Semi-Annual Report
[GRAPHIC APPEARS HERE]
Smith Barney
Adjustable Rate
Government
Income Fund
- ---------------
November 30,1995
[LOGO] Smith Barney
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Smith Barney Adjustable Rate Government Income Fund
Dear Shareholder:
We are pleased to provide you with the semi-annual report for Smith Barney
Adjustable Rate Government Income Fund for the period ended November 30, 1995.
The Fund is an open-end bond fund whose investment objective is to seek high
current income and to provide investors with low volatility of net asset value
(NAV) by investing primarily in the short duration, which includes adjustable
rate mortgages (ARMs), agency pass-through securities, collateralized mortgage
obligations (CMOs), fixed- and floating-rate asset-backed securities and
Treasuries. (ARMs are mortgaged-backed securities whose coupons periodically
adjust in relation to changes in certain interest rate benchmarks or indices.
This typically makes the value of these securities less sensitive to
fluctuations in interest rates than many other fixed rate securities.) The Fund
is part of Smith Barney Mutual Funds and is managed by its investment adviser,
Smith Barney Strategy Advisers Inc., and its sub-investment adviser, BlackRock
Financial Management Inc.
The period's prevailing economic and market conditions and an outline of our
portfolio strategy are summarized below. A more detailed summary of performance
and current holdings can be found in the appropriate sections that follow in the
semi-annual report.
Fund Performance
According to Lipper Analytical Services Inc., a major fund performance tracking
organization, the Smith Barney Adjustable Rate Government Income Fund posted a
six-month total return of 3.00% versus its peer group average return of 1.03%.
The Fixed Income Markets
The strong performance of the fixed income markets since the fourth quarter of
1994 has dramatically changed the market environment for investors. As interest
rates fell, the value of fixed income securities increased. Economic reports in
1995 generally provided statistical evidence that the U.S. economy grew at a
moderate and sustainable pace. This caused investor confidence in fixed income
securities to increase and ignited a tremendous rally in the U.S. Treasury
market.
Data released throughout 1995 has shown that economic growth has subsided from
the torrid pace of 1994. It appears that the Federal Reserve has achieved the
1
objective of a "soft landing" for the economy (moderate growth and low
inflation), which it engineered through a series of seven consecutive increases
in the fed funds target rate throughout 1994 and early 1995. The decline in the
rate of inflation over the first two quarters of 1995 provided the Fed with the
opportunity to reverse its policy of tight monetary control and lower the fed
funds target rate by 25 basis points (0.25%) to 5.75% in July. While the broader
markets experienced a correction in July and early August, yields returned to
their lows for the year by the end of November.
Yields on short-term fixed income securities, as measured by the yield of the
2-year U.S. Treasury, have fallen 49 basis points (0.49%) since May 31, 1995,
and a total of 234 basis points (2.34%) since December 30, 1994, to close at
5.61% at the end of the period covered by this report.
Portfolio Strategy
BlackRock Financial Management is responsible for the daily portfolio management
of Smith Barney Adjustable Rate Government Income Fund. By investing in a
portfolio comprised primarily of ARMs, we target a duration between 1 and 1 1/2
years. (Duration is a measure of the price sensitivity of a fixed income
security relative to a given change in interest rates.) Changes in the Fund's
NAV, therefore, will generally be comparable to the changes in price of 1-year
and 2-year Treasuries.
In searching for relative value opportunities, we look for securities and
sectors within the short duration market that have underperformed and have
strong appreciation potential. Securities are bought when they trade at
attractive yield levels and are sold upon price appreciation or outperformance
of other short duration alternatives.
Over the past six months, the Fund's allocation to adjustable rate mortgages
rose from approximately 58.7% to 68.6%. We believe that these securities offer
substantial relative value and less prepayment sensitivity than fixed-rate,
mortgage pass-throughs of similar maturity. Despite a drop in short-term
interest rate volatility (which should have had a positive effect), ARMs
underperformed during the third quarter of 1995 because of an increase in
refinancing activity. As a consequence, ARMs have, in our view, traded at
attractive levels relative to other short duration securities. We added ARMs to
the portfolio in anticipation of possible positive performance.
As of November 30, 1995, the Fund's position in Treasury securities was reduced
from 11.40% to less than 1%. The Fund captured the strong performance of this
sector as the fixed income markets rallied. At the same time, we reduced the
Fund's holdings in floating-rate asset-backed securities in order
2
to capitalize on their price appreciation potential. Over the third quarter, we
increased the Fund's exposure in the fixed-rate asset-backed market.
Economic Outlook
BlackRock Financial Management remains positive about the performance potential
of the fixed income markets in 1996. Inflationary expectations are extremely low
and recent economic data indicates the U.S. economy is growing at a slower and
steadier rate than in 1994. Many fixed income investors believe the Federal
Reserve Board is committed to further easing of monetary policy, and many expect
another reduction in the fed funds target rate in early 1996. In addition,
investor confidence in the fixed income markets has rebounded from 1995, and
that should fuel strong demand for fixed income securities going forward.
We appreciate your investment in the Smith Barney Adjustable Rate Government
Income Fund and look forward to serving your investment needs in 1996.
Sincerely,
/s/ Heath B. McLendon /s/ Robert S. Kapito
Heath B. McLendon Robert S. Kapito
Chairman and Portfolio Manager and
Chief Executive Officer Vice Chairman,
BlackRock Financial
Management Inc.
/s/ Scott M. Amero /s/ Keith T. Anderson
Scott M. Amero Keith T. Anderson
Portfolio Manager and Portfolio Manager and
Managing Director, Managing Director,
BlackRock Financial BlackRock Financial
Management Inc. Management Inc.
December 8, 1995
3
Smith Barney
Adjustable Rate Government Income Fund
Historical Performance -- Class A Shares
<TABLE>
<CAPTION>
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/30/95 $ 9.88 $9.88 $0.29 $0.00 3.00%
5/31/95 9.78 9.88 0.49 0.01 6.39
5/31/94 9.96 9.78 0.38 0.00 2.05
Inception* - 5/31/93 10.00 9.96 0.43 0.00 3.89+
------ ------ ------ ------ ------
Total $1.59 $0.01
<CAPTION>
Historical Performance -- Class B Shares
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/30/95 $ 9.88 $9.88 $0.29 $0.00 3.00%
5/31/95 9.78 9.88 0.49 0.01 6.39
5/31/94 9.96 9.78 0.38 0.00 2.05
Inception* - 5/31/93 9.96 9.96 0.25 0.00 2.56+
------ ------ ------ ------ ------
Total $1.41 $0.01
<CAPTION>
Historical Performance -- Class C Shares
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/30/95 $ 9.88 $9.88 $0.29 $0.00 3.00%
5/31/95 9.78 9.88 0.45 0.01 5.93
Inception* - 5/31/94 9.98 9.78 0.38 0.00 1.83+
------ ------ ------ ------ ------
Total $1.12 $0.01
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
4
Smith Barney
Adjustable Rate Government Income Fund
Average Annual Total Return
<TABLE>
<CAPTION>
Without Sales Charge(1)
-----------------------
Class A Class B Class C
<S> <C> <C> <C>
Six Months Ended 11/30/95+ 3.00% 3.00% 3.00%
Year Ended 11/30/95 7.63 7.63 7.63
Inception* through 11/30/95 4.46 4.57 4.49
<CAPTION>
With Sales Charge(2)
--------------------
Class A Class B Class C
<S> <C> <C> <C>
Six Months Ended 11/30/95+ 3.00% (2.00)% 2.00%
Year Ended 11/30/95 7.63 2.63 6.63
Inception* through 11/30/95 4.46 3.97 4.49
<CAPTION>
Cumulative Total Return
Without Sales Charge(1)
-----------------------
Class A (Inception* through 11/30/95) 16.19%
Class B (Inception* through 11/30/95) 14.69
Class C (Inception* through 11/30/95) 11.59
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class B shares reflect the deduction
of a maximum 5.00% CDSC, which applies if shares are redeemed less than one
year from initial purchase and declines thereafter by 1.00% per year until
no CDSC is incurred. Class C shares reflect the deduction of a 1.00% CDSC,
which applies if shares are redeemed within the first year of purchase.
* Inception dates for Class A, B and C shares are June 22, 1992, November 6,
1992 and June 2, 1993, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
5
Smith Barney
Adjustable Rate Government Income Fund
Historical Performance (unaudited)
Growth of $10,000 Invested in Class A Shares of the
Smith Barney Adjustable Rate Government Income Fund vs.
U.S. Government 1-Year Treasury Bill Index +
- --------------------------------------------------------------------------------
June 1992 -- November 1995
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
SB Adjustable Rate U.S. 1-Year Treasury
------------------ --------------------
<S> <C> <C>
6/22/92 $ 10,000 $ 10,000
11/92 10,166 10,138
5/93 10,389 10,306
11/93 10,536 10,477
5/94 10,602 10,691
11/94 10,795 10,985
5/95 11,280 11,329
11/95 11,619 11,631
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares at inception
on June 22, 1992, assuming reinvestment of dividends and capital gains, if
any, at net asset value through November 30, 1995, compared to the U.S.
Government 1-Year Treasury Bill Index. The index is comprised of U.S.
Government Treasury Bills with a maturity of one year. The index is unmanaged
and is not subject to the same management and trading expenses of a mutual
fund. The performance of the Fund's other classes may be greater or less than
the Class A shares' performance indicated on this chart, depending on whether
greater or lesser sales charges and fees were incurred by shareholders
investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than original cost. No adjustment has
been made for shareholder tax liability on dividends or capital gains.
6
Smith Barney
Adjustable Rate Government Income Fund
Portfolio Highlights (unaudited) November 30, 1995
Portfolio Breakdown
[GRAPH APPEARS HERE]
<TABLE>
<S> <C>
Adjustable Rate M. 0.676
Asset-Backed Sec. 0.173
Fixed Rate Collate 0.082
Fixed Rate Mortgage 0.025
Options Purchased 0.012
Short-Term Secur. 0.032
</TABLE>
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,
CMO's are collateralized by GNMA, FNMA or FHLMC Mortgage Pass-Through
Certificates, but also may be collateralized by whole loans or private mortgage
pass-through securities.
Collateralized Mortgage Obligations Planned Amortization Class Interest Only
(PAC IOs) are CMO IOs which have repayment schedules that are guaranteed if the
actual speed of prepayments is within a designated range.
7
Smith Barney
Adjustable Rate Government Income Fund
Schedule of Investments (unaudited) November 30, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ------ -------- -----
<S> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 67.6%
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 62.7%
Federal National Mortgage Association (FNMA) -- 19.4%
$ 3,972,992 FNMA One Year CMT ARM, 7.631% due 8/1/22 $ 4,030,441
3,295,712 FNMA One Year CMT ARM, 8.137% due 8/1/22 3,366,273
3,078,882 FNMA One Year CMT ARM, 7.193% due 7/1/24 3,151,514
8,790,823 FNMA One Year CMT ARM, 6.337% due 10/1/24+ 8,992,749
4,571,562 FNMA One Year CMT ARM, 6.835% due 1/1/25+ 4,682,280
4,437,558 FNMA One Year CMT ARM, 7.075% due 1/1/25 4,544,326
4,341,041 FNMA One Year CMT ARM, 7.405% due 1/1/25 4,438,715
2,842,052 FNMA Seven Year Balloon, 8.000% due 9/1/01+ 2,920,209
8,709,250 FNMA Six Month LIBOR, 7.044% due 6/1/24+ 8,853,475
2,084,363 FNMA Three Year, 8.228% due 7/1/22 2,154,690
---------
Total Federal National Mortgage Association
(Cost -- $47,042,494) 47,134,672
==========
Federal Home Loan Mortgage Corporation (FHLMC) -- 11.6%
5,144,674 FHLMC COFI, 5.948% due 9/1/13 5,069,100
9,908,503 FHLMC COFI, 6.632% due 4/1/19 9,930,204
7,050,741 FHLMC One Year CMT ARM, 7.872% due 9/1/23+ 7,200,569
3,084,125 FHLMC One Year CMT ARM, 6.145% due 4/1/24 3,149,169
2,713,787 FHLMC Three Year CMT ARM, 7.967% due 1/1/22 2,784,346
---------
Total Federal Home Loan Mortgage Corporation
(Cost -- $28,097,743) 28,133,388
==========
Government National Mortgage Association (GNMA) -- 31.7%
4,757,612 GNMA One Year, 6.500% due 3/20/21+ 4,872,081
322,923 GNMA One Year, 6.500% due 4/20/25 330,189
9,188,163 GNMA One Year, 6.500% due 5/20/25+ 9,392,049
4,233,323 GNMA One Year, 6.500% due 10/20/25 4,303,427
4,586,681 GNMA One Year, 6.500% due 11/20/25 4,662,636
3,322,624 GNMA One Year, 7.000% due 4/20/22 3,397,384
8,711,303 GNMA One Year, 7.000% due 7/20/24+ 8,929,086
687,162 GNMA One Year, 7.000% due 1/20/25 705,737
4,913,823 GNMA One Year, 7.000% due 1/20/25 5,035,146
4,407,975 GNMA One Year, 7.000% due 2/20/25+ 4,498,912
748,211 GNMA One Year, 7.000% due 5/20/25 766,685
3,915,050 GNMA One Year, 7.000% due 6/20/25 4,023,340
3,687,438 GNMA One Year, 7.500% due 7/20/24 3,787,700
</TABLE>
See Notes to Financial Statements.
8
Smith Barney
Adjustable Rate Government Income Fund
Schedule of Investments (unaudited) (continued) November 30, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ------ -------- -----
<S> <C>
Government National Mortgage Association (GNMA) -- 31.7%
(continued)
$ 12,348,218 GNMA One Year, 7.500% due 3/20/25+ $ 12,683,967
9,034,546 GNMA One Year, 7.500% due 4/20/25+ 9,285,797
------------
Total Government National Mortgage
Association (Cost -- $75,624,201) 76,674,136
===========
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost -- $150,764,438) 151,942,196
============
NON-AGENCY ADJUSTABLE RATE MORTGAGE OBLIGATIONS -- 4.9%
3,282,382 Bear Stearns, Series 1992-3B, 3,334,704
Class A2, 8.142% due 5/25/23
5,491,939 Resolution Trust Corp., Series 1992-4, Class A Shares,
8.739% due 6/25/24 5,605,238
2,811,667 Salomon Brothers Corp., Series 92-5, Class A1,
7.960% due 11/25/22 2,846,813
------------
TOTAL NON-AGENCY ADJUSTABLE RATE MORTGAGE
OBLIGATIONS (Cost $11,779,750) 11,786,755
============
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost -- $162,544,188) 163,728,951
============
FIXED RATE COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.2%
Non-Agency Fixed Rate CMOs -- 2.6%
5,801,780 Salomon Brothers Corp. Series 83-1, Class Z Shares,
12.000% due 12/1/13 (Cost -- $6,398,046) 6,354,749
------------
Stripped Pass-Through -- 4.8%
3,230,103 FHLMC Strips, Series 124, Class
A Shares, 8.500% due 3/15/97 3,257,365
508,752 FNMA Strips, 11.000% due 4/1/09 568,373
1,147,407 FNMA Strips, 11.500% due 3/1/09 1,279,360
2,264,778 FNMA Strips, 11.500% due 4/1/09 2,525,228
3,542,772 FNMA Strips, 11.500% due 5/1/09 3,950,191
------------
Total Stripped Pass-Through (Cost -- $11,436,530) 11,580,517
============
</TABLE>
See Notes to Financial Statements.
9
Smith Barney
Adjustable Rate Government Income Fund
Schedule of Investments (unaudited)(continued) November 30, 1995
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ------ -------- -----
<S> <C>
PAC IOs--0.8%
$ 32,365 FNMA REMIC 91-132, Class J Shares, 1018.775%
due 12/25/18 $ 675,136
16,008 FNMA REMIC 90-106, Class K Shares, 928.950%
due 9/25/20 391,899
83,546,800 FHLMC-GNMA, Series 33, Class IA, 3.000% due 5/25/96 861,367
-------
Total PAC IOs
(Cost -- $3,046,748) 1,928,402
=========
TOTAL FIXED RATE COLLATERALIZED MORTGAGE
OBLIGATIONS (Cost $20,881,324) 19,863,668
==========
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- 2.5%
1,676,063 FHLMC 15 Year, 9.000% due 11/1/05++ 1,763,890
3,295,913 FHLMC 30 Year, 9.000% due 9/1/09 3,478,013
803,898 FHLMC Gold 30 Year, 9.000% due 10/1/20 863,146
---------
TOTAL FIXED RATE MORTGAGE PASS-THROUGH SECURITIES
(Cost -- $6,077,047) 6,105,049
=========
PROJECT LOANS -- 0.8%
1,904,237 Alliance Federal Housing Administration, 7.350%
due 4/1/19 (Cost -- $2,018,774) 1,944,874
=========
ASSET-BACKED SECURITIES -- 17.3%
4,300,000 Daimler-Benz Auto Grantor Trust,
Series 95-A, 5.850% due 5/15/02 4,297,648
2,500,000 Discover Card Master Trust I,
Series 95-A, 6.155% due 2/16/07 2,503,125
7,700,000 First Deposit Master Trust, Series 93-1, Class A Shares,
4.900% due 6/15/00 7,680,750
4,849,064 Green Tree Financial Corp.,
Series 94-A1, 4.850% due 1/15/19 4,816,478
1,680,529 General Motors Acceptance Corp. Grantor Trust,
Series 95-A, 7.150% due 3/15/00 1,704,947
7,600,000 NationsBank Auto Grantor Trust,
Series 95-A, 5.850% due 6/15/02 7,597,424
9,138,839 Nissan Auto Receivables Grantor Trust, Series 95-1A2,
7.350% due 5/4/97 9,175,943
4,203,821 Premier Auto Trust, Series 95-1,
Class A2, 7.350% due 5/4/97 4,218,282
---------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $41,959,396) 41,994,597
==========
U.S. TREASURY NOTES -- 0.1%
95,000 U.S. Treasury Notes, 6.250% due 8/31/00+
(Cost -- $96,057) 97,733
======
</TABLE>
See Notes to Financial Statements.
10
Smith Barney
Adjustable Rate Government Income Fund
Schedule of Investments (unaudited)(continued) November 30, 1995
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
- ------ -------- -----
<S> <C>
Options Purchased -- 0.3%
15 U.S. 5 Year Note Future Call @ $109, Expires 2/17/96 $ 17,580
277 U.S. 10 Year Note Future Call @ $112, Expires 2/17/96 588,625
15 U.S. 5 Year Note Future Put @ $109, Expires 2/17/96 8,205
-------
Total Options Purchased
(Cost -- $466,602) 614,410
=======
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ------ -------- -----
<S> <C>
SHORT-TERM SECURITY -- 3.2%
$7,840,000 FHLMC Agency Discount Note, 5.800% due 12/1/95
(Cost -- $7,840,000) 7,840,000
=========
TOTAL INVESTMENTS -- 100%
(Cost -- $241,883,388)+++ $242,189,282
===========
</TABLE>
+ Security partially segregated by custodian for reverse repurchase
agreements.
++ Security partially segregated by custodian for futures contracts
commitments.
+++ Aggregate cost for Federal income tax purposes is substantially the same.
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
See Notes to Financial Statements.
11
Smith Barney
Adjustable Rate Government Income Fund
Statement of Assets and Liabilities (unaudited) November 30, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost--$241,883,388) $ 242,189,282
Receivable for securities sold 10,165,307
Interest receivable 2,409,811
Receivable for Fund shares sold 409,241
Deferred organization costs 63,364
Other receivables 827,613
-------
Total Assets 256,064,618
-----------
LIABILITIES:
Reverse repurchase agreements (Note 6) 62,931,206
Payable for securities purchased 13,616,204
Distribution fees payable 635,745
Payable to bank 161,863
Dividends payable 141,510
Payable to broker 77,640
Investment advisory fees payable 56,652
Administration fees payable 30,256
Accrued expenses and other liabilities 211,287
-------
Total Liabilities 77,862,363
----------
Total Net Assets $ 178,202,255
===========
NET ASSETS:
Par value of capital shares $ 18,043
Capital paid in excess of par value 184,966,001
Overdistributed net investment income (118,865)
Accumulated net realized loss on
security transactions,
options and futures contracts (6,617,836)
Net unrealized depreciation of investments
and futures contracts (45,088)
------
Total Net Assets $ 178,202,255
===========
Shares Outstanding:
Class A 17,513,987
----------
Class B 526,557
-------
Class C 2,133
-----
Net Asset Value:
Class A (and redemption price) $9.88
----
Class B* $9.88
----
Class C** $9.88
====
</TABLE>
* Redemption price is NAV of Class B shares reduced by a maximum 5.00% CDSC if
shares are redeemed less than one year from initial purchase (See Note 2).
**Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
12
Smith Barney
Adjustable Rate Government Income Fund
Statement of Operations (unaudited)
For the Six Months Ended November 30, 1995
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest $ 7,630,028
Less: Interest expense (1,002,379)
---------
Total Investment Income 6,627,649
---------
EXPENSES:
Distribution fees (Note 2) 668,812
Investment advisory fees (Note 2) 356,747
Administration fees (Note 2) 178,373
Registration fees 61,561
Shareholder and system servicing fees 33,000
Shareholder communications 31,596
Audit and legal 28,337
Custody 20,000
Amortization of deferred organization costs 15,846
Trustees' fees 12,033
Other 694
---
Total Expenses 1,406,999
---------
Net Investment Income 5,220,650
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS (NOTE 3, 7 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities) 719,575
Options purchased (13,924)
Futures contracts (82,990)
------
Net Realized Gain 622,843
-------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Futures:
Beginning of period 622,539
End of period (45,088)
------
Increase in Net Unrealized Depreciation (667,627)
-------
Net Loss on Investments, Options and Futures Contracts (44,784)
------
Increase in Net Assets From Operations $ 5,175,866
=========
</TABLE>
See Notes to Financial Statements.
13
Smith Barney
Adjustable Rate Government Income Fund
Statements of Changes in Net Assets
For the Six Months Ended November 30, 1995 (unaudited)
and the Year Ended May 31, 1995
<TABLE>
<CAPTION>
November 30 May 31
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 5,220,650 $ 10,459,005
Net realized gain (loss) 622,843 (5,595,082)
Increase in net unrealized appreciation (depreciation) (667,627) 7,517,963
------------ -------------
Increase in Net Assets From Operations 5,175,866 12,381,886
------------ -------------
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net investment income (5,238,914) (10,249,631)
Overdistribution of net investment income -- (100,601)
Net realized gains -- (220,199)
------------ -------------
Decrease In Net Assets From
Distributions to Shareholders (5,238,914) (10,570,431)
------------ -------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares 94,111,522 155,030,774
Net asset value of shares issued
for reinvestment of dividends 5,094,573 9,448,787
Cost of shares reacquired (99,926,409) (279,466,761)
------------ -------------
Decrease in Net Assets From
Fund Shares Transactions (720,314) (114,987,200)
------------ -------------
Decrease in Net Assets (783,362) (113,175,745)
NET ASSETS:
Beginning of period 178,985,617 292,161,362
------------ -------------
End of period* $ 178,202,255 $ 178,985,617
============ =============
* Includes overdistributed net investment income of: $ (118,865) $ (100,601)
============ =============
</TABLE>
See Notes to Financial Statements.
14
Smith Barney
Adjustable Rate Government Income Fund
Statement of Cash Flows (unaudited)
For the Six Months Ended November 30, 1995
<TABLE>
<CAPTION>
<S> <C>
NET DECREASE IN CASH:
Cash Flows From Operating and Investing Activities:
Interest received $ 7,350,618
Operating expenses paid (703,016)
Purchases of short-term securities, net (5,255,147)
Purchases of long-term securities and purchased options (399,941,240)
Proceeds from disposition of long-term securities
and purchased options 359,130,060
Proceeds from futures transactions 1,426,459
Net Cash Used By Operating and Investing Activities (37,992,266)
-------------
Cash Flows From Financing Activities:
Proceeds from shares sold 100,050,901
Payments on shares redeemed (101,829,944)
Cash dividends paid to shareholders (553,188)
Increase in reverse repurchase agreements outstanding 41,231,206
Interest expenses (1,002,379)
Net Cash Provided By Financing Activities 37,896,596
-------------
Net Decrease in Cash (95,670)
Due to Bank - Beginning of Period (66,193)
-------------
Due to Bank - End of Period (161,863)
=============
RECONCILIATION OF NET INCREASE IN NET ASSETS
TO NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES:
Net Increase in Net Assets From Operations $ 5,175,866
-------------
Increase in investments (47,539,089)
Increase in written options (614,410)
Decrease in futures contracts (417,029)
Decrease in receivable for securities sold 6,053,618
Increase in interest receivable (276,410)
Decrease in other assets (233,917)
Decrease in payable for securities purchased (1,751,587)
Increase in accrued expenses and other liabilities 608,313
Interest expense 1,002,379
Total Adjustments (43,168,132)
-------------
Net Cash Provided By Operating and Investing Activities $ (37,992,266)
=============
</TABLE>
* Non-cash financing activities include reinvestment of dividends of $5,094,573.
See Notes to Financial Statements.
15
Smith Barney
Adjustable Rate Government Income Fund
Notes to Financial Statements (unaudited)
1. Significant Accounting Policies
The Smith Barney Adjustable Rate Government Income Fund ("Fund"), a
Massachusetts business trust, is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company.
The significant accounting policies followed by the Fund are: (a)
securities transactions are accounted for on trade date; (b) U.S. Government and
Government agency obligations are valued at the quoted bid price in the over-
the-counter market; (c) 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; (d) short-term investments that have a maturity of
60 days or more are valued at prices based on market quotations for securities
of similar type, yield, and maturity; (e) short-term investments that have a
maturity of 60 days or less are valued at cost plus accreted discount, or minus
amortized premium, as applicable; (f) dividend income is recorded on the ex-
dividend date and interest income, adjusted for accretion of original issue
discount, is recorded on the accrual basis; (g) gains or losses on the sale of
securities are calculated by using the specific identification method; (h)
direct expenses are charged to each class; management fees and general fund
expenses are allocated on the basis of relative net assets; and (i) the Fund
intends to comply with the requirements of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes.
In addition, organization costs have been deferred and are being amortized
on a straight-line basis over a five year period, beginning with the
commencement of the Fund's operations in June 1992.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Strategy Advisers Inc. ("SBSA"), a wholly owned subsidiary of
Smith Barney Mutual Funds Management Inc. ("SBMFM"), which, in turn, is a
subsidiary of Smith Barney Holdings Inc. ("SBH"), acts as investment adviser to
the Fund. The Fund pays SBSA an investment advisory fee calculated at the annual
rate of 0.40% of the average daily net assets. This fee is calculated daily and
paid monthly.
16
Smith Barney
Adjustable Rate Government Income Fund
Notes to Financial Statements (unaudited) (continued)
SBSA has entered into a sub-advisory agreement with BlackRock Financial
Management Inc. ("BlackRock"), a wholly owned subsidiary of PNC Bank. Pursuant
to the sub-advisory agreement, BlackRock is responsible for the day-to-day
portfolio operations and investment decisions for the Fund. SBSA pays BlackRock
a monthly fee calculated at the annual rate of 0.20% of the average daily net
assets of the Fund.
SBMFM acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, acted as sub-
administrator to the Fund. SBMFM paid Boston Advisors a portion of its
administration fee at a rate agreed upon from time to time between SBMFM and
Boston Advisors. As of September 28, 1995, this relationship was terminated.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
the Fund's shares.
There is a maximum contingent deferred sales charge ("CDSC") of 5.00% on
Class B shares, which applies if redemption occurs less than one year from
initial purchase and declines thereafter by 1.00% per year until no CDSC is
incurred. Class C shares have a 1.00% CDSC, which applies if redemption occurs
within the first year of purchase. For the six months ended November 30, 1995,
CDSCs paid to SB for Class B shares were approximately $4,000.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect
to Class A, B, and C shares calculated at the annual rate of 0.25% of the
average daily net assets for each respective class' shares. The Fund also pays a
distribution fee with respect to Class A, B and C shares calculated at an annual
rate of 0.50% of the average daily net assets for each class. For the six months
ended November 30, 1995, total Distribution Plan fees incurred were:
Class A Class B Class C
-------- ------- -------
Distribution Plan Fees $648,705 $20,067 $40
======== ======= =======
All officers and one Trustee of the Fund are employees of SB.
17
Smith Barney
Adjustable Rate Government Income Fund
Notes to Financial Statements (unaudited) (continued)
3. Investments
During the six months ended November 30, 1995, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
Purchases $396,541,322
------------
Sales 339,391,713
============
At November 30, 1995, aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
Gross unrealized appreciation $ 1,887,605
Gross unrealized depreciation (1,581,711)
-----------
Net unrealized appreciation $ 305,894
===========
4. 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 into the Fund 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.
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of ) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts equal to the repurchase price.
6. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by the Fund
of securities that it holds with an agreement by the Fund to
18
Smith Barney
Adjustable Rate Government Income Fund
Notes to Financial Statements (unaudited) (continued)
repurchase the same securities at an agreed upon price and date. The Fund will
establish a segregated account with its custodian, in which the Fund will
maintain cash, U.S. government securities or other liquid high grade debt
obligations equal in value to its obligations with respect the reverse
repurchase agreements.
At November 30, 1995, the Fund had the following reverse repurchase
agreements outstanding:
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
- ------ -------- -----
<C> <S> <C>
$ 98,206 Reverse Repurchase Agreement with Aubrey Lanston, dated
11/24/95 bearing 6.000% to be repurchased at $98,403
on 12/6/95, collateralized by $95,000 U.S. Treasury Note,
6.250% due 8/31/00 $ 98,206
500,000 Reverse Repurchase Agreement with Salomon Brothers,
dated 11/21/95 bearing 5.820% to be repurchased at
$502,344 on 12/20/95, collateralized by $574,000 FNMA
Seven Year Balloon, 8.000% due 9/01/01 500,000
3,900,000 Reverse Repurchase Agreement with Salomon Brothers,
dated 11/15/95 bearing 5.850% to be repurchased at
$3,922,815 on 12/21/95, collateralized by $5,946,000
GNMA One Year, Pool 8762, 6.500% due 3/20/21 3,900,000
4,800,000 Reverse Repurchase Agreement with Salomon Brothers,
dated 11/16/95 bearing 5.820% to be repurchased at
$4,853,544 on 1/24/96, collateralized by $5,000,000
GNMA One Year, Pool 8628, 6.500% due 5/20/25 4,800,000
7,500,000 Reverse Repurchase Agreement with Nikko Securities, dated
11/06/95 bearing 5.840% to be repurchased at $7,536,500
on 12/6/95, collateralized by $7,600,000 FNMA One Year,
Pool 303599, 6.337% due 10/01/24 7,500,000
9,000,000 Reverse Repurchase Agreement with Salomon Brothers,
dated 11/22/95 bearing 5.850% to be repurchased at
$9,092,138 on 1/24/96, collateralized by $10,000,000
FHLMC One Year, Pool 845882, 7.872% due 9/1/23, and
by $2,166,000 GNMA One Year, Pool 8595, 7.000%
due 2/20/25 9,000,000
17,509,000 Reverse Repurchase Agreement with Salomon Brothers,
dated 11/22/95 bearing 5.850% to be repurchased at
$17,688,248 on 1/24/96, collateralized by $4,667,000
FNMA One Year, 6.835% due 1/1/25, by $6,568,000
FNMA Six Month LIBOR, 7.044% due 6/1/24, and by GNMA
One Year, 7.000% due 7/20/24 17,509,000
</TABLE>
19
Smith Barney
Adjustable Rate Government Income Fund
Notes to Financial Statements (unaudited) (continued)
FACE
AMOUNT SECURITY VALUE
- ------ -------- -----
$19,624,000 Reverse Repurchase Agreement with Nikko
Securities, dated 11/22/95 bearing 5.880% to
be repurchased at $19,825,931 on 1/24/96,
collateralized by $13,664,746 GNMA One Year,
Pool 8611, 7.500% due 3/20/25, and by
$8,725,000 GNMA One Year, 7.500% due 4/20/25 $19,624,000
-----------
TOTAL REVERSE REPURCHASE AGREEMENTS $62,931,206
===========
During the six months ended November 30, 1995, the maximum and average
amount of reverse repurchase agreements outstanding were as follows:
Maximum amount outstanding $68,886,269
-----------
Average amount outstanding $29,595,137
===========
Interest paid for the six months ended November 30, 1995 on borrowings by
the Fund under reverse repurchase agreements totaled $1,002,379.
7. Options Contracts
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into closing sales transaction, the Fund will realize a gain or loss
depending on whether the sales proceeds form the closing sales transaction are
greater or less than the premium paid for the option. When the Fund exercises a
put option, it will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Fund exercises a call option, the cost of the security
which the Fund purchases upon exercise will be increased by the premium
originally paid.
When a Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is marked-
to-market daily. When a written option expires, the Fund realizes a gain equal
to the mount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
written) without regard to any unrealized gain or loss on the underlying
security, and the liability related
20
Smith Barney
Adjustable Rate Government Income Fund
Notes to Financial Statements (unaudited) (continued)
to such option is eliminated. When a call option is exercised the cost of the
security sold will be increased by the premium originally received. When a put
option is excercised, the amount of the premium received will reduce the cost of
the security which the Fund purchased upon exercise.
8. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recognized as assets due from the broker (the Fund's agent in acquiring the
futures position). During the period the futures contract is open, changes in
the value of the contract are recognized as unrealized gains or losses by
"marking to market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or received
and recognized as assets due from or liabilities due to broker, depending upon
whether unrealized gains or losses are incurred. When the contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or cost of) the closing transactions and the Fund's basis in the
contract.
At November 30, 1995, the Fund had the following open futures contracts:
<TABLE>
<CAPTION>
Expiration # of Basis Market Unrealized
Month/Year Contracts Value Value Gain (Loss)
---------- --------- ----- ------ ----------
<S> <C> <C> <C> <C> <C>
Futures contracts purchased:
U.S. 10 Year Note 12/95 11 $ 1,210,000 $ 1,245,406 $ 35,406
U.S. Long Bond 3/96 56 6,566,336 6,672,750 106,414
-------
141,820
-------
Futures contracts sold:
U.S. 2 Year Note 12/95 15 3,104,063 3,132,891 (28,828)
U.S. 5 Year Note 12/95 67 7,200,406 7,337,547 (137,141)
U.S. Long Bond 12/95 28 3,208,500 3,343,374 (134,874)
U.S. 10 Year Note 3/96 139 15,567,166 15,759,125 (191,959)
-------
(492,802)
--------
Net Unrealized Loss $(350,982)
========
</TABLE>
9. Capital Loss Carryforward
As of May 31, 1995, the Fund had, for Federal tax purposes, $5,258,938 of
unused capital loss carryforwards available to offset future capital gains
through 2003. To the extent that these carryforward losses are used to offset
capital gains, it is probable that the gains so offset will not be distributed.
21
Smith Barney
Adjustable Rate Government Income Fund
Notes to Financial Statements (unaudited) (continued)
10. Shares of Beneficial Interest
At November 30, 1995, the Fund had an unlimited amount of shares of
beneficial interest authorized with a par value of $0.001 per share. The Fund
has the ability to issue multiple classes of shares. Class B and C shares are
available for purchase to investors in the Smith Barney 401(k) Program. In
addition, Class B shares can be purchased through exchanges. Each share
represents an identical interest in the Fund and has the same rights except that
each class bears certain expenses specifically related to the distribution of
its shares.
At November 30, 1995, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Total Paid-in Capital $179,670,237 $ 5,290,915 $ 22,892
============ ============ ============
<CAPTION>
Transactions in shares of each class were as follows:
Six Months Ended Year Ended
November 30, 1995 May 31, 1995
-------------------------- ----------------------------
Shares Amount Shares Amount
---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Class A
Shares sold 6,608,535 $ 65,084,804 14,386,553 $ 141,131,613
Shares issued on reinvestment 504,241 4,967,035 940,901 9,209,448
Shares redeemed (7,257,011) (71,475,244) (26,681,307) (261,264,880)
---------- ----------- ----------- ------------
Net Decrease (144,235) (1,423,405) (11,353,853) $(110,923,819)
========== =========== =========== ============
Class B
Shares sold 2,942,767 $ 29,007,995 1,416,453 $ 13,875,924
Shares issued on reinvestment 12,918 127,246 24,052 235,412
Shares redeemed (2,886,641) (28,451,165) (1,844,482) (18,063,640)
---------- ----------- ----------- ------------
Net Increase (Decrease) 69,044 $ 684,076 (403,977) $ (3,952,304)
========== =========== =========== ============
Class C
Shares sold 1,898 $ 18,723 2,375 $ 23,237
Shares issued on reinvestment 30 292 402 3,927
Shares redeemed -- -- (14,088) (138,241)
---------- ----------- ----------- ------------
Net Increase (Decrease) 1,928 $ 19,015 (11,311) $ (111,077)
========== =========== =========== ============
</TABLE>
22
Smith Barney
Adjustable Rate Government Income Fund
Financial Highlights
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1995(1) 1995(2) 1994 1993(3)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.88 $ 9.78 $ 9.96 $ 10.00
-------- -------- -------- --------
Income From Operations:
Net investment income (4) 0.29 0.47 0.37 0.44
Net realized and unrealized gain (loss) 0.00* 0.13 (0.17) (0.05)
-------- -------- -------- --------
Total Income From Operations 0.29 0.60 0.20 0.39
Less Distributions From:
Net investment income (0.29) (0.49) (0.37) (0.43)
Overdistribution of net investment income -- (0.00)* (0.01) --
Net realized gains -- (0.01) -- --
-------- -------- -------- --------
Total Distributions (0.29) (0.50) (0.38) (0.43)
-------- -------- -------- --------
Net Asset Value, End of Period $ 9.88 $ 9.88 $ 9.78 $ 9.96
-------- -------- -------- --------
Total Return 3.00%++ 6.39% 2.05% 3.89%++
-------- -------- -------- --------
Net Assets, End of Period (000s) $172,980 $174,463 $283,627 $313,184
-------- -------- -------- --------
Ratios to Average Net Assets:
Expenses (4)(5) 1.58%+ 1.60% 1.53% 1.50%+
Net investment income 5.85+ 4.94 3.72 4.36+
-------- -------- -------- --------
Portfolio Turnover Rate 163% 524% 525% 236%
======== ======== ======== ========
</TABLE>
(1) For the six months ended November 30, 1995 (unaudited).
(2) 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.
(3) For the period from June 22, 1992 (inception date) to May 31, 1993.
(4) The Investment advisor waived a portion of its fees for the period ended
May 31, 1993. If such fees were not waived, the per share decrease of net
investment income would have been $0.01 and the expense ratio would have
been 2.03%.
(5) For the years ended May 31, 1995 and May 31, 1994 and the period ended May
31, 1993, the annualized expense ratios were calculated excluding interest
expense. The ratios including interest expense were 2.47%, 2.31% and 1.92%,
respectively.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year
+ Annualized.
23
Smith Barney
Adjustable Rate Government Income Fund
Financial Highlights (continued)
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1995(1) 1995(2) 1994 1993(3)
- -------------- ------- ------ ------- -------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.88 $ 9.78 $ 9.96 $ 9.96
------- ------ ------- -------
Income From Operations:
Net investment income (4) 0.29 0.47 0.37 0.25
Net realized and unrealized gain (loss) 0.00* 0.13 (0.17) --
------- ------ ------- -------
Total Income From Operations 0.29 0.60 0.20 0.25
------- ------ ------- -------
Less Distributions From:
Net investment income (0.29) (0.49) (0.37) (0.25)
Overdistribution of net investment income -- (0.00)* (0.01) --
Net realized gains -- (0.01) -- --
------- ------ ------- -------
Total Distributions (0.29) (0.50) (0.38) (0.25)
------- ------ ------- -------
Net Asset Value, End of Period $ 9.88 $ 9.88 $ 9.78 $ 9.96
------- ------ ------- -------
Total Return 3.00%++ 6.39% 2.05% 2.56%++
------- ------ ------- -------
Net Assets, End of Period (000s) $ 5,201 $4,521 $ 8,422 $ 3,569
------- ------ ------- -------
Ratios to Average Net Assets:
Expenses (4)(5) 1.58%+ 1.63% 1.57% 1.50%+
Net investment income 5.85+ 4.92 3.68 4.36+
------- ------ ------- -------
Portfolio Turnover Rate 163% 524% 525% 236%
======= ====== ======= =======
</TABLE>
(1) For the six months ended November 30, 1995 (unaudited).
(2) 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.
(3) For the period from November 6, 1992 (inception date) to May 31, 1993.
(4) The Investment advisor waived a portion of its fees for the period ended
May 31, 1993. If such fees were not waived, the per share decrease of net
investment income would have been $0.01 and the expense ratios would have
been 2.03%.
(5) For the year ended May 31, 1995 and May 31, 1994 and the period ended May
31, 1993, the annualized expense ratios were calculated excluding interest
expense. The ratios including interest expense were 2.49%, 2.35% and 1.92%,
respectively.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
Smith Barney
Adjustable Rate Government Income Fund
Financial Highlights (continued)
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1995(1) 1995(2) 1994(3)
- -------------- ------- ------ ------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.88 $ 9.78 $ 9.98
------- ------ ------
Income From Operations:
Net investment income 0.29 0.46 0.37
Net realized and unrealized gain (loss) 0.00* 0.10 (0.19)
------- ------ ------
Total Income From Operations 0.29 0.56 0.18
------- ------ ------
Less Distributions
Net investment income (0.29) (0.45) (0.37)
Overdistribution of net investment income -- (0.00)* (0.01)
Net realized gains -- (0.01) --
------- ------ ------
Total Distributions (0.29) (0.46) (0.38)
------- ------ ------
Net Asset Value, End of Period $ 9.88 $ 9.88 $ 9.78
------- ------ ------
Total Return 3.00%++ 5.93% 1.83%++
------- ------ ------
Net Assets, End of Period (000s) $ 21 $ 2 $ 113
------- ------ ------
Ratios to Average Net Assets:
Expenses (4) 1.59%+ 1.59% 1.55%+
Net investment income 5.84+ 4.95 3.69+
------- ------ ------
Portfolio Turnover Rate 163% 524% 525%
======= ====== ======
</TABLE>
(1) For the six months ended November 30, 1995 (unaudited).
(2) 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.
(3) For the period from June 2, 1993 (inception date) to May 31, 1994.
(4) For the years ended May 31, 1995 and the period ended May 31, 1994, the
annualized expense ratios were calculated excluding interest expense. The
ratios including interest expense were 2.46%, and 2.34%, respectively.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
25
Smith Barney
Adjustable Rate Government Income Fund
Additional Information
Change in Independent Auditor: On May 24, 1995, based upon the
recommendation of the Audit Committee of the Fund, the Board of Trustees
determined not to retain Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, during this same period there were no disagreements with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of Coopers & Lybrand, would have caused it to make reference
to the subject matter of such disagreements in connection with its audit
reports. The Fund has requested Coopers & Lybrand to provide a letter to the
Securities and Exchange Commission stating whether Coopers & Lybrand agrees with
the foregoing statements, and to provide the Fund with a copy of such letter. A
copy of this letter is available upon request by calling the Fund at
(212) 723-9218.
26
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Smith Barney
Adjustable Rate
Government
Income Fund
Trustees
Charles F. Barber
Allan J. Bloorstein
Martin Brody
Dwight B. Crane
Robert A. Frankel
William R. Hutchinson
Heath B. McLendon, Chairman
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Strategy Advisers Inc.
Administrator
Smith Barney Mutual Funds
Management, Inc.
SMITH BARNEY
- ------------
A Member of TravelersGroup [ART]
Sub-Investment Adviser
BlackRock Financial
Management Inc.
345 Park Avenue
New York, New York 10154
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
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
Adjustable Rate
Government
Income Fund
388 Greenwich Street
New York, New York 10013
FD0301 1/96
