------------------------------------------
(14,725,576)
- -----------------------------------------------------------------------------------------------------------------------------------
To Buy:
Euro 2,925,000 3,131,998 8/5/99 23,601
Euro 100,000,000 107,218,659 8/23/99 2,628,159
Euro 24,641 26,466 9/15/99 344
- -----------------------------------------------------------------------------------------------------------------------------------
2,652,104
- -----------------------------------------------------------------------------------------------------------------------------------
Total Unrealized Loss on Open
Forward Currency Contracts $(12,073,472)
===================================================================================================================================
</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 year ended July 31, 1999, the Fund did not have any reverse
repurchase agreement.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 27
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (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 July 31, 1999, the Fund held two TBA securities with a total cost of
$631,237,672.
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 July 31, 1999, the Fund loaned common stocks having a value of $73,990,497.
The Fund received cash collateral totalling $74,360,117. A portion of the cash
collateral amounting to $1,448,220 remained uninvested and the balance was
invested as follows:
<TABLE>
<CAPTION>
Security Description Value
===================================================================================================================================
<S> <C>
Time Deposits:
Unibank, 5.130% due 8/2/99 $ 3,102,111
Rabobank, London, 5.130% due 8/2/99 3,102,111
Landesbank Hessen Thuringen, 5.130% due 8/2/99 3,102,111
Caisse de Depots et Consign., Paris, 5.130% due 8/2/99 3,102,111
Societe Generale, G.C., 5.130% due 8/2/99 3,102,111
Fortis Bank, 5.130% due 8/2/99 3,102,111
National Australia Bank, G.C., 5.130% due 8/2/99 3,102,111
Bank of Austria G.C., 5.130% due 8/2/99 3,102,111
Banque National De Paris, G.C., 5.130% due 8/2/99 3,102,111
Banco Bilbao Milan, 5.130% due 8/2/99 3,102,111
Credit Commerciale de France, 5.130% due 8/2/99 3,102,111
Credit Communal de Belgique, 5.190% due 8/2/99 3,102,111
Credit Agricole Indozuex Singapore, 5.130% due 8/2/99 2,249,030
Den Danske-Copenhagen, 5.130% due 8/2/99 3,102,111
Nordeutsche Landesbank Singapore, 5.130% due 8/2/99 1,240,844
First National Chicago London, 5.130% due 8/2/99 3,102,111
Svenska London, 5.130% due 8/2/99 3,102,111
Abbey National London, 5.130% due 8/2/99 3,102,111
Halifax PLC, 5.130% due 8/2/99 3,102,111
Toronto Dominion-Grand Cayman, 5.130% due 8/2/99 3,102,111
Credit Suisse, G.C., 5.130% due 8/2/99 3,412,322
Banque National De Paris, G.C., 5.130% due 8/2/99 465,317
Canadian Imperial Bank G.C., 5.130% due 8/2/99 3,567,427
Repurchase Agreement:
Morgan Stanley Dean Witter & Co., 5.110% due 8/2/99 1,056,756
Commercial Paper:
Koch Industries Inc., 5.110% due 8/2/99 1,671,346
General Electric Capital Services, 5.150% due 8/2/99 3,410,857
===================================================================================================================================
Total $72,911,897
===================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
28 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
For the year ended July 31, 1999, the Fund earned income from securities loaned
of $211,483.
11. Shares of Beneficial Interest
At July 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 July 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 $484,062,421 $1,970,715,109 $191,866,610 $170,416,656 $31,328,061
====================================================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1999 July 31, 1998
--------------------------------------- --------------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 49,423,427 $ 382,503,137 35,840,369 $ 286,903,611
Shares issued on reinvestment 2,130,596 16,483,850 1,840,380 14,697,639
Shares reacquired (39,196,000) (302,969,796) (21,154,188) (169,264,458)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 12,358,023 $ 96,017,191 16,526,561 $132,336,792
====================================================================================================================================
Class B
Shares sold 35,214,847 $ 275,802,675 55,482,798 $ 445,398,765
Shares issued on reinvestment 9,329,090 72,489,124 11,463,425 91,837,518
Shares reacquired (83,241,196) (648,668,655) (85,170,973) (683,731,364)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Decrease (38,697,259) $(300,376,856) (18,224,750) $(146,495,081)
====================================================================================================================================
Class L*
Shares sold 40,377,358 $314,105,808 9,669,210 $ 77,498,478
Shares issued on reinvestment 927,846 7,187,211 693,017 5,540,434
Shares reacquired (33,732,218) (261,860,475) (3,784,006) (30,324,154)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 7,572,986 $ 59,432,544 6,578,221 $ 52,714,758
====================================================================================================================================
Class Y
Shares sold 6,217,160 $ 48,511,994 5,598,158 $ 44,807,089
Shares issued on reinvestment 2,732 21,163 2,869 22,907
Shares reacquired (82,339) (635,345) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 6,137,553 $ 47,897,812 5,601,027 $ 44,829,996
====================================================================================================================================
Class Z
Shares sold 1,914,307 $ 15,033,251 286,159 $ 2,296,397
Shares issued on reinvestment 246,824 1,910,567 214,133 1,711,718
Shares reacquired (906,344) (7,026,796) (324,497) (2,597,758)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 1,254,787 $ 9,917,022 175,795 $ 1,410,357
====================================================================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 29
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<TABLE>
<CAPTION>
Class A Shares 1999(1) 1998(1) 1997 1996 1995
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 7.96 $ 8.01 $ 7.82 $ 7.85 $ 7.76
- -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.50 0.53 0.62 0.61 0.94
Net realized and unrealized gain (loss) (0.46) 0.05 0.24 0.03 (0.18)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.04 0.58 0.86 0.64 0.76
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.49) (0.58) (0.67) (0.62) (0.48)
Net realized gains (0.01) (0.05) -- -- --
Capital (0.04) -- -- (0.05) (0.19)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.54) (0.63) (0.67) (0.67) (0.67)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.46 $ 7.96 $ 8.01 $ 7.82 $ 7.85
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 0.41% 7.47% 11.36% 8.39% 10.35%
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $464,652 $397,127 $267,272 $202,700 $177,336
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.38% 6.51% 7.75% 7.85% 8.15%
Interest expense -- 0.06 0.06 0.01 --
Other expenses(2) 1.02 1.01 1.03 1.04 1.09
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 150% 128% 85% 90% 83%
=============================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) The manager waived part of its fees for the year ended July 31, 1995. If
such fees were not waived, the per share effect on net investment income
and the expense ratio would have been $0.01 and 1.14%, respectively.
- --------------------------------------------------------------------------------
30 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<TABLE>
<CAPTION>
Class B Shares 1999(1) 1998(1) 1997 1996 1995
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 7.98 $ 8.03 $ 7.83 $ 7.86 $ 7.76
- -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.46 0.49 0.59 0.58 0.70
Net realized and unrealized gain (loss) (0.46) 0.05 0.23 0.01 0.02
- -----------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.00 0.54 0.82 0.59 0.72
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.46) (0.54) (0.62) (0.57) (0.44)
Net realized gains (0.01) (0.05) -- -- --
Capital (0.03) -- -- (0.05) (0.18)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.50) (0.59) (0.62) (0.62) (0.62)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.48 $ 7.98 $ 8.03 $ 7.83 $ 7.86
- -----------------------------------------------------------------------------------------------------------------------------
Total Return (0.06)% 6.93% 10.89% 7.80% 10.00%
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $1,849 $2,280 $2,440 $2,380 $2,367
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.88% 6.12% 7.34% 7.36% 6.82%
Interest expense -- 0.06 0.06 0.01 --
Other expenses(2) 1.49 1.50 1.51 1.52 1.56
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 150% 128% 85% 90% 83%
=============================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) The manager waived part of its fees for the year ended July 31, 1995. If
such fees were not waived, the per share effect on net investment income
and the expense ratio would have been $0.00* and 1.61%, respectively.
* Amount represents less than $0.01 per share.
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Class L Shares 1999(1) 1998(1)(2) 1997 1996 1995(3)
=============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 7.97 $ 8.01 $ 7.81 $ 7.84 $ 7.76
- -----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(4) 0.47 0.49 0.58 0.52 1.16
Net realized and unrealized gain (loss) (0.46) 0.06 0.24 0.07 (0.46)
- -----------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.01 0.55 0.82 0.59 0.70
- -----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.46) (0.54) (0.62) (0.57) (0.44)
Net realized gains (0.01) (0.05) -- -- --
Capital (0.03) -- -- (0.05) (0.18)
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.50) (0.59) (0.62) (0.62) (0.62)
- -----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.48 $ 7.97 $ 8.01 $ 7.81 $ 7.84
- -----------------------------------------------------------------------------------------------------------------------------
Total Return 0.08% 7.08% 10.92% 7.82% 9.73%
- -----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $183,740 $135,485 $ 83,543 $ 42,222 $ 12,730
- -----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.01% 6.09% 7.19% 7.61% 10.23%
Interest expense -- 0.06 0.06 0.01 --
Other expenses(4) 1.45 1.45 1.46 1.47 1.46
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 150% 128% 85% 90% 83%
=============================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) On November 7, 1994, the former Class D shares were renamed Class C
shares.
(4) The manager waived part of its fees for the year ended July 31, 1995. If
such fees were not waived, the per share effect on net investment income
and the expense ratios would have been $0.00* and 1.51%, respectively.
* Amount represents less than $0.01 per share.
- --------------------------------------------------------------------------------
32 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<TABLE>
<CAPTION>
Class Y Shares 1999(1) 1998(1) 1997 1996(2)
===========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 7.96 $ 8.00 $ 7.82 $ 7.89
- -----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.53 0.55 0.64 0.50
Net realized and unrealized gain (loss) (0.47) 0.06 0.24 0.01
- -----------------------------------------------------------------------------------------------------------
Total Income From Operations 0.06 0.61 0.88 0.51
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.51) (0.60) (0.70) (0.53)
Net realized gains (0.01) (0.05) -- --
Capital (0.04) -- -- (0.05)
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.65) (0.70) (0.58)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.46 $ 7.96 $ 8.00 $ 7.82
- -----------------------------------------------------------------------------------------------------------
Total Return 0.72% 7.96% 11.64% 6.65%++
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $162,674 $124,559 $ 80,479 $ 26,940
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.76% 6.88% 7.84% 8.54%+
Interest expense -- 0.06 0.06 0.01
Other expenses 0.67 0.66 0.70 0.69+
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 150% 128% 85% 90%
===========================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) For the period from October 10, 1995 (inception date) to July 31, 1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 33
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<TABLE>
<CAPTION>
Class Z Shares 1999(1) 1998(1) 1997 1996 1995(2)
=====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 7.96 $ 8.01 $ 7.82 $ 7.85 $ 7.76
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.53 0.55 0.65 0.64 0.84
Net realized and unrealized gain (loss) (0.46) 0.05 0.23 0.02 (0.06)
- ---------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.07 0.60 0.88 0.66 0.78
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.51) (0.60) (0.69) (0.63) (0.49)
Net realized gains (0.01) (0.05) -- -- --
Capital (0.04) -- -- (0.06) (0.20)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.65) (0.69) (0.69) (0.69)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.47 $ 7.96 $ 8.01 $ 7.82 $ 7.85
- ---------------------------------------------------------------------------------------------------------------------
Total Return 0.84% 7.78% 11.69% 8.72% 10.94%
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $29,710 $21,670 $20,397 $16,270 $14,361
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.80% 6.85% 8.08% 8.19% 8.30%
Interest expense -- 0.06 0.06 0.01 --
Expenses(3) 0.67 0.74 0.69 0.70 0.75
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 150% 128% 85% 90% 83%
=====================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On November 7, 1994, the former Class C shares were renamed Class Z
shares.
(3) The manager waived part of its fees for the year ended July 31, 1995. If
such fees were not waived, the per share decrease in net investment income
and the actual expense ratios would have been $0.00* and 0.80%,
respectively.
* Amount represents less than $0.01 per share.
- --------------------------------------------------------------------------------
34 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Income Funds:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Diversified Strategic Income Fund
of Smith Barney Income Funds as of July 31, 1999, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1999, by correspondence with the custodian. As to securities purchased and
sold but not received and delivered, we performed other appropriate auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Diversified Strategic Income Fund of Smith Barney Income Funds as of July
31, 1999, the results of its operations for the year then ended, the changes in
its net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the five-year period then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
September 14, 1999
- --------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund 35
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year
ended July 31, 1999:
o A corporate dividends received deduction of 1.48%.
o Total long-term capital gain distributions paid of $2,720,960.
A total of 1.32% of the ordinary dividends paid by the Fund from net
investment income are derived from Federal obligations and may be exempt
from taxation at the state level.
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On April 19, 1999, a special meeting of shareholders of the Trust was held for
the purpose of electing Trustees of the Fund. The results of the vote were as
follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Trustees For Shares Voted Against Shares Voted
====================================================================================================================
<S> <C> <C> <C> <C>
Lee Abraham 543,591,987.967 97.621% 13,249,035.953 2.379%
Allan J. Bloostein 543,887,340.881 97.674 12,953,683.039 2.326
Jane F. Dasher 544,416,099.765 97.769 12,424,924.155 2.231
Donald R. Foley 543,336,693.437 97.575 13,504,330.483 2.425
Richard E. Hanson, Jr. 544,212,126.755 97.732 12,628,897.165 2.268
Paul Hardin 544,290,529.761 97.746 12,550,494.159 2.254
Heath B. McLendon 544,304,571.357 97.749 12,536,452.563 2.251
Roderick C. Rasmussen 543,666,173.202 97.634 13,174,850.718 2.366
John P. Toolan 544,353,379.596 97.757 12,487,644.324 2.243
====================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
36 1999 Annual Report to Shareholders
<PAGE>
Smith Barney
Diversified Strategic
Income Fund
Trustees
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald Foley
Richard E. Hanson, Jr.
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
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
Paul A. Brook
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 9699
Providence, RI 02940-9699
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
FD01184 9/99
[PHOTO OMITTED]
Smith Barney
Total Return
Bond Fund
[PHOTO OMITTED]
-------------
ANNUAL REPORT
-------------
July 31, 1999
[LOGO] Smith Barney
Mutual Funds
<PAGE>
Smith Barney Total
Return Bond Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Smith Barney Total Return Bond Fund ("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
July 31, 1999
Without Sales Charges(1)
----------------------------------
Class A Class B Class L
================================================================================
One-Year (1.79)% (2.29)% (2.24)%
- --------------------------------------------------------------------------------
Since Inception+ 0.57 0.09 0.14
================================================================================
Without Sales Charges(2)
----------------------------------
Class A Class B Class L
================================================================================
One-Year (6.18)% (6.46)% (4.16)%
- --------------------------------------------------------------------------------
Since Inception+ (2.63) (2.54) (0.59)
================================================================================
(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.
+ Inception date for Class A, B and L shares is February 27, 1998.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
Fairly wide yield spreads represent an excellent opportunity to lengthen
maturity in the Fund by selling off shorter maturity securities and taking on
longer maturity securities offering higher yields. This scenario, under present
economic conditions, creates compelling opportunities in fixed income
investments. Our goal will be to sell off some shorter maturity assets, and in
today's attractive rate environment take a somewhat more positive stance.
- --------------------------------------------------------------------------------
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 ............................................................... 5
Schedule of Investments ................................................... 6
Statement of Assets and Liabilities ....................................... 11
Statement of Operations ................................................... 12
Statements of Changes in Net Assets ....................................... 13
Notes to Financial Statements ............................................. 14
Financial Highlights ...................................................... 18
Independent Auditors' Report .............................................. 19
Tax Information ........................................................... 20
Additional Shareholder Information ........................................ 20
<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 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.
Performance Overview
For the period ended July 31, 1999, the Fund had a total return of a negative
1.79% for its Class A shares without sales charges. This compares to the
negative 0.84% total return for the Merrill Lynch U.S. Corporate and Government
10+ Years Index during the same period.
Market Overview
Fixed income markets are experiencing a return to normalcy in the aftermath of
the forced liquidations that wreaked havoc among major hedge funds, and
negatively impacted global markets in late 1998. Following these forced
liquidations, the long bond has exceeded the 6% mark, and municipal securities
are trading lower than governments. Additionally, the markets that represents
mortgage-backed securities, high-grade corporate bonds and taxable municipal
securities appear to be reasonably priced compared to Treasuries. Market
reaction to the recent rise in interest rates reflects investor confidence in
the Federal Reserve Board's ("Fed") ability to effectively manage monetary
policy. Investors typically view an increase in commodity prices as indicative
of inflationary pressures; however, we believe the recent run-up in commodities
should not be viewed as a sign that inflation is looming, but rather as a
rebound following the recent downturn in many commodities (e.g., oil prices). It
is also relevant to note the fact that the pending Asian recovery and Japanese
fiscal reform package are driving industrial commodity valuations.
Investment Strategy
Fairly wide yield spreads represent an excellent opportunity to lengthen
maturity in the Fund by selling off shorter maturity securities and taking on
longer maturity securities offering higher yields. This scenario, under present
economic conditions, creates compelling opportunities in fixed income
investments. Our goal will be to sell off some shorter maturity assets, and in
today's attractive rate environment take a somewhat more positive stance.
Trepidation regarding Y2K pressures affecting the financial services industry in
late 1999 has resulted in over-purchasing of fixed income securities in late
summer; however, we plan to capitalize on buying opportunities when and if they
emerge. (Y2K is a phrase referring to the fact that some dates were coded into
computers using only the last two digits of the year, assuming the first two
digits were "19." On or after January 1, 2000, some computers may misread or not
recognize dates and cause potential dislocations.)
Late in the year, we feel that it may be prudent to own more dollar-denominated
securities due to confidence in the ability of the U.S. to control Y2K. We
believe this event may serve to effectively bolster fixed income markets.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 1
<PAGE>
Market Outlook
Y2K may influence the Fed not to raise short-term interest rates for the
remainder of the year. While Y2K in the U.S. will likely prove to be a
relatively smooth transition, economies in the rest of the world may experience
temporary glitches and foreign investors may look to U.S. bonds for investment
opportunities as a temporary 'safe haven' for their assets.
It is widely believed that the Fed's decision to raise the federal funds rate by
25 basis points, or a quarter of a point, should effectively serve to diminish
the risk of inflation. The reason behind the economic decision to raise rates
was cited by the Federal Open Market Committee to be tight labor markets,
persistent domestic demand, and firm foreign economies. The intended effect of
the rate increase is to slow the economy just a bit to relieve inflationary
pressures from tight labor markets. Higher interest rates raise the costs of
borrowing for both consumers and businesses, forcing them to cut back and
alleviate the strain on the labor market. Bonds may rally in the fourth quarter
of 1999 based on the current economic environment of strong economic growth,
benign inflation and vigilant policy making. We feel that the Fed's recent
interest rate increase was well priced into the markets, and the balance of the
year could be quite positive for bonds as we near Y2K.
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
September 14, 1999
- --------------------------------------------------------------------------------
2 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================
7/31/99 $11.53 $10.67 $0.68 (1.79)%
- --------------------------------------------------------------------------------
Inception* through 7/31/98 11.46 11.53 0.23 2.64+
================================================================================
Total 0.91
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================
7/31/99 $11.53 $10.67 $0.62 (2.29)%
- --------------------------------------------------------------------------------
Inception* through 7/31/98 11.46 11.53 0.21 2.48+
================================================================================
Total 0.83
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
Net Asset Value
--------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
================================================================================
7/31/99 $11.53 $10.67 $0.62 (2.24)%
- --------------------------------------------------------------------------------
Inception* through 7/31/98 11.46 11.53 0.21 2.49+
================================================================================
Total 0.83
================================================================================
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
---------------------------------
Class A Class B Class L
================================================================================
Year Ended 7/31/99 (1.79)% (2.29)% (2.24)%
- --------------------------------------------------------------------------------
Inception* through 7/31/99 0.57 0.09 0.14
================================================================================
Without Sales Charges(2)
---------------------------------
Class A Class B Class L
================================================================================
Year Ended 7/31/99 (6.18)% (6.46)% (4.16)%
- --------------------------------------------------------------------------------
Inception* through 7/31/99 (2.63) (2.54) (0.59)
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (Inception* through 7/31/99) 0.81%
- --------------------------------------------------------------------------------
Class B (Inception* through 7/31/99) 0.13
- --------------------------------------------------------------------------------
Class L (Inception* through 7/31/99) 0.20
================================================================================
(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;
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.
- --------------------------------------------------------------------------------
4 1999 Annual Report to Shareholders
<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+
- --------------------------------------------------------------------------------
February 1998 -- July 1999
[GRAPHIC OMITTED]
+ 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 July 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.]
Auto Parts 10.7%
Chemicals 7.4%
Diversified Manufacturers 15.6%
Electronic Components 6.8%
Finance Companies 10.0%
Food Distributors 8.3%
Insurance 11.8%
Investment Bankers 6.9%
Oil & Gas Production 13.5%
Retail 9.0%
* As a percentage of total corporate bonds and notes.
Investment Breakdown**
- ------------------------------------------------------------------------------
[The following table was depicted as a pie graph in the printed material.]
Municipal Bonds 39.7%
Asset-Backed Securities 6.7%
Government Agencies and Obligation 9.5%
Corporate Bonds and Notes 41.2%
Collateralized Mortgage-Backed Securities 2.9%
** As a percentage of total investments.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
========================================================================================================
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCIES AND OBLIGATIONS -- 9.5%
$14,700,000 AAA Federal Home Loan Mortgage Bank, 6.910% due 5/13/13 $ 14,069,664
1,000,000 AAA U.S. Treasury Bonds, 5.250% due 2/15/29 883,010
- --------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES AND OBLIGATIONS
(Cost -- $15,662,223) 14,952,674
========================================================================================================
ASSET-BACKED SECURITIES -- 6.7%
Finance -- 6.7%
6,000,000 AAA Emergent Home Equity Loan Trust, 7.080% due 12/15/28 5,914,800
5,000,000 AAA Residential Asset Securities Corp., 6.980% due 12/25/27 4,712,050
- --------------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $11,025,111) 10,626,850
========================================================================================================
COLLATERALIZED MORTGAGE-BACKED SECURITIES -- 2.9%
Finance -- 2.9%
5,000,000 AAA Residential Accredit Loans, Inc., 6.750% due 6/25/28
(Cost -- $4,899,478) 4,597,100
========================================================================================================
CORPORATE BONDS AND NOTES -- 41.2%
Auto Parts -- 4.4%
4,700,000 A1* Ford Motor Co., 8.875% due 1/15/22 5,293,375
1,400,000 A General Motors Corp., 9.400% due 7/15/21 1,652,000
- --------------------------------------------------------------------------------------------------------
6,945,375
- --------------------------------------------------------------------------------------------------------
Chemicals -- 3.0%
5,000,000 BBB+ ARCO Chemical Co., 9.800% due 2/1/20 4,762,500
- --------------------------------------------------------------------------------------------------------
Diversified Manufacturers -- 6.4%
6,670,000 Baa2* FMC Corp., 7.000% due 5/15/08 6,178,088
Philip Morris Co.:
1,500,000 A 7.650% due 7/1/08 1,531,875
2,400,000 A 7.750% due 1/15/27 2,409,000
- --------------------------------------------------------------------------------------------------------
10,118,963
- --------------------------------------------------------------------------------------------------------
Electronic Components -- 2.9%
5,000,000 A+ Motorola Inc., 6.500% due 11/15/28 4,412,500
- --------------------------------------------------------------------------------------------------------
Finance Companies -- 4.1%
6,650,000 A Aetna Services Inc., 7.625% due 8/15/26 6,450,500
- --------------------------------------------------------------------------------------------------------
Food Distributors -- 3.4%
5,700,000 A- Tyson Foods, Inc., 7.000% due 5/1/18 5,407,875
- --------------------------------------------------------------------------------------------------------
Insurance -- 4.9%
7,700,000 A- CNA Financial Corp., 6.950% due 1/15/18 6,968,500
700,000 A Hartford Financial Services Group, Inc., 7.300% due 11/1/15 670,250
- --------------------------------------------------------------------------------------------------------
7,638,750
- --------------------------------------------------------------------------------------------------------
Investment Bankers -- 2.8%
5,000,000 AA- Merrill Lynch & Co., Inc., 6.750% due 6/1/28 4,468,750
- --------------------------------------------------------------------------------------------------------
Oil & Gas Production -- 5.6%
3,000,000 BBB+ Enterprise Oil PLC, 7.000% due 5/1/18 2,741,250
4,700,000 Aa1* Northern Illinois Gas Co., 7.375% due 10/15/27 4,476,750
1,700,000 A ONEOK Inc., 6.875% due 10/1/28 1,530,000
- --------------------------------------------------------------------------------------------------------
8,748,000
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
========================================================================================================
<S> <C> <C> <C> <C>
Retail -- 3.7%
$ 750,000 A3* J.C. Penney Co., Inc., 7.650% due 8/15/16 $ 734,063
5,300,000 A2* Sears Roebuck Acceptance Corp., 7.500% due 10/15/27 5,094,625
- --------------------------------------------------------------------------------------------------------
5,828,688
- --------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $71,163,014) 64,781,901
========================================================================================================
MUNICIPAL BONDS -- 39.7%
Arizona -- 2.9%
4,700,000 AAA Phoenix, AZ IDA, America West Arena, AMBAC-Insured,
7.125% due 12/1/21 4,506,125
- --------------------------------------------------------------------------------------------------------
California -- 16.3%
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 5,080,625
1,000,000 AAA Taxable Home Mortgage, MBIA-Insured, Series H, 7.250%
due 8/1/22 947,500
California Rural Home Mortgage Finance Authority,
Single-Family Mortgage Revenue, GNMA/FNMA/FHLMC-
Collateralized:
835,000 AAA Series A, 7.000% due 6/1/22 779,681
2,025,000 AAA Series B-3, 7.000% due 6/1/21 1,890,844
6,200,000 AAA Los Angeles, CA Convention and Exhibition Center
Authority Lease Revenue, MBIA-Insured, Series
A, 7.125% due 8/15/24 5,866,750
7,980,000 AAA Monrovia, CA Redevelopment Agency, Tax Allocation
(Center Redevelopment Project), Series A,
7.050% due 5/1/29 7,481,250
2,040,000 Aaa* Pinole, CA Redevelopment Agency, Tax Allocation, MBIA-
Insured 6.750% due 8/1/17 1,881,900
1,850,000 AAA San Dieguito, CA Public Facilities Authority Revenue,
AMBAC-Insured, Series B, 7.000% due 8/1/18 1,752,875
- --------------------------------------------------------------------------------------------------------
25,681,425
- --------------------------------------------------------------------------------------------------------
Georgia -- 2.6%
4,500,000 AAA De Kalb County, GA Development Authority Revenue
(Regional Office Project), 6.875% due 3/1/20 4,134,375
- --------------------------------------------------------------------------------------------------------
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 1,822,500
- --------------------------------------------------------------------------------------------------------
Massachusetts -- 3.9%
6,500,000 AAA Northeastern University, Massachusetts Revenue, MBIA-
Insured, Series A, 7.040% due 10/1/28 6,085,625
- --------------------------------------------------------------------------------------------------------
New York -- 3.3%
New York State Housing Finance Agency Revenue, Multi-
Family Housing,
SONYMA-Insured, Series A:
1,730,000 Aa2* 6.875% due 8/15/18 1,608,900
3,845,000 Aa2* 6.920% due 8/15/29 3,547,013
- --------------------------------------------------------------------------------------------------------
5,155,913
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
========================================================================================================
<S> <C> <C> <C> <C>
Pennsylvania -- 1.7%
York County, PA IDA, Economic Development
Revenue, FGIC-Insured:
$2,295,000 AAA 6.875% due 10/1/18 $ 2,131,481
525,000 AAA 7.000% due 10/1/23 490,875
- --------------------------------------------------------------------------------------------------------
2,622,356
- --------------------------------------------------------------------------------------------------------
Texas -- 6.4%
2,500,000 AAA Dallas/Fort Worth, TX International Airport Facility,
MBIA-Insured, 7.070% due 11/1/24 2,356,250
7,650,000 AAA Tyler, TX, Health Facilities Development Corp.,
Hospital Revenue, East Texas, FSA Insured, Series E,
Remarketed 2/17/99, 7.830% due 11/1/27 7,678,687
- --------------------------------------------------------------------------------------------------------
10,034,937
- --------------------------------------------------------------------------------------------------------
Virginia -- 1.5%
2,735,000 AAA Virginia State Housing Development Authority,
Multi-Family Housing Revenue, MBIA-Insured, Series A,
6.510% due 5/1/19 2,376,031
- --------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost -- $66,363,919) 62,419,287
========================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $169,113,745**) $157,377,812
========================================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service except those
identified by an asterisk (*) which are rated by Moody's Investors Service
Inc..
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 9 and 10 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 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 "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.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 9
<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
- --------------------------------------------------------------------------------
10 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $169,113,745) $ 157,377,812
Interest receivable 3,094,683
Receivable for securities sold 2,570,938
Receivable for Fund shares sold 111,842
Receivable from manager 65,226
- ---------------------------------------------------------------------------------------
Total Assets 163,220,501
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payable to bank 442,045
Dividends payable 207,258
Payable for Fund shares purchased 104,837
Distribution fees payable 40,095
Accrued expenses 80,808
- ---------------------------------------------------------------------------------------
Total Liabilities 875,043
- ---------------------------------------------------------------------------------------
Total Net Assets $ 162,345,458
=======================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 15,217
Capital paid in excess of par value 175,942,070
Undistributed net investment income 197,449
Accumulated net realized loss from investments and futures contracts (2,073,345)
Net unrealized depreciation of investments (11,735,933)
- ---------------------------------------------------------------------------------------
Total Net Assets $ 162,345,458
=======================================================================================
Shares Outstanding:
Class A 4,882,480
------------------------------------------------------------------------------------
Class B 8,060,756
------------------------------------------------------------------------------------
Class L 2,273,412
------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $10.67
------------------------------------------------------------------------------------
Class B * $10.67
------------------------------------------------------------------------------------
Class L ** $10.67
------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $11.17
------------------------------------------------------------------------------------
Class B (net asset value plus 1.01% of net asset value per share) $10.78
=======================================================================================
</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.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 12,427,597
- ---------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,169,060
Distribution fees (Note 2) 1,034,865
Shareholder and system servicing fees 121,345
Registration fees 92,611
Shareholder communications 77,034
Audit and legal 49,080
Trustees' fees 15,402
Custody 6,959
Pricing service fees 5,676
Other 9,401
- ---------------------------------------------------------------------------------------
Total Expenses 2,581,433
Less: Management fee waiver (Note 2) (155,458)
- ---------------------------------------------------------------------------------------
Net Expenses 2,425,975
- ---------------------------------------------------------------------------------------
Net Investment Income 10,001,622
- ---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 5):
Realized Loss From:
Security transactions (excluding short-term securities) (371,628)
Futures contracts (1,215,016)
- ---------------------------------------------------------------------------------------
Net Realized Loss (1,586,644)
- ---------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of Investments:
Beginning of year 883,575
End of year (11,735,933)
- ---------------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (12,619,508)
- ---------------------------------------------------------------------------------------
Net Loss on Investments (14,206,152)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (4,204,530)
=======================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998(a)
===================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 10,001,622 $ 2,969,782
Net realized loss (1,586,644) (467,062)
Increase (decrease) in net unrealized depreciation (12,619,508) 883,575
- ---------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (4,204,530) 3,386,295
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (10,075,382) (2,772,994)
- ---------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (10,075,382) (2,772,994)
- ---------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares 59,560,712 158,252,495
Net asset value of shares issued for reinvestment of dividends 7,474,258 2,115,250
Cost of shares reacquired (47,266,874) (4,123,772)
- ---------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 19,768,096 156,243,973
- ---------------------------------------------------------------------------------------------------
Increase in Net Assets 5,488,184 156,857,274
NET ASSETS:
Beginning of year 156,857,274 --
- ---------------------------------------------------------------------------------------------------
End of year* $ 162,345,458 $ 156,857,274
===================================================================================================
* Includes undistributed net investment income of: $ 197,449 $ 251,570
===================================================================================================
</TABLE>
(a) For the period February 27, 1998 (commencement of operations) to July 31,
1998.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 shareholder 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, 1999, 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; (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 July 31, 1999, a portion of the management fee
amounting to $155,458 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 a member of the selling group.
There is a contingent deferred sales charge ("CDSC") of
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (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 year ended July 31, 1999, CFBDS and SSB received sales charges of
approximately $215,000 and $110,000 on sales of the Fund's Class A and Class L
shares, respectively. In addition, CDSCs paid to CFBDS and SSB were
approximately:
Class A Class B Class L
================================================================================
CDSCs $19,000 $348,000 $17,000
================================================================================
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
year ended July 31, 1999, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $150,535 $702,597 $181,733
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the year ended July 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $ 79,325,994
- --------------------------------------------------------------------------------
Sales 55,899,329
================================================================================
At July 31, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 28,687
Gross unrealized depreciation (11,764,620)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(11,735,933)
================================================================================
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
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
arises from changes in the value of the financial instruments and securities
indices (futures contracts).
At July 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 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 July 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 July 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 July 31, 1999, the Fund had no when-issued securities and had not entered
into any delayed delivery transactions.
9. Capital Loss Carryforward
At July 31, 1999, the Fund had, for Federal income tax purposes, a capital loss
carryforward of approximately $1,372,200, available to offset future capital
gains through July 31, 2007. To the extent that these carryforward losses are
used to offset capital gains, it is probable that the gains so offset will not
be distributed.
10. Shares of Beneficial Interest
At July 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.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At July 31, 1999, total paid-in capital amounted to the following for each
class:
Class A Class B Class L
================================================================================
Total Paid-in Capital $56,529,583 $93,083,364 $26,344,340
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Period Ended
July 31, 1999 July 31, 1998+
-------------------------- --------------------------
Shares Amount Shares Amount
================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,553,323 $ 18,008,777 4,839,711 $ 55,583,555
Shares issued on reinvestment 238,783 2,703,100 70,212 812,189
Shares reacquired (1,649,788) (18,589,705) (169,761) (1,968,679)
- ----------------------------------------------------------------------------------------------------------------
Net Increase 142,318 $ 2,122,172 4,740,162 $ 54,427,065
================================================================================================================
Class B
Shares sold 2,436,732 $ 28,251,213 7,159,431 $ 82,222,890
Shares issued on reinvestment 314,514 3,558,412 87,577 1,012,757
Shares reacquired (1,785,496) (20,175,965) (152,002) (1,757,296)
- ----------------------------------------------------------------------------------------------------------------
Net Increase 965,750 $ 11,633,660 7,095,006 $ 81,478,351
================================================================================================================
Class L*
Shares sold 1,149,639 $ 13,300,722 1,777,314 $ 20,446,050
Shares issued on reinvestment 107,281 1,212,746 25,102 290,304
Shares reacquired (751,724) (8,501,204) (34,200) (397,797)
- ----------------------------------------------------------------------------------------------------------------
Net Increase 505,196 $ 6,012,264 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.
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 17
<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) 1998(2) 1999(1) 1998(2) 1999(1) 1998(2)
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $11.53 $11.46 $11.53 $11.46 $11.53 $11.46
- ------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.67 0.25 0.62 0.23 0.62 0.22
Net realized and unrealized gain (loss) (0.85) 0.05 (0.86) 0.05 (0.86) 0.06
- ------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.18) 0.30 (0.24) 0.28 (0.24) 0.28
- ------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.68) (0.23) (0.62) (0.21) (0.62) (0.21)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.68) (0.23) (0.62) (0.21) (0.62) (0.21)
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.67 $11.53 $10.67 $11.53 $10.67 $11.53
- ------------------------------------------------------------------------------------------------------------------------------
Total Return (1.79)% 2.64%++ (2.29)% 2.48%++ (2.24)% 2.49%++
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $52,101 $54,674 $85,991 $81,797 $24,253 $20,386
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.02% 1.00%+ 1.52% 1.50%+ 1.47% 1.45%+
Net investment income 5.88 5.39+ 5.39 4.90+ 5.44 4.97+
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 32% 0% 32% 0% 32% 0%
==============================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the average shares method.
(2) For the period from February 27, 1998 (inception date) to July 31, 1998.
(3) The manager waived part of its fees for the year ended January 31, 1999
and the period ended 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 1.11% 1.21%
Class B 0.01 0.01 1.61 1.71
Class L 0.01 0.01 1.56 1.66
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Income Funds:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Total Return Bond Fund of Smith
Barney Income Funds as of July 31, 1999, the related statement of operations for
the year then ended, the statements of changes in net assets and financial
highlights for the year then ended and the period from February 27, 1998
(commencement of operations) to July 31, 1998. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1999, by correspondence with the custodian. As to securities sold but not
yet delivered, we performed other appropriate auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Total Return Bond Fund of Smith Barney Income Funds as of July 31, 1999,
the results of its operations for the year then ended, the changes in its net
assets and the financial highlights for the year then ended and the period from
February 27, 1998 to July 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
New York, New York
September 14, 1999
- --------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
A total of 2.25% of the ordinary dividends paid by the Fund from net investment
income are derived from Federal obligations and may be exempt from taxation at
the state level.
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On April 19, 1999, a special meeting of shareholders of the Trust was held for
the purpose of electing Trustees of the Fund.
The results of the vote were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Trustees For Shares Voted Against Shares Voted
==================================================================================================================
<S> <C> <C> <C> <C>
Lee Abraham 543,591,987.967 97.621% 13,249,035.953 2.379%
Allan J. Bloostein 543,887,340.881 97.674 12,953,683.039 2.326
Jane F. Dasher 544,416,099.765 97.769 12,424,924.155 2.231
Donald R. Foley 543,336,693.437 97.575 13,504,330.483 2.425
Richard E. Hanson, Jr. 544,212,126.755 97.732 12,628,897.165 2.268
Paul Hardin 544,290,529.761 97.746 12,550,494.159 2.254
Heath B. McLendon 544,304,571.357 97.749 12,536,452.563 2.251
Roderick C. Rasmussen 543,666,173.202 97.634 13,174,850.718 2.366
John P. Toolan 544,353,379.596 97.757 12,487,644.324 2.243
==================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
20 1999 Annual Report to Shareholders
<PAGE>
Smith Barney
Total Return Bond Fund
Trustees
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald R. Foley
Richard E. Hanson, Jr.
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
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 9699
Providence, RI 02940-9699
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
FD01539 9/99
[PHOTO OMITTED]
[GRAPHIC OMITTED] Smith Barney
Municipal High
Income Fund
-------------
ANNUAL REPORT
-------------
July 31, 1999
[LOGO] Smith Barney
Mutual Funds
<PAGE>
Smith Barney Municipal
High Income Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Smith Barney Municipal High Income Fund ("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 Service.
Smith Barney Municipal High Income Fund
Average Annual Total Returns
July 31, 1999
Without Sales Charges(1)
--------------------------------
Class A Class B Class L
================================================================================
One-Year 2.06% 1.48% 1.42%
- --------------------------------------------------------------------------------
Five-Year 6.30 5.77 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 6.31 N/A
- --------------------------------------------------------------------------------
Since Inception+ 6.35 7.67 7.64
================================================================================
With Sales Charges(2)
--------------------------------
Class A Class B Class L
================================================================================
One-Year (2.04)% (2.77)% (0.53)%
- --------------------------------------------------------------------------------
Five-Year 5.44 5.61 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 6.31 N/A
- --------------------------------------------------------------------------------
Since Inception+ 5.70 7.67 7.41
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distri butions, if
any, at net asset value and does not reflect the de duc tion 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 distri butions, 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 re deemed within the
first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Inception dates for Class A, B and L shares are November 6, 1992,
September 16, 1985 and November 17, 1994.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
Our overall view is one of cautious optimism. We plan to pursue a reasonably
defensive stance, but may slightly extend maturities in a portion of our assets.
We are confident that we can achieve a high level of tax-exempt income,
consistent with prudent investing and assessment of credits. Additionally, we
intend to sell off some shorter maturity assets and, in today's attractive rate
environment, take a somewhat more positive posture.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A STXAX
Class B SXMTX
Class L SMHLX
- --------------------------------------------------------------------------------
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...........................................19
Statement of Operations.......................................................20
Statements of Changes in Net Assets...........................................21
Notes to Financial Statements.................................................22
Financial Highlights..........................................................25
Independent Auditors' Report..................................................28
Additional Shareholder Information............................................29
Tax Information...............................................................29
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. MCLENDON PETER M. COFFEY
Chairman Vice President
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Municipal High
Income Fund ("Fund") for the year ended July 31, 1999. We hope you find this
report to be useful and informative.
Please note that on February 3, 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.
Performance Update
For the year ended July 31, 1999, the Fund's Class A shares posted a total
return of 2.06% without sales charges, in comparison to its Lipper, Inc. peer
group average of a negative 1.91% for the same period. (Lipper is a major
fund-tracking organization.)
Market and Economic Overview
We believe that fixed income markets are returning to 'normal' in the aftermath
of forced liquidations by major hedge funds and negatively impacted global
markets in late 1998. The return to normalcy was evident by mid-August, with
municipal securities yielding roughly 87% of similar maturity Treasuries - just
slightly above average under normal market conditions. Following these forced
liquidations, the long bond has exceeded the 6% mark, and municipal securities
have been trading at low valuations relative to governments. As a result of last
year's crisis (and ensuing credit crunch), the spread between the yields on
municipal securities and Treasuries widened. The robust state of the U.S.
economy contributed to the second highest municipal securities issuance volume
in history in 1998. The ability of the market to absorb such volume indicates
the steady demand for tax-exempt investments and reflects investor confidence.
The municipal bond market has come under considerable pressure in recent weeks.
Yields on long-term municipals are up 30 - 40 basis points since the third week
in July, substantially more than the increase in Treasury yields over the same
period. In our opinion, this increase has occurred in spite of an inflation
outlook that is well within the Federal Reserve Board's ("Fed") ability to
control. The upward pressure on municipal yields appears to result largely from
two factors: 1) the lack of demand for municipal bonds by the traditional
institutional sectors that have supported the municipal market, and 2)
additional pressures resulting from the pre-Y2K avalanche of issues in the
taxable market, which has attracted institutional investors who would otherwise
buy municipals.
Yields have rebounded sharply, up nearly 3/4 of 1% since the beginning of 1999.
The slope of the municipal yield curve has remained extremely steep, with
20-year municipals yielding roughly 120 basis points more than 1-year paper. In
the Treasury market, the difference between 1-year and 30-year bond yields is
only 80 basis points.
Investment Strategy
As previously noted, the Fund seeks maximum current income that is exempt from
federal income taxes* by
- ----------
* Please note that a portion of the income from this Fund may be subject to the
Alternative Minimum Tax ("AMT").
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 1
<PAGE>
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 Service. (Standard & Poor's Ratings Service and
Moody's Investors Service Inc. are two major credit reporting and bond-rating
agencies.)
Preferred sectors in the Fund include hospitals, transportation, industrial
development revenues, life care (retirement) facilities, and
low-income/multi-family housing. These issues tend to represent opportunities
for higher yield at good relative values.
Our overall view is one of cautious optimism. We plan to pursue a reasonably
defensive stance, but may slightly extend maturities on a portion of our assets.
We remain confident that we can achieve a high level of tax-exempt income,
consistent with prudent investing and assessment of credits. Yields on municipal
securities have risen quite substantially, and the long end of the yield curve
continues to favor the asset class. The Fund tends to contain bonds priced to
call shorter than maturity, so they consequently have a shorter life than most
of the funds in their peer groups. We intend to sell off some shorter maturity
assets and, in today's attractive rate environment, take a somewhat more
positive stance.
The recent rise in interest rates has created buying opportunities. Current
market conditions should provide a supportive backdrop for municipals for the
remainder of 1999.
Fed actions to control a potentially overly exuberant economy have helped to
stabilize markets and have proved beneficial, as we have been able to obtain
higher yields on lower-rated securities.
Municipal Bond Market Outlook
Looking ahead, we believe that the U.S. economy should remain strong in the
coming months with muted inflationary pressures. Recent economic conditions have
created opportunities for municipal securities to catch up with Treasuries, and
we continue to see good value at the long end of the market. This scenario,
under present economic conditions, creates compelling opportunities in fixed
income investments, specifically municipal securities.
With long-term municipal bond yields in the 5 3/4% range and inflation under
control, "real," inflation-adjusted yields on longer intermediate and long-term
municipals are quite attractive. Following the Fed's August 24 quarter point
short-term interest rate increase, we do not anticipate further policy change
for the remainder of 1999 amid optimism that the Fed has acted sufficiently to
curb inflationary pressures. The rate increase was justified in a statement
released by the Fed, citing very tight labor markets, normally functioning
financial markets and firmer foreign economies. The intended effect of the rate
increase is to slow the economy just a bit to relieve inflationary pressures
from tight labor markets. Higher interest rates should, over time, raise the
costs of spending and investing for both consumers and businesses, forcing them
to cut back and alleviate the strain on the labor market.
As quality spreads narrow and pricing in the Fed rate increase, we expect
continued strong economic growth, benign inflation and tight labor markets.
While we believe municipal securities have good value relative to inflation, we
expect some upward pressure until markets stabilize with regard to inflation and
vigilant Fed actions.
In closing, we thank you for your investment in the Smith Barney Municipal High
Income Fund. We look forward to continuing to help you pursue your financial
goals.
Sincerely,
/s/ Heath B. McLendon /s/ Peter M. Coffey
Heath B. McLendon Peter M. Coffey
Chairman Vice President
September 10, 1999
- --------------------------------------------------------------------------------
2 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $17.96 $16.98 $0.92 $0.43 $0.00 2.06%
- ------------------------------------------------------------------------------------------------------------------------------------
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 $6.77 $1.01 $0.04
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $17.98 $16.99 $0.83 $0.43 $0.00 1.48%
- ------------------------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================================
Total $9.68 $1.30 $0.04
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $17.95 $16.96 $0.82 $0.43 $0.00 1.42%
- ------------------------------------------------------------------------------------------------------------------------------------
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 $4.12 $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
================================================================================
Year Ended 7/31/99 2.06% 1.48% 1.42%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/99 6.30 5.77 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/99 N/A 6.31 N/A
- --------------------------------------------------------------------------------
Inception* through 7/31/99 6.35 7.67 7.64
================================================================================
With Sales Charges(2)
----------------------------------
Class A Class B Class L
================================================================================
Year Ended 7/31/99 (2.04)% (2.77)% (0.53)%
- --------------------------------------------------------------------------------
Five Years Ended 7/31/99 5.44 5.61 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 7/31/99 N/A 6.31 N/A
- --------------------------------------------------------------------------------
Inception* through 7/31/99 5.70 7.67 7.41
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (Inception* through 7/31/99) 51.34%
- --------------------------------------------------------------------------------
Class B (7/31/89 through 7/31/99) 84.46
- --------------------------------------------------------------------------------
Class L (Inception* through 7/31/99) 41.37
================================================================================
(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 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+
- --------------------------------------------------------------------------------
July 1989 -- July 1999
[LINE GRAPH OMITTED]
+ Hypothetical illustration of $10,000 invested in Class B shares on July
31, 1989, assuming reinvestment of dividends and capital gains, if any, at
net asset value through July 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 INFORMATION WAS DEPICTED AS A BAR CHART
IN THE PRINTED MATERIALS.]
2.9% Education
3.9% General Obligation
16.1% Hospital
10.8% Housing
10.1% Industrial Development
7.3% Life Care Systems
9.1% Pollution Control
14.6% Transportation
8.6% Utility
3.1% Water & Sewer
13.5% Other
- --------------------------------------------------------------------------------
Summary of Investments by Combined Ratings*
- --------------------------------------------------------------------------------
Standard Percentage
Moody's & Poor's of Total Investments
- --------------------------------------------------------------------------------
Aaa AAA 22.5%
Aa AA 3.9
A A 12.0
Baa BBB 23.5
Ba BB 8.8
B B 1.5
Caa CCC 0.2
Ca CC 0.3
NR NR 27.3
--------
100.0%
========
* As a percentage of total investments.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================================
MUNICIPAL BONDS AND NOTES -- 100%
<S> <C> <C> <C>
Alabama -- 1.7%
$ 4,000,000 Baa3* Alabama IDA, (Boise Cascade Project), 6.450% due 12/1/23(b)(c) $ 4,140,000
1,000,000 Baa1* Courtland, AL Solid Waste Dispense Revenue, 6.000% due 8/1/29 991,740
3,000,000 AAA Huntsville, AL Health Care Facilities Authority, Series A,
MBIA-Insured, 6.375% due 6/1/12 3,195,000
2,500,000 AAA Morgan County-Decatur, AL Healthcare Authority,
Hospital Revenue, Decatur General Hospital,
CONNIE LEE-Insured, 6.250% due 3/1/13 2,681,250
- -----------------------------------------------------------------------------------------------------------------
11,007,990
- -----------------------------------------------------------------------------------------------------------------
Arizona -- 3.1%
1,000,000 Aa* Arizona Educational Loan Marketing Corp.,
Sr. Series, 6.375% due 9/1/05(b) 1,045,000
2,500,000 NR Flagstaff, AZ IDA, (Living Community Northern Community Project),
6.300% due 9/1/38 2,496,875
2,000,000 NR Gilbert, AZ Development Authority Non-Profit Revenue,
5.850% due 2/1/19 1,927,500
5,325,000 Aa3* Maricopa County, AZ IDA, Family Housing Revenue, 6.500% due 7/1/29 5,304,951
5,000,000 BB+ Maricopa County, AZ PCR, Public Service Co.,
Palo Verde, Series A, 6.375% due 8/15/23 5,206,250
274,000 NR Peoria, AZ IDA, Sierra Winds Life Care Inc., 8.500% due 11/1/17 274,000
4,000,000 B Pima County, AZ IDA, Tuscon Electric Power Co.,
Series A, 6.100% due 9/1/25(b) 3,925,000
- -----------------------------------------------------------------------------------------------------------------
20,179,576
- -----------------------------------------------------------------------------------------------------------------
Arkansas -- 0.1%
780,000 AAA Arkansas State Development Authority, Single-Family
Mortgage Revenue, Series A, GNMA/FNMA-Collateralized,
6.200% due 7/1/15 807,300
- -----------------------------------------------------------------------------------------------------------------
California -- 2.6%
3,940,000 A- Burbank, CA Redevelopment Agency, Series A, (Golden
State Redevelopment Project), 6.250% due 12/1/24 4,127,150
2,500,000 AAA California Statewide Community Development Authority Revenue,
COP, Sutter Health, AMBAC-Insured, 6.125% due 8/15/22 2,637,500
5,500,000 BBB Long Beach, CA (Aquarium of the Pacific Project),
Series A, 6.125% due 7/1/15 5,610,000
4,000,000 A- Los Angeles, CA Regional Airports Improvement, Corporate Lease
Revenue, LA International Airport, 6.800% due 1/1/27(b) 4,195,000
- -----------------------------------------------------------------------------------------------------------------
16,569,650
- -----------------------------------------------------------------------------------------------------------------
Colorado -- 2.2%
Colorado Health Facilities Authority Revenue:
1,100,000 NR Health and Residential Care Facilities, 6.000% due 7/1/29(b) 1,047,750
National Jewish Medical Research Center:
1,500,000 BBB 5.375 % due 1/1/16 1,438,215
2,500,000 NR Volunteers, Series A, 5.875% due 7/1/28 2,403,125
4,750,000 BBB+ Colorado Springs, CO Airport Revenue, Series A, 7.000% due 1/1/22(b) 5,058,750
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================================
<S> <C> <C> <C>
Colorado -- 2.2% (continued)
Denver, CO City and County Airport Revenue:
$ 205,000 BBB+ Series A, 7.500% due 11/15/23(b) $ 228,831
1,715,000 BBB+ Series C, 6.750% due 11/15/22(b) 1,824,331
2,250,000 AAA Jefferson County, CO COP, MBIA-Insured, 6.650% due 12/1/08 2,427,187
- -----------------------------------------------------------------------------------------------------------------
14,428,189
- -----------------------------------------------------------------------------------------------------------------
Connecticut -- 1.5%
2,000,000 AAA Connecticut State Airport Revenue, Bradley International
Airport, FGIC-Insured, 7.650% due 10/1/12 2,270,000
4,125,000 Ba1* Connecticut State Development Pollution Control Revenue,
Connecticut Light and Power, Series A, 5.850% due 9/1/28 4,068,281
Connecticut State Health and Educational Facilities,
University of Hartford, Series D:
1,655,000 BBB- 6.750% due 7/1/12 1,710,856
1,450,000 BBB- 6.800% due 7/1/22 1,504,375
- -----------------------------------------------------------------------------------------------------------------
9,553,512
- -----------------------------------------------------------------------------------------------------------------
District of Columbia -- 1.1%
6,500,000 BBB- District of Columbia COP, 7.300% due 1/1/13 7,117,500
- -----------------------------------------------------------------------------------------------------------------
Florida -- 2.3%
4,250,000 NR Hillsborough County, FL Development Authority Revenue, Series A,
6.700% due 7/1/21 4,239,375
2,800,000 A3* Hillsborough County, FL Utility Revenue, Series A, 7.000% due 8/1/14 2,957,500
3,440,000 AAA Jacksonville, FL Health Facilities Revenue, University Medical Center,
CONNIE LEE-Insured, 6.600% due 2/1/21 3,655,000
2,000,000 A+ Jacksonville, FL Sewer & Solid Waste Disposal Facilities Revenue,
(Anheuser-Busch Project), 5.875% due 2/1/36(b) 2,062,500
1,900,000 AAA Tampa, FL Utility Tax and Special Revenue,
AMBAC-Insured, 6.900% due 10/1/09 2,028,250
- -----------------------------------------------------------------------------------------------------------------
14,942,625
- -----------------------------------------------------------------------------------------------------------------
Georgia -- 6.0%
4,000,000 A Atlanta, GA Airport Facilities Revenue, 7.250% due 1/1/17(b) 4,210,000
5,595,000 NR Atlanta, GA Urban Residential, 6.750% due 3/1/31 5,622,975
2,300,000 Baa1* Clayton County, GA Housing Authority, 7.500% due 12/1/30 2,297,125
1,500,000 NR Columbus, GA Housing Authority Revenue, 7.000% due 11/15/29 1,511,250
4,840,000 NR Coweta County, GA Development Authority Revenue, 6.750% due 7/1/29 4,737,150
2,500,000 NR Fulton County, GA Residential Care Facilities, 7.000% due 7/1/29 2,496,875
4,750,000 AAA George L. Smith, GA World Congress Center Authority Revenue,
(Domed Stadium Project), 7.875% due 7/1/20(b) 5,019,372
7,000,000 AAA Georgia Municipal Electric Authority Power Revenue,
Series EE, AMBAC-Insured, 6.400% due 1/1/23 7,533,750
5,000,000 AAA Medical Center Hospital Authority, GA Columbus Healthcare,
Series C, MBIA-Insured, 6.400% due 8/1/06 5,331,250
- -----------------------------------------------------------------------------------------------------------------
38,759,747
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================================
<S> <C> <C> <C>
Hawaii -- 0.3%
$ 2,000,000 A Hawaii State Department of Budget and Finance,
Special Purpose Mortgage Revenue,
Kapiolani Healthcare Systems, 6.400% due 7/1/13 $ 2,112,500
- -----------------------------------------------------------------------------------------------------------------
Illinois -- 3.7%
20,000,000 AAA Chicago, IL Board of Education, Capital Appreciation, School Reform,
Series B-1, FGIC-Insured, zero coupon due 12/1/29 3,600,000
1,510,000 AA Chicago, IL HDC, Section 8, Series A, FHA-Insured, 6.700% due 7/1/12 1,587,387
2,000,000 B+ East Chicago, IL Industrial Exempt Facilities Revenue, (Ispat Inland
Income Project No. 16), 7.000% due 1/1/14 1,965,000
3,000,000 BB East Chicago, IL Industrial PCR, Inland Steel Co.,
(Project 10), 6.800% due 6/1/13 3,015,000
8,300,000 A- Illinois Development Facility Authority Revenue, 5.500% due 11/15/29 7,625,625
2,000,000 A- Illinois Health Facilities Authority Revenue, Victory
Health Services, Series A, 5.750% due 8/15/27 1,922,500
1,500,000 A+ Illinois Housing and Development Authority, Multi-Family
Housing, Series A, 6.125% due 7/1/25 1,541,250
2,750,000 AAA Illinois State Toll Highway Authority, Series A,
FGIC-Insured, 6.200% due 1/1/16 2,956,250
- -----------------------------------------------------------------------------------------------------------------
24,213,012
- -----------------------------------------------------------------------------------------------------------------
Indiana -- 2.7%
5,000,000 Baa2* Indiana State Development Finance Authority Environmental Revenue,
(USX Corp. Project), 5.600% due 12/1/32 4,706,250
3,000,000 B+ Indiana State Development Finance Authority Revenue,
(Inland Steel Project), 5.750% due 10/1/11 2,782,500
Indianapolis, IN Airport Authority Revenue, Special Facility:
5,245,000 BBB Federal Express Corporate Project, 7.100% due 1/15/17(b) 5,762,944
3,970,000 Baa2* United Airlines Project, Series A, 6.500% due 11/15/31(b) 4,153,612
- -----------------------------------------------------------------------------------------------------------------
17,405,306
- -----------------------------------------------------------------------------------------------------------------
Kentucky -- 2.1%
4,250,000 BBB- Kenton County, KY Airport Board Revenue,
Delta Airlines, Project A, 7.500% due 2/1/20(b) 4,552,812
1,500,000 BB+ Kentucky Economic Development Finance Authority,
Hospital Systems Revenue, Appalachian Regional
Healthcare, 5.875% due 10/1/22 1,421,250
590,000 NR Kentucky Multi-County Residential Mortgage, 10.500% due 10/1/00 592,950
4,000,000 A Pendleton County, KY Multi-County Lease Revenue,
Series A, 6.500% due 3/1/19 4,245,000
2,605,000 Aa2* Trimble County, KY PCR, Series B, 6.550% due 11/1/20(b) 2,793,862
- -----------------------------------------------------------------------------------------------------------------
13,605,874
- -----------------------------------------------------------------------------------------------------------------
Louisiana -- 2.3%
5,000,000 NR Hodge, LA Utility Revenue, 9.000% due 3/1/10(b) 5,190,200
2,600,000 A3* Lake Charles, LA Harbor and Terminal District, (Trunkline
Liquid Natural Gas Co. Project), 7.750% due 8/15/22 2,889,250
2,000,000 CC Port of New Orleans, LA IDR, (Continential Grain Co. Project),
7.500% due 7/1/13 1,995,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================================
<S> <C> <C> <C>
Louisiana -- 2.3% (continued)
$ 1,210,000 AAA State Tammany Parish, LA Hospital Revenue, District 2,
CONNIE LEE-Insured, 6.250% due 10/1/14 $ 1,296,212
3,000,000 BB+ West Feliciana Parish, LA PCR, Gulf State Utilities,
7.700% due 12/1/14 3,240,000
- -----------------------------------------------------------------------------------------------------------------
14,610,662
- -----------------------------------------------------------------------------------------------------------------
Maryland -- 2.5%
3,000,000 NR Baltimore County, MD Mortgage Revenue, Series A,
Dunfield Townhouses, FHA-Insured, 6.900% due 8/1/28 3,191,250
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 1,363,200
1,000,000 Aa2* Single-Family Program, Fourth Series, 6.450% due 4/1/14 1,053,750
2,830,000 Baa3* Maryland State Economic Development Student Housing
Revenue, Series A, 6.000% due 6/1/30 2,748,637
Northeast Maryland Waste Disposal Authority, Recovery Revenue,
MBIA-Insured, Southwest Resource Recovery:
3,000,000 AAA 7.200% due 1/1/06 3,352,500
3,000,000 AAA 7.200% due 1/1/07 3,345,000
2,500,000 Caa3* Prince Georges County, MD Greater Southeast Healthcare
System, 6.375% due 1/1/23(d) 1,375,000
- -----------------------------------------------------------------------------------------------------------------
16,429,337
- -----------------------------------------------------------------------------------------------------------------
Massachusetts -- 5.6%
Massachusetts State Health and Educational Facilities
Authority Revenue:
3,500,000 AAA New England Medical Center Hospitals, Series F,
FGIC-Insured, 6.625% due 7/1/25 3,753,750
3,370,000 Ba2* Saint Memorial Medical Center, Series A, 6.000% due 10/1/23 3,264,687
Massachusetts State HFA, Housing Projects,
Residential Development, FNMA-Collateralized:
2,445,000 A+ Series A, 6.375% due 4/1/21 2,576,419
2,000,000 AAA Series C, 6.875% due 11/15/11 2,145,000
3,000,000 AAA Series D, 6.800% due 11/15/12 3,195,000
2,490,000 Aa3* Massachusetts State Housing Finance Agency,
Single-Family, Series 41, 6.300% due 12/1/14 2,602,050
Massachusetts State IFA, Resource Recovery Revenue,
(Semass Project):
2,345,000 BBB- Bradford College, GO of Institution Insured, 5.625% due 11/1/28 2,198,437
2,700,000 NR Series A, 9.000% due 7/1/15 2,966,625
4,260,000 NR Series B, 9.250% due 7/1/15(b) 4,691,325
32,000,000 Aaa* Massachusetts State Turnpike Authority, Metropolitan Highway System
Revenue, Series C, MBIA-Insured, zero coupon due 1/1/23 8,800,000
- -----------------------------------------------------------------------------------------------------------------
36,193,293
- -----------------------------------------------------------------------------------------------------------------
Michigan -- 3.9%
6,000,000 BB- Detroit, MI Local Development Finance Authority, Tax Increment,
Series A, 5.500% due 5/1/21 5,722,500
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================================
<S> <C> <C> <C>
Michigan -- 3.9% (continued)
$ 1,500,000 AAA Detroit, MI Water Supply System Revenue, 10.000% due 7/1/22(e) $ 1,685,625
Michigan State Hospital Finance Authority Revenue:
2,500,000 AAA 10.000% due 2/15/22(e) 2,762,500
3,000,000 BBB Detroit Medical Center, Series A, 5.250% due 8/15/28 2,591,250
3,500,000 Ba3* Michigan State Strategic Fund Limited Obligation Revenue,
Michigan Sugar Co., Series A, 6.250% due 11/1/15 3,495,625
5,000,000 NR Michigan State Strategic Fund Reserve Recovery Limited Obligation
Revenue, Central Wayne Energy, 7.000% due 7/1/27 4,925,000
3,750,000 AAA Western Townships, MI Utilities Authority, Sewer Disposal
Systems, FSA-Insured, 6.750% due 1/1/15 3,937,500
- -----------------------------------------------------------------------------------------------------------------
25,120,000
- -----------------------------------------------------------------------------------------------------------------
Minnesota -- 0.9%
St. Paul, MN Housing and Redevelopment Authority,
(Healtheast Project), Series A:
2,250,000 BBB 5.700% due 11/1/15 2,123,437
3,900,000 BBB 6.625% due 11/1/17 3,968,250
- -----------------------------------------------------------------------------------------------------------------
6,091,687
- -----------------------------------------------------------------------------------------------------------------
Mississippi -- 0.7%
2,250,000 AAA Gulfport, MS Hospital Facilities Revenue, Memorial Hospital
Gulfport, Series A, MBIA-Insured, 6.200% due 7/1/18 2,401,875
1,750,000 Aaa* Mississippi Home Corp., Single-Family Mortgage Revenue,
GNMA-Collateralized, 6.550% due 4/1/21(b) 1,817,812
- -----------------------------------------------------------------------------------------------------------------
4,219,687
- -----------------------------------------------------------------------------------------------------------------
Montana -- 2.1%
7,000,000 BBB- Lewis & Clark County, MT Environmental Revenue Facilities,
(Asarco Inc. Project), 5.850% due 10/1/33 6,685,000
6,500,000 NR Montana State Board Resource Recovery, (Yellowstone
Energy LP Project), 7.000% due 12/31/19(b) 6,548,750
- -----------------------------------------------------------------------------------------------------------------
13,233,750
- -----------------------------------------------------------------------------------------------------------------
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) 1,532,837
- -----------------------------------------------------------------------------------------------------------------
Nevada -- 1.1%
Henderson, NV Health Care Facilities Revenue,
Catholic Healthcare West:
4,000,000 BBB+ 5.250% due 7/1/18 3,545,000
4,500,000 BBB+ 5.125% due 7/1/28 3,757,500
- -----------------------------------------------------------------------------------------------------------------
7,302,500
- -----------------------------------------------------------------------------------------------------------------
New Hampshire -- 1.0%
1,250,000 BB- New Hampshire Higher Educational and Health Facilities Authority
Revenue, Littleton Hospital, Series A, 6.000% due 5/1/28 1,235,937
5,000,000 BBB- New Hampshire State Business Finance
Authority, PCR, 6.000% due 5/1/21(b) 4,956,250
- -----------------------------------------------------------------------------------------------------------------
6,192,187
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================================
<S> <C> <C> <C>
New Jersey -- 3.9%
$ 775,000 B1 Atlantic County, NJ Utilities Authority, Solid Waste Revenue,
7.125% due 3/1/16 $ 780,812
5,000,000 NR Camden County, NJ Improvement Authority Revenue,
(Health Care Redevelopment Project), Cooper Health,
6.000% due 2/15/27 3,975,000
2,500,000 AAA Hoboken, Union City, Weehawken, NJ Sewer Authority
Revenue, MBIA-Insured, 6.200% due 8/1/19 2,659,375
Hudson County, NJ Improvement Authority, Solid Waste Revenue:
885,000 AAA 7.100% due 1/1/20 972,394
4,000,000 BBB- 6.000% due 1/1/29 4,020,000
New Jersey EDA:
1,000,000 NR Keswick Pines, 5.750% due 1/1/24 962,500
2,000,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27 2,015,000
2,500,000 AAA RWJ Health Care Corp., FSA-Insured, 6.500% due 7/1/24 2,715,625
4,000,000 NR Sayreville Living, Series A, 6.375% due 4/1/29 3,835,000
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 3,202,500
- -----------------------------------------------------------------------------------------------------------------
25,138,206
- -----------------------------------------------------------------------------------------------------------------
New Mexico -- 0.0%
39,480 Aaa* Santa Fe, NM Single-Family Mortgage Revenue, 8.450% due 12/1/11 41,701
- -----------------------------------------------------------------------------------------------------------------
New York -- 6.8%
1,500,000 NR Erie County, NY IDA, Civic Facilities Revenue, (Depaul
Properties Inc. Project), Series A, 5.750% due 9/1/28 1,417,500
1,595,000 NR Monroe County, NY IDR, Depaul Community
Facilities A, 5.875% due 2/1/28 1,547,150
New York, NY GO Bonds:
195,000 A- Pre-Refunded, Series A-1, 6.500% due 8/1/19 216,694
4,500,000 A- Series A, 6.250% due 8/1/17 4,770,000
100,000 AAA Series A-7, 3.900% due 7/1/23(e) 100,000
5,000,000 A- Series C, 6.660% due 8/1/09 5,193,750
2,750,000 A- Series H, 6.125% due 8/1/25 2,897,812
1,975,000 A- Unrefunded Balance, Series A-1, 6.500% due 8/1/19 2,133,000
4,045,000 A- Unrefunded Balance, Series F, 6.125% due 2/1/25 4,232,081
3,000,000 NR New York, NY IDA, City Development Agency Civic Facility Revenue,
6.750% due 6/1/20 3,003,750
2,850,000 NR New York, NY IDA, Community Hospital Brooklyn, 6.875% due 11/1/10 2,860,688
3,085,000 BBB+ New York State COP, (Hanson Redevelopment Project),
8.375% due 5/1/08 3,574,744
1,500,000 AA New York State Dormitory Authority Revenue,
Wesley Garden Nursing Home, FHA-Insured, 6.125% due 8/1/35 1,550,625
New York State Electric Facilities Revenue:
785,000 A- Pre-Refunded, Series A, 7.150% due 6/1/20 855,650
845,000 Aaa* Pre-Refunded, Series A, 7.150% due 12/1/20 921,050
2,215,000 A- Unrefunded Balance, Series A, 7.150% due 6/1/20 2,406,044
305,000 Aaa* Unrefunded Balance, Series A, 7.150% due 12/1/20 331,306
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================================
<S> <C> <C> <C>
New York -- 6.8% (continued)
New York State Medical Care Facilities Finance Agency Revenue:
$ 2,895,000 AAA Series C, Long-Term Health Care, FSA-Insured, 6.400% due 11/1/14 $ 3,086,794
715,000 A- Series F, Mental Improvement, 6.500% due 2/15/19 757,006
2,000,000 NR Onondaga County, NY IDA, Solid Waste Disposal Facilities Revenue,
(Solvay Paperboard LLC Project), 7.000% due 11/1/30 2,037,500
- -----------------------------------------------------------------------------------------------------------------
43,893,144
- -----------------------------------------------------------------------------------------------------------------
North Carolina -- 3.0%
8,250,000 NR Charlotte, NC SPL Facilities Revenue, Charlotte/Douglas
International Airport, 5.600% due 7/1/27 7,899,375
8,700,000 BBB North Carolina Eastern Municipal Power Agency, Power
System Revenue, Series B, 7.000% due 1/1/08 9,472,125
2,055,000 NR North Carolina Medical Care Community Hospital Revenue,
6.125% due 1/1/28 2,029,313
- -----------------------------------------------------------------------------------------------------------------
19,400,813
- -----------------------------------------------------------------------------------------------------------------
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 3,168,750
- -----------------------------------------------------------------------------------------------------------------
Ohio -- 2.8%
4,000,000 NR Cleveland, OH Airport Special Revenue, Continental Airlines Inc.,
9.000% due 12/1/19(b) 4,147,040
5,000,000 BB+ Ohio State Air Quality Development Authority,
Pollution Control-Toledo Edison, 6.875% due 7/1/23(b) 5,243,750
Ohio State Water Development Authority Revenue, Series A:
3,000,000 NR Bayshore Power Project, 5.875% due 9/1/20 2,992,500
3,475,000 BB+ Cleveland Electric, 8.000% due 10/1/23(b) 3,905,031
1,500,000 BB+ Toledo Edison, 8.000% due 10/1/23(b) 1,685,625
- -----------------------------------------------------------------------------------------------------------------
17,973,946
- -----------------------------------------------------------------------------------------------------------------
Oklahoma -- 1.0%
3,210,000 AAA Oklahoma HFA, Single-Family Mortgage, Series B,
GNMA-Collateralized, 7.997% due 8/1/18(b) 3,583,162
2,400,000 Baa1* Tulsa, OK Municipal Airport Revenue, American Airlines,
7.350% due 12/1/11 2,604,000
- -----------------------------------------------------------------------------------------------------------------
6,187,162
- -----------------------------------------------------------------------------------------------------------------
Oregon -- 0.8%
5,000,000 NR Klamath Falls, OR Electric Revenue, 6.000% due 1/1/25 4,881,250
- -----------------------------------------------------------------------------------------------------------------
Pennsylvania -- 14.7%
4,000,000 AAA Allegheny County, PA Airport Revenue, Greater Pittsburgh International
Airport, Series B, FSA-Insured, 6.625% due 1/1/22(b) 4,245,000
2,500,000 Baa2* Allegheny County, PA, Series A, 6.700% due 12/1/20 2,671,875
4,500,000 BBB Allentown, PA Hospital Authority Revenue, Sacred Heart
Hospital of Allentown, Series B, 6.750% due 11/15/15 4,815,000
2,200,000 NR Bucks County, PA Management Healthcare Facility-Chandler,
6.300% due 5/1/29 2,103,750
2,000,000 NR Chartiers Valley, PA, Health Center Development Authority Revenue,
6.375% due 12/1/24 1,965,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================================
<S> <C> <C> <C>
Pennsylvania -- 14.7% (continued)
Dauphin County, PA General Authority:
$ 3,100,000 NR Hotel and Conference Center - Hyatt Regency, 6.200% due 1/1/29 $ 3,049,625
6,000,000 NR Riverfront Office, 6.000% due 1/1/25 5,865,000
2,000,000 BB- Delaware County, PA IDA, Resource Recovery Facilities,
Series A, 6.200% due 7/1/19 2,017,500
3,500,000 NR Harrisburg, PA Authority Office, 6.000% due 5/1/19 3,443,125
7,500,000 AAA Lehigh County, PA IDA, PCR, MBIA-Insured, 6.400% due 9/1/29 8,137,500
Luzerne County, PA IDA, Pennsylvania Gas and Water Co., Series A:
2,500,000 AAA 7.200% due 10/1/17(b) 2,693,750
2,250,000 A- 6.050% due 1/1/19 2,300,625
Montgomery County, PA Higher Education & Health Authority Revenue:
8,840,000 NR 6.625% due 7/1/19 8,784,750
5,000,000 NR 6.750% due 7/1/29 4,962,500
1,500,000 A- Montgomery County, PA IDA, Retirement Community Revenue,
5.250% due 11/15/28 1,350,000
6,750,000 NR Montgomery County, PA Redevelopment Authority,
Multi-Family Housing, Series A, 6.500% due 7/1/25 7,079,062
2,560,000 NR New Morgan, PA Authority Office Revenue, Series A, 6.500% due 6/1/25 2,518,400
5,000,000 NR Pennsylvania Economic Development, Exempt Facilities Revenue,
6.250% due 11/1/27 4,993,750
6,000,000 NR Pennsylvania Economic Development, Fingauth Exempt Facilities
Revenue, National Gypsum Co., Series B, 6.125% due 11/1/27 5,970,000
Pennsylvania EDA:
4,500,000 BBB- Resource Recovery Revenue, (Colver Project),
Series D, 7.125% due 12/1/15 4,944,375
4,000,000 BBB WasteWater Treatment Revenue, Sun Co. Inc.,
(RTM Project), Series A, 7.600% due 12/1/24(b) 4,460,000
5,000,000 AAA Pennsylvania State Higher Education, Student Loan Revenue,
Series D, AMBAC-Insured, 6.050% due 1/1/19(b) 5,318,750
970,000 BBB Philadelphia, PA Municipal Authority Gas Works Lease Revenue,
Series B, 6.400% due 11/15/16 1,003,950
- -----------------------------------------------------------------------------------------------------------------
94,693,287
- -----------------------------------------------------------------------------------------------------------------
Rhode Island -- 1.5%
5,000,000 BBB+ Rhode Island Health & Educational Building Corp. Revenue,
5.500% due 7/1/28 4,450,000
4,750,000 AA+ Rhode Island Housing & Mortgage Finanace Corp., 10.000% due 4/1/24(e) 5,088,438
- -----------------------------------------------------------------------------------------------------------------
9,538,438
- -----------------------------------------------------------------------------------------------------------------
South Carolina -- 3.4%
1,500,000 BBB+ Greenville County, SC IDR, (Lockheed Aeromod Center Project),
7.200% due 11/1/21(b) 1,595,625
Greenville, SC Connector, 2000 Association:
11,250,000 BBB- 5.375% due 1/1/38(c) 9,956,250
20,250,000 BBB- Zero coupon due 1/1/30 3,037,500
1,475,000 BBB Loris, SC Community Hospital Revenue, 5.625% due 1/1/29 1,392,031
1,740,000 BBB- Piedmont Municipal Power Agency, SC Electrical Revenue,
5.250% due 1/1/21 1,570,350
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================================
<S> <C> <C> <C>
South Carolina -- 3.4% (continued)
$ 4,000,000 A3* Richland County, SC PCR, (Union Camp Corp. Project),
6.625% due 5/1/22 $ 4,240,000
- -----------------------------------------------------------------------------------------------------------------
21,791,756
- -----------------------------------------------------------------------------------------------------------------
South Dakota -- 0.3%
1,865,000 NR Oglala Sioux, SD Tribal Revenue Bond, 7.500% due 7/1/13 1,890,644
- -----------------------------------------------------------------------------------------------------------------
Tennessee -- 1.9%
3,150,000 BBB Memphis-Shelby County, TN Airport Authority,
Federal Express Corp., 6.750% due 9/1/12 3,354,750
5,000,000 AAA Metropolitan Nashville Airport Authority, TN Airport Revenue,
Special Facilities, Series C, FGIC-Insured, 6.600% due 7/1/15 5,306,250
3,500,000 NR Shelby County, TN Health Educational & Housing Facilities Revenue,
6.875% due 7/1/36 3,486,875
- -----------------------------------------------------------------------------------------------------------------
12,147,875
- -----------------------------------------------------------------------------------------------------------------
Texas -- 6.6%
3,000,000 NR Abilene, TX Health Facilities Development Corp., Retirement Facilities
Revenue, Sears Methodist Retirement, Series A, 5.900% due 11/15/25(c) 2,876,250
5,000,000 NR Austin-Bergstrom Landhost Enterprises Inc., 6.750% due 4/1/27 5,025,000
5,970,000 NR Bexar County, TX Housing Financial Corp., Multi-Family Housing,
6.875% due 6/1/29 5,977,462
2,000,000 AAA Brazos River Authority, TX PCR, Houston Lighting & Power Co.,
Series A, AMBAC-Insured, 6.700% due 3/1/17 2,127,500
2,000,000 NR Denton County, TX Reclamation and Road District, 8.500% due 6/1/16 2,013,940
5,000,000 BB Harris County, TX Airport Facilities Revenue, 5.375% due 7/1/19 4,662,500
1,200,000 Aa2* Harris County, TX Health Facilities Development Corp. Revenue,
3.200% due 7/1/34 (e) 1,200,000
970,000 AAA Harris County, TX Refunding Toll Road Authority,
Series A, AMBAC-Insured, 6.500% due 8/15/17 1,040,325
3,000,000 Ba1* Houston, TX Airport Systems Revenue, Special Facilities,
Series B, 5.700% due 7/15/29 2,850,000
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 2,162,181
Sam Rayburn, TX Municipal Power Agency, Power Supply System Revenue:
2,645,000 BB Series A, 6.750% due 10/1/14 2,757,412
3,165,000 BB Series B, 6.125% due 10/1/13 3,204,562
San Antonio, TX Airport System Revenue, AMBAC-Insured:
3,000,000 AAA 7.125% due 7/1/06 3,333,750
1,000,000 AAA 7.125% due 7/1/08 1,108,750
2,000,000 AAA 7.375% due 7/1/13 2,232,500
- -----------------------------------------------------------------------------------------------------------------
42,572,132
- -----------------------------------------------------------------------------------------------------------------
Vermont -- 0.4%
1,000,000 NR Vermont Educational & Health Buildings, 6.150% due 4/1/19 968,750
1,595,000 A1* Vermont Housing Financial Agency, Single Family, 6.875% due 5/1/25 1,640,856
- -----------------------------------------------------------------------------------------------------------------
2,609,606
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
=================================================================================================================
<S> <C> <C> <C>
Virgin Islands -- 0.2%
Virgin Islands Public Finance Authority Revenue,
Subordinate Lien, Series E:
$ 500,000 NR 5.750% due 10/1/13 $ 496,875
1,000,000 NR 6.000% due 10/1/22 1,010,000
- -----------------------------------------------------------------------------------------------------------------
1,506,875
- -----------------------------------------------------------------------------------------------------------------
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 2,596,319
2,000,000 NR Virginia Beach, VA Ramada on the Beach, 7.000% due 12/1/15 2,082,500
- -----------------------------------------------------------------------------------------------------------------
4,678,819
- -----------------------------------------------------------------------------------------------------------------
Washington -- 0.8%
2,000,000 BBB Port Moses Lake, WA PCR, Union Carbide, 7.875% due 8/1/06(b) 2,033,900
3,315,000 BBB- Spokane, WA Downtown Foundation Parking Revenue,
(River Park Square Project), 5.600% due 8/1/19 3,120,244
- -----------------------------------------------------------------------------------------------------------------
5,154,144
- -----------------------------------------------------------------------------------------------------------------
West Virginia -- 0.3%
2,000,000 A Beckley, WV IDR, (Water Commission Project), 7.000% due 10/1/17(b) 2,135,000
- -----------------------------------------------------------------------------------------------------------------
Wisconsin -- 0.5%
1,670,000 A3* Racine County, WI Health Center Revenue, 8.125% due 8/1/21 1,695,050
1,600,000 NR Wisconsin State Health and Educational Facilities Authority Revenue,
(Benchmark Healthcare Inc. Project), Series A, 6.750% due 12/1/28 1,480,000
- -----------------------------------------------------------------------------------------------------------------
3,175,050
- -----------------------------------------------------------------------------------------------------------------
Wyoming -- 0.2%
1,250,000 AA Wyoming Community Development Authority Housing
Revenue, 7.100% due 6/1/17 1,321,875
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $630,396,427**) $645,529,194
=================================================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service, except those
identified by an asterisk (*), which are rated by Moody's Investors
Service, 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) Security is in default.
(e) Variable rate municipal bonds and notes are payable upon not more than
seven business days notice.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 16 through 18 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal 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 "AA" to
"CCC" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ from the highest rated issue only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and re pay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for bonds in this category than in
higher rated categories.
BB, -- Bonds rated "BB" and "B" are regarded, on balance, as predominantly
B, speculative with respect to capacity to pay interest and repay
CCC principal in accordance with the terms of the obligation. BB
and CC represents a lower degree of speculation than B, CCC and CC, 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 "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 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.
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.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited) (continued)
- --------------------------------------------------------------------------------
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.
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.
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 VRDOprior to
the advent of the VMIG1 rating.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 17
<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
- --------------------------------------------------------------------------------
18 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $630,396,427) $645,529,194
Cash 31,236
Interest receivable 8,867,181
Receivable for Fund shares sold 104,828
- ------------------------------------------------------------------------------------
Total Assets 654,532,439
- ------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 6,467,086
Dividends payable 1,245,038
Payable for Fund shares purchased 487,402
Investment advisory fees payable 253,204
Administration fees payable 113,726
Distribution fees payable 86,362
Accrued expenses 133,631
- ------------------------------------------------------------------------------------
Total Liabilities 8,786,449
- ------------------------------------------------------------------------------------
Total Net Assets $645,745,990
====================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 38,017
Capital paid in excess of par value 630,271,225
Overdistributed net investment income (1,245,038)
Accumulated net realized gain on security transactions 1,549,019
Net unrealized appreciation of investments 15,132,767
- ------------------------------------------------------------------------------------
Total Net Assets $645,745,990
====================================================================================
Shares Outstanding:
Class A 17,027,134
---------------------------------------------------------------------------------
Class B 20,805,671
---------------------------------------------------------------------------------
Class L 184,059
---------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $16.98
---------------------------------------------------------------------------------
Class B * $16.99
---------------------------------------------------------------------------------
Class L ** $16.96
---------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.17% of net asset value per share) $17.69
---------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $17.13
====================================================================================
</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.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 42,740,100
- -------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 3,182,231
Investment advisory fees (Note 3) 2,832,068
Administration fees (Note 3) 1,416,034
Shareholder and system servicing fees 263,515
Shareholder communications 101,904
Audit and legal 46,091
Trustees' fees 27,039
Pricing service fees 26,704
Custody 23,883
Other 5,692
- -------------------------------------------------------------------------------
Total Expenses 7,925,161
- -------------------------------------------------------------------------------
Net Investment Income 34,814,939
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 444,025,864
Cost of securities sold 439,306,934
- -------------------------------------------------------------------------------
Net Realized Gain 4,718,930
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 41,414,188
End of year 15,132,767
- -------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (26,281,421)
- -------------------------------------------------------------------------------
Net Loss on Investments (21,562,491)
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 13,252,448
===============================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
20 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
==================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 34,814,939 $ 38,125,389
Net realized gain 4,718,930 19,192,567
Decrease in net unrealized appreciation (26,281,421) (10,697,596)
- --------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 13,252,448 46,620,360
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2):
Net investment income (34,767,118) (39,414,101)
Net realized gains (17,476,059) (11,871,835)
- --------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (52,243,177) (51,285,936)
- --------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 92,025,984 52,382,528
Net asset value of shares issued for reinvestment of dividends 30,791,548 29,453,809
Cost of shares reacquired (179,315,600) (152,494,853)
- --------------------------------------------------------------------------------------------------
Decrease in Net Assets From Fund Share Transactions (56,498,068) (70,658,516)
- --------------------------------------------------------------------------------------------------
Decrease in Net Assets (95,488,797) (75,324,092)
NET ASSETS:
Beginning of year 741,234,787 816,558,879
- --------------------------------------------------------------------------------------------------
End of year* $ 645,745,990 $ 741,234,787
==================================================================================================
* Includes overdistributed net investment income of: $(1,245,038) $(1,292,859)
==================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 shareholder 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 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
- --------------------------------------------------------------------------------
22 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
0.20% of the average daily net assets. This fee is calculated daily and paid
monthly.
On October 8, 1998, CFBDS, Inc. ("CFBDS") 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 a member 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 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% 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 year ended July 31, 1999, CFBDS and SSB received sales charges of
approximately $101,000 and $19,000 on sales of the Fund's Class A and Class L
shares, respectively. In addition, CDSCs paid to CFBDS and SSB were
approximately:
Class A Class B Class L
================================================================================
CDSCs $3,000 $127,000 $3,000
================================================================================
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 0.15% 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 year
ended July 31, 1999, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $426,375 $2,736,644 $19,212
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
4. Investments
During the year ended July 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $351,958,014
- --------------------------------------------------------------------------------
Sales 444,025,864
================================================================================
At July 31, 1999, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $25,058,992
Gross unrealized depreciation (9,926,225)
- --------------------------------------------------------------------------------
Net unrealized appreciation $15,132,767
================================================================================
5. Shares of Beneficial Interest
At July 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 July 31, 1999, total paid-in capital amounted to the following for each
class:
Class A Class B Class L
================================================================================
Total Paid-in Capital $295,000,576 $332,039,816 $3,268,850
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1999 July 31, 1998
--------------------------- ---------------------------
Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 3,963,217 $ 70,039,058 2,045,273 $ 36,791,410
Shares issued on reinvestment 746,907 13,127,610 599,605 10,757,575
Shares reacquired (2,605,804) (45,921,802) (1,752,808) (31,542,922)
- ------------------------------------------------------------------------------------------------
Net Increase 2,104,320 $ 37,244,866 892,070 $ 16,006,063
================================================================================================
Class B
Shares sold 1,121,035 $ 19,803,946 798,147 $ 14,386,588
Shares issued on reinvestment 995,292 17,532,725 1,039,421 18,653,146
Shares reacquired (7,522,522) (132,503,062) (6,710,099) (120,826,967)
- ------------------------------------------------------------------------------------------------
Net Decrease (5,406,195) $ (95,166,391) (4,872,531) $ (87,787,233)
================================================================================================
Class L*
Shares sold 123,749 $ 2,182,980 67,008 $ 1,204,530
Shares issued on reinvestment 7,478 131,213 2,404 43,088
Shares reacquired (51,280) (890,736) (6,936) (124,964)
- ------------------------------------------------------------------------------------------------
Net Increase 79,947 $ 1,423,457 62,476 $ 1,122,654
================================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
24 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<TABLE>
<CAPTION>
Class A Shares 1999(1) 1998 1997 1996 1995
==========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $17.96 $18.07 $17.31 $17.25 $17.26
- ----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.92 0.95 0.97 1.00 1.04
Net realized and unrealized gain (loss) (0.55) 0.19 0.77 0.06 0.01*
- ----------------------------------------------------------------------------------------------------------
Total Income From Operations 0.37 1.14 1.74 1.06 1.05
- ----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.92) (0.98) (0.98) (1.00) (1.00)
Net realized gains (0.43) (0.27) -- -- (0.02)
Capital -- -- -- -- (0.04)
- ----------------------------------------------------------------------------------------------------------
Total Distributions (1.35) (1.25) (0.98) (1.00) (1.06)
- ----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.98 $17.96 $18.07 $17.31 $17.25
- ----------------------------------------------------------------------------------------------------------
Total Return 2.06% 6.54% 10.40% 6.28% 6.42%
- ----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $289 $268 $254 $232 $238
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.82% 0.83% 0.83% 0.84% 0.84%
Net investment income 5.21 5.24 5.52 5.74 6.04
- ----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 50% 84% 51% 44% 38%
==========================================================================================================
</TABLE>
(1) 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.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<TABLE>
<CAPTION>
Class B Shares 1999(1) 1998 1997 1996 1995
==========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $17.98 $18.09 $17.32 $17.26 $17.26
- ----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.83 0.86 0.89 0.92 0.95
Net realized and unrealized gain (loss) (0.56) 0.19 0.77 0.06 0.02*
- ----------------------------------------------------------------------------------------------------------
Total Income From Operations 0.27 1.05 1.66 0.98 0.97
- ----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.83) (0.89) (0.89) (0.92) (0.91)
Net realized gains (0.43) (0.27) -- -- (0.02)
Capital -- -- -- -- (0.04)
- ----------------------------------------------------------------------------------------------------------
Total Distributions (1.26) (1.16) (0.89) (0.92) (0.97)
- ----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.99 $17.98 $18.09 $17.32 $17.26
- ----------------------------------------------------------------------------------------------------------
Total Return 1.48% 6.01% 9.89% 5.74% 5.91%
- ----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $353 $471 $562 $653 $737
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.31% 1.32% 1.32% 1.33% 1.35%
Net investment income 4.70 4.75 5.04 5.23 5.61
- ----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 50% 84% 51% 44% 38%
==========================================================================================================
</TABLE>
(1) 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.
- --------------------------------------------------------------------------------
26 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<TABLE>
<CAPTION>
Class L Shares 1999(1) 1998(2) 1997 1996 1995(3)
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $17.95 $18.07 $17.31 $17.25 $15.83
- -----------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.81 0.87 0.88 0.89 0.60
Net realized and unrealized gain (loss) (0.55) 0.16 0.77 0.08 1.50*
- -----------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.26 1.03 1.65 0.97 2.10
- -----------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.82) (0.88) (0.89) (0.91) (0.62)
Net realized gains (0.43) (0.27) -- -- (0.02)
Capital -- -- -- -- (0.04)
- -----------------------------------------------------------------------------------------------------------------
Total Distributions (1.25) (1.15) (0.89) (0.91) (0.68)
- -----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $16.96 $17.95 $18.07 $17.31 $17.25
- -----------------------------------------------------------------------------------------------------------------
Total Return 1.42% 5.91% 9.79% 5.69% 13.45%++
- -----------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,122 $1,869 $752 $546 $211
- -----------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.44% 1.42% 1.40% 1.39% 1.18%+
Net investment income 4.62 4.64 4.94 5.18 5.56+
- -----------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 50% 84% 51% 44% 38%
=================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) For the period from November 17, 1994 (inception date) to July 31, 1995.
* Includes the per share effect of shareholder sales and redemption activity
during the period, most of which occurred at net asset values less than
the beginning of the period.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 27
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Income Funds:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Municipal High Income Fund of Smith
Barney Income Funds as of July 31, 1999, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1999, by correspondence with the custodian. As to securities purchased but
not yet received, we performed other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Municipal High Income Fund of Smith Barney Income Funds as of July 31,
1999, the results of its operations for the year then ended, the changes in its
net assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
September 14, 1999
- --------------------------------------------------------------------------------
28 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On April 19, 1999, a special meeting of shareholders of the Trust was held for
the purpose of electing Trustees of the Fund. The results of the vote were as
follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Trustees For Shares Voted Against Shares Voted
=================================================================================================================================
<S> <C> <C> <C> <C>
Lee Abraham 543,591,987.967 97.621% 13,249,035.953 2.379%
Allan J. Bloostein 543,887,340.881 97.674 12,953,683.039 2.326
Jane F. Dasher 544,416,099.765 97.769 12,424,924.155 2.231
Donald R. Foley 543,336,693.437 97.575 13,504,330.483 2.425
Richard E. Hanson, Jr. 544,212,126.755 97.732 12,628,897.165 2.268
Paul Hardin 544,290,529.761 97.746 12,550,494.159 2.254
Heath B. McLendon 544,304,571.357 97.749 12,536,452.563 2.251
Roderick C. Rasmussen 543,666,173.202 97.634 13,174,850.718 2.366
John P. Toolan 544,353,379.596 97.757 12,487,644.324 2.243
=================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
July 31, 1999:
o 100% of the dividends paid by the Fund from net investment income as
tax exempt for regular Federal income tax purposes.
o Long-term capital gain distributions paid of $13,025,528.
- --------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 29
<PAGE>
Smith Barney
Municipal High
Income Fund
Trustees
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald R. Foley
Richard E. Hanson, Jr.
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
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 9699
Providence, RI 02940-9699
This report is submitted for the general information of the shareholders of
Smith Barney Municipal High Income Fund. It is not for distribution to prospec
tive 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.
SALOMONSMITHBARNEY
------------------
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
FD0427 9/99
[PHOTO OMITTED]
Smith Barney
[PHOTO OMITTED] Convertible
Fund
-------------
ANNUAL REPORT
-------------
July 31, 1999
[LOGO] Smith Barney
Mutual Funds
<PAGE>
Smith Barney
Convertible Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Smith Barney Convertible Fund ("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
July 31, 1999
Without Sales Charges(1)
-------------------------------------------
Class A Class B Class L Class O
================================================================================
One-Year (3.11)% (3.61)% (4.08)% (3.66)%
- --------------------------------------------------------------------------------
Five-Year 8.25 7.72 N/A N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 7.27 N/A N/A
- --------------------------------------------------------------------------------
Since Inception+ 8.28 7.74 (4.26) 8.66
================================================================================
With Sales Charges(2)
-------------------------------------------
Class A Class B Class L Class O
================================================================================
One-Year (7.96)% (8.12)% (5.93)% (4.56)%
- --------------------------------------------------------------------------------
Five-Year 7.14 7.57 N/A N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 7.27 N/A N/A
- --------------------------------------------------------------------------------
Since Inception+ 7.45 7.74 (5.10) 8.66
================================================================================
(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 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.
+ 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
- --------------------------------------------------------------------------------
In our view, our conservative management style was one of the primary reasons
for the Fund's underperformance relative to our peer group. The performance of
the Fund during the period was more in line with the performance of the fixed
income market than the performance of the equity markets. Convertible securities
are unique investments that have both fixed income and equity characteristics.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SCRAX
Class B SCVSX
Class O SCVOX
- --------------------------------------------------------------------------------
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
Independent Auditors' Report .............................................. 24
Additional Shareholder Information ........................................ 25
Tax Information ........................................................... 25
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. ROBERT E.
MCLENDON SWAB
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Convertible
Fund ("Fund") for the period ended July 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 that you find this report to be
useful and informative.
Performance Overview
For the year ended July 31, 1999, the Smith Barney Convertible Fund had a total
return of a negative 3.11% for Class A shares, without sales charges, compared
with its Lipper, Inc. peer group average of 9.84% for the same period. (Lipper,
Inc. is a major fund-tracking organization.) In our view, our conservative
management style was one of the primary reasons for the Fund's underperformance
relative to our peer group. The performance of the Fund during the period was
more in line with the performance of the fixed income market than the
performance of the equity markets. Convertible securities are unique investments
that have both fixed income and equity characteristics. Unlike many of the funds
within the Lipper convertible bond universe, the Convertible Fund avoids
investing in common stocks and equity sensitive convertible issues.
The Fund also has minimal exposure to convertible issues not rated by one of the
major credit rating agencies. Over the past year, common stocks performed well
and the speculative, non-rated convertible issues, specifically in the
technology, telecommunications and Internet sectors showed considerable
strength. Our weighting in these two sectors is small as we tend to focus on
higher quality issues. Unfortunately, several of the Fund's large, higher
quality holdings such as Rite Aid, Elan, and Waste Management(1) underperformed
during the period. We are monitoring these positions closely, and while no
guarantees can be made, we continue to believe the basic businesses of these
companies remain attractive over the long term.
Economic and Market Overview
During the Fund's fiscal year, the U.S. economy continued to expand, adding yet
another year to the business cycle that began over eight years ago. A unique
characteristic in this late phase of economic expansion has been the general
absence of any significant inflationary pressures. In fact, the economy grew in
excess of an annual rate of 3.5% during the period and inflation rose only about
2.5%. In our opinion, these positive conditions can be attributed to high
consumer confidence, low unemployment, relatively low interest rates, an
increase in worker productivity and the monetary policy of the Federal Reserve
Board ("Fed"). In fact, the financial problems witnessed last summer in the
emerging markets now appear to be over thanks in large part to the resolve of
the Fed.
The Fed, sensing a state of global investor panic, lowered interest rates three
times late last year and provided the world financial system with liquidity.
This
- ----------
(1) Please note that the Fund's holdings as of July 31, 1999 are subject to
change.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 1
<PAGE>
effort, along with numerous world central bank interest rate decreases, helped
to improve global investor psychology and provided a monetary stimulus to
faltering economies around the world.
The Fed has subsequently increased interest rates recently however, as
inflationary fears have resurfaced due to an unexpected increase in wages. We
believe that the Fed is "taking back" some of the interest rate cuts they
imposed last fall as a result of global financial pressures. In addition, it is
our belief the Fed wants to be pre-emptive in an effort to head off any future
pressures brought on by the surprising sustained strength in the economy. We
believe that further rate increases should be minimal.
Over the past six months and since our last report, the stock market, as
measured by the S&P 500, a capitalization-weighted measure of 500 widely held
common stocks, rose approximately 4%. Corporations, benefiting from a stong
economy and an increase in worker productivity, showed strong results during the
period and this helped to drive stock prices higher.
Unfortunately, bond investors did not fare as well as bond prices declined in
the wake of the Fed's interest rate hike. The yield on the 30-year U.S. Treasury
bond actually rose from 5.09% to 6.11% during the past six months ended July 31,
1999.
The overall convertible market performed well the past six months and, since our
last report, rose approximately 3.5% as measured by the Goldman Sachs
Convertible Bond Index.(2) This performance was driven primarily by the equity
sensitivity inherent in the convertible marketplace and the success of a number
of issues within the volatile and speculative technology and telecommunications
sectors. The convertible issues in these two economic sectors are lower rated in
terms of credit quality, however, because of the interest and demand for the
Internet and related services (i.e., telecommunications), the stock prices of
underlying companies were driven considerably higher and this increased the
value of the convertible securities in these areas.
Investment Strategy
Our investment strategy in the Fund has not changed during its fiscal past year.
As previously noted, the primary objective of the Fund is to provide investors
with current income and capital appreciation by investing in convertible
securities. We continue to focus on high-quality convertible issues and issues
that are rated by at least one of the major credit rating agencies such as
Moody's Investors Service, Inc. or Standard & Poor's Ratings Service ("Standard
& Poor's"). The Fund consists of convertible bonds and convertible preferred
stocks that have both fixed income and equity characteristics. The Fund avoids
investing in other asset classes, such as common stock or convertible securities
that have considerable equity sensitivity. We believe this "pure" approach to
convertible investing can provide investors with a higher degree of downside
protection and reduced volatility when compared to most other convertible funds.
Yet, conversely, this approach can penalize performance when market conditions
are adverse.
We also seek to reduce volatility and risk by investing in a broad range of
different economic sectors. Some of the sectors that are well represented in the
Fund include financial, healthcare, retail and manufacturing. We believe these
sectors have attractive long term capital appreciation potential. Since our last
report, the Fund established new positions in:
o Citrix Systems, Inc., a company that develops, sells, markets, and
supports client application software designed to enable the efficient
enterprise-wide deployment of Windows business applications.
o Centocor, Inc., a biopharmaceutical company that reduces and markets drugs
developed through a monoclonal antibody and other technologies.
- ----------
(2) The Goldman Sachs Convertible Bond Index is an index of approximately 100
liquid convertible securities.
- --------------------------------------------------------------------------------
2 1999 Annual Report to Shareholders
<PAGE>
Over the past six months, we added to our positions in:
o CNB Bancshares, Inc., a bank holding company for Citizens Bank of
MidAmerica. The bank offers a broad range of retail and commercial banking
services.
o El Paso Energy Corporation, a company that gathers, processes, transports
and sells fuels and electricity.
o Suiza Foods Corporation, a company that produces milk and related dairy
products and plastic products.
During the reporting period, we sold our positions in Titanium Metals, Fleetwood
Enterprises, Tenet Healthcare and Thermo Electron due to changes in the
underlying company's fundamentals. Our position in Beazer Homes was called for
redemption.
The convertible securities market has grown over the past year as total market
value is now in excess of $150 billion. However, the characteristics of the
convertible security universe has changed significantly. For instance, the
percentage of issues rated B or lower or not rated (i.e., non-rated issues are
generally extremely speculative) by Standard & Poor's, is now close to 50%. In
addition over the past several years, a large number of investment grade issues
(i.e., issues rated BBB or higher by Standard & Poor's) have been redeemed.
Therefore, the market has become more speculative and volatile as the overall
credit quality has deteriorated sharply.
A growing share of the convertible market is now comprised of two highly
volatile sectors, technology and telecommunications. Also, a significant number
of "synthetic" convertible securities such as mandatory preferreds are being
brought to market. These securities have some of the characteristics of a
traditional convertible such as an exchange or convertible feature, however they
do not have, a "bond" floor, a defensive feature inherent in most traditional
convertible securities.
Market Outlook
We believe that the U.S. economy should continue to grow over the next twelve
months as the combination of high employment and rising personal income should
keep consumer spending strong. In addition, the "wealth effect" brought on by
the strong equity market the past few years should also keep consumer confidence
high. Our expectations for a strong domestic economy, a recovering global
economy and an improvement in worker productivity over the next year should bode
well for corporate earnings growth. In addition, we believe that inflation
should remain moderate as globalization keeps companies competitive in terms of
pricing to maintain market share. This suggests that the long term fundamentals
remain positive for the financial markets looking forward.
In closing, thank you for your investment in the Smith Barney Convertible Fund.
We look forward to helping you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Robert E. Swab
Heath B. McLendon Robert E. Swab
Chairman Vice President and
Investment Officer
September 10, 1999
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Top Five Stock Holdings* As of July 31, 1999
- --------------------------------------------------------------------------------
1. American General Delaware LLC 2.0%
- --------------------------------------------------------------------------------
2. Unocal Capital Trust 2.0
- --------------------------------------------------------------------------------
3. KMart Financing 1.9
- --------------------------------------------------------------------------------
4. International Paper Capital Trust 1.8
- --------------------------------------------------------------------------------
5. Union Pacific Capital Trust 1.7
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Top Five Bond Holdings* As of July 31, 1999
- --------------------------------------------------------------------------------
1. Bell Atlantic Financial Services Corp. 4.1%
- --------------------------------------------------------------------------------
2. Athena Neurosciences, Inc. 3.7
- --------------------------------------------------------------------------------
3. Alpharma Inc. 2.9
- --------------------------------------------------------------------------------
4. Magna International Inc. 2.7
- --------------------------------------------------------------------------------
5. Mark IV Industries 2.5
- --------------------------------------------------------------------------------
* As a percentage of total investments.
- --------------------------------------------------------------------------------
4 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $16.90 $15.25 $0.66 $0.44 $0.00 (3.11)%
- ------------------------------------------------------------------------------------------------------------------------------------
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 $4.90 $2.09 $0.00
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $16.89 $15.22 $0.60 $0.44 $0.00 (3.61)%
- ------------------------------------------------------------------------------------------------------------------------------------
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)
====================================================================================================================================
Total $6.73 $2.21 $0.09
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $16.90 $15.18 $0.57 $0.44 $0.00 (4.08)%
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/98 17.14 16.90 0.12 0.00 0.00 (0.74)+
====================================================================================================================================
Total $0.69 $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
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $16.87 $15.19 $0.60 $0.44 $0.00 (3.66)%
- ------------------------------------------------------------------------------------------------------------------------------------
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 $3.15 $2.06 $0.00
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/99 $16.98 $15.34 $0.71 $0.44 $0.00 (2.68)%
- ------------------------------------------------------------------------------------------------------------------------------------
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 $2.74 $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>
Year Ended 7/31/99 (3.11)% (3.61)% (4.08)% (3.66)% (2.68)%
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/99 8.25 7.72 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/99 N/A 7.27 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/99 8.28 7.74 (4.26) 8.66 6.94
====================================================================================================================================
<CAPTION>
With Sales Charges(2)
-----------------------------------------------------------------------
Class A Class B Class L Class O Class Y
====================================================================================================================================
Year Ended 7/31/99 (7.96)% (8.12)% (5.93)% (4.56)% (2.68)%
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/99 7.14 7.57 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/99 N/A 7.27 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/99 7.45 7.74 (5.10) 8.66 6.94
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
6 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (Inception* through 7/31/99) 70.75%
- --------------------------------------------------------------------------------
Class B (7/31/89 through 7/31/99) 101.72
- --------------------------------------------------------------------------------
Class L (Inception* through 7/31/99) (4.79)
- --------------------------------------------------------------------------------
Class O (Inception* through 7/31/99) 48.11
- --------------------------------------------------------------------------------
Class Y (Inception* through 7/31/99) 26.31
================================================================================
(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+
- --------------------------------------------------------------------------------
July 1989 -- July 1999
[The following table was represented as a
mountain chart in the printed material.]
Lipper Convertible
Smith Barney Standard & Poor's Securities Fund
Convertible Fund 500 Index Peer Group Average
---------------- ----------------- ------------------
July 1989 $10,000 $10,000 $10,000
July 1990
July 1991
July 1992
July 1993 [PLOT POINTS NEEDED]
July 1994
July 1995
July 1996
July 1997
July 1998
July 1999 $20,172 $45,818 $27,402
+ Hypothetical illustration of $10,000 invested in Class B shares on July
31, 1989, assuming reinvestment of dividends and capital gains, if any, at
net asset value through July 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 the over-the-counter market. Figures
for the index include reinvestment of dividends. The Lipper Convertible
Securities Fund Peer Group Average is composed of the Fund's peer group of
61 mutual funds, as of July 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 performance of the Fund's other
classes may be greater or less than the Class B shares' performance
indicated on this chart, depending on whether greater or lesser sales
charges and fees were incurred by shareholders investing in the other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
Industry Diversification*
- --------------------------------------------------------------------------------
[The following table was represented as a bar chart in the printed material.]
Communications 5.1%
Diversified and Conglomerate Mfg. 4.7%
Electronics - Computers and Software 3.7%
Finance Companies - Consumer Credit 4.8%
Health Care, Drugs & Hospital Supp. 11.8%
Metals and Mining 5.4%
Oil and Natural Gas 5.7%
Real Estate Development - REITS 3.9%
Restaurants - Food Services 4.5%
Retail 9.0%
Other 41.4%
* As a percentage of total investments.
Investment Breakdown*
- --------------------------------------------------------------------------------
[The following table was represented as a pie chart in the printed material.]
Repurchase Agreement 8.2%
Convertible Bonds and Notes 58.8%
Convertible Preferred Stock 33.0%
- --------------------------------------------------------------------------------
8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
========================================================================================================
<C> <S> <C>
CONVERTIBLE PREFERRED STOCK -- 33.0%
Electronics and Military -- 1.7%
50,000 Coltec Capital Trust, Exchange 5.250%+ $2,475,000
- --------------------------------------------------------------------------------------------------------
Finance Companies - Consumer Credit -- 4.8%
30,000 American General Delaware LLC, Series A, Exchange 6.000% 2,925,000
75,000 CNB Capital Trust I, Exchange 6.000% 2,268,750
30,000 St. Paul Capital LLC, Exchange 6.000% 1,766,250
- --------------------------------------------------------------------------------------------------------
6,960,000
- --------------------------------------------------------------------------------------------------------
Home Furnishings -- 1.1%
30,000 Newell Financial Trust I, Exchange 5.250%+ 1,571,250
- --------------------------------------------------------------------------------------------------------
Lodging -- 0.5%
20,000 Host Marriot Financial Trust, Exchange 6.750% 760,000
- --------------------------------------------------------------------------------------------------------
Metals and Mining -- 3.5%
Bethlehem Steel Corp.:
30,000 Exchange $3.50+ 1,072,500
32,000 Exchange $5.00 1,704,000
30,000 Kinam Gold Inc., Series B, Exchange $3.75 971,250
40,000 WHX Corp., Series A, Exchange 6.500% 1,302,500
- --------------------------------------------------------------------------------------------------------
5,050,250
- --------------------------------------------------------------------------------------------------------
Oil and Natural Gas -- 5.0%
50,000 El Paso Energy Capital Trust I, Exchange 4.750% 2,468,750
40,000 Tosco Financing Trust, Exchange 5.750% 1,940,000
50,000 Unocal Capital Trust, Exchange 6.250% 2,818,750
- --------------------------------------------------------------------------------------------------------
7,227,500
- --------------------------------------------------------------------------------------------------------
Paper, Forest Products and Printing -- 1.8%
50,000 International Paper Capital Trust, Exchange 5.250% 2,600,000
- --------------------------------------------------------------------------------------------------------
Real Estate Development - REITS -- 3.9%
50,000 Archstone Communities Trust, Series A, Exchange $1.75 1,437,500
40,000 Equity Office Properties Trust, Exchange 5.250%+ 1,605,000
50,000 Felcor Lodging Trust Inc., Series A, Exchange $1.95 971,875
40,000 Glenborough Realty Trust, Series A, Exchange 7.750% 735,000
30,000 Tanger Factory Outlet Centers Inc., Depository Shares,
Series A, Exchange $2.16 697,500
- --------------------------------------------------------------------------------------------------------
5,446,875
- --------------------------------------------------------------------------------------------------------
Rental Auto/Equipment -- 0.7%
30,000 Budget Group Capital Trust, Exchange 6.250%+ 1,053,750
- --------------------------------------------------------------------------------------------------------
Restaurants - Food Service -- 2.9%
60,000 Suiza Capital Trust II, Exchange 5.500% 2,017,500
35,000 Wendy's Financing I, Series A, Exchange 5.000% 2,108,750
- --------------------------------------------------------------------------------------------------------
4,126,250
- --------------------------------------------------------------------------------------------------------
Retail -- 1.9%
50,000 KMart Financing, Exchange 7.750% 2,718,750
- --------------------------------------------------------------------------------------------------------
Telecommunications Equipment -- 1.1%
30,000 Loral Space & Communications, Exchange 6.000% 1,578,750
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
========================================================================================================
<C> <S> <C>
Transportation Services -- 2.8%
25,000 CNF Trust I, Series A, Exchange 5.000% $ 1,450,000
50,000 Union Pacific Capital Trust, Exchange 6.250%+ 2,506,250
- --------------------------------------------------------------------------------------------------------
3,956,250
- --------------------------------------------------------------------------------------------------------
Utilities -- 1.3%
40,000 Calenergy Capital Trust III, Exchange 6.500% 1,900,000
- --------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost -- $50,245,462) 47,424,625
========================================================================================================
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
========================================================================================================
CONVERTIBLE BONDS AND NOTES -- 58.8%
<C> <C> <S> <C>
Aerospace and Defense -- 0.5%
$1,000,000 B- Kellstrom Industries Inc., 5.750% due 10/15/02+ 763,750
- --------------------------------------------------------------------------------------------------------
Automobile Parts -- 3.5%
2,500,000 AA Deutsche Bank Finance B.V., zero coupon due 2/12/17+++ 1,212,500
4,000,000 A- Magna International Inc., 4.875% due 2/15/05 3,835,000
- --------------------------------------------------------------------------------------------------------
5,047,500
- --------------------------------------------------------------------------------------------------------
Building and Construction -- 0.9%
3,200,000 BBB- Lenar Corp., zero coupon due 7/29/18 1,316,000
- --------------------------------------------------------------------------------------------------------
Communications -- 5.1%
1,500,000 B Adaptive Broadband Corp., 5.250% due 12/15/03 1,395,000
Bell Atlantic Financial Services Corp.:
2,500,000 A+ 5.750% due 4/1/03+ 2,592,250
3,000,000 A+ 4.250% due 9/15/05+ 3,330,300
- --------------------------------------------------------------------------------------------------------
7,317,550
- --------------------------------------------------------------------------------------------------------
Data Processing -- 1.8%
2,500,000 BB- National Data Corp., 5.000% due 11/1/03 2,590,625
- --------------------------------------------------------------------------------------------------------
Diversified and Conglomerate Manufacturing -- 4.7%
Mark IV Industries:
3,000,000 Ba2* 4.750% due 11/1/04+ 2,673,750
1,000,000 Ba2* 4.750% due 11/1/04 891,250
4,000,000 B+ MascoTech Inc., 4.500% due 12/15/03 3,165,000
- --------------------------------------------------------------------------------------------------------
6,730,000
- --------------------------------------------------------------------------------------------------------
Diversified and Conglomerate Services -- 1.8%
430,000 B- Getty Images Inc., 4.750% due 6/1/03+ 387,000
2,250,000 B+ Mail-Well Inc., 5.000% due 11/1/02 2,255,625
- --------------------------------------------------------------------------------------------------------
2,642,625
- --------------------------------------------------------------------------------------------------------
Electronics - Computers and Software -- 3.7%
3,000,000 NR Citrix Systems, zero coupon due 3/22/19 1,267,500
1,000,000 B Micron Technology Inc., 7.000% due 7/1/04 1,160,000
3,000,000 Ba2* National Semiconductor Corp., 6.500% due 10/1/02+ 2,846,250
- --------------------------------------------------------------------------------------------------------
5,273,750
- --------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
========================================================================================================
<C> <C> <S> <C>
Environmental Control -- 1.3%
$2,000,000 BBB Waste Management Inc., 4.000% due 2/1/02 $ 1,860,000
- --------------------------------------------------------------------------------------------------------
Health Care, Drugs and Hospital Supplies -- 11.8%
2,000,000 B+ AES Corp., 4.500% due 8/15/05 2,577,500
3,000,000 B Alpharma Inc., 5.750% due 4/1/05+ 4,222,500
1,000,000 BB- Alza Corp., 5.000% due 5/1/06 1,360,000
Athena Neurosciences, Inc.:
2,000,000 BBB- 4.750% due 11/15/04+ 2,150,000
3,000,000 BBB- 4.750% due 11/15/04 3,225,000
2,000,000 B+ Centocor Inc., 4.750% due 2/15/05 2,570,000
1,000,000 B2* Concentra Managed Care Inc., 4.500% due 3/15/03+ 980,000
- --------------------------------------------------------------------------------------------------------
17,085,000
- --------------------------------------------------------------------------------------------------------
Human Resources -- 1.9%
1,000,000 B2* Data Processing Resources Corp., 5.250% due 4/1/05+ 987,500
2,000,000 BB+ Interim Services Inc., 4.500% due 6/1/05 1,752,500
- --------------------------------------------------------------------------------------------------------
2,740,000
- --------------------------------------------------------------------------------------------------------
Insurance -- 0.9%
1,250,000 BB+ Penn Treaty American Corp., 6.250% due 12/1/03 1,231,250
- --------------------------------------------------------------------------------------------------------
Leisure, Amusement and Motion Picture -- 1.1%
1,000,000 B1* Imax Corp., Series AI, 5.750% due 4/1/03 1,250,000
500,000 BBB- Scholastic Corp., 5.000% due 8/15/05 469,050
- --------------------------------------------------------------------------------------------------------
1,719,050
- --------------------------------------------------------------------------------------------------------
Lodging -- 3.1%
3,000,000 BBB- Hilton Hotels Corp., 5.000% due 5/15/06 2,673,750
2,500,000 B Signature Inns Inc., 5.750% due 1/15/07 1,753,125
- --------------------------------------------------------------------------------------------------------
4,426,875
- --------------------------------------------------------------------------------------------------------
Metals and Mining -- 1.9%
3,000,000 BB+ Inco Ltd., 7.750% due 3/15/16 2,756,250
- --------------------------------------------------------------------------------------------------------
Oil and Natural Gas -- 0.7%
1,000,000 A- Diamond Offshore Drilling Inc., 3.750% due 2/15/07 1,057,500
- --------------------------------------------------------------------------------------------------------
Pharmacy Services -- 1.0%
2,000,000 BBB- Omnicare Inc., 5.000% due 12/1/07 1,400,000
- --------------------------------------------------------------------------------------------------------
Printing -- 1.5%
2,000,000 BB- World Color Press Inc., 6.000% due 10/1/07 2,100,000
- --------------------------------------------------------------------------------------------------------
Radio and Television -- 2.9%
2,000,000 BBB- Clear Channel Communications Inc., 2.625% due 4/1/03 2,552,500
3,000,000 BB+ Jacor Communications Inc., zero coupon due 2/9/18 1,687,500
- --------------------------------------------------------------------------------------------------------
4,240,000
- --------------------------------------------------------------------------------------------------------
Restaurants - Food Service -- 1.6%
3,000,000 B CKE Restaurants, Inc., 4.250% due 3/15/04 2,246,250
- --------------------------------------------------------------------------------------------------------
Retail -- 7.1%
1,000,000 A3* Costco Cos., Inc., zero coupon due 8/19/17+ 886,250
1,000,000 B- Homebase Inc., 5.250% due 11/1/04+ 775,000
4,000,000 NR Koninklijke Ahold NV, 3.000% due 9/30/03 2,384,634
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
========================================================================================================
Retail -- 7.1% (continued)
<C> <C> <S> <C>
$2,500,000 Baa2* Rite Aid Corp., 5.250% due 9/15/02+ $ 2,440,625
2,000,000 B- The Sports Authority Inc., 5.250% due 9/15/01 1,142,500
7,000,000 BB- Whole Foods Market Inc., zero coupon due 3/2/18+ 2,520,000
- --------------------------------------------------------------------------------------------------------
10,149,009
- --------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS AND NOTES
(Cost -- $87,609,111) 84,692,984
========================================================================================================
REPURCHASE AGREEMENT -- 8.2%
11,805,000 J.P. Morgan Corp., 5.050% due 8/2/99;
Proceeds at maturity -- $11,809,968; (Fully collateralized
by U.S. Treasury Notes, 3.625% due 1/15/08;
Market value -- $12,041,124) (Cost -- $11,805,000) 11,805,000
========================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $149,659,573**) $143,922,609
========================================================================================================
</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.
++ Security is on loan (See Note 6).
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 13 for bond ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 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
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.
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 July 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $149,659,573) $143,922,609
Cash 578
Collateral for securities on loan (Note 6) 1,242,600
Dividends and interest receivable 1,195,804
Receivable for Fund shares sold 16,080
- --------------------------------------------------------------------------------
Total Assets 146,377,671
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 6) 1,242,600
Dividends payable 400,878
Payable for Fund shares purchased 103,437
Investment advisory fees payable 56,956
Administration fees payable 22,783
Distribution fees payable 3,969
Accrued expenses 28,106
- --------------------------------------------------------------------------------
Total Liabilities 1,858,729
- --------------------------------------------------------------------------------
Total Net Assets $144,518,942
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $9,446
Capital paid in excess of par value 155,209,041
Undistributed net investment income 171,334
Accumulated net realized loss from security transactions (5,132,081)
Net unrealized depreciation of investments (5,738,798)
- --------------------------------------------------------------------------------
Total Net Assets $144,518,942
================================================================================
Shares Outstanding:
Class A 1,714,651
---------------------------------------------------------------------------
Class B 1,416,917
---------------------------------------------------------------------------
Class L 35,588
---------------------------------------------------------------------------
Class O 37,674
---------------------------------------------------------------------------
Class Y 6,240,893
---------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $15.25
---------------------------------------------------------------------------
Class B * $15.22
---------------------------------------------------------------------------
Class L ** $15.18
---------------------------------------------------------------------------
Class O ** $15.19
---------------------------------------------------------------------------
Class Y (and redemption price) $15.34
---------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value) $16.05
---------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value) $15.33
================================================================================
* 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 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 5,053,989
Dividends 3,282,680
- --------------------------------------------------------------------------------
Total Investment Income 8,336,669
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 727,464
Distribution fees (Note 2) 295,113
Administration fees (Note 2) 290,986
Registration fees 95,496
Shareholder and system servicing fees 86,683
Shareholder communications 52,712
Audit and legal 28,411
Trustees' fees 25,851
Pricing service fees 6,099
Custody 5,052
Other 9,474
- --------------------------------------------------------------------------------
Total Expenses 1,623,341
- --------------------------------------------------------------------------------
Net Investment Income 6,713,328
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 36,333,307
Cost of securities sold 41,414,723
- --------------------------------------------------------------------------------
Net Realized Loss (5,081,416)
- --------------------------------------------------------------------------------
Change in Net Unrealized Depreciation of Investments:
Beginning of year (164,387)
End of year (5,738,798)
- --------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (5,574,411)
- --------------------------------------------------------------------------------
Net Loss on Investments (10,655,827)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (3,942,499)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
=========================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 6,713,328 $ 5,477,773
Net realized gain (loss) (5,081,416) 7,697,282
Increase in net unrealized depreciation (5,574,411) (11,026,016)
- ---------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (3,942,499) 2,149,039
- ---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (6,407,643) (5,935,316)
Net realized gains (4,074,052) (9,092,705)
- ---------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (10,481,695) (15,028,021)
- ---------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 34,308,284 57,487,605
Net asset value of shares issued for reinvestment of dividends 3,497,766 7,328,412
Cost of shares reacquired (24,850,065) (18,012,365)
- ---------------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 12,955,985 46,803,652
- ---------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (1,468,209) 33,924,670
NET ASSETS:
Beginning of year 145,987,151 112,062,481
- ---------------------------------------------------------------------------------------------------------
End of year* $144,518,942 $145,987,151
=========================================================================================================
* Includes undistributed (overdistributed) net investment income of: $171,334 $(185,015)
=========================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Convertible Fund ("Fund"), a separate investment fund of Smith
Barney Income Funds ("Trust"), a Massachusetts business trust, is registered
under the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company. The Trust consists of the Fund and seven other
separate investment funds: Smith Barney Exchange Reserve Fund, Smith Barney
Premium Total Return Fund, Smith Barney High Income Fund, Smith Barney Municipal
High Income Fund, 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
shareholder 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 recorded on ex-dividend date and
interest income, adjusted for accretion of original discount, is recorded on an
accrual basis; (e) gains or losses on the sale of securities are calculated
using the specific identification method; (f) dividends and distributions to
shareholders are recorded on the ex-dividend date; (g) direct expenses are
charged to each class; management fees and general fund expenses are allocated
on the basis of relative net assets; (h) the Fund intends to comply with the
applicable provisions of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies and to make distributions of
taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (i) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At July 31, 1999, reclassifications
were made to undistributed net investment income and accumulated net realized
gains to reflect book/tax differences and income and gains available for
distributions under income tax regulations. Net investment income, net realized
gains and net assets were not affected by this change; and (j) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
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 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. For the year
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
ended July 31, 1999, SSB received no brokerage commissions.
For the year ended July 31, 1999, CFBDS and SSB received sales charges of
approximately $16,000 and $2,000 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 year ended July 31, 1999, CDSCs paid to SSB were
approximately $35,000 and $1,000 for Class B and L shares, respectively.
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 year ended July 31, 1999, total Distribution Plan fees incurred were:
Class A Class B Class L Class O
================================================================================
Distribution
Plan Fees $77,104 $207,128 $3,857 $7,024
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the year ended July 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $40,736,169
- --------------------------------------------------------------------------------
Sales 36,333,307
================================================================================
At July 31, 1999, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $8,307,656
Gross unrealized depreciation (14,044,620)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(5,736,964)
================================================================================
4. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Fund requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. Options Contracts
Premiums paid when put or call options are purchased by the Fund represent
investments, which are marked-to-market daily and are included in the schedule
of investments. When a purchased option expires, the Fund will realize a loss in
the amount of the premium paid. When the Fund enters into a closing sales
transaction, the Fund will realize a gain or loss depending on whether the
proceeds from the closing sales transaction are greater or less than the premium
paid for the option. When the Fund exercises a put option, it will realize a
gain or loss from the sale of the underlying security and the proceeds from such
sale will be decreased by the premium originally paid. When the Fund exercises a
call option, the cost of the security which the Fund purchases upon exercise
will be increased by the premium originally paid.
At July 31, 1999, the Fund had no open purchased put or call options contracts.
- --------------------------------------------------------------------------------
18 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 year ended July 31, 1999, the Fund did not have any written call or
put 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 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 July 31, 1999, the Fund loaned common stocks having a value of $1,212,500 and
holds the following collateral for loaned securities:
Security Description Value
================================================================================
Time Deposits:
Bank Brussels Lambert, 5.156% due 8/2/99 $ 268,132
Bank of Montreal, 5.125% due 8/2/99 173,163
Barclays Bank PLC, 5.125% due 8/2/99 173,163
Chase Manhattan Bank, 5.125% due 8/2/99 454,979
Toronto Dominion Bank, 5.125% due 8/2/99 173,163
- --------------------------------------------------------------------------------
Total $1,242,600
================================================================================
Income earned by the Fund from securities loaned for the year ended July 31,
1999 was $30,918.
7. Capital Loss Carryforward
At July 31, 1999, the Fund had, for Federal income tax purposes, a capital loss
carryforward of approximately $2,263,000, available to offset future capital
gains through July 31, 2007. 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.
8. Shares of Beneficial Interest
At July 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 (continued)
- --------------------------------------------------------------------------------
At July 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 $24,380,296 $24,338,345 $574,048 $678,247 $105,247,551
====================================================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 1999 July 31, 1998
------------------------------ -------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 136,322 $ 2,095,560 187,183 $ 3,373,179
Shares issued on reinvestment 121,000 1,853,157 211,208 3,642,177
Shares reacquired (659,488) (10,153,855) (366,561) (6,468,130)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (402,166) $ (6,205,138) 31,830 $ 547,226
====================================================================================================================================
Class B
Shares sold 85,020 $ 1,307,023 215,590 $ 3,822,846
Shares issued on reinvestment 101,749 1,556,010 205,341 3,534,856
Shares reacquired (876,431) (13,432,261) (622,216) (11,110,774)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Decrease (689,662) $(10,569,228) (201,285) $ (3,753,072)
====================================================================================================================================
Class L*
Shares sold 27,844 $ 429,273 15,235 $ 263,764
Shares issued on reinvestment 1,417 21,652 63 1,070
Shares reacquired (6,109) (93,180) (2,862) (48,369)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 23,152 $ 357,745 12,436 $ 216,465
====================================================================================================================================
Class O++
Shares sold 180 $ 2,762 37,643 $ 677,932
Shares issued on reinvestment 4,379 66,947 8,745 150,309
Shares reacquired (59,200) (915,187) (21,450) (385,092)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (54,641) $ (845,478) 24,938 $ 443,149
====================================================================================================================================
Class Y
Shares sold 1,965,698 $ 30,473,666 2,733,387 $ 49,349,884
Shares issued on reinvestment -- -- -- --
Shares reacquired (16,550) (255,582) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 1,949,148 $ 30,218,084 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 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<TABLE>
<CAPTION>
Class A Shares 1999(1) 1998 1997 1996(1) 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 16.90 $ 18.61 $ 15.66 $ 15.27 $ 14.56
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.69 0.73 0.78 0.74 0.74
Net realized and unrealized gain (loss) (1.24) (0.39) 3.28 0.38 0.70
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.55) 0.34 4.06 1.12 1.44
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.66) (0.79) (0.75) (0.73) (0.73)
Net realized gains (0.44) (1.26) (0.36) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.10) (2.05) (1.11) (0.73) (0.73)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.25 $ 16.90 $ 18.61 $ 15.66 $ 15.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (3.11)% 1.97% 26.94% 7.41% 10.35%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $26,141 $35,780 $38,803 $34,888 $35,238
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.29% 1.25% 1.27% 1.40% 1.40%
Net investment income 4.45 4.09 4.61 4.68 5.13
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 27% 49% 57% 59% 48%
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class B Shares 1999(1) 1998 1997 1996(1) 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 16.89 $ 18.60 $ 15.66 $ 15.27 $ 14.56
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.61 0.64 0.69 0.66 0.67
Net realized and unrealized gain (loss) (1.24) (0.38) 3.28 0.39 0.70
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.63) 0.26 3.97 1.05 1.37
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.60) (0.71) (0.67) (0.66) (0.66)
Net realized gains (0.44) (1.26) (0.36) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.04) (1.97) (1.03) (0.66) (0.66)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.22 $ 16.89 $ 18.60 $ 15.66 $ 15.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (3.61)% 1.51% 26.29% 6.91% 9.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $21,559 $35,570 $42,927 $42,420 $45,524
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.76% 1.74% 1.77% 1.90% 1.90%
Net investment income 3.98 3.60 4.12 4.18 4.63
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 27% 49% 57% 59% 48%
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Class L Shares 1999(1) 1998(2)
====================================================================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Year $16.90 $17.14
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.53 0.05
Net realized and unrealized loss (1.24) (0.17)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Loss From Operations (0.71) (0.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.57) (0.12)
Net realized gains (0.44) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.01) (0.12)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $15.18 $16.90
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (4.08)% (0.74)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 540 $ 210
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.30% 1.98%+
Net investment income 3.39 2.51+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 27% 49%
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class O Shares 1999(1) 1998(3) 1997 1996(1) 1995(4)(5)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $16.87 $18.58 $15.64 $15.27 $14.09
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.61 0.63 0.67 0.67 0.50
Net realized and unrealized gain (loss) (1.25) (0.37) 3.31 0.37 1.17
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.64) 0.26 3.98 1.04 1.67
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.60) (0.71) (0.68) (0.67) (0.49)
Net realized gains (0.44) (1.26) (0.36) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.04) (1.97) (1.04) (0.67) (0.49)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $15.19 $16.87 $18.58 $15.64 $15.27
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (3.66)% 1.53% 26.37% 6.82% 12.17%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 572 $1,557 $1,252 $ 641 $ 83
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.78% 1.70% 1.74% 1.86% 1.87%+
Net investment income 4.00 3.63 4.14 4.17 4.77+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 27% 49% 57% 59% 48%
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) For the period from June 15, 1998 (inception date) to July 31, 1998.
(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.
- --------------------------------------------------------------------------------
22 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<TABLE>
<CAPTION>
Class Y Shares 1999(1) 1998 1997 1996(1)(2)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 16.98 $ 18.66 $ 15.68 $16.15
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.76 0.77 0.83 0.38
Net realized and unrealized gain (loss) (1.25) (0.35) 3.31 (0.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.49) 0.42 4.14 (0.08)
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.71) (0.84) (0.80) (0.39)
Net realized gains (0.44) (1.26) (0.36) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.15) (2.10) (1.16) (0.39)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.34 $ 16.98 $ 18.66 $15.68
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (2.68)% 2.42% 27.44% (0.56)%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $95,707 $72,870 $29,080 $9,189
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.83% 0.83% 0.85% 1.00%+
Net investment income 4.87 4.49 5.04 4.98+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 27% 49% 57% 59%
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) 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 23
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
of Smith Barney Income Funds:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Convertible Fund of Smith Barney
Income Funds as of July 31, 1999, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the
years in the two-year period then ended, and the financial highlights for each
of the years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1999, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Convertible Fund of Smith Barney Income Funds as of July 31, 1999, the
results of its operations for the year then ended, the changes in its net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
September 14, 1999
- --------------------------------------------------------------------------------
24 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On April 19, 1999, a special meeting of shareholders of the Trust was held for
the purpose of electing Trustees of the Fund. The results of the vote were as
follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Trustees For Shares Voted Against Shares Voted
====================================================================================================================================
<S> <C> <C> <C> <C>
Lee Abraham 543,591,987.967 97.621% 13,249,035.953 2.379%
Allan J. Bloostein 543,887,340.881 97.674 12,953,683.039 2.326
Jane F. Dasher 544,416,099.765 97.769 12,424,924.155 2.231
Donald R. Foley 543,336,693.437 97.575 13,504,330.483 2.425
Richard E. Hanson, Jr. 544,212,126.755 97.732 12,628,897.165 2.268
Paul Hardin 544,290,529.761 97.746 12,550,494.159 2.254
Heath B. McLendon 544,304,571.357 97.749 12,536,452.563 2.251
Roderick C. Rasmussen 543,666,173.202 97.634 13,174,850.718 2.366
John P. Toolan 544,353,379.596 97.757 12,487,644.324 2.243
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
July 31, 1999:
o A corporate dividends received deduction of 38.13%.
o Total long-term capital gain distributions paid of $4,074,052.
A total of 5.65% of the ordinary dividends paid by the Fund from net investment
income are derived from Federal obligations and may be exempt from taxation at
the state level.
- --------------------------------------------------------------------------------
Smith Barney Convertible Fund 25
<PAGE>
Smith Barney
Convertible Fund
Trustees
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald R. Foley
Richard E. Hanson, Jr.
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
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 9699
Providence, RI 02940-9699
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
FD01020 9/99
[GRAPHIC OMITTED]
Smith Barney
Exchange
Reserve Fund
-------------
ANNUAL REPORT
-------------
July 31, 1999
[LOGO] Smith Barney
Mutual Funds
<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 annual report for the Smith Barney Exchange
Reserve Fund ("Fund") for the year ended July 31, 1999. We hope you find this
report to be useful and informative. 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 an investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although
the Fund seeks to preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Fund.
Performance Summary
The chart below provides the yields for the Fund's Class B shares for the year
ended July 31, 1999.
Seven-Day 30-Day
Current Yield Yield
------------- -----
4.17% 4.12%
Market Update and Outlook
The U.S. is in its ninth year of economic expansion and growth is now better
than the historical average and stands at 4.0%. The earlier weaknesses in Asia,
U.S. manufacturing and falling commodity prices have reversed. This has led the
Federal Reserve Board ("Fed") to change its monetary stance to a "tightening
bias" and raise interest rates at the June Federal Open Market Committee
("FOMC") meeting from 4.75% to 5.00% on the overnight federal-funds rate. As a
result, the short-term yield curve has steepened. (The short-term yield curve
shows the difference in yields between one month and one year money market
securities.)
July's economic data remained strong, leading to a hawkish semi-annual
Humphrey-Hawkins testimony to the U.S. House of Representatives.
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 1
<PAGE>
With the likelihood that interest rates are increased again, the market has
priced itself to a 5.25% federal-funds rate now. Chairman Alan Greenspan warned
that the Fed remains "especially alert to inflation risks," and "will have to
act promptly and forcefully" if sustainable economic growth is threatened by
forces of imbalances.
One indication of rising inflation could be a tendency for labor markets to
tighten further. We are monitoring upcoming economic data closely to determine
whether or not the Fed will tighten again. In our view, a significant increase
in payroll growth or inflationary pressures will give the Fed reason to act.
Investment Strategy
Due to a strong economic environment and in anticipation of further interest
rate tightening, as previously noted, the yield curve has continued to steepen.
As a result, we have shortened our average maturity. At the end of the Fund's
fiscal year end, the average maturity was 12 days.
The Fund remains well diversified with 36 different issuers. As of July 31,
1999, Fund assets were invested 61.0% in corporate commercial paper and 39.0% in
bank obligations.
We are committed to our strategy of buying high quality securities and the
credit quality of our investments remains strong. We have added several large
companies such as International Business Machines Corp., BellSouth
Telecommunications and Wal-Mart Stores to our approved list of issuers.
In closing, thank you for investing in the Smith Barney Exchange Reserve Fund
Inc. 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
August 23, 1999
- --------------------------------------------------------------------------------
2 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
===================================================================================================================
<S> <C> <C> <C>
FEDERAL AGENCY DISCOUNT NOTES -- 3.4%
$5,000,000 Federal Home Loan Mortgage Corp. matures 8/6/99
(Cost -- $4,996,576) 4.97% $ 4,996,576
===================================================================================================================
COMMERCIAL PAPER -- 80.6%
2,569,000 Alliance & Leicester Building Society matures 8/2/99 5.08 2,568,638
4,000,000 American Express Credit Corp. matures 8/24/99 5.09 3,987,069
4,000,000 American Home Products matures 8/2/99 5.10 3,999,433
4,000,000 Ameritech Corp. matures 8/16/99 5.08 3,991,567
4,000,000 ANZ Delaware Inc. matures 8/10/99 5.11 3,994,910
5,000,000 Associates First Capital Co. mature 8/12/99 to 9/2/99 5.05 to 5.11 4,983,391
4,000,000 AT&T Corp. matures 8/18/99 5.06 3,990,480
4,000,000 BCI Funding Corp. matures 8/19/99 5.11 3,989,820
5,000,000 Bellsouth Capital Funding mature 8/10/99 to 8/17/99 5.08 to 5.09 4,991,707
4,000,000 Canadian Imperial Hldgs. Inc. matures 8/12/99 5.10 3,993,797
3,000,000 CIT Group Holdings Inc. matures 8/9/99 4.93 2,996,740
4,000,000 Daimler Chrysler North America Corp. matures 8/2/99 5.09 3,999,437
4,500,000 Dresdner US Finance Inc. matures 8/11/99 5.09 4,493,662
2,900,000 E.I. du Pont de Nemours & Co. matures 8/16/99 5.09 2,893,862
5,000,000 Ford Motor Credit mature 8/3/99 to 8/19/99 4.93 to 5.09 4,991,852
5,000,000 General Electric Capital Corp.
mature 8/10/99 to 8/30/99 5.00 to 5.10 4,985,268
5,000,000 General Motors Acceptance Corp.
mature 8/11/99 to 8/23/99 5.01 to 5.10 4,987,926
4,000,000 Goldman Sachs matures 8/23/99 5.07 3,987,656
3,000,000 GTE Funding Inc. matures 8/17/99 5.09 2,993,227
4,000,000 IBM Credit Corp. matures 8/2/99 5.08 3,999,437
3,000,000 International Nederlanden US Funding matures 8/26/99 5.10 2,989,417
2,500,000 Johnson & Johnson matures 8/23/99 5.11 2,492,254
3,599,000 J.P. Morgan Inc. matures 8/4/99 5.11 3,597,470
6,000,000 Nestle Capital Corp. matures 8/3/99 5.07 5,998,310
4,000,000 Oesterreichsche Kontrollbank matures 8/13/99 5.09 3,993,240
2,000,000 Pfizer Inc. matures 8/16/99 5.09 1,995,783
4,000,000 Procter & Gamble Co. matures 8/4/99 5.06 3,998,319
2,000,000 Transamerica Finance matures 8/5/99 5.09 1,998,872
4,000,000 USAA Capital Corp. matures 8/10/99 5.07 3,994,951
3,000,000 Walt Disney Company matures 8/10/99 5.05 2,996,218
4,000,000 Wells Fargo & Co. matures 8/16/99 5.08 3,991,567
- -------------------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost -- $118,866,280) 118,866,280
===================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
===================================================================================================================
<S> <C> <C> <C>
TIME DEPOSITS -- 16.0%
$6,000,000 Bank Austriaengesellschaft matures 8/2/99 5.06% $ 6,000,000
5,671,000 First Chicago (National Bank) matures 8/2/99 5.12 5,671,000
6,000,000 Paribas S.A. matures 8/2/99 5.13 6,000,000
6,000,000 Republic National Bank matures 8/2/99 5.06 6,000,000
- -------------------------------------------------------------------------------------------------------------------
TOTAL TIME DEPOSITS
(Cost -- $23,671,000) 23,671,000
===================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $147,533,856*) $147,533,856
===================================================================================================================
</TABLE>
* Aggregate cost for Federal income taxes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
4 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at amortized cost $147,533,856
Cash 892
Interest receivable 6,491
Prepaid registration fees 280,070
Receivable from manager 183,227
- --------------------------------------------------------------------------------
Total Assets 148,004,536
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 292,760
Distribution fees payable 93,448
Administration fees payable 48,902
Investment advisory fees payable 38,080
Accrued expenses 67,500
- --------------------------------------------------------------------------------
Total Liabilities 540,690
- --------------------------------------------------------------------------------
Total Net Assets $147,463,846
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 147,484
Capital paid in excess of par value 147,316,362
- --------------------------------------------------------------------------------
Total Net Assets $147,463,846
================================================================================
Shares Outstanding:
Class B 120,149,909
----------------------------------------------------------------------------
Class L 27,333,775
----------------------------------------------------------------------------
Net Asset Value, Per Class $1.00
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $7,285,513
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 705,198
Investment advisory fees (Note 3) 423,119
Administration fees (Note 3) 282,079
Shareholder and system servicing fees 77,273
Registration fees 73,069
Audit and legal 56,448
Custody 23,341
Shareholder communications 13,200
Director fees 9,396
Other 1,880
- --------------------------------------------------------------------------------
Total Expenses 1,665,003
- --------------------------------------------------------------------------------
Net Investment Income 5,620,510
- --------------------------------------------------------------------------------
Net Realized Gain From Security Transactions 14,111
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $5,634,621
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
- --------------------------------------------------------------------------------
1999 1998
================================================================================
OPERATIONS:
Net investment income $ 5,620,510 $ 4,831,392
Net realized gain 14,111 4,628
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations 5,634,621 4,836,020
- -------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 2) (5,620,510) (4,831,392)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 952,335,299 430,187,888
Net asset value of shares issued for
reinvestment of dividends 4,687,823 4,209,538
Cost of shares reacquired (893,074,660) (473,623,461)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 63,948,462 (39,226,035)
- -------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 63,962,573 (39,221,407)
NET ASSETS:
Beginning of year 83,501,273 122,722,680
- -------------------------------------------------------------------------------
End of year $ 147,463,846 $ 83,501,273
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 In come 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 shareholder 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 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, 1999, reclassifications
were made to the Fund's capital accounts to reflect permanent book/tax
differences and income and gains available for distributions under income tax
regulations. Accordingly, a portion of accumulated net realized loss amounting
to $19,838 was reclassified to paid-in capital. Net investment income, net
realized gains and net assets were not affected by this change; (h) the Fund
intends to comply with the applicable provisions of the Internal Revenue Code of
1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; and (i) estimates and assumptions are required
to be made regarding assets, liabilities and changes in net assets resulting
from operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. Dividends
The Fund declares and records a dividend of substantially all of its net
investment income on each business day. Such dividends are paid or reinvested
monthly on the payable date. Net realized gains, if any, are distributed
annually.
- --------------------------------------------------------------------------------
8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Investment Advisory Agreement, Administration Agreement and Other
Transactions
SSBC Fund Management Inc. ("SSBC"), 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. ("CFBDS") 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 a member 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. Class L shares have a 1.00% CDSC, which
applies if redemption occurs within the first year from the date such investment
was made. For the year ended July 31, 1999, CDSCs paid to SSB were
approximately:
Class B Class L
================================================================================
CDSCs $491,000 $14,000
================================================================================
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 year ended July 31, 1999,
total Distribution Plan fees incurred were:
Class B Class L
================================================================================
Distribution Plan Fees $614,878 $90,320
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
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.
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
5. 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:
Year Ended Year Ended
July 31, 1999 July 31, 1998
================================================================================
Class B
Shares sold 665,571,157 319,546,146
Shares issued on reinvestment 4,157,911 3,892,738
Shares reacquired (623,800,133) (366,172,777)
- --------------------------------------------------------------------------------
Net Increase (Decrease) 45,928,935 (42,733,893)
================================================================================
Class L+
Shares sold 286,764,142 110,641,742
Shares issued on reinvestment 529,912 316,800
Shares reacquired (269,274,527) (107,450,684)
- --------------------------------------------------------------------------------
Net Increase 18,019,527 3,507,858
================================================================================
+ On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
10 1999 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 B Shares 1999(1) 1998 1997 1996 1995
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------------
Net investment income 0.040 0.044 0.043 0.044 0.044
Dividends from net
investment income (0.040) (0.044) (0.043) (0.044) (0.044)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------------
Total Return 4.05% 4.51% 4.43% 4.53% 4.49%
- --------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Year (000s) $120,127 $74,186 $116,915 $150,421 $160,432
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.18% 1.21% 1.16% 1.17% 1.24%
Net investment income 3.98 4.43 4.34 4.45 4.35
====================================================================================================================
<CAPTION>
Class L Shares 1999(1) 1998(2) 1997 1996 1995(3)
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------------
Net investment income 0.040 0.044 0.043 0.044 0.035
Dividends from net
investment income (0.040) (0.044) (0.043) (0.044) (0.035)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00 $1.00
- --------------------------------------------------------------------------------------------------------------------
Total Return 4.04% 4.52% 4.42% 4.51% 3.52%++
- --------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Year (000s) $27,337 $9,315 $5,808 $9,444 $2,850
- --------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.21% 1.21% 1.16% 1.17% 1.21%+
Net investment income 3.95 4.43 4.34 4.39 4.76+
====================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) 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.
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Income Funds:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Smith Barney Exchange Reserve Fund of
Smith Barney Income Funds as of July 31, 1999, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended and the financial highlights
for each of the years in the five-year period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of July
31, 1999, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Smith Barney Exchange Reserve Fund of Smith Barney Income Funds as of July 31,
1999, the results of its operations for the year then ended, the changes in its
net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the five-year period then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
September 14, 1999
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
July 31, 1999:
A total of 0.28% of the ordinary dividends paid by the Fund from net investment
income are derived from Federal obligations and may be exempt from taxation at
the state level.
- --------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On May 12, 1999, a special meeting of shareholders of the Trust was held for the
purpose of electing Trustees to the Trust.
The results of the vote were as follows:
<TABLE>
<CAPTION>
Shares Voted Percentage Shares Voted Percentage
Name of Trustees For Shares Voted Against Shares Voted
=====================================================================================
<S> <C> <C> <C> <C>
Lee Abraham 62,342,961.572 98.630% 865,940.611 1.370%
Allan J. Bloostein 62,384,540.377 98.696 824,351.806 1.304
Jane F. Dasher 62,392,002.787 98.708 816,889.396 1.292
Donald R. Foley 62,322,262.500 98.595 886,629.683 1.403
Richard E. Hanson, Jr. 62,380,877.618 98.690 828,014.565 1.310
Paul Hardin 62,379,975.324 98.689 828,916.859 1.311
Heath B. McLendon 62,370,291.215 98.673 838,630.968 1.327
Roderick C. Rasmussen 62,346,471.848 98.636 862,420.335 1.364
John P. Toolan 62,396,377.832 98.715 812,514.351 1.285
=====================================================================================
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
SALOMONSMITHBARNEY
------------------
A member of citigroup[LOGO]
Trustees
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald R. Foley
Richard E. Hanson, Jr.
Paul Hardin
Heath B. McLendon
Roderick C. Rasmussen
John P. Toolan
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 9699
Providence, RI 02940-9699
This report is submitted for the general information of the shareholders of
Smith Barney Income Funds -- Smith Barney Exchange Reserve Fund. It is not au
thorized for distribution to prospec tive inves tors unless accompanied or pre
ceded by a current Prospectus for the Fund, which contains information con
cerning the Fund's investment policies, fees and expenses as well as other per
ti nent 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
FD01183 9/99
</TABLE>
