[TEXT]
<PAGE>
SEMI-ANNUAL REPORT
[GRAPHIC]
SMITH BARNEY
ADJUSTABLE RATE
GOVERNMENT
INCOME FUND
- -------------------------------------
November 30, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
Dear Shareholder:
We are pleased to provide you with the semi-annual report for the Smith Barney
Adjustable Rate Government Income Fund for the period ended November 30, 1996.
The period's prevailing economic and market conditions and an outline of our
investment strategy appear in this report. In addition, a detailed summary of
the Fund's historical performance as well its current holdings and portfolio
management strategy can be found in the appropriate sections that follow.
Fund Performance Update
The Fund seeks high current income and seeks to limit the fluctuation in net
asset value (NAV) that may result from interest rate movements. The Fund invests
primarily in a diversified portfolio of adjustable rate mortgage-backed
securities (ARMs), U.S. Government securities and asset-backed securities (ABS).
For the six months ended November 30, 1996, the Class A shares of the Fund had a
total return of 3.08%. In addition, over the last six months, the Fund paid
dividends of $0.27 per share for Class A.
Bond Market Update
Changing investor perceptions about the pace of U.S. economic growth was a
significant influence on the performance of the fixed income markets during
1996. Economic data released during the second quarter of 1996 seemed to suggest
a rejuvenated U.S. economy which caused many investors to become concerned about
the possible emergence of inflationary pressures. As measured by Gross Domestic
Product (GDP), annualized 1996 second quarter economic growth was 4.7%, which
led many investors to believe that the Federal Reserve Board (the Fed) would be
required to raise interest rates to curb the pace of U.S. economic growth.
However, GDP growth slowed to an annualized rate of 2.1% in the third quarter of
1996. Economic data indicating a slower economy and moderate inflation enabled
the Fed to leave short-term interest rates unchanged at their most recent policy
meetings. Moreover, higher demand from international investors for U.S. bonds
and a favorable market reaction to the November election results provided
additional support for the bond market rally.
1
<PAGE>
Over the six-month period ended November 30, 1996, the yield on the 2 year U.S.
Treasury note fell 67 basis points (0.67%). However, the net decline in interest
rates masked volatility that took place during the reporting period. From June
through August 1996, U.S. Treasury yields fluctuated in response to the apparent
strength of the U.S. economy and concerns about inflation. Slower U.S. economic
growth from September through November 1996 provided a more positive environment
for bonds as the yield of the 2 year Treasury note fell from 6.39% at the
beginning of September to 5.58% on November 30, 1996.
During 1996, the market for mortgage-backed securities (MBS) posted strong
performance versus the broader investment grade bond market. As homeowners
refinanced their mortgages at a relatively constant pace, prepayments displayed
considerable stability. In our view, positive technical conditions also
contributed to the strong performance of the MBS market. The lower supply of new
issues coupled with the higher demand on the part of financial institutions for
scarce high-quality bonds that offered higher yields than U.S. Treasuries
boosted prices.
Within the short-maturity sector of the market, adjustable-rate mortgages (ARMs)
continued their positive performance due to their relatively low interest rate
volatility and the strong demand for short maturity, floating-rate securities.
However, we became less bullish on the ARMs market because a flatter mortgage
curve could result in faster ARM prepayments as homeowners refinance into fixed-
rate mortgages to lock in lower rates.
Fund's Investment Strategy
The Fund uses a "targeted duration" approach which strives for a duration of
roughly 1 to 1.5 years. (Duration is a rough measure of the price sensitivity of
a fixed income security relative to a given change in interest rates.)
Maintaining a duration close to its target should result in the Fund having the
price sensitivity of between a 1 and 2 year U.S. Treasury security. In addition
to interest rate fluctuations, the Fund's net asset value is affected by
prepayment rates of the mortgage securities held in the portfolio.
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 usually bought when they trade at
higher yield levels and are sold upon price appreciation or the outperformance
of other short duration alternatives.
2
<PAGE>
As we stated previously, the Fund adopted a more defensive posture over the past
few months regarding the MBS market in general and ARMs in particular because of
our concerns about faster mortgage prepayments. During the reporting period, the
Fund's overall ARM exposure was reduced and we increased the Fund's weighting in
the new supply of asset-backed securities (ABS). Within the ABS category, we
increased our stake in floating-rate ABS (with an emphasis on auto-backed
securities because we believe they represent good value) and reduced our fixed-
rate ABS holdings (with an underweighting in credit card ABS). In addition, we
increased the Fund's exposure in short average life mortgage pass-throughs and
collateralized mortgage obligations (CMOs) because, in our view, these
securities offered good relative values despite their present nominal yield
advantage over many other U.S. Treasury security alternatives.
Bond Market Outlook
Our short-term outlook for the bond market is cautious because lean retail
inventories and increasingly confident consumers suggest to us that U.S.
economic growth may sharply rebound in the coming months. We continue to
maintain our cautious view over the near term despite the decline in interest
rates during the first two months of the fourth quarter of 1996 and data that
indicates mixed holiday sales. However, because we expect inflation to remain
moderate and foreign investor demand for U.S. bonds to stay strong, we are
positive about the bond market's long-term prospects.
In closing, thank you for investing in the Smith Barney Adjustable Rate
Government Income Fund. We look forward to continuing to help you achieve your
financial goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman and
Chief Executive Officer
December 17, 1996
3
<PAGE>
- --------------------------------------------------------------------------------
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>
11/30/96 $ 9.84 $9.88 $0.27 $0.00 3.08%+
- ---------------------------------------------------------------------------------------
5/31/96 9.88 9.84 0.56 0.00 5.48
- ---------------------------------------------------------------------------------------
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 $2.13 $0.01
=======================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B 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>
11/30/96 9.84 $9.86 $0.27 $0.00 2.87%+
- -------------------------------------------------------------------------------------------
5/31/96 9.88 9.84 0.56 0.00 5.48
- -------------------------------------------------------------------------------------------
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 $1.95 $0.01
===========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class C 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>
11/30/96 $9.82 $9.86 $0.27 $0.00 3.04%+
- ------------------------------------------------------------------------------------------------
5/31/96 9.88 9.82 0.56 0.00 5.27
- ------------------------------------------------------------------------------------------------
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 $1.66 $0.01
================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
4
<PAGE>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
------------------------------
Class A Class B Class C
=============================================================
Six Months Ended 11/30/96+ 3.08% 2.87% 3.04%
- -------------------------------------------------------------
Year Ended 11/30/96 5.56 5.35 5.31
- -------------------------------------------------------------
Inception* through 11/30/96 4.70 4.76 4.72
=============================================================
With Sales Charge(2)
------------------------------
Class A Class B Class C
=============================================================
Six Months Ended 11/30/96+ 3.08% (2.13)% 2.04%
- -------------------------------------------------------------
Year Ended 11/30/96 5.56 0.35 4.31
- -------------------------------------------------------------
Inception* through 11/30/96 4.70 4.55 4.72
=============================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================
Class A (Inception* through 11/30/96) 22.65%
- ----------------------------------------------------------------
Class B (Inception* through 11/30/96) 20.83
- ----------------------------------------------------------------
Class C (Inception* through 11/30/96) 17.51
================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the 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. Class B shares reflect the deduction of a maximum
5.00% CDSC, which applies if shares are redeemed within 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
<PAGE>
- --------------------------------------------------------------------------------
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 1996
[GRAPHIC]
<TABLE>
<CAPTION>
Smith Barney Adjustable U.S. Government 1-Year
Rate Government Income Fund Treasury Bill Index
- ----------------------------------------------------------------------
<S> <C> <C>
6/22/92 $10,000 $10,000
5/93 10,389 10,306
5/94 10,602 10,691
5/95 11,280 11,329
5/96 11,898 11,927
11/30/96 12,265 12,252
</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, 1996, 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 as 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
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) November 30, 1996
- --------------------------------------------------------------------------------
Portfolio Breakdown
[GRAPHIC]
Asset-Backed Securities 17.1%
Fixed Rate Collateralized Mortgage Obligations 15.2%
U.S. Treasury Notes 6.4%
Options Purchased and Project Loans 1.2%
Short-Term Security 2.0%
Other Fixed Rate Securities 4.7%
Adjustable Rate Mortgage-Backed Securities 53.4%
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.
Planned Amortization Class Interest Only (PAC IOs) are CMO IOs which have
repayment schedules that are guaranteed if the actual speed of the prepayments
is within a designated range. PAC classes typically are combined with companion
classes that reduce the risk of the variation of the amount and timing of the
prepayments. Should the prepayments fall outside of the PAC band or ranges, the
class will not pay the prepayment as scheduled.
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===============================================================================================
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 53.4%
===============================================================================================
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 41.7%
Federal Home Loan Mortgage Corporation (FHLMC) -- 17.6%
<S> <C> <C>
$6,675,986 FHLMC COFI, 6.074% due 9/1/20+ $ 6,642,874
9,313,239 FHLMC COFI, 6.059% due 11/1/20+ 9,267,139
4,583,703 FHLMC COFI, 6.059% due 3/1/30+ 4,561,426
6,500,345 FHLMC COFI, 6.069% due 6/1/30+ 6,468,818
3,942,384 FHLMC REMIC, Series 1632, Class F Shares, 5.788% due 4/15/23+ 3,937,259
- -----------------------------------------------------------------------------------------------
Total Federal Home Loan Mortgage Corporation
(Cost -- $30,671,699) 30,877,516
===============================================================================================
Government National Mortgage Association (GNMA) -- 22.1%
4,138,881 GNMA II One Year, 6.500% due 3/20/21+ 4,214,581
6,426,722 GNMA II One Year, 6.500% due 2/20/23+ 6,549,794
552,129 GNMA II One Year, 6.500% due 1/20/25+ 563,409
2,481,000 GNMA II One Year, 7.125% due 8/20/20+ 2,532,853
2,050,452 GNMA II One Year, 7.125% due 9/20/20+ 2,093,430
2,747,386 GNMA II One Year, 7.125% due 4/20/22+ 2,795,493
2,265,093 GNMA II One Year, 7.125% due 6/20/22+ 2,310,984
3,146,020 GNMA II One Year, 7.125% due 9/20/22+ 3,209,476
4,367,595 GNMA II One Year, 7.125% due 11/20/22+ 4,448,484
3,744,133 GNMA II One Year, 7.125% due 4/20/23+ 3,804,172
3,927,655 GNMA II One Year, 7.125% due 5/20/23+ 3,997,135
2,241,380 GNMA II One Year, 7.125% due 6/20/23+ 2,281,030
- -----------------------------------------------------------------------------------------------
Total Government National Mortgage Association
(Cost -- $38,447,009) 38,800,841
===============================================================================================
Tennessee Valley Authority -- 2.0%
3,450,000 Tennessee Valley Authority, 5.980% due 4/1/36+
(Cost -- $3,452,513) 3,510,375
===============================================================================================
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost -- $72,571,221) 73,188,732
===============================================================================================
NON-AGENCY ADJUSTABLE RATE MORTGAGE OBLIGATIONS -- 11.7%
2,410,066 Bear Stearns, Series 92-3B, Class A2, 8.304% due 5/25/23+ 2,485,381
MLCC Mortgage Investors, Inc., Class A Shares:
7,309,841 Series 96-A, 5.868% due 2/15/21+ +++ 7,300,704
3,779,640 Series 96-B, 5.775% due 7/15/21+ 3,787,881
4,698,127 Resolution Trust Corp., Series 92-4, Class A Shares,
7.114% due 6/25/24+ 4,767,143
2,044,530 Salomon Brothers, Series 92-5, Class A1, 8.236% due 11/25/22+ 2,119,912
- -----------------------------------------------------------------------------------------------
TOTAL NON-AGENCY ADJUSTABLE RATE MORTGAGE
OBLIGATIONS (Cost -- $20,394,998) 20,461,021
===============================================================================================
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost -- $92,966,219) 93,649,753
===============================================================================================
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==============================================================================================
FIXED RATE COLLATERALIZED MORTGAGE OBLIGATIONS -- 15.2%
==============================================================================================
<S> <C> <C>
AGENCY FIXED RATE CMOS -- 2.8%
$ 4,983,197 FNMA Grantor Trust 96-T6, Class C Shares, 6.200% due 2/26/01+
(Cost -- $4,902,741) $ 4,959,826
==============================================================================================
NON-AGENCY FIXED RATE CMOS -- 2.8%
4,497,262 Salomon Brothers Corp., Series 83-1, Class Z Shares,
12.000% due 12/1/13+ (Cost -- $4,950,071) 4,994,660
==============================================================================================
PAC IOs -- 3.4%
12,304 FNMA REMIC 90-106, Class K Shares, 928.950% due 9/25/20+ 360,596
7,251,863 FNMA REMIC 93-101, Class A Shares, 7.000% due 6/25/08+ 779,575
1,902,151 FNMA REMIC 94-4, Class D Shares, 5.375% due 2/25/14+ 1,893,592
3,000,000 FNMA REMIC 94-39, Class B Shares, 5.750% due 6/25/12+ 2,993,220
- ----------------------------------------------------------------------------------------------
TOTAL PAC IOS
(Cost -- $6,059,941) 6,026,983
==============================================================================================
STRIPPED PASS-THROUGH SECURITIES -- 6.2%
1,787,317 FHLMC Strips, Series 124, Class A Shares, 8.500% due 3/15/97+ 1,842,599
976,128 FNMA Strips, 11.000% due 4/1/09+ 1,110,034
2,160,406 FNMA Strips, 11.500% due 3/1/09+ 2,464,203
1,805,994 FNMA Strips, 11.500% due 4/1/09+ 2,051,484
2,943,787 FNMA Strips, 11.500% due 5/1/09+ 3,357,743
- ----------------------------------------------------------------------------------------------
TOTAL STRIPPED PASS-THROUGH SECURITIES
(Cost -- $10,453,406) 10,826,063
==============================================================================================
TOTAL FIXED RATE COLLATERALIZED MORTGAGE
OBLIGATIONS (Cost -- $26,366,159) 26,807,532
==============================================================================================
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 4.0%
4,921,826 FNMA Ten Year CMT, 6.000% due 1/1/04+ 4,894,165
2,058,539 FNMA Thirty Year CMT, 8.500% due 12/1/10+ 2,170,483
- ----------------------------------------------------------------------------------------------
TOTAL FEDERAL NATIONAL MORTGAGE ASSOCIATION
(Cost -- $6,938,355) 7,064,648
==============================================================================================
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- 0.7%
1,230,548 FHLMC 15 Year, 9.000% due 11/1/05+
(Cost -- $1,286,135) 1,249,770
==============================================================================================
PROJECT LOANS -- 1.0%
1,881,707 Alliance Federal Housing Administration, 7.350% due 4/1/19+
(Cost -- $1,992,853) 1,904,175
==============================================================================================
ASSET-BACKED SECURITIES -- 17.1%
2,345,494 Advanta Mortgage Loan Trust, Series 94-A3, 5.988% due 1/25/26+ +++ 2,357,222
4,773,322 AFC Home Equity Loan Trust, Series 96-1, 5.735% due 7/25/27+ 4,782,296
701,110 Banc One Auto Grantor Trust, Series 96-B, 6.550% due 2/15/03+ 706,369
1,753,014 Chase Manhattan Grantor Trust, Series 96-A, 5.200% due 2/15/02+ 1,741,777
2,700,000 Daimler-Benz Auto Grantor Trust, Series 96-A, 5.850% due 12/15/03+ 2,702,944
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==============================================================================================
<S> <C> <C>
ASSET-BACKED SECURITIES -- 17.1% (continued)
$3,500,000 Discover Card Master Trust I, Series 94-A2, 5.725% due 10/16/04+ +++ $ 3,532,900
3,000,000 Discover Card Master Trust I, Series 96-A4, 5.750% due 10/16/13+ +++ 3,036,540
651,075 Fifth Third Auto Grantor Trust, Series 96-A, 6.200% due 9/15/01+ 652,495
6,000,000 First Chicago Master Trust, Series 92-E, Class A Shares,
6.250% due 8/15/99+ 6,013,080
1,903,389 Ford Credit Grantor Trust, Series 95-B, Class A Shares,
5.900% due 10/15/00+ 1,902,495
2,541,193 Green Tree Financial Corp., Series 94-A1, 5.600% due 4/15/19+ 2,540,381
- ----------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $29,917,632) 29,968,499
==============================================================================================
U.S. TREASURY NOTES -- 6.4%
11,100,000 U.S. Treasury Notes, 6.125% due 8/31/98+
(Cost -- $11,081,856) 11,201,787
==============================================================================================
<CAPTION>
SHARES SECURITY VALUE
==============================================================================================
<S> <C> <C>
CALL OPTION PURCHASED -- 0.2%
169,000 U.S. 10 Year Note Future Call @ 111, Expire 2/22/97
(Cost -- $225,213) 279,864
==============================================================================================
FACE
AMOUNT SECURITY VALUE
==============================================================================================
SHORT-TERM SECURITY -- 2.0%
$3,450,000 FHLMC Agency Discount Note, 5.402% due 12/2/96
(Cost -- $3,449,483) 3,449,483
==============================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $174,223,905*) $175,575,511
==============================================================================================
</TABLE>
+ Security segregated by Custodian for reverse repurchase agreements and/or
futures contract commitments.
+++ Variable rate security - rate resets monthly.
* 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.
10
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) November 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $174,223,905) $175,575,511
Receivable for securities sold 27,014,150
Receivable for Fund shares sold 1,691,947
Interest receivable 2,084,906
Deferred organization costs 15,793
Other receivables 260,905
- ----------------------------------------------------------------------------------------
Total Assets 206,643,212
- ----------------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreements (Note 6) 52,597,000
Payable for securities purchased 7,042,833
Dividends payable 601,878
Payable to bank 410,912
Payable for Fund shares purchased 71,208
Payable to broker -- variation margin 67,062
Investment advisory fees payable 48,637
Administration fees payable 24,318
Distribution fees payable 22,647
Accrued expenses and other liabilities 585,512
- ----------------------------------------------------------------------------------------
Total Liabilities 61,472,007
- ----------------------------------------------------------------------------------------
Total Net Assets $145,171,205
========================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 14,701
Capital paid in excess of par value 152,098,627
Overdistributed net investment income (1,097,108)
Accumulated net realized loss from security
transactions, options and futures contracts (7,158,476)
Net unrealized appreciation of investments and futures contracts 1,313,461
- ----------------------------------------------------------------------------------------
Total Net Assets $145,171,205
========================================================================================
Shares Outstanding:
Class A 14,224,568
- ----------------------------------------------------------------------------------------
Class B 473,447
- ----------------------------------------------------------------------------------------
Class C 3,358
- ----------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $9.88
- ----------------------------------------------------------------------------------------
Class B* $9.86
- ----------------------------------------------------------------------------------------
Class C** $9.86
========================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a maximum 5.00% CDSC
if shares are redeemed within 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.
11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 5,332,179
Less: Interest expense (1,219,063)
- ------------------------------------------------------------------------------
Total Investment Income 4,113,116
- ------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 565,400
Investment advisory fees (Note 2) 301,547
Administration fees (Note 2) 150,773
Shareholder communications 43,499
Shareholder and system servicing fees 28,588
Audit and legal 27,499
Registration fees 17,500
Amortization of deferred organization costs 15,879
Trustees' fees 10,500
Custody 9,600
Other 8,499
- ------------------------------------------------------------------------------
Total Expenses 1,179,284
- ------------------------------------------------------------------------------
Net Investment Income 2,933,832
- ------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS (NOTES 3, 9 AND 10):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 344,546
Options purchased 414,814
Futures contracts (850,848)
- ------------------------------------------------------------------------------
Net Realized Loss (91,488)
- ------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Futures Contracts:
Beginning of period (338,149)
End of period 1,313,461
- ------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 1,651,610
- ------------------------------------------------------------------------------
Net Gain on Investments, Options and Futures Contracts 1,560,122
- ------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 4,493,954
==============================================================================
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1996 (unaudited)
and the Year Ended May 31, 1996
<TABLE>
<CAPTION>
November 30 May 31
=======================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,933,832 $ 9,951,704
Net realized gain (loss) (91,488) 173,691
Increase in net unrealized appreciation (depreciation) 1,651,610 (960,688)
- ---------------------------------------------------------------------------------------
Increase in Net Assets From Operations 4,493,954 9,164,707
- ---------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,951,029) (9,931,014)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (3,951,029) (9,931,014)
- ---------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 13):
Net proceeds from sale of shares 73,312,591 179,468,808
Net asset value of shares issued for
reinvestment of dividends 3,048,490 9,402,283
Cost of shares reacquired (93,100,656) (205,722,546)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (16,739,575) (16,851,455)
- ---------------------------------------------------------------------------------------
Decrease in Net Assets (16,196,650) (17,617,762)
NET ASSETS:
Beginning of period 161,367,855 178,985,617
- ---------------------------------------------------------------------------------------
End of period* $145,171,205 $ 161,367,855
=======================================================================================
* Includes overdistributed net investment income of: $ (1,097,108) $ (79,911)
=======================================================================================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Cash Flows (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1996
<TABLE>
<S> <C>
NET DECREASE IN CASH:
Cash Flows From Operating and Investing Activities:
Interest received $ 6,864,442
Operating expenses paid (1,448,174)
Purchases of short-term securities and purchased options, net (3,666,086)
Purchases of long-term securities (250,222,795)
Proceeds from disposition of long-term securities 272,307,019
Proceeds from short sale transactions (411,899)
Proceeds from futures transactions (711,228)
- ---------------------------------------------------------------------------------
Net Cash Provided By Operating and Investing Activities 22,711,279
- ---------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds from shares sold 72,389,813
Payments on shares redeemed (93,236,459)
Cash dividends paid to shareholders* (402,017)
Decrease in reverse repurchase agreements outstanding (845,094)
Interest expense (1,051,412)
- ---------------------------------------------------------------------------------
Net Cash Used By Financing Activities (23,145,169)
- ---------------------------------------------------------------------------------
Net Decrease in Cash (433,890)
Cash -- Beginning of Period 22,978
- ---------------------------------------------------------------------------------
Due to Bank -- End of Period $ (410,912)
=================================================================================
RECONCILIATION OF INCREASE IN NET ASSETS FROM
OPERATIONS TO NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES:
Increase in Net Assets From Operations $ 4,493,954
- ---------------------------------------------------------------------------------
Decrease in investments 39,056,358
Increase in purchased options (177,795)
Decrease in futures contracts 334,016
Increase in receivable for securities sold (17,939,737)
Increase in interest receivable (113,807)
Decrease in other assets 391,923
Decrease in payable for securities purchased (4,063,618)
Decrease in accrued expenses and other payables (489,078)
Interest expense 1,219,063
- ---------------------------------------------------------------------------------
Total Adjustments 18,217,325
- ---------------------------------------------------------------------------------
Net Cash Provided By Operating and Investing Activities $ 22,711,279
=================================================================================
</TABLE>
* Exclusive of dividend reinvestment of $3,048,490.
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
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) security transactions are accounted for on trade date; (b) U.S. Government
and Agency obligations 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; (c) securities maturing within 60 days are valued at cost
plus accreted discount, or minus amortized premium, which approximates market
value; (d) interest income, adjusted for accretion of original issue discount,
is recorded on the accrual basis; (e) dividends and distributions to
shareholders are recorded on the ex-dividend date; (f) gains or losses on the
sale of securities are calculated by using the specific identification method;
(g) direct expenses are charged to each class; management fees and general fund
expenses are allocated on the basis of relative net assets; (h) 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; and (i) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
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.
15
<PAGE>
- --------------------------------------------------------------------------------
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.
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 within 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, 1996, CDSCs paid
to SB for Class B shares were approximately $13,000.
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 of each respective class. 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 of each class. For the six months ended November
30, 1996, total Distribution Plan fees incurred were:
Class A Class B Class C
====================================================================
Distribution Plan Fees $543,854 $21,431 $115
====================================================================
All officers and one Trustee of the Fund are employees of SB.
3. Investments
During the six months ended November 30, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
====================================================================
Purchases $246,159,177
- --------------------------------------------------------------------
Sales 265,444,450
====================================================================
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At November 30, 1996, aggregate gross unrealized appreciation and depreciation
of investments were as follows:
====================================================================
Gross unrealized appreciation $1,657,711 *
Gross unrealized depreciation (306,105)*
- --------------------------------------------------------------------
Net unrealized appreciation $1,351,606 *
====================================================================
* Substantially the same for Federal income tax purposes.
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.
As of November 30, 1996, the Fund had no open repurchase agreements.
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 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. 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 to the reverse repurchase agreements.
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At November 30, 1996, the Fund had the following reverse repurchase agreements
outstanding:
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
========================================================================================
<S> <C> <C>
$26,965,000 Reverse Repurchase Agreement with Nomura Securities,
dated 11/21/96 bearing 5.350% to be repurchased
at $27,093,234 on 12/23/96, collateralized by $6,125,000
FHLMC COFI, 6.074% due 9/1/20, and by $8,630,000
FHLMC COFI, 6.059% due 11/1/20, and by $4,220,000
GNMA II One Year, 7.125% due 11/20/22, and by 4,000,000
GNMA II One Year, 6.500% due 2/20/23 and by 3,990,000
GNMA II One Year, 7.000% due 1/20/25* $26,965,000
1,265,000 Reverse Repurchase Agreement with Nomura Securities,
dated 11/21/96 bearing 5.350% to be repurchased
at $1,271,016 on 12/23/96, collateralized by $775,000
GNMA II One Year, 7.125% due 5/20/23, and by 490,000
GNMA II One Year, 7.125% due 6/20/22 1,265,000
5,980,000 Reverse Repurchase Agreement with Nomura Securities,
dated 11/21/96 bearing 5.350% to be repurchased
at $6,008,438 on 12/23/96, collateralized by $5,980,000
FNMA One Year CMT ARM, 7.661% due 9/1/25* 5,980,000
1,987,000 Reverse Repurchase Agreement with Salomon Brothers,
dated 11/21/96 bearing 5.470% to be repurchased
at $2,006,021 on 1/23/97, collateralized by $1,987,000
GNMA II One Year, 7.125% due 6/20/23 1,987,000
16,400,000 Reverse Repurchase Agreement with Nomura Securities,
dated 11/21/96 bearing 5.350% to be repurchased
at $16,477,991 on 12/23/96, collateralized by $4,300,000
FHLMC COFI, 6.059% due 3/1/30, and by $6,100,000
FHLMC COFI, 6.069% due 6/1/30, and by $4,000,000
GNMA II One Year, 7.125% due 11/20/22 and by 2,000,000
GNMA II One Year, 7.000% due 1/20/25* 16,400,000
- ----------------------------------------------------------------------------------------
TOTAL REVERSE REPURCHASE AGREEMENTS $52,597,000
========================================================================================
</TABLE>
* Security was sold during the reporting period but did not settle until
December 23, 1996.
During the six months ended November 30, 1996, the maximum and average amount
of reverse repurchase agreements outstanding were as follows:
===============================================================================
Maximum amount outstanding $61,912,338
- -------------------------------------------------------------------------------
Average amount outstanding $41,771,672
===============================================================================
Interest rates ranged from 4.75% to 5.57% during the period. Total market
value of the collateral for the reverse repurchase agreements is $52,597,000.
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Interest expense for the six months ended November 30, 1996 on borrowings by
the Fund under reverse repurchase agreements totalled $1,120,602.
7. Dollar Roll Transactions
The Fund may enter into dollar roll transactions. 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 for the Fund
exceeding the yield on the securities sold.
As of November 30, 1996, the Fund had no open dollar roll transactions.
8. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly the
face amount and maturity date in GNMA transactions. Securities purchased on a
TBA basis are not settled until they are delivered to the Fund, normally 15 to
45 days later. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other securities.
As of November 30, 1996, the Fund held no TBA securities.
9. 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 from 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.
As of November 30, 1996, the Fund held one purchased call option with a cost
of $225,213.
19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
When a Fund writes a covered 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 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
written) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is eliminated. When a written
call option is exercised the cost of the security sold will be decreased by the
premium originally received. When a written put option is exercised, the amount
of the premium 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 Fund enters into options for hedging purposes. The
risk in writing a call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of loss if the market price of the underlying security declines.
As of November 30, 1996, the Fund had no written call options.
10. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. 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. The Fund enters into such contracts to hedge a
portion of its portfolio. The Fund bears the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts) and the credit risk should a counterparty fail to perform
under such contracts.
20
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At November 30, 1996, 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 3/97 93 $10,299,168 $10,372,406 $ 73,238
- --------------------------------------------------------------------------------------------
Futures contracts sold:
U.S. 5 Year Note 3/97 274 29,568,173 29,651,938 (83,765)
U.S. Long Bond 3/97 31 3,564,507 3,592,125 (27,618)
- --------------------------------------------------------------------------------------------
(111,383)
- --------------------------------------------------------------------------------------------
Total Unrealized Loss $ (38,145)
============================================================================================
</TABLE>
11. Short Sales of Securities
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 for the short sale are retained by the broker until the Fund replaces the
borrowed securities. In borrowing the securities to be delivered to the buyer,
the Fund becomes obligated to replace the securities borrowed at their market
price at the time of replacement, whatever that price may be.
As of November 30, 1996, the Fund had no open short sale transactions but had
incurred interest expense related to closed transactions during the period of
$98,461.
12. Capital Loss Carryforward
As of May 31, 1996, the Fund had, for Federal income tax purposes,
approximately $6,300,000 of capital loss carryforwards available to offset any
future capital gains. 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. The amount and expiration of the carryforwards are indicated below.
Expiration occurs on May 31 of the year indicated:
2003 2004
===============================================================================
Carryforward Amounts $5,300,000 $1,000,000
===============================================================================
13. Shares of Beneficial Interest
At November 30, 1996, 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
21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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, 1996, total paid-in capital amounted to the following for each
class:
Class A Class B Class C
================================================================================
Total Paid-in Capital $147,328,961 $4,749,416 $34,951
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1996 May 31, 1996
-------------------------- ----------------------------
Shares Amount Shares Amount
=========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 4,396,483 $ 43,355,747 10,827,229 $ 106,653,375
Shares issued on reinvestment 300,484 2,957,626 930,447 9,166,413
Shares redeemed (6,290,810) (61,988,591) (13,597,487) (133,909,251)
- -----------------------------------------------------------------------------------------
Net Decrease (1,593,843) $(15,675,218) (1,839,811) $ (18,089,463)
=========================================================================================
Class B
Shares sold 3,039,556 $ 29,956,319 7,388,624 $ 72,782,060
Shares issued on reinvestment 9,173 90,210 23,848 234,910
Shares redeemed (3,155,872) (31,110,158) (7,289,395) (71,810,764)
- -----------------------------------------------------------------------------------------
Net Increase (Decrease) (107,143) $ (1,063,629) 123,077 $ 1,206,206
=========================================================================================
Class C
Shares sold 49 $ 525 3,388 $ 33,372
Shares issued on reinvestment 67 654 98 960
Shares redeemed (193) (1,907) (256) (2,530)
- -----------------------------------------------------------------------------------------
Net Increase (Decrease) (77) $ (728) 3,230 $ 31,802
=========================================================================================
</TABLE>
14. Subsequent Event
On December 31, 1996, an entry was recorded on the Fund's books and records in
order to correct an over accrual of income which occurred during the reporting
period. The adjustment reduced each classes net asset value by $0.11, $0.11 and
$0.09 for Class A, B and C shares, respectively. This adjustment has been
reflected in the financial statements for the six months ended November 30,
1996. In addition, the Fund as a whole and all shareholders affected above a de
minimus amount during the period, will be reimbursed in a timely fashion.
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1996 1995(2) 1994 1993(3)
================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $9.84 $9.88 $9.78 $9.96 $10.00
- ------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (4) 0.20 0.56 0.47 0.37 0.44
Net realized and unrealized
gain (loss) 0.11 (0.04) 0.13 (0.17) (0.05)
- ------------------------------------------------------------------------------------------------
Total Income From Operations 0.31 0.52 0.60 0.20 0.39
- ------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.27) (0.56) (0.49) (0.37) (0.43)
Overdistribution of net
investment income -- -- (0.00)* (0.01) --
Net realized gains -- -- (0.01) -- --
- ------------------------------------------------------------------------------------------------
Total Distributions (0.27) (0.56) (0.50) (0.38) (0.43)
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.88 $9.84 $9.88 $9.78 $9.96
- ------------------------------------------------------------------------------------------------
Total Return 3.08%+++ 5.48% 6.39% 2.05% 3.89%+++
- ------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $140,468 $155,622 $174,463 $283,627 $313,184
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (4)(5) 1.58%+ 1.58% 1.60% 1.53% 1.50%+
Net investment income 5.57+ 5.66 4.94 3.72 4.36+
- ------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 135% 273% 524% 525% 236%
================================================================================================
</TABLE>
(1) For the six months ended November 30, 1996 (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 adviser waived a portion of its fees for the period ended
May 31, 1993. If such fees were not waived, the per share effect on net
investment income would have been a decrease of $0.01 and the expense ratio
would have been 2.03% (annualized).
(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
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1996(1) 1996 1995(2) 1994 1993(3)
========================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $9.84 $9.88 $9.78 $9.96 $9.96
- ----------------------------------------------------------------------------------------
Income From Operations:
Net investment income (4) 0.20 0.56 0.47 0.37 0.25
Net realized and unrealized
gain (loss) 0.09 (0.04) 0.13 (0.17) --
- ----------------------------------------------------------------------------------------
Total Income From Operations 0.29 0.52 0.60 0.20 0.25
- ----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.27) (0.56) (0.49) (0.37) (0.25)
Overdistribution of net
investment income -- -- (0.00)* (0.01) --
Net realized gains -- -- (0.01) -- --
- ----------------------------------------------------------------------------------------
Total Distributions (0.27) (0.56) (0.50) (0.38) (0.25)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.86 $9.84 $9.88 $9.78 $9.96
- ----------------------------------------------------------------------------------------
Total Return 2.87%+++ 5.48% 6.39% 2.05% 2.56%+++
- ----------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $4,670 $5,712 $4,521 $8,422 $3,569
- ----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (4)(5) 1.60%+ 1.60% 1.63% 1.57% 1.50%+
Net investment income 5.56+ 5.64 4.92 3.68 4.36+
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 135% 273% 524% 525% 236%
========================================================================================
</TABLE>
(1) For the six months ended November 30, 1996 (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 adviser waived a portion of its fees for the period ended
May 31, 1993. If such fees were not waived, the per share effect on net
investment income would have been a decrease of $0.01 and the expense ratio
would have been 2.03% (annualized).
(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 2.49%, 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
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1996 1995(2)(3) 1994(4)
==========================================================================================
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $9.82 $9.88 $9.78 $9.98
- ------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.20 0.56 0.46 0.37
Net realized and unrealized gain (loss) 0.11 (0.06) 0.10 (0.19)
- ------------------------------------------------------------------------------------------
Total Income From Operations 0.31 0.50 0.56 0.18
- ------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.27) (0.56) (0.45) (0.37)
Overdistribution of net
investment income -- -- (0.00)* (0.01)
Net realized gains -- -- (0.01) --
- ------------------------------------------------------------------------------------------
Total Distributions (0.27) (0.56) (0.46) (0.38)
- ------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.86 $9.82 $9.88 $9.78
- ------------------------------------------------------------------------------------------
Total Return 3.04%+++ 5.27% 5.93% 1.83%+++
- ------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $33 $34 $2 $113
- ------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (5) 1.60%+ 1.59% 1.59% 1.55%+
Net investment income 5.56+ 5.66 4.95 3.69+
- ------------------------------------------------------------------------------------------
Portfolio Turnover Rate 135% 273% 524% 525%
==========================================================================================
</TABLE>
(1) For the six months ended November 30, 1996 (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) On November 7, 1994, the former Class D shares were renamed Class C shares.
(4) For the period from June 2, 1993 (inception date) to May 31, 1994.
(5) For the year 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
<PAGE>
SMITH BARNEY
ADJUSTABLE RATE
GOVERNMENT
INCOME FUND
TRUSTEES
Charles F. Barber
Allan J. Bloostein
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[LOGO]
SUB-INVESTMENT ADVISER
BlackRock Financial
Management Inc.
345 Park Avenue
New York, New York 10154
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank, N.A.
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 1/97
