<PAGE>
SEMI-ANNUAL REPORT NOVEMBER 30, 1993
[GRAPHIC]
SMALL BOX ABOVE FUND NAME
SHOWING AN EAGLE CENTERED WITH
THE AMERICAN FLAG BEHIND IT.
SMITH BARNEY SHEARSON
ADJUSTABLE RATE
GOVERNMENT
INCOME FUND
[LOGO]
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
DEAR SHAREHOLDER:
We are pleased to present the semi-annual report for Smith Barney Shearson
Adjustable Rate Government Income Fund (the "Fund") for the fiscal period ended
November 30, 1993. 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 adviser, Smith Barney Shearson Strategy
Advisers Inc. and by its sub-investment adviser, BlackRock Financial Management.
The Fund has been operating since June 22, 1992 with an initial net asset
value for Class A shares of $10.00 per share. As of November 30, 1993, the net
asset value for Class A and Class B shares was $9.90 and $9.90 per share,
respectively. During the past six months, the Fund's net asset value ranged from
$10.00 to $9.90 and the aggregate net assets of the Fund increased to
approximately $410 million. 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."
PORTFOLIO STRATEGY
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 of net asset value of between the 1-and 2-year Treasury by managing a
portfolio of primarily adjustable rate mortgage-backed securities ("ARMs"). The
adjustable rate securities in the Fund's portfolio have coupons which adjust 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 cost 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.
CONTINUED
1
<PAGE>
BlackRock manages the Fund using a "targeted duration" approach such that the
Fund's duration target is approximately between 1 and 1 1/2 years. That duration
target should create a fund with the price, or net asset value, 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
the interest rates, the Fund's net asset value is affected by the rate of
prepayments of the mortgage securities in its portfolio. Specifically, the
Fund's investment in mortgage-backed securities is 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,
affecting the performance of such securities. In seeking to take advantage of
the difficult market environment for mortgage securities, the Fund has been
actively managed to attempt to reduce its exposure to mortgage prepayments by
selling such prepayment sensitive securities as interest-only securities, now
less than 1% of the total portfolio.
Over the past six months, the Fund's portfolio has been heavily weighted in
the adjustable rate mortgage sector, in excess of the 65% minimum requirement.
As of the end of this fiscal period, ARMs represented 82% of the Fund's
portfolio, and averaged 75% throughout this period. The Fund emphasizes strong
credit quality by investing primarily in securities issued or guaranteed by the
United States government, its agencies or instrumentalities. As of November 30,
1993, approximately 91% of the portfolio was invested in government securities
while 4% was invested in triple-A rated securities and 5% was invested in
double-A rated securities.
In the past six months, the Fund's net asset value for its Class A shares has
fluctuated along with short-term interest rates, beginning and ending the period
at $9.96 and $9.90, respectively, and performing according to its investment
objective. For the same period, the Fund's net asset value for Class B shares
fluctuated beginning at $9.96 and ending the period at $9.90. The Fund provided
monthly distributions over the period which averaged more than 150 basis points
over money market funds. And, the Fund's current annualized distribution rate of
3.89% for Class A shares is approximately 125 basis points over money market
funds yields. Of course, while the Fund's price per share will fluctuate with
market conditions, money market funds seek to maintain a stable net asset value
of $1.00. The Fund's SEC yield was 3.78% for Class A shares as of November 30,
1993,
CONTINUED
2
<PAGE>
the end of the Fund's semi-annual period. Although past performance is no
guarantee of future results, we are optimistic that the Fund will continue to
meet its objective going forward.
THE FIXED INCOME MARKETS
During the past twelve months, the fixed income markets presented a
tremendous challenge to mortgage-backed securities investors, with a combination
of interest rate volatility and unprecedented levels of mortgage refinancing
rates. Much of the market's volatility has been the result of conflicting
economic data and the expectations regarding the economic recovery. Short-term
Treasuries experienced a great deal of volatility which affects the coupons and
prices of adjustable rate mortgages. In fact, the 1-year Treasury ranged in
yield over the period from 3.17% to 3.86%, while the 2-year Treasury ranged in
yield from 3.70% to 4.83%.
In addition, the rally in the U.S. Treasury market during most of the period,
particularly in the 10-year Treasury, brought U.S. home mortgage interest rates
to their lowest levels in 20 years. At these interest rates, more than 80% of
the home mortgages in the United States become refinanceable from an economic
perspective, with interest savings costs to borrowers far in excess of the costs
associated with refinancing. The marketplace, therefore, has continued to
exhibit fears of rapid prepayments on mortgage securities which kept the prices
of mortgages from rallying along with the Treasury market. As a result,
mortgage-backed securities underperformed their Treasury counterparts as the
yield spreads of mortgage securities to Treasury benchmarks widened over the
period.
ECONOMIC OUTLOOK
We believe that economic growth in the U.S. is constrained and that 1994
should see slow growth with low to moderate inflationary pressures. We continue
to expect short duration securities, primarily adjustable rate mortgages and
short CMOs, to perform well due to new regulations for financial institutions
which favor investments in such products. While we may see a continued
flattening of the yield curve with short term rates moving modestly upward while
longer term rates decline somewhat, we believe the Fund's emphasis on adjustable
rate securities positions it well to benefit from this environment.
CONTINUED
3
<PAGE>
As we conclude this letter 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
January 5, 1994
4
<PAGE>
HISTORICAL PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE CAPITAL GAINS DIVIDENDS TOTAL
PERIOD CLASS A CLASS B CLASS D DISTRIBUTED PAID RETURN**
COVERED BEGIN END BEGIN END BEGIN END CLASS A CLASS B CLASS D CLASS A CLASS B CLASS D CLASS A CLASS B CLASS D
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
6/22/92* -
5/31/93 $10.00 $9.96 $9.96 $9.96 -- -- -- -- -- $0.43 $0.25 -- 3.89% 2.56% --
- -----------------------------------------------------------------------------------------
6/1/93 -
11/30/93 9.96 9.90 9.96 9.90 $9.98 $9.90 -- -- -- 0.20 0.20 $0.20 1.45 1.45 1.23%
- -----------------------------------------------------------------------------------------
TOTAL -- -- -- -- -- $0.63 $0.45 $0.20
- -----------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN - CLASS A SHARES (6/22/92 THROUGH 11/30/93)
5.40%
- -----------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN - CLASS B SHARES (11/6/92 THROUGH 11/30/93)
4.04%
- -----------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN - CLASS D SHARES (6/2/93 THROUGH 11/30/93) 1.23%
- -----------------------------------------------------------------------------------------
<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 and June
2, 1993 the Fund commenced selling Class B shares and Class D shares,
respectively.
**Figures assume reinvestment of all dividends and capital gains at net asset
value and do not reflect deduction of the applicable contingent deferred sales
charge (CDSC).
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN*** -- (UNAUDITED)
<TABLE>
<CAPTION>
WITH WITHOUT
WAIVER WAIVER
<S> <C> <C>
- ------------------------------------------------------
Class A***
- ------------------------------------------------------
Year Ended 11/30/93 3.67% 3.60%
Inception (6/22/92) through
11/30/93 3.72% 3.63%
- ------------------------------------------------------
Class B***
- ------------------------------------------------------
Year Ended 11/30/93 3.67% 3.59%
Inception (11/6/92) through
11/30/93 3.81% 3.74%
- ------------------------------------------------------
Class D***
- ------------------------------------------------------
Inception (6/2/93) through
11/30/93 2.44% 1.23%
- ------------------------------------------------------
<FN>
***All total return figures shown reflect the reinvestment of dividends and
capital gains at net asset value. Class A shares are not subject to a sales
charge. 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 D shares are sold at net
asset value and are not subject to an initial sales charge or CDSC. A portion of
the Fund's investment advisory, sub-investment advisory and administration fees
were waived from inception through November 30, 1993. A shareholder's actual
return for a given class for the period during which fees were waived would be
the higher of the two numbers shown. Please consult the Notes to Financial
Statements for complete information on fees and expenses.
</TABLE>
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 and the growth of the
original shares, through November 30, 1993. The line graph demonstrates that
since inception, the hypothetical investment of $10,000 would have grown to
$10,540 including the value of reinvested dividends and capital gains of
approximately $640. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF VALUE OF GROWTH OF INVESTMENT
INITIAL REINVESTED WITH DISTRIBUTIONS
DATE INVESTMENT DISTRIBUTIONS REINVESTED
<S> <C> <C> <C>
06/22/92 $ 10,000 $ 0 $10,000
06/92 $ 10,050 $ 0 $10,050
09/92 $ 10,020 $122 $10,142
12/92 $ 10,010 $245 $10,255
03/93 $ 9,990 $357 $10,347
06/93 $ 10,000 $468 $10,468
09/93 $ 9,950 $574 $10,524
11/93 $ 9,900 $640 $10,540
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares on June 22,
1992 assuming reinvestment of dividends and capital gains at net asset value
through November 30, 1993. The performance of the Fund's other classes of
shares will be greater than or less than the line shown based on the
difference in loads and fees paid by shareholders investing in the different
classes of shares.
This period was one in which Treasury bill prices and adjustable rate mortgage
prices fluctuated and the results should not be considered as a representation
of the dividend income or capital gain or loss which may be realized from an
investment in the Fund today. No adjustment has been made for shareholder tax
liability on dividends or capital gains.
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
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS November 30, 1993
PORTFOLIO BREAKDOWN
Pie chart depicting the allocation of the Adjustable Rate Government Income
Fund's investment securities held at November 30, 1993 by industry
classification. The pie chart is broken into pieces representing industries in
the following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Asset-Backed Securities 1.8%
Collateralized Mortgage Obligation
Planned Amortization Class
Interest Only Strips 1.1%
Principal-Only Strips 0.7%
Fixed Rate Collateralized
Mortgage Obligations 14.2%
Interest-Only Strips 0.2%
Adjustable Rate Mortgage-Backed
Securities 82.0%
</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 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.
INTEREST-ONLY STRIPS (IOS) are a common type of Stripped Mortgage-Backed
Securities which receive most of the interest and some of the principal from the
underlying assets. In the most extreme case the IO Strips would receive all the
interest and none of the principal from the underlying assets.
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.
5
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS November 30, 1993 (unaudited)
<TABLE>
<S> <C>
KEY TO ABBREVIATIONS
CMO -- Collateralized Mortgage Obligation
CMT -- Constant Maturity Treasury
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
TAC -- Targeted Amortization Class
TBA -- To Be Announced
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE POOL # (NOTE 1)
<C> <C> <S> <C>
-------------------------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 103.9%
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 21.5%
FHLMC ONE YEAR+-4.4%
$ 6,932,183 350010 5.000%, 8/1/16 $ 7,092,524
6,446,798 406400 5.806%, 3/1/22++ 6,672,436
4,200,349 350195 5.750%, 8/1/22 4,389,365
-------------------------------------------------------------------------------------
18,154,325
-------------------------------------------------------------------------------------
FHLMC THREE YEAR+-1.5%
1,484,141 865002 8.549%, 2/1/18 1,565,769
4,338,927 865361 8.407%, 1/1/22 4,523,332
-------------------------------------------------------------------------------------
6,089,101
-------------------------------------------------------------------------------------
FHLMC SIX MONTH LIBOR+-1.5%
5,924,620 845341 4.611%, 4/1/23 6,020,895
-------------------------------------------------------------------------------------
FHLMC FLOATERS+-7.5%
6,000,000 Multiclass 1040 Series H, 4.138%, 2/15/21 6,097,500
9,000,000 Multiclass 1043 Series F, 4.187%, 2/15/21 9,174,420
15,604,973 Multiclass 1333 Series FL, 6.500%, 7/15/22++ 15,839,046
-------------------------------------------------------------------------------------
31,110,966
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) November 30, 1993 (unaudited)
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE POOL # (NOTE 1)
-------------------------------------------------------------------------------------
<C> <C> <S> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- (CONTINUED)
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) --
(CONTINUED)
FHLMC SUPER FLOATERS+-5.1%
$19,875,552 Multiclass 1584, Series FB, 2.875%, 9/15/23 $ 21,167,462
-------------------------------------------------------------------------------------
FHLMC COFI+-1.5%
6,386,778 395013 4.717%, 9/1/13++ 6,410,728
-------------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 31.2%
FNMA ONE YEAR+-8.8%
7,703,975 124349 5.168%, 5/1/22 7,884,556
8,134,621 181274 5.064%, 8/1/22 8,312,606
8,247,647 181279 5.165%, 9/1/22 8,422,910
11,431,712 200357 4.875%, 2/1/23 11,748,570
-------------------------------------------------------------------------------------
36,368,642
-------------------------------------------------------------------------------------
FNMA THREE YEAR+-5.1%
11,158,363 122794 7.886%, 11/1/17 11,824,406
5,349,174 111643 7.394%, 9/1/20 5,482,904
3,732,015 173343 7.637%, 7/1/22 3,933,768
-------------------------------------------------------------------------------------
21,241,078
-------------------------------------------------------------------------------------
FNMA SIX MONTH CERTIFICATE OF DEPOSIT+-6.8%
8,393,357 170512 4.609%, 7/1/22++ 8,561,224
19,502,578 124937 4.170%, 6/1/23++ 19,857,922
-------------------------------------------------------------------------------------
28,419,146
-------------------------------------------------------------------------------------
FNMA SIX MONTH LIBOR+-2.1%
2,030,726 173152 5.292%, 7/1/22 2,111,955
1,606,173 172692 5.127%, 8/1/22 1,658,374
4,858,588 209970 4.804%, 4/1/23 4,970,967
-------------------------------------------------------------------------------------
8,741,296
-------------------------------------------------------------------------------------
FNMA FLOATERS+-8.4%
13,426,760 Guaranteed REMIC 92-123, Class F, 4.4375%, 3/25/21 13,556,865
10,817,000 Guaranteed REMIC 91 G-9, Class FA, 4.0875%, 4/25/21 10,999,591
10,000,000 Guaranteed REMIC G92-25, Class FA, 4.0875%, 5/25/22 10,162,500
-------------------------------------------------------------------------------------
34,718,956
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) November 30, 1993 (unaudited)
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE POOL # (NOTE 1)
-------------------------------------------------------------------------------------
<C> <C> <S> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) -- 39.4%
GNMA ONE YEAR+-39.4%
$10,615,579 008822 4.875%, 8/20/21 $ 10,778,104
13,604,513 008839 5.000%, 9/20/21 13,808,581
23,185,143 008915 4.750%, 2/20/22 23,540,108
7,638,266 008974 5.000%, 5/20/22 7,802,948
19,030,758 008006 5.000%, 7/20/22++ 19,316,220
24,376,786 008052 5.000%, 9/20/22++ 24,742,438
31,495,001 008121 5.500%, 1/20/23++ 32,528,352
11,581,722 008191 5.000%, 5/20/23 11,787,993
18,828,203 008216 5.000%, 6/20/23++ 19,163,534
-------------------------------------------------------------------------------------
163,468,278
-------------------------------------------------------------------------------------
NON-AGENCY CMOS -- 11.8%
6,282,898 Bear Stearns, Series 1992-3B, 3 year CMT, Class A2,
7.770%, 5/25/23 6,502,799
830,397 Resolution Trust Corporation, Series 1992-M1, Class A4,
6.987%, 1/25/20+++ 846,490
9,129,619 Resolution Trust Corporation, Series 1991-M6, Class A1,
5.591%, 6/25/21+++ 9,198,091
4,334,271 Resolution Trust Corporation, Series 1992-M4, Class A2,
5.909%, 9/25/21**+++ 4,328,854
7,709,503 Resolution Trust Corporation, 3 year CMT, Series
1992-4,
Class A,
9.055%, 6/25/24+++ 8,075,704
6,580,534 Resolution Trust Corporation, Series 1991-12, Class A1,
5.032%, 12/26/29+++ 6,596,985
13,051,005 Sears Mortgage Corporation, 1 year CMT, 92-16, Class
A2,
5.122%, 9/25/02 13,312,011
-------------------------------------------------------------------------------------
48,860,934
-------------------------------------------------------------------------------------
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED
SECURITIES
(Cost $431,253,208) 430,771,807
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) November 30, 1993 (unaudited)
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE POOL # (NOTE 1)
-------------------------------------------------------------------------------------
<C> <C> <S> <C>
FIXED RATE MORTGAGE PASS-THROUGH -- 12.7%
FHLMC 15 YEAR -- 3.3%
$ 9,460,963 200055 8.500%, 10/1/01 $ 9,882,071
3,428,501 850106 9.000%, 11/1/05 3,641,446
-------------------------------------------------------------------------------------
13,523,517
-------------------------------------------------------------------------------------
FHLMC GOLD 30 YEAR -- 1.9%
1,431,996 A00813 9.000%, 10/1/20 1,526,250
5,930,211 G00122 9.000%, 1/1/24 6,309,507
-------------------------------------------------------------------------------------
7,835,757
-------------------------------------------------------------------------------------
FHLMC 30 YEAR -- 3.5%
9,123,450 141845 7.500%, 7/1/07++ 9,512,656
4,924,414 309714 9.000%, 9/1/09 5,255,482
-------------------------------------------------------------------------------------
14,768,138
-------------------------------------------------------------------------------------
FNMA 30 YEAR -- 1.8%
5,439,608 044174 6.500%, 11/1/03 5,596,595
1,915,146 190003 8.500%, 7/1/17 2,016,284
-------------------------------------------------------------------------------------
7,612,879
-------------------------------------------------------------------------------------
GNMA 30 YEAR SEASONED -- 2.2%
3,424,426 8.000%, 1/15/08 3,625,609
1,807,059 8.000%, 2/15/08 1,913,223
2,764,800 8.000%, 3/15/08 2,927,234
548,055 8.000%, 4/15/08 580,253
-------------------------------------------------------------------------------------
9,046,319
-------------------------------------------------------------------------------------
TOTAL FIXED RATE MORTGAGE PASS-THROUGH
(Cost $52,900,137) 52,786,610
-------------------------------------------------------------------------------------
FIXED RATE CMOS -- 8.2%
AGENCY-BACKED FIXED RATE CMO --2.3%
8,282,002 Salomon Brothers Corporation, 83-1 Class Z,
12.000%, 12/1/13 9,400,073
-------------------------------------------------------------------------------------
IO -- 0.2%
6,943,676 S10009 FHLMC Strip 133, 8.500%, 6/1/22 902,678
-------------------------------------------------------------------------------------
PAC IOS -- 1.4%
32,051 FHLMC Multiclass 1439, Class GA, 1000.000%(1), 11/15/21 1,418,322
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) November 30, 1993 (unaudited)
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE POOL # (NOTE 1)
-------------------------------------------------------------------------------------
<C> <C> <S> <C>
FIXED RATE CMOS -- (CONTINUED)
PAC IOS -- (CONTINUED)
$ 27,870 FNMA Guaranteed REMIC 91-132, Class J,
1018.775%(2), 12/25/18+++ $ 742,940
69,154 FNMA Guaranteed REMIC 90-76, Class L, 960.75%(3),
7/25/20 1,424,745
32,113 FNMA Guaranteed REMIC 90-106, Class K, 928.95%(4),
9/25/20 584,237
21,053 FNMA Guaranteed REMIC 91-59, Class LC, 1006.022%(5),
6/25/21+++ 1,578,956
-------------------------------------------------------------------------------------
5,749,200
-------------------------------------------------------------------------------------
PAC & TAC CMOS -- 3.4%
6,288,200 FNMA Guaranteed REMIC 92-16 Class C, 5.750%, 10/25/09 6,303,921
1,600,000 FNMA Guaranteed REMIC 90-117, Class C, 8.950%, 7/25/17 1,648,784
6,000,000 FNMA Guaranteed REMIC 92-49 Class H, 7.000%, 5/25/20 6,152,400
-------------------------------------------------------------------------------------
14,105,105
-------------------------------------------------------------------------------------
POS -- 0.9%
3,835,628 FNMA Guaranteed REMIC 92-115, Class A, Zero Coupon,
6/25/22 3,750,861
-------------------------------------------------------------------------------------
TOTAL FIXED RATE CMOS
(Cost $38,327,840) 33,907,917
-------------------------------------------------------------------------------------
PROJECT LOANS -- 1.9%
1,978,642 Alliance, 7.350%, 4/1/19 2,041,369
2,319,349 Citi, Project 85-1, 6.875%, 3/1/16 2,367,579
3,394,567 Salomon, 7.350%, 12/1/19 3,496,404
-------------------------------------------------------------------------------------
TOTAL PROJECT LOANS
(COST $8,058,308) 7,905,352
-------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $530,539,493*) 126.7% 525,371,686
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) November 30, 1993 (unaudited)
<TABLE>
<CAPTION>
NUMBER OF MARKET VALE
CONTRACTS (NOTE 1)
-------------------------------------------------------------------------------------
<C> <C> <S> <C>
FUTURES CONTRACTS -- SHORT POSITION
195 March 5 year U.S. Treasury Note $(21,587,110)
250 December 5 year U.S. Treasury Note (11.9)% (27,910,156)
-------------------------------------------------------------------------------------
TOTAL FUTURES CONTRACTS -- SHORT POSITION
(Contract Amount $49,464,844) (49,497,266)
-------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) (14.8) (61,143,169)
-------------------------------------------------------------------------------------
NET ASSETS 100.0% $414,731,251
-------------------------------------------------------------------------------------
<FN>
*Aggregate cost for Federal tax purposes.
**Securities pledged as collateral for futures contracts.
+Initial mortgage rates fixed for period indicated. Thereafter, interest rates
are subject to periodic adjustment.
++A portion of the securities are held as collateral for reverse repurchase
agreements.
(1)Annualized yield at date of purchase: 9.610%.
(2)Annualized yield at date of purchase: 23.221%.
(3)Annualized yield at date of purchase: 13.721%.
(4)Annualized yield at date of purchase: 18.505%.
(5)Annualized yield at date of purchase: 13.433%.
+++A portion of the security's coupon payment is received in additional
securities.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES November 30, 1993 (unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $530,539,493) (Note 1)
See accompanying schedule $525,371,686
Cash 376,476
Receivable for investment securities sold 164,585,444
Receivable for Fund shares sold 5,976,098
Interest receivable 2,876,913
Unamortized organization costs (Note 7) 110,902
- -------------------------------------------------------------------------------------
TOTAL ASSETS 699,297,519
- -------------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities purchased $161,672,801
Securities sold under agreement of repurchase (Notes 1 and 5) 119,810,000
Payable for Fund shares redeemed 1,563,117
Dividends payable 886,375
Distribution fee payable (Note 3) 173,619
Investment management fee payable (Note 2) 119,048
Service fees payable (Note 3) 87,099
Administration fee payable (Note 2) 49,601
Net unrealized depreciation of forward foreign exchange
contracts
(Note 1) See accompanying schedule 32,422
Custodian fees payable (Note 2) 23,570
Transfer agent fees payable (Note 2) 13,953
Accrued Trustees' fees and expenses (Note 2) 3,500
Accrued expenses and other payables 131,163
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES 284,566,268
- -------------------------------------------------------------------------------------
NET ASSETS $414,731,251
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (CONTINUED)
NOVEMBER 30, 1993
<TABLE>
<S> <C>
NET ASSETS consist of:
Distributions in excess of net
investment income earned to date $ (96,389)
Accumulated net realized gain on
securities transactions,
written options and futures
contracts during the period 922,157
Unrealized depreciation of
securities and futures contracts
during the period (5,200,229)
Par value 41,909
Paid-in capital in excess of par
value 419,063,803
- -----------------------------------------------------------
TOTAL NET ASSETS $414,731,251
- -----------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price
per share
($410,361,643 DIVIDED BY 41,467,075
shares of beneficial interest
outstanding) $9.90
- -----------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE, offering price per
share+
($4,254,781 DIVIDED BY 429,993 shares
of beneficial interest outstanding) $9.90
- -----------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE and offering price per
share
($114,827 DIVIDED BY 11,603 shares of
beneficial interest outstanding) $9.90
- -----------------------------------------------------------
<FN>
+Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1993 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest (Note 5) $ 11,652,752
- -------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 11,652,752
- -------------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $984,130
Investment management fee (Note 2) 787,304
Service fees (Note 3) 492,065
Administration fee (Note 2) 393,652
Transfer agent fees (Notes 2 and 4) 65,489
Legal and audit fees 52,768
Custodian fees (Note 2) 44,480
Amortization of organization costs (Note 7) 15,846
Trustees' fees and expenses (Note 2) 10,163
Other 148,975
Fees waived by investment manager, investment adviser and
administrator (Note 2) (39,694)
- -------------------------------------------------------------------------------------
Total Expenses before interest 2,955,178
- -------------------------------------------------------------------------------------
Interest expense (Note 5) 1,056,636
- -------------------------------------------------------------------------------------
TOTAL EXPENSES 4,011,814
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 7,640,938
- -------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities transactions 1,768,386
Written options (56,400)
Futures contracts (278,048)
- -------------------------------------------------------------------------------------
Net realized gain on investments during the period 1,433,938
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation/(depreciation) of:
Securities (4,353,062)
Written options 63,600
Futures contracts (32,422)
- -------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the
period (4,321,884)
- -------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (2,887,946)
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,752,992
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1993
<TABLE>
<S> <C> <C>
NET INCREASE IN CASH:
Cash flows from operating activities:
Interest received $ 12,824,653
Fee income received 93,750
Operating expenses paid (2,830,595)
Deferred organization costs (110,902)
- --------------------------------------------------------------------------------
Net cash provided by operating
activities $ 9,976,906
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of long-term investment
securities and purchased options (1,364,360,524)
Proceeds from disposition of
investment securities and
purchased options 1,181,579,310
Net proceeds from futures
transactions (278,048)
- --------------------------------------------------------------------------------
Net cash used in investing
activities (183,059,262)
- --------------------------------------------------------------------------------
NET CASH USED IN OPERATING AND INVESTING ACTIVITIES (173,082,356)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from shares sold 290,913,785
Payments on shares redeemed (191,435,250)
Cash dividend paid to shareholders* (743,048)
Increase in reverse repurchase
agreements outstanding 75,665,000
Interest expense (925,230)
- --------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 173,475,257
- --------------------------------------------------------------------------------
Net increase in cash 392,901
Cash -- beginning of period (16,425)
- --------------------------------------------------------------------------------
Cash -- end of period $ 376,476
- --------------------------------------------------------------------------------
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM OPERATIONS
TO CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES:
Net decrease in net assets resulting
from operations $ 4,752,992
Increase in investments $ (175,671,395)
Increase in short futures contracts
and written options 49,322,449
Increase in receivable for investment
securities sold (194,460,855)
Increase in payable for investment
securities purchased 142,146,415
Increase in interest and fees
receivable (353,181)
Decrease in other assets 15,846
Increase in accrued expenses 108,737
Interest expense 1,056,636
- --------------------------------------------------------------------------------
Total adjustments (177,835,348)
- --------------------------------------------------------------------------------
NET CASH USED IN OPERATING AND INVESTING ACTIVITIES $(173,082,356)
- --------------------------------------------------------------------------------
<FN>
*Non-cash financing activities include reinvestment of dividends of $6,828,594.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
11/30/93 ENDED
(UNAUDITED) 5/31/93*
<S> <C> <C>
Net investment income $ 7,640,938 $ 7,608,601
Net realized gain/(loss) on securities transactions,
written options and futures contracts during the
period 1,433,938 (511,781)
Net unrealized depreciation of securities, written
options and futures contracts during the period (4,321,884) (878,345)
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,752,992 6,218,475
Distributions to shareholders from net investment
income:
Class A (7,714,800) (7,521,122)
Class B (78,911) (29,148)
Class D (1,947) --
Net increase in net assets from:
Class A share transactions (Note 6) 100,194,653 314,407,594
Class B share transactions (Note 6) 710,650 3,577,056
Class D share transactions (Note 6) 115,749 10
- -------------------------------------------------------------------------------------
Net increase in net assets 97,978,386 316,652,865
NET ASSETS:
Beginning of period 316,752,865 100,000
- -------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income earned to date and undistributed
net investment income of $96,389 and $58,331,
respectively) $414,731,251 $316,752,865
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on June 22, 1992.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
11/30/93 ENDED
(UNAUDITED) 5/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 9.96 $ 10.00
- -----------------------------------------------------------------------------------
Income from investment operations:
Net investment income# 0.20 0.44
Net realized and unrealized loss on investments (0.06) (0.05)
- -----------------------------------------------------------------------------------
Total from investment operations 0.14 0.39
Dividends from net investment income (0.20) (0.43)
- -----------------------------------------------------------------------------------
Net Asset Value, end of period $ 9.90 $ 9.96
- -----------------------------------------------------------------------------------
Total return++ 1.45% 3.89%
- -----------------------------------------------------------------------------------
Ratios/Supplemental Data (annualized):
Net assets, end of period (in 000's) $410,361 $313,184
Ratio of net investment income to average net assets 3.88% 4.36%
Ratio of operating expenses to average net assets+ 1.50% 1.50%
Portfolio turnover rate 292% 236%
- -----------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on June 22, 1992. On November 6, 1992 the Fund
commenced selling Class B shares. Those shares in existence prior to November
6, 1992 were designated as Class A shares.
+The annualized operating expense ratios exclude interest expense. The ratios
including interest expense for the six months ended November 30, 1993 and the
period ended May 31, 1993 were 2.04% and 1.92%, respectively. Annualized
expense ratios before voluntary waiver of fees by investment adviser, sub-
investment adviser and administrator (including interest expense) for the six
months ended November 30, 1993 and the period ended May 31, 1993 were 2.06%
and 2.03%, respectively.
++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 six months ended November 30,
1993 and the period ended May 31, 1993 were $0.20 and $0.43, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED PERIOD
11/30/93 ENDED
(UNAUDITED) 5/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 9.96 $ 9.96
- ------------------------------------------------------------------------------------
Income from investment operations:
Net investment income# 0.19 0.25
Net realized and unrealized loss on investments (0.05) --
- ------------------------------------------------------------------------------------
Total from investment operations 0.14 0.25
Dividends from net investment income (0.20) (0.25)
- ------------------------------------------------------------------------------------
Net Asset Value, end of period $ 9.90 $ 9.96
- ------------------------------------------------------------------------------------
Total return++ 1.45% 2.56%
- ------------------------------------------------------------------------------------
Ratios/Supplemental Data (annualized):
Net assets, end of period (in 000's) $4,255 $3,569
Ratio of net investment income to average net assets 3.84% 4.36%
Ratio of operating expenses to average net assets+ 1.55% 1.50%
Portfolio turnover rate 292% 236%
- ------------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on June 22, 1992. The Fund's Class B shares
commenced operations on November 6, 1992.
+The annualized operating expense ratios exclude interest expense. The ratios
including interest expense for the six months ended November 30, 1993 and the
period ended May 31, 1993 were 2.08% and 1.92%, respectively. Annualized
expense ratios before voluntary waiver of fees by investment adviser, sub-
investment adviser and administrator (including interest expense) for the six
months ended November 30, 1993 and the period ended May 31, 1993 were 2.10%
and 2.03%, respectively.
++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 six months ended November 30,
1993 and the period ended May 31, 1993 were $0.19 and $0.24, respectively.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
11/30/93*
(UNAUDITED)
<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 (0.25)
- --------------------------------------------------------------------------------
Total from investment operations 0.12
Dividends from net investment income (0.20)
- --------------------------------------------------------------------------------
Net Asset Value, end of period $9.90
- --------------------------------------------------------------------------------
Total return++ 1.23%
- --------------------------------------------------------------------------------
Ratios/Supplemental Data (annualized):
Net assets, end of period (in 000's) $ 115
Ratio of net investment income to average net assets 3.91%
Ratio of operating expenses to average net assets+ 1.57%
Portfolio turnover rate 292%
- --------------------------------------------------------------------------------
<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 November 30, 1993 was 2.01%.
Annualized expense ratio before voluntary waiver of fees by investment
adviser, sub-investment adviser and administrator (including interest expense)
for the period ended November 30, 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 November 30,
1993 was $0.37.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 beginning on September 30, 1994. On
January 29, 1993, the Fund began offering Class D shares to investors that are
eligible to participate in the Smith Barney Shearson 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.
22
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 adviser 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 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
23
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
For financial statement purposes, an amount equal to the settlement amount of
the contract is included in its Statement of Assets and Liabilities as an asset
and as an equivalent liability. For long futures positions, the asset is
marked-to-market daily; for short futures positions, the liability is
marked-to-market daily. The daily changes in the contract are recorded as
unrealized gains or losses. 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 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
24
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 financial institutions 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 at time of delivery
if delivery is taken by different 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 in
additional instruments for the Fund, 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 sold by
the Fund may decline in value.
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 the
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 remaining 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
25
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 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 RELATED PARTY
TRANSACTIONS
Up to the close of business on July 30, 1993, the Fund was party to an
investment management agreement with Shearson Lehman Investment Strategy
Advisors Inc. ("Strategy Advisors"), a wholly owned subsidiary of Shearson
Lehman Brothers Inc. ("Shearson Lehman Brothers"). The Fund and Strategy
Advisors entered into an investment advisory agreement with BlackRock Financial
Management, L.P. ("BlackRock"). Under the investment management agreement, the
Fund paid a monthly fee at the annual rate of 0.40% of the value of its average
daily net assets from which BlackRock was compensated with a monthly fee at the
annual rate of 0.20% of the value of the Fund's
26
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
average daily net assets. For the six months ended November 30, 1993, Strategy
Advisors and BlackRock voluntarily waived fees of $13,231 and $13,231,
respectively.
As of the close of business on July 30, 1993, The Travelers Inc. (which at
the time was known as Primerica Corporation) ("Travelers") and Smith Barney,
Harris Upham & Co. Incorporated completed the acquisition of substantially all
of the domestic retail brokerage and asset management businesses of Shearson
Lehman Brothers and Smith Barney, Harris Upham & Co. Incorporated was renamed
Smith Barney Shearson Inc. ("Smith Barney Shearson").
As of the close of business on July 30, 1993, Smith Barney Shearson Strategy
Advisers Inc. ("SBSSA"), a division of Smith, Barney Advisers, Inc. ("SBA"),
succeeded Strategy Advisors as the Fund's investment adviser. SBA is a wholly
owned subsidiary of Smith Barney Shearson Holdings Inc., which in turn is a
wholly owned subsidiary of Travelers.The new investment advisory agreement with
SBSSA (the "Advisory Agreement") contains terms and conditions substantially
similar to the investment management agreement with Strategy Advisors and
provides for the payment of fees at the same rate as was paid to such
predecessor investment adviser.
As of July 30, 1993, BlackRock, formerly investment adviser to the Fund,
became the sub-adviser to the Fund. Under the terms of the sub-advisory
agreement, BlackRock provides investment advisory assistance and portfolio
management advice with respect to the Fund's holdings.
The Fund has also entered into an administration agreement (the
"Administration Agreement") dated May 21, 1993, with The Boston Company
Advisors, Inc. ("Boston Advisors"), an indirect wholly owned subsidiary of
Mellon Bank Corporation ("Mellon"). Under the Administration Agreement, the Fund
pays a monthly fee at the annual rate of 0.20% of the value of its average daily
net assets. Prior to the close of business on May 21, 1993, Boston Advisors
served as the Fund's sub-investment adviser and administrator. For the six
months ended November 30, 1993, Boston Advisors voluntarily waived fees of
$13,232.
For the six months ended November 30, 1993, the Fund incurred total
brokerage commissions of $50,474 on futures transactions, none of which was paid
to Smith Barney Shearson.
27
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 period since commencement of operations through November 30, 1993, Smith
Barney Shearson received from investors $10,283 in CDSC on the redemption of
Class B shares.
No officer, director or employee of Smith Barney Shearson, SBSSA, BlackRock,
or Boston Advisors or of any parent or subsidiary 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 Shearson, SBSSA, BlackRock, or Boston Advisors, 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. SERVICES AND DISTRIBUTION PLAN
Smith Barney Shearson 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 Shearson or its affiliates.
Pursuant to 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 Shearson 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 Shearson 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 Shearson 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
28
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
the six months ended November 30, 1993, the Fund incurred service fees of
$487,139, $4,806 and $120, for Class A, Class B and Class D shares,
respectively. For the six months ended November 30, 1993, the Fund incurred
distribution fees of $974,278, $9,612 and $240, 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 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 $63,928, $1,514 and $47 for Class A, Class B and
Class D shares, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities,
excluding short-term investments and U.S. government securities for the period
since commencement of operations through November 30, 1993, aggregated
$19,349,569 and $52,003,117, respectively. Costs of purchases and proceeds from
sales of long-term U.S. government securities aggregated $1,486,991,397 and
$1,274,147,582, respectively, for the six months ended November 30, 1993.
At November 30, 1993, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost amounted to
$1,255,005, and the aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value amounted to $6,422,812.
29
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Information regarding borrowing by the Fund under reverse repurchase
agreements is as follows:
Reverse repurchase agreements outstanding at November 30, 1993:
<TABLE>
<CAPTION>
FACE VALUE MARKET VALUE
<C> <S> <C>
-----------------------------------------------------------------
$26,410,000 Reverse CD Agreement with J.P.
Morgan Securities Inc.,
dated 11/29/93 bearing
3.170% to be repurchased as
$26,426,279 on 12/6/93,
collateralized by:
$7,150,000 FNMA Pool 170512,
4.499% due 7/1/22
$19,260,000 FNMA Pool
124937, 4.157% due 6/1/23 $ 26,410,000
67,250,000 Reverse CMO/CMT One Year
Agreement with Prudential
Securities Inc., dated
11/15/93 bearing 3.270% to
be repurchased at
$67,421,039 on 12/13/93,
collateralized by:
$15,210,000 FHLMC Multiclass
1333FL, 6.500% due 7/15/22;
$20,880,000 GNMA II Pool
008052, 5.000% due 9/20/22;
and $31,160,000 GNMA II Pool
008121, 5.500% due 1/20/23 67,250,000
19,550,000 Reverse CMT One Year Agreement
with Prudential Securities
Inc., dated 11/15/93 bearing
3.270% to be repurchased at
$19,599,722 on 12/13/93,
collateralized by:
$19,424,000 GNMA II Pool
008006, 5.000% due 7/20/22;
and $1,126,000 GNMA II Pool
008216, 5.000% due 6/20/23 19,550,000
6,600,000 Reverse Pool Agreement with
J.P. Morgan Securities Inc.,
dated 11/30/93 bearing
3.300% to be repurchased at
$6,600,605 on 12/1/93,
collateralized by $6,600,000
FHLMC Pool 141845, 7.500%
due 7/1/07 6,600,000
-----------------------------------------------------------------
TOTAL REVERSE REPURCHASE
AGREEMENTS $119,810,000
-----------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS--
-----------------------------------------------------------------
Maximum amount outstanding during the period $133,670,000
Average amount outstanding during the period $ 64,500,008
-----------------------------------------------------------------
</TABLE>
Interest rates ranged from 2.98% to 4.39% 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 six months
ended November 30, 1993.
Interest paid for the six months ended November 30, 1993 on borrowings by
the Fund under reverse repurchase agreements aggregated $1,056,636.
30
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Information regarding transactions by the Fund under dollar roll
transactions is as follows:
<TABLE>
<S> <C>
--------------------------------------------------------------------------
DOLLAR ROLL TRANSACTIONS--
--------------------------------------------------------------------------
Maximum amount outstanding during the period $28,000,000
Average amount outstanding during the period $ 7,519,126
--------------------------------------------------------------------------
</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 six months ended November 30, 1993.
Interest income earned for the six months ended November 30, 1993 by the
Fund under dollar roll transactions aggregated $104,741.
Written option activity for the six months ended November 30, 1993 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 November 30, 1993 $0 0
- --------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. SHARES OF BENEFICIAL INTEREST
At November 30, 1993, 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>
SIX MONTHS ENDED PERIOD ENDED
11/30/93 5/31/93*
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 27,825,860 $ 277,481,406 50,155,149 $ 501,502,604
Issued as reinvestment of dividends 679,793 6,773,432 616,364 6,157,760
Redeemed (18,481,997) (184,060,185) (19,338,094) (193,252,770)
- -------------------------------------------------------------------------------------
Net increase 10,023,656 $ 100,194,653 31,433,419 $ 314,407,594
- -------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
1/30/93 5/31/93**
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 820,268 $ 8,149,959 383,519 $ 3,829,121
Issued as reinvestment of dividends 5,368 53,463 1,561 15,579
Redeemed (753,945) (7,492,772) (26,778) (267,644)
- -------------------------------------------------------------------------------------
Net increase 71,691 $ 710,650 358,302 $ 3,577,056
- -------------------------------------------------------------------------------------
<CAPTION>
PERIOD ENDED
11/30/93***
CLASS D SHARES: Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 11,432 $ 114,050
Issued as reinvestment of dividends 170 1,699
- -------------------------------------------------------------------------------------
Net increase 11,602 $ 115,749
- -------------------------------------------------------------------------------------
<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.
***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 to Smith Barney Shearson.
32
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
7. CAPITAL LOSS CARRYFORWARD AND POST OCTOBER LOSSES
At May 31, 1993, the Fund had available for Federal income tax purposes
unused capital losses of $165,372 expiring in the year 2001. Under current tax
law, capital losses realized after October 31 may be deferred and treated as
occurring on the first day of the following fiscal year. For the fiscal year
ended May 31, 1993, the Fund has elected to defer $253,583 of losses occurring
between June 22, 1992 (commencement of operations) and May 31, 1993 under these
rules. Such deferred losses will be treated as arising on the first day of the
fiscal year ending May 31, 1994.
8. 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.
33
<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): One kind of 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 after a certain period of time.
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.
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.
34
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
TRUSTEES
Charles F. Barber
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Heath B. McLendon
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
Scott Amero
VICE PRESIDENT AND
INVESTMENT OFFICER
Keith T. Anderson
VICE PRESIDENT AND
INVESTMENT OFFICER
Robert S. Kapito
VICE PRESIDENT AND
INVESTMENT OFFICER
Vincent Nave
TREASURER
Francis J. McNamara, III
SECRETARY
DISTRIBUTOR
Smith Barney Shearson Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Smith Barney Shearson
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
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
35
<PAGE>
THE SMITH BARNEY
SHEARSON
APPROACH TO
MUTUAL FUND
INVESTING
1. PERSONAL SERVICE The Smith Barney Shearson
Financial Consultant (FC) is highly trained and
deeply committed to client service. Your FC works
with you to establish a relationship based on
one-to-one communication and the highest
standards of quality.
2. ANALYZING YOUR NEEDS Defining your needs
and establishing specific goals is the first step
toward any successful investment program. The
Smith Barney Shearson Strategic Asset Allocator
-- a sophisticated financial planning tool -- can
help you and your FC evaluate your resources and
objectives. This groundwork then becomes the
basis for a strategy designed specifically for
you. Your FC can use the Strategic Asset
Allocator on a periodic basis to ensure that your
investment strategy is keeping pace with your
changing needs and goals.
3. A UNIQUE MUTUAL FUND INVESTMENT
PROGRAM Your Smith Barney Shearson FC offers a
number of mutual fund assessment tools that are
unmatched in the financial services industry.
Smith Barney Shearson FCs have access to a
proprietary mutual fund research database that
provides information at their fingertips on more
than 2,100 funds. In addition, working with
another proprietary system known as the Mutual
Fund Evaluation Service, your FC can help guide
you through the complex mutual fund maze.
4. LOOKING AHEAD Selecting a mutual fund
should not be a one-event process that ends with
the purchase of shares. You can count on the
expertise of your FC as he or she continues to
monitor and evaluate your funds, to suggest new
strategies and to listen. That, in our opinion,
is how to use mutual funds to help achieve your
financial goals.
36
<PAGE>
INVESTOR BENEFITS MONTHLY DISTRIBUTIONS It's your fund's
policy to distribute dividend income monthly.
AUTOMATIC REINVESTMENT You may reinvest your
dividends and/or capital gains automatically in
additional shares of your fund at the current net
asset value.
UNLIMITED EXCHANGES If your investment goals
change, you may exchange into another Smith Barney
Shearson mutual fund with the same sales charge
structure without incurring a sales charge.*
SYSTEMATIC INVESTMENT PLAN This program
allows you to invest equal dollar amounts
automatically on a regular basis, monthly or
quarterly.
AUTOMATIC CASH WITHDRAWAL PLAN With this
plan, you may withdraw money on a regular basis
while maintaining your investment.
MUTUAL FUND EVALUATION SERVICE Through your
Financial Consultant, you may obtain a free
personalized analysis of how your fund has
performed for you, taking into account the effect
of every transaction. The analysis is based upon
month-end data from CDA Investment Technologies,
Inc., a widely recognized mutual fund information
service. An evaluation also gives you other
important facts and figures about your investment.
FOR MORE INFORMATION ABOUT THESE BENEFITS, OR IF
YOU HAVE ANY OTHER QUESTIONS, PLEASE CALL YOUR
FINANCIAL CONSULTANT OR WRITE:
MUTUAL FUND POLICY GROUP
SMITH BARNEY SHEARSON
388 GREENWICH STREET 37TH FLOOR
NEW YORK, NY 10013
*AFTER WRITTEN NOTIFICATION, EXCHANGE
PRIVILEGE MAY BE MODIFIED OR TERMINATED
AT ANY TIME.
<PAGE>
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 APPLICABLE SALES
CHARGES, FEES AND EXPENSES AS WELL AS OTHER
PERTINENT INFORMATION.
PERFORMANCE CITED IS THROUGH NOVEMBER 30,
1993. PLEASE CONSULT SMITH BARNEY SHEARSON
MUTUAL FUNDS QUARTERLY PERFORMANCE UPDATE FOR
FIGURES THROUGH THE MOST RECENT CALENDAR
QUARTER.
SMITH BARNEY SHEARSON
ADJUSTABLE RATE
GOVERNMENT
INCOME FUND
Two World Trade Center
New York, New York 10048
Fund 167, 226, 240
FD0301 A4
