<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME SHOWING
AN EAGLE CENTERED WITH THE
AMERICAN FLAG BEHIND IT.
SEMI- SMITH BARNEY
ANNUAL ADJUSTABLE
REPORT RATE
GOVERNMENT
INCOME FUND
.......................................
NOVEMBER 30, 1994
[LOGO]
<PAGE>
Adjustable Rate Government Income Fund
DEAR SHAREHOLDER:
While 1993 was characterized by dramatic declines in interest
rates and historically high levels of prepayments, the past
twelve months have been characterized by rapid and
substantial increases in interest rates across the yield curve, most
notably in short-term interest rates. As a result, it has been a
challenging investment environment for fixed income products,
including Smith Barney Adjustable Rate Government Income Fund (the
"Fund"). The performance of the Fund, however, was very strong,
outperforming the broader markets and its peer group over the six
months ended November 30, 1994.
The Fund is an open-end bond fund whose investment objective is to
seek high current income and to limit the degree of fluctuation in its
net asset value ("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 family of mutual funds and is managed by its
investment adviser, Smith Barney Strategy Advisers Inc., and its
sub-investment adviser, BlackRock Financial Management, L.P.
("BlackRock").
Despite significant market volatility and the 317 basis point rise in
short-term interest rates since December 31, 1993 (as measured by the
2-Year Treasury), the NAV of the Class A
shares has been relatively stable, declining only 15 cents since December 31,
1993, closing at $9.75 as of November 30, 1994. From inception in June 1992
through the Fund's most recent fiscal year end, November 30, 1994, the NAV has
remained relatively stable, fluctuating within a narrow range of $10.05 to $9.75
and performing according to its investment objective.
THE FIXED INCOME MARKETS
The beginning of the third quarter of 1994 provided fixed income investors with
a renewed sense of stability; however, lack of monetary restraint by the Federal
Reserve Board in September along with increasingly strong economic data
unleashed bearish sentiment that pushed the yields of fixed-income securities
higher. On November 15, 1994, the Federal Reserve intervened and increased the
Fed Funds rate for the sixth time in 1994 by another 0.75% to 5.50%. This
increase was more aggressive than most had anticipated, and the bond market's
initial response was favorable. This
1
<PAGE>
favorable bond market sentiment was short lived, however, as interest rates
continued to rise with inflation fears resulting from economic data which still
suggests strength in the economy.
During the past six months, the yield of the 2-year Treasury, which most
directly reflects the Fund's NAV, increased over 240 basis points to 7.40% (as
of November 30, 1994), and since the beginning of 1994, the 2-year Treasury has
risen by more than 300 basis points to its highest level in four years.
Increased interest rates have caused a dramatic decline in prepayments. As a
result, many formerly "short" securities have extended to intermediate
securities, while new issuances of alternative short duration mortgage
securities including 15-year pass-throughs, balloons and CMOs have declined
sharply. In contrast to the first half of 1994, where the performance of short
duration securities was driven primarily by changing fundamentals due to
substantial changes in interest rates, volatility and prepayments, supply and
demand technicals played the dominant role in the relative performance of short
duration securities during the latter half of 1994. Asset-backed issuance has
become extremely heavy and ARMs origination has become a larger percentage of
mortgage origination.
PORTFOLIO STRATEGY
As sub-investment adviser to the Fund, BlackRock is responsible for making the
day-to-day investment decisions for the Fund's portfolio. The Fund is managed to
seek to achieve a volatility of NAV of between the 1- and 2-year Treasury by
managing a portfolio of primarily ARMs.
BlackRock manages the Fund using a "targeted duration" approach such that the
Fund's duration is approximately between 1 and 1 1/2 years. Duration is a
measure of the price sensitivity of a given security relative to movements in
interest rates. That duration target should create a fund with the price, or
NAV, sensitivity between a 1- and 2-year Treasury. Changes in the prices and
yields of these Treasury securities affect the value of the Fund's securities.
In addition to interest rates, the Fund's NAV is affected by the rate of
prepayments of the mortgage securities in its portfolio.
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
2
<PAGE>
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 level of the index changes, the coupon
of the adjustable rate mortgage will adjust, subject to the terms of the
security.
The Fund's emphasis on mortgage pools with higher rate caps and shorter ARMs
reset periods has benefitted the Fund throughout the year. The ARMs within the
portfolio should continue to lend a degree of NAV stability to the Fund as the
securities within the portfolio reset to reflect the rise in interest rates.
Given the dramatic changes in the relative value among short duration
securities, the Fund has made some significant changes to the portfolio during
the latter half of the year. Weightings in the asset-backed sector have
increased given the recent spread widening and the relative richness of other
short duration products. This reallocation of the portfolio in favor of
securities which trade in substantial daily volume such as Treasuries, credit
card asset backeds and Government National Mortgage Association ARMs, gives the
Fund the flexibility to take advantage of year-end dislocations in the market.
The Fund continues to be weighted heavily in adjustable rate securities
(including adjustable rate mortgage-backed securities and adjustable rate
asset-backed securities), ending the fiscal period with 80% (based on total net
assets as of November 30, 1994) of the portfolio in these securities. Since the
coupons of ARMs reset periodically to reflect current interest rates, thus
limiting their price sensitivity, the Fund's concentration in these securities
has helped to limit its NAV volatility notwithstanding the dramatic increase in
short-term Treasury rates since the beginning of 1994. The Fund also emphasizes
strong credit quality by investing primarily in securities issued or guaranteed
by the United States government, its agencies or instrumentalities ("U.S.
government securities"). As of November 30, 1994, approximately 72% of the
portfolio was invested in U.S. government securities, and approximately 24% was
invested in "AAA" and 4% in "AA" rated securities.
PERFORMANCE
The substantial increase in interest rates created a challenging investment
environment for fixed income products including the Fund. The performance
3
<PAGE>
of the Fund on a relative basis, however, has been extremely strong,
outperforming the broader markets and earning significantly higher rankings in
its Lipper peer group than in recent periods.
The Fund finished at the top of all ARM funds for six-month total return
performance (1 of 83) according to Lipper Analytical as of November 30, 1994.
Including dividends paid, the Fund's Class A, B and C total return for the
six-month period ended November 30, 1994 was 1.82%. This compares to a total
return of 1.07% during the same period by the Lehman Brothers Short (1-3) U.S.
Government Index.
The Fund began operating on June 22, 1992 with an initial net asset value for
Class A shares of $10.00 per share and began offering Class B shares on November
6, 1992 with an initial NAV of $9.96 per share. The Fund began offering Class C
shares on June 2, 1993 with an initial NAV of $9.98 per share. As of November
30, 1994, the NAV for Class A, Class B and Class C shares was $9.75 per share.
The Fund's NAV is calculated daily and reported for the Class A shares in the
mutual fund listing in national newspapers under the heading Smith Barney Funds
as "AdjGvA".
Reflecting the resets towards higher interest rates of many of the coupons of
the ARMs in the portfolio, the Fund has consistently been increasing its
distribution rate during the latter half of 1994. The distribution for the
dividend period from December 13, 1994 through January 10, 1995 has been
increased by 60 bp to $0.044583 per share, representing an annualized
distribution rate of 5.49% (based on the Fund's current NAV of $9.74 as of
December 16, 1994). The Fund's SEC yield for Class A shares as of November 30,
1994 was 5.09%.
ECONOMIC OUTLOOK
As inflation indicators continue to point to strength in the economy, we believe
that the Federal Reserve will remain committed to preemptively fighting
inflation and increase the Fed Funds rate again during the first quarter of
1995. Additional tightening should result in a further flattening of the yield
curve with short-term rates edging upward and a possible decline on the long-end
of the curve during the latter half of 1995. Inflationary pressure is expected
to diminish following further Fed tightening, and longer-term projections are
for a stabilization of interest rates beginning the second quarter of 1995 and
rolling into the latter half of the year.
4
<PAGE>
Because adjustable rate securities reset to current interest rates on a periodic
basis, the rapid increase in short-term interest rates in the broader markets
has left the Fund somewhat lagging behind its benchmark yield. Over the next
several months, however, the Fund's dividend is expected to continue to increase
as the adjustable rate securities contained within the portfolio reset to
reflect the current interest rate environment.
We greatly appreciate your investment in the Fund and hope we can continue to
serve your 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 23, 1995
5
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) NOVEMBER 30, 1994
PORTFOLIO BREAKDOWN
Pie chart depicting the allocation of the Adjustable Rate Government Income Fund
investment securities held at November 30, 1994 by industry classification. The
pie is broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Asset-Backed Securities -- Floating Rate 13.5%
Asset-Backed Securities -- Fixed Rate 7.9%
Adjustable Rate Mortgage-Backed Securities 57.0%
Repurchase Agreement 0.5%
Fixed Rate Mortgage Pass-Through Securities 3.1%
Fixed Rate Collateralized Mortgage Obligations 11.3%
Project Loans 6.7%
</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 Government National Mortgage Association, Federal
National Mortgage Association or Federal Home Loan Mortgage Corporation Mortgage
Pass-Through Certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS PLANNED AMORTIZATION CLASS INTEREST ONLY
(PAC IOS) are CMO IOs which have repayment schedules that are guaranteed if the
actual speed of prepayments is within a designated range.
INTEREST ONLY STRIPS (IOS) are an investment instrument derived from a floating
or fixed rate debt obligation, generally mortgage-backed securities, that
provides only the interest payments of the underlying assets. These securities
perform best in slow prepayment rate environments (interest rates rise) as the
average life of the underlying assets extends along with the number of interest
payments.
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.
6
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) NOVEMBER 30, 1994
-------------------------------------------------------------
<TABLE>
<S> <C>
KEY TO ABBREVIATIONS
CMO -- Collateralized Mortgage Obligation
COFI -- Cost of funds for member institutions for the
Federal Home Loan Bank of San Francisco
IO -- Interest Only
LIBOR -- London Interbank Offered Rate
PAC -- Planned Amortization Class
PO -- Principal Only
REMIC -- Real Estate Mortgage Investment Conduit
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
--------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 64.3%
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 37.6%
FNMA ONE YEAR+ -- 30.2%
$ 4,519,748 6.927%, 1/1/22 $ 4,564,810
5,675,701 5.934%, 5/1/22 5,658,674
4,996,693 6.008%, 5/1/22 5,012,333
6,534,899 6.229%, 7/1/22 6,559,405
9,746,286 6.615%, 7/1/22 9,826,985
5,180,248 6.824%, 8/1/22 5,163,775
5,776,628 6.957%, 8/1/22 5,826,249
9,701,062 5.315%, 6/1/24 9,594,932
9,773,533 5.549%, 9/1/24 9,645,304
--------------------------------------------------------------------
61,852,467
--------------------------------------------------------------------
FNMA THREE YEAR+ -- 7.4%
8,319,504 7.890%, 11/1/17 8,386,060
3,878,612 7.357%, 9/1/20 3,908,594
2,855,752 7.458%, 7/1/22 2,852,496
--------------------------------------------------------------------
15,147,150
--------------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 12.7%
FHLMC ONE YEAR+ -- 2.1%
4,225,140 5.691%, 3/1/22 4,235,703
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
MARKET VALUE
(NOTE 1)
FACE VALUE
--------------------------------------------------------------------
<C> <S> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES --
(CONTINUED)
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) --
(CONTINUED)
FHLMC THREE YEAR+ -- 1.9%
$ 920,940 8.218%, 2/1/18 $ 920,332
2,957,368 7.283%, 1/1/22 2,939,623
--------------------------------------------------------------------
3,859,955
--------------------------------------------------------------------
FHLMC FLOATERS+ -- 6.1%
11,000,000 Multiclass 1189G, 9.125%, 1/15/22 12,430,000
--------------------------------------------------------------------
FHLMC COFI+ -- 2.6%
5,629,618 4.574%, 9/1/13 5,369,248
--------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) -- 2.8%
GNMA ONE YEAR+ -- 2.8%
5,672 7.000%, 10/20/24 5,607
4,900,000 6.500%, 11/20/24 4,736,144
1,000,000 7.000%, 1/24/95 980,310
--------------------------------------------------------------------
5,722,061
--------------------------------------------------------------------
NON-AGENCY ARMS -- 11.2%
4,188,537 Bear Stearns, Series 1992-3B, Class A2,
7.464%, 5/25/23 4,153,186
4,105,397 Prudential Home Mortgage Services,
Series 92-15, Class A1, 7.384%, 11/25/21 4,102,852
6,283,856 Resolution Trust Corporation, Series
1992-4, Class A, 8.460%, 6/24/24 6,299,566
4,751,652 Resolution Trust Corporation, Series
1992-4, Class A2, 6.140%, 7/25/28 4,724,948
3,765,057 Salomon Brothers Corporation, Series
92-5, Class VII, 6.104%, 11/25/22 3,760,350
--------------------------------------------------------------------
23,040,902
--------------------------------------------------------------------
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED
SECURITIES
(Cost $133,077,308) 131,657,486
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
PROJECT LOANS -- 7.5%
FEDERAL HOUSING ADMINISTRATION -- 7.5%
$ 1,935,297 Alliance, 7.350%, 4/1/19 $ 1,841,145
10,348,223 Citi, Project 85-A, 6.875%, 3/1/16 10,357,846
3,342,563 Salomon, 7.350%, 12/1/19 3,181,051
--------------------------------------------------------------------
TOTAL PROJECT LOANS
(Cost $16,112,128) 15,380,042
--------------------------------------------------------------------
FIXED RATE CMOS -- 12.7%
PREMIUM STRIPPED PASS-THROUGHS -- 4.4%
4,204,166 FNMA Strips, 11.500% (2), 5/25/09 4,572,031
1,348,308 FNMA Strips, 11.500% (3), 3/25/09 1,466,285
2,638,897 FNMA Strips, 11.500% (4), 4/1/09 2,869,801
--------------------------------------------------------------------
8,908,117
--------------------------------------------------------------------
NON-AGENCY -- 4.1%
7,867,211 Salomon Brothers Corporation, Series
83-1, Class Z, 12.000%, 12/1/13 8,326,184
--------------------------------------------------------------------
FHLMC -- 3.5%
7,177,010 Multiclass 124A, 8.500%, 3/15/97 7,165,814
--------------------------------------------------------------------
PAC IOS -- 0.7%
30,034 FNMA REMIC 91-132, Class J, 1018.775%
(1), 12/25/18 978,973
19,198 FNMA REMIC 90-106, Class K, 928.95% (5),
9/25/20 583,437
--------------------------------------------------------------------
1,562,410
--------------------------------------------------------------------
PAC POS -- 0.0%
51,843 FNMA REMIC 92-115A, Zero Coupon, 6/25/22 51,422
--------------------------------------------------------------------
TOTAL FIXED RATE CMOS
(Cost $27,232,023) 26,013,947
--------------------------------------------------------------------
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- 3.5%
FHLMC 15 YEAR -- 1.1%
20,265 8.500%, 10/1/01 20,427
2,227,042 9.000%, 11/1/05 2,240,738
--------------------------------------------------------------------
2,261,165
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- (CONTINUED)
FHLMC GOLD 30 YEAR -- 0.5%
$ 970,111 9.000%, 10/1/20 $ 979,880
--------------------------------------------------------------------
FHLMC 30 YEAR -- 1.9%
3,884,984 9.000%, 9/1/09 3,914,005
--------------------------------------------------------------------
FNMA 30 YEAR -- 0.0%
18,844 9.000%, 7/1/17 18,844
--------------------------------------------------------------------
TOTAL FIXED RATE MORTGAGE PASS-THROUGH
SECURITIES
(Cost $7,550,476) 7,173,894
--------------------------------------------------------------------
ASSET-BACKED SECURITIES -- 24.1%
FLOATING RATE -- 15.2%
5,000,000 Discover Card, 5.475%, 10/16/04 4,995,300
7,875,000 First Chicago Mortgage Trust, Series
94-J, 5.595%, 1/16/01 7,835,625
5,000,000 First USA Credit Card, Series 94-4,
5.245%, 8/15/03 4,996,850
5,330,000 First USA Credit Card, Series 94-6,
5.725%, 10/15/03 5,325,003
8,000,000 MBNA Master Credit Card, Series 94-C,
5.250%, 3/15/04 7,996,240
--------------------------------------------------------------------
31,149,018
--------------------------------------------------------------------
FIXED RATE -- 8.9%
8,000,000 Chase Manhattan Credit Card, Series
91-1, 8.750%, 8/15/99 8,107,440
10,000,000 Discover Card, Series 91-B, 8.625%,
7/16/98 10,087,500
--------------------------------------------------------------------
18,194,940
--------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $49,606,278) 49,343,958
--------------------------------------------------------------------
REPURCHASE AGREEMENT -- 0.6% (COST $1,250,000)
1,250,000 Agreement with Chase Securities, 5.650%
dated 11/30/94 to be repurchased at
$1,250,196 on 12/1/94, collateralized
by $1,285,000 U.S. Treasury Note,
7.250% due 11/15/96 1,250,000
--------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $234,828,213*) 112.7% 230,819,327
--------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (CONTINUED) NOVEMBER 30, 1994
<TABLE>
<CAPTION>
NUMBER OF MARKET VALUE
CONTRACTS (NOTE 1)
--------------------------------------------------------------------
<C> <S> <C>
FUTURES CONTRACTS -- SHORT POSITION -- (21.4)%
(122) March 2 year U.S. Treasury Note $(24,468,625)
(194) March 5 year U.S. Treasury Note (19,409,094)
--------------------------------------------------------------------
TOTAL FUTURES CONTRACTS -- SHORT POSITION
(Contract Amount $43,794,656) (21.4%) (43,877,719)
--------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) 8.7% 17,777,783
--------------------------------------------------------------------
NET ASSETS 100.0% $204,719,391
--------------------------------------------------------------------
<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.
(1) Annualized yield at date of purchase: 23.221%.
(2) Annualized yield at date of purchase: 9.820%.
(3) Annualized yield at date of purchase: 8.200%.
(4) Annualized yield at date of purchase: 8.140%.
(5) Annualized yield at date of purchase: 18.505%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) NOVEMBER 30, 1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $234,828,213)
(Note 1)
See accompanying schedule $230,819,327
Cash 76,692
Receivable for investment securities sold 51,587,953
Interest receivable 2,299,781
Receivable for Fund shares sold 732,580
Unamortized organization costs (Note 7) 79,210
Dollar roll income receivable 50,000
Prepaid expenses 26,995
- -------------------------------------------------------------------------------
TOTAL ASSETS 285,672,538
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities
purchased $39,950,083
Securities sold under agreement to
repurchase (Notes 1 and 5) 39,024,146
Payable for Fund shares redeemed 1,003,669
Dividends payable 518,974
Service fees payable (Note 3) 127,319
Net unrealized depreciation of futures
contracts (Note 1)
See accompanying schedule 83,063
Investment advisory fee payable (Note 2) 69,287
Administration fee payable (Note 2) 34,643
Custodian fees payable (Note 2) 11,146
Transfer agent fees payable (Note 2) 8,139
Distribution fee payable (Note 3) 2,594
Accrued Trustees' fees and expenses (Note
2) 2,250
Accrued expenses and other payables 117,834
- -------------------------------------------------------------------------------
TOTAL LIABILITIES 80,953,147
- -------------------------------------------------------------------------------
NET ASSETS $204,719,391
- -------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------- NOVEMBER 30, 1994
<TABLE>
<S> <C> <C>
NET ASSETS consist of:
Undistributed net investment income $ 216,610
Accumulated net realized loss on
securities transactions, futures
contracts and investments sold short (5,080,310)
Unrealized depreciation of securities and
futures contracts (4,091,949)
Par value 20,993
Paid-in capital in excess of par value 213,654,047
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $204,719,391
- -------------------------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE, offering and redemption price per share
($198,683,542 DIVIDED BY 20,373,835 shares of beneficial
interest outstanding) $9.75
- -------------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($5,952,791 DIVIDED BY 610,477 shares of beneficial
interest outstanding) $9.75
- -------------------------------------------------------------------------------
CLASS C SHARES:
NET ASSET VALUE and offering price per share+
($83,058 DIVIDED BY 8,517 shares of beneficial interest
outstanding) $9.75
- -------------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest (Note 5) $ 8,547,490
- -------------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $ 612,232
Investment advisory fee (Note 2) 489,786
Service fees (Note 3) 306,118
Administration fee (Note 2) 244,893
Transfer agent fees (Notes 2 and 4) 50,148
Custodian fees (Note 2) 47,657
Legal and audit fees 36,011
Amortization of organization costs (Note 7) 15,846
Trustees' fees and expenses (Note 2) 9,111
Other 140,635
- -------------------------------------------------------------------------------------
Total expenses before interest 1,952,437
Interest expense (Note 5) 1,058,075
- -------------------------------------------------------------------------------------
TOTAL EXPENSES 3,010,512
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 5,536,978
- -------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities transactions (4,833,292)
Futures contracts 1,203,000
Investments sold short (24,620)
- -------------------------------------------------------------------------------------
Net realized loss on investments during the
period (3,654,912)
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation of:
Securities 2,695,600
Futures contracts 107,875
- -------------------------------------------------------------------------------------
Net unrealized appreciation of investments during
the period 2,803,475
- -------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (851,437)
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,685,541
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1994
<TABLE>
<S> <C> <C>
NET DECREASE IN CASH:
Cash flows from operating activities:
Interest received $ 11,197,755
Fee income received 140,625
Operating expenses paid (2,097,476)
- ----------------------------------------------------------------------------------
Net cash provided by operating
activities $ 9,240,904
- ----------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of long-term investment
securities and purchased options (894,884,595)
Proceeds from disposition of investment
securities and purchased options 990,243,527
Purchase of short-term investments, net (1,250,000)
Net proceeds from short sale transactions (24,620)
Net proceeds from futures transactions 1,203,000
- ----------------------------------------------------------------------------------
Net cash provided by investing
activities 95,287,312
- ----------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES 104,528,216
- ----------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from shares sold 61,815,013
Payments on shares redeemed (153,256,548)
Cash dividends paid to shareholders* (615,572)
Decrease in reverse repurchase agreements
outstanding (11,675,854)
Interest expense (1,024,508)
- ----------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (104,757,469)
- ----------------------------------------------------------------------------------
NET DECREASE IN CASH (229,253)
CASH -- BEGINNING OF YEAR 305,945
- ----------------------------------------------------------------------------------
CASH -- END OF YEAR $ 76,692
- ----------------------------------------------------------------------------------
<FN>
*Non-cash financing activities include reinvestment of dividends of $4,654,635.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
STATEMENT OF CASH FLOWS (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1994
<TABLE>
<S> <C> <C>
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 $ 4,685,541
Decrease in investments $ 103,108,717
Decrease in futures contracts (107,875)
Decrease in receivable for investment
securities sold and short sales 65,276,030
Decrease in payable for investment
securities purchased and short sales (70,588,188)
Decrease in interest and fees receivable 1,240,954
Decrease in other assets 15,846
Decrease in accrued expenses (160,884)
Interest expense 1,058,075
- -------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 99,842,675
- -------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES $104,528,216
- -------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
11/30/94 ENDED
(UNAUDITED) 5/31/94
<S> <C> <C>
Net investment income $ 5,536,978 $ 14,105,427
Net realized loss on securities transactions, futures
contracts, investments sold short and written
options during the period (3,654,912) (913,617)
Net unrealized appreciation/(depreciation) on
securities, written options, futures contracts and
investments sold short during the period 2,803,475 (6,017,079)
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,685,541 7,174,731
Distributions to shareholders from net investment
income:
Class A (4,965,810) (13,963,952)
Class B (143,000) (195,811)
Class C (2,184) (3,995)
Distributions to shareholders in excess of net
investment income:
Class A -- (206,420)
Class B -- (2,895)
Class C -- (59)
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A (84,529,367) (22,490,133)
Class B (2,457,815) 4,982,086
Class C (29,336) 114,945
- -------------------------------------------------------------------------------------
Net decrease in net assets (87,441,971) (24,591,503)
NET ASSETS:
Beginning of period 292,161,362 316,752,865
- -------------------------------------------------------------------------------------
End of period (including undistributed net investment
income and distributions in excess of net
investment income of $216,610 and $209,374,
respectively) $204,719,391 $292,161,362
- -------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR PERIOD
11/30/94 ENDED ENDED
(UNAUDITED) 5/31/94 5/31/93*
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 9.78 $ 9.96 $ 10.00
- ---------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.19 0.37 0.44#
Net realized and unrealized loss on
investments (0.04) (0.17) (0.05)
- ---------------------------------------------------------------------------------
Total from investment operations 0.15 0.20 0.39
Less distributions:
Distributions from net investment
income (0.18) (0.37) (0.43)
Distributions in excess of net
investment income -- (0.01) --
- ---------------------------------------------------------------------------------
Total distributions (0.18) (0.38) (0.43)
- ---------------------------------------------------------------------------------
Net Asset Value, end of period $ 9.75 $ 9.78 $ 9.96
- ---------------------------------------------------------------------------------
Total return++ 1.82% 2.05% 3.89%
- ---------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of period (in 000's) $198,684 $283,627 $313,184
Ratio of operating expenses to average
net assets+ 1.59%** 1.53% 1.50%**
Ratio of net investment income to
average net assets 4.52%** 3.72% 4.36%**
Portfolio turnover rate 307% 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 six months ended November 30, 1994, the
year ended May 31, 1994 and the period ended May 31,1993 were 2.46%, 2.31%
and 1.92%, respectively.
Annualized expense ratio before voluntary waiver of fees by investment
adviser, sub-investment adviser and administrator (including interest
expense) for the period ended May 31, 1993 was 2.03%.
++ Total return represents the aggregate total return for the period indicated.
# Net investment income before voluntary waiver of fees by investment adviser,
sub-investment adviser and administrator for the period ended May 31, 1993
was $0.43.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEAR PERIOD
11/30/94 ENDED ENDED
(UNAUDITED) 5/31/94 5/31/93*
<S> <C> <C> <C>
Net Asset Value, beginning of period $ 9.78 $ 9.96 $ 9.96
- -----------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.19 0.37 0.25#
Net realized and unrealized loss on
investments (0.04) (0.17) --
- -----------------------------------------------------------------------------
Total from investment operations 0.15 0.20 0.25
Less distributions:
Distributions from net investment income (0.18) (0.37) (0.25)
Distributions in excess of net investment
income -- (0.01) --
- -----------------------------------------------------------------------------
Total distributions (0.18) (0.38) (0.25)
- -----------------------------------------------------------------------------
Net Asset Value, end of period $ 9.75 $ 9.78 $ 9.96
- -----------------------------------------------------------------------------
Total return++ 1.82% 2.05% 2.56%
- -----------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $5,953 $8,422 $3,569
Ratio of operating expenses to average net
assets+ 1.62%** 1.57% 1.50%**
Ratio of net investment income to average
net assets 4.49%** 3.68% 4.36%**
Portfolio turnover rate 307% 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 six months ended November 30, 1994, the
year ended May 31,1994 and the 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 charges.
# Net investment income before voluntary waiver of fees by investment adviser,
sub-investment adviser and administrator for the period ended May 31, 1993
was $0.24.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD.**
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED PERIOD
11/30/94 ENDED
(UNAUDITED) 5/31/94*
<S> <C> <C>
Net Asset Value, beginning of period $9.78 $9.98
- ----------------------------------------------------------------
Income from investment operations:
Net investment income 0.19 0.37
Net realized and unrealized loss on
investments (0.04) (0.19)
- ----------------------------------------------------------------
Total from investment operations 0.15 0.18
Less distributions:
Distributions from net investment
income (0.18) (0.37)
Distributions in excess of net
investment income -- (0.01)
- ----------------------------------------------------------------
Total distributions (0.18) (0.38)
- ----------------------------------------------------------------
Net Asset Value, end of period $9.75 $9.78
- ----------------------------------------------------------------
Total return++ 1.82% 1.83%
- ----------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in 000's) $ 83 $ 113
Ratio of operating expenses to average
net assets+ 1.57%*** 1.55%***
Ratio of net investment income to
average net assets 4.55%*** 3.69%***
Portfolio turnover rate 307% 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 six months ended November 30, 1994 and the
period ended May 31, 1994 were 2.43% and 2.34%, respectively.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney 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 D shares (Class D shares were re-designated "Class C"
shares as of that date). As of November 30, 1994, 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 not subject to any sales charges,
distribution or service fees and are available to investors making an initial
investment of at least $5 million. 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,
21
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 adviser, sub-investment adviser or
sub-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.
22
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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: Upon entering into a futures contract, the Fund is required
to deposit with the broker an amount of cash or cash equivalents equal to a
certain percentage of the contract amount. This is known as the "initial
margin." Subsequent payments ("variation margin") are made or received by the
Fund each day, depending on the daily fluctuation of the value of the contract.
The daily changes in the contract are recorded as unrealized gains or losses and
are shown net on the balance sheet. The Fund recognizes a realized gain or loss
when the contract is closed.
There are several risks associated with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk the
Fund may not be able to enter into a closing transaction because of an illiquid
secondary market.
23
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 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
24
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
to be delivered to the buyer, the Fund becomes obligated to replace the
securities borrowed at their market price at the time of replacement, whatever
that price may be.
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Interest income is recorded on the accrual basis.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date. Realized gains or losses from
securities sold are recorded on the identified cost basis. Investment income and
realized and unrealized gains and losses are allocated based upon the relative
net assets of each class.
MORTGAGE-BACKED SECURITIES: Income is accrued on the security using the
effective yield method. The effective yield is calculated monthly based on
current estimates 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 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
25
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 Advisers 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 The Travelers Inc.
Under the Advisory Agreement, the Fund pays a monthly fee at the annual rate of
0.40% of the value of its average daily net assets.
BlackRock Financial Management, L.P. ("BlackRock"), formerly investment adviser
to the Fund, serves as the sub-investment adviser to the Fund. Under
26
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 administration fee paid by the Fund to SBMFM at a rate agreed
upon from time to time between SBMFM and Boston Advisors.
For the six months ended November 30, 1994, the Fund incurred total brokerage
commissions of $34,810 on futures transactions, of which $21,368 was paid to
Smith Barney Inc. ("Smith Barney").
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years (eight years in the case of purchases in
certain 401(k) Plans) after the date of purchase. In circumstances in which the
charge is imposed, the amount of the charge ranges between 5% and 1% of net
asset value depending on the number of years since the date of purchase (except
in the case of purchases by certain 401(k) plans in which case a 3% charge is
imposed for the eight-year period after the date of purchase). A CDSC may be
payable by a shareholder in connection with the redemption of Class C shares
within four years after the date of purchase. In circumstances in which the
charge is imposed, the amount of the charge is 1%. For the six months ended
November 30, 1994, Smith Barney received from investors $24,948 in CDSC on the
redemption of Class B Shares.
27
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
No officer, director or employee of Smith Barney, SBSA or BlackRock, or 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
officer, director, or employee of Smith Barney, SBSA 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 Rule 12b-1 under the 1940 Act, the Fund has adopted a services and
distribution plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A, Class B and Class 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 six months ended
November 30, 1994, the Fund incurred service fees of $297,463, $8,525 and $130
for Class A, Class B and Class C shares, respectively. For the six months ended
November 30, 1994, the Fund incurred distribution fees of $594,919, $17,052 and
$261 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
28
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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 $47,748, $2,391 and $9 for Class A, Class B and Class C
shares, respectively.
5. SECURITIES TRANSACTIONS
Costs of purchases and proceeds from sales of long-term U.S. government
securities aggregated $830,948,499 and $924,390,366, respectively, for the six
months ended November 30, 1994.
At November 30, 1994, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost amounted to $634,499, and
aggregate gross unrealized depreciation for all securities in which there was an
excess of tax cost over value amounted to $4,643,385.
Information regarding borrowing by the Fund under reverse repurchase agreements
is as follows:
29
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Reverse repurchase agreements outstanding at November 30, 1994:
<TABLE>
<CAPTION>
FACE VALUE MARKET VALUE
<C> <S> <C>
------------------------------------------------------------------------------------
$8,103,150 Reverse Repurchase Agreement with Morgan Stanley, dated
11/29/94 bearing 5.000% to be repurchased at $8,105,401
on 12/1/94, collateralized by $8,185,000 U.S. Treasury
Note, 6.875% due 10/31/96. $ 8,103,150
8,019,521 Reverse Repurchase Agreement with Morgan Stanley, dated
11/21/94 bearing 5.925% to be repurchased at $8,103,993
on 1/24/95, collateralized by $8,449,093 FNMA Pool
122794, 7.890% due 11/1/17. 8,019,521
701,475 Reverse Repurchase Agreement with Morgan Stanley, dated
11/17/94 bearing 5.250% to be repurchased at $702,907 on
12/1/94, collateralized by $705,000 U.S. Treasury Note,
6.875% due 10/31/96. 701,475
16,300,000 Reverse Repurchase Agreement with Nikko Securities, dated
11/23/94 bearing 5.880% to be repurchased at $16,465,065
on 1/24/95, collateralized by $5,480,136 FNMA Pool
181274, 6.824% due 8/1/22; 2,952, 104 FNMA Pool 124349,
5.834% due 3/1/22; and $9,760,655 FNMA Pool 291722,
5.315% due 6/1/24. 16,300,00
5,900,000 Reverse Repurchase Agreement with Nikko Securities, dated
11/25/94 bearing 5.650% to be repurchased at $5,959,443
on 1/26/95, collateralized by $6,428,018 FNMA Pool
124410, 6.464% due 7/1/23. 5,900,000
------------------------------------------------------------------------------------
TOTAL REVERSE REPURCHASE AGREEMENTS $39,024,146
------------------------------------------------------------------------------------
REVERSE REPURCHASE AGREEMENTS--
---------------------------------------------------------------------------
Maximum amount outstanding during the period $108,102,781
Average amount outstanding during the period $ 43,942,496
------------------------------------------------------------------------------------
</TABLE>
Interest rates ranged from 4.44% to 5.69% 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, 1994.
Interest paid for the six months ended November 30, 1994 on borrowings by the
Fund under reverse repurchase agreements aggregated $1,058,075.
30
<PAGE>
Smith Barney
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 $20,000,000
Average amount outstanding during the period $ 6,174,863
-------------------------------------------------------------------------------------
</TABLE>
The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days in
the six months ended November 30, 1994.
Interest income earned for the six months ended November 30, 1994, by the Fund
under dollar roll transactions aggregated $185,234.
6. SHARES OF BENEFICIAL INTEREST
At November 30, 1994, 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>
SIX MONTHS ENDED YEAR ENDED
CLASS A SHARES: Shares 11/30/94Amount Shares 5/31/94Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 6,006,012 $ 58,791,495 37,723,115 $ 375,317,501
Issued as reinvestment of dividends 463,942 4,538,838 1,288,488 12,786,604
Redeemed (15,108,194) (147,859,700) (41,442,947) (410,594,238)
- -------------------------------------------------------------------------------------
Net decrease (8,638,240) $ (84,529,367) (2,431,344) $ (22,490,133)
- -------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
11/30/94 5/31/94
CLASS B SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 285,551 $ 2,792,176 1,642,723 $ 16,273,982
Issued as reinvestment of dividends 11,609 113,565 15,084 149,272
Redeemed (548,173) (5,363,556) (1,154,619) (11,441,168)
- -------------------------------------------------------------------------------------
Net increase/(decrease) (251,013) $ (2,457,815) 503,188 $ 4,982,086
- -------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
11/30/94 5/31/94
CLASS C SHARES:** Shares Amount Shares Amount
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 1,244 $ 12,183 12,666 $ 126,234
Issued as reinvestment of dividends 229 2,232 382 3,795
Redeemed (4,472) (43,751) (1,533) (15,084)
- -------------------------------------------------------------------------------------
Net increase/(decrease) (2,999) $ (29,336) 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 November 30, 1994, 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.
8. SUBSEQUENT EVENT
On June 16, 1994, the partners of BlackRock entered into a definitive agreement
under which PNC Bank N.A. ("PNC Bank") will acquire all of the outstanding
partnership interests in BlackRock (the "Transaction"). This Transaction is
expected to close in the first quarter of 1995.
PNC Bank is an indirect, wholly owned subsidiary of PNC Bank Corp. ("PNC"), a
bank holding company organized under the laws of the Commonwealth of
Pennsylvania in 1983. Following the closing of the Transaction, BlackRock will
become a wholly owned subsidiary of PNC Asset Management Group, Inc., the
holding company for PNC's asset management business.
32
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
As a result of the Transaction, the Fund's sub-investment advisory agreement
with SBSA and BlackRock will automatically terminate. The Board of Trustees has
approved a new sub-investment advisory agreement with SBSA and BlackRock,
identical in all material respects to the current sub-investment advisory
agreement, including fees, to take effect upon the closing of the Transaction. A
shareholder meeting to consider approval of the new sub-investment advisory
agreement is scheduled for February 22, 1995.
33
<PAGE>
ADJUSTABLE RATE
GOVERNMENT
INCOME FUND
TRUSTEES
Charles F. Barber
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
Heath B. McLendon
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen J. Treadway
PRESIDENT
Scott M. Amero
VICE PRESIDENT AND
INVESTMENT OFFICER
Keith T. Anderson
VICE PRESIDENT AND
INVESTMENT OFFICER
Robert S. Kapito
VICE PRESIDENT AND
INVESTMENT OFFICER
Lewis E. Daidone
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
FD 0301 A5
