<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME SHOWING AN
EAGLE CENTERED WITH
THE AMERICAN FLAG BEHIND IT.
1995 SMITH BARNEY
ANNUAL ADJUSTABLE
REPORT RATE
GOVERNMENT
INCOME FUND
.......................................
MAY 31, 1995
[LOGO]
<PAGE>
ADJUSTABLE RATE GOVERNMENT INCOME FUND
DEAR SHAREHOLDER:
WE ARE PLEASED TO PRESENT THE ANNUAL REPORT FOR THE SMITH BARNEY
ADJUSTABLE RATE
GOVERNMENT INCOME FUND FOR THE FISCAL YEAR ENDED MAY 31, 1995. THE FUND'S
INVESTMENT OBJECTIVE IS TO SEEK HIGH CURRENT INCOME AND TO LIMIT THE
DEGREE OF
FLUCTUATION OF ITS NET ASSET VALUE (NAV) RESULTING FROM MOVEMENTS IN
INTEREST
RATES BY INVESTING PRIMARILY IN A PORTFOLIO OF ADJUSTABLE RATE MORTGAGE-
BACKED
SECURITIES (ARMS) AND U.S. GOVERNMENT SECURITIES. THE FUND IS PART OF THE
SMITH
BARNEY MUTUAL FUND COMPLEX AND IS MANAGED BY ITS INVESTMENT SUB-
ADVISER,
BLACKROCK FINANCIAL MANAGEMENT, INC.
THE 12-MONTH PERIOD ENDED MAY 31, 1995 WAS CHARACTERIZED BY LARGE SWINGS
IN
INTEREST RATES ACROSS THE YIELD CURVE (BOTH UP AND DOWN) AND PROVED TO BE
A
CHALLENGING INVESTMENT ENVIRONMENT FOR FIXED-INCOME PRODUCTS.
NEVERTHELESS,
DURING THIS PERIOD, THE NAV OF THE FUND (BOTH A AND B SHARES) TRADED WITHIN
A
TIGHT RANGE OF $9.72 TO $9.88. AS OF MAY 31, 1995, THE NAV FOR BOTH CLASS A AND
CLASS B SHARES WAS $9.88 PER SHARE.
THE FIXED-INCOME MARKETS
For most of 1994, inflationary fears drove the prices of fixed-income
securities
down across all parts of the yield curve. The yield of the two-year Treasury
note (the Treasury security that
most closely reflects the interest-rate sensitivity of the Fund) increased
nearly two percentage points from May 1994 through December 1994, reaching a
four-year high of 7.73% on December 26, 1994. During this period the Federal
Reserve Board adopted a preemptive stance to contain the threat of inflation.
The Fed's vigilance towards containing inflation was highlighted by seven
increases in the Fed funds rate (the overnight lending rate that banks charge
each other to borrow cash) between February 1994 and February 1995.
In contrast to the rapid and substantial increase in interest rates during
1994,
the fixed-income markets have rallied sharply in the first and second quarters
of 1995. The bond-market rally, which has caused interest rates to decline as
prices have increased, has been fueled largely by modest inflationary data and
the perception that the Fed's proactive attempts to contain inflation and
provide a "soft landing" (modest economic growth with little or no inflation)
1
<PAGE>
for the economy may have been successful. Since December, interest rates have
declined precipitously, as the yield of the two-year Treasury note closed at
5.84% as of May 31, 1995.
Mortgage securities underperformed their Treasury counterparts during the
latter
half of 1994 as the market grew increasingly concerned about the possibility of
these securities having greater "extension risk." (Certain mortgage-backed
securities are likely to have longer average lives than had previously been
anticipated as homeowners will be less likely to prepay their mortgages in a
rising interest rate environment.) During the first quarter of 1995, however,
mortgage-backed securities posted strong performance relative to Treasuries as
fear of "extension risk" dissipated and prepayment concerns remained in check.
Recently, however, the possibility of a further decline in interest rates has
evoked growing concerns over increasing levels of prepayments. Consequently,
mortgage securities, including adjustable rate mortgages, have lagged the
Treasury market rally. In the asset-backed securities market, a slowdown in new
issuance from first-quarter 1995 levels has resulted in strong performance
relative to other short-duration products.
PERFORMANCE AND STRATEGY
The Fund is managed using a "targeted duration" approach such that the Fund's
duration is approximately equal to one to one and a half years. That duration
target should create a fund with the price, or NAV sensitivity between a one-
and two-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 NAV is affected by the rate of prepayments of the mortgage
securities in its portfolio.
Including dividends paid, the Fund's total return for the one-year period ended
May 31, 1995 was 6.39% for Class A shares and 6.39% for Class B shares. This
compares with an average total return of 1.62% during the same time period for
the universe of 81 adjustable rate mortgage funds, according to Lipper
Analytical Services. Further, during the same period, the U.S. Government
1-year
Treasury Bill, the Fund's comparative broad based index had a total return of
5.97%.
As interest rates rise or fall, the coupons of the adjustable rate mortgage
securities in the portfolio also increase or decrease to reflect the higher or
lower levels of their respective indices. As interest rates rose throughout
much
of the fiscal year, the Fund increased its distribution rate seven times
2
<PAGE>
between May 1994 and March 1995. As of May 31, the Fund had a current yield of
6.07% based on the Fund's NAV of $9.88. The Fund's SEC yield for Class A shares
as of May 31, 1995 was 5.20% and 5.17% for the B shares.
ACTIVE PORTFOLIO MANAGEMENT
During the second quarter of 1995 the portfolio has increased its allocation to
short-average-life-sequential-pay CMOs. These securities, also referred to as
"plain vanilla" CMOs, offer a relatively high degree of prepayment protection
while yielding approximately 100 basis points over Treasury securities with a
comparable duration. Additionally, the Fund allocated approximately 5% of net
assets to Small Business Administration (SBA) floating-rate securities. The
underlying assets of these securities are loans made to small businesses which
are backed by the full faith and credit of the U.S. government. These
securities
are similar to ARMs in that they have coupons which periodically adjust to a
spread over a specified index, but have no lifetime or periodic caps and offer
excellent prepayment protection.
The Fund continues to emphasize adjustable-rate securities including
adjustable-rate mortgages, floating-rate asset-backed securities and Small
Business Administration floating-rate securities. These securities are
typically
less sensitive to interest-rate fluctuations than most fixed-rate securities as
their coupon levels periodically reset to reflect changes in interest rates.
The Fund's allocation to agency-backed (GNMA, FNMA, FHLMC) ARMs is
approximately
55% of net assets. GNMA ARMs performed particularly well relative to other
short-duration products as increased demand met with a sharp decrease in supply
during the first quarter of 1995. As spreads continued to tighten (GNMA ARMs
increased in price relative to other short duration securities), the Fund
decreased its allocation in favor of floating-rate assets-backeds. Recently, as
ARM spreads have widened (have become cheaper) relative to other short-duration
products, the Fund has been adding to its position.
OUTLOOK
Although the recent market rally has afforded fixed-income investors an
opportunity to partially recoup losses suffered in 1994, we remain cautiously
optimistic concerning the near-term future of the bond market. Investor
sentiment clearly indicates that the inflationary fears that consumed the
market
during most of 1994 have dissipated. However, the steep decline in interest
rates could stimulate a resurgence in consumption and increase the
3
<PAGE>
potential for increased inflationary pressures. In addition, the momentum with
which the economy entered 1995, and the continued weakness of the dollar, could
prove the arrival of a "soft landing" to be premature.
Should the levels of inflation remain low, we expect the performance of the
fixed-income markets to remain strong and look for a possible stabilization of
interest rates towards year end. The Fund's portfolio will continue to be
actively managed to add value by both taking advantage of price dislocations in
the short-duration market and through sector rotation.
THE ADVISER
As Investment Sub-Adviser, BlackRock is responsible for making the day-to-day
investment decisions for the portfolio. BlackRock was formed in 1988 to provide
asset management services with respect to fixed-income securities to both
institutional and individual investors and currently manages over $32 billion
of
fixed-income securities through several open-end funds, 21 closed-end funds and
more than 95 institutional client accounts. We encourage shareholders with
questions about the Smith Barney Adjustable Rate Government Income Fund to call
your Smith Barney Financial Consultant or BlackRock's representatives at (800)
227-7236.
Sincerely,
Heath B. McLendon Keith T. Anderson
CHAIRMAN OF THE BOARD PORTFOLIO MANAGER
Scott M. Amero Robert S. Kapito
PORTFOLIO MANAGER PORTFOLIO MANAGER
MAY 31, 1995
4
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS MAY 31, 1995
PORTFOLIO BREAKDOWN
Pie chart depicting the allocation of the Adjustable Rate Government Income
Fund
investment securities held at May 31, 1995 by portfolio classification. The pie
is broken in pieces representing portfolios in the following percentages:
<TABLE>
<CAPTION>
PORTFOLIO PERCENTAGE
<S> <C>
Asset-Backed Securities 9.7%
Repurchase Agreement 1.3%
Adjustable Rate Mortgage-Backed Securities 57.0%
U.S. Treasury Notes 11.5%
Fixed Rate Mortgage Pass-Through Securities 3.5%
Fixed Rate Collateralized Mortgage Obligations 14.4%
Project Loans 1.0%
Collateralized Mortgage Obligation Planned
Amortization Class Interest-Only Strips 1.6%
</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
(PACIOs) are CMO IOs which have repayment schedules that are guaranteed if the
actual speed of prepayments is within a designated range.
5
<PAGE>
Smith Barney
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
- ---------------------------------------------------------------------------
1995 9.78 9.88 $0.01 0.50 6.39
- ---------------------------------------------------------------------------
Total $0.01 $1.31
- ---------------------------------------------------------------------------
Cumulative Total Return (6/22/92 through 5/31/95) 12.80%
- ---------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value.
+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. On June 7, 1993 the Fund commenced selling
Class C shares (formerly Class D shares).
</TABLE>
THE FUND'S POLICY IS 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 5/31/95 N/A 6.39%
- ------------------------------------------------------
Inception (6/22/92) through 5/31/95 4.18% 4.17%
- ------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains distributions at net asset value. The Fund waived
fees from June 22, 1992 through May 31, 1993. A shareholder's actual return
for the period during which waivers were in effect 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, 1995
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
09/92 $10,142 $10,082
12/92 $10,255 $10,168
03/93 $10,347 $10,252
06/93 $10,468 $10,335
09/93 $10,524 $10,420
12/93 $10,572 $10,508
03/94 $10,633 $10,606
06/94 $10,637 $10,735
09/94 $10,746 $10,877
12/94 $10,824 $11,046
03/95 $11,123 $11,221
05/95 $11,280 $11,329
</TABLE>
+ Illustration of $10,000 invested in Class A shares on June 22, 1992 assuming
reinvestment of dividends and capital gains distributions at net asset value
through May 31, 1995.
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 class has been used.
NOTE: All figures cited here represent past performance and do not guarantee
future results of Class A shares.
7
<PAGE>
Smith Barney
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
- --------------------------------------------------------------------------
1995 9.78 9.88 $0.01 0.50 6.39
- --------------------------------------------------------------------------
Total $0.01 $1.13
- --------------------------------------------------------------------------
Cumulative Total Return (11/6/92 through 5/31/95) 11.35%
- --------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions 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>
Without CDSC With CDSC***
With Without With Without
Waiver Waiver Waiver Waiver
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------
Year Ended 5/31/95 N/A 6.39% N/A 3.39%
- --------------------------------------------------------------------------
Inception (11/6/92) through 5/31/95 4.28% 4.28% 3.18% 3.18%
- --------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains distributions at net asset value. The Fund waived
fees from June 22, 1992 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.
***Average annual total return figures assume the deduction of the maximum
applicable CDSC which is described in the prospectus.
</TABLE>
NOTE: Class B shares may be acquired only through exchanges from Class B shares
of other Smith Barney 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 6, 1992 through May 31,
1995
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 INVESTMENT IN THE
GROWTH OF $10,000 INVESTED IN CLASS B SHARES U.S. GOVERNMENT
MONTH INVESTED IN CLASS B SHARES OF THE FUND 1-YEAR
ENDED OF THE FUND (3.00% BACK-END LOAD) TREASURY BILL
<S> <C> <C> <C>
10/31/92 -- -- $10,000
11/06/92 $10,000 $10,000 --
11/92 $10.036 $10,036 $10,029
12/92 $10,123 $10,123 $10,059
03/93 $10,214 $10,214 $10,142
06/93 $10,334 $10,334 $10,224
09/93 $10,389 $10,389 $10,308
12/93 $10,436 $10,436 $10,395
03/94 $10,497 $10,497 $10,492
06/94 $10,501 $ 9,501 $10,620
09/94 $10,608 $10,608 $10,760
12/94 $10,685 $10,685 $10,928
03/95 $10,980 $10,980 $11,100
05/95 $11,135 $10,837 $11,207
</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 and capital gains distributions at net asset value through May
31, 1995.
++ Value does not assume deduction of applicable CDSC.
+++ Value assumes deduction of applicable CDSC (assuming redemption on May 31,
1995).
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 class has been used.
NOTE: All figures cited here represent past performance and do not guarantee
future results of Class B shares.
9
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------
HISTORICAL PERFORMANCE -- CLASS C 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>
- --------------------------------------------------------------------------
6/2/93-
5/31/94 $9.96 $9.78 -- $0.38 1.83%
- --------------------------------------------------------------------------
1995 9.78 9.88 $0.01 0.45 5.93
- --------------------------------------------------------------------------
Total $0.01 $0.83
- --------------------------------------------------------------------------
Cumulative Total Return (6/2/93 through 5/31/95) 7.87%
- --------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends and capital gains distributions at
net asset value and do not assume deduction of the contingent deferred sales
charge ("CDSC").
</TABLE>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS C SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Without CDSC With CDSC***
<S> <C> <C>
- ------------------------------------------------------------------
Year Ended 5/31/95 5.93% 4.93%
- ------------------------------------------------------------------
Inception (6/2/93) through 5/31/95 3.87% 3.39%
- ------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains distributions at net asset value.
***Average annual total return figures shown assume the deduction of the maximum
applicable CDSC which is described in the prospectus.
</TABLE>
NOTE: Class C shares (formerly Class D shares) are subject to a maximum 1.00%
CDSC and 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.
10
<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 C shares on June 2, 1993 through May 31, 1995 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 INVESTMENT IN THE
GROWTH OF $10,000 INVESTED IN CLASS B SHARES U.S. GOVERNMENT
MONTH INVESTED IN CLASS C SHARES OF THE FUND 1-YEAR
ENDED OF THE FUND (1.00% BACK-END LOAD) TREASURY BILL
<S> <C> <C> <C>
05/31/93 -- -- $10,000
06/01/93 $10,000 $10,000 --
06/93 $10,054 $10,054 $10,028
09/93 $10,108 $10,108 $10,110
12/93 $10,154 $10,154 $10,196
03/94 $10,213 $10,213 $10,291
06/94 $10,216 $10,216 $10,416
09/94 $10,321 $10,321 $10,554
12/94 $10,396 $10,396 $10,718
03/95 $10,683 $10,683 $10,887
05/95 $10,787 $10,687 $11,329
</TABLE>
+ Illustration of $10,000 invested in Class C shares (formerly Class D shares)
on June 2, 1993 assuming deduction of the maximum CDSC at time of redemption
and reinvestment of dividends and capital gains at net asset value through
May
31, 1995.
++ Value does not assume deduction of applicable CDSC.
+++ Value assumes deduction of applicable CDSC (assuming redemption on May 31,
1995).
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 class has been used.
NOTE: All figures cited here represent past performance and do not guarantee
future results of Class C shares.
11
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS MAY 31, 1995
-------------------------------------------------------------
<TABLE>
<S> <C>
KEY TO ABBREVIATIONS
ARM -- Adjustable Rate Mortgage
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
REMIC -- Real Estate Mortgage Investment Conduit
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
--------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 61.8%
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA)
-- 17.1%
FNMA ONE YEAR CMT ARM+ -- 5.5%
$4,988,132 7.069%, 8/1/22 $ 5,122,213
4,638,804 6.818%, 8/1/22 4,737,518
--------------------------------------------------------------------
9,859,731
--------------------------------------------------------------------
FNMA THREE YEAR+ -- 1.6%
2,771,208 7.803%, 7/1/22 2,839,296
--------------------------------------------------------------------
FNMA SIX MONTH LIBOR+ -- 5.3%
9,397,015 6.311%, 6/1/24++ 9,570,296
--------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION
(FHLMC) -- 7.0%
FHLMC -- ONE YEAR CMT ARM+ --
1.9%
3,450,588 5.623%, 4/1/24 3,472,155
--------------------------------------------------------------------
FHLMC THREE YEAR CMT ARM+ --
2.1%
2,851,603 7.967%, 1/1/22 2,919,329
811,194 8.278%, 2/1/18 839,489
--------------------------------------------------------------------
3,758,818
--------------------------------------------------------------------
FHLMC COFI+ -- 3.0%
5,366,762 5.322%, 9/1/13 5,333,220
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- (CONTINUED)
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
(GNMA) -- 30.3%
GNMA ONE YEAR+ -- 30.3%
$3,625,179 6.000%, 4/20/22 $ 3,645,589
10,400,517 6.500%, 5/20/25 10,576,071
330,484 6.500%, 4/20/25 336,062
9,335,337 7.000%, 7/20/24 9,522,044
5,985,140 7.000%, 1/20/25 6,157,084
4,735,199 7.000%, 2/20/25 4,847,660
186,003 7.000%, 4/20/25 190,188
777,999 7.000%, 5/20/25 795,504
4,011,998 7.000%, 6/20/25 4,102,268
13,612,536 7.500%, 3/20/25+++ 14,037,928
--------------------------------------------------------------------
54,210,405
--------------------------------------------------------------------
NON-AGENCY ARMS -- 7.4%
3,937,260 Bear Stearns, Series 1992-3B,
Class A2, 7.966%, 5/25/23 3,964,348
6,016,995 Resolution Trust Corporation,
Series 1992-4, Class A,
8.629%, 6/25/24 6,086,551
3,169,225 Salomon, Series 92-5, Class
VII, 7.726%, 11/25/22 3,191,013
--------------------------------------------------------------------
13,241,912
--------------------------------------------------------------------
SMALL BUSINESS ADMINISTRATION (SBA) FLOATERS+
-- 4.7%
SBA Guaranteed Loan Pools:
3,816,010 7.250%, 8/25/16 3,863,710
4,379,980 7.375%, 9/25/16 4,456,630
--------------------------------------------------------------------
8,320,340
--------------------------------------------------------------------
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED
SECURITIES
(Cost $108,128,408) 110,606,173
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
FIXED RATE CMO'S -- 17.4%
NON-AGENCY FIXED RATE CMOS --
6.7%
$4,706,085 Resolution Trust Corporation,
Series 1992-9, Class A2B,
8.000%, 7/25/29 $ 4,735,498
Salomon Brothers Corporation:
6,434,637 Series 83-1, Class Z, 12.000%,
12/1/13 7,189,420
--------------------------------------------------------------------
11,924,918
--------------------------------------------------------------------
PREMIUM STRIPPED PASS-THROUGH
-- 8.9%
6,800,867 FHLMC Strips, Series 124,
Class 124-A 8.500%, 3/15/97 6,900,772
3,900,267 FNMA Strips, 11.500% (2),
5/25/09 4,319,546
1,250,955 FNMA Strips, 11.500% (3),
3/25/09 1,385,432
2,442,901 FNMA Strips, 11.500% (4),
4/1/09 2,705,513
560,455 FNMA Strips, 11.500% (5),
9/25/09 621,455
--------------------------------------------------------------------
15,932,718
--------------------------------------------------------------------
PAC IOS -- 1.8%
31,178 FNMA REMIC 91-132, Class J,
1018.775% (1),12/25/18 740,467
17,799 FNMA REMIC 90-106, Class K,
928.95% (6), 9/25/20 444,986
83,546,800 FHLMC-GNMA, Series 33, Class
IA, 3.000%, 5/25/96 1,984,237
--------------------------------------------------------------------
3,169,690
--------------------------------------------------------------------
TOTAL FIXED RATE CMO'S
(Cost $33,064,372) 31,027,326
--------------------------------------------------------------------
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- 3.7%
FHLMC 15 YEAR -- 1.1%
1,964,213 9.000%, 11/1/05+++ 2,031,310
--------------------------------------------------------------------
FHLMC GOLD 30 YEAR -- 0.5%
897,068 9.000%, 10/1/20 959,306
--------------------------------------------------------------------
FHLMC 30 YEAR -- 2.1%
3,546,031 9.000%, 9/1/09 3,713,687
--------------------------------------------------------------------
TOTAL FIXED RATE MORTGAGE PASS-THROUGH
SECURITIES
(Cost $6,768,483) 6,704,303
--------------------------------------------------------------------
PROJECT LOANS -- 1.1%
FEDERAL HOUSING ADMINISTRATION
-- 1.1%
1,919,348 Alliance, 7.350%, 4/1/19 1,913,973
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
ASSET-BACKED SECURITIES -- 10.5%
$5,000,000 Advanta Credit Card, Series
94-B, 6.405%, 10/1/01 $ 5,006,250
7,875,000 First Chicago Mortgage Trust,
Series 94-J, 6.345%, 1/15/01 7,860,195
5,910,000 First USA Credit Card, Series
94-4, 6.475%, 8/15/03 5,933,995
--------------------------------------------------------------------
TOTAL ASSET BACKED SECURITIES
(Cost $18,742,253) 18,800,440
--------------------------------------------------------------------
U.S. TREASURY NOTES -- 12.5%
10,460,000 6.625%, 3/31/97 10,598,909
5,830,000 7.250%, 2/15/98 6,019,475
1,990,000 7.750%, 1/31/00 2,123,709
3,550,000 6.875%, 3/31/00 3,666,475
--------------------------------------------------------------------
TOTAL U.S. TREASURY NOTES
(Cost $22,155,190) 22,408,568
--------------------------------------------------------------------
REPURCHASE AGREEMENT -- 1.4% (Cost $2,575,000)
2,575,000 Agreement with NIKKO
Securities, 6.140% dated
5/31/95 to be repurchased at
$2,575,439 on 6/1/95,
collateralized by $2,575,000
FHLMC, 8.50% due 4/15/22 2,575,000
--------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $193,479,291*) 108.4% 194,035,783
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31, 1995
<TABLE>
<CAPTION>
NUMBER OF MARKET VALUE
CONTRACTS (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
FUTURES CONTRACTS -- LONG POSITION
11 June 10 year U.S. Treasury
Note $ 1,212,750
21 June 30 day Federal Funds
Futures 8,226,533
--------------------------------------------------------------------
TOTAL FUTURES CONTRACTS --
LONG POSITION 5.3%
(CONTRACT AMOUNT $9,349,376) 9,439,283
--------------------------------------------------------------------
FUTURES CONTRACTS -- SHORT POSITION
(151) September 2 year U.S. Treasury
Note $(31,282,953)
(137) September 5 year U.S. Treasury
Note (14,684,688)
(21) May 30 day Federal Funds
Futures (8,224,783)
--------------------------------------------------------------------
TOTAL FUTURES CONTRACTS --
SHORT POSITION (30.3)%
(CONTRACT AMOUNT $54,168,564) (54,192,424)
--------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 16.6 29,702,975
--------------------------------------------------------------------
NET ASSETS 100.0% $178,985,617
--------------------------------------------------------------------
<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.
++ Part of holdings serve as collateral for reverse repurchase agreements (see
Note 5).
+++ Part of holdings serve as collateral for future contracts.
(1) Annualized yield at date of purchase (unaudited): 23.221%.
(2) Annualized yield at date of purchase (unaudited): 8.200%.
(3) Annualized yield at date of purchase (unaudited): 8.200%.
(4) Annualized yield at date of purchase (unaudited): 8.140%.
(5) Annualized yield at date of purchase (unaudited): 8.183%
(6) Annualized yield at date of purchase (unaudited): 18.505%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1995
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$193,479,291) (Note 1)
See accompanying schedule $194,035,783
Receivable for investment securities
sold 16,218,925
Receivable for Fund shares sold 6,348,620
Interest receivable 2,130,401
Net unrealized appreciation of futures
contracts (Note 1)
See accompanying schedule 66,047
Unamortized organization costs (Note 7) 63,364
Prepaid expenses 32,980
Dollar roll income receivable 3,000
- ----------------------------------------------------------------------------
TOTAL ASSETS 218,899,120
- ----------------------------------------------------------------------------
LIABILITIES:
Securities sold under agreement to
repurchase (Notes 1 and 5) $21,700,000
Payable for investment securities
purchased 15,367,791
Payable for Fund shares redeemed 1,903,535
Dividends payable 550,357
Distribution fee payable (Note 3) 74,181
Investment advisory fee payable (Note
2) 59,345
Service fee payable (Note 3) 37,091
Administration fee payable (Note 2) 29,672
Custodian fees payable (Note 2) 10,500
Transfer agent fees payable (Note 2) 6,604
Due to custodian 66,193
Accrued expenses and other payables 108,234
- ----------------------------------------------------------------------------
TOTAL LIABILITIES 39,913,503
- ----------------------------------------------------------------------------
NET ASSETS $178,985,617
- ----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
MAY 31, 1995
<TABLE>
<S> <C>
NET ASSETS consist of:
Distributions in excess of net
investment income $ (100,601)
Accumulated net realized loss on
securities transactions, futures
contracts and investments sold
short (7,240,679)
Unrealized appreciation of
securities and futures contracts 622,539
Par value 18,116
Paid-in capital in excess of par
value 185,686,242
- -----------------------------------------------------------
TOTAL NET ASSETS $178,985,617
- -----------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE, offering and
redemption price per share
($174,463,014 DIVIDED BY 17,658,222
shares of beneficial interest
outstanding) $9.88
- -----------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE, offering price per
share+
($4,520,578 DIVIDED BY 457,513 shares
of beneficial interest outstanding) $9.88
- -----------------------------------------------------------
CLASS C SHARES:
NET ASSET VALUE, offering price per
share+
($2,025 DIVIDED BY 205 shares of
beneficial interest outstanding) $9.88
- -----------------------------------------------------------
<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
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 1995
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest (Note 5) $15,682,080
- ------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $1,058,362
Investment advisory fee (Note 2) 846,688
Service fee (Note 3) 529,180
Administration fee (Note 2) 423,344
Transfer agent fees (Notes 2 and 4) 89,147
Legal and audit fees 78,883
Custodian fees (Note 2) 77,886
Amortization of organization costs (Note 7) 31,692
Trustees' fees and expenses (Note 2) 20,230
Other 239,344
- ------------------------------------------------------------------------------
Total expenses before interest 3,394,756
Interest expense (Note 5) 1,828,319
- ------------------------------------------------------------------------------
TOTAL EXPENSES 5,223,075
- ------------------------------------------------------------------------------
NET INVESTMENT INCOME 10,459,005
- ------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized loss on:
Securities transactions (3,836,978)
Futures contracts (1,718,273)
Investments sold short (39,831)
- ------------------------------------------------------------------------------
Net realized loss on investments during the year (5,595,082)
- ------------------------------------------------------------------------------
Net change in unrealized appreciation of:
Securities 7,260,978
Futures contracts 256,985
- ------------------------------------------------------------------------------
Net unrealized appreciation of investments
during the year 7,517,963
- ------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,922,881
- ------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,381,886
- ------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 1995
<TABLE>
<S> <C> <C>
NET DECREASE IN CASH:
Cash flows from operating activities:
Interest received $ 19,036,738
Fee income received 273,202
Operating expenses paid (3,561,916)
- ----------------------------------------------------------------------------------
Net cash provided by operating
activities $ 15,748,024
- ----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of long term investment
securities and purchased options (1,315,217,766)
Proceeds from disposition of investment
securities and purchased options 1,461,838,079
Net proceeds from short sale transactions (39,831)
Net proceeds from futures transactions (1,718,273)
- ----------------------------------------------------------------------------------
Net cash provided by investing
activities 144,862,209
- ----------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES 160,610,233
- ----------------------------------------------------------------------------------
Cash flows used in financing activities:
Proceeds from shares sold 149,633,893
Payments on shares redeemed (278,556,436)
Cash dividends paid to shareholders* (1,249,474)
Decrease in reverse repurchase agreements
outstanding (29,000,000)
Interest expense (1,810,354)
- ----------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (160,982,371)
- ----------------------------------------------------------------------------------
NET DECREASE IN CASH (372,138)
CASH -- BEGINNING OF YEAR 305,945
- ----------------------------------------------------------------------------------
DUE TO CUSTODIAN -- END OF YEAR $ (66,193)
- ----------------------------------------------------------------------------------
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 $ 12,381,886
Decrease in investments $ 139,892,261
Decrease in securities sold short and
written options 3,381
Increase in futures contracts (256,985)
Decrease in receivable for investment
securities sold 89,754,052
Decrease in payable for investment
securities purchased (84,282,855)
Decrease in interest and fees receivable 1,457,334
Decrease in other assets 25,707
Decrease in accrued expenses (192,867)
Interest expense 1,828,319
- ----------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 148,228,347
- ----------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES $ 160,610,233
- ----------------------------------------------------------------------------------
<FN>
* Non-cash financing activities include reinvestment of dividends of
$9,448,787.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
5/31/95 5/31/94
<S> <C> <C>
Net investment income $ 10,459,005 $ 14,105,427
Net realized loss on securities transactions, futures
contracts, investments sold short and written
options during the year (5,595,082) (913,617)
Net unrealized appreciation/(depreciation) on
securities, written options, futures contracts, and
investments sold short during the year 7,517,963 (6,017,079)
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 12,381,886 7,174,731
Distributions to shareholders from net investment
income:
Class A (9,958,645) (13,963,952)
Class B (287,241) (195,811)
Class C (3,745) (3,995)
Distributions to shareholders in excess of net
investment income:
Class A (97,745) (206,420)
Class B (2,819) (2,895)
Class C (37) (59)
Distribution to shareholders from net realized gain on
investments:
Class A (213,778) --
Class B (6,326) --
Class C (95) --
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A (110,923,819) (22,490,133)
Class B (3,952,304) 4,982,086
Class C (111,077) 114,945
- -------------------------------------------------------------------------------------
Net decrease in net assets (113,175,745) (24,591,503)
NET ASSETS:
Beginning of year 292,161,362 316,752,865
- -------------------------------------------------------------------------------------
End of year (including distributions in excess of net
investment income of $100,601 and $209,374,
respectively) $ 178,985,617 $292,161,362
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
5/31/95+++ 5/31/94 5/31/93*
<S> <C> <C> <C>
Net Asset Value, beginning of year $ 9.78 $ 9.96 $ 10.00
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.47 0.37 0.44#
Net realized and unrealized gain/(loss) on
investments 0.13 (0.17) (0.05)
- -------------------------------------------------------------------------------------
Total from investment operations 0.60 0.20 0.39
Less distributions:
Distributions from net investment income (0.49) (0.37) (0.43)
Distributions in excess of net investment income (0.00)@ (0.01) --
Distributions from net realized capital gains (0.01) -- --
- -------------------------------------------------------------------------------------
Total distributions (0.50) (0.38) (0.43)
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $ 9.88 $ 9.78 $ 9.96
- -------------------------------------------------------------------------------------
Total return++ 6.39% 2.05% 3.89%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $174,463 $283,627 $313,184
Ratio of operating expenses to average net assets+ 1.60% 1.53% 1.50%**
Ratio of net investment income to average net
assets 4.94% 3.72% 4.36%**
Portfolio turnover rate 524% 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 years ended May 31, 1995 and 1994, and the
period ended May 31, 1993 were 2.47%, 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
and does not reflect any applicable sales charge.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
# 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.
@ Amount represents less than $0.01 per share.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
5/31/95+++ 5/31/94 5/31/93*
<S> <C> <C> <C>
Net Asset Value, beginning of year $ 9.78 $ 9.96 $ 9.96
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.47 0.37 0.25#
Net realized and unrealized gain/(loss) on investments 0.13 (0.17) --
- -------------------------------------------------------------------------------------
Total from investment operations 0.60 0.20 0.25
Less distributions:
Distributions from net investment income (0.49) (0.37) (0.25)
Distributions in excess of net investment income (0.00)@ (0.01) --
Distributions from net realized capital gains (0.01) -- --
- -------------------------------------------------------------------------------------
Total distributions (0.50) (0.38) (0.25)
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $ 9.88 $ 9.78 $ 9.96
- -------------------------------------------------------------------------------------
Total return++ 6.39% 2.05% 2.56%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $4,521 $8,422 $3,569
Ratio of operating expenses to average net assets+ 1.63% 1.57% 1.50%**
Ratio of net investment income to average net assets 4.92% 3.68% 4.36%**
Portfolio turnover rate 524% 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 years ended May 31, 1995 and 1994, and
period ended May 31, 1993 were 2.49%, 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 charge.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
# 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.
@ Amount represents less than $0.01 per share.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD.**
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
5/31/95+++ 5/31/94*
<S> <C> <C>
Net Asset Value, beginning of period $9.78 $9.98
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.46 0.37
Net realized and unrealized gain/(loss) on investments 0.10 (0.19)
- -------------------------------------------------------------------------------------
Total from investment operations 0.56 0.18
Less distributions:
Distributions from net investment income (0.45) (0.37)
Distributions in excess of net investment income (0.00)@ (0.01)
Distributions from net realized capital gains (0.01) --
- -------------------------------------------------------------------------------------
Total distributions (0.46) (0.38)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $9.88 $9.78
- -------------------------------------------------------------------------------------
Total return++ 5.93% 1.83%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 2 $ 113
Ratio of operating expenses to average net assets+ 1.59% 1.55%***
Ratio of net investment income to average net assets 4.95% 3.69%***
Portfolio turnover rate 524% 525%
- -------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class D shares on June 2, 1993.
** Effective November 7, 1994, Class D shares were reclassified as Class C
shares.
*** Annualized.
+ The annualized operating expense ratio excludes interest expense. The ratios
including interest expense for the year ended May 31, 1995 and the period
ended May 31, 1994 were 2.46% and 2.34%, respectively.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charge.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
@ Amount represents less than $0.01 per share.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Adjustable Rate Government Income Fund (formerly 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"). Effective
November 7, 1994, the Fund began offering Class Y shares and continued to offer
Class A, Class B and Class C shares (Class D shares were re-designated
"Class C"
shares as of that date). As of May 31, 1995, no Class Y shares had been sold.
Class A shares are sold without a sales charge and are available for direct
purchases. Class B and Class C shares may be subject to a contingent deferred
sales charge ("CDSC") upon redemption. Class B shares are available only
through
exchanges. Class B shares will convert automatically to Class A shares eight
years after the date of original purchase. Class C shares are available only to
those investors participating in the Smith Barney Inc. ("Smith Barney") 401(k)
Program. Class Y shares are available to investors making an initial investment
of at least $5 million and are not subject to any sales charges,
distribution or
service fees. All classes of shares have identical rights and privileges except
with respect to the effect of the respective sales charges on 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
25
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
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: Option selling and purchasing is used by the Fund to effectively
"hedge" more volatile positions so that changes in interest rates do not change
the duration of the portfolio unexpectedly. In general, the Fund uses non-trade
related options to hedge a long or short position or an overall portfolio that
is longer or shorter than the benchmark security. 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
26
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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: The Fund may invest in non-trade related financial futures
contracts primarily for the purpose of hedging its existing portfolio
securities
or securities the Fund intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. 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
27
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 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. Proceeds of the sale will be
invested and the income from these investments, together with any
28
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 may 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 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.
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 are determined on a class level. It is the policy of the Fund to declare
dividends from net investment income daily and to pay such dividends on the
last
business day of the Smith Barney Inc. ("Smith Barney") statement month.
Distributions of any net realized capital gains are declared and paid annually,
after the end of the fiscal year. Additional distributions of net investment
income and capital gains for the Fund may be made at the discretion of the
Board
of Trustees in order to avoid the application of a 4.00% nondeductible excise
tax on certain undistributed amounts of net
29
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
investment income and capital gains. To the extent net realized capital gains
can be offset by capital losses and loss carryforwards, it is the policy of the
Fund not to distribute such gains.
Income distributions and capital gains distributions on a Fund level 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 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 Mutual Funds Management Inc. ("SBMFM") (formerly known as Smith
Barney Advisers, Inc.). SBMFM is a wholly-owned subsidiary of Smith Barney
Holdings Inc., which in turn is a wholly-owned subsidiary of
30
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Travelers Group 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.
BlackRock Financial Management, Inc., a wholly owned subsidiary of PNC Bank
("BlackRock"), serves as the sub-investment adviser to the 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.
The Fund has also entered into an administration agreement (the "Administration
Agreement") with SBMFM. 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.
The Fund has also entered into a sub-administration agreement (the "Sub-
Administration Agreement") with The Boston Company Advisors Inc. ("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). 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 SBMFM and Boston Advisors.
For the year ended May 31, 1995, the Fund incurred total brokerage commissions
of $72,252 on futures transactions, of which $63,930 was paid to Smith Barney.
A CDSC is generally payable by a shareholder in connection with the redemption
of certain Class B and Class C shares. In circumstances in which the CDSC is
imposed, the amount will vary depending on the number of years since the date
of
purchase. For the year ended May 31, 1995, Smith Barney received from investors
$8,410 in CDSC on the redemption of Class B shares.
No officer, director or employee of Smith Barney, or BlackRock, or of any of
their affiliates 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
31
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 PLAN
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 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 C
shareholders, and covers expenses incurred in distributing Class A, Class B and
Class C shares. Smith Barney is paid an annual service fee with respect to
Class
A, Class B and Class C 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
C 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,
1995, the Fund incurred service fees of $514,261, $14,720 and $199,
respectively, for Class A, Class B and Class C shares, respectively. For the
year ended May 31, 1995, the Fund incurred distribution fees of $1,028,523,
$29,440 and $399, for Class A, Class B and Class C 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
32
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
above servicing and distribution fees, class specific operating expenses
include
transfer agent fees of $85,121, $3,999 and $27 for Class A, Class B and Class C
shares.
5. SECURITIES TRANSACTIONS
Costs of purchases and proceeds from sales of investment securities, excluding
short-term investments and U.S. government securities for the year ended May
31,
1995 aggregated $112,358,938 and $161,952,264, respectively. Costs of purchases
and proceeds from sales of long-term U.S. government securities aggregated
$1,118,575,973 and $1,212,703,382, respectively for the year ended May 31,
1995.
At May 31, 1995, aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost amounted to $1,980,093, and
the
aggregate gross unrealized depreciation for all securities in which there was
an
excess of tax cost over value amounted to $1,423,601.
Information regarding borrowing by the Fund under reverse repurchase agreements
is as follows:
Reverse repurchase agreements outstanding at May 31, 1995:
<TABLE>
<CAPTION>
FACE VALUE MARKET VALUE
<C> <S> <C>
------------------------------------------------------------------------------------
$3,000,000 Reverse Repurchase Agreement with Nikko Securities, dated
5/22/95 bearing 6.030% to be repurchased at $3,015,578
on 6/22/95, collateralized by $3,020,000 GNMA one year,
7.500% due 3/20/25. $ 3,000,000
8,200,000 Reverse Repurchase Agreement with Nikko Securities, dated
5/25/95 bearing 6.030% to be repurchased at $8,263,181
on 7/10/95, collateralized by $9,385,000 FNMA six month
Libor, 6.311% due 6/1/24. 8,200,000
10,500,000 Reverse Repurchase Agreement with Nikko Securities, dated
5/30/95 bearing 6.030% to be repurchased at $10,540,451
on 6/22/95, collateralized by $10,644,746 GNMA one year,
Pool 8611, 7.500%, due 3/20/25; and $52,210 of
Receivable for investments sold. 10,500,000
------------------------------------------------------------------------------------
TOTAL REVERSE REPURCHASE AGREEMENTS 21,700,000
------------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS--
--------------------------------------------------------------------------
Maximum amount outstanding during the year $108,102,781
Average amount outstanding during the year $ 34,438,606
------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Interest rates ranged from 3.740% to 6.680% during the year. The average amount
outstanding during the year 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,
1995.
Interest paid for the year ended May 31, 1995 on borrowings by the Fund under
reverse repurchase agreements aggregated $1,828,319.
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 $20,164,063
Average amount outstanding during the year $ 5,451,468
------------------------------------------------------------------------------------
</TABLE>
The average amount outstanding during the year 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, 1995.
Interest income earned for the year ended May 31, 1995, by the Fund under
dollar
roll transactions aggregated $270,811.
6. SHARES OF BENEFICIAL INTEREST
At May 31, 1995, an unlimited number of shares of beneficial interest divided
into four classes, Class A, Class B, Class C and Class Y 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 YEAR ENDED
CLASS A SHARES: Shares 5/31/95Amount Shares 5/31/94Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 14,386,553 $ 141,131,613 37,723,115 $ 375,317,501
Issued as reinvestment of dividends 940,901 9,209,448 1,288,488 12,786,604
Redeemed (26,681,307) (261,264,880) (41,442,947) (410,594,238)
- -------------------------------------------------------------------------------------
Net decrease (11,353,853) $(110,923,819) (2,431,344) $ (22,490,133)
- -------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
5/31/95 5/31/94
CLASS B SHARES: Shares Amount Shares Amount
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 1,416,453 $ 13,875,924 1,642,723 $ 16,273,982
Issued as reinvestment of dividends 24,052 235,412 15,084 149,272
Redeemed (1,844,482) (18,063,640) (1,154,619) (11,441,168)
- -------------------------------------------------------------------------------------
Net increase/(decrease) (403,977) $ (3,952,304) 503,188 $ 4,982,086
- -------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED YEAR ENDED
5/31/95 5/31/94
CLASS C SHARES:** Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 2,375 $ 23,237 12,666 $ 126,234
Issued as reinvestment of dividends 402 3,927 382 3,795
Redeemed (14,088) (138,241) (1,533) (15,084)
- -------------------------------------------------------------------------------------
Net increase/(decrease) (11,311) $ (111,077) 11,515 $ 114,945
- -------------------------------------------------------------------------------------
<FN>
** The Fund commenced selling Class D shares on June 2, 1993. Effective November
7, 1994, Class D shares were reclassified as Class C shares.
</TABLE>
As of May 31, 1995, no Class Y shares had been sold.
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.
35
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL LOSS CARRYFORWARD
As of May 31, 1995, the Fund had available for federal tax purposes an unused
capital loss carryforwards of $5,258,938, to offset future net capital gains
expiring May 31, 2003.
36
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND:
We have audited the accompanying statement of assets and liabilities of the
Smith Barney Adjustable Rate Government Income Fund (formerly Smith Barney
Shearson Adjustable Rate Government Income Fund), including the schedule of
portfolio investments, as of May 31, 1995, the related statement of operations
and cash flows for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial
highlights
for each of the two years in the period then ended and for the period from 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, 1995 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 Adjustable Rate Government Income Fund as of May 31, 1995, the results
of
its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the
financial
highlights for each of the two years in the period then ended and for the
period
from June 22, 1992 (commencement of operations) to May 31, 1993, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
July 26, 1995
37
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
FISCAL YEAR ENDED MAY 31, 1995
In accordance with tax law, the Fund has elected to defer the recognition of
losses occurring between October 31 and May 31 until the first day of the
following fiscal year. The amount of such deferral is $1,915,693 of capital
losses. These losses for tax purposes will be deemed to occur on June 1, 1995.
38
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
ADDITIONAL INFORMATION (UNAUDITED)
On February 22, 1995 the meeting of the shareholders of the Fund was held for
the purpose of voting on the following matters:
1. To approve or disapprove for the Fund a new Sub-Advisory Agreement between
the Fund, Smith Barney Strategy Advisors, Inc. and BlackRock Financial
Management, Inc.
The results of the Vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
% VOTING FOR THE PROPOSAL % VOTING AGAINST THE PROPOSAL % ABSTAINING
------------------------- ----------------------------- ------------
<S> <C> <C>
91.237% 2.629% 6.134%
</TABLE>
39
<PAGE>
Smith Barney
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.
388 Greenwich Street
New York, New York 10013
SUB-INVESTMENT ADVISER
BlackRock Financial
Management Inc.
345 Park Avenue
New York, New York 10154
ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand L.L.P.
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
40
<PAGE>
Smith Barney
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 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.
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.
41
<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
Jessica Bibliowicz
PRESIDENT
Lewis E. Daidone
SENIOR VICE PRESIDENT
AND TREASURER
Christina T. Sydor
SECRETARY
[LOGO]
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS
OF
SMITH BARNEY 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.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
[LOGO]
Fund 167, 226, 240, 494
FD2224 7/95
