<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME
SHOWING AN EAGLE CENTERED
WITH THE AMERICAN FLAG
BEHIND IT.
1994 Smith Barney Shearson
ANNUAL ADJUSTABLE
REPORT RATE
GOVERNMENT
INCOME
FUND
.......................................
MAY 31, 1994
[LOGO]
<PAGE>
Adjustable Rate Government Income Fund
DEAR SHAREHOLDER:
We are pleased to present the Annual Report for the Smith
Barney Shearson Adjustable Rate Government Income Fund (the
"Fund") for the fiscal year ended May 31, 1994. The Fund is
an open-end bond fund whose investment objective is to seek high
current income and to limit the degree of fluctuation in its net
asset
value resulting from movements in interest rates by investing
primarily in a portfolio of adjustable rate mortgage-backed
securities
and U.S. government securities. The Fund is part of the Smith Barney
Shearson family of mutual funds and is managed by its investment
manager, Smith Barney Strategy Advisers Inc., and by its investment
sub-adviser, BlackRock Financial Management.
The Fund began operating on June 22, 1992 with an initial net asset
value for Class A shares of $10.00 per share. As of May 31, 1994,
the
net asset value for both Class A and Class B shares was $9.78 per
share. During the past year, the Fund's net asset value ranged from
$10.00 to $9.75 for both Class A and Class B shares. The Fund's net
asset value is calculated daily and reported for Class A shares in
the
mutual funds listing in national newspapers under the heading Smith
Barney Shearson Funds A as "AdjGvA".
THE FIXED-INCOME MARKETS
Declining U.S. interest rates dominated the market during 1993 as the U.S.
fixed
income markets presented a tremendous challenge to investors. Treasury yields
ended the year down over 100 basis points from the close of 1992 in part due
to
conflicting data regarding the economic recovery of the U.S. and due to
inflation continuing at low levels. However, as the economy showed clear signs
of improvement during the first half of 1994, the markets indicated that fears
of inflationary pressure were growing as both fixed-income and equity prices
declined. The Federal Reserve Board demonstrated its resolve to limit
inflation
with a series of "preemptive" measures. Four times between February and May,
the
central bank raised the federal funds rate -- the interest rate that banks
charge each other for overnight loans -- resulting in an overall increase from
3% to 4.25%. While these moves were intended to calm fears of rising long-term
rates, bond prices across all points of the yield curve declined
significantly,
with the yield on the two-year U.S. Treasury note eclipsing the 6% mark for
the
first time since early 1991, and the yield on the 30-year U.S. Treasury bond
crossing over 7.5%.
1
<PAGE>
Adjustable rate mortgage-backed securities ("ARMs") performed relatively well
in
these volatile markets, since their coupons adjust periodically to changes in
interest rates. However, ARMs with restrictive caps, which limit a coupon's
increase when a security resets, have experienced some pressure. In reaction
to
the recent rise in interest rates, mortgage prepayments have subsided to more
normal lower levels, causing mortgage investors to focus less on fears of
rapid
prepayments than on fears of extension risk. The concern is that, as interest
rates continue to rise, homeowners will "lock in" their current mortgage
rates,
making prepayments unlikely. This would result in a lengthening of the average
life of certain mortgage-backed securities ("MBSs"). Very seasoned, short
average life MBSs (30-year mortgages that originated in the late 1970s and now
have small remaining loan balances) have performed relatively well in this
environment since they are unlikely to extend significantly. One-year credit
card asset-backed securities have also performed well because of their AAA
credit quality, short term, stable cash flow and their 40 to 50 basis point
yield advantage over U.S. Treasury securities with comparable maturities. The
Fund's flexible asset allocation policy allows the portfolio managers to
allocate assets among different types of adjustable rate mortgage securities
and
other short term assets, thus providing the Fund with the opportunity to take
advantage of the value of the securities such as short average life
mortgage-backed securities and one-year credit card asset-backed securities.
PORTFOLIO STRATEGY AND PERFORMANCE
As sub-investment adviser, BlackRock is responsible for making the day-to-day
investment decisions for the portfolio. The Fund is managed to seek to achieve
a
volatility which corresponds to a 1-and 2-year Treasury by managing a
portfolio
primarily of ARMs. The adjustable rate securities in the Fund's portfolio have
coupons which adjust, subject to restrictive caps, in relation to changes in
certain indices, such as the 1-year Constant Maturity Treasury Index (an index
of Treasury securities with remaining terms of one year as published by the
Federal Reserve), 6-month London Interbank Offered Rate (LIBOR) and the 11th
District Cost of Funds Index (the weighted average costs of funds for savings
and loan institutions of the Federal Home Loan Bank of San Francisco). As the
value of the index changes at the time of the reset of the adjustable rate
mortgage, the coupon will adjust, subject to the terms of the security.
BlackRock manages the Fund using a "targeted duration" approach such that the
Fund's duration is approximately between 1 and 1 1/2 years. That duration
target
should create a fund with the price or net asset value
2
<PAGE>
sensitivity between a 1- and 2-year Treasury. Changes in the prices and yields
of these Treasury securities affect the value of the Fund's securities. In
addition to interest rates, the Fund's net asset value is affected by the rate
of prepayments of the mortgage securities in its portfolio. As such, the
Fund's
investment in mortgage-backed securities is highly dependent upon the degree
to
which homeowners refinance their mortgages. The actual performance of these
securities depends upon whether the rate of prepayments is higher or lower
than
anticipated at the time of purchase of these securities. The past year has
presented one of the most challenging periods for managers of mortgage
securities as the rate of prepayments of mortgages rose to unprecedented
levels
through the end of 1993, affecting the performance of such securities. This
was
followed by interest rates rising since the beginning of 1994 to two-year
highs.
The portfolio managers have positioned the Fund to take advantage of this
volatile market by limiting its exposure to fixed income instruments which are
highly sensitive to changes in interest rates such as interest-only securities
and other mortgage derivatives and emphasizing securities with stable cash
flows
and limited cap risk such as 1-year asset-backed securities, and short
weighted
average maturity MBSs.
In addition to the securities mentioned above, the Fund continues to be
weighted
heavily in ARMs, ending the fiscal period with 75% of the portfolio in these
securities. Since the coupons of ARMs reset periodically to reflect current
interest rates, thus limiting their price sensitivity, the Fund's
concentration
in these securities has helped to limit its net asset value volatility in
light
of the dramatic increase in short-term Treasury rates since the beginning of
1994. The Fund also emphasizes strong credit quality by investing primarily in
securities issued or guaranteed by the United States government, its agencies
or
instrumentalities. As of May 31, 1994, approximately 78% of the portfolio was
invested in U.S. Government or Agency securities and approximately 18% was
invested in "AAA" and 7% in "AA" rated securities.
The Fund's net asset value for its Class A shares has been relatively stable
since its inception in June 1992, fluctuating within a narrow band between
$10.05 and $9.75 and performing according to its investment objective. Since
year-end 1993, the 2-year Treasury has risen 1.73%; however, during this same
period the Fund has outperformed its benchmark, decreasing only 18 cents since
year-end. For the twelve-month period ended May 31, 1994, the Fund's net asset
value for both Class A and Class B shares fluctuated from $10.00 to $9.75. For
the dividend period ended June 10th, the Fund's monthly dividend was increased
to $0.03333 per share reflecting the resets towards higher interest rates of
many of the coupons of the ARMs in the
3
<PAGE>
portfolio. This new distribution rate represents an annualized rate of 4.09%
for
Class A shares. The Fund's SEC yield for Class A shares as of May 31, 1994 was
3.88%.
While the past year has been difficult for all investors, Smith Barney
Shearson
Adjustable Rate Government Income Fund has performed well in comparison to its
ARM fund peers largely because of its emphasis on securities with a low degree
of interest rate sensitivity and less cash flow risk. We believe that going
forward, this conservative strategy will continue to benefit investors seeking
to achieve relative stability of principal while earning a higher level of
income than that offered by money market funds. Of course, while the Fund's
share price will fluctuate with market conditions, money market funds seek to
maintain a stable net asset value of $1.00.
ECONOMIC OUTLOOK
We believe the Federal Reserve Board is likely to continue to tighten monetary
policy over the next four to six months in reaction to the weakened U.S.
dollar
and to demonstrate its commitment to controlling inflation, but recently
released data does not warrant as strong a market reaction as is currently the
case. As a result, our forecast is for continued volatility throughout the
summer as investors attempt to price in expected Fed tightening on the short
end
of the yield curve. After this period of volatility, however, we believe that
short-term interest rates, such as that of the two-year Treasury note, will
stabilize between 5.75% and 6.00% by the end of the year. In the interim, the
volatility in the markets should create additional demand for less interest
rate
sensitive investments, such as ARMs and short average life MBSs, which should
benefit the Fund throughout the next fiscal period.
4
<PAGE>
We would like to thank you for your investment in the Fund and look forward to
serving your future investment needs.
Sincerely,
Heath B. McLendon Keith T. Anderson
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
INVESTMENT OFFICER
Scott M. Amero Robert S. Kapito
VICE PRESIDENT AND VICE PRESIDENT AND
INVESTMENT OFFICER INVESTMENT OFFICER
JULY 15, 1994
5
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
May 31, Beginning Ending Distributed Paid Return
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
6/22/92*-
5/31/93 $10.00 $9.96 -- $0.43 3.89%
- ---------------------------------------------------------------------------
1994 9.96 9.78 -- 0.38 2.05
- ---------------------------------------------------------------------------
Total -- $0.81
- ---------------------------------------------------------------------------
Cumulative Total Return (6/22/92 through 5/31/94) 6.02%
- ---------------------------------------------------------------------------
<FN>
*The Fund commenced operations on June 22, 1992 and on November 6, 1992 its
existing shares were designated as Class A shares. On November 6, 1992 the
Fund
commenced offering Class B shares.
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
With Without
Waiver Waiver
<S> <C> <C>
- ---------------------------------------------------------------------------
Year Ended 1994 N/A 2.05%
- ---------------------------------------------------------------------------
Inception (6/22/92) through 5/31/94 3.06% 3.01%
- ---------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends at net asset value. A portion of the Fund's investment
management,
sub-investment advisory and administration fees were waived from inception
through May 31, 1993; a shareholder's actual return for the period during
which fees were waived would be the higher of the two numbers shown.
</TABLE>
NOTE: On November 6, 1992, existing shares of the Fund were designated Class A
shares. Class A shares are not subject to a sales charge. Class A shares are
subject to annual service and distribution fees of 0.25% and 0.50%,
respectively, of the value of the average daily net assets attributable to
that
class.
6
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends
and
capital gains) of a hypothetical investment of $10,000 in Adjustable Rate
Government Income Fund's Class A shares on June 22, 1992 through May 31, 1994
as
compared with the growth of a $10,000 investment in the U.S. Government 1-Year
Treasury Bill. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 U.S. GOVERNMENT
MONTH INVESTED IN CLASS A SHARES 1-YEAR
ENDED OF THE FUND TREASURY BILL
<S> <C> <C>
06/22/92 $10,000 --
06/92 $10,050 $10,000
08/92 $10,095 $10,057
11/92 $10,166 $10,138
02/93 $10,310 $10,224
05/93 $10,389 $10,306
08/93 $10,533 $10,392
11/93 $10,540 $10,477
02/94 $10,633 $10,570
05/94 $10,602 $10,691
</TABLE>
+ Illustration of $10,000 invested in Class A shares on June 22, 1992 assuming
reinvestment of dividends at net asset value through May 31, 1994.
The U.S. Government 1-Year Treasury Bill Index is comprised of U.S.
Government
Treasury Bills with a maturity of one year.
Index information is available at month-end only; therefore the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares
upon redemption may be worth more or less than original cost.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS REPORT.
7
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
May 31, Beginning Ending Distributed Paid Return*
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------
11/6/92-
5/31/93 $9.96 $9.96 -- $0.25 2.56%
- --------------------------------------------------------------------------
1994 9.96 9.78 -- 0.38 2.05
- --------------------------------------------------------------------------
Total -- $0.63
- --------------------------------------------------------------------------
Cumulative Total Return (11/6/92 through 5/31/94) 4.66%
- --------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends at net asset value and do not
assume deduction of the contingent deferred sales charge ("CDSC").
</TABLE>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
With Without
Waiver Waiver
<S> <C> <C>
- ----------------------------------------------------------------------------
Year Ended 1994 N/A 2.05%
- ----------------------------------------------------------------------------
Inception (11/6/92) through 5/31/94 2.97% 2.90%
- ----------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends at net asset value. A portion of the Fund's investment
management,
sub-investment advisory and administration fees were waived from inception
through May 31, 1993; a shareholder's actual return for the period during
which fees were waived would be the higher of the two numbers shown.
</TABLE>
NOTE: Class B shares may be acquired only through exchanges from Class B
shares
of other Smith Barney Shearson Funds and will assume the CDSC structure of the
shares from which the exchange was made. Class B shares are subject to annual
service and distribution fees of 0.25% and 0.50%, respectively, of the value
of
the average daily net assets attributable to that class.
8
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends
and
capital gains) of a hypothetical investment of $10,000 in Adjustable Rate
Government Income Fund's Class B shares on November 9, 1992 through May 31,
1994
as compared with the growth of a $10,000 investment in U.S. Government 1-Year
Treasury Bill. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
GROWTH OF $10,000 GROWTH OF $10,000
INVESTMENT IN THE
INVESTED IN CLASS B SHARES INVESTED IN CLASS B SHARES U.S.
GOVERNMENT
MONTH OF THE FUND OF THE FUND
1-YEAR
ENDED (NO LOAD) (BACK-END LOAD)
TREASURY BILL
<S> <C> <C> <C>
10/31/92 -- --
$10,000
11/09/92 $10,000 $10,000
- --
11/92 $10.036 $10,036
$10,029
02/93 $10,178 $10,178
$10,114
05/93 $10,256 $10,256
$10,196
08/93 $10,397 $10,397
$10,280
11/93 $10,404 $10,404
$10,365
02/94 $10,497 $10,497
$10,456
05/94 $10,466 $ 9,975
$10,576
</TABLE>
+ Illustration of $10,000 invested in Class B shares on November 6, 1992
assuming deduction of the maximum CDSC at time of redemption and
reinvestment
of dividends at net asset value through May 31, 1994.
++ Value does not assume deduction of applicable CDSC.
+++ Value assumes deduction of applicable CDSC (assuming redemption on May 31,
1994).
The U.S. Government 1-Year Treasury Bill Index is comprised of U.S.
Government Treasury Bills with a maturity of one year.
Index information is available at month-end only; therefore the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results. Investment return and
principal value of an investment will fluctuate so that an investor's
shares
upon redemption may be worth more or less than original cost.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS REPORT.
9
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS MAY 31,
1994
PORTFOLIO BREAKDOWN
Pie chart depicting the allocation of the Adjustable Rate Government Income
Fund's investment securities held at May 31, 1994 by industry classification.
The pie is broken in pieces representing industries in the following
percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Asset-Backed Securities 7.1%
Collateralized Mortgage Obligation
Planned Amortization Class
Interest-Only Strips 0.8%
Principal-Only Strips 0.5%
Adjustable Rate Mortgage-Backed
Securities 71.9%
Put Option Purchased 0.1%
U.S. Treasury Notes 0.8%
Fixed Rate Mortgage Pass-Through
Securities 9.5%
Fixed Rate Collateralized Mortgage
Obligations 4.9%
Project Loans 4.4%
</TABLE>
*Percentages are based on total investments
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES (ARMS) are instruments that bear
interest at rates that adjust at periodic intervals at a fixed amount over the
market levels of interest rates as reflected in specified indexes. ARMs
directly
or indirectly represent an interest in, or are backed by and are payable from
mortgage loans secured by real property.
ASSET-BACKED SECURITIES are similar in structure to Mortgage-Backed
Securities,
except that the underlying asset pools consist of credit card, automobile or
other types of receivables, or of commercial loans.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) are Mortgage-Backed Securities
collateralized by mortgage loans or mortgage pass-through securities.
Typically,
CMOs are collateralized by GNMA, FNMA or FHLMC Mortgage Pass-Through
Certificates, but also may be collateralized by whole loans or private
mortgage
pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS PLANNED AMORTIZATION CLASS INTEREST ONLY
(PAC IOS) are CMO IOs which have repayment schedules that are guaranteed if
the
actual speed of prepayments is within a designated range.
PRINCIPAL-ONLY STRIPS (POS) are a common type of Stripped Mortgage-Backed
Securities which receive most of the principal and some of the interest from
the
underlying assets. In the most extreme case the PO Strips would receive all
the
principal and none of the interest from the underlying assets.
10
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS MAY 31,
1994
-------------------------------------------------------------
<TABLE>
<S> <C>
KEY TO ABBREVIATIONS
CMO -- Collateralized Mortgage Obligation
COFI -- Cost of funds for member institutions for the
Federal Home Loan Bank of San Francisco
IO -- Interest Only
LIBOR -- London Interbank Offered Rate
PAC -- Planned Amortization Class
PO -- Principal Only
REMIC -- Real Estate Mortgage Investment Conduit
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
---------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 82.2%
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 22.9%
FHLMC ONE YEAR+ -- 7.4%
$ 4,182,855 5.506%, 12/1/18 $ 4,250,157
7,429,699 5.549%, 5/1/19 7,544,637
4,723,522 5.193%, 12/1/20 4,803,963
4,771,294 5.689%, 3/1/22 4,880,127
---------------------------------------------------------------------
21,478,884
---------------------------------------------------------------------
FHLMC THREE YEAR+ -- 1.5%
1,027,486 8.281%, 2/1/18 1,045,879
3,285,448 8.052%, 1/1/22 3,356,085
---------------------------------------------------------------------
4,401,964
---------------------------------------------------------------------
FHLMC SIX MONTH LIBOR+ -- 1.9%
5,366,437 5.042%, 4/1/23 5,470,439
---------------------------------------------------------------------
FHLMC -- FLOATERS+ -- 7.3%
9,000,000 Multiclass 1043F, 5.450%, 2/15/21 9,101,250
11,000,000 Multiclass 1189G, 8.500%, 1/15/22 12,402,500
---------------------------------------------------------------------
21,503,750
---------------------------------------------------------------------
FHLMC -- SUPER FLOATERS+ -- 2.8%
Multiclass 1584, Series FB, 5.828%,
7,806,903 9/15/23 8,119,179
---------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31,
1994
<TABLE>
<CAPTION>
MARKET VALUE
(NOTE 1)
FACE VALUE
---------------------------------------------------------------------
<C> <S> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES --
(CONTINUED)
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) --
(CONTINUED)
FHLMC COFI+ -- 2.0%
$ 5,998,908 4.463%, 9/1/13 $ 5,833,938
---------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 21.2%
FNMA ONE YEAR+ -- 7.2%
6,424,433 5.210%, 5/1/22 6,504,738
6,669,908 5.073%, 8/1/22 6,771,624
200,346 5.523%, 2/1/23 203,383
7,596 5.206%, 9/1/22 7,699
7,533,280 5.792%, 4/1/23 7,669,858
---------------------------------------------------------------------
21,157,302
---------------------------------------------------------------------
FNMA THREE YEAR+ -- 5.9%
9,372,990 7.897%, 11/1/17 9,494,839
4,241,697 7.380%, 9/1/20 4,301,505
3,303,527 7.452%, 7/1/22 3,377,856
---------------------------------------------------------------------
17,174,200
---------------------------------------------------------------------
FNMA SIX MONTH CERTIFICATE OF DEPOSIT+
-- 2.7%
8,317,713 4.250%, 7/29/94 8,166,996
---------------------------------------------------------------------
FNMA SIX MONTH LIBOR+ -- 2.7%
2,017,165 5.470%, 7/1/22 2,086,939
1,338,571 5.288%, 8/1/22 1,380,937
4,531,419 5.129%, 4/1/23 4,534,274
---------------------------------------------------------------------
8,002,150
---------------------------------------------------------------------
FNMA -- FLOATERS+ -- 2.7%
7,721,324 REMIC 92-123, Class F, 5.594%, 3/25/21 7,759,931
---------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) --
16.7%
GNMA ONE YEAR+ -- 16.7%
10,000,000 6.500%, 7/25/94 10,050,000
10,027,019 4.875%, 8/20/21 9,726,208
15,902,637 5.500%, 8/20/22 15,798,316
12,905,442 6.500%, 4/20/23 13,103,024
---------------------------------------------------------------------
48,677,548
---------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31,
1994
<TABLE>
<CAPTION>
MARKET VALUE
(NOTE 1)
FACE VALUE
---------------------------------------------------------------------
<C> <S> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES --
(CONTINUED)
NON-AGENCY ARMS -- 21.4%
Bear Stearns, Series 1992-3B, Class A2,
$ 4,944,740 7.571%, 5/25/23 $ 4,969,464
Capstead Mortgage Corporation II, Series
8,152,822 93-H, Class A1,
5.094%, 9/25/23 8,203,777
Prudential Home Mortgage Services,
10,997,099 Series 92-15, Class A1,
6.300%, 5/25/22 11,148,309
Resolution Trust Corporation, Series
5,180,681 1992-4, Class A2,
5.880%, 7/25/28 5,237,358
Resolution Trust Corporation, Series
6,803,355 1992-4, Class A,
8.854%, 6/25/24 6,860,776
Salomon Brothers Corporation:
4,777,246 Series 92-5, Class VII, 5.824%, 11/25/22 4,839,923
10,093,197 Series 93-2, Class VII, 5.807%, 3/25/23 10,244,595
Sears Mortgage Corporation, 92-16 Class
10,882,136 A2,
5.058%, 8/25/20 10,990,958
---------------------------------------------------------------------
62,495,160
---------------------------------------------------------------------
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost $242,276,942) 240,241,441
---------------------------------------------------------------------
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- 10.9%
FHLMC 15 YEAR -- 3.2%
6,425,079 8.500%, 10/1/01 6,540,730
2,635,016 9.000%, 11/1/05 2,705,450
---------------------------------------------------------------------
9,246,180
---------------------------------------------------------------------
FHLMC GOLD 30 YEAR -- 0.4%
1,105,656 9.000%, 10/1/20 1,141,745
---------------------------------------------------------------------
FHLMC 30 YEAR -- 4.2%
8,030,652 7.500%, 7/1/07 7,991,623
4,329,329 9.000%, 9/1/09 4,467,781
---------------------------------------------------------------------
12,459,404
---------------------------------------------------------------------
FNMA 30 YEAR -- 0.5%
1,537,137 8.500%, 7/1/17 1,560,195
---------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31,
1994
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------
<C> <S> <C>
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- (CONTINUED)
GNMA 30 YEAR SEASONED -- 2.6%
$ 7,365,538 8.000%, 3/15/08 $ 7,441,034
---------------------------------------------------------------------
TOTAL FIXED RATE MORTGAGE PASS-THROUGH SECURITIES
(Cost $33,219,768) 31,848,558
---------------------------------------------------------------------
FIXED RATE CMOS -- 7.1%
AGENCY BACKED FIXED RATE CMO -- 3.7%
Salomon Brothers Corporation, Series
9,930,162 83-1, Class Z,
12.000%, 12/1/13 10,873,527
---------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED FIXED RATE
CMO -- 1.4%
Cheslock Bakker Mortgage Corporation,
4,000,000 7.158%, 1/25/04 3,952,520
---------------------------------------------------------------------
NON-AGENCY BACKED FIXED RATE CMO -- 0.5%
Resolution Trust Corporation, Series
1,553,428 1991-M5, Class A1,
9.000%, 3/15/17 1,570,904
---------------------------------------------------------------------
PAC IOS -- 0.9%
28,932 FNMA REMIC 91-132, Class J,
1018.775%, (1) 12/25/18 708,243
55,569 FNMA REMIC 90-76, Class L,
960.75% (2),
7/25/20 1,331,615
22,818 FNMA REMIC 90-106, Class K,
928.95% (3),
9/25/20 530,002
---------------------------------------------------------------------
2,569,860
---------------------------------------------------------------------
PAC POS -- 0.6%
1,847,581 FNMA REMIC 92-115A, Zero Coupon, 6/25/22 1,829,400
---------------------------------------------------------------------
TOTAL FIXED RATE CMO'S
(Cost $23,074,155) 20,796,211
---------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31,
1994
<TABLE>
<CAPTION>
MARKET VALUE
(NOTE 1)
FACE VALUE
---------------------------------------------------------------------
<C> <S> <C>
PROJECT LOANS -- 5.0%
FEDERAL HOUSING ADMINISTRATION -- 5.0%
$ 1,949,396 Alliance, 7.350%, 4/1/19 $ 1,907,991
9,321,071 Citi, Project 85-1, 6.875%, 3/1/16 9,376,252
3,363,823 Salomon, 7.350%, 12/1/19 3,287,767
---------------------------------------------------------------------
TOTAL PROJECT LOANS
(Cost $15,162,255) 14,572,010
---------------------------------------------------------------------
ASSET-BACKED SECURITIES -- 8.1%
First Chicago Mortgage Trust II, Series
10,000,000 90-A, 9.250%, 6/15/95 10,312,500
12,900,000 Standard Credit Card, 9.375%, 6/10/95 13,319,250
---------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $23,929,582) 23,631,750
---------------------------------------------------------------------
U.S. TREASURY NOTES -- 0.9% (Cost $2,565,527)
2,600,000 U.S. Treasury Notes, 5.125%, 3/31/96 2,563,418
---------------------------------------------------------------------
<CAPTION>
NUMBER OF
CONTRACTS
<C> <S> <C>
---------------------------------------------------------------------
PUT OPTIONS PURCHASED -- 0.1% (Cost $404,301)
Five Year U.S. Treasury Notes,
517 September, $102.00 274,656
---------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $340,632,530*) 114.3 333,928,044
---------------------------------------------------------------------
<CAPTION>
FACE VALUE
<C> <S> <C>
---------------------------------------------------------------------
SECURITIES SOLD SHORT -- (3.7)% (Cost $10,887,625)
U.S. Treasury Notes, 6.500%,
$(10,820,000) 5/15/97+++ (3.7) (10,887,625)
---------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31,
1994
<TABLE>
<CAPTION>
MARKET VALUE
(NOTE 1)
NUMBER OF
CONTRACTS
---------------------------------------------------------------------
<C> <S> <C>
FUTURES CONTRACTS -- LONG POSITION -- 1.8% (Contract Amount
$5,217,188)
50 September 5 year U.S. Treasury Note 1.8 $ 5,196,875
---------------------------------------------------------------------
FUTURES CONTRACTS -- SHORT POSITION -- (10.0)% (Contract Amount
$28,971,594)
(278) June 5 year U.S. Treasury Note (10.0) (29,142,219)
---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) (2.4) (6,943,088)
---------------------------------------------------------------------
NET ASSETS 100.0% $292,151,987
---------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Initial mortgage rates fixed for period indicated. Thereafter, interest
rates
are subject to periodic adjustment based on a benchmark index.
+++ Collateralized by a cash deposit with the broker in the amount of
$10,891,006.
(1) Annualized yield at date of purchase (unaudited): 23.221%.
(2) Annualized yield at date of purchase (unaudited): 13.721%.
(3) Annualized yield at date of purchase (unaudited): 18.505%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES MAY 31,
1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$340,632,530) (Note 1)
See accompanying schedule $333,928,044
Cash 305,945
Receivable for investment securities
sold 105,972,977
Deposit with broker (Note 1) 10,891,006
Interest receivable 3,585,344
Receivable for Fund shares sold 951,739
Unamortized organization costs (Note 7) 95,056
Prepaid expenses 26,995
Fee income receivable 5,391
- ----------------------------------------------------------------------------
TOTAL ASSETS 455,762,497
- ----------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities
purchased $99,650,646
Securities sold under agreement to
repurchase (Notes 1 and 5) 50,700,000
Investments sold short, at value
(Contract amount $10,887,625) (Note
1)
See accompanying schedule 10,887,625
Payable for Fund shares redeemed 993,210
Dividends payable 678,187
Net unrealized depreciation of futures
contracts
(Note 1) See accompanying schedule 190,938
Distribution fee payable (Note 3) 132,627
Investment advisory fee payable (Note
2) 105,718
Service fees payable (Note 3) 66,314
Administration fee payable (Note 2) 52,859
Custodian fees payable (Note 2) 12,763
Transfer agent fees payable (Note 2) 9,556
Accrued Trustees' fees and expenses
(Note 2) 3,500
Accrued expenses and other payables 117,192
- ----------------------------------------------------------------------------
TOTAL LIABILITIES 163,601,135
- ----------------------------------------------------------------------------
NET ASSETS $292,161,362
- ----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) MAY 31,
1994
<TABLE>
<S> <C> <C>
NET ASSETS consist of:
Distributions in excess of net
investment income $ (209,374)
Accumulated net realized loss on
securities transactions, futures
contracts and investments sold
short (1,425,398)
Net unrealized depreciation of
securities, written options,
futures contracts and investments
sold short (6,895,424)
Par value 29,885
Paid-in capital in excess of par
value 300,661,673
- --------------------------------------------------------------------------
TOTAL NET ASSETS $292,161,362
- --------------------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE, offering and redemption price per
share
($283,627,176 DIVIDED BY 29,012,075 shares of
beneficial interest outstanding) $9.78
- --------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($8,421,610 DIVIDED BY 861,490 shares of beneficial
interest outstanding) $9.78
- --------------------------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per
share
($112,576 DIVIDED BY 11,516 shares of beneficial
interest outstanding) $9.78
- --------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any
applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MAY 31,
1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest (Note 5)
$22,894,057
- ------------------------------------------------------------------------------
- ------
EXPENSES:
Distribution fee (Note 3) $1,898,235
Investment advisory fee (Note 2) 1,518,588
Service fees (Note 3) 949,117
Administration fee (Note 2) 759,294
Transfer agent fees (Notes 2 and 4) 125,735
Legal and audit fees 115,182
Custodian fees (Note 2) 103,651
Amortization of organization costs (Note 7) 31,692
Trustees' fees and expenses (Note 2) 18,026
Other 274,309
- ------------------------------------------------------------------------------
- ------
Total Expenses before interest
5,793,829
Interest expense (Note 5)
2,994,801
- ------------------------------------------------------------------------------
- ------
TOTAL EXPENSES
8,788,630
- ------------------------------------------------------------------------------
- ------
NET INVESTMENT INCOME
14,105,427
- ------------------------------------------------------------------------------
- ------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities transactions
(1,061,058)
Written options
(56,400)
Futures contracts
200,460
Investments sold short
3,381
- ------------------------------------------------------------------------------
- ------
Net realized loss on investments during the
year
(913,617)
- ------------------------------------------------------------------------------
- ------
Net change in unrealized
appreciation/(depreciation) of:
Securities
(5,889,741)
Written options
63,600
Futures contracts
(190,938)
- ------------------------------------------------------------------------------
- ------
Net unrealized depreciation of investments during the year
(6,017,079)
- ------------------------------------------------------------------------------
- ------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(6,930,696)
- ------------------------------------------------------------------------------
- ------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $
7,174,731
- ------------------------------------------------------------------------------
- ------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MAY 31,
1994
<TABLE>
<S> <C> <C>
NET INCREASE IN CASH:
Cash flows from operating activities:
Interest received $ 25,804,870
Fee income received 136,250
Operating expenses paid (5,660,379)
- ------------------------------------------------------------------------------
- -----
Net cash provided by operating
activities $
20,280,741
- ------------------------------------------------------------------------------
- -----
Cash flows from investing activities:
Increase in short-term portfolio
securities, net (28,162)
Purchase of long term investment
securities and purchased options (2,241,630,143)
Proceeds from disposition of investment
securities and purchased options 2,239,971,181
Net proceeds from futures transactions 200,460
- ------------------------------------------------------------------------------
- -----
Net cash used in investing activities
(1,486,664)
- ------------------------------------------------------------------------------
- -----
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES
18,794,077
- ------------------------------------------------------------------------------
- -----
Cash flows from financing activities:
Proceeds from shares sold 401,910,444
Payments on shares redeemed (422,502,690)
Cash dividends paid to shareholders* (1,417,631)
Increase in reverse repurchase agreements
outstanding 6,555,000
Interest expense (3,016,830)
- ------------------------------------------------------------------------------
- -----
NET CASH USED IN FINANCING ACTIVITIES
(18,471,707)
- ------------------------------------------------------------------------------
- -----
NET INCREASE IN CASH
322,370
CASH -- BEGINNING OF YEAR
(16,425)
- ------------------------------------------------------------------------------
- -----
CASH -- END OF YEAR $
305,945
- ------------------------------------------------------------------------------
- -----
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM OPERATIONS TO
CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES:
Net increase in net assets resulting from
operations $
7,174,731
Decrease in investments $ 15,772,247
Increase in securities sold short and
written options 10,777,625
Increase in futures contracts 190,938
Decrease in receivable for investment
securities sold (106,601,819)
Increase in payable for investment
securities purchased 89,414,260
Increase in interest and fees receivable (1,062,156)
Decrease in other assets 4,697
Increase in accrued expenses 128,753
Interest expense 2,994,801
- ------------------------------------------------------------------------------
- -----
TOTAL ADJUSTMENTS
11,619,346
- ------------------------------------------------------------------------------
- -----
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES $
18,794,077
- ------------------------------------------------------------------------------
- -----
<FN>
* Non-cash financing activities include reinvestment of dividends of
$12,939,671.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
5/31/94
5/31/93*
<S> <C>
<C>
Net investment income $ 14,105,427
$ 7,608,601
Net realized loss on securities transactions, futures
contracts and investments sold short during the
period (913,617)
(511,781)
Net unrealized depreciation on securities, written
options, futures contracts and investments sold
short during the period (6,017,079)
(878,345)
- ------------------------------------------------------------------------------
- -------
Net increase in net assets resulting from operations 7,174,731
6,218,475
Distributions to shareholders from net investment
income:
Class A (13,963,952)
(7,521,122)
Class B (195,811)
(29,148)
Class D (3,995)
- --
Distributions to shareholders in excess of net
investment income:
Class A (206,420)
- --
Class B (2,895)
- --
Class D (59)
- --
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A (22,490,133)
314,407,594
Class B 4,982,086
3,577,056
Class D 114,945
10
- ------------------------------------------------------------------------------
- -------
Net increase/(decrease) in net assets (24,591,503)
316,652,865
NET ASSETS:
Beginning of year 316,752,865
100,000
- ------------------------------------------------------------------------------
- -------
End of year (including distributions in excess of net
investment income and undistributed net investment
income of $209,374 and $58,331, respectively) $292,161,362
$316,752,865
- ------------------------------------------------------------------------------
- -------
<FN>
* The Fund commenced operations on June 22, 1992.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
5/31/94
5/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 9.96 $
10.00
- ------------------------------------------------------------------------------
- --
Income from investment operations:
Net investment income 0.37
0.44#
Net realized and unrealized loss on investments (0.17)
(0.05)
- ------------------------------------------------------------------------------
- --
Total from investment operations 0.20
0.39
Less distributions:
Distributions from net investment income (0.37)
(0.43)
Distributions in excess of net investment income (0.01) --
- ------------------------------------------------------------------------------
- --
Total distributions (0.38)
(0.43)
- ------------------------------------------------------------------------------
- --
Net Asset Value, end of period $ 9.78 $
9.96
- ------------------------------------------------------------------------------
- --
Total return++ 2.05%
3.89%
- ------------------------------------------------------------------------------
- --
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $283,627
$313,184
Ratio of operating expenses to average net assets+ 1.53%
1.50%**
Ratio of net investment income to average net
assets 3.72%
4.36%**
Portfolio turnover rate 525%
236%
- ------------------------------------------------------------------------------
- --
<FN>
* The Fund commenced operations on June 22, 1992. Any shares in existence
prior
to November 6, 1992 were designated as Class A shares.
** Annualized.
+ The annualized operating expense ratios exclude interest expense. The
ratios
including interest expense for the year ended May 31, 1994 and period
ended
May 31, 1993 were 2.31% and 1.92%, respectively. Annualized expense ratio
before voluntary waiver of fees by investment adviser, sub-investment
adviser
and administrator (including interest expense) for the period ended May
31,
1993 was 2.03%.
++ Total return represents the aggregate total return for the period
indicated.
# Net investment income before voluntary waiver of fees by investment
adviser,
sub-investment adviser and administrator for the period ended May 31,
1993
was $0.43.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
5/31/94
5/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 9.96 $
9.96
- ------------------------------------------------------------------------------
- --
Income from investment operations:
Net investment income 0.37
0.25#
Net realized and unrealized loss on investments (0.17) --
- ------------------------------------------------------------------------------
- --
Total from investment operations 0.20
0.25
Less distributions:
Distributions from net investment income (0.37)
(0.25)
Distributions in excess of net investment income (0.01) --
- ------------------------------------------------------------------------------
- --
Total distributions (0.38)
(0.25)
- ------------------------------------------------------------------------------
- --
Net Asset Value, end of period $ 9.78 $
9.96
- ------------------------------------------------------------------------------
- --
Total return++ 2.05%
2.56%
- ------------------------------------------------------------------------------
- --
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $8,422
$3,569
Ratio of operating expenses to average net assets+ 1.57%
1.50%**
Ratio of net investment income to average net assets 3.68%
4.36%**
Portfolio turnover rate 525%
236%
- ------------------------------------------------------------------------------
- --
<FN>
* On November 6, 1992 the Fund commenced selling Class B shares.
** Annualized.
+ The annualized operating expense ratios exclude interest expense. The
ratios
including interest expense for the year ended May 31, 1994 and period
ended
May 31, 1993 were 2.35% and 1.92%, respectively. Annualized expense ratio
before voluntary waiver of fees by investment adviser, sub-investment
adviser
and administrator (including interest expense) for the period ended May
31,
1993 was 2.03%.
++ Total return represents the aggregate total return for the period
indicated
and does not reflect any applicable sales charges.
# Net investment income before voluntary waiver of fees by investment
adviser,
sub-investment adviser and administrator for the period ended May 31,
1993
was $0.24.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
5/31/94*
<S> <C>
Net Asset Value, beginning of period $ 9.98
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.37
Net realized and unrealized loss on investments (0.19)
- ----------------------------------------------------------------------------
Total from investment operations 0.18
Less distributions:
Distributions from net investment income (0.37)
Distributions in excess of net investment income (0.01)
- ----------------------------------------------------------------------------
Total distributions (0.38)
- ----------------------------------------------------------------------------
Net Asset Value, end of period $ 9.78
- ----------------------------------------------------------------------------
Total return++ 1.83%
- ----------------------------------------------------------------------------
Ratios to average net assets/Supplemental Data (annualized):
Net assets, end of period (in 000's) $ 113
Ratio of operating expenses to average net assets+ 1.55%
Ratio of net investment income to average net assets 3.69%
Portfolio turnover rate 525%
- ----------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class D shares on June 2, 1993.
+ The annualized operating expense ratio excludes interest expense. The
ratio
including interest expense for the period ended May 31, 1994 was 2.34%.
++ Total return represents the aggregate total return for the period
indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Adjustable Rate Government Income Fund (the "Fund") was
organized as a "Massachusetts business trust" under the laws of The
Commonwealth
of Massachusetts on May 7, 1992. The Fund is a diversified, open-end
management
investment company registered with the Securities and Exchange Commission
under
the Investment Company Act of 1940, as amended (the "1940 Act"). As of
November
6, 1992, the Fund offered two classes of shares: Class A shares available for
direct purchases and Class B shares available only through exchanges. Class A
shares are sold without a sales charge. Class B shares may be subject to a
contingent deferred sales charge ("CDSC") upon redemption. Class B shares will
convert automatically to Class A shares eight years after the date of original
purchase. On January 29, 1993, the Fund began offering Class D shares to
investors that are eligible to participate in the Smith Barney 401(k) Program.
Class D shares are offered without a front-end sales load or a CDSC. All
classes
of shares have identical rights and privileges except with respect to the
effect
of the respective sales charges to each class, if any, expenses allocable
exclusively to each class, voting rights on matters affecting a single class,
and the conversion feature of Class B shares. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
PORTFOLIO VALUATION: Generally, the Fund's investments are valued at market
value or, in the absence of market value with respect to any portfolio
securities, at fair value as determined by or under the direction of the
Fund's
Board of Trustees. An option generally is valued at the last sale price or, in
the absence of the last sales price, the last offer price. Investments in U.S.
government securities (other than short-term securities) are valued at the
quoted bid price in the over-the-counter market. Corporate debt securities,
mortgage-backed securities and asset-backed securities are valued on the basis
of valuations provided by dealers in those instruments or by an independent
pricing service, approved by the Fund's Board of Trustees. The value of a
futures contract equals the unrealized gain or loss on the contract, which is
determined by marking the contract to the current settlement price for a like
contract acquired on the day on which the futures contract is being valued.
Short-term investments that mature in 60 days or less are valued at amortized
cost.
25
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession
of
an underlying debt obligation subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is
at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the
right
to use the collateral to offset losses incurred. There is potential loss to
the
Fund in the event the Fund is delayed or prevented from exercising its rights
to
dispose of the collateral securities, including the risk of a possible decline
in the value of the underlying securities during the period while the Fund
seeks
to assert its rights. The Fund's investment manager or administrator, acting
under the supervision of the Board of Trustees, reviews on an ongoing basis
the
value of the collateral and the creditworthiness of those banks and dealers
with
which the Fund enters into repurchase agreements to evaluate potential risks.
OPTIONS: Upon the purchase of a put option or a call option by the Fund, the
premium paid is recorded as an investment, the value of which is
marked-to-market daily. When a purchased option expires, the Fund will realize
a
loss in the amount of the cost of the option. When the Fund enters into a
closing sale transaction, the Fund will realize a gain or loss depending on
whether the sales proceeds from the closing sale transaction are greater or
less
than the cost of 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. When purchased
index
options are exercised, settlement is made in cash.
When the Fund writes a call option or a 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
26
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 sold) without regard to any unrealized gain or loss on the
underlying
security or index, and the liability related to such option is eliminated.
When
a call option is exercised, the Fund realizes a gain or loss from the sale of
the underlying security and the proceeds from such sale are increased 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 risk in writing a call option is that the Fund
may
forego the opportunity of profit if the market value of the underlying
security
or index increases and the option is exercised. The risk in writing a put
option
is that the Fund may incur a loss if the market value of the underlying
security
or index decreases and the option is exercised. In addition, there is the risk
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.
FUTURES CONTRACTS: Upon entering into a futures contract, the Fund is required
to deposit with the broker an amount of cash or cash equivalents equal to a
certain percentage of the contract amount. This is known as the "initial
margin." Subsequent payments ("variation margin") are made or received by the
Fund each day, depending on the daily fluctuation of the value of the
contract.
The daily changes in the contract are recorded as unrealized gains or losses
and
are shown net on the balance sheet. The Fund recognizes a realized gain or
loss
when the contract is closed.
There are several risks associated with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with
the
change in value of the hedged investments. In addition, there is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid
secondary market.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreement transactions with member banks on the Federal Reserve Bank of New
York's list of reporting dealers for leverage purposes. A reverse
27
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Fund's use
of the proceeds of the agreement may be restricted pending a determination by
the party, or its trustee or receiver, whether to enforce the Fund's
obligation
to repurchase the securities. The Fund will establish a segregated account
with
its custodian, Boston Safe Deposit and Trust Company ("Boston Safe"), 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.
DOLLAR ROLL TRANSACTIONS: The Fund may enter into dollar roll transactions
with
broker dealers to take advantage of opportunities in the mortgage market. A
dollar roll transaction involves a sale by the Fund of securities that it
holds
with an agreement by the Fund to repurchase similar securities at an agreed
upon
price and date. The securities repurchased will bear the same interest as
those
sold, but generally will be collateralized by pools of mortgages with
different
prepayment histories than those securities sold. During the period between the
sale and repurchase, the Fund will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be
invested
and the income from these investments, together with any additional income
received on the sale, will generate income for the Fund exceeding the yield on
the securities sold. Dollar roll transactions involve the risk that the market
value of the securities may decline in value.
SHORT SALES: A short sale is a transaction in which the Fund sells securities
it
does not own (but has borrowed) in anticipation of a decline in the market
price
of the securities. To complete a short sale, the Fund must arrange through a
broker to borrow the securities to be delivered to the buyer. The proceeds
received by the Fund from the short sale are retained by the broker until the
Fund replaces the borrowed securities. In borrowing the securities
28
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to be delivered to the buyer, the Fund becomes obligated to replace the
securities borrowed at their market price at the time of replacement, whatever
that price may be.
Possible losses from short sales differ from losses that could be incurred
from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Interest income is recorded on the accrual
basis.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date. Realized gains or losses from
securities sold are recorded on the identified cost basis. Investment income
and
realized and unrealized gains and losses are allocated based upon the relative
net assets of each class.
MORTGAGE-BACKED SECURITIES: Income is accrued on the security using the
effective yield method. The effective yield is calculated monthly based on
current estimate of future cash flows. This effective yield is then used to
accrue income on the investment balance in the subsequent month.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are determined on a class level and declared daily and
distributed monthly. Distributions from any short-term and long-term capital
gains are determined on a Fund level and are declared and paid annually with
the
final distribution of each calendar year. To the extent net realized capital
gains can be offset by capital loss carryovers, it is the policy of the Fund
not
to distribute such gains. Additional distributions of net investment income
and
capital gains may be made at the discretion of the Fund's Board of Trustees to
avoid the application of a nondeductible 4% excise tax on certain
undistributed
amounts of ordinary income and capital gains. Income distributions and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments of
29
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
income and gains on various investment securities held by the Fund, timing
differences and differing characterization of distributions made by the Fund
as
a whole.
FEDERAL INCOME TAXES: It is the Fund's policy to qualify as a regulated
investment company, if such qualification is in the best interests of its
shareholders, by complying with the requirements of the Internal Revenue Code
of
1986, as amended, applicable to regulated investment companies and by
distributing substantially all of its earnings to its shareholders. Therefore,
no Federal income tax provision is required.
CASH FLOW INFORMATION: Cash, as used in the Statement of Cash Flows, is the
amount reported in the Statement of Assets and Liabilities. The Fund issues
and
redeems its shares, invests in securities, and distributes dividends from net
investment income and net realized gains (which are either paid in cash or
reinvested at the discretion of shareholders). These activities are reported
in
the Statement of Changes in Net Assets. Information on cash payments is
presented in the Statement of Cash Flows. Accounting practices that do not
affect reporting activities on a cash basis include unrealized gain or loss on
investment securities, accretion income recognized on investment securities
and
amortization of deferred organization costs.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE
AND OTHER TRANSACTIONS
The Fund has entered into an Investment Advisory Agreement (the "Advisory
Agreement") with Smith Barney Strategy Advisors Inc. ("SBSA"), a division of
Smith, Barney Advisers, Inc. ("SBA"). SBA is a wholly-owned subsidiary of
Smith
Barney Holdings Inc. ("Holdings"), which in turn is a wholly-owned subsidiary
of
The Travelers Inc. Under the Advisory Agreement, the Fund pays a monthly fee
at
the annual rate of 0.40% of the value of its average daily net assets.
As of July 30, 1993, BlackRock Financial Management, L.P. ("BlackRock"),
formerly investment adviser to the Fund, became the sub-adviser to the
30
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund. Under the terms of the sub-investment advisory agreement, BlackRock
provides investment advisory assistance and portfolio management advice with
respect to the Fund's holdings.
Prior to June 1, 1994, the Fund was party to an administration agreement with
The Boston Company Advisors Inc. ("Boston Advisors"), an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under this agreement, the
Fund
paid a monthly fee at the annual rate of .20% of the value of its average
daily
net assets.
As of the close of business on June 1, 1994, SBA, which is controlled by
Holdings, succeeded Boston Advisors as the Fund's administrator. The new
administration agreement contains substantially the same terms and conditions,
including the level of fees, as the predecessor agreement.
As of the close of business on June 1, 1994, the Fund also entered into a
sub-administration agreement ("the Sub-Administration Agreement") with Boston
Advisors. Under the Sub-Administration Agreement, Boston Advisors is paid a
portion of the fees paid by the Fund to SBA at a rate agreed upon from time to
time between SBA and Boston Advisors.
For the year ended May 31, 1994, the Fund incurred total brokerage commissions
of $135,457 on futures and options transactions, of which $61,028 was paid to
Smith Barney, Inc. ("Smith Barney").
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years (eight years in the case of purchases in
certain 401(k) Plans) after the date of purchase. In circumstances in which
the
charge is imposed, the amount of the charge ranges between 5% and 1% of net
asset value depending on the number of years since the date of purchase
(except
in the case of purchases by certain 401(k) plans in which case a 3% charge is
imposed for the eight-year period after the date of purchase). For the year
ended May 31, 1994, Smith Barney received from investors $21,639 in CDSC on
the
redemption of Class B Shares.
31
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
No officer, director or employee of Smith Barney or BlackRock, or of any
parent
or affiliate of those corporations receives any compensation from the Fund for
serving as a Trustee or officer of the Fund. The Fund pays each Trustee who is
not an officer, director, or employee of Smith Barney or BlackRock, or any of
their affiliates $2,500 per annum plus $250 per meeting attended and
reimburses
each such Trustee for travel and out-of-pocket expenses.
Boston Safe, an indirect wholly owned subsidiary of Mellon, serves as the
Fund's
custodian. The Shareholder Services Group, Inc., a subsidiary of First Data
Corporation, serves as the Fund's transfer agent.
3. DISTRIBUTION AGREEMENT
Smith Barney acts as exclusive distributor of the Fund's shares pursuant to a
distribution agreement with the Fund, and sells shares of the Fund through
Smith
Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a Services and
Distribution Plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A, Class B and Class D
shareholders, and covers expenses incurred in distributing Class A, Class B
and
Class D shares. Smith Barney is paid an annual service fee with respect to
Class
A, Class B and Class D shares of the Fund at the rate of 0.25% of the value of
the average daily net assets of each respective class of shares. Smith Barney
is
also paid an annual distribution fee with respect to Class A, Class B and
Class
D shares at the rate of 0.50% of the value of the average daily net assets
attributable to each respective class of shares. For the year ended May 31,
1994, the Fund incurred service fees of $935,890, $12,962 and $265,
respectively, for Class A, Class B and Class D shares, respectively. For the
year ended May 31, 1994, the Fund incurred distribution fees of $1,871,783,
$25,923 and $529, for Class A, Class B and Class D shares, respectively.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class
of
shares are prorated among the classes based upon the relative net assets
32
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of each class of shares. Operating expenses directly attributable to a class
of
shares are charged to that class of shares' operations. In addition to the
above
servicing and distribution fees, class specific operating expenses include
transfer agent fees of $121,906, $3,766 and $63 for Class A, Class B and Class
D
shares.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments and U.S. government securities for the year ended May
31,
1994, aggregated $79,480,732 and $57,173,554, respectively. Costs of purchases
and proceeds from sales of long-term U.S. government securities aggregated
$2,250,442,078 and $2,277,800,908, respectively, for the year ended May 31,
1994.
At May 31, 1994, aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost amounted to $91,422, and
aggregate gross unrealized depreciation for all securities in which there was
an
excess of tax cost over value amounted to $6,821,335.
Information regarding borrowing by the Fund under reverse repurchase
agreements
is as follows:
33
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Reverse repurchase agreements outstanding at May 31, 1994:
<TABLE>
<CAPTION>
FACE VALUE
MARKET VALUE
<C> <S> <C>
-----------------------------------------------------------------------------
- -------
$45,100,000 Reverse Repurchase Agreement with Nikko Securities, dated
5/31/94 bearing 4.450% to be repurchased at $45,217,072
on 6/21/94, collateralized by: $10,027,019 GNMA II Pool
008822, 4.875% due 8/20/21; $7,596 FNMA Pool 181279,
5.396% due 9/1/22; 4,723,522 FNMA Pool 116590, 5.193%
due 12/1/20; $200,346 FNMA Pool 124845, 5.750% due
2/1/23; $8,030,652 FHLMC Pool 141845, 7.500% due 7/1/07;
2,635,016 FHLMC Pool 850106, 9.000% due 11/1/05; and
$19,661,674 of
Receivable for investments sold
$45,100,000
5,600,000 Reverse Repurchase Agreement with Prudential Securities,
dated 5/25/94 bearing 4.400% to be repurchased at
$5,609,582 on 6/8/94, collateralized by 5,687,493 FNMA
Pool 022794, 7.896% due 11/1/17
5,600,000
-----------------------------------------------------------------------------
- -------
TOTAL REVERSE REPURCHASE AGREEMENTS
$50,700,000
-----------------------------------------------------------------------------
- -------
REVERSE REPURCHASE AGREEMENTS--
--------------------------------------------------------------------------
Maximum amount outstanding during the year $169,870,000
Average amount outstanding during the year $ 86,732,463
-----------------------------------------------------------------------------
- -------
</TABLE>
Interest rates ranged from 2.98% to 4.44% during the period. The average
amount
outstanding during the period was calculated by adding the borrowings at the
end
of each day and dividing the sum by the number of days in the year ended May
31,
1994.
Interest expense for the year ended May 31, 1994 on borrowings by the Fund
under
reverse repurchase agreements aggregated $2,994,801.
Information regarding transactions by the Fund under dollar roll transactions
is
as follows:
<TABLE>
<C> <S> <C>
-------------------------------------------------------------------
DOLLAR ROLL TRANSACTIONS--
--------------------------------------------------------------------------
Maximum amount outstanding during the year $28,000,000
Average amount outstanding during the year $ 3,769,863
-----------------------------------------------------------------------------
- -------
</TABLE>
The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days
in
the year ended May 31, 1994.
34
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Interest income earned for the year ended May 31, 1994, by the Fund under
dollar
roll transactions aggregated $104,741.
Written option activity for the year ended May 31, 1994 was as follows:
<TABLE>
<CAPTION>
Number
of
Premiums
Contracts
<S> <C> <C>
- ------------------------------------------------------------------------------
- ---
Options outstanding at May 31, 1993 $ 46,400
400
Options closed (46,400)
(400)
- ------------------------------------------------------------------------------
- ---
Options outstanding at May 31, 1994 $ 0
0
- ------------------------------------------------------------------------------
- ---
</TABLE>
6. SHARES OF BENEFICIAL INTEREST
At May 31, 1994, an unlimited number of shares of beneficial interest divided
into three classes, Class A, Class B and Class D shares, with a par value of
$.001 per share, were authorized. Changes in the Fund's shares of beneficial
interest for each class were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED
CLASS A SHARES: Shares 5/31/94Amount
Shares 5/31/93*Amount
<S> <C> <C> <C>
<C>
- ------------------------------------------------------------------------------
- -------
Sold 37,723,115 $ 375,317,501
50,155,149 $ 501,502,604
Issued as reinvestment of dividends 1,288,488 12,786,604
616,364 6,157,760
Redeemed (41,442,947) (410,594,238)
(19,338,094) (193,252,770)
- ------------------------------------------------------------------------------
- -------
Net increase/(decrease) (2,431,344) $ (22,490,133)
31,433,419 $ 314,407,594
- ------------------------------------------------------------------------------
- -------
<CAPTION>
YEAR ENDED
PERIOD ENDED
5/31/94
5/31/93**
CLASS B SHARES: Shares Amount
Shares Amount
<S> <C> <C> <C>
<C>
- ------------------------------------------------------------------------------
- -------
Sold 1,642,723 $ 16,273,982
383,519 $ 3,829,121
Issued as reinvestment of dividends 15,084 149,272
1,561 15,579
Redeemed (1,154,619) (11,441,168)
(26,778) (267,644)
- ------------------------------------------------------------------------------
- -------
Net increase 503,188 $ 4,982,086
358,302 $ 3,577,056
- ------------------------------------------------------------------------------
- -------
<FN>
* The Fund commenced operations on June 22, 1992.
** The Fund commenced selling Class B shares on November 6, 1992. Any shares
outstanding prior to November 6, 1992 were designated as Class A shares.
</TABLE>
35
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
5/31/94***
CLASS D SHARES: Shares Amount
<S> <C> <C>
- -------------------------------------------------------------------
Sold 12,666 $126,234
Issued as reinvestment of dividends 382 3,795
Redeemed (1,533) (15,084)
- -------------------------------------------------------------------
Net increase 11,515 $114,945
- -------------------------------------------------------------------
<FN>
*** The Fund commenced selling Class D shares on June 2, 1993.
</TABLE>
At May 31, 1993, the Fund had one Class D share issued in the amount of $9.96.
7. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including the
fees
and expenses of registering and qualifying its shares for distribution under
Federal and state securities regulations. All such costs are being amortized
on
the straight-line method over a period of five years from June 22, 1992, the
date that the Fund commenced operations. In the event that any of the initial
shares of the Fund are redeemed during such amortization period, the Fund will
be reimbursed for any unamortized costs in the same proportion as the number
of
shares redeemed bears to the number of initial shares outstanding at the time
of
redemption.
8. SUBSEQUENT EVENT
On June 16, 1994, BlackRock entered into a definitive agreement to be acquired
by PNC Bank, N.A. The acquisition, which is subject to regulatory approval, is
expected to close prior to the end of the year. Prior to closing, BlackRock
will
seek approval for the assignment of the investment advisory contract from the
Fund's Board and Shareholders. Shareholder approval will be solicited by a
proxy
statement. Following closing, BlackRock will become a subsidiary of PNC
Investment Management and Research, the holding company for PNC's asset
management business.
36
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF
SMITH BARNEY SHEARSON ADJUSTABLE RATE
GOVERNMENT INCOME FUND:
We have audited the accompanying statement of assets and liabilities of Smith
Barney Shearson Adjustable Rate Government Income Fund, including the schedule
of portfolio investments, as of May 31, 1994, the related statement of
operations and the statement of cash flows for the year then ended, and the
statement of changes in net assets and the financial highlights for the year
then ended and for the period June 22, 1992 (commencement of operations) to
May
31, 1993. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on
a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1994 by correspondence with the custodian and brokers. 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 Shearson Adjustable Rate Government Income Fund as of May 31, 1994, the
results of its operations and the results of its cash flows for the year then
ended, and the changes in its net assets and the financial highlights for the
year then ended and for the period June 22, 1992 (commencement of operations)
to
May 31, 1993, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Boston, Massachusetts
July 29, 1994
37
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
FISCAL YEAR ENDED MAY 31, 1994
Of the dividends paid by the Fund from investment income for the year ended
May
31, 1994, 78.80% was derived from investments in U.S. Government and Agency
Obligations. All or a portion of the distributions from this income may be
exempt from taxation at the state level. Consult your tax advisor for state
specific information.
38
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Smith Barney Strategy Advisers Inc.
Two World Trade Center
New York, New York 10048
SUB-INVESTMENT ADVISER
BlackRock Financial
Management L.P.
345 Park Avenue
New York, New York 10154
ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services
Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
39
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
CAPITAL GAIN (OR LOSS): This is the increase (or decrease) in the market value
(price) of a security in your portfolio. If a stock or bond appreciates in
price, there is a capital gain; if it depreciates there is a capital loss. A
capital gain or loss is "realized" upon the sale of a security; if net capital
gains exceed net capital losses, there may be a capital gain distribution to
shareholders.
CONTINGENT DEFERRED SALES CHARGE (CDSC): A back-end load, a CDSC is imposed if
shares are redeemed during the first few years of ownership. The CDSC may be
expressed as a percentage of either the original purchase price or the
redemption proceeds. Most CDSCs decline over time, and some will not be
charged
if shares are redeemed under certain conditions.
DISTRIBUTION RATE: This is the rate at which a mutual fund pays out (or
distributes) interest, dividends and realized capital gains to shareholders. A
fund's distribution rate is usually expressed as an annualized percent of the
fund's offering price.
DIVIDEND: This is income generated by securities in a portfolio and
distributed
after expenses to shareholders.
FRONT-END SALES CHARGE: This is the sales charge applied to an investment at
the
time of initial purchase.
NET ASSET VALUE (NAV): Net asset value is the total market value of all
securities held by a fund, minus any liabilities, divided by the number of
shares outstanding. It is the value of a single share of a mutual fund on a
given day. The total value of your investment would be the NAV multiplied by
the
number of shares you own.
SEC YIELD: This standardized calculation of a mutual fund's yield is based on
a
formula developed by the Securities and Exchange Commission (SEC) to allow
funds
to be compared on an equal basis. It is an annualized yield based on the
portfolio's potential earnings from dividends, interest and yield to maturity
of
its holdings, and it reflects the payments of all portfolio expenses for the
most recent 30-day period. Mutual funds are required to use this figure when
stating yield.
TOTAL RETURN: Total return measures a fund's performance, taking into account
the combination of dividends paid and the gain or loss in the value of the
securities held in the portfolio. It may be expressed on an AVERAGE ANNUAL
basis
or CUMULATIVE basis (total change over a given period). In addition, total
return may be expressed with or without the effects of sales charges or the
reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the
average
annual total return according to the standardized calculation developed by the
SEC. The SEC AVERAGE ANNUAL TOTAL RETURN calculation includes the effects of
all
fees and sales charges and assumes the reinvestment of all dividends and
capital
gains.
40
<PAGE>
ADJUSTABLE RATE
GOVERNMENT
INCOME FUND
TRUSTEES
Charles F. Barber
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
Heath B. McLendon
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
Scott M. Amero
VICE PRESIDENT AND
INVESTMENT OFFICER
Keith T. Anderson
VICE PRESIDENT AND
INVESTMENT OFFICER
Robert S. Kapito
VICE PRESIDENT AND
INVESTMENT OFFICER
Lewis E. Daidone
TREASURER
Christina T. Sydor
SECRETARY
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF
SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND. IT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR
PRECEDED BY AN EFFECTIVE PROSPECTUS FOR THE FUND, WHICH CONTAINS INFORMATION
CONCERNING THE FUND'S INVESTMENT POLICIES AND EXPENSES AS WELL AS OTHER
PERTINENT INFORMATION.
[LOGO]
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 167, 226, 240
FD2224 G4
