<PAGE>
-------------------------------------------------------------
SMITH BARNEY
HIGH INCOME FUND
-------------------------------------------------------------
CLASSIC SERIES | ANNUAL REPORT | JULY 31, 2000
[LOGO OF SMITH BARNEY]
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NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
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<PAGE>
[PHOTO]
JOHN C. BIANCHI
PORTFOLIO MANAGER
[GRAPHIC]
Classic Series
Annual Report . July 31, 2000
SMITH BARNEY
HIGH INCOME FUND
---------------------
JOHN C. BIANCHI, CFA
---------------------
John Bianchi has more than 22 years of securities business experience and has
been managing the Fund since 1990.
Education: BA from Seton Hall
University; MBA in Finance from
Fairleigh Dickinson University
---------------------
FUND OBJECTIVE
---------------------
The Fund seeks high current income by investing primarily in high yield corpo-
rate bonds,debentures and notes. These securities are commonly known as "junk
bonds" because they are rated in the lower rating categories of nationally and
internationally recognized rating agencies, or, if unrated of similar credit
quality.
---------------------
FUND FACTS
---------------------
FUND INCEPTION
---------------------
November 6, 1992
MANAGER TENURE
---------------------
10 Years
MANAGER INVESTMENT
INDUSTRY EXPERIENCE
---------------------
22 Years
CLASS A CLASS B CLASS L
-------------------------------------------
NASDAQ SHIAX SHIBX SHICX
-------------------------------------------
INCEPTION 11/6/92 9/2/86 8/24/94
-------------------------------------------
Average Annual Total Returns as of July 31, 2000
Without Sales Charges(1)
Class A Class B Class L
----------------------------------------------------------
One-Year 0.93% 0.40% 0.57%
----------------------------------------------------------
Five-Year 6.41 5.88 5.98
----------------------------------------------------------
Ten-Year N/A 9.02 N/A
----------------------------------------------------------
Since Inception+ 7.91 7.63 6.95
----------------------------------------------------------
With Sales Charges(2)
Class A Class B Class L
----------------------------------------------------------
One-Year (3.65)% (3.72)% (1.31)%
----------------------------------------------------------
Five-Year 5.44 5.74 5.77
----------------------------------------------------------
Ten-Year N/A 9.02 N/A
----------------------------------------------------------
Since Inception 7.27 7.63 6.77
----------------------------------------------------------
(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.
--------------------------------------------------------------------------------
What's Inside
A Message from the Chairman . . . . . . . . . . . . . . . . . . . . . . .1
Letter from the Portfolio Manager . . . . . . . . . . . . . . . . . . . .2
Historical Performance . . . . . . . . . . . . . . . . . . . . . . . . . 5
Smith Barney High Income Fund at a Glance . . . . . . . . . . . . . . . .8
Schedule of Investments . . . . . . . . . . . . . . . . . . . . . . . . .9
Bond Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Statement of Assets and Liabilities . . . . . . . . . . . . .. . . . . .21
Statement of Operations . . . . . . . . . . . . . . . . .. . . . . . . .22
Statements of Changes in Net Assets . . . . . . . . . . . . . . . . .23
Notes to Financial Statements . . . . . . . . . . . . . . .. . . . . . .24
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . .29
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . .34
Tax Information . . . . . . . . . . . . . . . . . . .. . . . . . . . . .35
[LOGO OF SMITH BARNEY]
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Investment Products: Not FDIC Insured. Not Bank Guaranteed. May Lose Value
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<PAGE>
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A MESSAGE FROM THE CHAIRMAN
--------------------------------------------------------------------------------
For years, individuals and businesses have looked to the investment
professionals of SSB Citi Fund Management LLC ("SSB Citi") for thoughtful
insights and advice. For some, the solution has been a long-term investment
strategy, incorporating multiple stock and bond mutual funds. Others have
invested with specific portfolio managers who are recognized and respected for
their insights and record.
The Smith Barney High Income Fund ("Fund") was designed to be an appropriate
investment for those who are seeking to invest in fixed income securities for
high current income and are willing to accept the credit and interest rate risks
of high yield securities. Portfolio manager John Bianchi attempts to minimize
the risk of any individual security by diversifying the Fund's investments
across a range of issues, industries and maturity dates. John carefully
considers and compares the relative yields of various types of obligations and
employs a forward-looking strategy seeking to identify companies that exhibit
favorable earnings prospects or demonstrate a potential for higher ratings over
time.
In our opinion, the lessons of the past may be used to better understand the
challenges and opportunities of the future. We also believe that expertise is
achieved through the intelligent application of knowledge and experience. Our
portfolio managers provide asset management expertise and have managed
portfolios across markets and cycles.
With economic growth robust, interest rates stable and inflationary pressures
apparently in check, many investors may not feel compelled to alter their
portfolio mixes. Yet, when times are good, it may be prudent for investors to
consider adding a bond fund to their investment plan to cushion the effects of
stock market volatility and gain additional income potential.
When you invest with SSB Citi, you can do so with the confidence that your
interests come first, your investment success is paramount and that the ultimate
in resources is being committed to your financial future. Thank you for
investing with us.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
August 29, 2000
[PHOTO]
HEATH B. MCLENDON
CHAIRMAN
1 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
Dear Shareholder,
We are pleased to provide the annual report for the Smith Barney High Income
Fund ("Fund") for the year ended July 31, 2000. In this report we have
summarized the period's prevailing economic and market conditions and outlined
our investment strategy. The information provided in this letter represents
the opinion of the manager and is not intended to be a forecast of future
events, a guarantee of future results nor investment advice.
Additionally, please note that the statistical performance information that
appears throughout this report is compiled from SSB Citi Fund Management LLC
internal research. It is not intended to be used as a forecast of future events,
a guarantee of future results nor investment advice. Further, there is no
assurance that certain securities will remain in or out of the Fund. A detailed
summary of the Fund's performance can be found in the appropriate sections that
follow. We hope you find this report to be useful and informative.
Performance Update
For the year ended July 31, 2000, the Fund's Class A shares, without and with
sales charges, returned 0.93% and a negative 3.65%, respectively. In comparison,
the Salomon Smith Barney High Yield Market (7-10 Year) Index ("SSB Index")1
returned a negative 0.60% and the Bear Stearns High Yield Market Index2 returned
0.98% for the same period. In addition, during the past twelve months, the Fund
distributed income dividends totaling $0.96 per Class A share. Past performance
is not indicative of future results.
During the reporting period, the Fund generated relatively competitive
performance versus the SSB Index, but still weak total returns on an absolute
basis. The Fund benefited from its exposure to the energy, cable, media and
technology sectors. Our relative overweight in middle-quality B rated issues
held back the Fund's absolute performance. Yet, we are pleased to report that
there were no defaults in the Fund's portfolio during the period despite the
overall increase in defaults in the high-yield bond market.
Investment Objective
The Fund seeks high current income by investing primarily in high yield
corporate bonds, debentures and notes. These securities are commonly known as
"junk bonds" because they are rated in the lower rating categories of nationally
and internationally recognized rating agencies, or, if unrated, of similar
credit quality. The Fund will not, however, invest more than 10% of its assets
in securities rated lower than B by both Moody's Investors Service, Inc. and
Standard & Poor's Ratings Service, two major credit reporting agencies.
High-Yield Bond Market and Economic Overview
Since the beginning of 2000, 30-Year U.S. Treasuries are up approximately 12%,
10-year U.S. Treasuries are up approximately 6% and investment-grade3 corporate
bonds are up approximately 4%. Given the greater uncertainty over future
economic growth and corporate profits, the stock market has generated single
digit negative total returns and continued to be marked by increased volatility.
--------------
1 The SSB Index is an unmanaged broad-based index of high yield bonds with a
remaining maturity of at least seven years, but less than ten years. Please
note that an investor cannot invest directly in an index.
2 The Bear Stearns High Yield Market Index is an unmanaged broad-based index
of high-yield bonds. Please note that an investor cannot invest directly in
an index.
3 Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody's
Investors Service, Inc. or AAA, AA, A and BBB by Standard & Poor's Ratings
Service, or that have an equivalent rating by any nationally recognized
statistical rating organization, as determined by the manager to be of
equivalent quality.
2 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
The high-yield bond market, for the most part, mirrored the performance of the
stock market during the period, posting a modest return in comparison to other
classes of bonds. Given the recent moderation in economic growth, the
highest-quality sectors of the bond market such as U.S.Treasuries,
investment-grade corporate bonds and U.S. agency securities generated the
strongest results. 30-Year U.S. Treasuries, which were up almost 2% in July
alone, outperformed all other sectors during the period.
Given the disparate performance between the U.S. high-yield bond market and the
remainder of the bond market, high-yield bond spreads now stand at over 683
basis points4 above U.S.Treasuries.These extremely high levels were last reached
during the 1998 emerging market crisis. The high-yield bond market now yields
more than 100% more than the U.S.Treasury market.
There is no doubt that the high-yield bond market has reflected the tighter
Federal Reserve Board ("Fed") monetary policy instituted on June 30, 1999 and
the increase in default rates in the past year. We believe the high-yield bond
market is heavily discounting the negative fundamental risks about potentially
tighter monetary policy, softer economic growth, weaker corporate profits and
potentially higher default rates.
We think investors have overreacted about the recent performance of high-yield
bonds. After a modestly positive month in June, high-yield bond mutual funds
again experienced net redemptions in July totaling more than $1 billion. Since
the beginning of this year, there has been a total of $7 billion of net
redemptions out of high-yield bond mutual funds. As a direct result of flagging
demand, new issue supply has decreased dramatically with only $34 billion of new
issues price in the past seven months, over 50% below last year's levels.
In addition, a large proportion of the new issues has been from the more liquid,
better quality companies. A majority of the new issues have been purchased by
longer-term institutional investors such as insurance companies and pension
plans that can discern the attractive long-term value of the high-yield bond
market relative to the other sectors of the bond market.
High-Yield Bond Market Update
The best-performing segment of the high-yield bond market for the first seven
months of this year were the highest-quality BB rated bonds. BB rated bonds, as
measured by the SSB Index, returned 2.25% for the first seven months of 2000.
B-rated issues, the most significant component of the high-yield bond market,
returned a negative 1.27% for the first seven months of 2000, as measured by the
SSB Index.
By far, the worst performing credit segment of the high-yield bond market were
the lower quality CCC-rated issues which delivered negative total returns in the
0.25% to 1.00% range in July and in the negative 4.00% to negative 6.00% range
for the first seven months of 2000. It is obvious to us the high-yield bond
market may be discounting a potential economic slow-down in the second half of
this year given the Fed's multiple increases in short-term interest rates. In
addition, the lower quality end of the high-yield bond market has continued to
be hurt by meaningfully higher default rates.
The best performing industry sectors of the high-yield bond market during 2000
were energy (oil and natural gas), technology, cable, media and operating
utilities, which historically have fared better during an economic slow-down.
The worst performing sectors included telecommunication, basic materials,
capital goods manufacturing, consumer-related industries and transportation.
The telecommunications sector, which accounts for about 25% of the high-yield
bond market, has underperformed due in large part to the recent weakness of the
stock market as well as the increased new issue supply of telecommunications
issues over the past year. Many companies in this sector are aggressive
consumers of external capital as they seek to build out their infrastructure.
--------------
4 A basis point is 0.01% or one one-hundredth of a percent.
3 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
Any credit tightening either in the form of lower liquidity in the banking
system or increased stock market volatility may cause these issues to
underperform in the near future. However, we remain convinced the better-quality
and larger capitalized companies in this sector may ultimately succeed and
perform well. (Of course, no guarantees can be given that our expectations
will be met.)
Conclusion
In summary, we believe the high-yield bond market has already discounted most of
the negative sentiment concerning the slowdown in economic growth and represents
compelling value for long-term investors seeking attractive income as well as
total return potential. Our goal over the near term in the Fund is to continue
to redeploy cash reserves into more liquid issues that we believe offer the
greatest upside price potential.
We remain confident the high-yield bond market is capable of generating
competitive total annual returns over the next three to five years, especially
if the Fed successfully engineers a moderation in economic growth and
inflation.We also continue to believe the Fed may be close to finishing its
latest rounds of interest rate increases, given the recent moderate economic
statistics on employment growth, retail sales, industrial production and
inflation.
If our expectations come true, we believe the high-yield bond market most likely
will play "catch-up" with the other sectors of the bond market which in turn,
would mean much stronger total return potential for the rest of 2000. (Of
course, no guarantees can be made that our expectations will be met.)
Thank you for your investment in the Smith Barney High Income Fund.We look
forward to continuing to help you pursue your financial goals in the future.
Sincerely,
/s/ John C. Bianchi, CFA
John C. Bianchi, CFA
Vice President and Investment Officer
August 29, 2000
4 Smith Barney High Income Fund | 2000 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>
7/31/00 $10.30 $ 9.43 $0.96 $0.00 $0.00 0.93%
------------------------------------------------------------------------------------------------------------------------------------
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 $8.23 $0.00 $0.08
====================================================================================================================================
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Historical Performance -- Class B Shares
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/00 $10.31 $ 9.44 $ 0.91 $ 0.00 $0.00 0.40%
------------------------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================================
Total $10.45 $0.00 $0.16
====================================================================================================================================
</TABLE>
5 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
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>
7/31/00 $10.32 $ 9.46 $0.91 $0.00 $0.00 0.57%
------------------------------------------------------------------------------------------------------------------------------------
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 $5.85 $0.00 $0.08
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class Y Shares
====================================================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/00 $10.33 $ 9.46 $0.99 $0.00 $0.00 1.29%
------------------------------------------------------------------------------------------------------------------------------------
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 $5.19 $0.00 $0.08
====================================================================================================================================
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/00 $10.29 $ 8.93 $0.98 $0.00 $0.00 (3.88)%
------------------------------------------------------------------------------------------------------------------------------------
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 $8.44 $0.00 $0.08
====================================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
6 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Returns
------------------------------------------------------------------------------------------------------------------------------------
Without Sales Charges(1)
-------------------------------------------------------------------------------
Class A Class B Class L Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 7/31/00 0.93% 0.40% 0.57% 1.29% (3.88)%
------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/00 6.41 5.88 5.98 N/A 5.59
------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/00 N/A 9.02 N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/00 7.91 7.63 6.95 5.75++ 7.46
====================================================================================================================================
<CAPTION>
With Sales Charges(2)
-------------------------------------------------------------------------------
Class A Class B Class L Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 7/31/00 (3.65)% (3.72)% (1.31)% 1.29% (3.88)%
------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/00 5.44 5.74 5.77 N/A 5.59
------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/00 N/A 9.02 N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/00 7.27 7.63 6.77 5.75++ 7.46
====================================================================================================================================
------------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Returns
------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Without Sales Charges(1)
====================================================================================================================================
<S> <C>
Class A (Inception* through 7/31/00) 80.20%
------------------------------------------------------------------------------------------------------------------------------------
Class B (7/31/90 through 7/31/00) 137.12
------------------------------------------------------------------------------------------------------------------------------------
Class L (Inception* through 7/31/00) 49.04
------------------------------------------------------------------------------------------------------------------------------------
Class Y (Inception* through 7/31/00) 28.50++
------------------------------------------------------------------------------------------------------------------------------------
Class Z (Inception* through 7/31/00) 74.50
====================================================================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the applica-
ble 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.
++ Performance calculations for Class Y shares use February 5, 1996 as the
inception date since all Class Y shares redeemed and new shares in Class Y
were not purchased until February 5, 1996.
* 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.
7 Smith Barney High Income Fund | 2000 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 1990 -- July 2000
[GRAPH]
Smith Barney Salomon Bros High-Yield
High Income fund Market (7-10 year) Index
July 1990 10,000 10,000
July 1991 10,787 9,199
July 1992 13,479 13,319
July 1993 15,979 15,590
July 1994 16,235 18,167
July 1995 17,821 17,691
July 1996 19,320 21,226
July 1997 22,744 23,686
July 1998 24,641 27,212
July 1999 23,618 27,572
July 2000 23,827 27,408
+ Hypothetical illustration of $10,000 invested in Class B shares on July 31,
1990, assuming reinvestment of dividends and capital gains, if any, at net
asset value through July 31, 2000. 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. The
Index is unmanaged and is not subject to the same management and trading
expenses as a mutual fund. The performance of the Fund's other classes
may be greater or less than the Class B shares' performance indicated on
this chart, depending on whether greater or lesser sales charges and fees
were incurred by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
--------------------------------------------------------------------------------
Industry Diversification*
--------------------------------------------------------------------------------
[GRAPH]
10.8% Cable Television
3.5% Casinos/Gambling
2.5% Containers/Packaging
4.1% Environmental Services
2.5% Food Distributors
5.7% Internet Services
2.9% Oil Refining/Marketing
14.9% Telecommunications-Other
10.9% Telephone-Cellular
2.7% Unregulated Power Generation
39.5% Other
--------------------------------------------------------------------------------
Investment Breakdown**
--------------------------------------------------------------------------------
[GRAPH]
1.2% Preferred Stock, Common Stock and Warrants
3.2% Repurchase Agreement
95.6% Corporate Bonds and Notes
* As a percentage of total corporate bonds and notes. These holdings are as
of July 31, 2000 and are subject to change.
** As a percentage of total investments. These holdings are as of July 31,
2000 and are subject to change.
8 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 95.6%
Aerospace -- 1.0%
BE Aerospace, Inc., Sr. Sub. Notes, Series B:
1,930,000 B 9.875% due 2/1/06 $ 1,891,400
5,795,000 B 8.000% due 3/1/08 5,114,088
2,810,000 B 9.500% due 11/1/08 2,683,550
4,380,000 B- Dunlop Standard Aerospace Holdings PLC, Sr. Notes, 11.875% due 5/15/09 4,336,200
------------------------------------------------------------------------------------------------------------------------------------
14,025,238
------------------------------------------------------------------------------------------------------------------------------------
Airlines -- 0.5%
8,721,391 BB Airplanes Pass-Through Trust, Corporate Asset-Backed Securities,
Series 1, Class D, 10.875% due 3/15/19 7,003,539
------------------------------------------------------------------------------------------------------------------------------------
Aluminum -- 1.2%
Kaiser Aluminum & Chemical Corp.:
Sr. Notes:
1,210,000 B1* Series B, 10.875% due 10/15/06 1,164,625
1,640,000 B1* Series D, 10.875% due 10/15/06 1,578,500
15,455,000 B3* Sr. Sub. Notes, 12.750% due 2/1/03 14,064,050
------------------------------------------------------------------------------------------------------------------------------------
16,807,175
------------------------------------------------------------------------------------------------------------------------------------
Apparel -- 0.8%
4,785,000 BB- Levi Strauss & Co., Notes, 7.000% due 11/1/06 3,804,075
Tommy Hilfiger USA, Inc., Guaranteed Notes:
745,000 BBB- 6.500% due 6/1/03 597,863
2,375,000 BBB- 6.850% due 6/1/08 1,632,813
4,550,000 B- Tropical Sportswear International Corp., Guaranteed Sr. Sub. Notes,
Series A, 11.000% due 6/15/08 4,402,125
------------------------------------------------------------------------------------------------------------------------------------
10,436,876
------------------------------------------------------------------------------------------------------------------------------------
Auto Parts: O.E.M. -- 1.1%
3,870,000 B Collins & Aikman Products Co., Guaranteed Sr. Sub. Notes, 11.500% due 4/15/06 3,773,250
3,970,000 B Dura Operating Corp., Guaranteed Sr. Sub. Notes, Series B, 9.000% due 5/1/09 3,553,150
Hayes Lemmerz International, Inc., Guaranteed Sr. Sub. Notes:
2,480,000 B 11.000% due 7/15/06 2,504,800
5,905,000 B Series B, 8.250% due 12/15/08 5,137,350
------------------------------------------------------------------------------------------------------------------------------------
14,968,550
------------------------------------------------------------------------------------------------------------------------------------
Books/Magazines -- 0.4%
5,630,000 B2* Ziff Davis Media Inc., Sr. Sub. Notes, 12.000% due 7/15/10 (b) 5,742,600
------------------------------------------------------------------------------------------------------------------------------------
Broadcasting -- 1.2%
7,007,300 NR AM/FM Operating Inc., Debentures, 12.625% due 10/31/06 8,268,614
4,830,000 B Capstar Broadcasting Partners, Inc., Sr. Discount Notes,
step bond to yield 12.572% due 2/1/09 4,503,975
Young Broadcasting Inc.:
2,840,000 B Guaranteed Sr. Sub. Notes, 11.750% due 11/15/04 2,928,750
1,140,000 B Sr. Sub. Notes, 10.125% due 2/15/05 1,145,700
------------------------------------------------------------------------------------------------------------------------------------
16,847,039
------------------------------------------------------------------------------------------------------------------------------------
Building Materials -- 0.6%
Nortek, Inc.:
5,885,000 B+ Sr. Notes, Series B, 9.125% due 9/1/07 5,561,325
2,415,000 B+ Sr. Sub. Notes, 9.875% due 3/1/04 2,324,438
------------------------------------------------------------------------------------------------------------------------------------
7,885,763
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Building Products -- 0.5%
4,135,000 B Amatek Industries Pty Ltd., Sr. Sub. Notes, 12.000% due 2/15/08 $ 3,824,875
3,320,000 B- Atrium Cos., Inc., Guaranteed Sr. Sub. Notes, Series B, 10.500% due 5/1/09 3,037,800
------------------------------------------------------------------------------------------------------------------------------------
6,862,675
------------------------------------------------------------------------------------------------------------------------------------
Cable Television -- 10.4%
Adelphia Communications Corp.:
22,480,000 BB- Sr. Discount Notes, Series B, zero coupon bond to yield 11.635% due 1/15/08 9,216,800
Sr. Notes:
1,450,000 BB- 9.750% due 2/15/02 1,460,875
7,490,000 BB- 8.750% due 10/1/07 6,703,550
5,595,000 B+ Series B, 8.375% due 2/1/08 4,881,638
1,920,000 CCC+ Cable Satisfaction International, Inc., Sr. Notes, 12.750% due 3/1/10 1,879,200
Charter Communications Holdings, LLC/Charter Communications
Holdings Capital Corp.:
14,930,000 B+ Sr. Discount Notes, step bond to yield 12.298% due 1/15/10 8,472,775
1,470,000 B+ Sr. Notes, 8.625% due 4/1/09 1,293,600
10,430,000 BB- CSC Holdings Inc., Sr. Sub. Debentures, 10.500% due 5/15/16 11,147,063
4,975,000GBP B Diamond Holdings PLC, Guaranteed Notes, 10.000% due 2/1/08 (c) 6,930,277
2,915,000 B Echostar DBS Corp., Sr. Notes, 9.375% due 2/1/09 2,823,906
15,205,000 B NTL Inc., Sr. Notes, Series B, 11.500% due 10/1/08 15,547,113
10,955,000 BB- Rogers Cablesystems, Ltd., Guaranteed Sr. Sub. Debentures, 11.000% due 12/1/15 12,160,050
4,720,000 B+ TeleWest Communications PLC, Sr. Notes, 11.250% due 11/1/08 4,767,200
42,470,000 B- United International Holdings, Inc., Sr. Secured Discount Notes, Series B,
step bond to yield 13.526% due 2/15/08 31,109,275
50,000,000 B United Pan-Europe Communications N.V., Sr. Discount Notes, Series B,
step bond to yield 13.319% due 8/1/09 23,250,000
------------------------------------------------------------------------------------------------------------------------------------
141,643,322
------------------------------------------------------------------------------------------------------------------------------------
Casinos/Gambling -- 3.4%
9,060,000 B Hollywood Casino Corp., Guaranteed Sr. Secured Notes, 11.250% due 5/1/07 9,286,500
4,620,000 B+ Horseshoe Gaming Holding Corp., Guaranteed Sr. Sub. Notes, Series B,
8.625% due 5/15/09 4,377,450
92,200 NR Jazz Casino Co. LLC, Sr. Sub. Notes, 5.927% due 11/15/09 14,291
Las Vegas Sands, Inc./Venetian Casino Resort, LLC:
8,955,000 B- Guaranteed Mortgage Notes, 12.250% due 11/15/04 9,066,938
1,925,000 CCC+ Guaranteed Sr. Sub. Notes, 14.250% due 11/15/05 1,886,500
Mandalay Resort Group:
1,495,000 BB- Sr. Sub. Debentures, 7.625% due 7/15/13 1,233,375
2,260,000 BB- Sr. Sub. Notes, 10.250% due 8/1/07 (b) 2,293,900
4,065,000 B+ Station Casinos Inc., Sr. Sub. Notes, 9.875% due 7/1/10 (b) 4,090,406
6,885,000 B+ Sun International Hotels Ltd., Guaranteed Sr. Sub. Notes, 9.000% due 3/15/07 6,471,900
7,975,000 B+ Sun International Hotels Ltd./Sun International North America, Inc.,
Guaranteed Sr. Sub. Notes, 8.625% due 12/15/07 7,376,875
------------------------------------------------------------------------------------------------------------------------------------
46,098,135
------------------------------------------------------------------------------------------------------------------------------------
Chemicals - Major -- 1.3%
5,030,000 B+ Huntsman ICI Chemicals LLC, Guaranteed Sr. Sub. Notes, 10.125% due 7/1/09 5,143,175
38,450,000 B+ Huntsman ICI Holdings LLC, Sr. Discount Notes,
zero coupon bond to yield 14.257% due 12/31/09 12,880,750
------------------------------------------------------------------------------------------------------------------------------------
18,023,925
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Chemicals - Specialty -- 0.8%
5,910,000 B Avecia Group PLC, Guaranteed Sr. Notes, 11.000% due 7/1/09 $ 5,969,100
2,175,000EUR B+ Ineos Acrylics Finance PLC, Guaranteed Sr. Notes, 10.250% due 5/15/10 (b) 2,025,439
2,500,000 B+ Lyondell Chemical Co., Sr. Sub. Notes, 10.875% due 5/1/09 2,521,875
------------------------------------------------------------------------------------------------------------------------------------
10,516,414
------------------------------------------------------------------------------------------------------------------------------------
Coal Mining -- 0.1%
7,930,000 Ca* AEI Resources, Inc., Guaranteed Sr. Notes, 10.500% due 12/15/05 (b) 1,308,450
------------------------------------------------------------------------------------------------------------------------------------
Construction/AG Equipment/Trucks -- 0.5%
8,280,000 B Columbus McKinnon Corp., Guaranteed Sr. Sub. Notes, 8.500% due 4/1/08 7,327,800
------------------------------------------------------------------------------------------------------------------------------------
Consumer Specialties -- 0.2%
2,875,000 B Jostens, Inc., Sr. Sub. Notes, 12.750% due 5/1/10# 2,860,625
------------------------------------------------------------------------------------------------------------------------------------
Containers/Packaging -- 2.4%
4,285,000 B BWAY Corp., Sr. Sub. Notes, Series B, 10.250% due 4/15/07 4,231,438
16,125,000 B Stone Container Finance Corp., Guaranteed Sr. Notes, 11.500% due 8/15/06 (b) 16,770,000
8,532,000 B- Sweetheart Cup Co., Inc., Guaranteed Sr. Sub. Notes, 10.500% due 9/1/03 7,764,120
4,400,000 B- Tekni-Plex, Inc., Sr. Sub. Notes, 12.750% due 6/15/10 (b) 4,510,000
------------------------------------------------------------------------------------------------------------------------------------
33,275,558
------------------------------------------------------------------------------------------------------------------------------------
Contract Drilling -- 2.2%
Parker Drilling Co.:
3,150,000 B- Convertible Sub. Notes, 5.500% due 8/1/04 2,512,125
4,750,000 B+ Guaranteed Sr. Notes, Series D, 9.750% due 11/15/06 4,607,500
6,890,000 BB Pride International, Inc., Sr. Notes, 10.000% due 6/1/09 7,131,150
7,940,000 Ba3* R&B Falcon Corp., Sr. Notes, 12.250% due 3/15/06 8,773,700
6,705,000 BB- RBF Finance Co., Guaranteed Sr. Secured Notes, 11.375% due 3/15/09 7,308,450
------------------------------------------------------------------------------------------------------------------------------------
30,332,925
------------------------------------------------------------------------------------------------------------------------------------
Discount Stores -- 1.0%
10,755,000 B+ Ames Department Stores, Inc., Sr. Notes, 10.000% due 4/15/06 (c) 6,829,425
6,205,000 Baa3* Kmart Corp., Debentures, 12.500% due 3/1/05 6,685,888
------------------------------------------------------------------------------------------------------------------------------------
13,515,313
------------------------------------------------------------------------------------------------------------------------------------
Diversified Commercial Services -- 1.2%
7,950,000 B2* Intertek Finance PLC, Guaranteed Sr. Sub. Notes, Series B, 10.250% due 11/1/06 6,638,250
10,450,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes, Series B, 11.000% due 11/1/06 9,143,750
------------------------------------------------------------------------------------------------------------------------------------
15,782,000
------------------------------------------------------------------------------------------------------------------------------------
Diversified Financial Services -- 0.3%
Amresco, Inc., Sr. Sub. Notes:
4,510,000 CCC- Series 1997-A, 10.000% due 3/15/04 1,916,750
5,935,000 CCC- Series 1998-A, 9.875% due 3/15/05 2,522,375
------------------------------------------------------------------------------------------------------------------------------------
4,439,125
------------------------------------------------------------------------------------------------------------------------------------
Diversified Manufacturing -- 0.6%
7,440,000 B+ Park-Ohio Industries, Inc., Sr. Sub. Notes, 9.250% due 12/1/07 6,696,000
2,375,000 B Polymer Group, Inc., Guaranteed Sr. Sub. Notes, Series B, 9.000% due 7/1/07 2,012,813
------------------------------------------------------------------------------------------------------------------------------------
8,708,813
------------------------------------------------------------------------------------------------------------------------------------
Drugs - Generic -- 1.2%
15,760,000 BB ICN Pharmaceuticals Inc., Sr. Notes, Series B, 9.250% due 8/15/05 15,760,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11 Smith Barney High Income Fund 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Electronic Components -- 0.9%
5,173,000 BB- Celestica International Inc., Sr. Sub. Notes, 10.500% due 12/31/06 $ 5,431,650
7,360,000 Ba3* Flextronics International Ltd., Sr. Sub. Notes, 9.875% due 7/1/10 (b) 7,525,600
------------------------------------------------------------------------------------------------------------------------------------
12,957,250
------------------------------------------------------------------------------------------------------------------------------------
Engineering & Construction -- 0.6%
4,515,000 BB- Integrated Electrical Services, Inc., Guaranteed Notes, Series B, 9.375% due 2/1/09 3,736,163
4,635,000 B- National Holdings LLC/Orius Capital Corp., Sr. Sub. Notes, 12.750% due 2/1/10 (b) 4,774,050
------------------------------------------------------------------------------------------------------------------------------------
8,510,213
------------------------------------------------------------------------------------------------------------------------------------
Environmental Services -- 3.9%
Allied Waste North America, Inc.:
4,810,000 BB- Guaranteed Sr. Notes, Series B, 7.875% due 1/1/09 4,268,875
29,740,000 B+ Guaranteed Sr. Sub. Notes, Series B, 10.000% due 8/1/09 (b) 25,910,975
Term Loans:
4,545,454 NR Traunche B, 9.563% due 7/21/06 4,375,000
5,454,545 NR Traunche C, 9.813% due 7/21/07 5,250,000
4,620,000 B+ IT Group, Inc., Guaranteed Sr. Sub. Notes, Series B, 11.250% due 4/1/09 4,134,900
1,820,000 CCC+ Metal Management, Inc., Guaranteed Sr. Sub. Notes, 10.000% due 5/15/08 919,100
8,225,000 B+ URS Corp., Sr. Sub. Notes, Series B, 12.250% due 5/1/09 8,430,625
------------------------------------------------------------------------------------------------------------------------------------
53,289,475
------------------------------------------------------------------------------------------------------------------------------------
Finance Companies -- 0.2%
3,610,000 CCC+ Madison River Capital, LLC/Madison River Finance Corp., Sr. Notes, 13.250% due
3/1/10 (b) 3,321,200
------------------------------------------------------------------------------------------------------------------------------------
Food Distributors -- 2.4%
5,605,000 B- Agrilink Foods, Inc., Guaranteed Sr. Sub. Notes, 11.875% due 11/1/08 4,399,925
9,840,000 B2* Carrols Corp., Sr. Sub. Notes, 9.500% due 12/1/08 8,364,000
4,555,000 B International Home Foods, Inc., Guaranteed Sr. Sub. Notes, 10.375% due 11/1/06 4,885,238
6,810,000 B- Premier International Foods PLC, Sr. Notes, 12.000% due 9/1/09 (b) 5,482,050
9,945,000 B SC International Services, Inc., Guaranteed Sr. Sub. Notes, Series B, 9.250% due
9/1/07 9,509,906
------------------------------------------------------------------------------------------------------------------------------------
32,641,119
------------------------------------------------------------------------------------------------------------------------------------
Foods - Specialty/Candy -- 0.5%
7,000,000 B- B&G Foods Inc., Guaranteed Sr. Sub. Notes, 9.625% due 8/1/07 4,095,000
11,230,000 CCC+ Imperial Holly Corp., Guaranteed Sr. Sub. Notes, 9.750% due 12/15/07 (d) 2,246,000
------------------------------------------------------------------------------------------------------------------------------------
6,341,000
------------------------------------------------------------------------------------------------------------------------------------
Forest Products -- 1.0%
9,770,000 B Ainsworth Lumber Co. Ltd., Sr. Secured Notes, 12.500% due 7/15/07 9,647,875
3,535,000 B+ Millar Western Forest Products Ltd., Sr. Notes, 9.875% due 5/15/08 3,464,300
------------------------------------------------------------------------------------------------------------------------------------
13,112,175
------------------------------------------------------------------------------------------------------------------------------------
Health Industry Services -- 0.3%
4,390,000 BBB- Healthsouth Corp., Sr. Notes, 6.875% due 6/15/05 3,665,650
------------------------------------------------------------------------------------------------------------------------------------
Home Furnishings -- 0.3%
4,545,000 B Falcon Products, Inc., Guaranteed Sr. Sub. Notes, Series B, 11.375% due 6/15/09 4,408,650
------------------------------------------------------------------------------------------------------------------------------------
Homebuilding -- 0.8%
3,710,000 Ba1* D.R. Horton, Inc., Guaranteed Sr. Notes, 8.000% due 2/1/09 3,376,100
7,730,000 BB+ Lennar Corp., Sr. Notes, 9.950% due 5/1/10 (b) 7,865,275
------------------------------------------------------------------------------------------------------------------------------------
11,241,375
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12 Smith Barney High Income Fund 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Hospital/Nursing Management -- 0.4%
5,874,000 Ba3* Fresenius Medical Care Capital Trust I, Guaranteed Trust Preferred Securities,
9.000% due 12/1/06 $ 5,800,575
------------------------------------------------------------------------------------------------------------------------------------
Hotel/Resort -- 1.3%
65,000 B- Courtyard By Marriott II LP/Courtyard Finance Co.,
Sr. Secured Notes, Series B, 10.750% due 2/1/08 64,188
1,810,000 BB HMH Properties, Inc., Guaranteed Sr. Notes, Series C, 8.450% due 12/1/08 1,710,450
Intrawest Corp., Sr. Notes:
8,485,000 B+ 9.750% due 8/15/08 8,485,000
7,340,000 B+ 10.500% due 2/1/10 7,633,600
------------------------------------------------------------------------------------------------------------------------------------
17,893,238
------------------------------------------------------------------------------------------------------------------------------------
Internet Services -- 5.5%
1,985,000 NR Colo.com, Sr. Notes, 13.875% due 3/15/10 (b)# 2,143,800
3,650,000 Caa2* Cybernet Internet Services International, Inc., Sr. Notes, 14.000% due 7/1/09 1,551,250
Exodus Communications, Inc., Sr. Notes:
465,000 B 10.750% due 12/15/09 449,888
21,200,000 B 11.625% due 7/15/10 (b) 21,412,000
PSINet Inc., Sr. Notes:
1,625,000 B- 11.500% due 11/1/08 1,389,375
15,640,000 B- 11.000% due 8/1/09 12,746,600
8,060,000 B3* Rhythms NetConnections Inc., Sr. Notes, 14.000% due 2/15/10 (b) 5,440,500
Verio Inc., Sr. Notes:
4,940,000 B- 10.375% due 4/1/05 5,261,100
10,185,000 B- 11.250% due 12/1/08 11,661,825
7,505,000 B- 10.625% due 11/15/09 8,668,275
6,955,000 CCC+ WAM!NET Inc., Guaranteed Sr. Discount Notes, Series B,
step bond to yield 16.798% due 3/1/05 3,929,575
------------------------------------------------------------------------------------------------------------------------------------
74,654,188
------------------------------------------------------------------------------------------------------------------------------------
Leisure/Movies/Entertainment -- 0.7%
10,250,000 B- Premier Parks Inc., Sr. Discount Notes, step bond to yield 11.349% due 4/1/08 6,816,250
3,020,000 BB+ SFX Entertainment, Inc., Guaranteed Sr. Sub. Notes, Series B, 9.125% due 2/1/08 3,110,600
------------------------------------------------------------------------------------------------------------------------------------
9,926,850
------------------------------------------------------------------------------------------------------------------------------------
Medical Specialties -- 0.2%
3,585,000 B- Hanger Orthopedic Group, Inc., Sr. Sub. Notes, 11.250% due 6/15/09 3,083,100
------------------------------------------------------------------------------------------------------------------------------------
Multi-Sector Companies -- 0.6%
8,155,000 B- Triarc Consumer Products Group, LLC/Triarc Beverage Holdings Corp.,
Guaranteed Sr. Sub. Notes, 10.250% due 2/15/09 7,971,513
------------------------------------------------------------------------------------------------------------------------------------
Newspapers -- 0.7%
9,905,000 B+ Garden State Newspapers, Inc., Sr. Sub. Notes, Series B, 8.625% due 7/1/11 9,013,550
------------------------------------------------------------------------------------------------------------------------------------
Oil & Gas Production -- 1.9%
Belco Oil & Gas Corp.:
4,700,000 B1* Guaranteed Sr. Sub. Notes, Series B, 10.500% due 4/1/06 4,758,750
4,910,000 B1* Sr. Sub. Notes, Series B, 8.875% due 9/15/07 4,664,500
8,215,000 B Chesapeake Energy Corp., Guaranteed Sr. Notes, Series B, 9.625% due 5/1/05 8,050,700
2,775,000 B Houston Exploration Co., Sr. Sub Notes, Series B, 8.625% due 1/1/08 2,670,938
1,885,000 B- Lomak Petroleum, Inc., Guaranteed Sr. Sub. Notes, 8.750% due 1/15/07 1,715,350
</TABLE>
See Notes to Financial Statements.
13 Smith Barney High Income Fund 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Oil & Gas Production -- 1.9% (continued)
Plains Resources, Inc., Guaranteed Sr. Sub. Notes:
1,225,000 B2* Series B, 10.250% due 3/15/06 $ 1,246,438
2,440,000 B2* Series E, 10.250% due 3/15/06 (b) 2,482,700
------------------------------------------------------------------------------------------------------------------------------------
25,589,376
------------------------------------------------------------------------------------------------------------------------------------
Oil & Gas Transmission -- 0.2%
3,045,000 BB- Leviathan Gas Pipeline Partners, L.P./Leviathan Finance Corp., Sr. Sub. Notes,
Series B, 10.375% due 6/1/09 3,151,575
------------------------------------------------------------------------------------------------------------------------------------
Oil Refining/Marketing -- 2.8%
Clark Refining & Marketing, Inc., Sr. Notes:
4,385,000 BB- 9.500% due 9/15/04 3,902,650
750,000 BB- 8.375% due 11/15/07 607,500
8,965,000 B Clark USA Inc., Sr. Notes, Series B, 10.875% due 12/1/05 4,964,369
6,680,000 B Forest Oil Corp., Guaranteed Sr. Sub. Notes, 10.500% due 1/15/06 6,897,100
14,020,000 B+ Nuevo Energy Co., Sr. Sub. Notes, Series B, 9.500% due 6/1/08 13,984,950
3,120,000 B Stone Energy Corp., Guaranteed Sr. Sub. Notes, 8.750% due 9/15/07 3,026,400
3,975,000 BB- Vintage Petroleum, Inc., Sr. Sub. Notes, 9.750% due 6/30/09 4,104,188
------------------------------------------------------------------------------------------------------------------------------------
37,487,157
------------------------------------------------------------------------------------------------------------------------------------
Paper -- 2.2%
5,400,000 B Doman Industries Ltd., Sr. Notes, 8.750% due 3/15/04 4,428,000
10,540,000 CCC+ Repap New Brunswick Inc., Second Priority Mortgage Notes, 10.625% due 4/15/05 9,591,400
Riverwood International Corp.:
4,965,000 B- Guaranteed Sr. Notes, 10.625% due 8/1/07 4,965,000
9,580,000 CCC+ Guaranteed Sr. Sub. Notes, 10.875% due 4/1/08 8,861,500
2,317,500 NR S.D. Warren Co., Debentures, 14.000% due 12/15/06 2,572,425
------------------------------------------------------------------------------------------------------------------------------------
30,418,325
------------------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals -- 0.6%
7,750,000 B King Pharmaceuticals, Inc., Guaranteed Sr. Sub. Notes, 10.750% due 2/15/09 8,253,750
------------------------------------------------------------------------------------------------------------------------------------
Photographic Products -- 0.7%
9,065,000 BB- Polaroid Corp., Sr. Notes, 11.500% due 2/15/06 9,495,588
------------------------------------------------------------------------------------------------------------------------------------
Printing/Forms -- 0.3%
2,450,000GBP B Polestar Corp. PLC, Sr. Notes, Series B, 10.500% due 5/30/08 (c) 3,449,205
------------------------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts -- 0.4%
6,750,000 NR Ocwen Asset Investment Corp., Redeemable Notes, 11.500% due 7/1/05 5,231,250
------------------------------------------------------------------------------------------------------------------------------------
Rental/Leasing Companies -- 0.9%
2,735,000 BB- Avis Rent a Car, Inc., Guaranteed Sr. Sub. Exchange Notes, 11.000% due 5/1/09 2,899,100
3,040,000 B NationsRent, Inc., Guaranteed Sr. Sub. Notes, 10.375% due 12/15/08 2,264,800
United Rentals (North America), Inc., Guaranteed Sr. Sub. Notes, Series B:
4,390,000 BB- 9.250% due 1/15/09 4,093,675
3,910,000 BB- 9.000% due 4/1/09 3,567,875
------------------------------------------------------------------------------------------------------------------------------------
12,825,450
------------------------------------------------------------------------------------------------------------------------------------
Retail - Drug Store Chains -- 0.1%
1,865,000 B- Rite Aid Corp., Notes, 6.500% due 10/1/03 (b) 1,044,400
------------------------------------------------------------------------------------------------------------------------------------
Retail - Other Specialty Stores -- 0.7%
12,250,000 B- Advance Stores Co. Inc., Sr. Sub. Notes, Series B, 10.250% due 4/15/08 (b) 10,167,500
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
14 Smith Barney High Income Fund 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Savings & Loan Associations -- 1.0%
8,100,000 B2* Ocwen Capital Trust I, Guaranteed Capital Securities, 10.875% due 8/1/27 $ 4,131,000
4,000,000 B+ Ocwen Federal Bank FSB, Sub. Debentures, 12.000% due 6/15/05 3,740,000
5,835,000 B+ Ocwen Financial Corp., Notes, 11.875% due 10/1/03 5,280,675
------------------------------------------------------------------------------------------------------------------------------------
13,151,675
Semiconductors -- 1.3%
1,845,000 B1* Amkor Technology, Inc., Sr. Sub. Notes, 10.500% due 5/1/09 1,872,675
12,265,000 B Fairchild Semiconductor Corp., Sr. Sub. Notes, 10.125% due 3/15/07 12,510,300
2,830,000 B SCG Holding Corp./Semiconductor Components Industries, LLC,
Guaranteed Sr. Sub. Notes, 12.000% due 8/1/09 3,070,550
------------------------------------------------------------------------------------------------------------------------------------
17,453,525
------------------------------------------------------------------------------------------------------------------------------------
Steel/Iron Ore -- 0.8%
3,975,000 BB- The LTV Corp., Guaranteed Sr. Exchange Notes, 11.750% due 11/15/09 3,418,500
6,425,000 B+ WCI Steel, Inc., Sr. Secured Notes, Series B, 10.000% due 12/1/04 6,103,750
2,175,000 B- WHX Corp., Sr. Exchange Notes, 10.500% due 4/15/05 1,712,813
------------------------------------------------------------------------------------------------------------------------------------
11,235,063
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Major U.S. -- 0.3%
3,810,000 B2* Omnipoint Corp., Sr. Notes, Series A, 11.625% due 8/15/06 4,286,250
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Other -- 14.2%
2,785,000 B+ Call-Net Enterprises, Inc., Sr. Notes, 9.375% due 5/15/09 1,462,125
150,000EUR AA+ Esat Telecom Group PLC, Sr. Notes, 11.875% due 11/1/09 (c) 171,437
Esprit Telecom Group PLC, Sr. Notes:
5,950,000 B- 11.500% due 12/15/07 4,075,750
5,000,000DEM B- 11.500% due 12/15/07 (c) 1,587,075
1,900,000 B- 10.875% due 6/15/08 1,263,500
3,500,000EUR B Flag Telecom Holdings Ltd., Sr. Notes, 11.625% due 3/30/10 (b) 2,935,017
Focal Communications Corp.:
6,665,000 B- Sr. Discount Notes, Series B, step bond to yield 13.100% due 2/15/08 4,398,900
4,770,000 B- Sr. Notes, 11.875% due 1/15/10 4,722,300
8,760,000 BB Global Crossing Holdings, Ltd., Guaranteed Sr. Notes, 9.500% due 11/15/09 8,541,000
7,250,000EUR B Global TeleSystems Group, Inc., Sr. 11.000% due 12/1/09 (b)(c) 4,568,156
5,215,000 B- GT Group Telecom Inc., Sr. Discount Notes, step bond to yield 13.286% due 2/1/10 (b)# 2,790,025
Hermes Europe Railtel B.V., Sr. Notes:
6,820,000 B 11.500% due 8/15/07 5,490,100
9,245,000 B 10.375% due 1/15/09 7,072,425
6,735,000 B- ICG Holdings, Inc., Guaranteed Sr. Discount Notes, step bond to yield 13.810% due 9/15/05 6,398,250
Jazztel PLC, Sr. Notes:
4,750,000EUR CCC+ 13.250% due 12/15/09 (b)(c) 3,983,237
2,835,000EUR CCC+ 14.000% due 7/15/10 (b)# 2,718,863
KMC Telecom Holdings, Inc.:
8,340,000 CCC+ Sr. Discount Notes, step bond to yield 16.306% due 2/15/08 4,211,700
4,080,000 CCC+ Sr. Notes, 13.500% due 5/15/09 3,636,300
Level 3 Communications, Inc.:
25,885,000 B Sr. Discount Notes, step bond to yield 12.860% due 3/15/10 13,783,763
13,300,000EUR B Sr. Notes, 11.250% due 3/15/10 (b)(c) 11,707,637
</TABLE>
See Notes to Financial Statements.
15 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
====================================================================================================================================
Telecommunications - Other -- 14.2% (continued)
<S> <C> <C> <C>
1,780,000 B+ McLeodUSA Inc., Sr. Notes, 8.125% due 2/15/09 $ 1,606,450
6,245,000 B+ Metromedia Fiber Network, Inc., Sr. Notes, Series B, 10.000% due 11/15/08 6,120,100
7,720,000 B- MGC Communications, Inc./Mpower Communications Corp., Sr. Notes,
13.000% due 4/1/10 (b) 7,218,200
4,375,000CAD B- Microcell Telecommunications Inc., Sr. Discount Notes, Series B,
step bond to yield 16.905% due 10/15/07 2,068,540
NEXTLINK Communications, Inc.:
Sr. Discount Notes:
17,300,000 B Step bond to yield 13.522% due 6/1/09 10,726,000
16,055,000 B Step bond to yield 13.011% due 12/1/09 9,151,350
2,955,000 B Sr. Notes, 10.750% due 6/1/09 2,881,125
6,635,000 B NEXTLINK Communications, LLC/NEXTLINK Capital Inc.,
Sr. Notes, 12.500% due 4/15/06 6,867,225
10,140,000 B- Primus Telecommunications Group, Inc., Sr. Notes, 11.750% due 8/1/04 6,641,700
Tele1 Europe B.V., Sr. Notes:
1,900,000EUR B- 13.000% due 2/15/09 (c) 1,822,166
6,855,000 B- 13.000% due 5/15/09 6,992,100
VersaTel Telecom International N.V., Sr. Notes:
10,945,000 B- 13.250% due 5/15/08 11,328,075
7,600,000EUR B- 11.250% due 3/30/10 (b)(c) 6,681,276
4,990,000 B- Viatel, Inc., Sr. Dollar Notes, 11.500% due 3/15/09 3,243,500
17,390,000 B- World Access, Inc., Sr. Notes, Series B, 13.250% due 1/15/08 15,651,000
------------------------------------------------------------------------------------------------------------------------------------
194,516,367
------------------------------------------------------------------------------------------------------------------------------------
Telephone - Cellular -- 10.4%
7,780,000 Caa1* AirGate PCS, Inc., Sr. Sub. Notes, step bond to yield 17.947% due 10/1/09 4,337,350
13,405,000 CCC+ Alamosa PCS Holdings, Inc., Guaranteed Sr. Discount Notes,
step bond to yield 12.981% on 2/15/10 6,903,575
3,170,000 B- Centennial Cellular Corp./Centennial Cellular Operating Co. LLC, Sr. Sub. Notes,
10.750% due 12/15/08 3,059,050
10,500,000CAD B3* Clearnet Communications Inc., Sr. Discount Notes,
step bond to yield 13.158% due 5/15/08 (c) 4,240,139
4,000,000 B1* Clearnet Communications Inc./DLJ Secured Loan Trust, Sr. Secured Certificates,
Class A-1, 10.125% due 7/7/07 4,017,660
Crown Castle International Corp.:
13,780,000 B Sr. Discount Notes, step bond to yield 12.069% due 5/15/11 8,681,400
2,070,000 B Sr. Notes, 10.750% due 8/1/11 2,126,925
6,225,000 B3* Dobson/Sygnet Communications Co., Sr. Notes, 12.250% due 12/15/08 6,442,875
7,210,000 B- Microcell Telecommunications Inc., Sr. Discount Notes,
step bond to yield 13.229% due 6/1/09 4,902,800
17,675,000 B- Millicom International Cellular S.A., Sr. Discount Notes,
step bond to yield 19.575% due 6/1/06 15,642,375
Nextel Communications, Inc.:
10,520,000 B1* Sr. Redeemable Discount Notes, step bond to yield 11.444% due 9/15/07 8,284,500
28,785,000 B1* Sr. Serial Redeemable Discount Notes, step bond to yield 11.369% due 2/15/08 21,156,975
4,700,000 B1* Sr. Serial Redeemable Notes, 9.375% due 11/15/09 4,512,000
8,050,000 B- Spectrasite Holdings Inc., Sr. Discount Notes, step bond to yield 12.488% due 4/15/09 4,789,750
4,365,000 B3* Telecorp PCS, Inc., Sr. Sub. Notes, 10.625% due 7/15/10 (b) 4,430,475
</TABLE>
See Notes to Financial Statements.
16 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT+ RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Telephone - Cellular -- 10.4% (continued)
Telesystem International Wireless Inc., Discount Notes:
18,130,000 CCC+ Series B, step bond to yield 17.437% due 6/30/07 12,962,950
12,505,000 CCC+ Series C, step bond to yield 14.238% due 11/1/07 7,690,575
9,150,000 B3* Triton PCS, Inc., Guaranteed Sr. Sub. Discount Notes,
step bond to yield 12.435% due 5/1/08 6,782,437
VoiceStream Wireless Corp.:
3,225,000 B2* Sr. Discount Notes, step bond to yield 12.501% due 11/15/09 2,338,125
25,000 B2* Sr. Notes, 11.500% due 9/15/09 27,875
Winstar Communications, Inc.:
8,905,000 B- Sr. Discount Notes, step bond to yield 15.208% due 4/15/10 4,096,300
5,310,000 B- Sr. Notes, 12.750% due 4/15/10 (b) 4,925,025
------------------------------------------------------------------------------------------------------------------------------------
142,351,136
------------------------------------------------------------------------------------------------------------------------------------
Textiles -- 0.3%
1,350,000DEM B3* Texon International PLC, Sr. Notes, 10.000% due 2/1/08 (b)(c) 597,996
4,390,000 BB WestPoint Stevens Inc., Sr. Notes, 7.875% due 6/15/05 3,846,737
------------------------------------------------------------------------------------------------------------------------------------
4,444,733
------------------------------------------------------------------------------------------------------------------------------------
Tobacco -- 0.1%
2,060,000 BB- Standard Commercial Tobacco Co., Inc., Guaranteed Sr. Notes, 8.875% due 8/1/05 1,761,300
------------------------------------------------------------------------------------------------------------------------------------
Transportation - Marine -- 0.3%
4,400,000 B- Oglebay Norton Co., Sr. Sub. Notes, 10.000% due 2/1/09 4,103,000
------------------------------------------------------------------------------------------------------------------------------------
Unregulated Power Generation -- 2.6%
AES Corp.:
11,085,000 Ba1* Sr. Notes, 9.500% due 6/1/09 11,209,706
11,425,000 Ba3* Sr. Sub. Notes, 10.250% due 7/15/06 11,610,656
3,230,000 Ba2* AES Drax Energy Ltd., Sr. Secured Notes, 11.500% due 8/30/10 (b) 3,334,975
9,085,000 BB+ Calpine Corp., Sr. Notes, 10.500% due 5/15/06 9,482,469
------------------------------------------------------------------------------------------------------------------------------------
35,637,806
------------------------------------------------------------------------------------------------------------------------------------
Wholesale Distributors -- 0.3%
3,780,000 B2* Buhrmann N.V., Guaranteed Sr. Sub. Notes, 12.250% due 11/1/09 3,959,550
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost--1,403,183,426) 1,308,016,962
====================================================================================================================================
SHARES SECURITY VALUE
====================================================================================================================================
COMMON STOCK (e) -- 0.2%
Telecommunications - Other -- 0.2%
18,375 Pagemart Nationwide Inc. (b) 183,750
130,265 Tele1 Europe Holding AB, Sponsored ADR 1,709,728
54,641 World Access, Inc. 491,769
------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost--1,188,353) 2,385,247
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
17 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
PREFERRED STOCK -- 0.3%
Diversified Manufacture -- 0.1%
60,000 Eagle-Picher Holdings, Inc., Series B, 11.750% Cumulative Redeemable Exchangeable $ 1,215,000
------------------------------------------------------------------------------------------------------------------------------------
Electronic Components -- 0.0%
8,353 Viasystems Inc., Series B, Payment-in-Kind 150,358
------------------------------------------------------------------------------------------------------------------------------------
Food Distributors -- 0.0%
2,882 AmeriKing, Inc., 13.000% Cumulative Exchangeable 23,056
------------------------------------------------------------------------------------------------------------------------------------
Savings & Loan Associations -- 0.2%
102,300 California Federal Preferred Capital Series A, 9.125% Noncumulative Exchangeable Corp., 2,225,025
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Other -- 0.0%
124 Intermedia Communications Inc., 13.500% Redeemable Exchangeable 97,507
------------------------------------------------------------------------------------------------------------------------------------
Telephone - Cellular -- 0.0%
1,973 Dobson Communications Corp., 13.000% Sr. Exchangeable 196,852
------------------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost--6,482,806) 3,907,798
====================================================================================================================================
WARRANTS (e) -- 0.7%
Broadcasting -- 0.0%
21,675 UIH Australia/Pacific, Inc., Expire 5/15/06 650,250
------------------------------------------------------------------------------------------------------------------------------------
Cable Television -- 0.0%
1,920 Cable Satisfaction International Inc., Expire 3/1/10 49,440
5,925 Wireless One Inc., Expire 10/19/00 59
------------------------------------------------------------------------------------------------------------------------------------
49,499
------------------------------------------------------------------------------------------------------------------------------------
Internet Services -- 0.2%
3,650 Cybernet Internet Services International, Inc., Expire 7/1/09 (b) 45,625
14,405 Splitrock Services, Inc., Expire 7/15/08 (b) 2,193,161
33,975 WAM!NET Inc., Expire 3/1/05 (b) 394,959
------------------------------------------------------------------------------------------------------------------------------------
2,633,745
------------------------------------------------------------------------------------------------------------------------------------
Printing/Forms -- 0.0%
3,775 Merrill Corp., Expire 5/1/09 (b) 378
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Other -- 0.4%
9,550 RSL Communications, Ltd., Expire 11/15/06 200,550
10,945 VersaTel Telecom International N.V., Expire 5/15/08 4,569,538
37,490 WebLink Wireless, Inc., Expire 12/31/03 299,920
------------------------------------------------------------------------------------------------------------------------------------
5,070,008
------------------------------------------------------------------------------------------------------------------------------------
Telephone - Cellular -- 0.1%
7,425 Airgate PCS, Inc., Expire 10/1/09 742,500
10,475 Iridium World Communications Ltd., Expire 7/15/05 (b) 105
------------------------------------------------------------------------------------------------------------------------------------
742,605
------------------------------------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost--3,239,021) 9,146,485
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
18 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
REPURCHASE AGREEMENT -- 3.2%
$44,132,000 Morgan Stanley Dean Witter & Co., 6.530% due 8/1/00; Proceeds
at maturity--$44,140,005; (Fully collateralized by U.S. Treasury Notes,
4.500% to 6.375% due 8/15/00 to 2/15/07; Market value--$45,246,318)
(Cost--$44,132,000) 44,132,000
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost--1,458,225,606**) 1,367,588,492
====================================================================================================================================
</TABLE>
+ Face amount in U.S. dollars unless otherwise indicated.
(a) All ratings are by Standard & Poor's Ratings Service, except for those
which are identified by an asterisk (*) are rated by Moody's Investors
Service, Inc.
(b) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(c) Security is segregated for open forward foreign currency contracts.
(d) Security is in default.
(e) Non-income producing security.
# Security is issued with attached warrants.
** Aggregate cost for Federal income tax purposes is substantially the same.
Currency abbreviations:
----------------------
CAD -- Canadian Dollar
DEM -- German Mark
EUR -- Euro
GBP -- British Pound
See page 20 for definition of ratings.
See Notes to Financial Statements.
19 Smith Barney High Income Fund 2000 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
"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.
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.
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 Investors Service, Inc. ("Moody's") -- Numerical modifiers 1, 2, and 3
may be applied to each generic rating from "Baa" through "Ca", 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.
Ca -- Bonds rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often
in default or have other marked shortcomings.
NR -- Indicates that the bond is not rated by Standard &
Poor's or Moody's.
20 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at value (Cost--$1,458,225,606) $ 1,367,588,492
Cash 637
Dividends and interest receivable 31,464,582
Receivable for Fund shares sold 2,861,024
Receivable for securities sold 3,926,156
Receivable for open forward foreign currency contracts (Note 8) 847,100
------------------------------------------------------------------------------------------------------------------------------------
Total Assets 1,406,687,991
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 6,505,559
Payable for Fund shares purchased 2,775,553
Investment advisory fees payable 593,011
Administration fees payable 237,204
Distribution fees payable 115,553
Payable for open forward foreign currency contracts (Note 8) 24,623
Accrued expenses 283,099
------------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 10,534,602
------------------------------------------------------------------------------------------------------------------------------------
Total Net Assets 1,396,153,389
====================================================================================================================================
NET ASSETS:
Par value of shares of beneficial interest 147,833
Capital paid in excess of par value 1,727,415,508
Undistributed net investment income 3,467,530
Accumulated net realized loss from security transactions (245,022,774)
Net unrealized depreciation of investments and foreign currencies (89,854,708)
------------------------------------------------------------------------------------------------------------------------------------
Total Net Assets 1,396,153,389
====================================================================================================================================
Shares Outstanding:
Class A 43,710,204
----------------------------------------------------------------------------------------------------------------------------
Class B 65,129,745
----------------------------------------------------------------------------------------------------------------------------
Class L 12,938,842
----------------------------------------------------------------------------------------------------------------------------
Class Y 26,044,941
----------------------------------------------------------------------------------------------------------------------------
Class Z 9,017
----------------------------------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) 9.43
----------------------------------------------------------------------------------------------------------------------------
Class B * 9.44
----------------------------------------------------------------------------------------------------------------------------
Class L ** 9.46
----------------------------------------------------------------------------------------------------------------------------
Class Y (and redemption price) 9.46
----------------------------------------------------------------------------------------------------------------------------
Class Z (and redemption price) 8.93
----------------------------------------------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) 9.87
----------------------------------------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) 9.56
====================================================================================================================================
</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.
21 Smith Barney High Income Fund 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest $ 168,511,892
Dividends 1,654,564
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Income 170,166,456
------------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 7,716,387
Distribution fees (Note 2) 7,427,964
Administration fees (Note 2) 3,086,555
Shareholder and system servicing fees 885,702
Shareholder communications 450,374
Custody 93,275
Pricing fees 57,585
Registration fees 44,120
Audit and legal 37,239
Trustees' fees 30,434
Other 16,312
------------------------------------------------------------------------------------------------------------------------------------
Total Expenses 19,845,947
------------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 150,320,509
------------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (109,191,923)
Foreign currency transactions 8,406,302
------------------------------------------------------------------------------------------------------------------------------------
Net Realized Loss (100,785,621)
------------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Depreciation of Investments
and Foreign Currencies:
Beginning of year (55,133,719)
End of year (89,854,708)
------------------------------------------------------------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (34,720,989)
------------------------------------------------------------------------------------------------------------------------------------
Net Loss on Investments and Foreign Currencies (135,506,610)
------------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 14,813,899
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
22 Smith Barney High Income Fund 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
====================================================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 150,320,509 $ 146,589,832
Net realized loss (100,785,621) (100,357,309)
Increase in net unrealized depreciation (34,720,989) (104,146,218)
------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 14,813,899 (57,913,695)
------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (144,754,864) (147,164,256)
Capital -- (2,010,947)
------------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions To Shareholders (144,754,864) (149,175,203)
------------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 1,074,822,409 962,304,050
Net asset value of shares issued for reinvestment of dividends 56,438,761 62,438,522
Cost of shares reacquired (1,270,542,773) (828,877,756)
------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Fund Share Transactions (139,281,603) 195,864,816
------------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Assets (269,222,568) (11,224,081)
NET ASSETS:
Beginning of year 1,665,375,957 1,676,600,039
------------------------------------------------------------------------------------------------------------------------------------
End of year* $1,396,153,389 $1,665,375,957
====================================================================================================================================
* Includes undistributed (overdistributed) net investment income of: 3,467,530 (7,563,912)
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
23 Smith Barney High Income Fund | 2000 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, 2000, 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 $9,861,336 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
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
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), 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.
24 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
Citi Fiduciary Trust Company ("CFTC"), formerly known as Smith Barney Private
Trust Company, another subsidiary of Citigroup, acts as the Fund's transfer
agent and PFPC Global Fund Services ("PFPC") acts as the Fund's sub-transfer
agent. CFTC receives fees and asset-based fees that vary according to the
account size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder accounts and is paid
by CFTC. For the year ended July 31, 2000, the Fund paid transfer agent fees
of $778,058 to CFTC.
Effective June 5, 2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of
SSBH, became the Fund's distributor replacing CFBDS, Inc. ("CFBDS"). In
addition, SSB acts as the primary broker for the Fund's portfolio agency
transactions. Certain other broker-dealers continue to sell Fund shares to the
public as members of the selling group. For the year ended July 31, 2000, SSB
and its affiliates did not receive any brokerage commissions.
There are maximum initial sales charges of 4.50% and 1.00% for 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
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, 2000, SSB and CFBDS received sales charges of
$583,000 and $238,000 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 $21,000 $1,728,000 $49,000
================================================================================
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, 2000, total Distribution Plan fees
incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $1,106,958 $5,390,918 $930,088
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the year ended July 31, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $ 946,783,361
--------------------------------------------------------------------------------
Sales 1,126,745,428
================================================================================
At July 31, 2000, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 30,485,029
Gross unrealized depreciation (121,122,143)
--------------------------------------------------------------------------------
Net unrealized depreciation $(90,637,114)
================================================================================
4. Capital Loss Carryforward
At July 31, 2000, the Fund had, for Federal income tax purposes, capital loss
carryforwards of approximately $159,625,000 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
================================================================================
2003 $13,404,000
2004 23,360,000
2007 25,768,000
2008 97,093,000
================================================================================
5. Futures Contracts
Initial margin deposits made upon entering into futures con- tracts 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
25 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
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, 2000, 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, 2000, the Fund had no open purchased call or put option contracts.
When a Fund writes a covered call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily.When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised, the cost of the security sold will be
decreased by the premium originally received.When a put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise. When written index options are
exercised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium originally
paid. The Fund enters into options for hedging purposes. The risk in writing a
covered call option is that the Fund gives up the opportunity to participate in
any increase in the price of the underlying security beyond the exercise
price. The risk in writing a put option is that the Fund is exposed to the risk
of a loss if the market price of the underlying security declines.
For the year ended July 31, 2000, the Fund did not write any call or put option
contracts.
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 agreedupon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
26 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
8. Forward Foreign Currency Contracts
At July 31, 2000, 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)
====================================================================================================================================
To Sell:
<S> <C> <C> <C> <C>
British Pound 6,929,375 10,404,573 12/22/00 15,128
Canadian Dollar 7,245,000 4,892,093 12/8/00 33,295
Canadian Dollar 680,000 459,161 12/8/00 1,434
Canadian Dollar 342,500 231,269 12/8/00 150
Canadian Dollar 256,875 173,452 12/8/00 489
Canadian Dollar 1,709,375 1,154,234 12/8/00 7,027
Euro 19,051,397 17,788,926 12/15/00 721,412
Euro 950,000 887,047 12/15/00 12,983
Euro 1,611,094 1,504,332 12/15/00 20,407
Euro 1,167,500 1,090,134 12/15/00 20,859
Euro 238,125 222,345 12/15/00 6,588
Euro 251,250 234,601 12/15/00 7,328
------------------------------------------------------------------------------------------------------------------------------------
847,100
------------------------------------------------------------------------------------------------------------------------------------
To Buy:
Canadian Dollar 630,000 425,399 12/8/00 (2,473)
Euro 2,390,290 2,231,893 12/15/00 (22,150)
------------------------------------------------------------------------------------------------------------------------------------
(24,623)
------------------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gain on Forward Foreign Currency Contracts 822,477
====================================================================================================================================
</TABLE>
9. Shares of Beneficial Interest
At July 31, 2000, 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, 2000, 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 $468,329,785 $858,840,189 $136,781,516 $261,263,222 $2,348,629
====================================================================================================================================
</TABLE>
27 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Notes to Financial Statements (continued)
-----------------------------------------------------------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
Year Ended Year Ended
July 31, 2000 July 31, 1999
-------------------------------------- ----------------------------------
Shares Amount Shares Amount
==================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 71,410,664 $ 700,135,130 30,693,460 $ 329,457,614
Shares issued on reinvestment 2,249,761 22,080,663 2,320,067 24,728,133
Shares reacquired (77,889,493) (766,467,833) (28,694,046) (309,682,580)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (4,229,068) $ (44,252,040) 4,319,481 $ 44,503,167
===================================================================================================================================
Class B
Shares sold 9,472,131 $ 94,239,529 22,658,578 $ 243,905,277
Shares issued on reinvestment 2,735,790 26,901,250 2,881,204 30,722,603
Shares reacquired (26,398,627) (261,819,544) (19,385,138) (208,080,670)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (14,190,706) $(140,678,765) 6,154,644 $ 66,547,210
===================================================================================================================================
Class L
Shares sold 5,922,929 $ 59,236,088 10,088,505 $ 108,547,108
Shares issued on reinvestment 624,506 6,148,218 542,331 5,780,852
Shares reacquired (7,414,113) (74,061,708) (4,726,792) (50,764,189)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (866,678) $ (8,677,402) 5,904,044 $ 63,563,771
===================================================================================================================================
Class Y
Shares sold 22,286,558 $ 221,211,662 26,317,750 $ 280,394,051
Shares issued on reinvestment 131,214 1,303,951 112,305 1,201,686
Shares reacquired (16,880,979) (168,183,050) (23,916,811) (260,350,270)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase 5,536,793 $ 54,332,563 2,513,244 $ 21,245,467
===================================================================================================================================
Class Z
Shares sold -- $ -- -- $ --
Shares issued on reinvestment 492 4,679 492 5,248
Shares reacquired (1,065) (10,638) (4) (47)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (573) $ (5,959) 488 $ 5,201
===================================================================================================================================
</TABLE>
28 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Financial Highlights
-----------------------------------------------------------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each year ended July 31:
Class A Shares 2000(1) 1999(1) 1998 1997 1996
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.30 $11.74 $11.82 $10.98 $11.10
-----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 1.04 1.00 1.02 1.09 1.08
Net realized and unrealized gain (loss) (0.95) (1.44) (0.01) 0.83 (0.12)
-----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.09 (0.44) 1.01 1.92 0.96
-----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.96) (0.99) (1.09) (1.08) (1.08)
Capital -- (0.01) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.96) (1.00) (1.09) (1.08) (1.08)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.43 $10.30 $11.74 $11.82 $10.98
-----------------------------------------------------------------------------------------------------------------------------------
Total Return 0.93% (3.65)% 8.85% 18.31% 8.95%
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $412,333 $493,725 $512,294 $424,087 $341,040
-----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.08% 1.05% 1.05% 1.06% 1.10%
Net investment income 10.43 9.24 8.61 9.57 9.65
-----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 65% 96% 102% 78% 72%
===================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
29 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
-----------------------------------------------------------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each year ended July 31:
Class B Shares 2000(1) 1999(1) 1998 1997 1996
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.31 $11.75 $11.83 $10.99 $11.11
-----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.98 0.95 0.96 1.03 1.02
Net realized and unrealized gain (loss) (0.94) (1.44) (0.01) 0.83 (0.12)
-----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.04 (0.49) 0.95 1.86 0.90
-----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.91) (0.94) (1.03) (1.02) (1.02)
Capital -- (0.01) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.91) (0.95) (1.03) (1.02) (1.02)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.44 $10.31 $11.75 $11.83 $10.99
-----------------------------------------------------------------------------------------------------------------------------------
Total Return 0.40% (4.15)% 8.34% 17.72% 8.41%
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $614,996 $817,382 $859,472 $680,916 $560,031
-----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.57% 1.55% 1.55% 1.55% 1.59%
Net investment income 9.87 8.75 8.11 9.07 9.16
-----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 65% 96% 102% 78% 72%
===================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
30 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
-----------------------------------------------------------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each year ended July 31:
Class L Shares 2000(1) 1999(1) 1998(2) 1997 1996
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.32 $11.76 $11.84 $11.00 $11.11
-----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.99 0.96 0.97 1.04 1.03
Net realized and unrealized gain (loss) (0.94) (1.45) (0.01) 0.83 (0.11)
-----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.05 (0.49) 0.96 1.87 0.92
-----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.91) (0.94) (1.04) (1.03) (1.03)
Capital -- (0.01) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.91) (0.95) (1.04) (1.03) (1.03)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.46 $10.32 $11.76 $11.84 $11.00
-----------------------------------------------------------------------------------------------------------------------------------
Total Return 0.57% (4.08)% 8.38% 17.77% 8.56%
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $122,367 $142,477 $92,946 $44,444 $21,049
-----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.51% 1.48% 1.48% 1.48% 1.51%
Net investment income 9.96 8.84 8.15 9.14 9.23
-----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 65% 96% 102% 78% 72%
===================================================================================================================================
</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.
31 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
-----------------------------------------------------------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each year ended July 31:
Class Y Shares 2000(1) 1999(1) 1998 1997 1996
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.33 $11.77 $11.84 $10.99 $11.10
-----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 1.09 1.02 1.05 1.12 0.92
Net realized and unrealized gain (loss) (0.97) (1.42) (0.01) 0.84 (0.11)
-----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.12 (0.40) 1.04 1.96 0.81
-----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.99) (1.03) (1.11) (1.11) (0.92)
Capital -- (0.01) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.99) (1.04) (1.11) (1.11) (0.92)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.46 $10.33 $11.77 $11.84 $10.99
-----------------------------------------------------------------------------------------------------------------------------------
Total Return 1.29% (3.33)% 9.18% 18.68% 9.32%
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $246,376 $211,693 $211,781 $139,269 $35,097
-----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.71% 0.72% 0.72% 0.73% 0.76%
Net investment income 10.87 9.52 8.83 9.90 9.98
-----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 65% 96% 102% 78% 72%
===================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
32 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
-----------------------------------------------------------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each year ended July 31:
Class Z Shares 2000(1) 1999(1) 1998(1) 1997(1) 1996
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.29 $11.74 $11.80 $10.99 $11.09
-----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.68 1.01 1.04 1.12 1.11
Net realized and unrealized gain (loss) (1.06) (1.43) 0.01 0.80 (0.10)
-----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.38) (0.42) 1.05 1.92 1.01
-----------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.98) (1.02) (1.11) (1.11) (1.11)
Capital -- (0.01) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.98) (1.03) (1.11) (1.11) (1.11)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.93 $10.29 $11.74 $11.80 $10.99
-----------------------------------------------------------------------------------------------------------------------------------
Total Return (3.88)% (3.49)% 9.33% 18.29% 9.42%
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $81 $99 $107 $104 $7,158
-----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 4.46% 0.89% 0.85% 0.75% 0.77%
Net investment income 7.00 9.28 8.82 9.88 9.98
-----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 65% 96% 102% 78% 72%
===================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
33 Smith Barney High Income Fund | 2000 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, 2000, 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 auditing standards generally accepted
in the United States of America. 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, 2000, 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, 2000, 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 accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
New York, New York
September 11, 2000
34 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Tax Information (unaudited)
--------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year
ended July 31, 2000:
. A corporate dividends received deduction of 1.06%.
35 Smith Barney High Income Fund | 2000 Annual Report to Shareholders
<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
SSB Citi Fund Management LLC
DISTRIBUTOR
Salomon Smith Barney Inc.
CUSTODIAN
PFPC Trust Company
TRANSFER AGENT
Citi Fiduciary Trust Company
125 Broad Street, 11th Floor
New York, New York 10004
SUB-TRANSFER AGENT
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island
02940-9699
<PAGE>
--------------------------------------------------------------------------------
Smith Barney High Income Fund
--------------------------------------------------------------------------------
This report is submitted for general information of the shareholders of Smith
Barney Income Funds -- Smith Barney High Income Fund, but it may also be used as
sales literature when preceded or accompanied by the current Prospectus, which
gives details about charges, expenses, investment objectives and operating
policies of the Fund. If used as sales material after October 31, 2000, this
report must be accompanied by performance information for the most recently
completed calendar quarter.
SMITH BARNEY HIGH INCOME FUND
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
For complete information on any of the above Smith Barney Mutual Funds,
including management fees and expenses, call or write for a free prospectus.
Read it carefully before you invest or send money.
www.smithbarney.com/mutualfunds
[LOGO OF SALOMON SMITH BARNEY]
Salomon Smith Barney is a service mark of Salomon
Smith Barney Inc.
FD0429 9/00
<PAGE>
--------------------------------------------------------------------------------
SMITH BARNEY
DIVERSIFIED STRATEGIC
INCOME FUND
--------------------------------------------------------------------------------
CLASSIC SERIES | ANNUAL REPORT | JULY 31, 2000
[LOGO OF SMITH BARNEY MUTUAL FUNDS]
Your Serious Money. Professionally Managed. (SM)
--------------------------------------------------------------------------------
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
--------------------------------------------------------------------------------
<PAGE>
[PHOTO]
JOHN C. BIANCHI,
PORTFOLIO MANAGER
[PHOTO]
JAMES E. CONROY,
PORTFOLIO MANAGER
[PHOTO]
SIMON HILDRETH,
PORTFOLIO MANAGER
[GRAPHIC] Classic Series
Annual Report . July 31, 2000
SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND
--------------------------------------------------------------------------------
JOHN C. BIANCHI, CFA
--------------------------------------------------------------------------------
John C. Bianchi, CFA, has more than 22 years of securities business experience.
--------------------------------------------------------------------------------
JAMES E. CONROY
--------------------------------------------------------------------------------
James E. Conroy has more than 24 years of securities business experience.
--------------------------------------------------------------------------------
SIMON HILDRETH
--------------------------------------------------------------------------------
Simon Hildreth has more than 17 years of securities business experience.
--------------------------------------------------------------------------------
FUND OBJECTIVE
--------------------------------------------------------------------------------
The Fund seeks high current income by investing primarily in U.S. government
securities and U.S. government mortgage-related securities, foreign government
securities, including securities issued by supranational organizations and U.S.
and foreign corporate debt securities.
--------------------------------------------------------------------------------
FUND FACTS
--------------------------------------------------------------------------------
FUND INCEPTION
--------------------------------------------------------------------------------
December 28, 1989
MANAGER INVESTMENT
INDUSTRY EXPERIENCE
--------------------------------------------------------------------------------
22 Years (John C. Bianchi)
24 Years (James E. Conroy)
17 Years (Simon Hildreth)
CLASS A CLASS B CLASS L
--------------------------------------------------------------------------------
NASDAQ SDSAX SLDSX SDSIX
--------------------------------------------------------------------------------
INCEPTION 11/6/92 12/28/89 3/19/93
--------------------------------------------------------------------------------
Average Annual Total Returns as of July 31, 2000
Without Sales Charges(1)
Class A Class B Class L
--------------------------------------------------
One-Year 3.35% 2.98% 2.84%
--------------------------------------------------
Five-Year 6.13 5.64 5.69
--------------------------------------------------
Ten-Year N/A 7.29 N/A
--------------------------------------------------
Since Inception+ 6.63 7.45 5.71
--------------------------------------------------
With Sales Charges(2)
Class A Class B Class L
--------------------------------------------------
One-Year (1.28)% (1.37)% 0.80%
--------------------------------------------------
Five-Year 5.15 5.49 5.48
--------------------------------------------------
Ten-Year N/A 7.29 N/A
--------------------------------------------------
Since Inception+ 5.99 7.45 5.58
--------------------------------------------------
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable sales
charges with respect to Class A and L shares of 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.
--------------------------------------------------------------------------------
What's Inside
Your Investment in the Smith Barney Diversified Strategic Income Fund..........1
A Message from the Chairman ...................................................2
Letter from the Portfolio Managers ............................................3
Fund at a Glance ..............................................................8
Historical Performance ........................................................9
Growth of $10,000 ............................................................12
Schedule of Investments ......................................................13
Bond Ratings .................................................................24
Statement of Assets and Liabilities ..........................................25
Statement of Operations ......................................................26
Statements of Changes in Net Assets ..........................................27
Notes to Financial Statements ................................................28
Financial Highlights .........................................................33
Independent Auditors' Report .................................................38
Tax Information ..............................................................39
[LOGO OF SMITH BARNEY MUTUAL FUNDS]
Your Seriour Money. Professionally Managed.(SM)
--------------------------------------------------------------------------------
Investment Products: Not FDIC Insured . Not Bank Guaranteed . May Lose Value
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
YOUR INVESTMENT IN THE SMITH BARNEY DIVERSIFIED
STRATEGIC INCOME FUND
--------------------------------------------------------------------------------
An Opportunity to Diversify Your Income Sources
The Smith Barney Diversified Strategic Income Fund brings together three
fixed-income opportunities: U.S. government securities, foreign government debt
and high-yielding corporate bonds.
[GRAPHIC] -- Broad Income Diversification
Portfolio managers John Bianchi, Jim Conroy and Simon Hildreth
believe that one way to minimize portfolio volatility is to
diversify broadly across regions, asset classes and currencies.
Keep in mind, diversification does not protect against market loss.
[GRAPHIC] -- A Comprehensive Investment Process
John, Jim and Simon follow an investment process that incorporates
in-depth fundamental and quantitative analysis covering 15 of the
world's major government bond markets, focusing on opportunities in
U.S. government and agency securities, high-yield corporate bonds
and foreign government bonds. (Please note that investments in
foreign securities are subject to special risks such as those
associated with currency fluctuations.)
[GRAPHIC] -- A Distinguished History of Managing Your Serious Money
Founded in 1873 and 1892, respectively, the firms of Charles D.
Barney and Edward B. Smith were among the earliest providers of
securities information, research and transactions. Merged in 1937,
Smith Barney & Co. offered its clients timely information, advice
and insightful asset management. Today, SSB Citi Fund Management
LLC ("SSB Citi") unites the distinguished history of Smith Barney &
Co. with the unparalleled global reach of its parent, Citigroup.
At SSB Citi you have access to blue-chip management delivered professionally. We
are proud to offer you, the serious investor, a variety of managed options.
1 Smith Barney Diversified Strategic Income Fund
| 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
A MESSAGE FROM THE CHAIRMAN
--------------------------------------------------------------------------------
For years, individuals and businesses have looked to the investment
professionals of SSB Citi Fund Management LLC ("SSB Citi") for thoughtful
insights and advice. For some, the solution has been a long-term investment
strategy, incorporating multiple stock and bond mutual funds. Others have
invested with specific portfolio managers who are recognized and respected for
the insights and performance record.
The Smith Barney Diversified Strategic Income Fund ("Fund") is designed as an
investment option that seeks to provide investors with a competitive rate of
income through dividends, while attempting to minimize share price volatility.
In line with this objective, the Fund looks to take advantage of three separate
sectors of the bond market -- U.S. government securities, foreign government
securities and U.S. and foreign corporate securities. By diversifying in three
distinct sectors, the Fund has the flexibility to allocate and reallocate its
assets to adjust to different market cycles.
We believe your investment in the Fund represents an opportunity for you, the
serious investor, to globally diversify your sources of income. Portfolio
managers John C. Bianchi, James E. Conroy and Simon Hildreth allocate the Fund's
assets by identifying undervalued sectors and securities in the U.S. government
and U.S. government-mortgage bond market, following a disciplined process for
selecting foreign government bonds and searching for what they deem to be
better-quality corporate securities offering high yields.
[PHOTO]
HEATH B. MCLENDON
CHAIRMAN
-----------------
With economic growth robust, interest rates stable and inflationary pressures
apparently in check, many investors may not feel compelled to alter their
portfolio mixes. Yet, when times are good, it may be prudent for investors to
consider adding a bond fund to their investment plan to cushion the effects of
stock market volatility and gain additional income potential. An investment in
the Smith Barney Diversified Strategic Income Fund provides you with bond market
diversification, a necessary part of a well-balanced portfolio.
When you invest with SSB Citi, you can do so with the confidence that your
interests come first, your investment success is paramount and that the ultimate
in resources is being committed to your financial future. Thank you for
investing with us.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
September 6, 2000
2 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
Dear Shareholder,
We are pleased to provide the annual report for the Smith Barney Diversified
Strategic Income Fund ("Fund") for the year ended July 31, 2000. In this report
we have summarized the period's prevailing economic and market conditions and
outlined our investment strategy. The information provided in this letter
represents the opinion of the managers and is not intended to be a forecast of
future events, a guarantee of future results nor investment advice. Further,
there is no assurance that certain securities will remain in or out of the Fund.
Additionally, please note that the statistical performance information that
appears throughout this report is compiled from SSB Citi Fund Management LLC.
Furthermore, there is no assurance that certain securities will remain in or out
of the Fund. Please refer to pages 13 through 23 for a complete list and
percentage breakdown of the Fund's holdings. A detailed summary of the Fund's
performance can be found in the appropriate sections that follow. Also, please
note any discussion of the Fund's holdings is as of July 31, 2000 and is subject
to change. We hope you find this report to be useful and informative.
Performance Update
For the year ended July 31, 2000, the Fund's Class A shares, without and with
sales charges, returned 3.35% and a negative 1.28%, respectively. In comparison,
the Lehman Brothers Aggregate Bond Index ("Lehman Index")1 returned 5.97% for
the same period. The Fund is also measured against a combination of 35% of the
Merrill Lynch Master GNMA Index, 2 30% of the Merrill Lynch High Yield Master
Index3 and 30% of the Merrill Lynch Global Bond Index.4 For the year ended July
31, 2000, the Merrill Lynch Master GNMA Index returned 6.92%, the Merrill Lynch
High Yield Master Index returned a negative 0.81% and the Merrill Lynch Global
Bond Index returned 0.79%. Past performance is not indicative of future results.
As stated in the "A Message from the Chairman" section of this report, the Fund
relies on our 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.
Investment Strategy
The Fund seeks high current income by investing primarily in three bond sectors:
. U.S. government securities and U.S. government mortgage-related
securities;
. Foreign government securities, including securities issued by
supranational organizations; and
. U.S. and foreign corporate debt securities.
We reallocate the Fund's assets from time to time among the types of bonds
described above based on our analysis of economic and market conditions and the
relative returns and risks then represented by each type of bonds. As of July
31, 2000, the Fund's allocation was 21.7% in foreign government bonds, 28.6% in
high-yield corporate bonds and 49.7% in U.S. government securities.
--------------
1 The Lehman Index is a broad measure of the performance of taxable bonds in
the U.S. market, with maturities of at least one year. The index is
comprised of U.S. Treasury bonds, government agency bonds, mortgage-backed
securities and corporate bonds. Please note that an investor cannot invest
directly in an index.
2 The Merrill Lynch Master GNMA Index includes various weighting of all
outstanding coupons issued in 15- and 30-year GNMA mortgage pass-throughs.
Please note that an investor cannot invest directly in an index.
3 The Merrill Lynch High Yield Master Index is a market
capitalization-weighted index of all domestic and Yankee high-yield bonds.
Issues included in the index have maturities of at least one year and have
a credit rating lower than BBB-Baa3, but are not in default. Please note
that an investor cannot invest directly in an index.
4 The Merrill Lynch Global Bond Index is a broad-based unmanaged index of
high-yield securities. Please note that an investor cannot invest directly
in an index.
3 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
Market & Economic Update
During the period, bonds were impacted due in large part to the interest rate
increases by the Federal Reserve Board ("Fed") and the U.S.Treasury's plan to
buy back more than $30 billion of its outstanding long-term debt. However,
despite the interest rate increases by the Fed, many classes of bonds
outperformed stocks during the period. In our view, several factors exist which
largely contributed to the bond market's performance in 2000. Many investors
believe that the growth of the U.S. economy is beginning to slow, and no longer
view inflation as the major threat it was a year ago. Additionally, many
investors are now convinced that the Fed may be finished with its latest round
of interest rate hikes.
--------------------------------------------------------------------------------
OUR INVESTMENT PROCESS
INCORPORATES IN-DEPTH FUNDAMENTAL
AND QUANTITATIVE ANALYSIS COVERING 15
OF THE WORLD'S MAJOR GOVERNMENT BOND
MARKETS, FOCUSING ON OPPORTUNITIES IN
U.S. GOVERNMENT AND AGENCY SECURITIES,
HIGH-YIELD CORPORATE BONDS AND FOREIGN
GOVERNMENT BONDS.
--------------------------------------------------------------------------------
Given the potential for a slowdown in U.S. economic growth -- due in large part
to rising short-term interest rates by the Fed -- many bond investors have been
buying higher-quality instruments such as U.S. Treasury notes. As a result, the
high-yield bond market was under pressure during the period, given the potential
economic slowdown in the second half of past six months and its possible impact
on the U.S. stock markets.
U.S. Government and Mortgage-Backed Securities
In our opinion, the issues that significantly impacted the performance of the
bond market during the period were:
. Interest rate increases by the Fed;
. The stock market's resiliency in the face of the Fed's actions;
. The U.S. Treasury's buyback program; and
. Investors' concerns regarding credit quality, extreme levels of
volatility and illiquidity.
On May 16, 2000, the Fed enacted the sixth in a series on monetary policy
actions that began on June 30, 1999, when the federal funds rate ("fed funds
rate")5 was 4.75%. Since last June 30, 1999, the Fed raised rates by 175 basis
points6 resulting in a rate presently at 6.5%, the cumulative effect of which,
we believe, may begin to have a more pronounced effect in dampening inflationary
pressures in the economy.
--------------
5 The fed funds rate is the interest rate that banks with excess reserves at
a Federal Reserve district bank charge other banks that need overnight
loans. The fed funds rate often points to the direction of U.S. interest
rates.
6 A basis point is 0.01% or one one-hundredth of a percent.
4 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
A critical point, which many investors overlook, is that Fed monetary policy
adjustments take time to be absorbed into the general economy. In our opinion,
the rallies we have recently seen are a direct result of changes that were
enacted six to nine months ago.
Moreover, the plan by the U.S. Treasury to buy back more than $30 billion of its
long-term debt obligations in 2000 and $50 billion in 2001 of its long-term debt
obligations has led to a reduced supply in the marketplace. The U.S. Treasury's
intent to retire debt, particularly at the long end of the yield curve,7 has
been the most recent test for the bond market. The notion that a decreased
supply of Treasury securities with constant if not increasing demand would cause
interest rates to decrease seemed to many investment professionals as "too
easy." Many investment professionals believed that this was too good to be true
and for awhile they were right. However, the constant yet small quantities of
U.S. Treasuries, relative to outstanding supply, that were retired cumulatively
have begun to have an impact on the market.
--------------------------------------------------------------------------------
WE BELIEVE INVESTORS SHOULD HAVE ACCESS TO
A DIVERSIFIED INCOME STRATEGY. WE EVALUATE
RELATIVE INCOME OPPORTUNITIES AND RISKS
WITHIN EACH OF THE FUND'S BOND SECTORS.
--------------------------------------------------------------------------------
As such, the price of long-term bonds increased in relation to their short-term
counterparts, as reflected by an inverted yield curve. Instead of a "normal"
yield curve,8 with yields rising slowly along with the maturity of U.S. Treasury
bonds, the highest yields were for shorter-term bonds.
We focus on investing in individual securities and sectors that we deem to be
undervalued relative to the marketplace. More specifically, we determine sector
and maturity weightings based on intermediate and long-term assessments of the
market and relative value factors based on the outlook for interest rates.
Additionally, through our research we seek to uncover inefficient sectors of the
government securities and mortgage markets and adjust the Fund's portfolio to
take advantage of the new information.
The high-yield bond market, for the most part, mirrored the performance of the
stock market during the period, posting a modest return in comparison to other
classes of bonds. Given the recent moderation in economic growth, the
highest-quality sectors of the bond market such as U.S. Treasuries,
investment-grade9 corporate bonds and U.S. agency securities generated the
strongest results. 30-Year U.S. Treasuries, which were up almost 2% in July
alone, outperformed all other sectors during the period.
High-Yield Corporate Bonds
Given the disparate performance between the U.S. high-yield bond market and the
remainder of the bond market, high-yield bond spreads now stand at over 683
basis points above U.S. Treasuries. These extremely high levels were last
reached during the 1998 emerging market crisis. The high-yield bond market now
yields more than 100% more than the U.S. Treasury market.
There is no doubt that the high-yield bond market has reflected the tighter Fed
monetary policy instituted beginning in June 30, 1999 and the increase in
default rates in the past year. We believe the high-yield bond market is heavily
discounting the negative fundamental risks about potentially tighter monetary
policy, softer economic growth, weaker corporate profits and potentially higher
default rates.
--------------
7 The yield curve is the graphical depiction of the relationship between the
yield on bonds of the same credit quality but different maturities.
8 An inverted yield curve represents an unusual situation where short-term
interest rates are higher than long-term rates.
9 Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody's
Investors Service, Inc. or AAA, AA, A and BBB by Standard & Poor's Ratings
Service, or that have an equivalent rating by any nationally recognized
statistical rating organization, as determined by the manager to be of
equivalent quality.
5 Smith Barney Diversified Strategic Income Fund|2000 Annual Report to
Shareholders
<PAGE>
We think investors have overreacted to the recent performance of high-yield
bonds. After a modestly positive month on June, high-yield bond mutual funds
again experienced net redemptions in July totaling more than $1 billion. Since
the beginning of this year, there has been a total of $7 billion of net
redemptions out of high-yield bond mutual funds. As a direct result of flagging
demand, new issue supply has decreased dramatically with only $34 billion of new
issues price in the past seven months, over 50% below last year's levels.
In addition, a large proportion of the new issues has been from the more liquid,
better-quality companies. A majority of the new issues have been purchased by
longer-term institutional investors such as insurance companies and pension
plans that have a positive view of the long-term value of the high-yield bond
market relative to the other sectors of the bond market.
--------------------------------------------------------------------------------
BY DIVERSIFYING IN THREE DISTINCT SECTORS OF
THE BOND MARKET, WE HAVE THE FLEXIBILITY TO
ALLOCATE AND REALLOCATE ASSETS IN
RESPONSE TO CHANGING MARKET CONDITIONS.
--------------------------------------------------------------------------------
The best-performing industry sectors of the high-yield bond market during 2000
were energy (oil and natural gas), technology, cable, media and operating
utilities, which historically have fared better during an economic slowdown. The
worst-performing sectors included telecommunication, basic materials, capital
goods manufacturing, consumer-related industries and transportation.
The telecommunications sector, which accounts for about 25% of the high-yield
bond market, has underperformed due in large part to the recent weakness of the
stock market as well as the increased new issue supply of telecommunications
issues over the past year. Many companies in this sector are aggressive
consumers of external capital as they seek to build out their infrastructure.
Any credit tightening either in the form of lower liquidity in the banking
system or increased stock market volatility may cause these issues to
underperform in the near future. However, we remain convinced the better-quality
and larger-capitalized companies in this sector may ultimately succeed and
perform well. (Of course, no guarantees can be given that our expectations will
be met.)
Foreign Government Securities
Our investment strategy with the Fund's foreign government securities during the
period currently emphasized three factors:
. To be fully invested and possibly earn high yield, without undue
credit risk;
. To maintain exposures to take advantage of potential spread
tightening; and
. To focus on countries with low external financing requirements.
We maintained the bulk of the Fund's foreign bond exposure in core European
government securities denominated in the euro,10 where we felt the likely hedged
returns over the remainder of the year to be the most compelling.
--------------
10 The euro is the single currency of the European Monetary Union that was
adopted by Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain on January 1, 1999.
6 Smith Barney Diversified Strategic Income Fund
| 2000 Annual Report to Shareholders
<PAGE>
The rest of the Fund's foreign bond holdings were concentrated in the more
peripheral European countries. In particular, we held securities denominated in
the English pound and in the Danish and Swedish kroner. The yield levels on
bonds in these countries offered an additional convergence opportunity on yields
in the core "euroland"11 economies.
During the period, we held no positions denominated in the Japanese yen as
already very low yields and the possibility that the Japanese government would
put an end to its zero-interest-rate policy suggested that yield levels might
rise going forward.
We remain positive on the performance of both euro- and U.S. dollar-denominated
bonds over the coming months. After the poor performance experienced last year,
yields have already risen to levels that we think have provided a cushion
against the official rate increases seen so far this year. As the core economies
display signs of slower economic activity, we expect a steady fall in interest
rates to occur. (Of course, no guarantees can be given this will occur.)
Conclusion
We will continue to focus on what we believe are better-quality securities in
each of the Fund's bond sectors and look to pick up additional yield. We remain
bullish on the total return prospects of the bond market at current valuation
levels, especially given the continued health of many of the world's economies.
Further, we anticipate that economic growth should continue, with inflation
remaining tame.
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
future.
Sincerely,
/s/John C. Bianchi /s/James E. Conroy
John C. Bianchi, CFA James E. Conroy
Vice President and Investment Officer Vice President and Investment Officer
/s/Simon Hildreth
Simon Hildreth
Investment Officer
September 6, 2000
--------------
11 Euroland refers to those countries which make up the European Monetary
Union ("EMU"). The EMU members include Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.
7 Smith Barney Diversified Strategic Income Fund
| 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Smith Barney Diversified Strategic Income Fund at a Glance
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Top Ten Holdings*+
--------------------------------------------------------------------------------
1. Government National Mortgage Association ..............................43.4%
2. Bundesrepublic ........................................................ 4.7
3. U.S. Treasury Principal Strips ........................................ 3.7
4. Bundesobligation ...................................................... 3.3
5. Swedish Government .................................................... 2.6
6. Kingdom of Denmark .................................................... 2.5
7. NYKREDIT .............................................................. 1.8
8. U.K. Treasury ......................................................... 1.4
9. U.S. Treasury Note .................................................... 1.4
10. Federal National Mortgage Association ................................. 1.2
--------------------------------------------------------------------------------
Industry Diversification*++
--------------------------------------------------------------------------------
[GRAPH]
11.5% Cable Television
2.9% Containers/Packaging
3.0% Contract Drilling
3.1% Food
6.9% Internet Services
5.6% Oil & Gas
15.5% Telecommunications
10.2% Telephone
3.4% Unregulated Power Generation
37.9% Other
* These holdings are as of July 31, 2000 and are subject to change.
+ As a percentage of total investments.
++ As a percentage of total high-yield sector.
--------------------------------------------------------------------------------
Investment Breakdown*+
--------------------------------------------------------------------------------
[GRAPH]
28.0% Corporate Bonds and Notes
21.7% International Bonds
0.6% Common Stock, Preferred Stock and Warrants
49.7% U.S. Goverment Agencies & Obligations
8 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Historical Performance -- Class A Shares
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
--------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/00 $7.46 $7.19 $0.51 $0.00 $0.00 3.35%
-----------------------------------------------------------------------------------------------------------------------------------
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 $ 4.42 $ 0.28 $ 0.32
===================================================================================================================================
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Historical Performance -- Class B Shares
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
--------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/00 $7.48 $7.22 $0.47 $0.00 $0.00 2.98%
-----------------------------------------------------------------------------------------------------------------------------------
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
===================================================================================================================================
Total $5.67 $0.36 $0.45
===================================================================================================================================
</TABLE>
9 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Historical Performance -- Class L Shares
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/00 $7.48 $7.21 $0.47 $0.00 $0.00 2.84%
-----------------------------------------------------------------------------------------------------------------------------------
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 $3.90 $0.19 $0.29
===================================================================================================================================
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/00 $7.46 $7.20 $0.53 $0.00 $0.00 3.83%
-----------------------------------------------------------------------------------------------------------------------------------
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 $2.87 $0.06 $0.09
===================================================================================================================================
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value
-----------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
7/31/00 $7.47 $7.21 $0.53 $0.00 $0.00 3.83%
-----------------------------------------------------------------------------------------------------------------------------------
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 $4.57 $0.28 $0.34
===================================================================================================================================
It is the Fund's policy to distribute dividends monthly and capital gains, if any, annually.
</TABLE>
10 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Average Annual Total Returns
------------------------------------------------------------------------------------------------------------------------------------
Without Sales Charges(1)
---------------------------------------------------------------------
Class A Class B Class L Class Y Class Z
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 7/31/00 3.35% 2.98% 2.84% 3.83% 3.83%
-----------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/00 6.13 5.64 5.69 N/A 6.50
-----------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/00 N/A 7.29 N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/00 6.63 7.45 5.71 6.34 7.00
===================================================================================================================================
<CAPTION>
With Sales Charges(2)
---------------------------------------------------------------------
Class A Class B Class L Class Y Class Z
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 7/31/00 (1.28)% (1.37)% 0.80% 3.83% 3.83%
-----------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/00 5.15 5.49 5.48 N/A 6.50
-----------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/00 N/A 7.29 N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/00 5.99 7.45 5.58 6.34 7.00
===================================================================================================================================
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Cumulative Total Returns
------------------------------------------------------------------------------------------------------------------------------------
Without Sales Charges(1)
===================================================================================================================================
<S> <C>
Class A (Inception* through 7/31/00) 64.27%
-----------------------------------------------------------------------------------------------------------------------------------
Class B (7/31/90 through 7/31/00) 102.08
-----------------------------------------------------------------------------------------------------------------------------------
Class L (Inception* through 7/31/00) 50.64
-----------------------------------------------------------------------------------------------------------------------------------
Class Y (Inception* through 7/31/00) 34.43
-----------------------------------------------------------------------------------------------------------------------------------
Class Z (Inception* through 7/31/00) 68.80
===================================================================================================================================
</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.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
11 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
--------------------------------------------------------------------------------
Historical Performance (unaudited)
--------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the
Smith Barney Diversified Strategic Income Fund vs. Lehman Brothers Aggregate
Bond Index+
--------------------------------------------------------------------------------
July 1990 -- July 2000
[GRAPH]
<TABLE>
<CAPTION>
Smith Barney Diversified Strategic Income Fund Lehman Brothers Aggregate Bond Index
<S> <C> <C>
July 1990 10,000 10,000
July 1991 10,646 11,071
July 1992 12,632 12,707
July 1993 13,673 14,000
July 1994 13,867 14,014
July 1995 15,360 15,430
July 1996 16,558 16,284
July 1997 18,362 18,037
July 1998 19,635 19,456
July 1999 19,624 19,940
July 31, 2000 20,208 21,131
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class B shares on July 31,
1990, assuming reinvestment of dividends and capital gains, if any, at net
asset value through July 31, 2000. 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. An investor cannot invest directly
in an index. 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.
12 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
===================================================================================================================================
<S> <C> <C>
U.S. GOVERNMENT SECTOR -- 49.7%
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 49.7%
$ 25,000,000 U.S. Treasury Note, 6.500% due 2/15/10 $ 25,828,000
U.S. Treasury Principal Strip:
44,013,000 Zero coupon bond to yield 6.431% due 11/15/09 24,472,989
138,100,000 Zero coupon bond to yield 6.213% due 2/15/19 45,332,706
24,878,378 Federal National Mortgage Association (FNMA), 6.500% due 5/1/30 (a) 23,517,780
Government National Mortgage Association (GNMA):
138,327,449 7.500% due 7/15/29 (a) 137,245,729
20,467,342 6.500% due 3/15/30 (a) 19,431,081
243,048,103 8.500% due 5/15/30 (b) 248,438,910
12,280,407 9.000% due 6/15/30 (a) 12,656,433
402,654,258 8.000% due 7/15/30 (b) 406,427,129
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR
(Cost --$942,285,983) 943,350,757
===================================================================================================================================
<CAPTION>
FACE
AMOUNT RATING(c) SECURITY VALUE
===================================================================================================================================
<S> <C> <C>
HIGH-YIELD SECTOR -- 28.6%
CORPORATE BONDS & NOTES -- 28.0%
Aerospace -- 0.2%
1,655,000 B BE Aerospace, Sr. Sub. Notes, Series B, 8.000% due 3/1/08+ 1,460,538
2,485,000 B- Dunlop Standard Aerospace Holdings, Sr. Notes, 11.875% due 5/15/09 2,460,150
3,920,688
Airlines -- 0.4%
9,212,791 BB Airplanes Pass-Through Trust, Corporate Collateralized Mortgage Obligation, Series D,
10.875% due 3/15/19 7,398,148
Aluminum -- 0.4%
Kaiser Aluminum & Chemical Corp.:
Sr. Notes:
600,000 B1* Series B, 10.875% due 10/15/06+ 577,500
935,000 B1* Series D, 10.875% due 10/15/06 899,938
7,375,000 B3* Sr. Sub. Notes, 12.750% due 2/1/03+ 6,711,250
8,188,688
Apparel -- 0.1%
145,000 BB- Levi Strauss & Co., Notes, 7.000% due 11/1/06 115,275
Tommy Hilfiger USA Inc., Company Guaranteed:
360,000 BBB- 6.500% due 6/1/03+ 288,900
1,565,000 BBB- 6.850% due 6/1/08+ 1,075,938
1,150,000 B- Tropical Sportswear International Corp., 11.000% due 6/15/08+ 1,112,625
2,592,738
Auto Parts: O.E.M. -- 0.3%
2,930,000 B Collins & Aikman Products, Company Guaranteed, 11.500% due 4/15/06 2,856,750
2,740,000 B Dura Operating Corp., Sr. Sub. Notes, 9.000% due 5/1/09+ 2,452,300
5,309,050
Book/Magazines -- 0.2%
2,730,000 B2* Ziff Davis Media Inc., Sr. Sub. Notes, 12.000% due 7/15/10 (d)+ 2,784,600
</TABLE>
See Notes to Financial Statements.
13 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT RATING(c) SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
Broadcasting -- 0.4%
$ 3,955,800 NR AMFM Operating Inc., Payment-in-kind, 12.625% due 10/31/06 $ 4,667,844
1,925,000 B Capstar Broadcasting, Sr. Discount Notes, step bond to yield 11.007% due 2/1/09 1,795,063
Young Broadcasting Corp., Sr. Sub. Notes:
990,000 B 11.750% due 11/15/04+ 1,020,938
555,000 B 10.125% due 2/15/05 557,775
------------------------------------------------------------------------------------------------------------------------------------
8,041,620
------------------------------------------------------------------------------------------------------------------------------------
Building Materials -- 0.1%
Nortek, Inc.:
1,100,000 B+ Sr. Notes, Series B, 9.125% due 9/1/07 1,039,500
1,230,000 B- Sr. Sub. Notes, 9.875% due 3/1/04+ 1,183,875
------------------------------------------------------------------------------------------------------------------------------------
2,223,375
------------------------------------------------------------------------------------------------------------------------------------
Building Products -- 0.2%
1,480,000 B Amatek Industries Property Ltd., Sr. Sub. Notes, 12.000% due 2/15/08 1,369,000
2,510,000 B- Atrium Cos. Inc., Sr. Sub. Notes, 10.500% due 5/1/09 (d) 2,296,650
------------------------------------------------------------------------------------------------------------------------------------
3,665,650
------------------------------------------------------------------------------------------------------------------------------------
Cable Television -- 3.3%
Adelphia Communications Corp.:
2,090,000 BB- Sr. Discount Notes, zero coupon bond to yield 11.879% due 1/15/08 856,900
490,000 B+ Sr. Notes, 8.375% due 2/1/08 427,525
965,000 CCC+ Cable Satisfaction International Sr. Notes, 12.750% due 3/1/10 Inc., 944,494
Charter Communications Holdings LLC:
12,505,000 B+ Sr. Discount Notes, step bond to yield 11.722% due 1/15/10+ 7,096,588
1,605,000 B+ Sr. Notes, 8.625% due 4/1/09+ 1,412,400
4,570,000 BB- CSC Holdings, Inc., Sr. Sub. Debentures, 10.500% due 5/15/16 4,884,188
1,515,000 B EchoStar DBS Corp., Sr. Notes, 9.375% due 2/1/09 1,467,656
5,870,000 B- NTL Communications Corp., Sr. Notes, 11.500% due 10/1/08+ 6,002,075
8,070,000 BB- Rogers Cablesystems Ltd., Sr. Sub. Debentures, 11.000% due 12/1/15 8,957,700
2,740,000 B+ Telewest Communications PLC, Sr. Notes, 11.250% due 11/1/08+ 2,767,400
22,155,000 B- United International Holdings, Sr. Discount Notes, Series B, step bond to yield
11.248% due 2/15/08 16,228,538
24,635,000 B United Pan-Europe Communications N.V., Sr. Discount Notes, Series B, step bond to yield
12.500% due 8/1/09+ 11,455,275
------------------------------------------------------------------------------------------------------------------------------------
62,500,739
------------------------------------------------------------------------------------------------------------------------------------
Casinos/Gambling -- 0.5%
1,375,000 B Hollywood Casino Corp., Company Guaranteed, 11.250% due 5/1/07+ 1,409,375
1,185,000 B+ Horseshoe Gaming Holding Corp., Series B, Company Guaranteed, 8.625% due 5/15/09 1,122,788
57,325 NR Jazz Casino Co. LLC, Payment-in-kind, Sr. Sub. Notes, 5.867% due 11/15/09 8,885
Mandalay Resort Group:
915,000 BB- Sr. Sub. Debentures, 7.625% due 7/15/13 754,875
1,090,000 BB- Sr. Sub. Notes, 10.250% due 8/1/07 (d) 1,106,350
2,030,000 B+ Station Casinos, Inc., Sr. Sub. Notes, 9.875% due 7/1/10 (d) 2,042,688
Sun International Hotels, Company Guaranteed:
925,000 Ba3* 9.000% due 3/15/07 869,500
970,000 Ba3* 8.625% due 12/15/07 897,250
Venetian Casino Resort LLC, Company Guaranteed:
935,000 B- 12.250% due 11/15/04+ 946,688
970,000 CCC+ 14.250% due 11/15/05 950,600
------------------------------------------------------------------------------------------------------------------------------------
10,108,999
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
14 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT RATING(c) SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
Chemicals - Major -- 0.4%
Huntsman ICI Chemicals LLC:
$ 430,000 B+ Company Guaranteed, 10.125% due 7/1/09 $ 439,675
21,275,000 B+ Sr. Discount Notes, zero coupon to yield 13.067% due 12/31/09 7,127,125
------------------------------------------------------------------------------------------------------------------------------------
7,566,800
------------------------------------------------------------------------------------------------------------------------------------
Chemicals - Specialty -- 0.2%
1,560,000 B+ Lyondell Chemical Co., Sr. Sub. Notes, 10.875% due 5/1/09+ 1,573,650
1,150,000 B ZSC Specialty Chemical PLC, Sr. Notes, 11.000% due 7/1/09 (d) 1,161,500
------------------------------------------------------------------------------------------------------------------------------------
2,735,150
------------------------------------------------------------------------------------------------------------------------------------
Coal Mining -- 0.0%
4,790,000 Caa* AEI Resources Inc., Company Guaranteed, 10.500% due 12/15/05 (d) 790,350
------------------------------------------------------------------------------------------------------------------------------------
Construction/AG Equipment/Trucks -- 0.2%
4,595,000 B Columbus McKinnon Corp., Sr. Sub. Notes, 8.500% due 4/1/08 4,066,575
------------------------------------------------------------------------------------------------------------------------------------
Consumer Specialties -- 0.1%
1,505,000 B Jostens, Inc., 12.750% due 5/1/10 (d)(e) 1,497,475
------------------------------------------------------------------------------------------------------------------------------------
Containers/Packaging -- 0.8%
500,000 B BWAY Corp., Series B, Company Guaranteed, 10.250% due 4/15/07 493,750
9,175,000 B Stone Container Corp., Sr. Notes, 11.500% due 8/15/06 (d) 9,542,000
3,505,000 B- Sweetheart Cup Corp., Inc., Sr. Sub. Notes, 10.500% due 9/1/03+ 3,189,550
2,200,000 B- Tekni-Plex, Inc., Sr. Sub. Notes, 12.750% due 6/15/10 (d) 2,255,000
------------------------------------------------------------------------------------------------------------------------------------
15,480,300
------------------------------------------------------------------------------------------------------------------------------------
Contract Drilling -- 0.9%
2,020,000 B+ Parker Drilling Co., Sr. Notes, 9.750% due 11/15/06 1,959,400
6,145,000 BB Pride International, Inc., Sr. Notes, 10.000% due 6/1/09+ 6,360,075
3,290,000 Ba3* R&B Falcon Corp., Sr. Notes, 12.250% due 3/15/06 3,635,450
3,920,000 BB- RBF Finance Co., Sr. Secured Notes, 11.375% due 3/15/09+ 4,272,800
------------------------------------------------------------------------------------------------------------------------------------
16,227,725
------------------------------------------------------------------------------------------------------------------------------------
Discount Stores -- 0.3%
1,085,000 B+ Ames Department Stores, Inc., Sr. Notes, 10.000% due 4/15/06+ 688,975
3,695,000 Baa3* Kmart Corp., 12.500% due 3/1/05+ 3,981,363
------------------------------------------------------------------------------------------------------------------------------------
4,670,338
------------------------------------------------------------------------------------------------------------------------------------
Diversified Commercial Services -- 0.2%
1,900,000 B2* Intertek Finance PLC, Sr. Sub. Notes, 10.250% due 11/1/06 1,586,500
1,500,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes, 11.000% due 11/1/06 1,312,500
------------------------------------------------------------------------------------------------------------------------------------
2,899,000
------------------------------------------------------------------------------------------------------------------------------------
Diversified Financial Services -- 0.1%
Amresco Inc., Sr. Sub. Notes:
3,640,000 Caa* 10.000% due 3/15/04+ 1,547,000
1,975,000 Caa* 9.875% due 3/15/05 839,375
------------------------------------------------------------------------------------------------------------------------------------
2,386,375
------------------------------------------------------------------------------------------------------------------------------------
Diversified Manufacture -- 0.2%
4,725,000 B+ Park-Ohio Industries Inc., Sr. Sub. Notes, 9.250% due 12/1/07 4,252,500
------------------------------------------------------------------------------------------------------------------------------------
Drugs - Generic -- 0.2%
2,995,000 BB ICN Pharmaceuticals, Inc., Sr. Notes, 9.250% due 8/15/05 2,995,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT RATING(c) SECURITY VALUE
<S> <C> <C>
Electronic Components -- 0.4%
$ 3,090,000 BB- Celestica International Inc., Sr. Sub. Notes, 10.500% due 12/31/06 $ 3,244,500
3,700,000 Ba3* Flextronics International Ltd., Sr. Sub. Notes, 9.875% due 7/1/10 (d) 3,783,250
------------------------------------------------------------------------------------------------------------------------------------
7,027,750
------------------------------------------------------------------------------------------------------------------------------------
Engineering & Construction -- 0.1%
2,210,000 BB- Integrated Electrical Services, Inc., Sr. Sub. Notes, 9.375% due 2/1/09+ 1,828,775
------------------------------------------------------------------------------------------------------------------------------------
Environmental Services -- 0.4%
Allied Waste Industries Inc., Series B, Company Guaranteed:
760,000 BB- 7.875% due 1/1/09 674,500
2,380,000 B+ 10.000% due 8/1/09+ 2,073,575
430,000 B+ The IT Group, Inc., Sr. Sub. Notes, 11.250% due 4/1/09 384,850
2,315,000 CCC+ Metal Management, Inc., Company Guaranteed, 10.000% due 5/15/08+ 1,169,075
3,165,000 B+ URS Corp., Sr. Sub. Notes, 12.250% due 5/1/09 3,244,125
------------------------------------------------------------------------------------------------------------------------------------
7,546,125
------------------------------------------------------------------------------------------------------------------------------------
Food Distributors -- 0.7%
4,900,000 B2* Carrols Corp., Sr. Sub. Notes, 9.500% due 12/1/08 4,165,000
1,915,000 B International Home Foods, Company Guaranteed, 10.375% due 11/1/06 2,053,838
2,110,000 B- Premier International Foods PLC, Sr. Notes, 12.000% due 9/1/09 (d)+ 1,698,550
4,745,000 B SC International Services Inc., Sr. Sub. Notes, 9.250% due 9/1/07 4,537,406
------------------------------------------------------------------------------------------------------------------------------------
12,454,794
------------------------------------------------------------------------------------------------------------------------------------
Foods Specialty/Candy -- 0.2%
5,775,000 B- B&G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07 3,378,375
4,675,000 CCC+ Imperial Holly Corp., Sr. Sub. Notes, 9.750% due 12/15/07 935,000
------------------------------------------------------------------------------------------------------------------------------------
4,313,375
------------------------------------------------------------------------------------------------------------------------------------
Forest Products -- 0.3%
5,555,000 B Ainsworth Lumber Co. Ltd., Sr. Notes, 12.500% due 7/15/07 5,485,563
895,000 B+ Millar Western Forest Products, 9.875% due 5/15/08+ 877,100
------------------------------------------------------------------------------------------------------------------------------------
6,362,663
------------------------------------------------------------------------------------------------------------------------------------
Health Industry Services -- 0.1%
2,260,000 BBB- HEALTHSOUTH Corp., Sr. Notes, 6.875% due 6/15/05 1,887,100
------------------------------------------------------------------------------------------------------------------------------------
Home Furnishings -- 0.1%
2,635,000 B Falcon Products, Inc., Sr. Sub. Notes, 11.375% due 6/15/09 2,555,950
------------------------------------------------------------------------------------------------------------------------------------
Homebuilding -- 0.2%
1,900,000 Ba1* D.R. Horton, Inc., Company Guaranteed, 8.000% due 2/1/09 1,729,000
2,845,000 BB+ Lennar Corp., Sr. Notes, 9.950% due 5/1/10 (d) 2,894,788
------------------------------------------------------------------------------------------------------------------------------------
4,623,788
------------------------------------------------------------------------------------------------------------------------------------
Hotels/Resorts -- 0.6%
2,665,000 B- Courtyard by Marriott, Sr. Secured Notes, 10.750% due 2/1/08 2,631,688
Intrawest Corp., Sr. Notes:
3,715,000 B+ 9.750% due 8/15/08 3,715,000
3,880,000 B+ 10.500% due 2/1/10 4,035,200
------------------------------------------------------------------------------------------------------------------------------------
10,381,888
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT RATING(c) SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
Internet Services -- 1.9%
$ 995,000 NR COLO.COM, Sr. Notes, 13.875% due 3/15/10 (d)(e) $ 1,074,600
2,095,000 Caa* Cybernet Internet Services International, Inc., Sr. Notes, 14.000% due 7/1/09 890,375
Exodus Communications, Inc., Sr. Notes:
505,000 B 10.750% due 12/15/09 (d) 488,588
10,095,000 B 11.625% due 7/15/10 (d) 10,195,950
PSINet Inc., Sr. Notes:
2,765,000 B- 11.500% due 11/1/08+ 2,364,075
6,290,000 B- 11.000% due 8/1/09 5,126,350
4,560,000 B3* Rhythms NetConnections, Inc., Sr. Notes, 14.000% due 2/15/10 (d)+ 3,078,000
Verio Inc., Sr. Notes:
3,090,000 B- 10.375% due 4/1/05+ 3,290,850
3,765,000 B- 11.250% due 12/1/08 4,310,925
3,735,000 B- 10.625% due 11/15/09 (d) 4,313,925
1,635,000 CCC+ WAM!NET Inc., Series B, Company Guaranteed, step bond to yield 12.827% due 3/1/05 923,775
------------------------------------------------------------------------------------------------------------------------------------
36,057,413
------------------------------------------------------------------------------------------------------------------------------------
Leisure/Movies/Entertainment -- 0.2%
750,000 B- Premier Parks, Inc., Sr. Discount step bond to yield 10.812% due 4/1/08 Notes, 498,750
2,470,000 B- SFX Entertainment, Sr. Sub. Notes, 9.125% due 2/1/08 2,544,100
------------------------------------------------------------------------------------------------------------------------------------
3,042,850
------------------------------------------------------------------------------------------------------------------------------------
Medical Specialties -- 0.1%
2,740,000 B- Hanger Orthopedic Group, Sr. Sub. Notes, 11.250% due 6/15/09+ 2,356,400
------------------------------------------------------------------------------------------------------------------------------------
Multi-Sector Companies -- 0.3%
5,920,000 B- Triarc Consumer & Beverage, Company Guaranteed, 10.250% due 2/15/09+ 5,786,800
------------------------------------------------------------------------------------------------------------------------------------
Newspapers -- 0.1%
2,800,000 B+ Garden State Newspapers, Sr. Sub. Notes, 8.625% due 7/1/11+ 2,548,000
------------------------------------------------------------------------------------------------------------------------------------
Oil & Gas Production -- 1.2%
Belco Oil & Gas Corp., Sr. Sub. Notes:
1,500,000 B1* 10.500% due 4/1/06 1,518,750
2,780,000 B1* 8.875% due 9/15/07+ 2,641,000
1,285,000 B Canadian Forest Oil Corp., Company Guaranteed, 10.500% due 1/15/06 1,326,763
4,300,000 B Chesapeake Energy Corp., Company Guaranteed, 9.625% due 5/1/05 4,214,000
1,360,000 B Houston Exploration Co., Sr. Sub. Notes, Series B, 8.625% due 1/1/08 1,309,000
4,220,000 B+ Nuevo Energy Corp., Sr. Sub. Notes, 9.500% due 6/1/08+ 4,209,450
1,500,000 B2* Plains Resources Inc., Company Guaranteed, 10.250% due 3/15/06 (d) 1,526,250
1,000,000 B- Range Resources Corp., Company Guaranteed, 8.750% due 1/15/07 910,000
2,885,000 B Stone Energy Corp., Sr. Sub. Notes, 8.750% due 9/15/07 2,798,450
1,925,000 BB- Vintage Petroleum, Inc., Sr. Sub. Notes, 9.750% due 6/30/09+ 1,987,563
------------------------------------------------------------------------------------------------------------------------------------
22,441,226
------------------------------------------------------------------------------------------------------------------------------------
Oil/Gas Transmission -- 0.2%
3,670,000 BB- Leviathan Gas Pipeline Partners, LP, Sr. Sub. Notes, 10.375% due 6/1/09 3,798,450
------------------------------------------------------------------------------------------------------------------------------------
Oil Refining/Marketing -- 0.2%
1,635,000 BB- Clark Oil & Refining Corp., Sr. Notes, 9.500% due 9/15/04 1,455,150
5,040,000 B Clark USA Inc., Sr. Notes, 10.875% due 12/1/05 2,790,900
------------------------------------------------------------------------------------------------------------------------------------
4,246,050
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
17 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT RATING(c) SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
Paper -- 0.5%
$ 935,000 B Doman Industries Ltd., Sr. Notes, 8.750% due 3/15/04+ $ 766,700
2,585,000 CCC+ Repap New Brunswick, Sr. Secured Notes, 10.625% due 4/15/05+ 2,352,350
Riverwood International Corp.:
3,300,000 B- Company Guaranteed, 10.625% due 8/1/07 3,300,000
3,390,000 CCC+ Sr. Sub. Notes, 10.875% due 4/1/08 3,135,750
231,750 NR SD Warren Co., Debentures, Payment-in-kind, 14.000% due 12/15/06 257,243
------------------------------------------------------------------------------------------------------------------------------------
9,812,043
------------------------------------------------------------------------------------------------------------------------------------
Pharmaceuticals - Other -- 0.2%
4,115,000 B King Pharmaceuticals, Inc., Sr. Sub. Notes, 10.750% due 2/15/09 4,382,475
------------------------------------------------------------------------------------------------------------------------------------
Photographic Products -- 0.2%
3,875,000 BB- Polaroid Corp., Sr. Notes, 11.500% due 2/15/06+ 4,059,063
------------------------------------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts -- 0.2%
4,000,000 NR Ocwen Asset Investment Corp., 11.500% due 7/1/05+ 3,100,000
------------------------------------------------------------------------------------------------------------------------------------
Rental/Leasing Companies -- 0.4%
4,165,000 BB- Avis Rent A Car Inc., Sr. Sub. Notes, 11.000% due 5/1/09+ 4,414,900
United Rentals, Inc., Series B, Company Guaranteed:
2,195,000 BB- 9.250% due 1/15/09+ 2,046,838
1,700,000 BB- 9.000% due 4/1/09+ 1,551,250
------------------------------------------------------------------------------------------------------------------------------------
8,012,988
------------------------------------------------------------------------------------------------------------------------------------
Retail - Drug Store Chains -- 0.0%
905,000 B- Rite Aid Corp., 6.500% due 10/1/03 (d) 506,800
------------------------------------------------------------------------------------------------------------------------------------
Retail - Other Specialty Stores -- 0.0%
875,000 B- Advance Stores Co., Sr. Sub. Notes, 10.250% due 4/15/08 726,250
------------------------------------------------------------------------------------------------------------------------------------
Savings & Loans Associations -- 0.2%
4,100,000 B2* Ocwen Capital Trust I, Jr. Sub. Notes, 10.875% due 8/1/27+ 2,091,000
1,655,000 B+ Ocwen Financial Corp., Sr. Notes, 11.875% due 10/1/03 1,497,775
------------------------------------------------------------------------------------------------------------------------------------
3,588,775
------------------------------------------------------------------------------------------------------------------------------------
Semiconductors -- 0.5%
915,000 B1* Amkor Technology, Inc., Sr. Sub. Notes, 10.500% due 5/1/09+ 928,725
7,325,000 B Fairchild Semiconductor Corp., Sr. Sub. Notes, 10.125% due 3/15/07+ 7,471,500
1,420,000 B SCG Holding & Semiconductor Co., Company Guaranteed, 12.000% due 8/1/09 1,540,700
------------------------------------------------------------------------------------------------------------------------------------
9,940,925
------------------------------------------------------------------------------------------------------------------------------------
Steel/Iron Ore -- 0.3%
1,980,000 BB- LTV Corp., Sr. Notes, 11.750% due 11/15/09 (d) 1,702,800
2,845,000 B+ WCI Steel, Inc., Sr. Notes, 10.000% due 12/1/04+ 2,702,750
2,285,000 B- WHX Corp., Sr. Notes, 10.500% due 4/15/05+ 1,799,438
------------------------------------------------------------------------------------------------------------------------------------
6,204,988
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Equipment -- 0.4%
8,505,000 B- World Access, Inc., 13.250% due 1/15/08 7,654,500
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Major -- 0.1%
1,860,000 B2* Omnipoint Corp., Sr. Notes, 11.625% due 8/15/06 2,092,500
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
18 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT RATING(c) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Telecommunications - Other -- 3.7%
$ 1,155,000 B+ Call-Net Enterprises, Inc., Sr. Notes, 9.375% due 5/15/09 $ 606,375
Esprit Telecom Group PLC, Sr. Notes:
3,950,000 B- 11.500% due 12/15/07+ 2,705,750
2,250,000 B- 10.875% due 6/15/08 1,496,250
Focal Communications Corp.:
2,915,000 B Sr. Discount Notes, Series B, step bond to yield 13.148% due 2/15/08 1,923,900
1,970,000 B- Sr. Notes, 11.875% due 1/15/10 (d) 1,950,300
1,955,000 BB Global Crossing Holding Ltd., Company Guaranteed, 9.500% due 11/15/09 1,906,125
2,750,000 CCC+ GT Group Telecom Inc., Sr. Discount Notes, step bond to yield 13.250% due 2/1/10 (d) (e) 1,471,250
Hermes Europe Railtel BV, Sr. Notes:
3,365,000 B 11.500% due 8/15/07+ 2,708,825
3,085,000 B 10.375% due 1/15/09+ 2,360,025
2,950,000 B- ICG Communications Inc., Sr. Discount Notes, step bond to yield 12.931% due 9/15/05+ 2,802,500
KMC Telecom Holdings, Inc., Sr. Notes:
50,000 CCC+ 13.500% due 5/15/09 44,563
2,655,000 CCC+ Step bond to yield 15.885% due 2/15/08 1,340,775
12,370,000 B Level 3 Communications, Inc., Sr. Discount Notes, step bond to yield 12.849% due 3/15/10 6,587,025
1,940,000 CCC+ Madison River Capital, Sr. Notes, 13.250% due 3/1/10 (d) 1,784,800
950,000 B+ McLeodUSA Inc., Sr. Notes, 8.125% due 2/15/09 857,375
2,140,000 B+ Metromedia Fiber Network, Inc., Sr. Notes, 10.000% due 11/15/08 2,097,200
4,065,000 B- MGC Communications, Inc., Sr. Notes, 13.000% due 4/1/10 (d)+ 3,800,775
NEXTLINK Communications, Inc.:
Sr. Discount Notes:
11,010,000 B Step bond to yield 12.094% due 6/1/09 6,826,200
5,660,000 B Step bond to yield 12.233% due 12/1/09+ 3,226,200
Sr. Notes:
4,340,000 B 12.500% due 4/15/06 4,491,900
1,775,000 B 10.750% due 6/1/09+ 1,730,625
8,405,000 B- Primus Telecom Group, Inc., Sr. Notes 11.750% due 8/1/04+ 5,505,275
2,195,000 B- Tele1 Europe B.V., Sr. Notes, 13.000% due 5/15/09+ 2,238,900
5,935,000 B- Versatel Telecom B.V., Sr. Notes, 13.250% due 5/15/08+ 6,142,725
2,100,000 B- Viatel Inc., Sr. Notes, 11.500% due 3/15/09+ 1,365,000
WinStar Communications:
2,045,000 B- Sr. Discount Notes, step bond to yield 15.035% due 4/15/10 (d)+ 940,700
1,340,000 B- Sr. Notes, 12.750% due 4/15/10 (d)+ 1,242,850
------------------------------------------------------------------------------------------------------------------------------------
70,154,188
------------------------------------------------------------------------------------------------------------------------------------
Telephone - Cellular -- 2.9%
3,080,000 B- Centennial Cellular, Sr. Sub. Notes, 10.750% due 12/15/08+ 2,972,200
Crown Castle International Corp.:
8,995,000 B Sr. Discount Notes, step bond to yield 11.100% due 5/15/11+ 5,666,850
620,000 B Sr. Notes, 10.750% due 8/1/11+ 637,050
2,940,000 NR Dobson/Sygnet Communications Corp., Sr. Notes, 12.250% due 12/15/08 3,042,900
1,620,000 B- Microcell Telecommunications, Sr. Discount Notes, step bond to yield
11.956% due 6/1/09+ 1,101,600
5,665,000 B- Millicom International Cellular S.A., Sr. Discount Notes, step bond to yield
13.762% due 6/1/06 5,013,525
</TABLE>
See Notes to Financial Statements.
19 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT RATING(c) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Telephone - Cellular -- 2.9% (continued)
Nextel Communications:
Sr. Discount Notes:
$ 6,820,000 B1* Step bond to yield 10.779% due 9/15/07+ $ 5,370,750
8,745,000 B1* Step bond to yield 10.759% due 2/15/08+ 6,427,575
1,970,000 B1* Sr. Notes, 9.375% due 11/15/09 1,891,200
6,885,000 B- Spectrasite Holdings, Inc., Sr. Discount Notes, step bond to yield 11.118% due 4/15/09 4,096,575
930,000 B3* Telecorp PCS Inc., Sr. Sub. Notes, 10.625% due 7/15/10 (d)+ 943,950
Telesystem International Wireless, Sr. Discount Notes:
16,250,000 CCC+ Series B, step bond to yield 12.572% due 6/30/07 11,618,750
3,590,000 CCC+ Series C, step bond to yield 12.860% due 11/1/07 2,207,850
4,500,000 B3* Triton PCS Inc., Company Guaranteed, step bond to yield 11.705% due 5/1/08+ 3,335,625
1,555,000 B2* VoiceStream Wireless Corp., Sr. Discount Notes, step bond to yield 11.875% due 11/15/09 1,127,375
------------------------------------------------------------------------------------------------------------------------------------
55,453,775
------------------------------------------------------------------------------------------------------------------------------------
Textiles -- 0.1%
2,315,000 BB WestPoint Stevens Inc., Sr. Notes, 7.875% due 6/15/05+ 2,028,519
------------------------------------------------------------------------------------------------------------------------------------
Tobacco -- 0.1%
1,020,000 BB- Standard Commercial Tobacco Co., Company Guaranteed, 8.875% due 8/1/05 872,100
------------------------------------------------------------------------------------------------------------------------------------
Transportation - Marine -- 0.1%
2,760,000 B- Oglebay Norton Co., Sr. Sub. Notes, 10.000% due 2/1/09 2,573,700
------------------------------------------------------------------------------------------------------------------------------------
Unregulated Power Generation -- 1.0%
AES Corp.:
1,730,000 Ba1* Sr. Notes, 9.500% due 6/1/09 1,749,463
7,170,000 Ba3* Sr. Sub. Notes, 10.250% due 7/15/06 7,286,513
1,095,000 Ba2* AES Drax Energy Ltd., Secured Notes, 11.500% due 8/30/10 (d) 1,130,588
7,775,000 BB+ Calpine Corp., Sr. Notes, 10.500% due 5/15/06+ 8,115,156
------------------------------------------------------------------------------------------------------------------------------------
18,281,720
------------------------------------------------------------------------------------------------------------------------------------
Wholesale Distributors -- 0.1%
1,875,000 B Buhrmann U.S. Inc., Company Guaranteed, 12.250% due 11/1/09 1,964,063
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES
(Cost -- $576,662,142) 532,970,652
====================================================================================================================================
CONVERTIBLE CORPORATE BONDS & NOTES -- 0.0%
Oil/Natural Gas -- 0.0%
500,000 B- Parker Drilling Co., 5.500% due 8/1/04 (Cost -- $375,748) 398,750
====================================================================================================================================
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
PREFERRED STOCK -- 0.2%
Hospital/Nursing Management -- 0.2%
3,785,000 Fresenius Medical Care Preferred Capital Trust, 9.000%+ 3,737,688
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications -- 0.0%
81 Intermedia Communications, Payment-in-kind, Series B, 13.500% 63,383
------------------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $3,775,473) 3,801,071
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
20 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
COMMON STOCK -- 0.1%
Telecommunications Equipment -- 0.0%
26,723 World Access, Inc. (f) $ 240,507
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications - Other -- 0.1%
19,250 Pagemart Nationwide Inc. (f) 192,500
78,124 Tele1 Europe Holding AB-ADR (f) 1,025,378
------------------------------------------------------------------------------------------------------------------------------------
1,217,878
------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost --$472,881) 1,458,385
====================================================================================================================================
WARRANTS -- 0.3%
Broadcasting -- 0.0%
6,775 Australis Media, Expire 10/30/01 (d)(f) 0
12,325 UIH Australia, Expire 5/15/06 (f) 369,750
------------------------------------------------------------------------------------------------------------------------------------
369,750
------------------------------------------------------------------------------------------------------------------------------------
Cable Television -- 0.0%
965 Cable Satisfaction, Expire 3/1/10 (f) 24,849
6,000 Wireless One Inc., Expire 10/19/00 (f) 60
------------------------------------------------------------------------------------------------------------------------------------
24,909
------------------------------------------------------------------------------------------------------------------------------------
Internet Services -- 0.1%
2,095 Cybernet Internet Services, Expire 7/1/09 (d)(f) 26,188
6,975 Splitrock Service, Expire 7/15/08 (f) 1,061,944
12,450 WAM!NET Inc., Expire 3/1/05 (f) 144,731
------------------------------------------------------------------------------------------------------------------------------------
1,232,863
------------------------------------------------------------------------------------------------------------------------------------
Paper -- 0.0%
8,500 SD Warren Co., Expire 12/15/06 (f) 0
------------------------------------------------------------------------------------------------------------------------------------
Printing/Forms -- 0.0%
1,865 Merrill Corp., Expire 5/1/09 (f) 187
------------------------------------------------------------------------------------------------------------------------------------
Telecommunications -- 0.2%
7,800 RSL Communications Ltd., Expire 11/15/06 (f) 163,800
5,935 Versatel Telecom, Expire 5/15/08 (d)(f) 2,477,863
42,090 WebLink Wireless, Inc., Expire 12/31/03 (f) 336,720
------------------------------------------------------------------------------------------------------------------------------------
2,978,383
------------------------------------------------------------------------------------------------------------------------------------
Telephone - Cellular -- 0.0%
5,000 Iridium World Communications, Expire 7/15/05 (d)(f) 50
------------------------------------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost --$67,443) 4,606,142
====================================================================================================================================
TOTAL HIGH-YIELD SECTOR
(Cost --$581,353,687) 543,235,000
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
21 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT++ SECURITY VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTERNATIONAL SECTOR -- 21.7%
BONDS -- 21.7%
Belgium -- 0.1%
1,200,000EUR Flag Telecom Holdings Ltd., 11.625% due 3/30/10 (d) $ 1,006,291
------------------------------------------------------------------------------------------------------------------------------------
Canada -- 0.1%
2,375,000 Microcell Telecommunications Inc., Sr. Discount Notes, Series B, step bond to yield
13.528% due 10/15/07 1,118,925
------------------------------------------------------------------------------------------------------------------------------------
Denmark -- 4.4%
400,000,000 Denmark, 4.000 due 3/15/02+ 48,199,068
NYKREDIT:
166,670,000 6.000% due 10/1/19 19,623,463
125,004,000 7.000% due 10/1/29 15,168,239
------------------------------------------------------------------------------------------------------------------------------------
82,990,770
------------------------------------------------------------------------------------------------------------------------------------
Europe -- 1.0%
1,250,000EUR ESAT Telecom Group PLC, 11.875% due 11/1/09 1,428,649
10,000,000EUR Export - Import Japan, 4.625% due 7/23/03 9,057,551
10,000,000EUR Republic of Portugal, 6.000% due 2/16/04 9,435,605
------------------------------------------------------------------------------------------------------------------------------------
19,921,805
------------------------------------------------------------------------------------------------------------------------------------
Germany -- 8.0%
Bundesobligation:
25,000,000EUR 3.250% due 2/17/04 21,756,655
45,000,000EUR 4.125% due 8/27/04 40,150,202
Bundesrepublic:
45,000,000EUR 5.375% due 1/4/10+ 42,134,987
50,000,000EUR 5.250% due 7/4/10 46,459,910
4,000,000 Esprit Telecom, Sr. Notes, 11.500% due 12/15/07 1,269,660
1,250,000 Texon International PLC, Sr. Notes, 10.000% due 2/1/08+ 553,700
------------------------------------------------------------------------------------------------------------------------------------
152,325,114
------------------------------------------------------------------------------------------------------------------------------------
Netherlands -- 0.1%
3,200,000EUR Versatel Telecom, NV, 11.250% due 3/30/10 (d)+ 2,813,168
------------------------------------------------------------------------------------------------------------------------------------
Sweden -- 2.6%
450,000,000 Swedish Government, 5.500% due 4/12/02+ 49,418,450
------------------------------------------------------------------------------------------------------------------------------------
United Kingdom -- 5.1%
2,375,000 Diamond Holdings PLC, Company Guaranteed, 10.000% due 2/1/08+ 3,272,476
10,000,000 European Investment Bank, 7.000% due 12/8/03+ 15,210,921
10,000,000 Fannie Mae, 6.875% due 6/7/02 15,085,698
International Bank Reconstruction & Development:
6,500,000 7.000% due 6/7/02 9,830,947
5,500,000 6.500% due 1/7/03+ 8,241,474
1,250,000EUR Jazztel PLC, 14.000% due 7/15/10 (d) 1,198,793
10,000,000 Nordic Investment Bank, 6.000% 8/10/04+ 14,711,917
500,000 NTL Inc., Sr. Sub. Notes, 9.500% due 4/1/08 681,453
1,900,000 Polestar Corp. PLC, Sr. Notes, 10.500% due 5/30/08 2,674,894
17,500,000 U.K. Treasury, 6.500% due 12/7/03 26,660,571
------------------------------------------------------------------------------------------------------------------------------------
97,569,144
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
22 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
------------------------------------------------------------------------------------------------------------------------------------
FACE
AMOUNT++ SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
United States -- 0.3%
1,100,000EUR Ineos Acrylics Finance, 10.250% due 5/15/10 (d) $ 1,024,360
6,000,000EUR Level 3 Communications, 11.250% due 3/15/10 (d) 5,281,641
2,000,000 United Mexican States - Value Recovery Rights, Expire 6/30/03 0
------------------------------------------------------------------------------------------------------------------------------------
6,306,001
------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTERNATIONAL SECTOR
(Cost -- 457,567,712) 413,469,668
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- 1,981,207,382**) $ 1,900,055,425
====================================================================================================================================
</TABLE>
(a) Date shown represents the last in range of maturity dates of mortgage
certificates owned.
(b) Security is segregated for open forward foreign currency contracts and open
purchase commitments.
(c) All ratings are by Standard & Poor's Ratings Service except those
identified by an asterisk (*), which are rated by Moody's Investors
Service, Inc.
(d) Security is exempt from registration under Rule 144A of the Security Act of
1933. This security may be resold in transactions that are exempt from reg-
istration, normally to qualified institutional buyers.
(e) Security is issued with attached warrants.
(f) Non-income producing security.
+ All or a portion of this security is on loan (See Note 10).
++ Face amount represents local currency, unless otherwise indicated.
** Aggregate cost for Federal income tax purposes is substantially the same.
Currency abbreviations used in this schedule:
---------------------------------------------
EUR -- Euro
See page 24 for definition of ratings.
See Notes to Financial Statements.
23 Smith Barney Diversified Strategic Income Fund | 2000 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 "BBB" to
"C" 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") -- Numerical modifiers 1, 2 and 3
may be applied to 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.
24 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 2000
--------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $1,981,207,382) $ 1,900,055,425
Foreign currency, at value (Cost -- $44,160,760) 43,862,006
Collateral for securities on loan (Note 10) 244,896,775
Dividends and interest receivable 29,275,567
Receivable for open forward foreign currency contracts
(Note 6) 679,875
Receivable for securities sold 70,483,999
Receivable for Fund shares sold 1,331,126
Other assets 25,668
--------------------------------------------------------------------------------
Total Assets 2,290,610,441
--------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 10) 244,896,775
Payable for Fund shares purchased 21,077,041
Payable to bank 4,958,442
Payable for securities purchased 2,588,028
Payable for open forward foreign currency contracts (Note 6) 1,651,614
Investment advisory fees payable 780,336
Distribution fees payable 606,177
Administration fees payable 346,816
Accrued expenses 681,538
--------------------------------------------------------------------------------
Total Liabilities 277,586,767
--------------------------------------------------------------------------------
Total Net Assets $ 2,013,023,674
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 279,267
Capital paid in excess of par value 2,258,050,950
Undistributed net investment income 24,206,300
Accumulated net realized loss from security transactions and
future contracts (185,858,309)
Net unrealized depreciation of investments and foreign
currencies (83,654,534)
--------------------------------------------------------------------------------
Total Net Assets $ 2,013,023,674
================================================================================
Shares Outstanding:
Class A 74,465,448
-----------------------------------------------------------------------------
Class B 159,112,834
-----------------------------------------------------------------------------
Class L 20,256,556
-----------------------------------------------------------------------------
Class Y 21,887,961
-----------------------------------------------------------------------------
Class Z 3,544,539
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 7.19
-----------------------------------------------------------------------------
Class B * $ 7.22
-----------------------------------------------------------------------------
Class L ** $ 7.21
-----------------------------------------------------------------------------
Class Y (and redemption price) $ 7.20
-----------------------------------------------------------------------------
Class Z (and redemption price) $ 7.21
-----------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $ 7.53
-----------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $ 7.28
================================================================================
* 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 shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
25 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 2000
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 185,234,973
Less: Foreign withholding tax (46,116)
--------------------------------------------------------------------------------
Total Investment Income 185,188,857
--------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 13,487,190
Investment advisory fees (Note 2) 10,518,800
Administration fees (Note 2) 4,675,022
Shareholder and system servicing fees 1,469,599
Custody 427,766
Shareholder communications 163,637
Registration fees 98,757
Audit and legal fees 51,482
Pricing service fees 30,035
Trustees' fees 29,258
Other 18,696
--------------------------------------------------------------------------------
Total Expenses 30,970,242
--------------------------------------------------------------------------------
Net Investment Income 154,218,615
--------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FUTURES CONTRACTS AND FOREIGN CURRENCIES (NOTES 3, 4 AND 6):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (133,930,326)
Futures contracts (436,594)
Foreign currency transactions 56,334,794
--------------------------------------------------------------------------------
Net Realized Loss (78,032,126)
--------------------------------------------------------------------------------
Change in Net Unrealized Depreciation of Investments
and Foreign Currencies:
Beginning of year (74,167,739)
End of year (83,654,534)
--------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (9,486,795)
--------------------------------------------------------------------------------
Net Loss on Investments, Futures Contracts and Foreign Currencies (87,518,921)
--------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 66,699,694
================================================================================
See Notes to Financial Statements.
26 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
-------------------------------------------------------------------------------------------------------
2000 1999
=======================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 154,218,615 $ 174,927,659
Net realized loss (78,032,126) (71,703,606)
Increase in net unrealized depreciation (9,486,795) (96,070,540)
-------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 66,699,694 7,153,513
-------------------------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (153,408,367) (173,885,347)
Net realized gains -- (2,720,960)
Capital -- (12,759,570)
-------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (153,408,367) (189,365,877)
-------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares 1,579,903,084 1,035,956,865
Net asset value of shares issued for reinvestment of dividends 78,341,841 98,091,915
Cost of shares reacquired (2,248,303,565) (1,221,161,067)
-------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Fund Share Transactions (590,058,640) (87,112,287)
-------------------------------------------------------------------------------------------------------
Decrease in Net Assets (676,767,313) (269,324,651)
NET ASSETS:
Beginning of year 2,689,790,987 2,959,115,638
-------------------------------------------------------------------------------------------------------
End of year* 2,013,023,674 2,689,790,987
=======================================================================================================
* Includes undistributed (overdistributed) net investment income of: 24,206,300 (896,492)
=======================================================================================================
</TABLE>
See Notes to Financial Statements.
27 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<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 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) 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, 2000, 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.
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
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), acts as investment advisor to the Fund. 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 Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the
28 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
average daily net assets. This fee is calculated daily and paid monthly.
Citi Fiduciary Trust Company ("CFTC"), formerly known as Smith Barney Private
Trust Company, another subsidiary of Citigroup, acts as the Fund's transfer
agent and PFPC Global Fund Services ("PFPC") acts as the Fund's subtransfer
agent. CFTC receives account fees and asset-based fees that vary according to
the account size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder accounts and is paid
by CFTC. For the year ended July 31, 2000, the Fund paid transfer agent fees
of $1,097,095 to CFTC.
Effective June 5, 2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of
SSBH, became the Fund's distributor replacing CFBDS, Inc. ("CFBDS"). In
addition, SSB acts as the primary broker for the Fund's portfolio agency
transactions. Certain other broker-dealers, continue to sell Fund shares to
the public as members of the selling group.
There are maximum initial sales charge of 4.50% and 1.00% for 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.
For the year ended July 31, 2000, SSB and CFBDS received sales charges of
approximately $422,000 and $376,000 on sales of the Fund's Class A and L shares,
respectively. In addition, CDSCs paid to SSB for the year ended July 31, 2000
were:
Class A Class B Class L
================================================================================
CDSCs $16,000, $2,672,000 $48,000
================================================================================
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, 2000, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $1,262,466 $11,045,041 $1,179,683
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the year ended July 31, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $2,480,810,781
--------------------------------------------------------------------------------
Sales 3,259,515,517
================================================================================
At July 31, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 19,092,252
Gross unrealized depreciation (100,244,209)
--------------------------------------------------------------------------------
Net unrealized depreciation $ (81,151,957)
================================================================================
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, 2000, the Fund had no open futures contracts.
29 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
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.
6. Forward Foreign Currency Contracts
At July 31, 2000, 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:
British Pound 61,730,000 $ 92,482,949 8/17/00 $ (34,373)
British Pound 4,460,625 6,697,704 12/22/00 9,738
Canadian Dollar 1,621,563 1,094,939 12/8/00 5,078
Danish Krone 767,100,000 95,403,823 8/17/00 (465,704)
Euro 269,753,691 250,246,673 8/17/00 (1,146,673)
Euro 8,525,582 7,960,620 12/15/00 284,882
Swedish Krone 462,100,000 50,455,907 8/17/00 380,177
------------------------------------------------------------------------------------------------------------------------------------
(966,875)
------------------------------------------------------------------------------------------------------------------------------------
To Buy:
Euro 358,543 334,784 12/15/00 (4,864)
------------------------------------------------------------------------------------------------------------------------------------
Total Unrealized Loss on Open Forward Foreign Currency Contracts $ (971,739)
====================================================================================================================================
</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 (plus accrued interest) of the collateral in
amounts at least equal to the repurchase price.
8. 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 equal in
value to its obligations with respect to reverse repurchase agreements.
During the year ended July 31, 2000, the Fund did not enter into any reverse
repurchase agreements.
30 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<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, 2000, the Fund did not hold any TBA securities.
10. Lending of Portfolio Securities
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations, and receives a lenders fee. Fees earned by the Fund on securities
lending are recorded in interest income. Loans of securities by the Fund are
collateralized by cash, U.S. government securities or high quality money market
instruments that are maintained at all times in an amount at least equal to the
current market value of the loaned securities, plus a margin which may vary
depending on the type of securities loaned. The custodian establishes and
maintains the collateral in a segregated account. The Fund maintains exposure
for the risk of any losses in the investment of amounts received as collateral.
At July 31, 2000, the Fund loaned common stocks having a value of $227,906,892
and holds the following collateral for loaned securities:
Security Description Value
================================================================================
Time Deposits:
Allied Irish, 6.688% due 8/1/00 $ 11,981,629
Banque Bruxelles Lambert London, 6.688% due 8/1/00 11,981,629
Bayerische Landesbank, 6.688% due 8/1/00 11,981,629
Deutsche Bank London, 6.688% due 8/1/00 11,981,629
Rabobank, London, 6.688% due 8/1/00 11,981,628
Toronto Dominion-London, 6.688% due 8/1/00 11,981,629
Westdeutsche Landesbank, London, 6.688% due 8/1/00 11,981,628
Repurchase Agreements:
Bear Stearns, 6.670% due 8/1/00 44,707,569
CS First Boston Corp., 6.680% due 8/1/00 35,766,056
J.P. Morgan Securities, 6.700% due 8/1/00 10,729,817
Morgan Stanley Dean Witter & Co., 6.625% due 8/1/00 22,619,454
Commercial Paper:
General Electric Credit, 6.641% due 8/1/00 11,800,621
General Motors Acceptance Corp., 6.661% due 8/1/00 11,800,615
Koch Industries Inc., 6.641% due 8/1/00 11,800,621
UBS Finance (Delaware) Inc., 6.641% due 8/1/00 11,800,621
--------------------------------------------------------------------------------
Total 244,896,775
================================================================================
Income earned by the Fund from securities loaned for the year ended July 31,
2000 was $253,099.
11. Capital Loss Carryforward
At July 31, 2000, the Fund had, for Federal income tax purposes, a capital loss
carryforward of approximately $ 104,877,000, available to offset future capital
gains expiring July 31, 2008. 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.
31 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
12. Shares of Beneficial Interest
At July 31, 2000, 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, 2000, 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 $572,889,415 $1,325,589,568 $160,436,846 $171,253,243 $28,161,145
===================================================================================================================================
Transactions in shares of each class were as follows:
<CAPTION>
Year Ended July 31, 2000 Year Ended July 31, 1999
----------------------------------- ------------------------------------
Shares Amount Shares Amount
===================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 101,513,330 $ 740,848,671 49,423,427 $ 382,503,137
Shares issued on reinvestment 2,656,440 19,334,944 2,130,596 16,483,850
Shares reacquired (91,974,710) (671,356,621) (39,196,000) (302,969,796)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase 12,195,060 $ 88,826,994 12,358,023 $ 96,017,191
===================================================================================================================================
Class B
Shares sold 10,697,959 $ 78,680,561 35,214,847 $ 275,802,675
Shares issued on reinvestment 6,822,479 49,923,241 9,329,090 72,489,124
Shares reacquired (105,504,666) (773,729,343) (83,241,196) (648,668,655)
-----------------------------------------------------------------------------------------------------------------------------------
Net Decrease (87,984,228) $(645,125,541) (38,697,259) $(300,376,856)
===================================================================================================================================
Class L
Shares sold 101,951,580 $ 745,134,537 40,377,358 $ 314,105,808
Shares issued on reinvestment 969,035 7,076,033 927,846 7,187,211
Shares reacquired (107,242,862) (783,640,334) (33,732,218) (261,860,475)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (4,322,247) $ (31,429,764) 7,572,986 $ 59,432,544
===================================================================================================================================
Class Y
Shares sold 1,701,444 $ 12,495,260 6,217,160 $ 48,511,994
Shares issued on reinvestment 2,982 21,719 2,732 21,163
Shares reacquired (1,610,810) (11,680,392) (82,339) (635,345)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase 93,616 $ 836,587 6,137,553 $ 47,897,812
===================================================================================================================================
Class Z
Shares sold 375,081 $ 2,744,055 1,914,307 $ 15,033,251
Shares issued on reinvestment 272,226 1,985,904 246,824 1,910,567
Shares reacquired (1,079,087) (7,896,875) (906,344) (7,026,796)
-----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (431,780) $ (3,166,916) 1,254,787 $ 9,917,022
===================================================================================================================================
</TABLE>
32 Smith Barney Diversified Strategic Income Fund | 2000 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 2000(1) 1999(1) 1998(1) 1997 1996
=========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 7.46 $ 7.96 $ 8.01 $ 7.82 $ 7.85
-------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.51 0.50 0.53 0.62 0.61
Net realized and unrealized gain (loss) (0.27) (0.46) 0.05 0.24 0.03
-------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.24 0.04 0.58 0.86 0.64
-------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.51) (0.49) (0.58) (0.67) (0.62)
Net realized gains -- (0.01) (0.05) -- --
Capital -- (0.04) -- -- (0.05)
-------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.54) (0.63) (0.67) (0.67)
-------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.19 $ 7.46 $ 7.96 $ 8.01 $ 7.82
-------------------------------------------------------------------------------------------------------------------------
Total Return 3.35% 0.41% 7.47% 11.36% 8.39%
-------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $535,525 $464,652 $397,127 $267,272 $202,700
-------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.93% 6.38% 6.51% 7.75% 7.85%
Interest expense -- -- 0.06 0.06 0.01
Other expenses 1.03 1.02 1.01 1.03 1.04
-------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 110% 150% 128% 85% 90%
=========================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
33 Smith Barney Diversified Strategic Income Fund | 2000 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 2000(1) 1999(1) 1998(1) 1997 1996
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 7.48 $ 7.98 $ 8.03 $ 7.83 $ 7.86
---------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.47 0.46 0.49 0.59 0.58
Net realized and unrealized gain (loss) (0.26) (0.46) 0.05 0.23 0.01
---------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.21 0.00 0.54 0.82 0.59
---------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.47) (0.46) (0.54) (0.62) (0.57)
Net realized gains -- (0.01) (0.05) -- --
Capital -- (0.03) -- -- (0.05)
---------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.47) (0.50) (0.59) (0.62) (0.62)
---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.22 $ 7.48 $ 7.98 $ 8.03 $ 7.83
---------------------------------------------------------------------------------------------------------------------------------
Total Return 2.98% (0.06)% 6.93% 10.89% 7.80%
---------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $1,148 $1,849 $2,280 $2,440 $2,380
---------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.46% 5.88% 6.12% 7.34% 7.36%
Interest expense -- -- 0.06 0.06 0.01
Other expenses 1.50 1.49 1.50 1.51 1.52
---------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 110% 150% 128% 85% 90%
=================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
34 Smith Barney Diversified Strategic Income Fund | 2000 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 2000(1) 1999(1) 1998(1)(2) 1997 1996
========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 7.48 $ 7.97 $ 8.01 $ 7.81 $ 7.84
-------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.48 0.47 0.49 0.58 0.52
Net realized and unrealized gain (loss) (0.28) (0.46) 0.06 0.24 0.07
-------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.20 0.01 0.55 0.82 0.59
-------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.47) (0.46) (0.54) (0.62) (0.57)
Net realized gains -- (0.01) (0.05) -- --
Capital -- (0.03) -- -- (0.05)
------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.47) (0.50) (0.59) (0.62) (0.62)
------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.21 $ 7.48 $ 7.97 $ 8.01 $ 7.81
------------------------------------------------------------------------------------------------------------------------
Total Return 2.84% 0.08% 7.08% 10.92% 7.82%
------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $146,086 $183,740 $135,485 $83,543 $42,222
------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 6.50% 6.01% 6.09% 7.19% 7.61%
Interest expense -- -- 0.06 0.06 0.01
Other expenses 1.46 1.45 1.45 1.46 1.47
------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 110% 150% 128% 85% 90%
========================================================================================================================
</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.
35 Smith Barney Diversified Strategic Income Fund | 2000 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 2000/(1)/ 1999/(1)/ 1998/(1)/ 1997 1996/(2)/
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 7.46 $ 7.96 $ 8.00 $ 7.82 $ 7.89
------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.53 0.53 0.55 0.64 0.50
Net realized and unrealized gain (loss) (0.26) (0.47) 0.06 0.24 0.01
------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.27 0.06 0.61 0.88 0.51
------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.53) (0.51) (0.60) (0.70) (0.53)
Net realized gains -- (0.01) (0.05) -- --
Capital -- (0.04) -- -- (0.05)
------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.53) (0.56) (0.65) (0.70) (0.58)
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.20 $ 7.46 $ 7.96 $ 8.00 $ 7.82
------------------------------------------------------------------------------------------------------------------------------------
Total Return 3.83% 0.72% 7.96% 11.64% 6.65%++
------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $157,526 $162,674 $124,559 $80,479 $26,940
------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 7.28% 6.76% 6.88% 7.84% 8.54%+
Interest expense -- -- 0.06 0.06 0.01
Other expenses 0.69 0.67 0.66 0.70 0.69+
------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 110% 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.
36 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Financial Highlights (continued)
------------------------------------------------------------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<CAPTION>
Class Z Shares 2000/(1)/ 1999/(1)/ 1998/(1)/ 1997 1996
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year 7.47 7.96 8.01 7.82 7.85
------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.53 0.53 0.55 0.65 0.64
Net realized and unrealized gain (loss) (0.26) (0.46) 0.05 0.23 0.02
------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.27 0.07 0.60 0.88 0.66
------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.53) (0.51) (0.60) (0.69) (0.63)
Net realized gains -- (0.01) (0.05) -- --
Capital -- (0.04) -- -- (0.06)
------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.53) (0.56) (0.65) (0.69) (0.69)
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year 7.21 7.47 7.96 8.01 7.82
------------------------------------------------------------------------------------------------------------------------------------
Total Return 3.83% 0.84% 7.78% 11.69% 8.72%
------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) 25,538 29,710 21,670 20,397 16,270
------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 7.28% 6.80% 6.85% 8.08% 8.19%
Interest expense -- -- 0.06 0.06 0.01
Other expenses 0.69 0.67 0.74 0.69 0.70
------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 110% 150% 128% 85% 90%
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
37 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<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 Diversified Strategic Income Fund
of Smith Barney Income Funds as of July 31, 2000, 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 high lights 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 auditing standards generally accepted
in the United States of America. 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, 2000, 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 Diversified Strategic Income Fund of Smith Barney Income Funds, as of
July 31, 2000, 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 accounting principles generally accepted in the
United States of America.
KPMG LLP
New York, New York
September 11, 2000
38 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
--------------------------------------------------------------------------------
Tax Information (unaudited)
--------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
July 31, 2000:
. A corporate dividends received deduction of 0.36%.
A total of 3.10% 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.
39 Smith Barney Diversified Strategic Income Fund | 2000 Annual Report to
Shareholders
<PAGE>
(This page intentionally left blank.)
<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
John C. Bianchi
Vice President and Investment Officer
James E. Conroy
Vice President and Investment Officer
Simon Hildreth
Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
INVESTMENT ADVISOR
SSB Citi Fund Management LLC
DISTRIBUTOR
Salomon Smith Barney Inc.
PFS Distributors, Inc.
CUSTODIAN
The Chase Manhattan Bank
TRANSFER AGENT
Citi Fiduciary Trust Company
125 Broad Street, 11th Floor
New York, New York 10004
SUB-TRANSFER AGENT
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island
02940-9699
<PAGE>
Smith Barney Diversified Strategic Income Fund
--------------------------------------------------------------------------------
This report is submitted for the general information of shareholders of Smith
Barney Diversified Strategic Income Fund, but it may also be used as sales
literature when proceeded or accompanied by the current Prospectus, which
gives details about charges, expenses, investment objectives and operating
policies of the Fund. If used as sales material after October 31, 2000, this
report must be accompanied by performance information for the most recently
completed calendar quarter.
SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
For complete information on any of the above Smith Barney Mutual
Funds, including management fees and expenses, call or write for a free
prospectus. Read it carefully before you invest or send money.
www.smithbarney.com/mutualfunds
[LOGO OF SALOMON SMITH BARNEY]
Salomon Smith Barney is a service mark of Salomon
Smith Barney Inc.
FD01184 9/00
<PAGE>
SMITH BARNEY
BALANCED FUND
CLASSIC SERIES | ANNUAL REPORT | JULY 31, 2000
[LOGO OF SMITH BARNEY MUTUAL FUNDS]
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
<PAGE>
Classic Series
Annual Report . July 31, 2000
SMITH BARNEY BALANCED FUND
[PHOTO] [PHOTO] [PHOTO]
JOHN C. BIANCHI, JAMES E. CONROY, CHARLES P. GRAVES, III
PORTFOLIO MANAGER PORTFOLIO MANAGER PORTFOLIO MANAGER
JOHN C. BIANCHI, CFA
John C. Bianchi, CFA, has more than 22 years of securities business experience.
JAMES E. CONROY
James E. Conroy has more than 24 years of securities business experience.
CHARLES P. GRAVES
Charles P. Graves, III, CFA, has more than 14 years of securities business
experience.
OBJECTIVE
The Fund seeks current income and long-term capital appreciation by investing in
equity and debt securities. The Fund normally maintains 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.
FUND INCEPTION
--------------------------
March 28, 1988
MANAGER INVESTMENT
INDUSTRY EXPERIENCE
--------------------------
22 Years (John C. Bianchi)
24 Years (James E. Conroy)
14 Years (Charles P. Graves, III)
CLASS A CLASS B CLASS L CLASS O
------------------------------------------------
NASDAQ SUTAX SLSUX SBBFL SBBOX
------------------------------------------------
INCEPTION 11/6/92 3/28/88 6/15/98 2/4/93
------------------------------------------------
Average Annual Total Returns as of July 31, 2000
Without Sales Charges(1)
Class A Class B Class L Class O
-------------------------------------------------------------------
One-Year 10.62% 10.09% 9.87% 10.13%
-------------------------------------------------------------------
Five-Year 12.82 12.30 N/A 12.35
-------------------------------------------------------------------
Ten-Year N/A 10.75 N/A N/A
-------------------------------------------------------------------
Since Inception+ 10.75 10.80 8.79 9.48
-------------------------------------------------------------------
With Sales Charges(2)
Class A Class B Class L Class O
-------------------------------------------------------------------
One-Year 5.08% 5.09% 7.77% 9.13%
-------------------------------------------------------------------
Five-Year 11.66 12.18 N/A 12.35
-------------------------------------------------------------------
Ten-Year N/A 10.75 N/A N/A
-------------------------------------------------------------------
Since Inception+ 10.01 10.80 8.28 9.48
-------------------------------------------------------------------
(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; and Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed within one year from purchase.
Thereafter, this CDSC declines by 1.00% per year until no CDSC is incurred.
Class 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.
--------------------------------------------------------------------------------
What's Inside
A Message from the Chairman ................................................. 1
Shareholder Letter .......................................................... 2
Historical Performance ...................................................... 6
Smith Barney Balanced Fund at a Glance ...................................... 9
Schedule of Investments ..................................................... 10
Bond Ratings ................................................................ 23
Statement of Assets and Liabilities ......................................... 24
Statement of Operations ..................................................... 25
Statements of Changes in Net Assets ......................................... 26
Notes to Financial Statements ............................................... 27
Financial Highlights ........................................................ 32
Independent Auditor's Report ................................................ 34
Tax Information ............................................................. 35
[LOGO OF SMITH BARNEY MUTUAL FUNDS]
Investment Products: Not FDIC Insured . Not Bank Guaranteed . May Lose Value
<PAGE>
A MESSAGE FROM THE CHAIRMAN
For years, individuals and businesses have looked to the investment
professionals of SSB Citi Fund Management LLC ("SSB Citi") for thoughtful
insights and advice. For some, the solution has been a long-term investment
strategy, incorporating multiple stock and bond mutual funds. Others have
invested with specific portfolio managers who are recognized and respected for
there insights and record.
The Smith Barney Balanced Fund ("Fund"), which seeks current income and
long-term capital appreciation, we believe, represents an opportunity for you,
the serious investor, to take part in both the stock and bond market. Portfolio
managers John Bianchi, Jim Conroy and Chad Graves carefully search for stock and
bonds by employing an investment approach that emphasizes a portfolio that is
broadly diversified across a wide range of industries.
Over the last century, the annual compound stock market total return was roughly
11%, including the reinvestment of dividends. In the past, reinvestment of
dividends have played a role in the stock market's historic return.
However, as "New Economy"1 company dividend yields that make up a larger
percentage of the Standard & Poor's 500 Index ("S&P 500 Index") have declined
dramatically (i.e., average dividend yield over the past 100 years was 4.51%
versus 1.20% for 2000), future stock market gains are going to have to be much
larger in order to compensate for the decline in the average dividend yield.2
However, by investing in the Smith Barney Balance Fund, you do not have to rely
solely on dividend yields, since the Fund seeks to balance long-term growth of
capital with current income by investing in both stocks and bonds.
[PHOTO OF HEATH MCLENDON]
HEATH MCLENDON
CHAIRMAN
In our opinion, the lessons of the past may be used to better understand the
challenges and opportunities of the future. We also believe that expertise is
achieved through the intelligent application of knowledge and experience. Our
portfolio managers provide asset management expertise and have managed
portfolios across up and down markets and cycles.
With economic growth robust, interest rates stable and inflationary pressures
apparently in check, many investors may not feel compelled to alter their
portfolio mixes. Yet, when times are good, it may make sense for investors to
contact their investment professional and re-examine their current asset
allocation to see if it still meets their age, tolerance for risk and investment
time horizon.
When you invest with SSB Citi, you can do so with the confidence that your
interests come first, your investment success is paramount and that the ultimate
in resources is being committed to your financial future. Thank you for
investing with us.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
September 6, 2000
---------------
1 The New Economy represents those companies in the technology,
telecommunications and Internet sectors.
2 Source: The Leuthold Group, August 2000.
1 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Dear Shareholder,
We are pleased to provide the annual report for the Smith Barney Balanced Fund
("Fund") for the year ended July 31, 2000. In this report we have summarized the
period's prevailing economic and market conditions and outlined our investment
strategy. The information provided in this letter represents the opinion of the
managers and is not intended to be a forecast of future results nor investment
advice.
Additionally, please note that the statistical performance information that
appears throughout this report is compiled from SSB Citi Fund Management LLC
internal research. Further, there is no assurance that certain securities will
remain in or out of the Fund. Please refer to pages 10 through 22 for a complete
list and percentage breakdown of the Fund's holdings. A detailed summary of the
Fund's performance can be found in the appropriate sections that follow. Also,
please note that any discussion of the Fund's holdings is as of July 31, 2000
and is subject to change. We hope that you find this report to be useful and
informative.
Performance Update
For the year ended July 31, 2000, the Fund's Class A shares, without and with
sales charges, returned 10.62% and 5.08%, respectively. In comparison, the
Standard & Poor's 500 Index ("S&P 500")1 returned 8.97% and the Lehman Brothers
Government/Corporate Bond Index ("Lehman Index")2 returned 5.72% for the same
period.
Investment Strategy
The Fund seeks current income and long-term capital appreciation by investing in
both equity and debt securities. In selecting stocks for the Fund, we employ an
investment 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 and Portfolio Update
For much of the past twelve months, the stock market has been influenced by two
dominant themes -- interest rates and the Internet. The Federal Reserve Board's
("Fed") decision to steadily increase short-term interest rates during the
period caused many investors to question the durability of broad economic growth
and accompanying sustainability of the current market.
In addition to the economically depressing effects of rising interest rates,
many investors also had to contend with the effect of rising energy costs --
namely, the idea that the more money we spend filling our gas tanks, the less
money we have to spend at the mall. The influence of these factors was most
acutely felt in the retail and financial services sector holdings of the Fund's
stock holdings.
Although we were slightly underweight in retail service stocks, the ones in the
Fund's portfolio such as Staples and Lowe's were unfortunately dismal performers
during the period. In the Fund's financial service stock holdings, strong
earnings performance was not able to overcome many investors' fears of slowing
loan growth and deteriorating loan portfolio credit quality. While returns in
this segment of the Fund's portfolio were positive, they were less than that of
the overall market, as measured by the Standard & Poor's 500 for the reporting
period.
During the period, the influence of the Internet had a greater and more positive
impact on the stock portion of the Fund's portfolio. The Fund was overweight
technology stocks for the first half of its fiscal year and underweight for the
second half. In our last shareholder report, we warned of the potential dangers
developing in many Internet-related stocks and as
----------------
1 The Standard & Poor's 500 Index ("S&P 500") is a market
capitalization-weighted measure of 500 widely held common stocks. An
investor cannot invest directly in an index.
2 The Lehman Index tracks the performance of the overall bond market and is a
broad measure of the performance of government and corporate fixed-rate
debt issues. An investor cannot invest directly in an index.
2 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
such, we elected to reduce the Fund's exposure to the technology sector, as we
believed a collapse in what we deemed to be low-quality stocks also may somewhat
negatively impact higher-quality issues.
Our expectation did come true and many Internet-related stocks did in fact later
collapse. We are pleased to report that the Fund's emphasis on what we deem to
be high-quality technology stocks proved to be a very sound strategy in hind
sight. Although the recent hype surrounding Internet stocks subsided, the
importance of executing sound business strategies with respect to the Internet
did not.
Many companies continue to spend heavily on technology and not surprisingly, the
Fund's top contributors to performance during the period were technology
stocks -- such as, EMC Corp., Sun Microsystems, Inc. and Cisco Systems, Inc.
As a result of the correction in technology stocks, we have recently started to
increase the Fund's technology holdings by adding names like Compaq Computer
Corp. and Computer Associates, companies with what we deem to be superior
long-term potential presently unrecognized by Wall Street.
As we look out over the next twelve months, we expect the Fund's stock
performance to be generated from a more eclectic group of stocks than just large
capitalization technology stocks. In fact, for the first half of 2000, AES
Corp., a power generation company, Southwest Airlines Co., and Coastal Corp., an
energy company, have been among the Fund's best performers. In general, our
expectation for broad stock market moves has not changed much from earlier this
year. We continue to believe that we may see stock prices appreciate more in
line with earnings growth, with more moderate returns than we have seen over the
last few years.
Bond Market and Portfolio Update
During the period, the bond market exhibited a split personality. From August
1999 until mid-January 2000, the bond market performed poorly on the heels of
strong economic growth and a renewed specter of inflation. On the flip side,
from mid-January 2000 until the end of July 2000, the market made up for its
past malaise and then some, fueled by news of the U.S. Treasury plans to buy
back approximately $30 billion of its long-term debt obligations.
During the first six months of the period, the Fed, led by Chairman Alan
Greenspan, became increasingly nervous that the higher growth exhibited by the
U.S. economy as well as the wealth effect created by rising stock markets would
reignite inflation. Thus, on August 24, 1999, the Fed commenced its current
tightening campaign by raising short-term interest rates by 25 basis points.3 In
response to the Fed's actions, the market began to retreat.
As measured by the 30-Year U.S. Treasury bond, yields rose 60 basis points, from
6.12% to 6.72% to a negative return of 6.11% for the reporting period. The only
bright spot for the market occurred in spread products (i.e., non-U.S. Treasury
securities such as corporate bonds and mortgage backed securities) which
continued to post negative returns, but were able to outperform U.S. Treasuries
for the first time in over a year.
During the last six month the U.S. Treasury Department announced that due to the
large federal budget surplus it may begin buying back debt in the open market
via a reverse auction. Portfolio managers and traders throughout the investment
community began to realize that for the first time in 20 years not only would
there be less new supply but also there would be fewer U.S. Treasuries
outstanding. This caused a huge rally in bonds even as the Fed was in its most
aggressive rate tightening campaign since 1994.
Long rates dropped 90 basis points from a 6.68% to 5.78% posting a total return
of 14.70% for the reporting period. As a result, the yield curve inverted.4
--------
3 A basis point is 0.01% or one one-hundredth of a percent.
4 The yield curve is the graphical depiction of the relationship between the
yield on bonds of the same credit quality but different maturities. An
inverted yield curve represents an unusual situation where short-term
interest rates are higher than long-term rates.
3 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
The spread between 30-Year U.S. Treasury bills and 10-Year U.S. Treasury notes
flattened dramatically from a positive spread of two basis points in mid January
to a negative spread of 25 basis points by the end of the July. This was the
first time since 1991 that longer maturity bonds yielded less than shorter
maturity bonds. Initially, spread product performed very poorly. Corporate bonds
lagged as fears of higher interest expenses would suppress future corporate
earnings and weaken balance sheets, causing credit ratings to deteriorate.
Mortgage-backed securities also got hurt as volatility spiked in the swaps
market. The situation began to improve in late June as signs of slowing began to
emerge in the economy and market pundits began to predict the Fed had completed
its latest round of interest rate increases.
As of July 31, 2000, the investment-grade bond portion of the Fund stood at 23%
in U.S. Treasuries, 10% in agencies, 11% in mortgage-backed securities and 56%
in corporate bonds. We currently maintain an overweight position in corporate
bonds and mortgages and an underweight position in U.S. Treasuries and agencies.
We do not anticipate any wholesale changes to the Fund's bond allocations at
this time. During the last year, the corporate bond portion of the Fund's
portfolio fluctuated between 52% and 58%.
Focus over the past year has been to upgrade the credit quality of the Fund's
bond portion portfolio as market conditions dictate. Some of the names we added
to the Fund's portfolio during the period were:
. General Electric Co., a diversified industrial corporation;
. Abbey National, PLC, a financial services company;
. Home Depot, Inc., an operator of retail warehouse stores;
. St. Paul Cos., Inc., an insurance company;
. Tyco International Ltd., an industrial conglomerate;
. DaimlerChrysler NA Holdings, a car design and manufacturing company;
. Price/Costco Wholesale Corp., an operator of discount wholesale
stores; and
. Wal-Mart Stores, an operator of discount department stores
To maintain a well-diversified portfolio, we generally do not maintain a
position of greater than 2.5% of the Fund's total assets in any one corporate
name. However, please note that the Fund's holdings are subject to change.
The corporate bond market bond faced many challenges over the past year when
widely held names like financial services company Finova Group Ltd.,
transportation company Laidlaw Inc., construction supplier Owens Corning,
business service provider FirstService Corp. and insurance company Conseco ran
into trouble. We did own some Conseco bonds, but fortunately, we were able to
liquidate them in early March well before the bottom dropped out.
Our strategy has been to utilize our extensive proprietary research to help make
the proper sector and security selection, rather than try to predict short-term
changes in interest rates. It has also been our objective to maintain a neutral
duration5 exposure to the Lehman Index. The Fund's effective duration currently
stands at 5.26 years.
--------------
5 Duration is a common gauge of the price sensitivity of a fixed income asset
or portfolio to a change in interest rates.
4 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Market Outlook
At this time, we believe it is difficult to predict how the stock and bond
markets will perform over the next few months due to uncertainty regarding any
potential actions by the Fed and the potential threat the presently low rate of
unemployment presents. However, regardless of the future, we believe that it is
important for the Fed to continue to act diligently to keep inflation in check.
Our Fund's strategy remains constant: seeking shares of those companies with
favorable valuations relative to their growth characteristics and bonds of
stable and improving credit quality at a low price relative to its credit and
interest rate characteristics.
In closing, thank you for your investment in the Smith Barney Balanced Fund. We
look forward to helping you pursue your financial goals in the feature.
Sincerely,
/s/ John C. Bianchi /s/ James E. Conroy
John C. Bianchi, CFA James E. Conroy
Vice President Vice President
/s/ Charles P. Graves III
Charles P. Graves III, CFA Vice
President
September 6, 2000
5 Smith Barney Balanced Fund | 2000 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>
7/31/00 $13.86 $14.83 $0.40 $0.08 $0.00 10.62%
--------------------------------------------------------------------------------------------------------------------------------
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 $5.38 $5.60 $0.02
================================================================================================================================
</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>
7/31/00 $13.82 $14.78 $0.34 $0.08 $0.00 10.09%
----------------------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------------------------------------------
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
============================================================================================================================
Total $7.18 $5.87 $0.06
============================================================================================================================
</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>
7/31/00 $13.83 $14.79 $0.31 $0.08 $0.00 9.87%
----------------------------------------------------------------------------------------------------------------------------
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 $0.60 $3.97 $0.00
============================================================================================================================
</TABLE>
6 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<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>
7/31/00 $13.83 $14.79 $0.34 $0.08 $0.00 10.13%
-----------------------------------------------------------------------------------------------------------------------
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 $4.69 $5.49 $0.02
=======================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
Average Annual Total Returns
Without Sales Charges(1)
-----------------------------------------
Class A Class B Class L Class O
==============================================================================
Year Ended 7/31/00 10.62% 10.09% 9.87 10.13%
------------------------------------------------------------------------------
Five Years Ended 7/31/00 12.82 12.30 N/A 12.35
------------------------------------------------------------------------------
Ten Years Ended 7/31/00 N/A 10.75 N/A N/A
------------------------------------------------------------------------------
Inception* through 7/31/00 10.75 10.80 8.79 9.48
==============================================================================
With Sales Charges(2)
-----------------------------------------
Class A Class B Class L Class O
==============================================================================
Year Ended 7/31/00 5.08% 5.09% 7.77% 9.13%
------------------------------------------------------------------------------
Five Years Ended 7/31/00 11.66 12.18 N/A 12.35
------------------------------------------------------------------------------
Ten Years Ended 7/31/00 N/A 10.75 N/A N/A
------------------------------------------------------------------------------
Inception* through 7/31/00 10.01 10.80 8.28 9.48
==============================================================================
7 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Cumulative Total Returns
Without Sales Charges(1)
================================================================================
Class A (Inception* through 7/31/00) 120.35%
--------------------------------------------------------------------------------
Class B (7/31/90 through 7/31/00) 177.51
--------------------------------------------------------------------------------
Class L (Inception* through 7/31/00) 19.63
--------------------------------------------------------------------------------
Class O (Inception* through 7/31/00) 97.09
================================================================================
(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.
8 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Smith Barney Balanced Fund at a Glance (unaudited)
Growth of $10,000 Invested in Class B Shares of the Smith Barney Balanced Fund
vs. Standard & Poor's 500 Index and Lehman Brothers Government/Corporate Bond
Index+
[GRAPH]
July 1990 -- July 2000
Smith Barney
Balanced Fund Lehman Brothers
Class B Gov't/Corp. Standard and Poor's
Shares Bond Index 500 Index
July 1990 9,970 10,000 10,000
July 1991 11,213 11,024 11,273
July 1992 13,284 12,747 12,712
July 1993 15,247 14,153 13,820
July 1994 13,794 14,134 14,531
July 1995 15,534 15,567 18,319
July 1996 16,898 16,393 21,352
July 1997 19,413 18,160 32,478
July 1998 22,551 19,626 38,747
July 1999 25,208 20,083 46,572
July 2000 27,751 21,229 50,744
+ Hypothetical illustration of $10,000 invested in Class B shares on July 31,
1990, assuming reinvestment of dividends and capital gains, if any, at net
asset value through July 31, 2000. The Standard & Poor's 500 Index is
composed of widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market. The Lehman
Brothers Government/Corporate Bond Index is a combination of publicly
issued intermediate and long-term U.S. government bonds and corporate
bonds. Figures for the indices include reinvestment of dividends. The
indices are unmanaged and are not subject to the same management and
trading expenses of a mutual fund. The performance of the Fund's other
classes may be greater or less than the Class B shares' performance
indicated on this chart, depending on whether greater or lesser sales
charges and fees were incurred by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
--------------------------------------------------------------------------------
Top Five Equity Holdings*
--------------------------------------------------------------------------------
1. EMC Corp. ............................................................ 3.1%
2. Chase Manhattan Corp. ................................................ 2.5
3. Cisco Systems, Inc. .................................................. 2.4
4. Merck & Co., Inc. .................................................... 2.4
5. Intel Corp. .......................................................... 2.3
--------------------------------------------------------------------------------
Top Five Bond Holdings*
--------------------------------------------------------------------------------
1. Nextlink Communications, Inc. ........................................ 0.6%
2. United International Holdings ........................................ 0.6
3. Verio Inc. ........................................................... 0.5
4. Private Export Funding Corp. ......................................... 0.4
5. AES Corp. ............................................................ 0.4
--------------------------------------------------------------------------------
Investment Breakdown*
--------------------------------------------------------------------------------
[GRAPH]
27.7% Corporate
Bonds and Notes
0.3% Collateralized
Mortgage Obligation
6.9% U.S. Government
and Agency Obligations
0.6% Cash Equivalent
64.4% Common and Preferred Stock
0.1% Warrants
* As a percentage of total investments. These holdings are as of July 31,
2000 and are subject to change.
9 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments July 31, 2000
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 64.4%
Airlines -- 1.4%
487,000 Southwest Airlines Co. (a) $11,505,375
--------------------------------------------------------------------------------
Aluminum -- 0.2%
60,000 Alcoa, Inc. 1,815,000
--------------------------------------------------------------------------------
Auto Parts -- 0.0%
9,819 Visteon Corp. 137,466
--------------------------------------------------------------------------------
Automotive Aftermarket -- 0.8%
75,000 Ford Motor Co. 3,492,188
52,647 General Motors Corp. 2,997,588
--------------------------------------------------------------------------------
6,489,776
--------------------------------------------------------------------------------
Banks - Major -- 4.5%
90,000 Bank Of New York Co., Inc. 4,213,125
402,000 Chase Manhattan Corp. 19,974,375
124,362 Fleet Boston Financial Corp. 4,453,714
77,000 State Street Corp. 7,728,875
--------------------------------------------------------------------------------
36,370,089
--------------------------------------------------------------------------------
Biotechnology -- 1.8%
226,000 Amgen, Inc. (b) 14,675,875
--------------------------------------------------------------------------------
Broadcasting -- 1.0%
55,440 General Motors Corp., Class H Shares (b) 1,434,510
175,000 Infinity Broadcasting Corp. (b) 6,168,750
--------------------------------------------------------------------------------
7,603,260
--------------------------------------------------------------------------------
Chemicals - Major -- 0.4%
78,000 Praxair, Inc. 3,085,875
--------------------------------------------------------------------------------
Computer Communications -- 2.5%
2,375 Avici Systems Inc. (b) 233,641
297,000 Cisco Systems, Inc. (b) 19,434,938
--------------------------------------------------------------------------------
19,668,579
--------------------------------------------------------------------------------
Computer Hardware -- 6.8%
400,000 Compaq Computer Corp. (a) 11,225,000
55,000 Dell Computer Corp. (b) 2,416,562
294,000 EMC Corp. (b) 25,026,750
155,000 Sun Microsystems, Inc. (b) 16,342,813
--------------------------------------------------------------------------------
55,011,125
--------------------------------------------------------------------------------
Computer Services -- 1.4%
152,000 Convergys Corp. (b) 6,849,500
99,000 Electronic Data Systems Corp. 4,257,000
--------------------------------------------------------------------------------
11,106,500
--------------------------------------------------------------------------------
Computer Software -- 1.6%
172,000 Oracle Corp. (a)(b) 12,932,250
--------------------------------------------------------------------------------
Conglomerates -- 4.6%
285,000 General Electric Co. 14,659,688
182,200 Koninklijke Philips Electronics NV 8,187,613
260,000 Tyco International Ltd. 13,910,000
--------------------------------------------------------------------------------
36,757,301
--------------------------------------------------------------------------------
See Notes to Financial Statements.
10 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
SHARES SECURITY VALUE
================================================================================
Consumer Electronics and Appliances -- 0.3%
60,000 Black & Decker Corp. $ 2,231,250
--------------------------------------------------------------------------------
Electronic Components -- 1.7%
195,000 Motorola, Inc. 6,447,188
145,000 Solectron Corp. (a)(b) 5,845,312
37,050 Vishay Intertechnology Inc. 1,146,234
--------------------------------------------------------------------------------
13,438,734
--------------------------------------------------------------------------------
Energy -- 3.1%
107,252 BP Amoco PLC, Sponsored ADR (b) 5,610,620
152,000 Coastal Corp. 8,778,000
86,000 El Paso Energy Corp. 4,160,250
35,000 Enron Corp. 2,576,875
100,000 Williams Cos., Inc. 4,175,000
--------------------------------------------------------------------------------
25,300,745
--------------------------------------------------------------------------------
Financial Services -- 4.7%
180,000 American Express Co. 10,203,750
247,000 Associates First Capital Corp. 6,468,312
300,000 Charles Schwab Corp. 10,837,500
169,000 Freddie Mac 6,664,937
25,000 J.P. Morgan & Co., Inc. 3,337,500
--------------------------------------------------------------------------------
37,511,999
--------------------------------------------------------------------------------
Insurance - Multi-Line -- 2.7%
178,125 American International Group, Inc. 15,619,336
53,000 Marsh & McLennan Cos., Inc. 6,466,000
--------------------------------------------------------------------------------
22,085,336
--------------------------------------------------------------------------------
Insurance - Property and Casualty -- 0.5%
65,000 XL Capital Ltd., Class A Shares 4,290,000
--------------------------------------------------------------------------------
Internet Services -- 0.8%
110,000 America Online, Inc. (b) 5,864,375
99,000 Genuity Inc. (b) 804,375
--------------------------------------------------------------------------------
6,668,750
--------------------------------------------------------------------------------
Leisure/Movies/Entertainment -- 2.4%
238,700 Viacom Inc., Class B Shares (b) 15,828,794
100,000 The Walt Disney Co. 3,868,750
--------------------------------------------------------------------------------
19,697,544
--------------------------------------------------------------------------------
Machinery - Industrial/Agricultural -- 1.0%
216,000 Deere & Co. 8,329,500
--------------------------------------------------------------------------------
Medical Equipment and Supplies -- 1.3%
203,000 Medtronic Inc. (a) 10,365,688
--------------------------------------------------------------------------------
Oil Field Services/Equipment -- 1.4%
127,000 Halliburton Co. 5,857,875
72,000 Schlumberger Ltd. 5,323,500
--------------------------------------------------------------------------------
11,181,375
--------------------------------------------------------------------------------
Personal and Household Products -- 2.7%
228,000 Colgate-Palmolive Co. 12,696,750
159,000 Kimberly Clark Corp. 9,132,562
--------------------------------------------------------------------------------
21,829,312
--------------------------------------------------------------------------------
See Notes to Financial Statements.
11 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
SHARES SECURITY VALUE
================================================================================
Pharmaceuticals - Major -- 4.5%
117,000 Bristol-Myers Squibb Co. $ 5,806,125
95,000 Johnson & Johnson 8,840,937
270,000 Merck & Co., Inc. 19,355,625
54,000 Schering Plough Corp. 2,332,125
--------------------------------------------------------------------------------
36,334,812
--------------------------------------------------------------------------------
Retail -- 1.2%
40,000 Circuit City Stores-Circuit City Group 917,500
203,000 Lowe's Cos., Inc. 8,564,063
--------------------------------------------------------------------------------
9,481,563
--------------------------------------------------------------------------------
Semiconductors -- 2.6%
280,000 Intel Corp. 18,690,000
30,000 Microchip Technology Inc. (b) 2,083,125
--------------------------------------------------------------------------------
20,773,125
--------------------------------------------------------------------------------
Telecommunications -- 3.9%
99,000 AT&T Wireless Group (a)(b) 2,722,500
33,000 Intermedia Communication (b) 581,625
25,000 MGC Communications Inc. (b) 1,125,000
276,638 SBC Communications, Inc. 11,774,405
18,026 Tele 1 Europe Holding AB ADR (b) 236,591
37,350 Time Warner Telecom Inc., Class A Shares (b) 2,313,366
95,160 Verizon Communications 4,472,520
7,462 World Access, Inc. (b) 67,158
215,500 WorldCom, Inc. (b) 8,417,968
--------------------------------------------------------------------------------
31,711,133
--------------------------------------------------------------------------------
Transportation - Other -- 0.6%
85,100 United Parcel Service Inc., Class B Shares 4,999,625
--------------------------------------------------------------------------------
Utilities -- 2.0%
308,000 AES Corp. (a)(b) 16,458,750
--------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost--$345,452,936) 519,847,712
================================================================================
PREFERRED STOCK -- 0.0%
Banking -- 0.0%
600 California Federal Preferred Capital Corp., 9.125% 13,050
--------------------------------------------------------------------------------
Broadcasting -- 0.0%
260 Dobson Communications, 13.000% (c) 25,935
--------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost--$42,670) 38,985
================================================================================
FACE
AMOUNT(d) RATING(e) SECURITY VALUE
================================================================================
CORPORATE BONDS AND NOTES -- 27.7%
Aerospace -- 0.1%
235,000 B BE Aerospace Inc., Sr. Sub. Notes, Series B,
8.000% due 3/1/08 207,388
575,000 B- Dunlop Standard Aerospace Holdings, 11.875%
due 5/15/09 569,250
--------------------------------------------------------------------------------
776,638
--------------------------------------------------------------------------------
See Notes to Financial Statements.
12 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
FACE
AMOUNT(d) RATING(e) SECURITY VALUE
================================================================================
Airlines -- 0.3%
2,124,703 AA+ Continental Airlines Inc., Secured
Notes, Series 974A, 6.900% due
1/2/18 $1,994,735
--------------------------------------------------------------------------------
Aluminum -- 0.1%
Kaiser Aluminum & Chemicals:
125,000 B1* Series B, 10.875% due 10/15/06 120,312
220,000 B1* Series D, 10.875% due 10/15/06 211,750
890,000 B3* 12.750% due 2/1/03 (a) 809,900
--------------------------------------------------------------------------------
1,141,962
--------------------------------------------------------------------------------
Apparel -- 0.1%
265,000 BB- Levi Strauss & Co., 7.000% due 11/1/06 210,675
Tommy Hilfiger USA Inc.:
105,000 BBB- 6.500% due 6/1/03 84,263
595,000 BBB- 6.850% due 6/1/08 409,063
265,000 B- Tropical Sportswear International Corp.,
Sr. Sub. Notes, Series A, 11.000%
due 6/15/08 256,388
--------------------------------------------------------------------------------
960,389
--------------------------------------------------------------------------------
Auto Parts -- 0.1%
810,000 B Collins & Aikman Products, 11.500%
due 4/15/06 789,750
170,000 B Dura Operating Corp., Series B, 9.000%
due 5/1/09 152,150
--------------------------------------------------------------------------------
941,900
--------------------------------------------------------------------------------
Automotive Aftermarket -- 0.4%
3,500,000 A+ DaimlerChrysler NA Holdings, 7.750%
due 5/27/03 3,530,625
--------------------------------------------------------------------------------
Banking -- 0.3%
2,500,000 Aa3* NationsBank Corp., 6.500% due 8/15/03 2,443,750
--------------------------------------------------------------------------------
Beverages - Soft Drinks -- 0.3%
2,000,000 A Coca-Cola Enterprises, 8.500% due 2/1/22 2,140,000
--------------------------------------------------------------------------------
Broadcasting -- 0.2%
791,000 NR AMFM Inc., 12.625% due 10/31/06 (c) 933,380
260,000 B Capstar Broadcasting, step bond to
yield 11.002% due 2/1/09 242,450
Young Broadcasting Corp., Sr. Sub.
Notes:
160,000 B 11.750% due 11/15/04 165,000
160,000 B 10.125% due to 2/15/05 160,800
--------------------------------------------------------------------------------
1,501,630
--------------------------------------------------------------------------------
Building Materials -- 0.3%
2,000,000 AA- Abbey National PLC, 7.950% due 10/26/29 2,003,234
Nortek Inc., Series B:
275,000 B- 9.875% due 3/4/04 264,688
290,000 B+ 9.125% due 9/1/07 274,050
--------------------------------------------------------------------------------
2,541,972
--------------------------------------------------------------------------------
Building Products -- 0.1%
555,000 B Amatek Industries, Sr. Sub. Notes,
12.000% due 2/15/08 513,375
580,000 B- Atrium Cos., Inc., Series B, 10.500%
due 5/1/09 530,700
--------------------------------------------------------------------------------
1,044,075
--------------------------------------------------------------------------------
See Notes to Financial Statements.
13 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
FACE
AMOUNT(d) RATING(e) SECURITY VALUE
================================================================================
Cable Television -- 2.2%
260,000 CCC+ Cable Satisfaction International,
12.750% due 3/1/10 $ 254,475
570,000 BB- Century Communications, Series B,
zero coupon due 1/15/08 233,700
Charter Communications Holdings Inc.:
2,490,000 B+ Step bond to yield 11.713%
due 1/15/10 1,413,075
180,000 B+ 8.625% due 4/1/09 158,400
1,695,000 BB- CSC Holdings Inc., 10.500%
due 5/15/16 (f) 1,811,531
425,000 B Echostar DBS Corp., 9.375% due 2/1/09 411,719
2,025,000 B NTL Inc., Series B, 11.500% due 10/1/08 2,070,563
1,760,000 BB- Roger Cablesystems Ltd., 11.000%
due 12/1/15 1,953,600
1,240,000 B+ TeleWest Communication PLC, 11.250%
due 11/1/08 (f) 1,252,400
6,950,000 B- United International Holdings,
Series B, step bond to yield 11.515%
due 2/15/08 5,090,875
6,600,000 B United Pan-Europe Communications,
Series B, step bond to yield 12.500%
due 8/1/09 3,069,000
--------------------------------------------------------------------------------
17,719,338
--------------------------------------------------------------------------------
Casinos/Gambling -- 0.3%
155,000 B Hollywood Casino Corp., 11.250%
due 5/1/07 158,875
165,000 B+ Horseshoe Gaming Holding,
Series B, 8.625% due 5/15/09 156,337
17,062 NR Jazz Casino Co., 5.867% due 11/15/09 (c) 2,645
Mandalay Resort Group:
315,000 BB- 10.250% due 8/1/07 (g) 319,725
205,000 BB- 7.625% due 7/15/13 169,125
565,000 B+ Station Casinos Inc., 9.875%
due 7/1/10 (g) 568,531
Sun International Hotels Ltd.:
480,000 B+ 9.000% due 3/15/07 451,200
445,000 B+ 8.625% due 12/15/07 411,625
Venetian Casino Co.:
250,000 B- 12.250% due 11/15/04 253,125
275,000 CCC+ 14.250% due 11/15/05 269,500
--------------------------------------------------------------------------------
2,760,688
--------------------------------------------------------------------------------
Chemicals Major -- 0.2%
Huntsman ICI Chemicals:
5,165,000 B+ Zero coupon due 12/31/09 (g) 1,730,275
230,000 B+ 10.125% due 7/1/09 (g) 235,175
--------------------------------------------------------------------------------
1,965,450
--------------------------------------------------------------------------------
Chemicals Specialty -- 0.0%
300,000/EUR/ B+ Ineos Acrylics Finance, 10.250%
due 5/15/10 (g) 279,371
--------------------------------------------------------------------------------
Coal Mining -- 0.0%
1,100,000 Caa* AEI Holding Co., Inc., 10.500%
due 12/15/05 (g) 181,500
--------------------------------------------------------------------------------
Construction/AG Equipment/Trucks -- 0.1%
1,335,000 B Columbus McKinnon Corp., 8.500%
due 4/1/08 1,181,475
--------------------------------------------------------------------------------
Consumer Electronics/Appliances -- 0.4%
3,000,000 BBB Black & Decker Corp., 6.625%
due 11/15/00 (f) 2,992,500
--------------------------------------------------------------------------------
Consumer Specialties -- 0.1%
415,000 B Jostens Inc., 12.750% due 5/1/10 (g)(h) 412,925
--------------------------------------------------------------------------------
See Notes to Financial Statements.
14 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
FACE
AMOUNT(d) RATING(e) SECURITY VALUE
================================================================================
Containers/Packaging -- 0.4%
1,610,000 B Stone Container Finance, 11.500%
due 8/15/06 (g) $1,674,400
930,000 B- Sweetheart Cup Co., Inc., 10.500%
due 9/1/03 846,300
625,000 B- Tekni-Plex, Inc., Sr. Sub. Notes,
12.750% due 6/15/10 (g) 640,625
--------------------------------------------------------------------------------
3,161,325
--------------------------------------------------------------------------------
Contract Drilling -- 0.4%
780,000 B+ Parker Drilling Co., Guaranteed Sr.
Notes, Series D, 9.750% due 11/15/06 756,600
1,595,000 BB Pride International Inc.,
10.000% due 6/1/09 1,650,825
900,000 BB- RBF Finance Co., 11.375% due 3/15/09 981,000
--------------------------------------------------------------------------------
3,388,425
--------------------------------------------------------------------------------
Discount Stores -- 0.2%
1,455,000 B+ Ames Dept. Stores, 10.000% due 4/15/06 923,925
850,000 BB+ KMart Corp., 12.500% due 3/1/05 915,875
--------------------------------------------------------------------------------
1,839,800
--------------------------------------------------------------------------------
Diversified Commercial Services -- 0.1%
750,000 B2* Intertek Financial PLC, Series B,
10.250% due 11/1/06 626,250
--------------------------------------------------------------------------------
Diversified Financial Services -- 0.2%
Amresco Inc.:
600,000 CCC- Series 97-A, 10.000% due 3/15/04 255,000
2,265,000 CCC- Series 98-A, 9.875% due 3/15/05 962,625
--------------------------------------------------------------------------------
1,217,625
--------------------------------------------------------------------------------
Diversified Manufacture -- 0.9%
1,160,000/GBP/ B Diamond Holdings, 10.000% due 2/1/08 1,613,785
2,500,000 Baa2* FMC Corp., 7.000% due 5/15/08 2,343,750
1,500,000 B+ Park-Ohio Industries Inc., 9.250%
due 12/1/07 1,350,000
2,000,000 A- Tyco International Group SA, 6.875%
due 9/5/02 (g) 1,987,500
--------------------------------------------------------------------------------
7,295,035
--------------------------------------------------------------------------------
Drugs/Generic -- 0.3%
2,170,000 BB ICN Pharmaceuticals Inc., Series B,
9.250% due 8/15/05 2,170,000
--------------------------------------------------------------------------------
Electronic Components -- 0.3%
1,000,000 BB- Celestica International Inc.,
10.500% due 12/31/06 1,050,000
1,020,000 B+ Flextronics International Ltd.,
9.875% due 7/1/10 (g) 1,042,950
--------------------------------------------------------------------------------
2,092,950
--------------------------------------------------------------------------------
Engineering and Construction -- 0.2%
745,000 BB- Integrated Electrical Services,
Series B, 9.375% due 2/1/09 616,488
640,000 B- Orius Capital Corp., 12.750%
due 2/1/10 (g) 659,200
--------------------------------------------------------------------------------
1,275,688
--------------------------------------------------------------------------------
Environmental Services -- 0.8%
Allied Waste NA, Series B:
350,000 BB- 7.875% due 1/1/09 310,625
2,725,000 B+ 10.000% due 8/1/09 (f) 2,374,156
215,000 B+ IT Group Inc., Series B, 11.250%
due 4/1/09 192,425
330,000 CCC+ Metal Management Inc., 10.000%
due 5/15/08 166,650
745,000 B+ URS Corp., Series B, 12.250% due 5/1/09 763,625
2,500,000 BBB USA Waste Services, 6.500%
due 12/15/02 2,381,250
--------------------------------------------------------------------------------
6,188,731
--------------------------------------------------------------------------------
See Notes to Financial Statements.
15 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
FACE
AMOUNT(d) RATING(e) SECURITY VALUE
================================================================================
Finance Companies -- 2.2%
2,000,000 A+ American General Finance Corp.,
5.875% due 7/15/01 $ 1,972,500
2,790,000 A+ Associates Corp. NA, 5.750% due
10/15/03 (f) 2,643,525
2,500,000 A+ AT&T Capital Corp., 6.250%
due 5/15/01 2,484,375
2,525,000 A Countrywide Home Loan, 7.200%
due 10/30/06 2,414,531
2,000,000 AAA General Electric Capital Corp.,
7.000% due 2/3/03 1,995,000
2,500,000 AA- International Lease Finance Corp.,
5.950% due 6/1/01 2,471,875
535,000 CCC+ Madison River Capital, Sr. Notes,
13.250% due 3/1/10 (g) 492,200
Private Export Funding Corp.:
2,500,000 AAA Series G, 6.670% due 9/15/09 (f) 2,425,000
1,000,000 AAA 7.010% due 4/30/04 1,001,250
--------------------------------------------------------------------------------
17,900,256
--------------------------------------------------------------------------------
Food Distributors -- 0.7%
185,000 B- Agrilink Foods Inc., 11.875%
due 11/1/08 145,225
1,220,000 B2* Carrols Corp., 9.500% due 12/1/08 1,037,000
2,400,000 A+ Diageo PLC, 8.625% due 8/15/01 2,433,000
530,000 B International Home Foods, 10.375%
due 11/1/06 568,425
490,000 B- Premier International Foods PLC,
12.000% due 9/1/09 (g) 394,450
985,000 B SC International Services Inc.,
Series B, 9.250% due 9/1/07 941,906
--------------------------------------------------------------------------------
5,520,006
--------------------------------------------------------------------------------
Food - Specialty/Candy -- 0.0%
1,495,000 CCC+ Imperial Holly, 9.750% due 12/15/07 (i) 299,000
--------------------------------------------------------------------------------
Forest Products -- 0.2%
865,000 B Ainsworth Lumber, 12.500% due 7/15/07 854,188
585,000 B+ Millar Western Forest, 9.875% due 5/15/08 573,300
--------------------------------------------------------------------------------
1,427,488
--------------------------------------------------------------------------------
Health Industry Services -- 0.1%
645,000 BBB- HealthSouth Corp., 6.875% due 6/15/05 538,575
--------------------------------------------------------------------------------
Home Furnishings -- 0.1%
610,000 B Falcon Products Inc., Series B, 11.375%
due 6/15/09 591,700
--------------------------------------------------------------------------------
Homebuilding -- 0.1%
365,000 BB D.R. Horton Inc., Guaranteed Sr. Notes,
8.000% due 2/1/09 332,150
795,000 BB+ Lennar Corp., 9.950% due 5/1/10 (g) 808,912
--------------------------------------------------------------------------------
1,141,062
--------------------------------------------------------------------------------
Hospital/Nursing Management -- 0.1%
6,400 Ba3* Fresenius Medical Care, 9.000%
due 12/1/06 632,000
--------------------------------------------------------------------------------
Hotels/Resorts -- 0.7%
2,500,000 A Carnival Corp., 6.150% due 4/15/08 2,196,875
1,915,000 B- Courtyard by Marriott, Series B,
10.750% due 2/1/08 1,891,062
50,000 BB HMH Properties, Inc., Series C,
8.450% due 12/1/08 47,250
Intrawest Corp.:
555,000 B+ 9.750% due 8/15/08 555,000
1,040,000 B+ 10.500% due 2/1/10 (g) 1,081,600
--------------------------------------------------------------------------------
5,771,787
--------------------------------------------------------------------------------
See Notes to Financial Statements.
16 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
FACE
AMOUNT(d) RATING(e) SECURITY VALUE
================================================================================
Insurance - Life -- 0.4%
2,000,000 AA Mass Mutual Life, 7.625%
due 11/15/23 (g) 1,937,500
1,300,000 AAA SunAmerica Inc., 6.580% due 1/15/02 1,285,375
--------------------------------------------------------------------------------
3,222,875
--------------------------------------------------------------------------------
Insurance - Multi-Line -- 0.1%
1,000,000 A+ St. Paul Cos., Inc., Sr. Notes,
7.875% due 4/15/05 1,012,500
--------------------------------------------------------------------------------
Internet Services -- 1.4%
505,000 Caa* Cybernet Internet Services,
14.000% due 7/1/09 214,625
Exodus Communications:
275,000 B 10.750% due 12/15/09 (g) 266,062
2,845,000 B 11.625% due 7/15/10 2,873,450
PSINet Inc.:
1,635,000 B- 11.500% due 11/1/08 1,397,925
1,205,000 B- 11.000% due 8/1/09 982,075
665,000 B3* Rhythms Netconnections, Sr. Notes,
14.000% due 2/15/10 (a)(g) 448,875
Verio Inc.:
695,000 B- 10.375% due 4/1/05 740,175
1,915,000 B- 11.250% due 12/1/08 2,192,675
1,010,000 B- 10.625% due 11/15/09 (g) 1,166,550
1,225,000 CCC+ Wam!Net Inc., Series B, step bond to
yield 13.724% due 3/1/05 692,125
--------------------------------------------------------------------------------
10,974,537
--------------------------------------------------------------------------------
Investment Bankers/Brokers/Services -- 0.3%
2,500,000 A- Donaldson, Lufkin & Jenrette,
Inc., 6.170% due 7/15/03 2,409,375
--------------------------------------------------------------------------------
Leisure/Movies/Entertainment -- 0.2%
560,000 B- Premier Parks Inc., step bond to
yield 10.819% due 4/1/08 372,400
1,250,000 BB+ SFX Entertainment Inc., Series B,
9.125% due 2/1/08 1,287,500
--------------------------------------------------------------------------------
1,659,900
--------------------------------------------------------------------------------
Media Conglomerates -- 0.3%
2,500,000 BBB- News America Holdings, 7.750%
due 2/1/24 2,328,125
--------------------------------------------------------------------------------
Medical Specialties -- 0.0%
360,000 B- Hanger Orthopedic Group, 11.250%
due 6/15/09 (a) 309,600
--------------------------------------------------------------------------------
Multi-Sector Companies -- 0.2%
1,315,000 B- Triarc Consumer Beverage, 10.250%
due 2/15/09 (g) 1,285,413
--------------------------------------------------------------------------------
Newspapers -- 0.1%
485,000 B+ Garden State Newspapers, 8.625%
due 7/1/11 441,350
--------------------------------------------------------------------------------
Oil and Gas Production -- 0.7%
Belco Oil & Gas Corp., Series B:
350,000 B1* 10.500% due 4/1/06 354,375
635,000 B1* 8.875% due 9/15/07 603,250
1,115,000 B Forest Oil Corp., 10.500% due 1/15/06 1,151,238
125,000 B- Lomak Petroleum, 8.750% due 1/15/07 113,750
1,110,000 B+ Nuevo Energy Co., Series B, 9.500%
due 6/1/08 1,107,225
425,000 B- Plains Resources Inc., 10.250%
due 3/15/06 (g) 432,438
1,000,000 B+ R&B Falcon Corp., 12.250% due 3/15/06 1,105,000
445,000 BB- Vintage Petroleum, 9.750% due 6/30/09 459,463
--------------------------------------------------------------------------------
5,326,739
--------------------------------------------------------------------------------
See Notes to Financial Statements.
17 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
FACE
AMOUNT(d) RATING(e) SECURITY VALUE
================================================================================
Oil Refining/Marketing -- 0.1%
475,000 BB- Clark Oil & Resources, 9.500%
due 9/15/04 $ 422,750
720,000 B Clark USA Inc., Series B, 10.875%
due 12/1/05 398,700
--------------------------------------------------------------------------------
821,450
--------------------------------------------------------------------------------
Oil/Gas Transmission -- 0.2%
1,500,000 BBB+ Enron Corp., 6.450% due 11/15/01 1,486,875
400,000 BB- Leviathan Gas Pipelines, Series B,
10.375% due 6/1/09 414,000
--------------------------------------------------------------------------------
1,900,875
--------------------------------------------------------------------------------
Package Goods/Cosmetics -- 0.2%
2,000,000 AA Proctor & Gamble Corp., 6.875%
due 9/15/09 1,955,000
--------------------------------------------------------------------------------
Packaged Foods -- 0.4%
2,265,000 BBB+ Conagra Inc., 5.500% due 10/15/02 2,180,062
1,000,000 A- Quaker Oats, 7.440% due 3/2/26 963,750
--------------------------------------------------------------------------------
3,143,812
--------------------------------------------------------------------------------
Paper -- 0.2%
560,000 CCC+ Repap New Brunswick, 10.625%
due 4/15/05 509,600
Riverwood International:
625,000 B- 10.625% due 8/1/07 625,000
835,000 CCC+ 10.875% due 4/1/08 772,375
--------------------------------------------------------------------------------
1,906,975
--------------------------------------------------------------------------------
Pharmaceuticals - Other -- 0.0%
415,000 B King Pharmaceutical Inc.,
10.750% due 2/15/09 441,975
--------------------------------------------------------------------------------
Photographic Products -- 0.1%
1,075,000 BB- Polaroid Corp., 11.500% due
2/15/06 (a) 1,126,063
--------------------------------------------------------------------------------
Printing/Forms -- 0.1%
795,000 B- Ziff Davis Media Inc., Sr. Sub. Notes,
12.000% due 7/15/10 (g) 810,900
--------------------------------------------------------------------------------
Railroads -- 0.9%
2,500,000 BBB CSX Corp., 7.250% due 5/1/04 2,450,000
3,000,000 BBB Norfolk Southern Corp., 7.875%
due 2/15/04 (f) 3,033,750
2,000,000 BBB- Union Pacific Co., 7.875%
due 2/15/02 2,017,500
--------------------------------------------------------------------------------
7,501,250
--------------------------------------------------------------------------------
Real Estate Investment Trust -- 0.1%
900,000 NR Ocwen Asset Investment,
11.500% due 7/1/05 697,500
--------------------------------------------------------------------------------
Recreational Products/Toys -- 0.2%
2,000,000 A2* Hasbro Inc., 6.600% due 7/15/28 (f) 1,690,000
--------------------------------------------------------------------------------
Rental/Leasing Companies -- 0.1%
95,000 BB- Avis Rent a Car Inc., 11.000%
due 5/1/09 100,700
75,000 B Nationsrent Inc., 10.375%
due 12/15/08 (a) 55,875
United Rentals Inc.:
290,000 BB- Series B, 9.250% due 1/15/09 270,425
250,000 BB- Series B, 9.000% due 4/1/09 228,125
--------------------------------------------------------------------------------
655,125
--------------------------------------------------------------------------------
Retail - Clothing/Shoe/Accessory -- 0.4%
500,000 BBB JC Penney Co., Inc., 7.250% due 4/1/02 485,625
2,500,000 AA Wal-Mart Stores, 6.875% due 8/1/02 2,505,500
--------------------------------------------------------------------------------
2,991,125
--------------------------------------------------------------------------------
See Notes to Financial Statements.
18 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
FACE
AMOUNT(d) RATING(e) SECURITY VALUE
================================================================================
Retail - Drug Store Chains -- 0.0%
260,000 B- Rite Aid Corp., 6.000% due 10/1/03 (g) $ 145,600
--------------------------------------------------------------------------------
Retail - Other Specialty Stores -- 0.7%
1,260,000 B- Advance Stores Co., Inc., Series B,
10.250% due 4/15/08 1,045,800
2,500,000 AA- Home Depot, Inc., 6.500% due 9/15/04 2,459,375
2,000,000 A Price/Costco Wholesale Corp., 7.125%
due 6/15/05 1,960,000
--------------------------------------------------------------------------------
5,465,175
--------------------------------------------------------------------------------
Savings and Loan Associations -- 0.1%
1,250,000 B2* Ocwen Capital Trust I, 10.875%
due 8/1/27 637,500
--------------------------------------------------------------------------------
Semiconductors -- 0.3%
260,000 B Amkor Technologies Inc., 10.500%
due 5/1/09 263,900
2,000,000 B Fairchild Semiconductor, 10.125%
due 3/15/07 2,040,000
260,000 B SCG Holding & Semiconductor Co.,
12.000% due 8/1/09 282,100
--------------------------------------------------------------------------------
2,586,000
--------------------------------------------------------------------------------
Steel/Iron -- 0.1%
585,000 B+ WCI Steel Inc., Series B, 10.000%
due 12/1/04 555,750
125,000 B- WHX Corp., 10.500% due 4/15/05 98,438
--------------------------------------------------------------------------------
654,188
--------------------------------------------------------------------------------
Telecommunications - Major U.S. -- 0.1%
500,000 B2* Omnipoint Corp., Series A, 11.625%
due 8/15/06 562,500
--------------------------------------------------------------------------------
Telecommunications - Other -- 3.3%
710,000 B+ Call-Net Enterprises Inc., 9.375%
due 5/15/09 372,750
Esprit Telecom Group PLC:
1,500,000 B- 11.500% due 12/15/07 1,027,500
750,000 B- 10.875% due 6/15/08 498,750
200,000EUR B Flag Telecom Holdings Ltd., 11.625%
due 3/30/10 (g) 167,715
Focal Communications Corp.:
785,000 B- Series B, step bond to yield
13.158% due 2/15/08 518,100
405,000 B- 11.875% due 1/15/10 (f) 400,950
740,000 CCC+ GT Group Telecom, step bond to yield
13.250% due 2/1/10 (g)(h) 395,900
255,000 BB Global Crossing Holdings Ltd.,
9.500% due 11/15/09 248,625
Hermes Europe Railtel BV, Sr.
Notes:
1,350,000 B 11.500% due 8/15/07 1,086,750
985,000 B 10.375% due 1/15/09 753,525
705,000 B- ICG Holdings Inc., step bond to yield
12.932% due 9/15/05 669,750
Jazztel PLC:
1,000,000EUR CCC+ Sr. Notes, 13.250% due 12/15/09 (g) 838,576
250,000EUR NR 14.000% due 7/15/10 (g) 239,758
KMC Telecom Holdings Inc.:
450,000 CCC+ Sr. Discount Notes, step bond to yield
15.834% due 2/15/08 227,250
935,000 CCC+ Sr. Notes, 13.500% due 5/159 833,319
Level 3 Communications Inc.:
2,750,000 B Sr. Discount Notes, step bond to yield
12.875% due 3/15/10 1,464,375
1,700,000EUR B Sr. Notes, 11.250% due 3/15/10 (g) 1,496,465
265,000 B+ Mcleod USA, Inc., Sr. Notes, 8.125%
due 2/15/09 239,163
Microcell Telecommunication:
1,100,000CAD B3* Series B, step bond to yield 16.745%
due 10/15/07 520,090
725,000 B- Sr. Discount Notes, step bond to yield
11.862% due 6/1/09 493,000
See Notes to Financial Statements.
19 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
FACE
AMOUNT(d) RATING(e) SECURITY VALUE
================================================================================
Telecommunications - Other -- 3.3% (continued)
Nextlink Communications:
2,030,000 B Step bond to yield 12.053%
due 6/1/09 $ 1,258,600
1,535,000 B Step bond to yield 12.234% due
12/1/09 (g) 874,950
2,400,000 B 12.500% due 4/15/06 2,484,000
625,000 B 10.750% due 6/1/09 609,375
2,000,000 B- Primus Telecomm Group, 11.750%
due 8/1/04 1,310,000
Tele1 Europe BV:
490,000 B- 13.000% due 5/15/09 499,800
500,000EUR B- 13.000% due 5/15/09 479,517
2,500,000 A- Telephone and Data Systems, 7.000%
due 8/1/06 2,368,750
Versatel Telecom BV:
1,655,000 B- 13.250% due 5/15/08 1,712,925
280,000EUR B- 11.250% due 3/30/10 (g) 246,152
740,000 B- Viatel Inc., 11.500% due 3/15/09 481,000
2,375,000 B- World Access Inc., Series B, 13.250%
due 1/15/08 2,137,500
--------------------------------------------------------------------------------
26,954,880
--------------------------------------------------------------------------------
Telephone and Cellular -- 1.8%
1,315,000 CCC Airgate PCS, Inc., Sr. Sub. Notes,
step bond to yield 16.049% due 10/1/09 733,112
320,000 CCC+ Alamosa PCS Holdings Inc., Guaranteed
Sr. Discount Notes,
step bond to yield 12.726% due 2/15/10 164,800
1,355,000 B- Centennial Cellular Corp., Sr. Sub.
Notes, 10.750% due 12/15/08 1,307,575
Crown Castle International Corp.:
2,305,000 B Sr. Discount Notes, step bond to
yield 11.057% due 5/15/11 1,452,150
205,000 B Sr. Notes, 10.750% due 8/1/11 210,638
505,000 NR Dobson/Sygnet Communications, Sr.
Notes, 12.250% due 12/15/08 522,675
1,835,000 B- Millicom International Cellular, S.A.,
Sr. Discount Notes,
step bond to yield 14.382% due 6/1/06 1,623,975
Nextel Communications, Sr.
Discount Notes:
1,135,000 B1* Step bond to yield 10.988% due 9/15/07 893,812
1,635,000 B1* Step bond to yield 10.743% due 2/15/08 1,201,725
265,000 B 9.375% due 11/15/09 254,400
495,000 NR Spectrasite Holdings Inc., Sr.
Discount Notes,
step bond to yield 11.250% due 4/15/09 294,525
725,000 B3* Telecorp PCS Inc., 10.625% due 7/15/10 (g) 735,875
Telesystems International Wireless
Inc., Sr. Discount Notes:
935,000 CCC+ Series B, step bond to yield 13.345%
due 6/30/07 668,525
1,080,000 CCC+ Series C, step bond to yield 12.706%
due 11/1/07 664,200
450,000 B3* Triton PCS, Inc., step bond to yield
12.148% due 5/1/08 333,562
2,500,000 BBB+ U.S. West Communications, 7.625%
due 6/9/03 (g) 2,509,375
410,000 B- Voicestream Wireless Co.,
Sr. Discount Notes,
step bond to yield 11.875% due 11/15/09 297,250
570,000 B- Winstar Communications Inc., 12.750%
due 4/15/10 (g) 528,675
--------------------------------------------------------------------------------
14,396,849
--------------------------------------------------------------------------------
Textiles -- 0.1%
650,000 BB Westpoint Stevens Inc., 7.875%
due 6/15/05 569,563
--------------------------------------------------------------------------------
Tobacco -- 0.0%
290,000 BB- Standard Commercial Tobacco, 8.875%
due 8/1/05 247,950
--------------------------------------------------------------------------------
See Notes to Financial Statements.
20 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
FACE
AMOUNT(d) RATING(e) SECURITY VALUE
================================================================================
Transportation - Marine -- 0.1%
615,000 B- Oglebay Norton Co., 10.000%
due 2/1/09 $ 573,488
--------------------------------------------------------------------------------
Unregulated Power Generation -- 0.7%
AES Corp.:
1,605,000 BB 10.250% due 7/15/06 1,631,081
1,725,000 Ba1* 9.500% due 6/1/09 1,744,406
320,000 BB- AES Drax Energy Ltd., 11.500%
due 8/30/10 (g) 330,400
2,000,000 BB+ Calpine Corp., 10.500% due 5/15/06 2,087,500
--------------------------------------------------------------------------------
5,793,387
--------------------------------------------------------------------------------
Wholesale Distributors -- 0.1%
505,000 B Buhrmann U.S. Inc., 12.250%
due 11/1/09 528,988
--------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost--$239,492,736) 223,317,158
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
COLLATERALIZED MORTGAGE OBLIGATION -- 0.3%
$ 2,750,744 Airplanes Pass Through Trust, 10.875%
due 3/15/19
(Cost--$3,039,573) 2,208,930
================================================================================
U.S. GOVERNMENT AGENCIES AND OBLIGATIONS -- 6.9%
U.S. Government Agencies -- 3.0%
5,000,000 Federal Home Loan Mortgage Corp.
(FHLMC), 5.750% due 7/15/03 4,845,300
5,000,000 Federal National Mortgage Association
(FNMA), 4.625% due 10/15/01 4,873,750
Government National Mortgage
Association (GNMA):
9,986,445 8.000% due 5/15/30 10,080,019
4,915,425 8.000% due 2/15/30 4,961,484
--------------------------------------------------------------------------------
24,760,553
--------------------------------------------------------------------------------
U.S. Treasury Obligations -- 3.9%
U.S. Treasury Notes:
2,500,000 6.250% due 2/15/03 2,495,300
5,000,000 6.500% due 8/15/05 5,060,900
3,000,000 6.500% due 2/15/10 3,099,360
U.S. Treasury Bonds:
3,000,000 7.250% due 5/15/16 3,336,540
2,500,000 7.875% due 2/15/21 3,009,375
1,000,000 6.250% due 8/15/23 1,020,930
2,500,000 6.125% due 8/15/29 2,573,425
10,000,000 6.250% due 5/15/30 10,656,200
--------------------------------------------------------------------------------
31,252,030
--------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES AND OBLIGATIONS
(Cost--$55,880,315) 56,012,583
================================================================================
See Notes to Financial Statements.
21 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Schedule of Investments (continued) July 31, 2000
SHARES SECURITY VALUE
================================================================================
WARRANTS (b) -- 0.1%
Cable Television -- 0.0%
260 Cable Satisfaction International, Inc.,
Expire 3/1/10 $ 6,695
--------------------------------------------------------------------------------
Internet Services -- 0.0%
505 Cybernet Internet Service, Expire 7/1/09 (f) 6,312
1,950 SplitRock Service, Expire 7/15/08 296,888
5,490 Wam!Net, Inc., Expire 3/1/05 63,821
--------------------------------------------------------------------------------
367,021
--------------------------------------------------------------------------------
Printing/Forms -- 0.0%
505 Merrill Corp., Expire 5/1/09 51
--------------------------------------------------------------------------------
Telecommunications - Other -- 0.1%
1,655 Versatel Telecommunications, Expire 5/15/08 (f) 690,963
--------------------------------------------------------------------------------
Telephone - Cellular -- 0.0%
995 Airgate PCS Inc., Expire 10/1/09 99,500
--------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost--296,401) 1,164,230
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 0.6%
$4,498,000 Morgan Stanley Dean Witter & Co., 6.530%
due 8/1/00;
Proceeds at maturity -- $4,498,815; (Fully
collateralized by U.S. Treasury Notes,
4.500% to 6.375% due 8/15/00 to 2/15/07;
Market value -- $4,597,526) (Cost --
$4,498,000) 4,498,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $648,702,631**) $807,087,598
================================================================================
(a) All or a portion of this security is on loan (See Note 5).
(b) Non-income producing security.
(c) Payment-in-kind security for which part of the income earned may be paid as
additional principal.
(d) Face amount in U.S. dollars unless otherwise indicated.
(e) All ratings are by Standard & Poor's Ratings Service with the exception of
those identified by an asterisk (*), which are rated by Moody's Investors
Service, Inc.
(f) Security is segregated for open forward foreign currency transactions.
(g) 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.
(h) Security issued with attached warrants.
(i) Security is in default.
** Aggregate cost for federal income tax purposes is substantially the same.
Currency abbreviations used in this schedule:
---------------------------------------------
CAD -- Canadian Dollar
GBP -- British Pound
EUR -- Euro
See Notes to Financial Statements.
22 Smith Barney Balanced Fund | 2000 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
and CCC predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. "BB" represents a lower degree of speculation than
"B", and "CCC" the highest degree of speculation. While such
bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Moody's 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 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.
23 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
Statement of Assets and Liabilities July 31, 2000
<S> <C>
ASSETS:
Investments, at value (Cost -- $648,702,631) $807,087,598
Cash 445
Collateral for securities on loan (Note 5) 62,957,928
Dividends and interest receivable 6,567,126
Receivable for securities sold 794,106
Receivable for Fund shares sold 232,607
Receivable for open forward foreign currency contracts (Note 8) 75,492
---------------------------------------------------------------------------------------------------------
Total Assets 877,715,302
---------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 5) 62,957,928
Payable for securities purchased 2,892,575
Payable for Fund shares purchased 588,402
Investment advisory fees payable 290,644
Administration fees payable 128,872
Distribution fees payable 55,986
Accrued expenses 370,974
---------------------------------------------------------------------------------------------------------
Total Liabilities 67,285,381
---------------------------------------------------------------------------------------------------------
Total Net Assets $810,429,921
=========================================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 54,728
Capital paid in excess of par value 641,226,033
Undistributed net investment income 7,512,155
Accumulated net realized gain from security transactions and foreign currencies 3,181,407
Net unrealized appreciation of investments and foreign currencies 158,455,598
---------------------------------------------------------------------------------------------------------
Total Net Assets $810,429,921
=========================================================================================================
Shares Outstanding:
Class A 29,411,631
-----------------------------------------------------------------------------------------------------
Class B 23,917,824
-----------------------------------------------------------------------------------------------------
Class L 1,010,509
-----------------------------------------------------------------------------------------------------
Class O 388,025
-----------------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $14.83
-----------------------------------------------------------------------------------------------------
Class B * $14.78
-----------------------------------------------------------------------------------------------------
Class L ** $14.79
-----------------------------------------------------------------------------------------------------
Class O ** $14.79
-----------------------------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value per share) $15.61
-----------------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $14.94
=========================================================================================================
</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.
24 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations For the Year Ended July 31, 2000
INVESTMENT INCOME:
<S> <C>
Interest $29,867,178
Dividends 5,370,741
---------------------------------------------------------------------------------------------------------
Total Investment Income 35,237,919
---------------------------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 4,575,346
Investment advisory fees (Note 2) 3,836,390
Administration fees (Note 2) 1,705,062
Shareholder and system servicing fees 749,986
Shareholder communications 223,739
Registration fees 117,612
Audit and legal 39,165
Custody 39,112
Trustees' fees 21,746
Pricing service fees 20,834
Other 13,540
---------------------------------------------------------------------------------------------------------
Total Expenses 11,342,532
---------------------------------------------------------------------------------------------------------
Net Investment Income 23,895,387
---------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTES 3 AND 8):
Realized Gain From:
Security transactions (excluding short-term securities) 3,190,764
Foreign currency transactions 626,507
---------------------------------------------------------------------------------------------------------
Net Realized Gain 3,817,271
---------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of year 102,319,889
End of year 158,455,598
---------------------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 56,135,709
---------------------------------------------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies 59,952,980
---------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $83,848,367
=========================================================================================================
</TABLE>
See Notes to Financial Statements.
25 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets For the Years Ended July 31,
2000 1999
=========================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $23,895,387 $27,456,408
Net realized gain 3,817,271 5,500,671
Increase in net unrealized appreciation 56,135,709 69,388,242
---------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 83,848,367 102,345,321
---------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (21,444,516) (23,023,939)
Net realized gains (4,876,562) (222,811,078)
---------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (26,321,078) (245,835,017)
---------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sales of shares 200,221,022 119,334,482
Net asset value of shares issued for reinvestment of dividends 21,356,539 201,028,376
Cost of shares reacquired (361,612,656) (323,959,616)
---------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Fund Share Transactions (140,035,095) (3,596,758)
---------------------------------------------------------------------------------------------------------
Decrease in Net Assets (82,507,806) (147,086,454)
NET ASSETS:
Beginning of year 892,937,727 1,040,024,181
---------------------------------------------------------------------------------------------------------
End of year* $810,429,921 $892,937,727
=========================================================================================================
* Includes undistributed net investment income of: $7,512,155 $4,537,718
=========================================================================================================
</TABLE>
See Notes to Financial Statements.
26 Smith Barney Balanced Fund | 2000 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 this Fund and seven other
separate investment funds: Smith Barney Convertible Fund, Smith Barney
Diversified Strategic Income Fund, Smith Barney High Income Fund, Smith Barney
Premium Total Return Fund, Smith Barney Municipal High Income Fund, Smith Barney
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, 2000, 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
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), 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 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.
Citi Fiduciary Trust Company ("CFTC"), formerly known as Smith Barney Private
Trust Company, another subsidiary of Citigroup, acts as the Trust's transfer
agent and PFPC Global Fund Services ("PFPC") acts as the Trust's sub-transfer
agent. CFTC receives account fees and asset-based fees that vary according to
the account size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder recordkeeping and
financial processing for all shareholder accounts and is paid by CFTC. During
the year ended July 31, 2000, the Fund paid transfer agent fees of $684,569 to
CFTC.
27 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Notes to Financial Statements (continued)
Effective June 5, 2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of
SSBH, became the Fund's distributor replacing CFBDS, Inc. ("CFBDS"). In
addition, SSB acts as the primary broker for the Fund's portfolio agency
transactions. Certain other broker-dealers, continue to sell Fund shares to the
public as members of the selling group. For the year ended July 31, 2000, SSB
and its affiliates received brokerage commissions of $16,889.
There are maximum initial sales charges of 5.00% and 1.00% for 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
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, 2000, SSB and CFBDS received sales charges of
$101,000 and $75,000 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 $3,000 $162,000 $2,000
================================================================================
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, 2000, total Distribution Plan
fees incurred were as follows:
Distribution
Plan Fees
================================================================================
Class A $ 922,310
--------------------------------------------------------------------------------
Class B 3,495,575
--------------------------------------------------------------------------------
Class L 115,833
--------------------------------------------------------------------------------
Class O 41,628
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the year ended July 31, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $358,480,438
--------------------------------------------------------------------------------
Sales 504,649,491
================================================================================
At July 31, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $190,938,434
Gross unrealized depreciation (32,553,467)
--------------------------------------------------------------------------------
Net unrealized appreciation $158,384,967
================================================================================
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 (plus accrued interest) of the collateral in
amounts at least equal to the repurchase price.
5. Lending of Portfolio Securities
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations. Fees earned by the Fund on securities lending are recorded as
interest income. Loans of securities by the Fund are collateralized by cash,
U.S. government securities or high quality money market instruments that are
maintained at all times in an amount at least equal to the current market value
of the loaned securities, plus a margin which may vary depending on the type of
securities loaned. The custodian establishes and maintains the collateral in a
segregated account. The Fund maintains exposure for the risk of any losses in
the investment of amounts received as collateral.
28 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Notes to Financial Statements (continued)
At July 31, 2000, the Fund loaned common stocks having a value of $62,740,883.
The Fund received cash collateral totalling $62,957,928. A portion of the cash
collateral amounting to $432,681 remained uninvested and the balance was
invested as follows:
Security Description Value
================================================================================
Time Deposits:
Bank Brussels Lambert, 6.690% due 8/1/00 $12,682,090
Caisse Des Depots Et Consignations,
6.660% due 8/1/00 7,270,352
Key Bank Corp., 6.640% due 8/1/00 11,464,786
Toronto Dominion Bank, 6.690% due 8/1/00 824,463
Wells Fargo Bank, 6.660% due 8/1/00 7,270,352
Floating Rate Notes:
AMSouth Bank, 5.730% due 1/25/01 1,096,354
Goldman, Sachs & Co., 5.280% due 8/23/00 7,154,613
Sigma Finance Corp., 6.020% due 9/14/00 14,536,521
Certificate of Deposit:
Comerica Bank, 5.860% due 2/14/01 225,716
--------------------------------------------------------------------------------
Total $62,525,247
================================================================================
Interest income earned by the Fund from securities loaned for the year ended
July 31, 2000 was $129,100.
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 a 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, 2000, the Fund had no open purchased call or put option contracts.
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, 2000, the Fund did not write any call or put
option contracts.
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, 2000, the Fund had no open futures contracts.
29 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Notes to Financial Statements (continued)
8. Forward Foreign Currency Contracts
At July 31, 2000, 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:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain
================================================================================
To Sell:
Euro 1,740,448 $1,625,114 12/15/2000 $65,905
Euro 133,000 124,187 12/15/2000 1,818
Euro 92,313 86,195 12/15/2000 1,169
Euro 125,000 116,717 12/15/2000 2,233
Canadian Dollar 291,125 196,578 12/8/2000 127
Canadian Dollar 461,531 311,643 12/8/2000 1,897
British Pound 1,073,000 1,611,128 12/22/2000 2,343
--------------------------------------------------------------------------------
75,492
--------------------------------------------------------------------------------
Net Unrealized Gain on Forward
Foreign Currency Contracts $75,492
================================================================================
9. Shares of Beneficial Interest
At July 31, 2000, the Trust had an unlimited number of shares of beneficial
interest authorized with a par value of $0.001 per share. The Fund has the
ability to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
expenses, specifically related to the distribution of its share.
At July 31, 2000, total paid-in capital amounted to the following for each
class:
Class A Class B Class L Class O
================================================================================
Total Paid-in Capital $401,648,117 $219,790,983 $14,148,291 $5,693,370
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 2000 July 31, 1999
---------------------------- ----------------------------
Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 11,999,498 $ 172,718,361 5,919,283 $ 81,549,199
Shares issued on reinvestment 687,541 9,884,487 4,606,069 56,520,992
Shares reacquired (5,700,646) (81,755,424) (4,974,702) (68,325,408)
-------------------------------------------------------------------------------------------------
Net Increase 6,986,393 $ 100,847,424 5,550,650 $ 69,744,783
=================================================================================================
Class B
Shares sold 1,334,840 $ 18,993,330 2,154,517 $ 29,356,635
Shares issued on reinvestment 775,062 11,044,262 1,468,647 139,771,603
Shares reacquired (19,313,105) (276,308,649) (7,345,693) (237,964,734)
-------------------------------------------------------------------------------------------------
Net Decrease (17,203,203) $(246,271,057) (3,722,529) $ (68,836,496)
=================================================================================================
</TABLE>
30 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Notes to Financial Statements (continued)
Year Ended Year Ended
July 31, 2000 July 31, 1999
-------------------- ---------------------
Shares Amount Shares Amount
--------------------------------------------------------------------------------
Class L
Shares sold 588,506 $ 8,372,402 577,934 $ 7,896,903
Shares issued on reinvestment 19,632 282,549 26,724 334,662
Shares reacquired (140,448) (1,998,385) (91,287) (1,238,215)
Net Increase 467,690 $ 6,656,566 513,371 $ 6,993,350
--------------------------------------------------------------------------------
Class O
Shares sold 9,574 $ 136,929 12,802 $ 177,899
Shares issued on reinvestment 10,158 145,241 134,052 1,634,462
Shares reacquired (109,393) (1,550,198) (204,621) (2,891,437)
Net Decrease (89,661) $ (1,268,028) (57,767) $ (1,079,076)
--------------------------------------------------------------------------------
Class Y(1)
Shares issued on reinvestment -- -- 27 $ 332
Shares reacquired -- -- (118) (1,535)
Net Decrease -- -- (91) $ (1,203)
--------------------------------------------------------------------------------
Class Z(2)
Shares sold -- -- 26,802 $ 353,846
Shares issued on reinvestment -- -- 225,868 2,766,325
Shares reacquired -- -- (989,658) (13,538,287)
Net Decrease -- -- (736,988) $(10,418,116)
--------------------------------------------------------------------------------
(1) At January 31, 1999, all Class Y shares were fully redeemed.
(2) At January 31, 1999, all Class Z shares were fully redeemed.
31 Smith Barney Balanced Fund | 2000 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:
Class A Shares 2000(1) 1999(1) 1998 1997 1996
================================================================================
Net Asset Value, Beginning of Year $13.86 $16.52 $15.53 $14.51 $14.03
--------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.45 0.45 0.70 0.80 0.83
Net realized and
unrealized gain 1.00 0.92 1.80 1.36 0.47
--------------------------------------------------------------------------------
Total Income From Operations 1.45 1.37 2.50 2.16 1.30
--------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.40) (0.37) (0.68) (0.82) (0.82)
Net realized gains (0.08) (3.66) (0.83) (0.32) --
--------------------------------------------------------------------------------
Total Distributions (0.48) (4.03) (1.51) (1.14) (0.82)
--------------------------------------------------------------------------------
Net Asset Value, End of Year $14.83 $13.86 $16.52 $15.53 $14.51
--------------------------------------------------------------------------------
Total Return 10.62% 12.27% 16.70% 15.48% 9.21%
--------------------------------------------------------------------------------
Net Assets, End of Year (millions) $436 $310 $279 $248 $266
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.04% 1.08% 1.05% 1.06% 1.04%
Net investment income 3.10 3.26 4.29 5.29 5.55
--------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 60% 110% 45% 58%
================================================================================
Class B Shares 2000(1) 1999(1) 1998 1997 1996
================================================================================
Net Asset Value, Beginning of Year $13.82 $16.49 $15.52 $14.51 $14.02
--------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.37 0.38 0.62 0.73 0.77
Net realized and
unrealized gain 1.01 0.93 1.80 1.35 0.47
--------------------------------------------------------------------------------
Total Income From Operations 1.38 1.31 2.42 2.08 1.24
--------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.34) (0.32) (0.62) (0.75) (0.75)
Net realized gains (0.08) (3.66) (0.83) (0.32) --
--------------------------------------------------------------------------------
Total Distributions (0.42) (3.98) (1.45) (1.07) (0.75)
--------------------------------------------------------------------------------
Net Asset Value, End of Year $14.78 $13.82 $16.49 $15.52 $14.51
--------------------------------------------------------------------------------
Total Return 10.09% 11.78% 16.17% 14.88% 8.78%
--------------------------------------------------------------------------------
Net Assets, End of Year (millions) $353 $568 $740 $951 $1,310
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.55% 1.56% 1.52% 1.52% 1.55%
Net investment income 2.60 2.81 3.87 4.85 5.13
--------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 60% 110% 45% 58%
================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
32 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Financial Highlights (continued)
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
Class L Shares 2000(1) 1999(1) 1998(2)
================================================================================
Net Asset Value, Beginning of Year $ 13.83 $16.52 $17.14
--------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.34 0.35 0.02
Net realized and unrealized
gain (loss) 1.01 0.91 (0.41)
--------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.35 1.26 (0.39)
--------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) (0.29) --
Net realized gains (0.08) (3.66) (0.23)
--------------------------------------------------------------------------------
Total Distributions (0.39) (3.95) (0.23)
--------------------------------------------------------------------------------
Net Asset Value, End of Year $ 14.79 $13.83 $16.52
--------------------------------------------------------------------------------
Total Return 9.87% 11.43% (2.28)%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s) $14,943 $7,508 $ 486
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.80% 1.85% 1.74%+
Net investment income 2.34 2.54 2.51+
--------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 60% 110%
================================================================================
Class O Shares 2000(1) 1999(1) 1998(1)(3) 1997(1) 1996
================================================================================
Net Asset Value, Beginning of Year $13.83 $16.50 $15.53 $14.51 $ 14.02
--------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.37 0.39 0.64 0.73 0.77
Net realized and unrealized gain 1.01 0.92 1.79 1.36 0.47
--------------------------------------------------------------------------------
Total Income From Operations 1.38 1.31 2.43 2.09 1.24
--------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.34) (0.32) (0.63) (0.75) (0.75)
Net realized gains (0.08) (3.66) (0.83) (0.32) --
--------------------------------------------------------------------------------
Total Distributions (0.42) (3.98) (1.46) (1.07) (0.75)
--------------------------------------------------------------------------------
Net Asset Value, End of Year $14.79 $13.83 $16.50 $15.53 $ 14.51
--------------------------------------------------------------------------------
Total Return 10.13% 11.79% 16.19% 15.01% 8.80%
--------------------------------------------------------------------------------
Net Assets, End of Year (000s) $5,738 $6,606 $8,838 $9,381 $11,441
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.53% 1.50% 1.48% 1.47% 1.50%
Net investment income 2.62 2.83 3.89 4.89 5.19
--------------------------------------------------------------------------------
Portfolio Turnover Rate 43% 60% 110% 45% 58%
================================================================================
(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.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
33 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<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, 2000, 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 auditing standards generally accepted
in the United States of America. 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, 2000, 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, 2000, 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
accounting principles generally accepted in the United States of America.
KPMG LLP
New York, New York
September 11, 2000
34 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
Tax Information (unaudited)
For Federal tax purposes the Fund hereby designates for the fiscal year ended
July 31, 2000:
. A corporate dividends received deduction of 21.27%.
. Total long-term capital gain distributions paid of $4,876,562.
A total of 4.72% 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.
35 Smith Barney Balanced Fund | 2000 Annual Report to Shareholders
<PAGE>
(This page intentionally left blank.)
<PAGE>
SMITH BARNEY
BALANCED FUND
TRUSTEES INVESTMENT ADVISER
Lee Abraham SSB Citi Fund Management LLC
Allan J. Bloostein
Jane F. Dasher DISTRIBUTOR
Donald R. Foley Salomon Smith Barney Inc.
Richard E. Hanson, Jr.
Paul Hardin CUSTODIAN
Heath B. McLendon, Chairman PFPC Trust Company
Roderick C. Rasmussen
John P. Toolan
TRANSFER AGENT
Citi Fiduciary Trust Company
OFFICERS 125 Broad Street, 11th Floor
Heath B. McLendon New York, New York 10004
President and
Chief Executive Officer
SUB-TRANSFER AGENT
PFPC Global Fund Services
Lewis E. Daidone P.O. Box 9699
Senior Vice President Providence, Rhode Island
and Treasurer 02940-9699
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
<PAGE>
Smith Barney Balanced Fund
This report is submitted for the general information of the shareholders of
Smith Barney Income Funds -- Smith Barney Balanced Fund, but it may also be
used as sales literature when proceeded or accompanied by the current
Prospectus, which gives details about charges, expenses, investment objectives
and operating policies of the Fund. If used as sales material after October
31, 2000, this report must be accompanied by performance information for the
most recently completed calendar quarter.
SMITH BARNEY BALANCED FUND
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
For complete information on any of the above Smith Barney Mutual Funds,
including management fees and expenses, call or write for a free prospectus.
Read it carefully before you invest or send money.
www.smithbarney.com/mutualfunds
[LOGO OF SALOMON SMITH BARNEY]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
FD0426 9/00
<PAGE>
--------------------------------------------------------------------------------
SMITH BARNEY
EXCHANGE RESERVE
FUND
--------------------------------------------------------------------------------
ANNUAL REPORT | JULY 31, 2000
[LOGO] Smith Barney
Mutual Funds
Your Serious Money, Professionally Managed.(SM)
--------------------------------------------------------------------------------
NOT FDIC INSURED o NOT BANK GUARANTEED o MAY LOSE VALUE
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
A Message from the Chairman
--------------------------------------------------------------------------------
[PHOTO]
HEATH B.
McLENDON
Chairman
Dear Shareholder:
For years, individuals and businesses have looked to the investment
professionals of SSB Citi Fund Management LLC ("SSB Citi") for thoughtful
insights and advice. For some, the solution has been an investment strategy,
incorporating multiple stock, bond and money market mutual funds. Others have
invested with specific portfolio managers who are recognized for their insights
and record.
Since the introduction of the first money fund in 1972, the explosive growth of
money funds has gone hand in hand with the growth of the entire mutual fund
industry. Over the last 28 years, millions of investors worldwide have made
money market funds a key part of their investment portfolios. Money funds now
represent approximately 23% of the $7.120 trillion mutual fund industry,
compared to 11% of bond funds, 61% of stock funds and 5% of hybrid funds.(1)
While all investments involve some degree of risk, money market funds provide
investors with an opportunity to earn current short-term interest rates with a
higher degree of liquidity than most other types of mutual funds.(2)
When you invest with SSB Citi, you can do so with the confidence that your
interests come first, your investment success is paramount and that the ultimate
in resources is being committed to your financial future. Thank you for
investing with us.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
August 29, 2000
----------
(1) Source: Investment Company Institute, June 30, 2000.
(2) Please note that an investment in a money market fund is not insured or
guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or any
other government agency. Although money market funds seek to preserve the
value of your investment at $1.00 per share, it is possible to lose money
by investing in a money market fund.
--------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 1
<PAGE>
--------------------------------------------------------------------------------
Shareholder Letter
--------------------------------------------------------------------------------
[PHOTO]
PHYLLIS M.
ZAHORODNY
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, 2000. In this report we
summarize the period's prevailing economic and market conditions and outline our
investment strategy. The information provided in this letter represents the
opinion of the manager and is not intended to be a forecast of future events, a
guarantee of future results nor investment advice.
Further, there is no assurance that certain securities will remain in or out of
the Fund. Please refer to page 5 for a complete list and percentage breakdown of
the Fund's holdings. A detailed summary of the Fund's performance and current
holdings can be found in the appropriate sections that follow. Also, please note
that any discussion of the Fund's holdings is as of July 31, 2000. We hope that
you find this report to be useful and informative.
Please note that an investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation ("FDIC") 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 and L shares as of
July 31, 2000:
Seven-Day Seven-Day
Current Yield Effective Yield (1)
------------- --------------
Class B 5.30% 5.44%
Class L 5.30% 5.44%
Market Update and Outlook
Throughout the second half of 1999, the Federal Reserve Board ("Fed") raised
interest rates three times (June 30, 1999, August 24, 1999 and November 16,
1999) from 4.75% to 5.50%. This action was taken to reverse the interest-rate
cuts made during 1998 in the face of an overall global
----------
(1) The seven-day effective yield is calculated similarly to the seven-day
yield, but when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The effective yield will be slightly higher
than the yield because of the compounding effect of the assumed
reinvestment.
--------------------------------------------------------------------------------
2 2000 Annual Report to Shareholders
<PAGE>
crisis. Throughout 2000, the U.S. economy has continued to exhibit signs of
strength and as a result, the Fed has implemented three additional interest rate
increases, with its latest rate increase of 50 basis points(2) at its May 16,
2000 Federal Open-Market Committee ("FOMC")(3) meeting. The federal funds rate
("fed funds rate")(4) is now targeted at 6.50%.
During Fed Chairman Alan Greenspan's semi-annual "Humphrey-Hawkins" testimony(5)
on monetary policy, he acknowledged that core inflation has picked up since the
beginning of the year and duly noted that the Fed would remain vigilant against
any imbalances between the growth of demand and potential supply. In his
testimony, Greenspan also pointed out that "while some signs of slower growth
were evident and justified standing pat at least for the time being, they were
not sufficiently compelling to alter our view (the Fed's) that the risks
remained more on the side of high inflation."
Economic data from the U.S. Department of Commerce has indicated that the
overall real Gross Domestic Product ("GDP")(6) has continued to show signs of
strength with second quarter growth reported at 5.2%. Going forward, the Fed
most likely will pay close attention to economic data releases to determine if
the cumulative effect of past tightenings have effectively contained potential
economic imbalances or if additional interest rate increases are needed.
In our opinion, Fed officials are likely to view the sustainability of any
overall slowing in the economy as questionable and may therefore be forced to
raise interest rates by another 50 basis points over the next six months.
Investment Strategy
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital. The Fund invests in high quality, U.S.
dollar-denominated short-term debt securities.
----------
(2) A basis point is 0.01% or one one-hundredth of a percent.
(3) The FOMC is a policy-making body of the Federal Reserve System, the U.S.
central bank, that is responsible for the formulation of policy design to
promote economic growth, full employment, stable prices and a sustainable
pattern of international trade and payments.
(4) The fed funds rate is the interest rate that banks with excess reserves at
a Federal Reserve district bank charge other banks that need overnight
loans. The fed funds rate often points to the direction of U.S. interest
rates.
(5) Humphrey-Hawkins testimony is a semi-annual testimony on monetary policy
given by the Fed to the U.S. Congress.
(6) GDP is the market value of the goods and services produced by labor and
property in the U.S. GDP is comprised on consumer and government
purchases, private domestic investments and net exports of goods and
services.
--------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 3
<PAGE>
During the reporting period, we targeted an average maturity in the range of 10
to 20 days as we expected short-term interest rates to rise. We anticipate that
a peak in short-term interest rates may occur later this year or early in 2001.
As a result, we will extend our maturities accordingly.
As of July 31, 2000, the Fund had 26 different issues with 59.8% of the Fund's
assets in bank obligations and 40.2% in corporate commercial paper.
Due to a strong U.S. economy and a high-quality approved list of issuers, the
credit quality of the Fund's investments remains strong. During the period under
review, we have added several companies, such as Coca-Cola Co., Alcoa Inc. and
Honeywell International Inc. to our approved list of issuers.
Thank you for investing in the Smith Barney Exchange Reserve Fund. We look
forward to continuing to help you pursue your financial goals in the future.
Sincerely,
/s/ Phyllis M. Zahorodny
Phyllis M. Zahorodny
Vice President and
Investment Officer
August 29, 2000
--------------------------------------------------------------------------------
4 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
==========================================================================================
<S> <C> <C> <C>
COMMERCIAL PAPER -- 80.4%
$ 5,000,000 Abbey National North America matures 8/7/00 6.56% $ 4,994,567
5,000,000 AT&T Corp. matures 8/21/00 6.51 4,982,000
5,000,000 Barclays US Funding matures 8/8/00 6.57 4,993,651
5,000,000 Baus Funding LLC matures 8/8/00 6.53 4,993,681
5,000,000 BBL NA Funding Corp. matures 8/11/00 6.57 4,990,930
5,000,000 BCI Funding Corp. matures 8/14/00 6.54 4,988,264
5,000,000 Bell Atlantic Financial Services matures 9/5/00 6.55 4,968,403
5,000,000 Daimler Chrysler North America Holding Corp.
matures 8/7/00 6.55 4,994,575
5,000,000 Dresdner US Finance Inc. matures 8/28/00 6.54 4,975,625
5,000,000 General Electric Capital International Funding
matures 8/15/00 6.54 4,987,361
5,000,000 General Motors Acceptance Corp. matures 8/10/00 6.53 4,991,875
5,000,000 Goldman, Sachs & Co. matures 8/9/00 6.58 4,992,733
5,000,000 J.P. Morgan & Co. matures 8/11/00 6.54 4,990,972
5,000,000 Lucent Technologies matures 9/6/00 6.54 4,967,550
2,500,000 Oesterreichische Kontrollbank matures 9/14/00 6.57 2,480,108
5,000,000 Procter & Gamble Co. matures 9/7/00 6.54 4,966,649
5,000,000 Province de Quebec matures 8/11/00 6.53 4,990,986
5,000,000 Siemens Capital matures 8/11/00 6.54 4,990,972
5,000,000 Transamerica Finance Corp. matures 8/7/00 6.54 4,994,567
2,641,000 Union Bank of Switzerland Finance matures 9/5/00 6.57 2,624,259
5,000,000 Walt Disney Co. matures 8/1/00 6.52 5,000,000
------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost -- $99,859,728) 99,859,728
==========================================================================================
TIME DEPOSITS -- 19.6%
4,376,000 Banc One Corp. matures 8/1/00 6.62 4,376,000
5,000,000 BNP Paribas SA matures 8/1/00 6.63 5,000,000
5,000,000 Chase Manhattan Bank matures 8/1/00 6.63 5,000,000
5,000,000 Credit Agricole Indosuez matures 8/1/00 6.63 5,000,000
5,000,000 Societe Generale matures 8/1/00 6.63 5,000,000
------------------------------------------------------------------------------------------
TOTAL TIME DEPOSITS
(Cost -- $24,376,000) 24,376,000
==========================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $124,235,728*) $124,235,728
==========================================================================================
</TABLE>
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 5
<PAGE>
--------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 2000
--------------------------------------------------------------------------------
ASSETS:
Investments, at amortized cost $124,235,728
Cash 737
Interest receivable 16,599
Receivable for Fund shares sold 19,675
Prepaid registration fees 280,070
--------------------------------------------------------------------------------
Total Assets 124,552,809
--------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 252,323
Investment advisory fees payable 28,445
Distribution fees payable 20,406
Administration fees payable 18,993
Accrued expenses 69,329
--------------------------------------------------------------------------------
Total Liabilities 389,496
--------------------------------------------------------------------------------
Total Net Assets $124,163,313
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 124,183
Capital paid in excess of par value 124,039,130
--------------------------------------------------------------------------------
Total Net Assets $124,163,313
================================================================================
Shares Outstanding:
Class B 94,924,910
--------------------------------------------------------------------------------
Class L 29,258,241
--------------------------------------------------------------------------------
Net Asset Value, Per Class $ 1.00
--------------------------------------------------------------------------------
See Notes to Financial Statements.
--------------------------------------------------------------------------------
6 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 2000
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $9,033,395
--------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 3) 774,777
Investment advisory fees (Note 3) 464,866
Administration fees (Note 3) 309,911
Registration fees 129,404
Shareholder and system servicing fees 123,773
Audit and legal 46,016
Shareholder communications 39,278
Custody 32,099
Trustees' fees 11,442
Other 9,420
--------------------------------------------------------------------------------
Total Expenses 1,940,986
--------------------------------------------------------------------------------
Net Investment Income 7,092,409
--------------------------------------------------------------------------------
Increase in Net Assets From Operations $7,092,409
================================================================================
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 7
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
--------------------------------------------------------------------------------
2000 1999
================================================================================
OPERATIONS:
Net investment income $ 7,092,409 $ 5,620,510
Net realized gain -- 14,111
--------------------------------------------------------------------------------
Increase in Net Assets From Operations 7,092,409 5,634,621
--------------------------------------------------------------------------------
DIVIDENDS TO SHAREHOLDERS (NOTE 2) (7,092,409) (5,620,510)
--------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 1,240,092,344 952,335,299
Net asset value of shares issued for
reinvestment of dividends 5,949,909 4,687,823
Cost of shares reacquired (1,269,342,786) (893,074,660)
--------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (23,300,533) 63,948,462
--------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (23,300,533) 63,962,573
NET ASSETS:
Beginning of year 147,463,846 83,501,273
--------------------------------------------------------------------------------
End of year $ 124,163,313 $ 147,463,846
================================================================================
See Notes to Financial Statements.
--------------------------------------------------------------------------------
8 2000 Annual Report to Shareholders
<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 Income Fund,
Smith Barney Premium Total Return Fund, Smith Barney Municipal High Income Fund,
Smith Barney Balanced Fund and Smith Barney Total Return Bond Fund. The
financial statements and financial highlights for the other Funds are presented
in separate 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; (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.
--------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 9
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
3. Investment Advisory Agreement, Administration Agreement and Other
Transactions
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), 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.
Citi Fiduciary Trust Company ("CFTC"), formerly known as Smith Barney Private
Trust Company, another subsidiary of Citigroup, acts as the Fund's transfer
agent and PFPC Global Fund Services acts as the Fund's sub-transfer agent. CFTC
receives fees and asset-based fees that vary according to the account size and
type of account. PFPC is responsible for shareholder recordkeeping and financial
processing for all shareholder accounts and is paid by CFTC. During the year
ended July 31, 2000, the Fund paid transfer agent fees of $95,343 to CFTC.
Effective June 5, 2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of
SSBH, became the Fund's distributor replacing CFBDS, Inc. In addition, SSB acts
as the primary broker for the Fund's portfolio agency transactions. Certain
other broker-dealers, continue to sell Fund shares to the public as members of
the selling group.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B shares,
which applies if redemption occurs within one year from purchase. This CDSC
declines by 0.50% the first year after purchase and thereafter declines by 1.00%
per year until no CDSC is incurred. 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, 2000, CDSCs paid to SSB were approximately:
Class B Class L
================================================================================
CDSCs $751,000 $98,000
================================================================================
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.
--------------------------------------------------------------------------------
10 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
For the year ended July 31, 2000, total Distribution Plan fees incurred were:
Class B Class L
================================================================================
Distribution Plan Fees $617,301 $157,476
================================================================================
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.
5. Shares of Beneficial Interest
The Trust 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. Class B and L shares are available through exchange only,
except that certain qualified and non-qualified retirement plans may make direct
purchases. 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, 2000 July 31, 1999
================================================================================
Class B
Shares sold 653,749,502 665,571,157
Shares issued on reinvestment 4,887,564 4,157,911
Shares reacquired (683,862,065) (623,800,133)
--------------------------------------------------------------------------------
Net Increase (Decrease) (25,224,999) 45,928,935
================================================================================
Class L
Shares sold 586,342,842 286,764,142
Shares issued on reinvestment 1,062,345 529,912
Shares reacquired (585,480,721) (269,274,527)
--------------------------------------------------------------------------------
Net Increase 1,924,466 18,019,527
================================================================================
--------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 11
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
<TABLE>
<CAPTION>
Class B Shares 2000(1) 1999(1) 1998 1997 1996
==============================================================================================================
<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 0.046 0.040 0.044 0.043 0.044
Dividends from
net investment income (0.046) (0.040) (0.044) (0.043) (0.044)
--------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------------------------------------------------------------------------------
Total Return 4.72% 4.05% 4.51% 4.43% 4.53%
--------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 95 $ 120 $ 74 $ 117 $ 150
--------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.25% 1.18% 1.21% 1.16% 1.17%
Net investment income 4.59 3.98 4.43 4.34 4.45
==============================================================================================================
<CAPTION>
Class L Shares 2000(1) 1999(1) 1998(2) 1997 1996
==============================================================================================================
<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 0.046 0.040 0.044 0.043 0.044
Dividends from
net investment income (0.046) (0.040) (0.044) (0.043) (0.044)
--------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------------------------------------------------------------------------------
Total Return 4.68% 4.04% 4.52% 4.42% 4.51%
--------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 29 $ 27 $ 9 $ 6 $ 9
--------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.26% 1.21% 1.21% 1.16% 1.17%
Net investment income 4.59 3.95 4.43 4.34 4.39
==============================================================================================================
</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.
--------------------------------------------------------------------------------
Tax Information (unaudited)
--------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
July 31, 2000:
A total of 0.44% 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.
--------------------------------------------------------------------------------
12 2000 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 Exchange Reserve Fund of
Smith Barney Income Funds as of July 31, 2000, 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 auditing standards generally
accepted in the United States of America. 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, 2000, 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,
2000, 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 accounting principles generally accepted in the United States
of America.
/s/ KPMG LLP
New York, New York
September 11, 2000
--------------------------------------------------------------------------------
Smith Barney Exchange Reserve Fund 13
<PAGE>
SALOMON SMITH BARNEY
--------------------
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
Michele Mirabella
Investment Officer
Irving P. David
Controller
Christina T. Sydor
Secretary
Investment Adviser
and Administrator
SSB Citi Fund Management LLC
Distributor
Salomon Smith Barney Inc.
PFS Distributors, Inc.
Custodian
PFPC Trust Company
Transfer Agent
Citi Fiduciary Trust Company
125 Broad Street, 11th Floor
New York, New York 10004
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
This report is submitted for the general information of the shareholders of
Smith Barney Income Funds -- Smith Barney Exchange Reserve Fund, but it may also
be used as sales literature when proceeded or accompanied by the current
Prospectus, which gives details about charges, expenses, investment objectives
and operating policies of the Fund. If used as sales material after October 31,
2000, this report must be accompanied by performance information for the most
recently completed calendar quarter.
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/mutualfunds
FD01183 9/00
<PAGE>
--------------------------------------------------------------------------------
SMITH BARNEY
CONVERTIBLE FUND
--------------------------------------------------------------------------------
CLASSIC SERIES | ANNUAL REPORT | JULY 31, 2000
[GRAPHIC OMITTED]
[LOGO] Smith Barney
Mutual Funds
Your Series Money. Professionally Managed.(SM)
-------------------------------------------------------
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
-------------------------------------------------------
<PAGE>
[LOGO] Classic Series
Annual Report . July 31, 2000
SMITH BARNEY
CONVERTIBLE FUND
[PHOTO OMITTED] ROSS S. MARGOLIES
PORTFOLIO MANAGER
--------------------------------------------------------------------------------
ROSS S. MARGOLIES
--------------------------------------------------------------------------------
Ross S. Margolies, a portfolio manager at Salomon Brothers Asset Management, has
more than 18 years of securities business experience.
Education: BA in Economics from Johns Hopkins University; MBA in Finance from
New York University
--------------------------------------------------------------------------------
FUND OBJECTIVE
--------------------------------------------------------------------------------
The Fund seeks current income and capital appreciation by investing primarily in
convertible securities. These are securities that may be converted to common
stock or other equity interests in the issuer at a predetermined price or rate.
The Fund also may invest up to 35% of its assets in "synthetic convertible
securities," equity securities and debt securities that are not convertible.
--------------------------------------------------------------------------------
FUND FACTS
--------------------------------------------------------------------------------
FUND INCEPTION
--------------------------------------------------------------------------------
September 9, 1986
MANAGER TENURE
--------------------------------------------------------------------------------
Since November 21, 1999
MANAGER INVESTMENT
INDUSTRY EXPERIENCE
--------------------------------------------------------------------------------
18 Years
CLASS A CLASS B CLASS L CLASS O
--------------------------------------------------------------------------------
NASDAQ SCRAX SCVSX CNVSL SCVOX
--------------------------------------------------------------------------------
INCEPTION 11/6/92 9/9/86 6/15/98 11/7/94
--------------------------------------------------------------------------------
Average Annual Total Returns as of July 31, 2000
Without Sales Charges(1)
Class A Class B Class L Class O
--------------------------------------------------------------------------------
One-Year 6.13% 5.59% 5.07% 5.57%
--------------------------------------------------------------------------------
Five-Year 7.41 6.88 N/A 6.87
--------------------------------------------------------------------------------
Ten-Year N/A 8.36 N/A N/A
--------------------------------------------------------------------------------
Since Inception+ 8.00 7.59 0.02 8.11
--------------------------------------------------------------------------------
With Sales Charges(2)
Class A Class B Class L Class O
--------------------------------------------------------------------------------
One-Year 0.84% 0.59% 3.04% 4.57%
Five-Year 6.32 6.73 N/A 6.87
Ten-Year N/A 8.36 N/A N/A
Since Inception+ 7.28 7.59 (0.44) 8.11
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A 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.
--------------------------------------------------------------------------------
What's Inside
A Message from the Chairman ............................................... 1
Shareholder Letter ........................................................ 2
Historical Performance .................................................... 5
Smith Barney Convertible Fund at a Glance ................................. 8
Schedule of Investments ................................................... 9
Bond Ratings .............................................................. 13
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
Tax Information ........................................................... 25
[LOGO] Smith Barney
Mutual Funds
Your Series Money. Professionally Managed.(SM)
----------------------------------------------------------------------------
Investment Products: Not FDIC Insured o Not Bank Guaranteed o May Lose Value
----------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
A Message from the Chairman
--------------------------------------------------------------------------------
[PHOTO OMITTED]
HEATH B. McLENDON
Chairman
Dear Shareholder:
For years, individuals and businesses have looked to the investment
professionals of SSB Citi Fund Management LLC ("SSB Citi") for thoughtful
insights and advice. For some, the solution has been a long-term investment
strategy, incorporating multiple stock and bond mutual funds. Others have
invested with specific portfolio managers who are recognized and respected for
the insights and record.
Your investment in the Smith Barney Convertible Fund represents an opportunity
for you, the serious investor, to take part in the convertible securities
market. Convertible securities, made up of convertible debt and convertible
preferred stock, represent a hybrid ownership interest combining features of
both bonds and stocks. When you invest in a convertible security an investor is
given the opportunity to acquire a debt instrument, with the rights to interest
and principal payments, without giving up the potential to participate in the
company's capital appreciation.
In evaluating convertible securities, Portfolio manager Ross S. Margolies and
his investment team analyze the fixed income characteristics of the security as
well as the equity characteristics of the underlying security. Margolies and his
investment team seek to carefully manage the Fund, with an objective to maximize
return potential while looking to minimize risk.
In our opinion, the lessons of the past may be used to better understand the
challenges and opportunities of the future. We also believe that expertise is
achieved through the intelligent application of knowledge and experience. Our
portfolio managers provide asset management expertise and have managed
portfolios across markets and cycles.
With economic growth robust, interest rates stable and inflationary pressures
apparently in check, many investors may not feel compelled to alter their
portfolio mixes. Yet, when times are good, it may make sense for investors to
contact their investment professional and re-examine their current asset
allocation to see if it still meets their age, tolerance for risk and investment
time horizon.
When you invest with SSB Citi, you can do so with the confidence that your
interests come first, your investment success is paramount and that the ultimate
in resources is being committed to your financial future. Thank you for
investing with us.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
September 5, 2000
--------------------------------------------------------------------------------
Smith Barney Convertible Fund 1
<PAGE>
--------------------------------------------------------------------------------
Shareholder Letter
--------------------------------------------------------------------------------
[PHOTO OMITTED]
ROSS S. MARGOLIES
Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Convertible
Fund ("Fund") for the year ended July 31, 2000. In this report we summarize the
period's prevailing economic and market conditions and outline our investment
strategy. The information provided in this letter represents the opinion of the
manager and is not intended to be a forecast of future events, a guarantee of
future results nor investment advice.
Further, there is no assurance that certain securities will remain in or out of
the Fund. Please refer to pages 9 through 12 for a complete list and percentage
breakdown of the Fund's holdings. A detailed summary of the Fund's performance
and current holdings can be found in the appropriate sections that follow. Also,
please note that any discussion of the Fund's holdings is as of July 31, 2000.
We hope that you find this report to be useful and informative.
Performance Overview
For the year ended July 31, 2000, the Fund's Class A shares, without and with
sales charges, returned 6.13% and 0.84%, respectively. In comparison, the
Standard & Poor's 500 Index ("S&P 500")(1) returned 8.97% and the Salomon Smith
Barney Broad Investment Grade ("SSB BIG") Index(2) returned 5.88% for the same
time period.
Investment Strategy
As noted in our January 2000 mid-year shareholder report, the current portfolio
management team of Salomon Brothers Asset Management ("SaBAM") was appointed the
Fund's sub-advisor on November 21, 1999. During the last few weeks of 1999 we
restructured the portfolio and began to employ the current investment strategy.
The goal of this strategy is to meet the Fund's investment objectives of current
income and capital appreciation by investing primarily in convertible securities
while taking advantage of the attractive risk and reward characteristics that
these securities offer.
Convertible securities are bonds or preferred stocks that may be converted into
common stock or other equity interests in the issuer at a predetermined price or
rate. In evaluating a convertible security, we analyze the fixed income
characteristics of the security, as well as the equity characteristics of the
underlying common stock. Our goal is to maximize return potential while also
reducing risk by providing income and helping to preserve principal for our
shareholders. In our opinion, as the convertible bond market has evolved over
the past few years, risk control has become more important for portfolio
managers in this asset class.
While no guarantees can be made, we have positioned the Fund to behave like a
classic convertible fund, participating in the upside potential of common stocks
while still providing some degree of downside support and a high level of
current income. We have positioned the Fund's portfolio as less equity sensitive
than the broad convertible market, which currently has a large component of
"deep in the money" convertibles. ("Deep in the money" refers to a convertible
security whose exercise price is well below the market price of the underlying
stock.) However, this did not come about because of a top-down investment
strategy(3) but because we generally look to purchase convertibles that we think
have a real investment value floor.
Market Overview and Outlook
The convertible market experienced stronger-than-
__________
(1) The S&P 500 is a market capitalization-weighted measure of 500 widely held
common stocks. An investor cannot invest directly in an index.
(2) The SSB BIG Index includes institutionally traded U.S. Treasury Bonds,
government-sponsored bonds (U.S. Agency and supranational),
mortgage-backed securities and corporate securities. An investor cannot
invest directly in an index.
(3) A 'top-down' investment strategy is a method of first looking at trends in
the general economy and then identifying those industries and companies
that are expected to benefit from those trends.
--------------------------------------------------------------------------------
2 2000 Annual Report to Shareholders
<PAGE>
average returns during the reporting period. In our view, much of this can be
attributed to the characteristics of the new issues from this period, which
changed the market's composition. This included strong representation from
Technology, Biotechnology and Telecommunication companies, as well as
participation from the energy sector. All of these sectors--other than
telecommunications (which has declined sharply in recent months)--led the
convertible and equity markets during the past year. We think that the new
selections available within the convertible market offer our shareholders
interesting opportunities to participate in the long-term growth of these market
sectors while enjoying the downside risk protection that convertibles can offer.
In addition to the evolving composition of the market, the overall economic,
stock and bond market environments have had an effect on the convertible market.
The series of interest rate increases instituted by the Federal Reserve Board
("Fed") have kept the stock and bond markets from appreciating much during the
Fund's fiscal year. It now appears that this spate of increases is nearing an
end as they have started to have a negative effect on the U.S. economy. We
believe that this Fed strategy of cooling off the economy without causing a
recession (i.e. a "soft landing") will be successful.
While the U.S. economy is well into a record economic expansion, the rest of the
world was emerging from either a recession or slow growth late last year. We
believe that the continued recovery of the global economy will help support the
U.S. economy during this period of rising U.S. interest rates. Just as
importantly, today's business environment is a global one, with factors around
the world affecting many U.S. companies. In an environment with slower U.S.
growth but continued global expansion, earnings growth should continue for most
companies. In this environment, we plan to stick to our investment style of
focusing on bottom-up security analysis,(4) with an emphasis on using the
convertible structure to quantify and reduce downside risk. (Of course, no
guarantees can be made that our approach will be successful.)
Portfolio Update
The portfolio's restructuring was completed late last year. Despite having broad
representation across the market since the end of 1999, the Fund's performance
has primarily come from the growth sectors of the market. The three sectors that
contributed most to Fund performance during this period were Technology,
Healthcare (including Biotechnology) and Energy while the Consumer Cyclicals,
Basic Industry, and Telecommunication sectors had significant negative
contributions. The composition of our top twenty individual contributors to the
Fund's performance during the period is follows:
Sector Number of Holdings
------ ------------------
Technology 11
Healthcare 4
Financial 2
Energy 1
Consumer 1
Communications 1
--
Total 20
While our investment approach involves a bottom-up security selection, as of
July 31, 2000 the Fund has significant representation across market sectors
including 24.9% Technology, 16.2% Energy, 14.6% Consumer Cyclicals, 8.3%
Communications and 7.3% Healthcare. We believe that the best current investment
opportunities in the market may be in the Communications, Consumer Cyclical and
Energy sectors. However, we have also been able to gain significant exposure to
the fast growing Technology and Healthcare sectors by using the natural
defensive structure of convertibles to provide some downside protection. This
individual security selection has led the portfolio to investments that we
believe have favorable risk and reward ratios.
__________
(4) Bottom-up investing is a search for outstanding performance of individual
stocks before considering the impact of economic trends.
--------------------------------------------------------------------------------
Smith Barney Convertible Fund 3
<PAGE>
The overall portfolio continues to be positioned more defensively than the broad
convertible market. Our results will be highly influenced by security selection
as the portfolio has lower than market equity sensitivity. (This means that when
the stock market moves up or down our portfolio will react less than the
convertible market.) A benefit that we have received for giving up some upside
potential is that we have a much higher than market amount of investment value
support (this is the convertible feature that provides downside protection).
Overall, while the broad convertible market is somewhat riskier and more
volatile than normal, we believe that the Fund continues to be positioned to
behave like a classical convertible fund. This means participating in the upside
potential of common stocks while still providing some degree of downside support
and a high level of current income.
Thank you for your investment in the Smith Barney Convertible Fund. We look
forward to helping you pursue your financial goals in the future.
Sincerely,
/s/ Ross S. Margolies
Ross S. Margolies
Investment Officer
September 5, 2000
--------------------------------------------------------------------------------
Top Ten Holdings* As of July 31, 2000
--------------------------------------------------------------------------------
1. Costco Cos., Inc. 3.6%
--------------------------------------------------------------------------------
2. Federated Department Stores, Inc. 3.2
--------------------------------------------------------------------------------
3. Quantum Corp. 2.9
--------------------------------------------------------------------------------
4. Verizon Communications 2.8
--------------------------------------------------------------------------------
5. Devon Energy Corp. 2.7
--------------------------------------------------------------------------------
6. Diamond Offshore Drilling, Inc. 2.7
--------------------------------------------------------------------------------
7. Pogo Producing Co. 2.3
--------------------------------------------------------------------------------
8. Wendy's International, Inc. 2.3
--------------------------------------------------------------------------------
9. Tosco Corp. 2.2
--------------------------------------------------------------------------------
10. Solectron Corp. 2.2
--------------------------------------------------------------------------------
* As a percentage of total investments.
--------------------------------------------------------------------------------
4 2000 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>
7/31/00 $15.25 $15.50 $0.65 $0.00 $0.00 6.13%
----------------------------------------------------------------------------------------------------------------------------
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 $5.55 $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>
7/31/00 $15.22 $15.45 $0.59 $0.00 $0.00 5.59%
----------------------------------------------------------------------------------------------------------------------------
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
============================================================================================================================
Total $6.49 $2.10 $0.05
============================================================================================================================
</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>
7/31/00 $15.18 $15.36 $0.56 $0.00 $0.00 5.07%
----------------------------------------------------------------------------------------------------------------------------
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 $1.25 $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>
7/31/00 $15.19 $15.41 $0.59 $0.00 $0.00 5.57%
------------------------------------------------------------------------------------------------------------------------------------
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 $3.74 $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>
7/31/00 $15.34 $15.61 $0.70 $0.00 $0.00 6.62%
------------------------------------------------------------------------------------------------------------------------------------
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 $3.44 $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 7/31/00 6.13% 5.59% 5.07% 5.57% 6.62%
------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/00 7.41 6.88 N/A 6.87 N/A
------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/00 N/A 8.36 N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/00 8.00 7.59 0.02 8.11 6.87
====================================================================================================================================
<CAPTION>
With Sales Charges(2)
------------------------------------------------------------------------------
Class A Class B Class L Class O Class Y
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 7/31/00 0.84% 0.59% 3.04% 4.57% 6.62%
------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 7/31/00 6.32 6.73 N/A 6.87 N/A
------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 7/31/00 N/A 8.36 N/A N/A N/A
------------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/00 7.28 7.59 (0.44) 8.11 6.87
====================================================================================================================================
</TABLE>
--------------------------------------------------------------------------------
6 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Cumulative Total Returns
--------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (Inception* through 7/31/00) 81.21%
--------------------------------------------------------------------------------
Class B (7/31/90 through 7/31/00) 123.10
--------------------------------------------------------------------------------
Class L (Inception* through 7/31/00) 0.04
--------------------------------------------------------------------------------
Class O (Inception* through 7/31/00) 56.25
--------------------------------------------------------------------------------
Class Y (Inception* through 7/31/00) 34.67
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B, L and O shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum 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 1990 -- July 2000
[The following table was depicted 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 1990 10,000 10,000 10,000
July 1991 10,786 11,277 10,977
July 1992 12,655 12,719 12,855
July 1993 14,351 13,830 15,182
July 1994 14,567 14,543 15,701
July 1995 15,994 18,340 17,775
July 1996 17,099 21,377 19,298
July 1997 21,595 30,001 23,010
July 1998 21,921 35,792 24,570
July 1999 21,129 43,020 27,021
July 2000 22,310 47,328 33,136
+ Hypothetical illustration of $10,000 invested in Class B shares on July
31, 1990, assuming reinvestment of dividends and capital gains, if any, at
net asset value through July 31, 2000. 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
63 mutual funds, as of July 31, 2000, investing in convertible securities.
The indices are unmanaged and are 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 depicted as a bar chart in the printed material.]
Basic Industries 4.0%
Capital Goods 2.7%
Communications 8.3%
Consumer Cyclicals 14.6%
Consumer Non-Cyclicals 8.8%
Energy 16.2%
Financial Services 4.3%
Healthcare 7.3%
Technology 24.9%
Transportation 1.5%
Other 7.4%
Investment Breakdown*
--------------------------------------------------------------------------------
[The following table was depicted as a pie chart in the printed material.]
Convertible Preferred Stock 24.2%
Warrants 0.5%
Repurchase Agreement 6.9%
Convertible Bonds and Notes 56.0%
Common Stock 12.4%
* As a percentage of total investments.
--------------------------------------------------------------------------------
8 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments July 31, 2000
--------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 12.4%
Basic Industries -- 1.2%
35,000 AK Steel Holding Corp. $ 352,187
80,000 Crown Cork & Seal Co., Inc. 1,115,000
--------------------------------------------------------------------------------
1,467,187
--------------------------------------------------------------------------------
Communications -- 1.3%
5,000 SBC Communications Inc. 212,812
30,500 Verizon Communications 1,433,500
--------------------------------------------------------------------------------
1,646,312
--------------------------------------------------------------------------------
Consumer Cyclicals -- 3.1%
160,000 Federated Department Stores, Inc. (a) 3,850,000
--------------------------------------------------------------------------------
Consumer Non-Cyclicals -- 5.1%
1,000,000 Delhaize America, Inc. (b) 665,000
70,000 Hormel Foods Corp. 1,133,125
100,000 Nabisco Group Holdings Corp. 2,650,000
20,000 Philip Morris Cos., Inc. 505,000
25,000 Safeway Inc. (a) 1,126,563
40,000 Tyson Foods, Inc., Class A Shares 375,000
--------------------------------------------------------------------------------
6,454,688
--------------------------------------------------------------------------------
Energy -- 0.9%
10,000 Diamond Offshore Drilling, Inc. (b) 375,625
75,000 Tesoro Petroleum Corp. (a) 717,187
--------------------------------------------------------------------------------
1,092,812
--------------------------------------------------------------------------------
Technology -- 0.8%
4,500 Corning Inc. 1,052,719
--------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $17,916,213) 15,563,718
================================================================================
CONVERTIBLE PREFERRED STOCK -- 24.2%
Basic Industries -- 2.8%
55,000 International Paper Capital Trust, 5.250% 2,234,375
LTV Corp.:
1,800 Series A, 8.250% 68,175
30,700 8.250% (c) 1,162,762
--------------------------------------------------------------------------------
3,465,312
--------------------------------------------------------------------------------
Capital Goods -- 1.6%
100,000 Ingersoll-Rand Co., 6.750% 2,056,250
--------------------------------------------------------------------------------
Communications -- 2.9%
35,000 ICG Funding LLC, 6.750% (b) 1,303,750
86,500 Morgan Stanley Dean Witter & Co.,
6.000% (d) 540,625
35,000 UnitedGlobalCom, Inc., Series D, 7.000% 1,715,000
--------------------------------------------------------------------------------
3,559,375
--------------------------------------------------------------------------------
Consumer Cyclicals -- 3.2%
31,400 Host Marriot Financial Trust, 6.750% 1,169,650
65,000 Wendy's Financing I, Series A, 5.000% 2,827,500
--------------------------------------------------------------------------------
3,997,150
--------------------------------------------------------------------------------
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Convertible Fund 9
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Consumer Non-Cyclicals -- 1.7%
67,300 Sinclair Broadcast Group, Inc., 6.000% $ 2,153,600
--------------------------------------------------------------------------------
Energy -- 6.2%
40,000 Kerr-McGee Corp., 5.500% (e) 1,680,000
12,500 Nuevo Financing, Series A, 5.750% 331,250
25,000 Pogo Trust I, Series A, 6.500% 1,281,250
150,000 Tesoro Petroleum Corp., 7.250% 1,593,750
60,000 Tosco Financing Trust, 5.750% 2,805,000
--------------------------------------------------------------------------------
7,691,250
--------------------------------------------------------------------------------
Financial Services -- 4.3%
65,000 CNB Capital Trust I, 6.000% 1,998,750
10,000 Equity Office Properties Trust, Series B,
5.250% 457,500
15,000 Lincoln National Corp., 7.750% 346,875
35,000 PLC Capital Trust II, 6.500% 1,627,500
13,000 St. Paul Capital LLC, 6.000% 979,875
--------------------------------------------------------------------------------
5,410,500
--------------------------------------------------------------------------------
Transportation -- 1.5%
40,000 Canadian National Railway Co., 5.250% 1,860,000
--------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost -- $32,584,138) 30,193,437
================================================================================
FACE
AMOUNT RATING(f) SECURITY VALUE
================================================================================
CONVERTIBLE BONDS-- 56.0%
Capital Goods -- 1.1%
$ 1,500,000 B Mark IV Industries, 4.750% due 11/1/04 1,415,625
--------------------------------------------------------------------------------
Communications -- 4.1%
Bell Atlantic Financial Services Corp. (g):
1,500,000 A+ 5.750% due 4/1/03 (h) 1,458,750
500,000 A+ 4.250% due 9/15/05 (c)(i) 588,750
3,250,000 B- NTL Inc., 5.750% due 12/15/09 (c) 2,287,188
500,000 BB- Rogers Communications, Inc., 2.000%
due 11/26/05 431,875
500,000 BBB+ U.S. Cellular Corp., zero coupon due 6/15/15 323,750
--------------------------------------------------------------------------------
5,090,313
--------------------------------------------------------------------------------
Consumer Cyclicals -- 8.3%
Costco Cos., Inc.:
500,000 A- Zero coupon due 8/19/17 (c) 403,750
5,000,000 A- Zero coupon due 8/19/17 4,037,500
2,225,000 BB+ Hilton Hotels Corp., 5.000% due 5/15/06 1,793,906
The Interpublic Group Co. Inc.:
250,000 NR 1.800% due 9/16/04 279,687
1,750,000 A 1.870% due 6/12/06 (b) 1,642,813
12,500,000 Caa2* Sunbeam Corp., zero coupon due 3/25/18 2,250,000
--------------------------------------------------------------------------------
10,407,656
--------------------------------------------------------------------------------
See Notes to Financial Statements.
--------------------------------------------------------------------------------
10 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
FACE
AMOUNT RATING(f) SECURITY VALUE
================================================================================
Consumer Non-Cyclicals -- 2.0%
$ 2,000,000 BBB- Clear Channel Communications, Inc.,
1.500% due 12/1/02 $ 1,980,000
500,000 A+ Goldman Sachs Group, 0.500%
due 1/21/04 (j) 476,250
--------------------------------------------------------------------------------
2,456,250
--------------------------------------------------------------------------------
Energy -- 9.1%
4,000,000 BBB+ Devon Energy Corp., zero coupon
due 6/27/20 (c) 1,670,000
2,750,000 A- Diamond Offshore Drilling Inc., 3.750%
due 2/15/07 2,963,125
2,500,000 B- Friede Goldman Halter, Inc., 4.500%
due 9/15/04 1,581,250
1,750,000 Baa2* Kerr-McGee Corp., 7.500%
due 5/15/14 1,734,688
2,000,000 BB- Pogo Producing Co., 5.500%
due 6/15/06 1,612,500
1,750,000 BBB- Seacor Holdings Inc., 5.375%
due 11/15/06 1,798,125
--------------------------------------------------------------------------------
11,359,688
--------------------------------------------------------------------------------
Healthcare -- 7.3%
1,500,000 NR Affymetrix Inc., 4.750% due 2/15/07 (c) 1,057,500
1,000,000 B Alpharma Inc., 3.000% due 6/1/06 (b) 2,085,000
750,000 BB+ Healthsouth Corp., 3.250% due 4/1/03 583,125
2,000,000 NR Invitrogen Corp., 5.500% due 3/1/07 (c) 1,840,000
1,500,000 Aaa* Novartis AG, 2.000% due 10/6/02 2,201,325
3,000,000 NR Roche Holdings Inc., zero coupon
due 5/16/12 (c) 1,413,750
--------------------------------------------------------------------------------
9,180,700
--------------------------------------------------------------------------------
Technology -- 24.1%
1,750,000 B+ Adaptec Inc., 4.750% due 2/1/04 1,500,625
600,000 CCC+ Advanced Micro Devices, Inc., 6.000%
due 5/15/05 1,179,000
2,000,000 CCC+ Amazon.com, Inc., 4.750% due 2/1/09 1,095,000
2,750,000 BB- America Online Inc., zero coupon
due 12/6/19 1,395,625
750,000 B Antec Corp., 4.500% due 5/15/03 (b) 1,227,187
1,000,000 B2* ASM Lithography Holding N.V., 4.250%
due 11/30/04 (c) 1,240,000
2,000,000 B Citrix Systems Inc., zero coupon
due 3/22/19 635,000
CommScope, Inc.:
225,000 Baa3* 4.000% due 12/15/06 231,106
775,000 Baa3* 4.000% due 12/15/06 (c) 791,469
300,000 B+ Comverse Technology, Inc., 4.500%
due 7/1/05 1,231,125
Cypress Semiconductor Corp.:
50,000 B 6.000% due 10/1/02 79,750
2,250,000 B 3.750% due 7/1/05 2,050,312
1,750,000 B- Integrated Process Equipment Corp.,
6.250% due 9/15/04 1,391,250
2,000,000 B- Juniper Networks Inc., 4.750% due 3/15/07 2,200,000
5,000,000 NR Network Associates, Inc., zero coupon
due 2/13/18 1,812,500
4,500,000 B+ Quantum Corp., 7.000% due 8/1/04 3,563,459
1,750,000 NR Redback Networks Inc., 5.000%
due 4/1/07 (c) 1,660,313
4,500,000 BBB Solectron Corp., zero coupon due 5/8/20 2,795,625
TriQuint Semiconductor, Inc.:
250,000 CCC+ 4.000% due 3/1/07 203,438
1,500,000 CCC+ 4.000% due 3/1/07 (c) 1,201,875
325,000 B2* Vitesse Semiconductor Corp., 4.000%
due 3/15/05 (c) 271,375
4,500,000 BBB+ Xerox Corp., 0.570% due 4/21/18 2,306,250
--------------------------------------------------------------------------------
30,062,284
--------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost -- $68,978,414) 69,972,516
================================================================================
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Convertible Fund 11
<PAGE>
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
===================================================================================================
<S> <C> <C>
WARRANTS (a) -- 0.5%
46,000 Federated Dept. Stores, Inc., Expire 12/19/01 $ 178,250
15,000 Fleet Boston Corp., Expire 1/26/01 428,438
---------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $768,762) 606,688
===================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===================================================================================================
<S> <C> <C>
REPURCHASE AGREEMENT -- 6.9%
$ 8,656,000 Morgan Stanley Dean Witter & Co., 6.530% due 8/1/00;
Proceeds at maturity -- $8,657,569; (Fully
collateralized by U.S. Treasury Notes and Bonds, 4.500%
to 6.375% due 8/15/00 to 2/15/07; Market value --
$8,874,561) (Cost -- $8,656,000) 8,656,000
===================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $128,903,527**) $124,992,359
===================================================================================================
</TABLE>
(a) Non-income producing security.
(b) All or a portion of this security is on loan (See Note 6).
(c) 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.
(d) Convertible into shares of WorldCom, Inc. common stock.
(e) Convertible into shares of Devon Energy Corp. common stock.
(f) All ratings are by Standard & Poor's Ratings Service with the exception of
those identified by an asterisk (*), which are rated by Moody's Investors
Service, Inc.
(g) On July 3, 2000, Bell Atlantic Corp. and GTE Corp. merged. The surviving
company was renamed Verizon Communications.
(h) Convertible into shares of New Zealand Telecom common stock.
(i) Convertible into shares of NTL Inc. and Cable Wireless PLC common stock.
(j) Convertible into shares of Hormel Foods Corp. common stock.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 13 for definition of bond ratings.
See Notes to Financial Statements.
--------------------------------------------------------------------------------
12 2000 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
"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 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, B -- Bonds rated "BB" and "B" are regarded, on balance, as
and CCC predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the
obligation. "BB" represents a lower degree of speculation than
"B," and "CCC" the highest degree of speculation. While such
bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Moody's 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 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.
Caa -- Bonds that are rated "Caa" are of poor standing. Such issues may
be in default or present elements of danger with respect to
principal or interest.
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, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $128,903,527) $ 124,992,359
Cash 696
Collateral for securities on loan (Note 6) 5,848,322
Receivable for securities sold 4,868,674
Dividends and interest receivable 884,985
Receivable for Fund shares sold 26,632
--------------------------------------------------------------------------------
Total Assets 136,621,668
--------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 6) 5,848,322
Payable for securities purchased 4,489,946
Investment advisory fees payable 51,352
Payable for Fund shares purchased 27,610
Administration fees payable 20,565
Distribution fees payable 1,304
Accrued expenses 109,281
--------------------------------------------------------------------------------
Total Liabilities 10,548,380
--------------------------------------------------------------------------------
Total Net Assets $ 126,073,288
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 8,095
Capital paid in excess of par value 134,434,217
Undistributed net investment income 765,567
Accumulated net realized loss from security
transactions and foreign currencies (5,223,423)
Net unrealized depreciation of investments (3,911,168)
--------------------------------------------------------------------------------
Total Net Assets $ 126,073,288
================================================================================
Shares Outstanding:
Class A 1,406,275
---------------------------------------------------------------------------
Class B 855,534
---------------------------------------------------------------------------
Class L 17,523
---------------------------------------------------------------------------
Class O 20,831
---------------------------------------------------------------------------
Class Y 5,795,238
Net Asset Value:
Class A (and redemption price) $ 15.50
---------------------------------------------------------------------------
Class B * $ 15.45
---------------------------------------------------------------------------
Class L ** $ 15.36
---------------------------------------------------------------------------
Class O ** $ 15.41
---------------------------------------------------------------------------
Class Y (and redemption price) $ 15.61
---------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26%
of net asset value per share) $ 16.32
---------------------------------------------------------------------------
Class L (net asset value plus 1.01%
of net asset value per share) $ 15.52
===========================================================================
</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.
--------------------------------------------------------------------------------
14 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations For the Year Ended July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest $ 5,276,837
Dividends 2,902,576
--------------------------------------------------------------------------------
Total Investment Income 8,179,413
--------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 685,152
Administration fees (Note 2) 274,061
Distribution fees (Note 2) 187,786
Registration fees 120,745
Shareholder and system servicing fees 65,535
Shareholder communications 45,100
Audit and legal 43,127
Trustees' fees 20,351
Custody 12,268
Pricing service fees 5,197
Other 8,719
--------------------------------------------------------------------------------
Total Expenses 1,468,041
--------------------------------------------------------------------------------
Net Investment Income 6,711,372
--------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (53,907)
Foreign currency transactions (25,400)
--------------------------------------------------------------------------------
Net Realized Loss (79,307)
--------------------------------------------------------------------------------
Change in Net Unrealized Depreciation of Investments:
Beginning of year (5,738,798)
End of year (3,911,168)
--------------------------------------------------------------------------------
Decrease in Net Unrealized Depreciation 1,827,630
--------------------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies 1,748,323
--------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 8,459,695
================================================================================
</TABLE>
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>
2000
1999
=====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 6,711,372 $ 6,713,328
Net realized loss (79,307) (5,081,416)
(Increase) decrease in net unrealized depreciation 1,827,630 (5,574,411)
-------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 8,459,695 (3,942,499)
-------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2):
Net investment income (6,129,174) (6,407,643)
Net realized gains -- (4,074,052)
-------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (6,129,174) (10,481,695)
--------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 9,745,512 34,308,284
Net asset value of shares issued
for reinvestment of dividends 1,296,152 3,497,766
Cost of shares reacquired (31,817,839) (24,850,065)
---------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Fund Share Transactions (20,776,175) 12,955,985
---------------------------------------------------------------------------------------
Decrease in Net Assets (18,445,654) (1,468,209)
NET ASSETS:
Beginning of year 144,518,942 145,987,151
----------------------------------------------------------------------------------------
End of year* $ 126,073,288 $ 144,518,942
========================================================================================
* Includes undistributed net investment income of: $ 765,567 $ 171,334
========================================================================================
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
16 2000 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 issue discount, is recorded
on an accrual basis; (e) gains or losses on the sale of securities are
calculated using the specific identification method; (f) dividends and
distributions to shareholders are recorded on the ex-dividend date; (g) direct
expenses are charged to each class; management fees and general fund expenses
are allocated on the basis of relative net assets; (h) the Fund intends to
comply with the applicable provisions of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (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, 2000, 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
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), acts as investment adviser to the Trust. 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.
Citi Fiduciary Trust Company ("CFTC"), formerly known as Smith Barney Private
Trust Company, another subsidiary of Citigroup, acts as the Trust's transfer
agent and PFPC Global Fund Services ("PFPC") acts as the Trust's sub-transfer
agent. CFTC receives account fees and asset-based fees that vary according to
the account
--------------------------------------------------------------------------------
Smith Barney Convertible Fund 17
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
size and type of account. PFPC is responsible for shareholder recordkeeping and
financial processing for all shareholder recordkeeping and financial processing
for all shareholder accounts and is paid by CFTC. During the year ended July 31,
2000, the Fund paid transfer agent fees of $44,804 to CFTC.
Effective June 5, 2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of
SSBH, became the Fund's distributor replacing CFBDS, Inc. ("CFBDS"). In
addition, SSB acts as the primary broker for the Fund's portfolio agency
transactions. Certain other broker-dealers continue to sell Fund shares to the
public as members of the selling group. For the year ended July 31, 2000, SSB
and its affiliates received no brokerage commissions.
There are maximum initial sales charges of 5.00% and 1.00% for 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, 2000, SSB and CFBDS received sales charges of
$19,000 and $1,000 on sales of the Fund's Class A and L shares, respectively. In
addition, CDSCs paid to SSB were approximately $23,000 for Class B shares.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B, L and O shares calculated at the annual rate of 0.25% of the average
daily net assets of each respective class. The Fund also pays a distribution fee
with respect to Class B, L and O shares calculated at the annual rate of 0.50%,
0.75% and 0.45% of the average daily net assets of each class, respectively.
For the year ended July 31, 2000, total Distribution Plan fees incurred were:
Class A Class B Class L Class O
================================================================================
Distribution
Plan Fees $ 57,682 $123,611 $ 3,537 $ 2,956
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the year ended July 31, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $208,237,436
--------------------------------------------------------------------------------
Sales 227,330,185
================================================================================
At July 31, 2000, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 6,910,387
Gross unrealized depreciation (10,821,555)
--------------------------------------------------------------------------------
Net unrealized depreciation $ (3,911,168)
================================================================================
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 (plus accrued interest) 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
--------------------------------------------------------------------------------
18 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
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, 2000, 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 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, 2000, the Fund did not write any call or put
option contracts.
6. Lending of Portfolio Securities
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations, and receives a lenders fee. Fees earned by the Fund on securities
lending are recorded in interest income. Loans of securities by the Fund are
collateralized by cash, U.S. government securities or high quality money market
instruments that are maintained at all times in an amount at least equal to the
current market value of the securities loaned, plus a margin which may vary
depending on the type of securities loaned. The custodian establishes and
maintains the collateral in a segregated account. The Fund maintains exposure
for the risk of any losses in the investment of amounts received as collateral.
At July 31, 2000, the Fund loaned common stocks having a value of $5,509,899.
The Fund received cash collateral totalling $5,848,322. A portion of the cash
collateral amounting to $63,993 remained uninvested and the balance was invested
as follows:
Security Description Value
================================================================================
Time Deposits:
Bank Brussels Lambert, 6.690% due 8/1/00 $1,875,660
Caisse Des Depots Et Consignations,
6.660% due 8/1/00 1,075,274
Key Bank Corp., 6.640% due 8/1/00 1,695,624
Toronto Dominion Bank, 6.690% due 8/1/00 62,497
Wells Fargo Bank, 6.660% due 8/1/00 1,075,274
--------------------------------------------------------------------------------
Total $5,784,329
================================================================================
Interest income earned by the Fund from securities loaned for the year ended
July 31, 2000 was $47,715.
--------------------------------------------------------------------------------
Smith Barney Convertible Fund 19
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
-------------------------------------------------------------------------------
7. Shares of Beneficial Interest
At July 31, 2000, 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, 2000, 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 $19,806,712 $16,007,878 $ 311,320 $ 427,304 $97,889,098
================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 2000 July 31, 1999
---------------------------- ----------------------------
Shares Amount Shares Amount
=============================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 135,905 $ 2,050,145 136,322 $ 2,095,560
Shares issued on reinvestment 52,418 783,486 121,000 1,853,157
Shares reacquired (496,699) (7,407,215) (659,488) (10,153,855)
-------------------------------------------------------------------------------------------------------------
Net Decrease (308,376) $ (4,573,584) (402,166) $ (6,205,138)
=============================================================================================================
Class B
Shares sold 45,749 $ 687,108 85,020 $ 1,307,023
Shares issued on reinvestment 32,872 489,177 101,749 1,556,010
Shares reacquired (640,004) (9,506,752) (876,431) (13,432,261)
-------------------------------------------------------------------------------------------------------------
Net Decrease (561,383) $ (8,330,467) (689,662) $(10,569,228)
=============================================================================================================
Class L
Shares sold 4,338 $ 64,803 27,844 $ 429,273
Shares issued on reinvestment 609 9,011 1,417 21,652
Shares reacquired (23,012) (336,542) (6,109) (93,180)
-------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (18,065) $ (262,728) 23,152 $ 357,745
=============================================================================================================
Class O
Shares sold 62 $ 957 180 $ 2,762
Shares issued on reinvestment 976 14,478 4,379 66,947
Shares reacquired (17,881) (266,378) (59,200) (915,187)
-------------------------------------------------------------------------------------------------------------
Net Decrease (16,843) $ (250,943) (54,641) $ (845,478)
=============================================================================================================
Class Y
Shares sold 469,700 $ 6,942,499 1,965,698 $ 30,473,666
Shares reacquired (915,355) (14,300,952) (16,550) (255,582)
-------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (445,655) $ (7,358,453) 1,949,148 $ 30,218,084
=============================================================================================================
</TABLE>
--------------------------------------------------------------------------------
20 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 2000(1) 1999(1) 1998 1997 1996(1)
==========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 15.25 $ 16.90 $ 18.61 $ 15.66 $ 15.27
----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.69 0.69 0.73 0.78 0.74
Net realized and unrealized gain (loss) 0.21 (1.24) (0.39) 3.28 0.38
----------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.90 (0.55) 0.34 4.06 1.12
----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.65) (0.66) (0.79) (0.75) (0.73)
Net realized gains -- (0.44) (1.26) (0.36) --
----------------------------------------------------------------------------------------------------------
Total Distributions (0.65) (1.10) (2.05) (1.11) (0.73)
----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.50 $ 15.25 $ 16.90 $ 18.61 $ 15.66
----------------------------------------------------------------------------------------------------------
Total Return 6.13% (3.11)% 1.97% 26.94% 7.41%
----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $21,794 $26,141 $35,780 $38,803 $34,888
----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.34% 1.29% 1.25% 1.27% 1.40%
Net investment income 4.62 4.45 4.09 4.61 4.68
----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 167% 27% 49% 57% 59%
==========================================================================================================
<CAPTION>
Class B Shares 2000(1) 1999(1) 1998 1997 1996(1)
==========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 15.22 $ 16.89 $ 18.60 $ 15.66 $ 15.27
----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.61 0.61 0.64 0.69 0.66
Net realized and unrealized gain (loss) 0.21 (1.24) (0.38) 3.28 0.39
----------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.82 (0.63) 0.26 3.97 1.05
----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.59) (0.60) (0.71) (0.67) (0.66)
Net realized gains -- (0.44) (1.26) (0.36) --
----------------------------------------------------------------------------------------------------------
Total Distributions (0.59) (1.04) (1.97) (1.03) (0.66)
----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.45 $ 15.22 $ 16.89 $ 18.60 $ 15.66
----------------------------------------------------------------------------------------------------------
Total Return 5.59% (3.61)% 1.51% 26.29% 6.91%
----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $13,216 $21,559 $35,570 $42,927 $42,420
Ratios to Average Net Assets:
Expenses 1.86% 1.76% 1.74% 1.77% 1.90%
Net investment income 4.10 3.98 3.60 4.12 4.18
----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 167% 27% 49% 57% 59%
==========================================================================================================
</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, except where noted:
<TABLE>
<CAPTION>
Class L Shares 2000(1) 1999(1) 1998(2)
==========================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $15.18 $16.90 $17.14
----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.53 0.53 0.05
Net realized and unrealized gain (loss) 0.21 (1.24) (0.17)
----------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.74 (0.71) (0.12)
----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.56) (0.57) (0.12)
Net realized gains -- (0.44) --
----------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (1.01) (0.12)
----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $15.36 $15.18 $16.90
----------------------------------------------------------------------------------------------------------
Total Return 5.07% (4.08)% (0.74)%++
----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 270 $ 540 $ 210
----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.34% 2.30% 1.98%+
Net investment income 3.64 3.39 2.51+
----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 167% 27% 49%
==========================================================================================================
<CAPTION>
Class O Shares 2000(1) 1999(1) 1998(3) 1997 1996(1)
==========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $15.19 $16.87 $18.58 $15.64 $15.27
----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.60 0.61 0.63 0.67 0.67
Net realized and unrealized gain (loss) 0.21 (1.25) (0.37) 3.31 0.37
----------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.81 (0.64) 0.26 3.98 1.04
----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.59) (0.60) (0.71) (0.68) (0.67)
Net realized gains -- (0.44) (1.26) (0.36) --
----------------------------------------------------------------------------------------------------------
Total Distributions (0.59) (1.04) (1.97) (1.04) (0.67)
----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $15.41 $15.19 $16.87 $18.58 $15.64
----------------------------------------------------------------------------------------------------------
Total Return 5.57% (3.66)% 1.53% 26.37% 6.82%
----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 321 $ 572 $1,557 $1,252 $ 641
----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.90% 1.78% 1.70% 1.74% 1.86%
Net investment income 4.06 4.00 3.63 4.14 4.17
----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 167% 27% 49% 57% 59%
==========================================================================================================
</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.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
--------------------------------------------------------------------------------
22 2000 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 2000(1) 1999(1) 1998 1997 1996(1)(2)
============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 15.34 $ 16.98 $ 18.66 $ 15.68 $16.15
------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.78 0.76 0.77 0.83 0.38
Net realized and unrealized gain (loss) 0.19 (1.25) (0.35) 3.31 (0.46)
------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.97 (0.49) 0.42 4.14 (0.08)
------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.70) (0.71) (0.84) (0.80) (0.39)
Net realized gains -- (0.44) (1.26) (0.36) --
------------------------------------------------------------------------------------------------------------
Total Distributions (0.70) (1.15) (2.10) (1.16) (0.39)
------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.61 $ 15.34 $ 16.98 $ 18.66 $15.68
------------------------------------------------------------------------------------------------------------
Total Return 6.62% (2.68)% 2.42% 27.44% (0.56)%++
------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $90,472 $95,707 $72,870 $29,080 $9,189
------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.87% 0.83% 0.83% 0.85% 1.00%+
Net investment income 5.10 4.87 4.49 5.04 4.98+
------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 167% 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, 2000, 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 auditing standards generally accepted
in the United States of America. 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, 2000, 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 Convertible Fund of Smith Barney Income Funds as of July 31, 2000, 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 accounting principles generally accepted in the United States of
America.
/s/ KPMG LLP
New York, New York
September 11, 2000
--------------------------------------------------------------------------------
24 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Tax Information (unaudited)
--------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
July 31, 2000:
o A corporate dividends received deduction of 37.17%.
--------------------------------------------------------------------------------
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
Ross S. Margolies
Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser
SSB Citi Fund Management LLC
Distributor
Salomon Smith Barney Inc.
Custodian
PFPC Trust Company
Transfer Agent
Citi Fiduciary Trust Company
125 Broad Street, 11th Floor
New York, New York 10004
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
This report is submitted for the general information of shareholders of Smith
Barney Convertible Fund, but it may also be used as sales literature when
proceeded or accompanied by the current Prospectus, which gives details about
charges, expenses, investment objectives and operating policies of the Fund. If
used as sales material after October 31, 2000, this report must be accompanied
by performance information for the most recently completed calendar quarter.
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/mutualfunds
FD01020 9/00
<PAGE>
--------------------------------------------------------------------------------
SMITH BARNEY
MUNICIPAL HIGH
INCOME FUND
--------------------------------------------------------------------------------
CLASSIC SERIES | ANNUAL REPORT | JULY 31, 2000
[LOGO] Smith Barney
Mutual Funds
Your Serious Money, Professionally Managed.(SM)
--------------------------------------------------------------------------------
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
[LOGO] Classic Series
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[PHOTO OMITTED]
PETER M. COFFEY
PORTFOLIO MANAGER
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Annual Report . July 31, 2000
SMITH BARNEY
MUNICIPAL HIGH INCOME FUND
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PETER M. COFFEY
--------------------------------------------------------------------------------
Peter M. Coffey has more than 31 years of securities business experience and
assumed management of the Fund on February 3, 1999.
--------------------------------------------------------------------------------
FUND OBJECTIVE
--------------------------------------------------------------------------------
The Fund seeks to maximize current income exempt from federal income taxes by
investing primarily in intermediate-term and long-term municipal securities
rated medium investment grade, low investment grade or below investment grade by
a nationally recognized rating organization or if unrated, of comparable
quality.
--------------------------------------------------------------------------------
FUND FACTS
--------------------------------------------------------------------------------
FUND INCEPTION
--------------------------------------------------------------------------------
September 16, 1985
MANAGER TENURE
--------------------------------------------------------------------------------
1 Year
MANAGER INVESTMENT
INDUSTRY EXPERIENCE
--------------------------------------------------------------------------------
31 Years
CLASS A CLASS B CLASS L
--------------------------------------------------------------------------------
NASDAQ STXAX SXMTX SMHLX
--------------------------------------------------------------------------------
Inception 11/6/92 9/16/85 11/17/94
--------------------------------------------------------------------------------
Average Annual Total Returns as of July 31, 2000
Without Sales Charges(1)
Class A Class B Class L
--------------------------------------------------------------------------------
One-Year (1.00)% (1.52)% (1.61)%
--------------------------------------------------------------------------------
Five-Year 4.78 4.24 4.16
--------------------------------------------------------------------------------
Ten-Year N/A 5.64 N/A
--------------------------------------------------------------------------------
Since Inception+ 5.36 7.03 5.95
--------------------------------------------------------------------------------
With Sales Charges(2)
Class A Class B Class L
--------------------------------------------------------------------------------
One-Year (4.97)% (5.70)% (3.51)%
--------------------------------------------------------------------------------
Five-Year 3.92 4.09 3.96
--------------------------------------------------------------------------------
Ten-Year N/A 5.64 N/A
--------------------------------------------------------------------------------
Since Inception+ 4.81 7.03 5.77
--------------------------------------------------------------------------------
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 4.00% and 1.00%,
respectively; and Class B shares reflect the deduction of a 4.50% CDSC,
which applies if shares are redeemed within one year from initial purchase
and thereafter declines by 0.50% the first year after purchase and by
1.00% per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC which applies if shares are redeemed within the
first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Inception dates for Class A, B and L shares are November 6, 1992,
September 16, 1985 and November 17, 1994, respectively.
--------------------------------------------------------------------------------
What's Inside
A Message from the Chairman ............................................... 1
Shareholder Letter ........................................................ 2
Historical Performance .................................................... 4
Smith Barney Municipal High Income Fund at a Glance ....................... 6
Schedule of Investments ................................................... 7
Bond Ratings .............................................................. 16
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
Tax Information ........................................................... 27
Independent Auditors' Report .............................................. 28
[LOGO] Smith Barney
Mutual Funds
Your Serious Money, Professionally Managed.(SM)
--------------------------------------------------------------------------------
Not FDIC Insured . Not Bank Guaranteed . May Lose Value
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
A Message from the Chairman
--------------------------------------------------------------------------------
[PHOTO OMITTED]
HEATH B. MCLENDON
Chairman
For years, individuals and their families and businesses have considered the
investment professionals of Smith Barney Fund Management LLC ("SSB Citi") for
market insight and advice. For some, the solution has been a long-term
investment strategy, incorporating multiple stock and bond mutual funds. Others
have invested with specific portfolio managers who are recognized and respected
for their insights and track records.
The Smith Barney Municipal High Income Fund, which seeks to maximize current
income exempt from federal income taxes,(1) represents an opportunity for you,
the serious investor, to consider investing in intermediate-term and long-term
municipal securities. Portfolio Manager Peter M. Coffey seeks to select
securities primarily by identifying what he believes to be undervalued sectors
and individual securities, while also selecting securities that he thinks may
benefit from changes in market conditions.
In our opinion, the lessons of the past may be used to better understand the
challenges and opportunities of the future. We also believe that expertise is
achieved through the intelligent application of knowledge and experience. Our
portfolio managers provide asset management expertise and have managed
portfolios across up and down markets and cycles.
With economic growth robust, interest rates stable and inflationary pressures
apparently in check, many investors may not feel compelled to alter their
portfolio mixes. Yet, when times are good, it may be prudent for investors to
consider adding a bond fund to their investment plan to cushion the effects of
stock market volatility and gain additional income potential.
When you invest with SSB Citi, you can do so with the confidence that your
interests come first, your investment success is paramount and that the ultimate
in resources is being committed to your financial future. Thank you for
investing with us.
Sincerely,
/s/ Heath B McLendon
Heath B McLendon
Chairman
August 25, 2000
----------
(1) Please note a portion of the Fund's income may be subject to the
Alternative Minimum Tax ("AMT").
--------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 1
<PAGE>
--------------------------------------------------------------------------------
Shareholder Letter
--------------------------------------------------------------------------------
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, 2000. In this report we
summarize the period's prevailing economic and market conditions and outline our
investment strategy. The information provided in this letter represents the
opinion of the manager and is not intended to be a forecast of future events, a
guarantee of future results nor investment advice.
Further, there is no assurance that certain securities will remain in or out of
the Fund. Please refer to pages 7 through 15 for a complete list and percentage
breakdown of the Fund's holdings. A detailed summary of the Fund's performance
and current holdings can be found in the appropriate sections that follow. Also,
please note that any discussion of the Fund's holdings is as of July 31, 2000.
We hope that you find this report to be useful and informative.
Performance Update
For the year ended July 31, 2000, the Fund's Class A shares, without and with
sales charges, reported negative total returns 1.00% and 4.97%, respectively. In
comparison to its Lipper, Inc. ("Lipper")(1) peer group average of general
municipal debt funds returned 2.17% for the same period.
Market and Economic
Overview and Outlook Currently, we see three overriding factors affecting the
municipal bond market:
. The outlook for the economy;
. Federal Reserve Board ("Fed") monetary policy tightening; and
. The collapsing supply of U.S. Treasury securities as the U.S. surplus
continues to expand.
In our opinion, of these three, the overriding factor currently affecting the
bond market is the outlook for the U.S. economy -- namely growth rates,
inflation risk and the possible need for additional Fed tightening.
The bond markets received some comfort on this front during Fed Chairman Alan
Greenspan's testimony to Congress on July 20, 2000. The testimony offered high
endorsement for a "soft landing" outcome for the economies. Greenspan weighed in
on the side of a growing market consensus that prospects for continuing solid
U.S. growth with low inflation. Although we anticipated that he would be
cautiously optimistic, the Chairman's tone was a little more confident than we
had expected. In our opinion, his thinking implies that it may take a very
compelling set of data and market developments to prompt an aggressive rate hike
in the next few months.
Nonetheless, Greenspan was careful to point out that it is "much too soon" to
declare inflation risks contained. If we are correct, that near-term demand
indicators may prove too strong for comfort (given the upward rise in underlying
inflation so far this year), it is possible that the latest Fed tightening cycle
may not be complete.
Greenspan's immediate optimism rests in part on evidence that the recent slowing
in consumer spending is fundamental. The flattening in stocks is curbing wealth
effects. Consumer debt burdens are weighing more heavily as interest rates rise.
The rise in energy prices has exacted the equivalent of a $75 billion tax hike
by diverting discretionary income. Against that backdrop, near-term data may
provide an important test of whether tentative slowing has gained momentum or
leveled off at a still threatening pace.
We expect second quarter gross domestic product ("GDP")(2) growth will end up
near 4%, with the pace for the rest of this year not far from that. The
continued stream of upbeat profit reports does not seem consistent with a sharp
slowing in activity. In particular, business investment spending and production
in new technology industries remains very strong.
__________
(1) Lipper is a major independent fund-tracking organization. The Fund's
calculation of the Lipper peer group average includes the reinvestment of
all capital gains and dividends without the effects of sales charges.
(2) GDP is the market value of the goods and services produced by labor and
property in the U.S. GDP is comprised on consumer and government
purchases, private domestic investments and net exports of goods and
services.
--------------------------------------------------------------------------------
2 2000 Annual Report to Shareholders
<PAGE>
Chairman Greenspan pointed to the sharp rise in measures of capital spending.
Perhaps more important for immediate Fed policy, a resilient stock market may
continue to buoy consumer spending via lingering wealth effects, especially if
the restraint from higher gasoline prices recedes somewhat. The upturn in
consumer confidence measures in recent weeks may be an indirect reminder that
there still may be ample reason for policymakers to err on the side of restraint
this summer.
Putting all of this together, we believe that the Fed may not be quite done
raising interest rates. However, the bond markets -- including municipals --
have often historically begun to rally before the Fed was finished. Once the
markets begin to believe that a tightening phase is nearing an end, they often
begin to do better, in the belief that:
. Inflation risks has been reduced to seemingly comfortable levels;
. Short-term interest rates are nearing a peak; and
. The total return performance on bonds should begin to improve. (Of
course, there are no guarantees that this will occur.)
A second key factor in the evolving bond market environment is the increasing
shortage of U.S. Treasury securities resulting from the expanding federal
government surplus. Using the most recent projections from the Congressional
Budget Office, we believe that gross issuance of U.S. Treasury debt may decline
to negligible levels by fiscal year 2003. This forecast is, of course, sensitive
to a number of factors, including the strength of the U.S. economy, and future
tax and spending legislation.
Nevertheless, we believe it is clear that the once-dominant role U.S. Treasury
securities played in the bond markets may already be at an end. As a
consequence, the key role Treasuries played as benchmarks from which to measure
the relative attractiveness of other bonds may also be at an end as well. With
the global marketplace awash in U.S. dollars, and the U.S. Treasury issuing
fewer and fewer new Treasuries, major shortage of Treasuries has already taken
place. The result has been that U.S. Treasury yields have fallen farther and
faster than yields on the other bonds, including corporate bonds, agency
securities and municipal bonds.
In summary, we think municipals may be attractively priced relative to
underlying inflation rates, in an environment of very light supply and muted or
near-dormant institutional demand.
Investment Strategy
As previously noted, the Fund seeks to maximize current income exempt from
federal income taxes(3) by investing primarily in intermediate-term and
long-term municipal securities rated medium investment-grade, low
investment-grade or below investment-grade(4) by a nationally recognized rating
organization or if unrated, of comparable quality.
Preferred sectors in the Fund include hospital bonds (18.1%), housing bonds
(15.3%) and industrial development bonds (14.2%). In our view, these issues tend
to represent opportunities for higher yield at good relative values.
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 in the future.
Sincerely,
/s/ Peter M. Coffey
Peter M. Coffey
Vice President
August 25, 2000
__________
(3) Please note a portion of the Fund's income may be subject to the
Alternative Minimum Tax ("AMT").
(4) Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody's
Investors Service, Inc. or AAA, AA, A and BBB by Standard & Poor's Ratings
Service; or that have an equivalent rating by any nationally recognized
statistical rating organization; or are determined by the manager to be of
equivalent quality.
--------------------------------------------------------------------------------
Smith Barney Municipal 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>
7/31/00 $16.98 $15.78 $0.95 $0.05 $0.00 (1.00)%
-----------------------------------------------------------------------------------------------------
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 $7.72 $1.06 $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>
7/31/00 $16.99 $15.79 $0.87 $0.05 $0.00 (1.52)%
-----------------------------------------------------------------------------------------------------
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
=====================================================================================================
Total $9.43 $1.32 $0.04
=====================================================================================================
</TABLE>
--------------------------------------------------------------------------------
4 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
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>
7/31/00 $16.96 $15.76 $0.85 $0.05 $0.00 (1.61)%
-----------------------------------------------------------------------------------------------------
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 $4.97 $0.77 $0.04
=====================================================================================================
</TABLE>
--------------------------------------------------------------------------------
Average Annual Total Returns
--------------------------------------------------------------------------------
Without Sales Charges(1)
-----------------------------------
Class A Class B Class L
================================================================================
Year Ended 7/31/00 (1.00)% (1.52)% (1.61)%
--------------------------------------------------------------------------------
Five Years Ended 7/31/00 4.78 4.24 4.16
--------------------------------------------------------------------------------
Ten Years Ended 7/31/00 N/A 5.64 N/A
--------------------------------------------------------------------------------
Inception* through 7/31/00 5.36 7.03 5.95
================================================================================
With Sales Charges(2)
-----------------------------------
Class A Class B Class L
================================================================================
Year Ended 7/31/00 (4.97)% (5.70)% (3.51)%
--------------------------------------------------------------------------------
Five Years Ended 7/31/00 3.92 4.09 3.96
--------------------------------------------------------------------------------
Ten Years Ended 7/31/00 N/A 5.64 N/A
--------------------------------------------------------------------------------
Inception* through 7/31/00 4.81 7.03 5.77
================================================================================
--------------------------------------------------------------------------------
Cumulative Total Returns
--------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (Inception* through 7/31/00) 49.82%
--------------------------------------------------------------------------------
Class B (7/31/90 through 7/31/00) 73.09
--------------------------------------------------------------------------------
Class L (Inception* through 7/31/00) 39.09
================================================================================
(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.
--------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 5
<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 1990 -- July 2000
[The following table was depicted as a line graph in the printed material.]
SBMuniHiInc Lehman
----------- ------
July 1990 10000 10000
July 1991 10740 10873
July 1992 12189 12367
July 1993 13198 13461
July 1994 13277 13712
July 1995 14061 14792
July 1996 14868 15768
July 1997 16337 17385
July 1998 17319 18428
July 1999 17575 18959
July 2000 17309 19777
+ Hypothetical illustration of $10,000 invested in Class B shares on July
31, 1990, assuming reinvestment of dividends and capital gains, if any, at
net asset value through July 31, 2000. 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. An investor cannot
invest directly in an index. 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* Summary of Investments by Combined Ratings
----------------------------- -----------------------------------------------
3.1% Education Standard Percentage
1.4% General Obligation Moody's &Poor's of Total Investments
18.1% Hospital -----------------------------------------------
15.3% Housing Aaa AAA 11.5%
14.2% Industrial Development Aa AA 2.3
9.7% Life Care Systems A A 4.6
4.8% Pollution Control Baa BBB 25.8
12.5% Transportation Ba BB 9.4
7.3% Utility B B 1.0
3.3% Water & Sewer Caa CCC 0.2
10.3% Other Ca CC 0.4
NR NR 44.8
-----
100.0%
=====
* As a percentage of total investments.
--------------------------------------------------------------------------------
6 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
======================================================================================================================
<S> <C> <C> <C>
MUNICIPAL BONDS AND NOTES -- 100%
Alabama -- 1.3%
$ 4,000,000 BB+ Alabama IDA (Boise Cascade Project), 6.450% due 12/1/23 (b) $ 3,755,000
1,750,000 NR Capstone Improvement District of Brookwood, AL, Series A,
7.700% due 8/15/23 1,682,188
1,500,000 AAA Jefferson County, AL Sewer Revenue, Capital Improvement Warrants, Series A,
5.000% due 2/1/33 1,335,000
----------------------------------------------------------------------------------------------------------------------
6,772,188
----------------------------------------------------------------------------------------------------------------------
Alaska -- 0.5%
3,000,000 NR Juneau, AK City & Boro, (St. Ann's Care Center Inc.), Non-recourse Revenue,
6.875% due 12/1/25 2,718,750
----------------------------------------------------------------------------------------------------------------------
Arizona -- 3.1%
2,900,000 BBB+ Arizona Health Facilities Authority Revenue, Catholic Healthcare West, Series A,
6.625% due 7/1/20 2,900,000
2,500,000 NR Flagstaff, AZ IDA, (Living Community Northern Community Project),
6.300% due 9/1/38 2,112,500
Maricopa County, AZ IDA, Multi-Family Housing Revenue:
5,280,000 NR 6.500% due 7/1/29 4,910,400
1,965,000 NR 7.400% due 7/1/29 1,886,400
2,500,000 NR 10.000% due 5/1/31 2,509,375
1,350,000 NR Series C, 10.000% due 4/1/30 1,363,500
----------------------------------------------------------------------------------------------------------------------
15,682,175
----------------------------------------------------------------------------------------------------------------------
Arkansas -- 0.8%
4,000,000 BBB- Arkansas State Development Financing Authority Hospital Revenue,
Washington Regional Medical Center, 7.375% due 2/1/29 3,940,000
----------------------------------------------------------------------------------------------------------------------
California -- 3.0%
6,000,000 NR Barona, CA Band of Mission Indians GO, 8.250% due 1/1/20 6,142,500
1,690,000 A- Los Angeles, CA Regional Airports Improvement, Corporate Lease Revenue,
LA International Airport, 6.800% due 1/1/27 (b) 1,728,025
3,800,000 Aaa* San Bernardino County, CA Single-Family Mortgage Revenue, Series A-1,
GNMA/FNMA-Collateralized, 6.250% due 12/1/31 3,885,500
3,000,000 Ba2* Vallejo, CA COP, Lease Revenue, Touro University, 7.375% due 6/1/29 3,015,000
----------------------------------------------------------------------------------------------------------------------
14,771,025
----------------------------------------------------------------------------------------------------------------------
Colorado -- 2.1%
Colorado Health Facilities Authority Revenue:
1,100,000 NR Health & Residential Care Facilities, 6.000% due 7/1/29 (b) 906,125
2,500,000 NR Volunteers of America, Series A, 5.875% due 7/1/28 2,021,875
4,750,000 BBB+ Colorado Springs, CO Airport Revenue, Series A, 7.000% due 1/1/22 (b) 4,892,500
205,000 BBB+ Denver, CO City & County Airport Revenue, Series A, 7.500% due 11/15/23 (b) 219,350
2,730,000 NR Highline Business Importation Distribution, Littleton CO, Series B,
8.750% due 12/15/19 2,743,650
----------------------------------------------------------------------------------------------------------------------
10,783,500
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 7
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
======================================================================================================================
<S> <C> <C> <C>
Connecticut -- 1.4%
$ 2,000,000 AAA Connecticut State Airport Revenue, Bradley International Airport, FGIC-Insured,
7.650% due 10/1/12 $ 2,217,500
4,000,000 NR Connecticut State Development Authority Industrial Development Revenue,
AFCO Cargo, 8.000% due 4/1/30 3,990,000
1,000,000 BBB- Connecticut State Health & Educational Facilities, University of Hartford,
Series D, 6.800% due 7/1/22 1,008,750
----------------------------------------------------------------------------------------------------------------------
7,216,250
----------------------------------------------------------------------------------------------------------------------
Delaware -- 0.7%
4,000,000 NR Sussex County, DE Assisted Living Facility Revenue, (Heritage at Milford Project),
7.250% due 7/1/29 3,675,000
----------------------------------------------------------------------------------------------------------------------
District of Columbia -- 1.4%
6,500,000 BBB- District of Columbia COP, 7.300% due 1/1/13 6,849,375
----------------------------------------------------------------------------------------------------------------------
Florida -- 2.2%
4,250,000 NR Hillsborough County, FL IDA Revenue, (Lakeshore Villas Project), Series A,
6.700% due 7/1/21 3,883,438
2,800,000 A3* Hillsborough County, FL Utility Revenue, Series A, 7.000% due 8/1/14 2,909,200
2,100,000 NR Orange County, FL HFA, Multi-Family Revenue, Series C,
9.000% due 1/1/32 2,126,250
1,900,000 AAA Tampa, FL Utility Tax & Special Revenue, AMBAC-Insured,
6.900% due 10/1/09 1,987,875
----------------------------------------------------------------------------------------------------------------------
10,906,763
----------------------------------------------------------------------------------------------------------------------
Georgia -- 6.1%
4,000,000 A Atlanta, GA Airport Facilities Revenue, 7.250% due 1/1/17 (b)(c) 4,122,480
5,595,000 NR Atlanta, GA Urban Residential Finance Authority, Multi-Family Revenue, Series A,
6.750% due 3/1/31 5,182,369
1,000,000 AAA Atlanta, GA Water & Wastewater Revenue, Series A, 5.000% due 11/1/38 877,500
5,000,000 NR Augusta, GA Housing Authority, Multi-Family Housing Revenue,
(Emerald Coast Housing II), Series A, 7.500% due 8/1/34 4,731,250
2,300,000 Baa1* Clayton County, GA Housing Authority, Multi-Family Housing Revenue,
(Magnolia Park Apartments Project), 7.500% due 12/1/30 2,228,125
1,500,000 NR Columbus, GA Housing Authority Revenue, (Gardens at Calvary Project),
7.000% due 11/15/29 1,368,750
4,840,000 NR Coweta County, GA Development Authority Revenue, 6.750% due 7/1/29 4,271,300
2,500,000 NR Fulton County, GA Residential Care Facilities, 7.000% due 7/1/29 2,171,875
1,500,000 NR Gainesville & Hall County, GA Development Authority Revenue,
Senior Living Facilities, Series C, 7.250% due 11/15/29 1,443,750
Savannah, GA Economic Development Authority Revenue:
2,000,000 BBB- College of Art & Design Project, 6.900% due 10/1/29 2,072,500
2,000,000 NR Marshview Inn, Series A, 7.125% due 7/1/29 1,847,500
----------------------------------------------------------------------------------------------------------------------
30,317,399
----------------------------------------------------------------------------------------------------------------------
Illinois -- 3.0%
20,000,000 AAA Chicago, IL Board of Education, Capital Appreciation, School Reform,
Series B-1, FGIC-Insured, zero coupon due 12/1/29 3,550,000
1,430,000 AA Chicago, IL HDC, Section 8, Series A, FHA-Insured, 6.700% due 7/1/12 1,483,625
2,535,000 Aaa* Chicago, IL Multi-Family Housing, Hearts United Apartments, Series A,
GNMA-Collateralized, 5.600% due 1/1/41 2,329,031
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
8 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
======================================================================================================================
<S> <C> <C> <C>
Illinois -- 3.0% (continued)
$ 8,300,000 A- Illinois Development Finance Authority Hospital Revenue,
5.500% due 11/15/29 $ 6,619,250
1,000,000 A- Illinois Health Facility Authority Revenue, Victory Health Services, Series A,
5.750% due 8/15/27 883,750
----------------------------------------------------------------------------------------------------------------------
14,865,656
----------------------------------------------------------------------------------------------------------------------
Indiana -- 3.6%
2,000,000 B+ East Chicago, IN Exempt Facility Revenue, (ISPAT Inland Inc. Project),
7.000% due 1/1/14 1,880,000
3,000,000 BB East Chicago, IN PCR, (Inland Steel Co. Project), 6.800% due 6/1/13 2,891,250
5,000,000 Baa2* Indiana State Development Finance Authority Environmental Revenue,
(USX Corp. Project), 5.600% due 12/1/32 4,331,250
3,000,000 B+ Indiana State Development Finance Authority Revenue, (Inland Steel Project),
5.750% due 10/1/11 2,557,500
3,500,000 BBB Indianapolis, IN Airport Authority Revenue, Special Facility, (Federal Express
Corporate Project), 7.100% due 1/15/17 (b) 3,657,500
2,925,000 NR Indianapolis, IN Multi-Family Revenue, (Lake Nora Fox Club Project),
Series B, 7.500% due 10/1/29 2,818,969
----------------------------------------------------------------------------------------------------------------------
18,136,469
----------------------------------------------------------------------------------------------------------------------
Kentucky -- 1.2%
4,250,000 BBB- Kenton County, KY Airport Board Revenue, Delta Airlines, Project A,
7.500% due 2/1/20 (b) 4,377,500
1,500,000 BB- Kentucky Economic Development Finance Authority, Hospital Systems Revenue,
Appalachian Regional Healthcare, 5.875% due 10/1/22 1,018,125
590,000 NR Kentucky Multi-County Residential Mortgage Revenue, 10.500% due 10/1/00 590,861
----------------------------------------------------------------------------------------------------------------------
5,986,486
----------------------------------------------------------------------------------------------------------------------
Louisiana -- 3.0%
5,000,000 NR Hodge, LA Utility Revenue, 9.000% due 3/1/10 (b) 5,109,100
5,000,000 NR Louisiana Local Government Environment Facilities, Development Authority
Revenue, 8.000% due 11/1/25 5,006,250
2,000,000 CC Port of New Orleans, LA IDR, (Continental Grain Co. Project), 7.500% due 7/1/13 1,997,500
3,000,000 BB+ West Feliciana Parish, LA PCR, Gulf State Utilities, 7.700% due 12/1/14 3,120,000
----------------------------------------------------------------------------------------------------------------------
15,232,850
----------------------------------------------------------------------------------------------------------------------
Maryland -- 4.3%
Maryland State Community Development Administration, Department of
Housing & Community Development:
485,000 Aa3* Multi-Family Housing, Insured Mortgage, Series A, FHA-Insured,
6.625% due 5/15/23 508,038
1,000,000 Aa2* Single-Family Program, Fourth Series, 6.450% due 4/1/14 1,042,500
Maryland State Economic Development Corp.:
3,500,000 NR Air Cargo Revenue, 6.500% due 7/1/24 3,294,375
7,000,000 NR Chesapeake Bay, Series A, 7.730% due 12/1/27 7,070,000
2,315,000 Baa3* Student Housing Revenue, Series A, 6.000% due 6/1/30 2,231,081
Northeast Maryland Waste Disposal Authority, Recovery Revenue,
MBIA-Insured, Southwest Resource Recovery:
3,000,000 AAA 7.200% due 1/1/06 3,288,750
3,000,000 AAA 7.200% due 1/1/07 3,281,250
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 9
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
======================================================================================================================
<S> <C> <C> <C>
Maryland -- 4.3% (continued)
$ 2,500,000 Ca* Prince Georges County, MD Greater Southeast Healthcare System,
6.375% due 1/1/23 (d) $ 1,025,000
----------------------------------------------------------------------------------------------------------------------
21,740,994
----------------------------------------------------------------------------------------------------------------------
Massachusetts -- 6.3%
1,500,000 NR Boston, MA Industrial Development Financing Authority Revenue,
Roadhouse Hospitality, 7.875% due 3/1/25 1,498,125
1,835,000 Aa3* Massachusetts State Development Financing Agency Housing Revenue,
Single-Family, Series 38, 7.200% due 12/1/26 1,924,456
1,950,000 NR Massachusetts State Development Financing Agency Revenue, Health Care
Facilities, Alliance A, 7.100% due 7/1/32 1,798,875
Massachusetts State Health & Educational Facilities Authority Revenue:
5,000,000 NR 8.437% due 7/1/25 5,000,000
3,670,000 Ba2* St. Memorial Medical Center, Series A, 6.000% due 10/1/23 2,885,538
Massachusetts State HFA, Housing Projects, Residential Development,
FNMA-Collateralized:
2,000,000 AAA Series C, 6.875% due 11/15/11 2,100,000
3,000,000 AAA Series D, 6.800% due 11/15/12 3,138,750
Massachusetts State IFA Revenue:
2,345,000 CCC Bradford College, GO of Institution Insured, 5.625% due 11/1/28 1,876,000
Resource Recovery Revenue, (Semass Project):
2,600,000 NR Series A, 9.000% due 7/1/15 2,749,474
4,260,000 NR Series B, 9.250% due 7/1/15 (b) 4,510,318
Massachusetts State Turnpike Authority:
2,000,000 AAA Highway Systems Revenue, Series A, AMBAC-Insured, 5.000% due 1/1/39 1,752,500
7,245,000 Aaa* Metropolitan Highway System Revenue, Series C, MBIA-Insured,
zero coupon due 1/1/23 2,001,430
----------------------------------------------------------------------------------------------------------------------
31,235,466
----------------------------------------------------------------------------------------------------------------------
Michigan -- 3.8%
6,000,000 BB- Detroit, MI Local Development Finance Authority, Tax Increment, Series A,
5.500% due 5/1/21 5,347,500
1,500,000 AAA Detroit, MI Water Supply System Revenue, 8.005% due 7/1/22 (e) 1,575,000
Michigan State Hospital Finance Authority Revenue:
2,500,000 AAA 8.007% due 2/15/22 (e) 2,596,875
3,000,000 BBB- Detroit Medical Center, Series A, 5.250% due 8/15/28 2,107,500
3,500,000 Ba3* Michigan State Strategic Fund Limited Obligation Revenue, Michigan Sugar Co.,
Series A, 6.250% due 11/1/15 2,970,625
5,000,000 NR Michigan State Strategic Fund Reserve Recovery Limited Obligation Revenue,
Central Wayne Energy, 7.000% due 7/1/27 4,487,500
----------------------------------------------------------------------------------------------------------------------
19,085,000
----------------------------------------------------------------------------------------------------------------------
Minnesota -- 1.2%
1,000,000 NR Sartell, MN Health Care & Housing Facilities Revenue, (Foundation For
Healthcare Project), Series A, 6.625% due 9/1/29 876,250
St. Paul, MN Housing & Redevelopment Authority, (Healtheast Project), Series A:
2,250,000 BBB 5.700% due 11/1/15 1,833,750
3,790,000 BBB 6.625% due 11/1/17 3,306,775
----------------------------------------------------------------------------------------------------------------------
6,016,775
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
10 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
======================================================================================================================
<S> <C> <C> <C>
Montana -- 2.4%
$ 7,000,000 B+ Lewis & Clark County, MT Environmental Revenue Facilities,
(Asarco Inc. Project), 5.850% due 10/1/33 $ 5,722,500
6,500,000 NR Montana State Board Resource Recovery, (Yellowstone Energy LP Project),
7.000% due 12/31/19 (b) 6,199,375
----------------------------------------------------------------------------------------------------------------------
11,921,875
----------------------------------------------------------------------------------------------------------------------
Nevada -- 1.3%
Henderson, NV Health Care Facilities Revenue, Catholic Healthcare West:
4,000,000 BBB+ 5.250% due 7/1/18 3,255,000
4,500,000 BBB+ 5.125% due 7/1/28 3,363,750
----------------------------------------------------------------------------------------------------------------------
6,618,750
----------------------------------------------------------------------------------------------------------------------
New Hampshire -- 1.4%
1,500,000 BBB- New Hampshire Health & Educational Facilities Authority Revenue,
New Hampshire College, 7.500% due 1/1/31 1,543,125
1,250,000 BB- New Hampshire Higher Educational & Health Facilities Authority Revenue,
Littleton Hospital, Series A, 6.000% due 5/1/28 1,000,000
5,000,000 BBB- New Hampshire State Business Finance Authority PCR, 6.000% due 5/1/21 (b) 4,587,500
----------------------------------------------------------------------------------------------------------------------
7,130,625
----------------------------------------------------------------------------------------------------------------------
New Jersey -- 4.5%
700,000 B1* Atlantic County, NJ Utilities Authority, Solid Waste Revenue, 7.125% due 3/1/16 667,625
5,000,000 NR Camden County, NJ Improvement Authority Revenue, (Health Care
Redevelopment Project), Cooper Health System, 6.000% due 2/15/27 3,443,750
Hudson County, NJ Improvement Authority, Solid Waste Revenue:
860,000 AAA 7.100% due 1/1/20 918,050
4,000,000 BBB- 6.000% due 1/1/29 3,745,000
New Jersey Healthcare Facility Financing Authority Revenue:
2,250,000 NR Raritan Bay Medical Center, 7.250% due 7/1/27 2,002,500
4,000,000 NR Sayreville Living, Series A, 6.375% due 4/1/29 3,365,000
5,000,000 BBB- Trinitas Hospital Obligation Group, 7.500% due 7/1/30 5,006,250
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 3,120,000
----------------------------------------------------------------------------------------------------------------------
22,268,175
----------------------------------------------------------------------------------------------------------------------
New Mexico -- 0.0%
25,471 Aaa* Santa Fe, NM Single-Family Mortgage Revenue, 8.450% due 12/1/11 26,554
----------------------------------------------------------------------------------------------------------------------
New York-- 4.4%
1,595,000 NR Monroe County, NY IDR, De Paul Community Facilities A, 5.875% due 2/1/28 1,357,743
New York, NY IDA, Civic Facility Revenue:
2,980,000 NR Amboy Properties Corp. Project, 6.750% due 6/1/20 2,860,800
2,625,000 NR NY Community Hospital Brooklyn, 6.875% due 11/1/10 2,451,093
3,085,000 BBB+ New York State COP, (Hanson Redevelopment Project), 8.375% due 5/1/08 3,516,900
New York State Energy, Research & Development Authority,
Electric Facilities Revenue, Long Island Lighting Co.:
Pre-Refunded, Series A:
785,000 A- 7.150% due 6/1/20 834,062
845,000 Baa3 7.150% due 12/1/20 897,815
2,215,000 A- Unrefunded Balance, Series A, 7.150% due 6/1/20 2,300,831
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 11
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
======================================================================================================================
<S> <C> <C> <C>
New York -- 4.4% (continued)
$ 2,000,000 NR Onondaga County, NY IDA, Solid Waste Disposal Facilities Revenue,
(Solvay Paperboard LLC Project), 7.000% due 11/1/30 $ 1,945,000
Suffolk County, NY IDA, Civic Facility Revenue, Southampton Hospital
Association:
3,000,000 NR Series A, 7.250% due 1/1/30 2,726,250
3,000,000 NR Series B, 7.625% due 1/1/30 2,853,750
----------------------------------------------------------------------------------------------------------------------
21,744,244
----------------------------------------------------------------------------------------------------------------------
North Carolina -- 2.0%
8,000,000 NR Charlotte, NC Special Facilities Revenue, Charlotte/Douglas International Airport,
5.600% due 7/1/27 6,230,000
North Carolina Medical Care Community, Health Care Facilities Revenue,
De Paul Community Facility:
2,055,000 NR 6.125% due 1/1/28 1,692,806
2,000,000 NR 7.625% due 11/1/29 1,927,500
----------------------------------------------------------------------------------------------------------------------
9,850,306
----------------------------------------------------------------------------------------------------------------------
Ohio -- 1.6%
2,500,000 BBB Cuyahoga County, Ohio Hospital Facilities Revenue, Canton Inc.,
7.500% due 1/1/30 2,506,250
Ohio State Water Development Authority Revenue PCR, Series A:
3,475,000 BB+ Cleveland Electric, 8.000% due 10/1/23 (b)(c) 3,722,594
1,500,000 BB+ Toledo Edison, 8.000% due 10/1/23 (b)(c) 1,606,875
----------------------------------------------------------------------------------------------------------------------
7,835,719
----------------------------------------------------------------------------------------------------------------------
Oklahoma -- 1.8%
5,000,000 BB+ Oklahoma Development Financing Authority Revenue, Hillcrest Healthcare
System A, 5.625% due 8/15/29 3,612,500
2,670,000 AAA Oklahoma HFA, Single-Family Mortgage, Series B, GNMA-Collateralized,
7.997% due 8/1/18 2,950,350
2,400,000 Baa1* Tulsa, OK Municipal Airport Revenue, American Airlines, 7.350% due 12/1/11 2,496,000
----------------------------------------------------------------------------------------------------------------------
9,058,850
----------------------------------------------------------------------------------------------------------------------
Oregon -- 1.1%
1,000,000 NR Clackamas County, OR Hospital Facility Authority Revenue, Senior Living Facilities,
Mary Woods at Maryhurst, 6.625% due 5/15/29 953,750
5,000,000 NR Klamath Falls, OR Electric Revenue, 6.000% due 1/1/25 4,431,250
----------------------------------------------------------------------------------------------------------------------
5,385,000
----------------------------------------------------------------------------------------------------------------------
Pennsylvania -- 11.2%
4,500,000 BBB Allentown, PA Hospital Authority Revenue, Sacred Heart Hospital of Allentown,
Series B, 6.750% due 11/15/15 4,404,375
2,200,000 NR Bucks County, PA IDA, Management Healthcare Facility-Chandler,
6.300% due 5/1/29 1,861,750
2,000,000 NR Chartiers Valley, PA Industrial & Commercial Development Authority Revenue,
6.375% due 12/1/24 1,715,000
Dauphin County, PA General Authority:
3,100,000 NR Hotel & Conference Center - Hyatt Regency, 6.200% due 1/1/29 2,793,875
6,000,000 NR Riverfront Office, 6.000% due 1/1/25 5,370,000
2,000,000 BB- Delaware County, PA IDA, Resource Recovery Facilities, Series A,
6.200% due 7/1/19 1,790,000
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
12 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
======================================================================================================================
<S> <C> <C> <C>
Pennsylvania -- 11.2% (continued)
$ 3,500,000 NR Harrisburg, PA Authority Office & Packaging Revenue, 6.000% due 5/1/19 $ 3,228,750
2,500,000 A Luzerne County, PA IDA, Exempt facility Revenue, (Pennsylvania Gas &
Water Co. Project), Series A, 7.200% due 10/1/17 (b) 2,631,250
Montgomery County, PA Higher Education & Health Authority Revenue,
Temple Continuing Care Center:
6,000,000 NR 6.625% due 7/1/19 5,340,000
5,000,000 NR 6.750% due 7/1/29 4,412,500
1,500,000 A- Montgomery County, PA IDA, Retirement Community Revenue,
5.250% due 11/15/28 1,241,250
2,560,000 NR New Morgan, PA Authority Office Revenue, (Commonwealth Office Project),
Series A, 6.500% due 6/1/25 2,345,600
5,000,000 NR Pennsylvania Economic Development Financing Authority, Exempt Facilities
Revenue, 6.250% due 11/1/27 4,512,500
Pennsylvania EDA:
6,000,000 NR Exempt Facilities Revenue, National Gypsum Co., Series B,
6.125% due 11/1/27 5,370,000
4,500,000 BBB- Resource Recovery Revenue, (Colver Project), Series D, 7.125% due 12/1/15 4,623,750
4,000,000 BBB WasteWater Treatment Revenue, Sun Co. Inc., (RTM Project), Series A,
7.600% due 12/1/24 (b) 4,305,000
----------------------------------------------------------------------------------------------------------------------
55,945,600
----------------------------------------------------------------------------------------------------------------------
Rhode Island -- 1.8%
5,000,000 BBB+ Rhode Island Health & Educational Building Corp. Revenue, Roger Williams
General Hospital, 5.500% due 7/1/28 3,906,250
4,750,000 AA+ Rhode Island Housing & Mortgage Finance Corp., 9.505% due 4/1/24 (e) 4,916,250
----------------------------------------------------------------------------------------------------------------------
8,822,500
----------------------------------------------------------------------------------------------------------------------
South Carolina -- 2.6 %
1,500,000 BBB+ Greenville County, SC IDR, (Lockheed Aeromod Center Project),
7.200% due 11/1/21 (b) 1,546,875
Greenville, SC Connector 2000 Association:
5,970,000 BBB- Series A, 5.375% due 1/1/28 4,343,175
Series B:
10,000,000 BBB- Zero coupon due 1/1/27 1,350,000
12,500,000 BBB- Zero coupon due 1/1/28 1,578,125
20,250,000 BBB- Zero coupon due 1/1/30 2,176,875
15,550,000 BBB- Zero coupon due 1/1/38 913,563
1,475,000 BBB Loris, SC Community Hospital Revenue, Series B, 5.625% due 1/1/29 1,172,625
----------------------------------------------------------------------------------------------------------------------
13,081,238
----------------------------------------------------------------------------------------------------------------------
South Dakota -- 0.4%
1,800,000 NR Oglala Sioux, SD Tribal Revenue Bonds, 7.500% due 7/1/13 1,802,790
----------------------------------------------------------------------------------------------------------------------
Tennessee -- 0.7%
3,500,000 NR Shelby County, TN Health Educational & Housing Facilities Revenue,
6.875% due 7/1/36 3,228,750
----------------------------------------------------------------------------------------------------------------------
Texas -- 7.3%
3,000,000 NR Abilene, TX Health Facilities Development Corp., Retirement Facilities Revenue,
Sears Methodist Retirement, Series A, 5.900% due 11/15/25 2,366,250
5,000,000 NR Austin-Bergstrom Landhost Enterprises Inc., TX Airport Hotel, 6.750% due 4/1/27 4,737,500
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 13
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
======================================================================================================================
<S> <C> <C> <C>
Texas -- 7.3% (continued)
$ 5,970,000 NR Bexar County, TX Housing Financial Corp., Multi-Family Housing Revenue,
Continental Lady Ester, 6.875% due 6/1/29 $ 5,522,250
1,665,000 BBB- Dallas-Fort Worth, TX International Airport Facilities Import Company Revenue,
American Airlines, Inc., 6.375% due 5/1/35 1,546,369
1,880,000 NR Denton County, TX Reclamation & Road District, 8.500% due 6/1/16 1,889,588
1,500,000 NR El Paso County, TX Housing Finance Corp., Multi-Family Housing Revenue,
(Sub-Las Lomas Apartments), Series C, 8.375% due 6/1/30 1,526,250
5,000,000 BB Harris County, TX IDC, Airport Facilities Revenue (Continental Airlines Project),
5.375% due 7/1/19 4,106,250
3,000,000 Ba1* Houston, TX Airport Systems Revenue, Special Facilities, Series B,
5.700% due 7/15/29 2,411,250
10,000,000 AAA Houston, TX Water & Sewer System Revenue, Capital Appreciation, Series A,
zero coupon due 12/1/28 1,912,500
300,000 AA+ Sabine River Authority, TX PCR, Utilities-Electric, 4.350% due 6/1/30 300,000
Sam Rayburn, TX Municipal Power Agency, Power Supply System Revenue:
1,935,000 BB Series A, 6.250% due 10/1/17 1,869,694
2,000,000 BB Series B, 6.125% due 10/1/13 1,932,500
San Antonio, TX Airport System Revenue, AMBAC-Insured:
3,000,000 AAA 7.125% due 7/1/06 3,243,750
1,000,000 AAA 7.125% due 7/1/08 1,082,500
2,000,000 AAA 7.375% due 7/1/13 2,172,500
----------------------------------------------------------------------------------------------------------------------
36,619,151
----------------------------------------------------------------------------------------------------------------------
Vermont -- 0.2%
1,000,000 NR Vermont Educational & Health Buildings Financing Agency, (Copley Manor Project),
6.150% due 4/1/19 866,250
----------------------------------------------------------------------------------------------------------------------
Virginia -- 3.2%
1,750,000 NR Alexandria, VA Redevelopment & Housing Authority, Multi-Family Housing Revenue,
(Parkwood Court Apartments Project), Series C, 8.125% due 4/1/30 1,758,750
2,435,000 AAA Fairfax County, VA Redevelopment & Housing Authority, Multi-Family Housing
Revenue, Series A, FHA-Insured, 7.000% due 5/1/26 2,544,575
Pocahontas Parkway Association, VA Toll Road Revenue, Series B:
18,400,000 BBB- Zero coupon due 8/15/33 1,794,000
35,500,000 BBB- Zero coupon due 8/15/35 3,017,500
2,000,000 NR Virginia Beach, VA Development Authority Revenue, Ramada on the Beach,
7.000% due 12/1/15 2,020,000
Virginia Beach, VA Development Authority, Multi-Family Housing Revenue,
Residential Rental:
2,500,000 NR Hamptons Project, 7.500% due 10/1/39 2,371,875
2,500,000 NR Mayfair Project, 7.500% due 10/1/39 2,371,874
----------------------------------------------------------------------------------------------------------------------
15,878,574
----------------------------------------------------------------------------------------------------------------------
Washington -- 0.9%
2,000,000 BBB Port Moses Lake, WA PCR, Union Carbide, 7.875% due 8/1/06 (b) 2,020,840
3,315,000 BBB- Spokane, WA Downtown Foundation Parking Revenue, (River Park Square Project),
5.600% due 8/1/19 2,544,262
----------------------------------------------------------------------------------------------------------------------
4,565,102
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
14 2000 Annual Report to Shareholders
<PAGE>
-----------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
-----------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
======================================================================================================================
<S> <C> <C> <C>
West Virginia -- 0.8%
$ 2,000,000 A Beckley, WV IDR, (Water Commission Project), 7.000% due 10/1/17 (b) $ 2,092,500
2,000,000 NR West Virginia Economic Development Authority Communal Development
Revenue, Stonewall Jackson, Series B, 8.000% due 4/1/30 1,992,500
----------------------------------------------------------------------------------------------------------------------
4,085,000
----------------------------------------------------------------------------------------------------------------------
Wisconsin -- 1.1%
Wisconsin State Health & Educational Facilities Authority Revenue:
5,000,000 BBB+ Aurora Health Care Inc., Series A, 5.600% due 2/15/29 4,031,250
1,600,000 NR Benchmark Healthcare Inc. Project, Series A, 6.750% due 12/1/28 1,310,000
----------------------------------------------------------------------------------------------------------------------
5,341,250
----------------------------------------------------------------------------------------------------------------------
Wyoming -- 0.3%
1,250,000 AA Wyoming Community Development Authority Housing Revenue, Series 1,
7.100% due 6/1/17 1,321,875
----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $528,162,309**) $499,330,299
======================================================================================================================
</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 is segregated by custodian for open purchase commitments.
(d) Security is currently 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 Ratings Service ("Standard & Poor's") -- Ratings from "AA" to
"CC" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ from the highest rated issue only in a
small degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
bonds in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this
category than in higher rated categories.
BB, B, -- Bonds rated "BB" and "B" are regarded, on balance, as predominantly
CCC speculative with respect to capacity to pay interest and repay
and CC principal in accordance with the terms of the obligation. BB
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 "Ca", 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.
--------------------------------------------------------------------------------
16 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Bond Ratings (unaudited) (continued)
--------------------------------------------------------------------------------
Ba -- Bonds rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B -- Bonds rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
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.
Ca -- Bonds rated "Ca" represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
Fitch IBCA, 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 likely to have adverse impact on these securities and,
therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for
securities with higher ratings.
NR -- Indicates that the bond is not rated by Standard & Poor's,
Moody's or Fitch.
--------------------------------------------------------------------------------
Short-Term Security Ratings (unaudited)
--------------------------------------------------------------------------------
SP-1 -- Standard & Poor's highest rating indicating very strong or strong
capacity to pay principal and interest; those issues determined to
possess overwhelming safety characteristics are denoted with a plus
(+) sign.
A-1 -- Standard & Poor's highest commercial paper and variable-rate
demand obligation (VRDO) rating indicating that the degree of safety
regarding timely payment is either overwhelming or very strong;
those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) sign.
VMIG 1 -- Moody's highest rating for issues having demand feature -- VRDO.
P-1 -- Moody's highest rating for commercial paper and for VRDO prior to
the advent of the 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 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $528,162,309) $ 499,330,299
Cash 32,645
Receivable for securities sold 40,000
Receivable for Fund shares sold 347,860
Interest receivable 6,928,467
-----------------------------------------------------------------------------------
Total Assets 506,679,271
-----------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased 473,202
Investment advisory fees payable 209,496
Administration fees payable 91,873
Distribution fees payable 49,947
Accrued expenses 114,378
-----------------------------------------------------------------------------------
Total Liabilities 938,896
-----------------------------------------------------------------------------------
Total Net Assets $ 505,740,375
===================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 32,042
Capital paid in excess of par value 534,633,680
Accumulated net realized loss on security transactions (93,337)
Net unrealized depreciation of investments (28,832,010)
-----------------------------------------------------------------------------------
Total Net Assets $ 505,740,375
===================================================================================
Shares Outstanding:
Class A 19,189,602
---------------------------------------------------------------------------------
Class B 12,511,757
---------------------------------------------------------------------------------
Class L 340,652
---------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 15.78
---------------------------------------------------------------------------------
Class B * $ 15.79
---------------------------------------------------------------------------------
Class L ** $ 15.76
---------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.17% of net asset value per share) $ 16.44
---------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $ 15.92
===================================================================================
</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, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest $ 38,647,321
---------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 3) 2,232,146
Distribution fees (Note 3) 2,186,951
Administration fees (Note 3) 1,116,073
Shareholder and system servicing fees 220,130
Shareholder communications 64,114
Audit and legal 41,561
Trustees' fees 26,644
Custody 24,203
Pricing service fees 23,807
Other 86,041
---------------------------------------------------------------------------------------
Total Expenses 6,021,670
---------------------------------------------------------------------------------------
Net Investment Income 32,625,651
---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 266,323,900
Cost of securities sold 265,994,295
---------------------------------------------------------------------------------------
Net Realized Gain 329,605
---------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of Investments:
Beginning of year 15,132,767
End of year (28,832,010)
---------------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (43,964,777)
---------------------------------------------------------------------------------------
Net Loss on Investments (43,635,172)
---------------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (11,009,521)
=======================================================================================
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
20 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
==================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 32,625,651 $ 34,814,939
Net realized gain 329,605 4,718,930
Increase in net unrealized depreciation (43,964,777) (26,281,421)
--------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (11,009,521) 13,252,448
--------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 2):
Net investment income (31,537,820) (34,767,118)
Net realized gains (1,971,961) (17,476,059)
--------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (33,509,781) (52,243,177)
--------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 124,867,277 92,025,984
Net asset value of shares issued for reinvestment of dividends 18,904,533 30,791,548
Cost of shares reacquired (239,258,123) (179,315,600)
--------------------------------------------------------------------------------------------------
Decrease in Net Assets From Fund Share Transactions (95,486,313) (56,498,068)
--------------------------------------------------------------------------------------------------
Decrease in Net Assets (140,005,615) (95,488,797)
NET ASSETS:
Beginning of year 645,745,990 741,234,787
--------------------------------------------------------------------------------------------------
End of year* $ 505,740,375 $ 645,745,990
==================================================================================================
* Includes overdistributed net investment income of: -- $ (1,245,038)
==================================================================================================
</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. At July 31, 2000, 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 overdistributed net investment income
amounting to $157,207 was reclassified to paid-in capital. Net investment
income, net realized gains and net assets were not affected by this change; (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
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), acts as investment advisor to the
--------------------------------------------------------------------------------
22 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
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 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
Citi Fiduciary Trust Company ("CFTC"), formerly known as Smith Barney Private
Trust Company, another subsidiary of Citigroup, acts as the Fund's transfer
agent and PFPC Global Fund Services ("PFPC") acts as the Fund's sub-transfer
agent. CFTC receives account fees and asset-based fees that vary according to
the account size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder accounts and is paid
by CFTC. For the year ended July 31, 2000, the Fund paid transfer agent fees of
$157,147 to CFTC.
Effective June 5, 2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of
SSBH, became the Fund's distributor replacing CFBDS, Inc. ("CFBDS"). In
addition, SSB acts as the primary broker for the Fund's portfolio agency
transactions. Certain other broker-dealers, continue to sell Fund shares to the
public as members of the selling group.
There are maximum initial sales charges of 4.00% and 1.00% for 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
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, 2000, SSB and CFBDS received sales charges of
approximately $68,000 and $14,000 on sales of the Fund's Class A and L shares,
respectively. In addition, CDSCs paid to SSB were approximately:
Class A Class B Class L
================================================================================
CDSCs $2,000 $158,000 $1,000
================================================================================
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, 2000, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $432,700 $1,725,560 $28,691
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
4. Investments
During the year ended July 31, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $158,948,152
--------------------------------------------------------------------------------
Sales 266,323,900
================================================================================
At July 31, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 8,726,664
Gross unrealized depreciation (37,558,674)
--------------------------------------------------------------------------------
Net unrealized depreciation $(28,832,010)
================================================================================
--------------------------------------------------------------------------------
Smith Barney Municipal High Income Fund 23
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
5. Shares of Beneficial Interest
At July 31, 2000, 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, 2000, total paid-in capital amounted to the following for each
class:
Class A Class B Class L
================================================================================
Total Paid-in Capital $329,395,083 $199,493,576 $5,777,063
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 2000 July 31, 1999
----------------------------- ----------------------------
Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 6,210,063 $ 98,983,684 39,632,217 $ 70,039,058
Shares issued on reinvestment 661,246 10,504,954 746,907 13,127,610
Shares reacquired (4,708,841) (75,012,521) (2,605,804) (45,921,802)
-------------------------------------------------------------------------------------------------
Net Increase 2,162,468 $ 34,476,117 37,773,320 $ 37,244,866
=================================================================================================
Class B
Shares sold 1,406,734 $ 22,534,472 1,121,035 $ 19,803,946
Shares issued on reinvestment 518,525 8,265,534 995,292 17,532,725
Shares reacquired (10,219,173) (163,271,817) (7,522,522) (132,503,062)
-------------------------------------------------------------------------------------------------
Net Decrease (8,293,914) $(132,471,811) (5,406,195) $ (95,166,391)
=================================================================================================
Class L
Shares sold 209,655 $ 3,349,121 123,749 $ 2,182,980
Shares issued on reinvestment 8,469 134,045 7,478 131,213
Shares reacquired (61,531) (973,785) (51,280) (890,736)
-------------------------------------------------------------------------------------------------
Net Increase 156,593 $ 2,509,381 79,947 $ 1,423,457
=================================================================================================
</TABLE>
--------------------------------------------------------------------------------
24 2000 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 2000(1) 1999(1) 1998 1997 1996
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 16.98 $ 17.96 $ 18.07 $ 17.31 $ 17.25
-------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.92 0.92 0.95 0.97 1.00
Net realized and unrealized gain (loss) (1.12) (0.55) 0.19 0.77 0.06
-------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.20) 0.37 1.14 1.74 1.06
-------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.95) (0.92) (0.98) (0.98) (1.00)
Net realized gains (0.05) (0.43) (0.27) -- --
-------------------------------------------------------------------------------------------------------------
Total Distributions (1.00) (1.35) (1.25) (0.98) (1.00)
-------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.78 $ 16.98 $ 17.96 $ 18.07 $ 17.31
-------------------------------------------------------------------------------------------------------------
Total Return (1.00)% 2.06% 6.54% 10.40% 6.28%
-------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 303 $ 289 $ 268 $ 254 $ 232
-------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.84% 0.82% 0.83% 0.83% 0.84%
Net investment income 6.13 5.21 5.24 5.52 5.74
-------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 29% 50% 84% 51% 44%
=============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
--------------------------------------------------------------------------------
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 2000(1) 1999(1) 1998 1997 1996
=============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 16.99 $ 17.98 $ 18.09 $ 17.32 $ 17.26
-------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 1.18 0.83 0.86 0.89 0.92
Net realized and unrealized gain (loss) (1.46) (0.56) 0.19 0.77 0.06
-------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.28) 0.27 1.05 1.66 0.98
-------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.87) (0.83) (0.89) (0.89) (0.92)
Net realized gains (0.05) (0.43) (0.27) -- --
-------------------------------------------------------------------------------------------------------------
Total Distributions (0.92) (1.26) (1.16) (0.89) (0.92)
-------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.79 $ 16.99 $ 17.98 $ 18.09 $ 17.32
-------------------------------------------------------------------------------------------------------------
Total Return (1.52)% 1.48% 6.01% 9.89% 5.74%
-------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 198 $ 353 $ 471 $ 562 $ 653
-------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.34% 1.31% 1.32% 1.32% 1.33%
Net investment income 5.59 4.70 4.75 5.04 5.23
-------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 29% 50% 84% 51% 44%
=============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
--------------------------------------------------------------------------------
26 2000 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 2000(1) 1999(1) 1998(2) 1997 1996
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 16.96 $ 17.95 $ 18.07 $ 17.31 $ 17.25
--------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.70 0.81 0.87 0.88 0.89
Net realized and unrealized gain (loss) (1.00) (0.55) 0.16 0.77 0.08
--------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.30) 0.26 1.03 1.65 0.97
--------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.85) (0.82) (0.88) (0.89) (0.91)
Net realized gains (0.05) (0.43) (0.27) -- --
--------------------------------------------------------------------------------------------------------------------
Total Distributions (0.90) (1.25) (1.15) (0.89) (0.91)
--------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.76 $ 16.96 $ 17.95 $ 18.07 $ 17.31
--------------------------------------------------------------------------------------------------------------------
Total Return (1.61)% 1.42% 5.91% 9.79% 5.69%
--------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 5,360 $ 3,122 $ 1,869 $ 752 $ 546
--------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.44% 1.44% 1.42% 1.40% 1.39%
Net investment income 5.57 4.62 4.64 4.94 5.18
--------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 29% 50% 84% 51% 44%
====================================================================================================================
</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.
--------------------------------------------------------------------------------
Tax Information (unaudited)
--------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
July 31, 2000:
. 99.50% of the dividends paid by the Fund from net investment income
as tax exempt for regular Federal income tax purposes.
. Long-term capital gain distributions paid of $1,235,738.
--------------------------------------------------------------------------------
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, 2000, 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 auditing standards generally accepted
in the United States of America. 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, 2000, 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 Municipal High Income Fund of Smith Barney Income Funds as of July 31,
2000, 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 accounting principles generally accepted in the United States
of America.
/s/ KPMG LLP
New York, New York
September 11, 2000
--------------------------------------------------------------------------------
28 2000 Annual Report to Shareholders
<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
Anthony Pace
Controller
Christina T. Sydor
Secretary
Investment Adviser
SSB Citi Fund Management LLC
Distributor
Salomon Smith Barney Inc.
Custodian
PFPC Trust Company
Transfer Agent
Citi Fiduciary Trust Company
125 Broad Street, 11th Floor
New York, New York 10004
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
This report is submitted for the general information of the shareholders of
Smith Barney Municipal High Income Fund, but it may also be used as sales
literature when proceeded or accompanied by the current Prospectus, which gives
details about charges, expenses, investment objectives and operating policies of
the Fund. If used as sales material after October 31, 2000, this report must be
accompanied by performance information for the most recently completed calendar
quarter.
SALOMON SMITH BARNEY
---------------------------
A member of citigroup[LOGO]
Salomon Smith Barney is a Service mark of Salomon Smith Barney Inc.
Smith Barney Municipal
High Income Fund
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com/mutualfunds
FD0427 9/00
<PAGE>
--------------------------------------------------------------------------------
SMITH BARNEY
TOTAL RETURN BOND FUND
--------------------------------------------------------------------------------
CLASSIC SERIES | ANNUAL REPORT | JULY 31, 2000
[LOGO] Smith Barney
Mutual Funds
Your Serious Money. Professionally Managed(SM)
-------------------------------------------------------
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
-------------------------------------------------------
<PAGE>
JOSEPH P. DEANE [PHOTO OMITTED]
PORTFOLIO MANAGER
[GRAPHIC OMITTED] Classic Series
Annual Report o July 31, 2000
SMITH BARNEY
TOTAL RETURN BOND FUND
--------------------------------------------------------------------------------
JOSEPH P. DEANE
--------------------------------------------------------------------------------
Joseph P. Deane has more than 30 years of securities business experience and has
been managing the Fund since its inception.
Education: BA in History from Iona College
--------------------------------------------------------------------------------
FUND OBJECTIVE
--------------------------------------------------------------------------------
The Fund seeks to maximize total return consisting of capital appreciation and
income by investing primarily in securities issued by the U.S. government, its
agencies and instrumentalities and high-grade mortgage-related securities. It
also invests in investment-grade corporate debt, taxable municipals and
asset-backed securities.
--------------------------------------------------------------------------------
FUND FACTS
--------------------------------------------------------------------------------
FUND INCEPTION
--------------------------------------------------------------------------------
February 27, 1998
MANAGER TENURE
--------------------------------------------------------------------------------
Since Inception
MANAGER INVESTMENT
INDUSTRY EXPERIENCE
--------------------------------------------------------------------------------
30 Years
CLASS A CLASS B CLASS L
--------------------------------------------------------------------------------
NASDAQ TRBAX TRBBX SBTLX
--------------------------------------------------------------------------------
INCEPTION 2/27/98 2/27/98 2/27/98
Average Annual Total Returns as of July 31, 2000
Without Sales Charges(1)
Class A Class B Class L
--------------------------------------------------------------------------------
One-Year 3.40% 2.83% 2.89%
--------------------------------------------------------------------------------
Since Inception+ 1.73 1.21 1.26
--------------------------------------------------------------------------------
With Sales Charges(2)
Class A Class B Class L
--------------------------------------------------------------------------------
One-Year (1.22)% (1.53)% 0.88%
--------------------------------------------------------------------------------
Since Inception+ (0.18) 0.11 0.83
--------------------------------------------------------------------------------
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A 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.
--------------------------------------------------------------------------------
What's Inside
A Message from the Chairman ............................................... 1
Shareholder Letter ........................................................ 2
Historical Performance .................................................... 4
Smith Barney Total Return Bond Fund at a Glance ........................... 6
Schedule of Investments ................................................... 7
Bond Ratings .............................................................. 9
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
Tax Information ........................................................... 20
Independent Auditors' Report .............................................. 21
[LOGO] Smith Barney
Mutual Funds
Your Serious Money. Professionally Managed(SM)
--------------------------------------------------------------------------------
Investment Products: Not FDIC Insured . Not Bank Guaranteed . May Lose Value
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
A Message from the Chairman
--------------------------------------------------------------------------------
[PHOTO OMITTED]
HEATH B.
McLENDON
Chairman
Dear Shareholder:
For years, individuals and their families and businesses have looked to the
investment professionals of SSB Citi Fund Management LLC ("SSB Citi") for
thoughtful insights and advice. For some, the solution has been a long-term
investment strategy, incorporating multiple stock and bond mutual funds. Others
have invested with specific portfolio managers who are recognized and respected
for their insights and record.
The Smith Barney Total Return Bond Fund ("Fund"), which seeks to maximize total
return utilizing fixed-income securities we believe represents an opportunity
for you, the serious investor, to take part in the benefits of investing
primarily in, but not limited to, securities issued by the U.S. government, its
agencies and instrumentalities and high-grade mortgage-related securities. When
allocating the Fund's investments, portfolio manager Joseph P. Deane carefully
takes into consideration economic and market conditions as well as the relative
risks and opportunities of each investment category.
In our opinion, the lessons of the past may be used to better understand the
challenges and opportunities of the future. We believe SSB Citi represents
extensive asset management expertise. We also believe that expertise is achieved
through the intelligent application of knowledge and experience. Our portfolio
managers have managed portfolios across up and down markets and business cycles.
With economic growth robust, interest rates stable and inflationary pressures
apparently in check, many investors may not feel compelled to alter their
portfolio mixes. Yet, when times are good, it may be prudent for investors to
consider adding a bond fund to their investment plan to cushion the effects of
stock market volatility and gain additional income potential.
When you invest with SSB Citi, you can do so with the confidence that your
interests come first, your investment success is paramount, and that the
ultimate in resources is being committed to your financial future. Thank you for
investing with us.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
September 1, 2000
--------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 1
<PAGE>
--------------------------------------------------------------------------------
Shareholder Letter
--------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Total Return
Bond Fund ("Fund"). In this report, we summarize the period's prevailing
economic and market conditions and outline our investment strategy. The
information provided in this letter represents the opinion of the manager and is
not intended to be a forecast of future events, a guarantee of future results
nor investment advice.
Further, there is no assurance that certain securities will remain in or out of
the Fund. Please refer to pages 7 and 8 for a complete list and percentage
breakdown of Fund's holdings. A detailed summary of performance and current
holdings can be found in the appropriate sections that follow. Also, please note
that any discussion of the Fund's holdings is as of July 31, 2000 and is subject
to change. We hope you find this report to be informative and useful.
Performance Overview
For the year ended July 31, 2000, the Fund's Class A shares, without and with
sales charges, returned 3.40% and a negative 1.22%, respectively. In comparison,
the Merrill Lynch U.S. Corporate & Government 10+ Years Bond Index ("Merrill
Index")(1) returned 7.15% during the same period. Past performance is not
indicative of future results.
Market Overview
On May 16, 2000, the Federal Reserve Board ("Fed") enacted the sixth in a series
of monetary policy actions that began last June, when the federal funds rate
("fed funds rate")(2) was 4.75%. With the fed funds rate presently at 6.50%, the
cumulative effect of the interest rate increases so far may begin to have a more
pronounced effect in dampening inflationary pressures in the economy. A critical
point, which we believe is often overlooked by many investors, is that the Fed's
monetary policy adjustments take time to be absorbed into the general economy.
In our view, the recent rallies we have seen are a result of changes enacted six
to nine months ago.
Over the past several weeks, the bond market has been rallying amidst a string
of economic reports that suggest that the economy may be slowing and that the
Fed may be close to the end of its tightening program. Based on the prospects
for slower, but still robust, economic growth in the months ahead and a less
aggressive Fed monetary policy, we believe yields may have peaked. We also think
that any further Fed policy actions have already been comfortably priced into
the bond market.
The inversion of the yield curve(3) has made us somewhat cautious regarding the
overall outlook for bonds. Fundamentals in the higher-quality tiers are still
sound and valuations have improved, but poor technicals, most notably large
pent-up issuance needs, have created some investor reticence about the prospects
for municipal bonds.
The prospect of further Fed tightening may mean modest further increases in
interest rates on shorter maturities. In contrast, long-term interest rates are
not likely to rise much. Our benign outlook for inflation, plus the ongoing
reduction in Treasury supply may contain the rise in long-term interest rates,
further inverting the U.S. Treasury yield curve (i.e., long-term yields should
fall even further below short-term yields).
----------
(1) The Merrill Index is a broad measure of the performance of U.S. government
and corporate fixed-rate debt issues with maturities greater than ten
years. An investor cannot invest directly in an index.
(2) The fed funds rate is the interest rate that banks with excess reserves at
a Federal Reserve district bank charge other banks that need overnight
loans. The fed funds rate often points to the direction of U.S. interest
rates.
(3) The yield curve is the graphical depiction of the relationship between the
yield on bonds of the same credit quality but different maturities. An
inverted yield curve is an unusual situation where short-term interest
rates are higher than long-term rates.
--------------------------------------------------------------------------------
2 2000 Annual Report to Shareholders
<PAGE>
Investment Strategy
Our aim is to provide our shareholders with high total return potential by
investing primarily in taxable U.S. bonds. Our investment process involves:
1. Reflecting on key market factors such as:
. U.S. economic indicators;
. Inflation;
. Fed policy; and
. The relative strength of the U.S. dollar.
2. Seeking to project the direction of interest rates as a foundation for
structuring the Fund's portfolio's average maturity; and
3. Attempting to select bonds likely to either experience significant price
appreciation when interest rates fall or sustain less-than-average price
depreciation when interest rates rise.
The Fund's investment strategy going forward will be three-fold:
1. We see value at the long end of the curve and are lengthening maturities
in the Fund's portfolio to take advantage of the inexpensive valuations of
municipal bonds relative to U.S. Treasuries;
2. We are focusing on investing in high-grade issues; and
3. We are investing in discount paper because this is where we believe we can
obtain the best value.
Our goal is to sell off some of the Fund's shorter-term bonds that were
purchased in the beginning of 1999 when we believed the market to be more
vulnerable and wanted to assume a defensive posture. We see the best opportunity
for reward right now at the long end of the curve where we can seek to lock in
today's higher rates.
As of July 31, 2000, 94.8% of the Fund's holdings were rated
investment-grade,(4) with about 50.5% of the Fund invested in AAA/Aaa-rated
bonds, the highest possible rating. The Fund's largest holdings are concentrated
in insurance bonds (10.5%), diversified manufacture bonds (7.5%) and auto part
bonds (6.1%).
Market Outlook
Increasing signs that the economy is moderating combined with a growing
consensus among investors that the Fed is nearing the end of its program of rate
hikes leads us to believe that interest rates may begin to stabilize in the near
term. Against this market backdrop, we believe it makes sense to maintain a
relatively long duration(5) position in U.S. Treasuries.
Thank you for your investment in the Smith Barney Total Return Bond Fund. We
look forward to continuing to help you pursue your financial goals in the
future.
Sincerely,
/s/ Joseph P. Deane
Joseph P. Deane
Vice President and
Investment Officer
September 1, 2000
----------
(4) Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody's
Investors Service, Inc. or AAA, AA, A and BBB by Standard & Poor's Ratings
Service; or that have an equivalent rating by any nationally recognized
statistical rating organization; or are determined by the manager to be of
equivalent quality. Moody's Investors Service, Inc. and Standard & Poor's
Ratings Service are two major credit rating agencies.
(5) Duration is a common gauge of the price sensitivity of a fixed-income asset
or portfolio to a change in interest rates.
--------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 3
<PAGE>
--------------------------------------------------------------------------------
Historical Performance -- Class A Shares
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
===================================================================================================================================
<S> <C> <C> <C> <C>
7/31/00 $10.67 $10.34 $0.68 3.40%
-----------------------------------------------------------------------------------------------------------------------------------
7/31/99 11.53 10.67 0.68 (1.79)
-----------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/98 11.46 11.53 0.23 2.64+
===================================================================================================================================
Total $1.59
===================================================================================================================================
</TABLE>
--------------------------------------------------------------------------------
Historical Performance -- Class B Shares
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C>
7/31/00 $10.67 $10.34 $0.62 2.83%
------------------------------------------------------------------------------------------------------------------------------------
7/31/99 11.53 10.67 0.62 (2.29)
------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/98 11.46 11.53 0.21 2.48+
====================================================================================================================================
Total $1.45
====================================================================================================================================
</TABLE>
--------------------------------------------------------------------------------
Historical Performance -- Class L Shares
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------------
Beginning End Income Total
Year Ended of Year of Year Dividends Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C>
7/31/00 $10.67 $10.34 $0.63 2.89%
------------------------------------------------------------------------------------------------------------------------------------
7/31/99 11.53 10.67 0.62 (2.24)
------------------------------------------------------------------------------------------------------------------------------------
Inception* -- 7/31/98 11.46 11.53 0.21 2.49+
====================================================================================================================================
Total $1.46
====================================================================================================================================
</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
====================================================================================================================================
<S> <C> <C> <C>
Year Ended 7/31/00 3.40% 2.83% 2.89%
------------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/00 1.73 1.21 1.26
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charges(2)
-----------------------------------------------
Class A Class B Class L
====================================================================================================================================
<S> <C> <C> <C>
Year Ended 7/31/00 (1.22)% (1.53)% 0.88%
------------------------------------------------------------------------------------------------------------------------------------
Inception* through 7/31/00 (0.18) 0.11 0.83
====================================================================================================================================
</TABLE>
--------------------------------------------------------------------------------
4 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Cumulative Total Returns
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charges(1)
================================================================================
<S> <C>
Class A (Inception* through 7/31/00) 4.24%
--------------------------------------------------------------------------------
Class B (Inception* through 7/31/00) 2.97
--------------------------------------------------------------------------------
Class L (Inception* through 7/31/00) 3.09
================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum 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.
--------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 5
<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 Fund vs. Merrill Lynch U.S. Corporate & Government 10+ Years Index+
--------------------------------------------------------------------------------
February 1998 -- July 2000
[The following table was depicted as a line chart in the printed material.]
<TABLE>
<CAPTION>
Smith Barney Smith Barney Smith Barney Merrill Lynch
Total Return Total Return Total Return U.S. Corporate
Bond Fund -- Bond Fund -- Bond Fund -- & Government
Class A Shares Class B Shares Class L Shares 10+ Years Index
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Feb 27, 1998 9,550 10,000 9,896 10,000
July 1998 9,803 9,798 10,044 10,521
Jan 1999 10,220 10,207 10,452 11,303
July 1999 9,628 9,640 9,916 9,915
Jan 2000 9,516 9,503 9,766 9,884
July 31, 2000 9,955 10,267 10,203 10,612
</TABLE>
+ 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, 2000. 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. An investor cannot invest directly in an
index.
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*
--------------------------------------------------------------------------------
13.1% Auto Parts
9.3% Chemicals
15.9% Diversified Manufacturers
8.1% Electronic Components [BAR CHART OMITTED]
9.6% Food Distributors
22.2% Insurance
11.4% Oil & Gas Production
10.4% Retail
* As a percentage of total corporate bonds and notes.
Investment Breakdown**
--------------------------------------------------------------------------------
52.0% Municipal Bonds
0.9% Repurchase Agreement [PIE CHART OMITTED]
47.1% Corporate Bonds & Notes
** As a percentage of total investments.
--------------------------------------------------------------------------------
6 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
CORPORATE BONDS & NOTES -- 47.1%
Auto Parts -- 6.1%
$ 4,775,000 A Ford Motor Co., Debentures, 8.875% due 1/15/22 $ 5,168,938
1,480,000 A General Motors Corp., Debentures, 9.400% due 7/15/21 1,722,350
------------------------------------------------------------------------------------------------------------------------------------
6,891,288
------------------------------------------------------------------------------------------------------------------------------------
Chemicals -- 4.4%
5,000,000 BB ARCO Chemical Co., Debentures, 9.800% due 2/1/20 4,881,250
------------------------------------------------------------------------------------------------------------------------------------
Diversified Manufacturers -- 7.5%
6,670,000 Baa2* FMC Corp., Medium-Term Notes, Series A, 7.000% due 5/15/08 6,253,125
2,475,000 A Philip Morris Cos. Inc., Debentures, 7.750% due 1/15/27 2,137,781
------------------------------------------------------------------------------------------------------------------------------------
8,390,906
------------------------------------------------------------------------------------------------------------------------------------
Electronic Components -- 3.8%
4,775,000 A+ Motorola, Inc., Debentures, 6.500% due 11/15/28 4,267,656
------------------------------------------------------------------------------------------------------------------------------------
Food Distributors -- 4.5%
5,775,000 A- Tyson Foods, Inc., Notes, 7.000% due 5/1/18 5,089,219
------------------------------------------------------------------------------------------------------------------------------------
Insurance -- 10.5%
6,425,000 A Aetna Services, Inc., Guaranteed Debentures, 7.625% due 8/15/26 5,565,656
7,775,000 Baa1* CNA Financial Corp., Notes, 6.950% due 1/15/18 6,171,406
------------------------------------------------------------------------------------------------------------------------------------
11,737,062
------------------------------------------------------------------------------------------------------------------------------------
Oil & Gas Production -- 5.4%
4,775,000 Aa1* Northern Illinois Gas Co., First Mortgage Bonds, 7.375% due 10/15/27 4,494,469
1,775,000 A ONEOK, Inc., Debentures, 6.875% due 10/1/28 1,515,406
------------------------------------------------------------------------------------------------------------------------------------
6,009,875
------------------------------------------------------------------------------------------------------------------------------------
Retail -- 4.9%
750,000 BBB J.C. Penney Co., Inc., Debentures, 7.650% due 8/15/16 596,250
5,300,000 A- Sears Roebuck Acceptance Corp., Notes, 7.500% due 10/15/27 4,876,000
------------------------------------------------------------------------------------------------------------------------------------
5,472,250
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS & NOTES
(Cost -- $61,056,638) 52,739,506
====================================================================================================================================
MUNICIPAL BONDS -- 52.0%
Arizona -- 3.9%
4,700,000 AAA Phoenix, AZ IDA Revenue, America West Arena, AMBAC-Insured,
7.125% due 12/1/21 4,406,250
------------------------------------------------------------------------------------------------------------------------------------
California -- 22.1%
5,215,000 AAA California Housing Finance Agency Revenue, Single-Family Mortgage,
FHA-Insured, Series B-4, Class I, 6.970% due 8/1/29 4,732,612
4,500,000 AAA Los Angeles, CA Convention & Exhibition Center Authority Lease Revenue,
MBIA-Insured, Series A, 7.125% due 8/15/24 4,196,250
7,980,000 AAA Monrovia, CA Redevelopment Agency, Tax Allocation (Center Redevelopment
Project), AMBAC-Insured, Series A, 7.050% due 5/1/29 7,291,725
5,000,000 AAA Oakland, CA Revenue, 1800 Harrison Foundation, AMBAC-Insured,
Series A, 8.500% due 1/1/29 5,143,750
2,040,000 AAA Pinole, CA Redevelopment Agency, Tax Allocation, MBIA-Insured,
Series B, 6.750% due 8/1/17 1,864,050
1,625,000 AAA San Dieguito, CA Public Facilities Authority Revenue, AMBAC-Insured,
Series B, 7.000% due 8/1/18 1,517,344
------------------------------------------------------------------------------------------------------------------------------------
24,745,731
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 7
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
Georgia -- 3.7%
$ 4,500,000 AAA De Kalb County, GA Development Authority Revenue (Regional Office
Project), MBIA-Insured, 6.875% due 3/1/20 $ 4,123,125
------------------------------------------------------------------------------------------------------------------------------------
Maryland -- 1.6%
2,000,000 Aa2* Montgomery County, MD Housing Opportunities, Community Single-Family
Mortgage Revenue, Series C, 7.000% due 7/1/30 1,757,500
------------------------------------------------------------------------------------------------------------------------------------
Massachusetts -- 5.3%
6,500,000 AAA Northeastern University, MA Revenue, FSA-Insured, Series A,
7.040% due 10/1/28 5,947,500
------------------------------------------------------------------------------------------------------------------------------------
Pennsylvania -- 6.7%
5,000,000 AAA Delaware River Port Authority, PA District Project, FSA-Insured, Series A,
7.630% due 1/1/21 4,956,250
York County, PA IDA, Economic Development Revenue, FGIC-Insured, Series B:
2,295,000 AAA 6.875% due 10/1/18 2,099,925
525,000 AAA 7.000% due 10/1/23 483,656
------------------------------------------------------------------------------------------------------------------------------------
7,539,831
------------------------------------------------------------------------------------------------------------------------------------
Texas -- 8.7%
2,500,000 AAA Dallas-Fort Worth, TX International Airport Facilities Improvement Corp.
Revenue, MBIA-Insured, 7.070% due 11/1/24 2,315,625
7,530,000 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 7,482,938
------------------------------------------------------------------------------------------------------------------------------------
9,798,563
------------------------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost -- $61,794,929) 58,318,500
====================================================================================================================================
REPURCHASE AGREEMENT -- 0.9%
990,000 Morgan Stanley Dean Witter & Co., 6.530% due 8/1/00;
Proceeds at maturity -- $990,180; (Fully collateralized
by U.S. Treasury Notes, 4.500% to 6.375% due 8/15/00 to 2/15/07;
Market value -- $1,014,997) (Cost -- $990,000) 990,000
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $123,841,567**) $112,048,006
====================================================================================================================================
</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 2000 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 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Assets and Liabilities July 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $123,841,567) $112,048,006
Receivable for Fund shares sold 109,106
Receivable for securities sold 245,000
Interest receivable 2,539,763
------------------------------------------------------------------------------------
Total Assets 114,941,875
------------------------------------------------------------------------------------
LIABILITIES:
Payable to bank 202,125
Management fees payable 63,449
Payable for Fund shares purchased 29,175
Distribution fees payable 22,240
Accrued expenses 98,967
------------------------------------------------------------------------------------
Total Liabilities 415,956
------------------------------------------------------------------------------------
Total Net Assets $114,525,919
====================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 11,078
Capital paid in excess of par value 132,717,619
Undistributed net investment income 584,921
Accumulated net realized loss on security transactions (6,994,138)
Net unrealized depreciation of investments (11,793,561)
------------------------------------------------------------------------------------
Total Net Assets $114,525,919
====================================================================================
Shares Outstanding:
Class A 3,189,159
---------------------------------------------------------------------------------
Class B 6,272,196
---------------------------------------------------------------------------------
Class L 1,616,545
---------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 10.34
---------------------------------------------------------------------------------
Class B * $ 10.34
---------------------------------------------------------------------------------
Class L ** $ 10.34
---------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $ 10.83
---------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $ 10.44
====================================================================================
</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, 2000
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 10,512,604
-------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 882,842
Distribution fees (Note 2) 807,065
Shareholder and system servicing fees 98,901
Shareholder communications 55,772
Registration fees 40,073
Audit and legal 34,163
Trustees' fees 18,399
Pricing service fees 7,909
Custody 5,183
Other 6,915
-------------------------------------------------------------------------------
Total Expenses 1,957,222
-------------------------------------------------------------------------------
Net Investment Income 8,555,382
-------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 52,146,490
Cost of securities sold 57,067,283
-------------------------------------------------------------------------------
Net Realized Loss (4,920,793)
-------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation of Investments:
Beginning of year (11,735,933)
End of year (11,793,561)
-------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (57,628)
-------------------------------------------------------------------------------
Net Loss on Investments (4,978,421)
-------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 3,576,961
===============================================================================
See Notes to Financial Statements.
--------------------------------------------------------------------------------
12 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended July 31,
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
====================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 8,555,382 $ 10,001,622
Net realized loss (4,920,793) (1,586,644)
Increase in net unrealized depreciation (57,628) (12,619,508)
----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 3,576,961 (4,204,530)
----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (8,167,910) (10,075,382)
----------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (8,167,910) (10,075,382)
----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares 12,855,348 59,560,712
Net asset value of shares issued for reinvestment of dividends 5,864,146 7,474,258
Cost of shares reacquired (61,948,084) (47,266,874)
----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Fund Share Transactions (43,228,590) 19,768,096
----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (47,819,539) 5,488,184
NET ASSETS:
Beginning of year 162,345,458 156,857,274
----------------------------------------------------------------------------------------------------
End of year* $114,525,919 $162,345,458
====================================================================================================
* Includes undistributed net investment income of: $ 584,921 $ 197,449
====================================================================================================
</TABLE>
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; (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
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), acts as investment manager to the Fund. 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.
Citi Fiduciary Trust Company ("CFTC"), formerly known as Smith Barney Private
Trust Company, another subsidiary of Citigroup, acts as the Fund's transfer
agent and PFPC Global Fund Services ("PFPC") acts as the Fund's sub-transfer
agent. CFTC receives account fees and asset-based fees that vary according to
the account size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder accounts and is paid
by CFTC. For the year ended July 31, 2000, the Fund paid transfer agent fees of
$65,735 to CFTC.
Effective June 5, 2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of
SSBH, became the Fund's distributor replacing CFBDS, Inc. ("CFBDS"). In
addition, SSB acts as the primary broker for the
--------------------------------------------------------------------------------
14 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
Fund's portfolio agency transactions. Certain other broker-dealers continue to
sell Fund shares to the public as members of the selling group.
There are maximum initial sales charges of 4.50% and 1.00% for 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
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, 2000, SSB and CFBDS received sales charges of
approximately $17,000 and $20,000 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 $1,000 $271,000 $5,000
================================================================================
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, 2000, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $100,712 $563,899 $142,454
================================================================================
All officers and one Trustee of the Trust are employees of SSB.
3. Investments
During the year ended July 31, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $10,774,874
--------------------------------------------------------------------------------
Sales 52,146,490
================================================================================
At July 31, 2000, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 238,906
Gross unrealized depreciation (12,032,467)
--------------------------------------------------------------------------------
Net unrealized depreciation $(11,793,561)
================================================================================
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 (plus accrued interest) 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
--------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 15
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
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, 2000, the Fund had no open futures contracts.
6. Lending of Portfolio Securities
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations, and receives a lenders fee. Fees earned by the Fund on securities
lending are recorded in interest income. Loans of securities by the Fund are
collateralized by cash, U.S. government securities or high quality money market
instruments that are maintained at all times in an amount at least equal to the
current market value of the securities loaned, plus a margin which may vary
depending on the type of securities loaned. The custodian establishes and
maintains the collateral in a segregated account. The Fund maintains exposure
for the risk of any losses in the investment of amounts received as collateral.
At July 31, 2000, 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.
During the year ended July 31, 2000, the Fund did not enter into any 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, 2000, the Fund had no when-issued securities and had not entered
into any delayed delivery transactions.
9. Capital Loss Carryforward
At July 31, 2000, the Fund had, for Federal income tax purposes, capital loss
carryforwards of approximately $2,424,000 available, subject to certain
limitations, to offset future capital gains. To the extent that these
carryforward losses are used to offset capital gains, it is probable that the
gains so offset will not be distributed.
The amount and expiration of the carryforwards are indicated below. Expiration
occurs on July 31 of the year indicated:
2007 2008
================================================================================
Carryforward Amounts $1,372,000 $1,052,000
================================================================================
--------------------------------------------------------------------------------
16 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
10. Shares of Beneficial Interest
At July 31, 2000, 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, 2000, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class L
====================================================================================================================================
<S> <C> <C> <C>
Total Paid-in Capital $38,808,074 $74,421,558 $19,499,065
====================================================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
July 31, 2000 July 31, 1999
------------------------------- ----------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 331,660 $ 3,453,600 1,553,323 $ 18,008,777
Shares issued on reinvestment 186,040 1,948,681 238,783 2,703,100
Shares reacquired (2,211,021) (23,123,790) (1,649,788) (18,589,705)
------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,693,321) $(17,721,509) 142,318 $ 2,122,172
====================================================================================================================================
Class B
Shares sold 556,356 $ 5,831,747 2,436,732 $ 28,251,213
Shares issued on reinvestment 278,605 2,915,293 314,514 3,558,412
Shares reacquired (2,623,521) (27,408,846) (1,785,496) (20,175,965)
------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,788,560) $(18,661,806) 965,750 $ 11,633,660
====================================================================================================================================
Class L
Shares sold 340,670 $ 3,570,001 1,149,639 $ 13,300,722
Shares issued on reinvestment 95,547 1,000,172 107,281 1,212,746
Shares reacquired (1,093,084) (11,415,448) (751,724) (8,501,204)
------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (656,867) $ (6,845,275) 505,196 $ 6,012,264
====================================================================================================================================
</TABLE>
--------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
Class A Shares 2000(1) 1999(1) 1998(2)
=======================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $10.67 $ 11.53 $ 11.46
---------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.70 0.67 0.25
Net realized and unrealized gain (loss) (0.35) (0.85) 0.05
---------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.35 (0.18) 0.30
---------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.68) (0.68) (0.23)
---------------------------------------------------------------------------------------
Total Distributions (0.68) (0.68) (0.23)
---------------------------------------------------------------------------------------
Net Asset Value, End of Year $10.34 $ 10.67 $ 11.53
---------------------------------------------------------------------------------------
Total Return 3.40% (1.79)% 2.64%++
---------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $32,972 $52,101 $54,674
---------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.08% 1.02% 1.00%+
Net investment income 6.69 5.88 5.39+
---------------------------------------------------------------------------------------
Portfolio Turnover Rate 8% 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 a portion of its fees for the year ended July 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+
---- ---- ---- -----
$0.01 $0.01 1.11% 1.21%
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
--------------------------------------------------------------------------------
18 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights (continued)
--------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
Class B Shares 2000(1) 1999(1) 1998(2)
================================================================================
Net Asset Value, Beginning of Year $ 10.67 $ 11.53 $ 11.46
--------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.64 0.62 0.23
Net realized and unrealized gain (loss) (0.35) (0.86) 0.05
--------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.29 (0.24) 0.28
--------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.62) (0.62) (0.21)
--------------------------------------------------------------------------------
Total Distributions (0.62) (0.62) (0.21)
--------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.34 $ 10.67 $ 11.53
--------------------------------------------------------------------------------
Total Return 2.83% (2.29)% 2.48%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s) $64,843 $85,991 $81,797
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.61% 1.52% 1.50%+
Net investment income 6.15 5.39 4.90+
--------------------------------------------------------------------------------
Portfolio Turnover Rate 8% 32% 0%
================================================================================
(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 a portion of its fees for the year ended July 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+
---- ---- ---- -----
$0.01 $0.01 1.61% 1.71%
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
--------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 19
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights (continued)
--------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended July 31:
Class L Shares 2000(1) 1999(1) 1998(2)
================================================================================
Net Asset Value, Beginning of Year $ 10.67 $ 11.53 $ 11.46
--------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.65 0.62 0.22
Net realized and unrealized gain (loss) (0.35) (0.86) 0.06
--------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.30 (0.24) 0.28
--------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.63) (0.62) (0.21)
--------------------------------------------------------------------------------
Total Distributions (0.63) (0.62) (0.21)
--------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.34 $ 10.67 $ 11.53
--------------------------------------------------------------------------------
Total Return 2.89% (2.24)% 2.49%++
--------------------------------------------------------------------------------
Net Assets, End of Year (000s) $16,711 $24,253 $20,386
--------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.57% 1.47% 1.45%+
Net investment income 6.18 5.44 4.97+
--------------------------------------------------------------------------------
Portfolio Turnover Rate 8% 32% 0%
================================================================================
(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 a portion of its fees for the year ended July 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+
---- ---- ---- -----
$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.
--------------------------------------------------------------------------------
Tax Information (unaudited)
--------------------------------------------------------------------------------
A total of 0.06% 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.
--------------------------------------------------------------------------------
20 2000 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, 2000, 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, the financial highlights for each of
the years in the two-year period 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 auditing standards generally accepted
in the United States of America. 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, 2000, 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, 2000,
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, the financial
highlights for each of the years in the two-year period then ended and the
period from February 27, 1998 to July 31, 1998, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
New York, New York
September 11, 2000
--------------------------------------------------------------------------------
Smith Barney Total Return Bond Fund 21
<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
SSB Citi Fund Management LLC
Distributor
Salomon Smith Barney Inc.
Custodian
PFPC Trust Company
Transfer Agent
Citi Fiduciary Trust Company
125 Broad Street, 11th Floor
New York, New York 10004
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
This report is submitted for the general information of shareholders of Smith
Barney Total Return Bond Fund, but it may also be used as sales literature when
proceeded or accompanied by the current Prospectus, which gives details about
charges, expenses, investment objectives and operating policies of the Fund. If
used as sales material after October 31, 2000, this report must be accompanied
by performance information for the most recently completed calendar quarter.
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/mutualfunds
FD01539 9/00
