<PAGE>
================================================================================
SEMI-ANNUAL REPORT
================================================================================
[GRAPHIC]
Smith Barney
Adjustable Rate
Government
Income Fund
---------------------------------------------
November 30, 1997
[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 present the semi-annual report for the Smith Barney Adjustable
Rate Government Income Fund ("Fund") for the six months ended November 30, 1997.
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 as its current holdings and portfolio
management strategy can be found in the appropriate sections that follow.
Fund Performance Update
The Fund is an open-end bond fund that seeks high current income and to limit
the degree of fluctuation of its net asset value ("NAV") resulting from
movements in interest rates. The Fund seeks these objectives by investing
primarily in a portfolio of adjustable rate mortgage-backed securities ("ARMs"),
U.S. Government securities and asset-backed securities ("ABS"). The Fund is part
of the Smith Barney family of mutual funds and is managed by its investment
sub-adviser, BlackRock Financial Management, Inc. (a wholly-owned subsidiary of
PNC Bank, N.A.). The Fund's NAV is calculated daily and reported for Class A
shares in the mutual fund listing in national newspapers under the heading Smith
Barney Funds A as "AdjGvA".
As of November 30, 1997, the Fund's Class A shares had an NAV of $9.87. For the
six-month period ended November 30, 1997, the Fund's Class A shares
underperformed the Merrill Lynch 1-3 Year U.S. Treasury Index by posting a total
return of 2.92% versus 3.68%. (The Merrill Lynch 1-3 Year U.S. Treasury Index is
a market capitalization weighted index including all U.S. Treasury notes and
bonds with maturities greater than or equal to one year and less than three
years.)
Bond Market Update
As signs of moderating economic growth began to appear, U.S. bonds rallied
during the second and third quarters of 1997. Auspicious inflationary forces,
including lower factory orders, decreased consumer spending and higher
inventories, in addition to continued benign inflationary forces--continued to
soothe investor fears regarding inflation. Accordingly, the Federal Reserve
1
<PAGE>
Board ("Fed") left interest rates unchanged at their July 2 and September 30,
1997 policy meetings. U.S. Treasury yields reflected investor expectations of a
neutral Fed monetary policy. As data showing a softening economy was released,
the yield for the 2-year U.S. Treasury note fell from 6.20% on May 31 to 5.74%
on November 30. Foreign investors also contributed to the strong demand for U.S.
Treasuries, as the Asian market volatility led foreign and domestic investors to
look to U.S. government securities as a safe haven.
During the reporting period, the market for mortgage-backed securities ("MBS"),
as measured by the Lehman Mortgage Index, modestly outperformed the broader
investment-grade domestic bond market as measured by the Lehman Aggregate Bond
Index. (The Lehman Mortgage Index covers all fixed-rate securities backed by
mortgage pools of the Government National Mortgage Association ("GNMA"), Federal
Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage
Association ("FNMA"). The Lehman Aggregate Bond Index is an unmanaged index
composed of the Lehman Intermediate Government/Corporate Bond Index and
Mortgage-Backed Securities Index and includes treasury issues, agency issues,
corporate bond issues and mortgage-backed securities.)
Demand for mortgage securities was largely concentrated in the first half of
1997, when MBS decisively outperformed U.S. Treasuries due to low interest-rate
volatility and relatively stable mortgage-prepayment activity. Recently, MBSs
have fallen out of favor, as declining interest rates have heightened prepayment
fears. Increased interest-rate volatility has also had a negative impact on the
valuations of mortgage securities. Moreover, as corporate bond prices have
fallen, yields in the corporate sector have increased, offering investors an
alternative to MBSs.
Short duration ARMs slightly underperformed short duration Treasuries during the
second quarter, as falling interest rates sparked prepayment concerns. This
underperformance continued during the third quarter, as a sharp decline in the
supply of U.S. Treasuries (in response to stronger than expected tax receipts
and the declining financing needs by the U.S. Treasuries) and a glut of new ARMs
supply caused yield spreads to widen.
ABSs performed well versus U.S. Treasuries during the second quarter due to a
pause in the pace of issuance and excellent mortgage-like performance in the
home equity and manufactured housing market segments. ABSs performance suffered
in the third quarter, as a substantial increase in supply contributed
significantly to underperformance and wider yield spreads.
2
<PAGE>
Investment Strategy
Duration is a rough measure of the price sensitivity of a fixed income security
relative to a given change in interest rates. The Fund uses a "targeted
duration" approach which strives for a duration of roughly 1-1.5 years. This
duration target should create a fund with price, or net asset value, sensitivity
between a 1- and 2-year Treasury securities. Changes in the prices and yields of
these Treasury securities affect the value of the Fund's securities. In addition
to interest rates, the Fund's net asset value is affected by prepayment rates of
the mortgage securities held in the portfolio. The Fund's assets are actively
managed to reflect the sub-adviser's relative value analysis of individual
securities and sectors. In searching for relative value opportunities, the
Fund's managers target securities and sectors within the short duration market
that have underperformed and have strong potential for price appreciation.
Securities are purchased at attractive yield or price levels and sold upon price
appreciation or significant outperformance of other short duration alternatives.
The Fund further reduced its exposure to high coupon ARMs, as that sector
remained at very rich levels. Additionally, the managers sold a portion of the
Fund's U.S. Treasury holdings. The proceeds from these sales aided Fund
purchases of mortgage-backed securities products such as short-duration project
loans, commercial mortgage-backed securities and corporate debt. All three of
these asset classes are new to the Fund and the managers believe they offer high
credit quality and a significant yield advantage over comparable duration
Treasury securities. Lastly, while the Fund's overall ABS allocation remained
fairly static, the fixed-rate portion was increased and some floating-rate
issues were sold. The portfolio managers think that fixed-rate ABS issues,
particularly those backed by auto loans, offer excellent relative value due to
an overall glut of short duration fixed-rate ABSs.
Bond Market Outlook
The U.S. economy has shown some signs of slowing, a condition which BlackRock
expects may persist as early indicators suggest that holiday spending may be
tepid. The managers do not see immediate signs of inflationary pressure nor do
they anticipate an imminent change in monetary policy by the Fed. BlackRock's
longer-term outlook for the bond market remains optimistic, based on the
fundamentally favorable backdrop of slower economic growth, low inflation and
declining U.S. Treasury borrowing.
3
<PAGE>
In closing, thank you for investing in the Smith Barney Adjustable Rate
Government Income Fund. We look forward to continuing to help you pursue your
financial goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
December 22, 1997
4
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
Historical Performance -- Class A Shares
==============================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/97 $9.84 $9.87 $0.26 $0.00 $0.00 2.92%+
- --------------------------------------------------------------------------------------------------------------
5/31/97 9.84 9.84 0.46 0.00 0.05 5.31
- --------------------------------------------------------------------------------------------------------------
5/31/96 9.88 9.84 0.56 0.00 0.00 5.48
- --------------------------------------------------------------------------------------------------------------
5/31/95 9.78 9.88 0.49 0.01 0.00 6.39
- --------------------------------------------------------------------------------------------------------------
5/31/94 9.96 9.78 0.38 0.00 0.00 2.05
- --------------------------------------------------------------------------------------------------------------
Inception* - 5/31/93 10.00 9.96 0.43 0.00 0.00 3.89+
==============================================================================================================
Total $2.58 $0.01 $0.05
==============================================================================================================
<CAPTION>
==============================================================================================================
Historical Performance -- Class B Shares
==============================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/97 $9.82 $9.86 $0.25 $0.00 $0.00 3.03%+
- --------------------------------------------------------------------------------------------------------------
5/31/97 9.84 9.82 0.46 0.00 0.05 5.10
- --------------------------------------------------------------------------------------------------------------
5/31/96 9.88 9.84 0.56 0.00 0.00 5.48
- --------------------------------------------------------------------------------------------------------------
5/31/95 9.78 9.88 0.49 0.01 0.00 6.39
- --------------------------------------------------------------------------------------------------------------
5/31/94 9.96 9.78 0.38 0.00 0.00 2.05
- --------------------------------------------------------------------------------------------------------------
Inception* - 5/31/93 9.96 9.96 0.25 0.00 0.00 2.56+
==============================================================================================================
Total $2.39 $0.01 $0.05
==============================================================================================================
<CAPTION>
==============================================================================================================
Historical Performance -- Class C Shares
==============================================================================================================
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/97 $9.84 $9.87 $0.26 $0.00 $0.00 2.93%+
- --------------------------------------------------------------------------------------------------------------
5/31/97 9.82 9.84 0.46 0.00 0.05 5.53
- --------------------------------------------------------------------------------------------------------------
5/31/96 9.88 9.82 0.56 0.00 0.00 5.27
- --------------------------------------------------------------------------------------------------------------
5/31/95 9.78 9.88 0.45 0.01 0.00 5.93
- --------------------------------------------------------------------------------------------------------------
Inception* - 5/31/94 9.98 9.78 0.38 0.00 0.00 1.83+
==============================================================================================================
Total $2.11 $0.01 $0.05
==============================================================================================================
</TABLE>
5
<PAGE>
================================================================================
Historical Performance -- Class I Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/97 $9.85 $9.88 $0.28 $0.00 $0.00 3.21%+
- --------------------------------------------------------------------------------------------------------------
Inception* - 5/31/97 9.79 9.85 0.06 0.00 0.00 1.20+
==============================================================================================================
Total $0.34 $0.00 $0.00
==============================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND CAPITAL GAINS, IF
ANY, ANNUALLY.
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
----------------------------------------------
Class A Class B Class C Class I
================================================================================
<S> <C> <C> <C> <C>
Six Months Ended 11/30/97+ 2.92% 3.03% 2.93% 3.21%
- --------------------------------------------------------------------------------
Year Ended 11/30/97 5.14 5.25 5.37 N/A
- --------------------------------------------------------------------------------
Inception* through 11/30/97 4.78 4.86 4.87 4.45+
================================================================================
<CAPTION>
With Sales Charge(2)
----------------------------------------------
Class A Class B Class C Class I
================================================================================
<S> <C> <C> <C> <C>
Six Months Ended 11/30/97+ 2.92% (1.97)% 1.93% 3.21%
- --------------------------------------------------------------------------------
Year Ended 11/30/97 5.14 0.24 4.37 N/A
- --------------------------------------------------------------------------------
Inception* through 11/30/97 4.78 4.86 4.87 4.45+
================================================================================
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (Inception* through 11/30/97) 28.96%
- --------------------------------------------------------------------------------
Class B (Inception* through 11/30/97) 27.17
- --------------------------------------------------------------------------------
Class C (Inception* through 11/30/97) 23.88
- --------------------------------------------------------------------------------
Class I (Inception* through 11/30/97) 4.45+
================================================================================
</TABLE>
(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 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.
* Inception dates for Class A, B, C and I shares are June 22, 1992, November
6, 1992, June 2, 1993 and April 14, 1997, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
6
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of the
Smith Barney Adjustable Rate Government Income Fund vs.
Lipper U.S. Government 1-Year Treasury Bill Index+
- --------------------------------------------------------------------------------
June 1992 -- November 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney Adjustable Lipper 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
5/97 $12,530 $12,587
11/30/97 $12,895 $13,275
</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, 1997, compared to
the Lipper Analytical Services, Inc. ("Lipper") U.S. Government 1-Year
Treasury Bill Index. The index is comprised of U.S. 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.
7
<PAGE>
================================================================================
Portfolio Highlights (unaudited) November 30, 1997
================================================================================
Portfolio Breakdown
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Adjustable Rate Mortgage-Backed Securities 54.7%
Asset-Backed Securities 20.3%
Fixed Rate Collateralized Mortgage Obligations 16.1%
U.S. Treasury Obligations 6.0%
Project Loan 2.3%
Fixed Rate Mortgage Pass-Through Security 0.6%
</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,
CMOs are collateralized by GNMA, FNMA or FHLMC Mortgage Pass-Through
Certificates, but also may be collateralized by whole loans or private mortgage
pass-through securities.
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.
8
<PAGE>
================================================================================
Schedule of Investments (unaudited) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===============================================================================================
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 54.7%
===============================================================================================
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 43.4%
===============================================================================================
Federal Home Loan Mortgage Corporation (FHLMC) -- 11.3%
$ 5,347,113 FHLMC One Year, 7.763% due 5/1/25+ $ 5,515,066
2,500,000 FHLMC Series 1267, Class Q Shares, 6.400% due 5/15/07+ 2,535,950
1,353,907 FHLMC Series 1611, Class MA Shares, 6.300% due 11/15/23+ 1,354,544
6,931,897 FHLMC Strip, 6.620% due 6/1/28+ 6,988,254
- -----------------------------------------------------------------------------------------------
Total Federal Home Loan Mortgage Corporation
(Cost -- $16,394,344) 16,393,814
===============================================================================================
Federal National Mortgage Association (FNMA) -- 13.1%
2,110,106 FNMA Series 1991-127, Class F Shares, 6.269% due 9/25/98+ 2,113,567
5,405,982 FNMA Series 1993-210, Class F Shares, 6.119% due 10/25/22+ 5,439,770
5,856,953 FNMA Series 1997-15, Class FA Shares, 6.222% due 4/25/27+ 5,856,953
3,924,733 FNMA Ten Year CMT ARM, 6.000% due 1/1/04+ 3,883,053
1,692,008 FNMA Thirty Year CMT ARM, 8.500% due 12/1/10+ 1,760,737
- -----------------------------------------------------------------------------------------------
Total Federal National Mortgage Association
(Cost -- $18,985,893) 19,054,080
===============================================================================================
Government National Mortgage Association (GNMA) -- 19.0%
2,000,000 GNMA II One Year, 5.000% due 12/23/97+@ 1,972,180
9,863,339 GNMA II One Year, 5.500% due 8/20/27+ 9,884,940
2,189,829 GNMA II One Year, 6.875% due 10/20/22+ 2,257,233
2,076,789 GNMA II One Year, 6.875% due 12/20/22+ 2,140,713
528,227 GNMA II One Year, 7.000% due 3/20/17+ 547,291
7,132,291 GNMA II One Year, 7.000% due 3/20/21+ 7,360,499
1,755,908 GNMA II One Year, 7.000% due 1/20/23+ 1,813,520
1,569,769 GNMA II One Year, 7.375% due 6/20/17+ 1,611,463
- -----------------------------------------------------------------------------------------------
Total Government National Mortgage Association
(Cost -- $27,246,145) 27,587,839
===============================================================================================
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost -- $62,626,382) 63,035,733
===============================================================================================
NON-AGENCY ADJUSTABLE RATE MORTGAGE OBLIGATIONS -- 11.3%
1,552,374 Bear Stearns & Co., Series 1992-3B, Class A2 Shares,
8.239% due 5/25/23+ 1,592,146
MLCC Mortgage Investors, Inc., Class A Shares:
3,091,298 Series 1996-A, 6.118% due 2/15/21+ 3,108,702
2,000,467 Series 1996-B, 5.660% due 7/15/21+ 2,009,529
Salomon Brothers Inc., Class A1 Shares:
1,545,160 Series 1992-5, 7.929% due 11/25/22+ 1,585,226
1,055,931 Series 1996-6B, 5.975% due 6/30/26+ 1,053,957
931,267 Series 1996-6G, 5.875% due 9/30/27+ 929,526
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===============================================================================================
<S> <C> <C>
NON-AGENCY ADJUSTABLE RATE MORTGAGE OBLIGATIONS -- 11.3% (continued)
Sequoia Mortgage Trust, Class A1 Shares:
$ 2,803,686 Series 1, 6.032% due 5/4/29+ $ 2,804,555
2,000,000 Series 2, 6.500% due 10/25/24+ 2,018,120
1,200,000 Swiss Bank Corp., Glacier Finance Ltd., Series 1997-1,
Class A Shares, 5.879% due 9/10/04+ 1,200,000
- -----------------------------------------------------------------------------------------------
TOTAL NON-AGENCY ADJUSTABLE RATE
MORTGAGE OBLIGATIONS
(Cost -- $16,258,678) 16,301,761
===============================================================================================
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost -- $78,885,060) 79,337,494
===============================================================================================
FIXED RATE COLLATERALIZED MORTGAGE OBLIGATIONS -- 16.1%
===============================================================================================
Non-Agency Fixed Rate CMOs -- 3.8%
3,308,872 Salomon Brothers Inc., Series 1983-1, Class Z Shares,
12.000% due 12/1/13+ 3,530,137
1,910,555 Wilshire Funding Corp., Series 1997-WFC1,
Class A1, 7.250% due 8/25/27+ 1,921,312
- -----------------------------------------------------------------------------------------------
Total Non-Agency Fixed Rate CMOs
(Cost -- $5,556,450) 5,451,449
===============================================================================================
Stripped Pass-Throughs -- 5.6%
1,793,189 FNMA Strips, 11.500% due 3/1/09+ 2,035,270
2,923,654 FNMA Strips, 11.500% due 4/1/09+ 3,302,890
2,442,242 FNMA Strips, 11.500% due 5/1/09+ 2,774,217
- -----------------------------------------------------------------------------------------------
Total Stripped Pass-Throughs
(Cost -- $7,845,940) 8,112,377
===============================================================================================
PAC IOs -- 4.3%
4,520,573 FNMA GRANTOR TRUST 1996-T6, Class C Shares, 6.200% due 2/26/01+ 4,462,665
9,961 FNMA REMIC 1990-106, Class K Shares, 928.95% due 9/25/20+ 253,631
4,678,164 FNMA REMIC 1993-101, Class A Shares, 7.000% due 6/25/08+ 401,761
12,437,310 JP Morgan Commercial Mortgage Finance Corp, Series 1997-C5,
Class X Shares, 7.000% due 9/15/29+ 1,175,695
- -----------------------------------------------------------------------------------------------
Total PAC IOs
(Cost -- $6,310,025) 6,293,752
===============================================================================================
PAC POs -- 2.4%
2,371,146 FNMA REMIC 1992-157, due 3/24/04+ 2,328,181
1,207,216 FNMA REMIC 1993-219, due 8/25/23+ 1,188,360
- -----------------------------------------------------------------------------------------------
Total PAC POs
(Cost -- $3,506,107) 3,516,541
===============================================================================================
TOTAL FIXED RATE COLLATERALIZED MORTGAGE
OBLIGATIONS (Cost -- $23,218,522) 23,374,119
===============================================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) November 30, 1997
================================================================================
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===============================================================================================
<S> <C> <C>
FIXED RATE MORTGAGE PASS-THROUGH SECURITY -- 0.6%
$ 817,208 FHLMC Fifteen Year, 9.000% due 11/1/05+
(Cost -- $851,220) $ 827,930
===============================================================================================
PROJECT LOAN -- 2.3%
3,300,692 GMAC II Mortgage-Backed Securities Project Loan,
7.465% due 7/25/19+ (Cost -- $3,336,504) 3,329,243
===============================================================================================
ASSET-BACKED SECURITIES -- 20.3%
1,500,000 Contimortgage Home Equity Loan Trust, Series 1997-4,
Class A2 Shares, 6.270% due 2/15/12+ 1,497,195
2,500,000 Discover Card Master Trust I, Series 1996-A4, 6.063%
due 10/16/13+# 2,519,525
1,500,000 IFC SBAP, Series 1997-1, 6.500% due 1/15/24+ 1,500,000
1,841,586 IMC Home Equity Loan Trust, Series 1997-5, Class A1 Shares,
6.510% due 2/20/06+ 1,840,445
3,000,000 Key Corp Student Loan, Series 1997-1, 6.070% due 1/27/23+ 2,986,890
2,000,000 MBNA Master Credit Card Trust, Series 1996-M, Class A Shares,
6.005% due 4/15/09+## 1,991,560
2,300,166 The Money Store Business Loan Backed Certificates, Series 1997-1,
Class A, 6.393% due 4/15/28+## 2,298,741
1,500,000 People's Bank Credit Card Master Trust, Series 1997-2, Class A
Shares, 5.818% due 4/15/05+# 1,497,195
2,000,000 PMC Capital SBA Loan-Backed Adjustable Rate Certificate,
Series 1997-1, Class A Shares, 6.600% due 9/15/23+ 2,000,000
Residential Asset Securitization Trust, Class A1 Shares:
1,439,158 Series 1996-A8, 8.000% due 12/25/26+ 1,462,545
2,131,766 Series 1997-A1, 7.000% due 3/25/27+ 2,139,420
1,300,000 SMS Student Loan Trust, Series 1997-A, Class A Shares,
5.888% due 10/27/25+ ++ 1,280,097
2,759,313 SWB SBAP, Series 1997-1, 6.350% due 3/15/17+ 2,750,704
1,992,647 TMS SBA Loan Trust, Series 1997-1, Class A Shares,
6.250% due 1/25/25+## 1,985,175
1,600,000 Triangle Funding Ltd., Series 1997-3, Class 1B Shares,
5.940% due 10/15/05+ 1,595,008
- -----------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $29,392,566) 29,344,500
===============================================================================================
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) November 30, 1997
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY OBLIGATIONS -- 6.0%
$ 4,000,000 U.S. Treasury Notes, 5.875% due 7/31/99+ $ 4,004,280
4,625,000 U.S. Treasury Notes, 6.000% due 8/15/00+ 4,646,229
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost -- $8,653,149) 8,650,509
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $144,337,021*) $144,863,795
================================================================================
+ Security segregated by custodian for reverse repurchase agreements and/or
futures contract commitments.
@ Security is traded on a "to-be-announced" basis (See Note 8).
# Variable rate security - rate resets monthly.
## Variable rate security - rate resets quarterly.
++ Variable rate security - rate resets weekly.
* 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
CPI -- Consumer Price Index
IO -- Interest Only
PAC -- Planned Amortization Class
PO -- Principal Only
REMIC -- Real Estate Mortgage Investment Conduit
See Notes to Financial Statements.
12
<PAGE>
================================================================================
Statement of Assets and Liabilities (unaudited) November 30, 1997
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $144,337,021) $144,863,795
Cash 84,343
Receivable for securities sold 5,004,306
Receivable for Fund shares sold 2,939,182
Deposit with broker for securities sold short (Note 11) 1,330,447
Interest receivable 1,163,373
Receivable from broker - variation margin 5,469
Other receivables 24,819
- -------------------------------------------------------------------------------
Total Assets 155,415,734
- -------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreement (Note 6) 28,019,688
Payable for securities purchased 8,959,948
Investment sold short, at value
(Proceeds -- 1,330,447) (Note 11) 1,323,953
Dividends payable 484,208
Investment advisory fees payable 38,891
Administration fees payable 16,058
Distribution fees payable 13,945
Accrued expenses 281,054
- -------------------------------------------------------------------------------
Total Liabilities 39,137,745
- -------------------------------------------------------------------------------
Total Net Assets $116,277,989
===============================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 11,778
Capital paid in excess of par value 122,573,221
Overdistributed net investment income (18,585)
Accumulated net realized loss on security transactions,
options and futures contracts (6,817,244)
Net unrealized appreciation on investments,
futures contracts and short sales 528,819
===============================================================================
Total Net Assets $116,277,989
===============================================================================
Shares Outstanding:
Class A 11,191,600
-----------------------------------------------------------------------------
Class B 288,858
-----------------------------------------------------------------------------
Class C 7,934
-----------------------------------------------------------------------------
Class I 290,092
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $9.87
-----------------------------------------------------------------------------
Class B* $9.86
-----------------------------------------------------------------------------
Class C (and redemption price) $9.87
-----------------------------------------------------------------------------
Class I (and redemption price) $9.88
===============================================================================
</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).
See Notes to Financial Statements.
13
<PAGE>
================================================================================
Statement of Operations (unaudited)
================================================================================
For the Six Months Ended November 30, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 5,373,887
Less: Interest expense (Note 6) (1,163,590)
- -------------------------------------------------------------------------------
Total Investment Income 4,210,297
- -------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 454,038
Investment advisory fees (Note 2) 246,456
Administration fees (Note 2) 123,227
Shareholder communications 43,053
Registration fees 34,116
Shareholder and system servicing fees 28,731
Audit and legal 27,256
Trustees' fees 10,357
Custody 9,432
Other 3,775
- -------------------------------------------------------------------------------
Total Expenses 980,441
- -------------------------------------------------------------------------------
Net Investment Income 3,229,856
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS,
FUTURES CONTRACTS AND SHORT SALES (NOTES 3, 9, 10 AND 11):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 139,908
Options purchased 7,950
Futures contracts (311,166)
- -------------------------------------------------------------------------------
Net Realized Loss (163,308)
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of
Investments, Futures Contracts and Short Sales:
Beginning of period (21,481)
End of period 528,819
- -------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 550,300
- -------------------------------------------------------------------------------
Net Gain on Investments, Options, Futures Contracts and Short Sales 386,992
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 3,616,848
===============================================================================
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended November 30, 1997 (unaudited)
and the Year Ended May 31, 1997
<TABLE>
<CAPTION>
November 30 May 31
===============================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 3,229,856 $ 6,405,048
Net realized gain (loss) (163,308) 709,108
Increase in net unrealized appreciation 550,300 316,668
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations 3,616,848 7,430,824
- -------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (3,202,245) (6,667,389)
Capital -- (804,871)
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Distribution to Shareholders (3,202,245) (7,472,260)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 13):
Net proceeds from sale of shares 77,055,125 149,127,584
Net asset value of shares issued for
reinvestment of dividends 2,463,671 6,819,197
Cost of shares reacquired (93,315,760) (187,612,850)
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (13,796,964) (31,666,069)
- -------------------------------------------------------------------------------
Decrease in Net Assets (13,382,361) (31,707,505)
NET ASSETS:
Beginning of period 129,660,350 161,367,855
===============================================================================
End of period* $116,277,989 $129,660,350
===============================================================================
* Includes overdistributed net
investment income of: $(18,585) $(46,196)
===============================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
================================================================================
Statement of Cash Flows (unaudited)
================================================================================
For the Six Months Ended November 30, 1997
<TABLE>
<S> <C>
NET INCREASE IN CASH:
Cash Flows Provided by Operating and Investing Activities:
Interest received $ 5,580,406
Operating expenses paid (1,104,512)
Purchases of short-term securities and purchased options, net 1,685,282
Purchases of long-term securities (167,878,885)
Proceeds from disposition of long-term securities 201,687,622
Proceeds from short sale transactions 34,903
Payments from futures transactions (379,233)
- -------------------------------------------------------------------------------
Net Cash Flows Provided By Operating and Investing Activities 39,625,583
- -------------------------------------------------------------------------------
Cash Flows Used by Financing Activities:
Proceeds from shares sold 74,892,557
Payments on shares redeemed (95,299,459)
Cash dividends paid to shareholders* (295,849)
Decrease in reverse repurchase agreements outstanding (17,612,562)
Interest expense (1,225,927)
- -------------------------------------------------------------------------------
Net Cash Flows Used By Financing Activities (39,541,240)
- -------------------------------------------------------------------------------
Net Increase in Cash 84,343
Cash -- Beginning of Period 0
- -------------------------------------------------------------------------------
Cash -- End of Period $ 84,343
===============================================================================
RECONCILIATION OF INCREASE IN NET ASSETS FROM
OPERATIONS TO NET CASH FLOWS PROVIDED BY OPERATING
AND INVESTING ACTIVITIES:
Increase in Net Assets From Operations $ 3,616,848
- -------------------------------------------------------------------------------
Decrease in investments 39,693,269
Increase in variation margin (63,619)
Increase in receivable for securities sold (5,004,306)
Decrease in interest receivable 601,374
Decrease in other assets 319,992
Decrease in payable for securities purchased (586,079)
Decrease in accrued expenses and other payables (115,486)
Interest expense 1,163,590
- -------------------------------------------------------------------------------
Total Adjustments 36,008,735
- -------------------------------------------------------------------------------
Net Cash Flows Provided By Operating and Investing Activities $ 39,625,583
===============================================================================
</TABLE>
* Exclusive of dividend reinvestment of $2,463,671.
See Notes to Financial Statements.
16
<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
agencies and 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 value;
(d) interest income, adjusted for accretion of original issue discount, is
recorded on an 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 by class; (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; (i) the character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. Accordingly,
overdistributed income of $804,871 at November 30, 1997 have been reclassified
to paid-in capital. Net investment income, net realized gains and net assets
were not affected by this change; and (j) 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.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
Smith Barney Strategy Advisers Inc. ("SBSA"), a wholly owned subsidiary of
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual Funds
Management Inc., which, in turn, is a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), 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.
17
<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, N.A.
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 an annual rate of 0.20% of the average
daily net assets of the Fund. This fee is calculated daily and paid monthly.
MMC also 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 SSBH, 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.
For the six months ended November 30, 1997, CDSCs paid to SB for Class B shares
were approximately $22,000.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect
to Class A, B, C, and I 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, 1997, total Distribution Plan fees incurred were:
Class A Class B Class C Class I
================================================================================
Distribution Plan Fees $437,333 $12,398 $275 $4,032
================================================================================
All officers and one Trustee of the Fund are employees of SB.
3. INVESTMENTS
During the six months ended November 30, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $168,744,546
- --------------------------------------------------------------------------------
Sales 186,673,026
================================================================================
18
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)(continued)
================================================================================
At November 30, 1997, aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $ 780,455
Gross unrealized depreciation (253,681)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 526,774
================================================================================
</TABLE>
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, 1997, 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.
19
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)(continued)
================================================================================
At November 30, 1997, the Fund had the following reverse repurchase
agreements outstanding:
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===================================================================================================
<S> <C> <C>
$ 4,149,000 Reverse Repurchase Agreement with Salomon Brothers,
dated 11/10/97 bearing 5.620% to be repurchased
at $4,168,431 on 12/10/97, collateralized by: $3,797,813
FHLMC Strip, 6.620% due 6/1/28. $ 4,149,000
19,887,000 Reverse Repurchase Agreement with Salomon Brothers, dated 11/24/97
bearing 5.750% to be repurchased at $20,090,289 on 1/27/98,
collateralized by: $1,518,554 GNMA II One Year, 6.875% due
12/20/22; $3,546,890 GNMA II One Year, 7.000% due 3/20/21;
$5,303,694 FHLMC One Year, 7.763% due 5/1/25; $9,863,339 GNMA II
One Year, 5.500% due 8/20/27. 19,887,000
664,625 Reverse Repurchase Agreement with J.P. Morgan Securities, dated
11/26/97 bearing 5.250% to be repurchased at $665,982 on 12/10/97,
collateralized by $650,000 U.S. Treasury Note, 6.000% due 8/15/00. 664,625
3,319,063 Reverse Repurchase Agreement with J.P. Morgan Securities, dated
11/28/97 bearing 5.600% to be repurchased at $3,325,258 on
12/10/97, collateralized by $3,250,000 U.S. Treasury Note, 6.000%
due 8/15/00. 3,319,063
- ---------------------------------------------------------------------------------------------------
TOTAL REVERSE REPURCHASE AGREEMENTS $28,019,688
===================================================================================================
</TABLE>
During the six months ended November 30, 1997, the maximum and average
amount of reverse repurchase agreements outstanding were as follows:
================================================================================
Maximum amount outstanding $49,747,500
- --------------------------------------------------------------------------------
Average amount outstanding $39,878,094
================================================================================
Interest rates ranged from 4.75% to 6.00% during the year. Total market
value of the collateral for the reverse repurchase agreements is $28,343,140.
Interest expense for the year ended November 30, 1997 on borrowings by the
Fund under reverse repurchase agreements totalled $1,163,590.
20
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)(continued)
================================================================================
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, 1997, 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, 1997, the Fund held one TBA security with a cost of
$2,000,000.
9. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily and are included in the schedule
of investments. When a purchased option expires, the Fund will realize a loss in
the amount of the premium paid. When the Fund enters into a 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
a 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, 1997, the Fund had no open purchased put or call option
contracts.
21
<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 an 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 originally received will reduce the cost of
the security which the Fund purchased upon exercise. When written index options
are exercised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a covered 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.
During the six months ended November 30, 1997, the Fund did not write any
options.
10. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. 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 received or made 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).
22
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)(continued)
================================================================================
At November 30, 1997, 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>
Future contracts to buy:
U.S. 10 Year Note 3/98 17 $1,897,702 $1,893,375 $(4,327)
- ----------------------------------------------------------------------------------------------------
Future contracts to sell:
U.S. 5 Year Note 3/98 70 7,566,441 7,566,563 (122)
- ----------------------------------------------------------------------------------------------------
Net Unrealized Loss $(4,449)
====================================================================================================
</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.
At November 30, 1997, the Fund had the following open short sale
transaction:
Face Market
Amount Value
================================================================================
$1,325,000 U.S. Treasury Note, 5.75% due 9/30/99
(Proceeds -- $1,330,447) $(1,323,953)
================================================================================
12. CAPITAL LOSS CARRYFORWARD
As of November 30, 1997, the Fund had, for Federal income tax purposes,
approximately $6,685,000 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 November 30 of the year indicated:
2003 2004 2005
================================================================================
Carryforward Amounts $5,259,000 $570,000 $856,000
================================================================================
23
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)(continued)
================================================================================
13. SHARES OF BENEFICIAL INTEREST
At November 30, 1997, 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, 1997, total paid-in capital amounted to the following for
each class:
Class A Class B Class C Class I
================================================================================
Total Paid-in Capital $116,734,910 $2,922,550 $79,839 $2,847,700
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1997 May 31, 1997*
--------------------------------- ---------------------------------
Shares Amount Shares Amount
=======================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 6,069,699 $ 59,936,016 8,490,645 $ 83,712,514
Shares issued on reinvestment 237,611 2,346,003 671,821 6,619,602
Shares redeemed (7,693,915) (75,964,207) (12,402,672) (122,143,557)
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease (1,386,605) $ (13,682,188) (3,240,206) $ (31,811,441)
=======================================================================================================================
Class B
Shares sold 1,451,199 $ 14,291,725 6,379,831 $ 62,813,921
Shares issued on reinvestment 5,518 54,417 19,196 189,004
Shares redeemed (1,514,548) (14,913,548) (6,632,928) (65,297,021)
- -----------------------------------------------------------------------------------------------------------------------
Net Decrease (57,831) $ (567,406) (233,901) $ (2,294,096)
=======================================================================================================================
Class C
Shares sold 809 $ 7,984 4,602 $ 45,366
Shares issued on reinvestment 160 1,580 223 2,191
Shares redeemed (45) (439) (1,250) (12,284)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase 924 $ 9,125 3,575 $ 35,273
=======================================================================================================================
Class I
Shares sold 284,969 $ 2,819,400 260,643 $ 2,555,783
Shares issued on reinvestment 6,232 61,671 853 8,400
Shares redeemed (246,324) (2,437,566) (16,281) (159,988)
- -----------------------------------------------------------------------------------------------------------------------
Net Increase 44,877 $ 443,505 245,215 $ 2,404,195
=======================================================================================================================
</TABLE>
* Transactions for Class I shares, are for the period from April 18, 1997
(inception date) to May 31, 1997.
24
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1997 1996 1995(2) 1994 1993(3)
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.84 $ 9.84 $ 9.88 $ 9.78 $ 9.96 $ 10.00
- --------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (4) 0.26 0.43 0.56 0.47 0.37 0.44
Net realized and unrealized
gain (loss) 0.03 0.08 (0.04) 0.13 (0.17) (0.05)
- --------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.29 0.51 0.52 0.60 0.20 0.39
- --------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.46) (0.56) (0.49) (0.38) (0.43)
Net realized gains -- -- -- (0.01) -- --
Capital -- (0.05) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.26) (0.51) (0.56) (0.50) (0.38) (0.43)
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.87 $ 9.84 $ 9.84 $ 9.88 $ 9.78 $ 9.96
- --------------------------------------------------------------------------------------------------------------------------
Total Return 2.92%++ 5.31% 5.48% 6.39% 2.05% 3.89%++
- --------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (in millions) $ 110 $ 124 $ 156 $ 174 $ 284 $ 313
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (4)(5) 1.42%+ 1.57% 1.58% 1.60% 1.53% 1.50%+
Net investment income 5.17+ 4.42 5.66 4.94 3.72 4.36+
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 104% 288% 273% 524% 525% 236%
==========================================================================================================================
</TABLE>
(1) For the six months ended November 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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 decrease on net
investment income would have been $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%
(annualized), respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
25
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class B Shares 1997(1) 1997 1996 1995(2) 1994 1993(3)
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.82 $ 9.84 $ 9.88 $ 9.78 $ 9.96 $ 9.96
- --------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (4) 0.26 0.39 0.56 0.47 0.37 0.25
Net realized and unrealized
gain (loss) 0.03 0.10 (0.04) 0.13 (0.17) --
- --------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.29 0.49 0.52 0.60 0.20 0.25
- --------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.25) (0.46) (0.56) (0.49) (0.38) (0.25)
Net realized gains -- -- -- (0.01) -- --
Capital -- (0.05) -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.25) (0.51) (0.56) (0.50) (0.38) (0.25)
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.86 $ 9.82 $ 9.84 $ 9.88 $ 9.78 $ 9.96
- --------------------------------------------------------------------------------------------------------------------------
Total Return 3.03%++ 5.10% 5.48% 6.39% 2.05% 2.56%++
- --------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $ 2,849 $ 3,406 $ 5,712 $ 4,521 $ 8,422 $ 3,569
- --------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (4)(5) 1.44%+ 1.61% 1.60% 1.63% 1.57% 1.50%+
Net investment income 5.34+ 4.32 5.64 4.92 3.68 4.36+
- --------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 104% 288% 273% 524% 525% 236%
==========================================================================================================================
</TABLE>
(1) For the six months ended November 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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%
(annualized), respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
26
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout each
period:
<TABLE>
<CAPTION>
Class C Shares 1997(1) 1997 1996 1995(2)(3) 1994(4)
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.84 $ 9.82 $ 9.88 $ 9.78 $ 9.98
- -----------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.26 0.40 0.56 0.46 0.37
Net realized and unrealized gain (loss) 0.03 0.13 (0.06) 0.10 (0.19)
- -----------------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.29 0.53 0.50 0.56 0.18
- -----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.46) (0.56) (0.45) (0.38)
Net realized gains -- -- -- (0.01) --
Capital -- (0.05) -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.26) (0.51) (0.56) (0.46) (0.38)
- -----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.87 $ 9.84 $ 9.82 $ 9.88 $ 9.78
- -----------------------------------------------------------------------------------------------------------------------
Total Return 2.93%++ 5.53% 5.27% 5.93% 1.83%++
- -----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 78 $ 69 $ 34 $ 2 $ 113
- -----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (5) 1.41%+ 1.52% 1.59% 1.59% 1.55%+
Net investment income 5.18+ 4.67 5.66 4.95 3.69+
- -----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 104% 288% 273% 524% 525%
=======================================================================================================================
</TABLE>
(1) For the six months ended November 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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% (annualized),
respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
27
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of beneficial interest outstanding throughout the
period:
<TABLE>
<CAPTION>
Class I Shares 1997(1) 1997(2)
================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Period $ 9.85 $ 9.79
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.27 0.10
Net realized and unrealized gain 0.04 0.02
- --------------------------------------------------------------------------------
Total Income from Operations 0.31 0.12
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (0.06)
Capital -- (0.00)*
- --------------------------------------------------------------------------------
Total Distribution (0.28) (0.06)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.88 $ 9.85
- --------------------------------------------------------------------------------
Total Return++ 3.21% 1.20%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 2,867 $ 2,416
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.90% 1.10%
Net investment income 5.69 5.60
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 104% 288%
================================================================================
</TABLE>
(1) For the six months ended November 30, 1997 (unaudited).
(2) For the period from April 14, 1997 (inception date) to May 31, 1997.
* Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
28
<PAGE>
Smith Barney SMITH BARNEY
Adjustable Rate --------------------------------
Government
Income Fund A Member of TravelersGroup[LOGO]
Trustees Sub-Investment Adviser
Allan J. Bloostein BlackRock Financial
Martin Brody Management Inc.
Dwight B. Crane 345 Park Avenue
Robert A. Frankel New York, New York 10154
William R. Hutchinson
Heath B. McLendon, Chairman Distributor
Smith Barney Inc.
Charles F. Barber, Emeritus
Custodian
Officers PNC Bank, N.A.
Heath B. McLendon
President and Shareholder
Chief Executive Officer Servicing Agent
First Data Investor Services Group, Inc.
Lewis E. Daidone P.O. Box 9134
Senior Vice President Boston, MA 02205-9134
and Treasurer
This report is submitted for the general
Thomas M. Reynolds information of the shareholders of Smith
Controller Barney Adjustable Rate Government Income
Fund. It is not authorized for
Christina T. Sydor distribution to prospective investors
Secretary unless accompanied or preceded by an
effective Prospectus for the Fund, which
Investment Adviser contains information concerning the
Smith Barney Strategy Advisers Inc. Fund's investment policies and expenses
as well as other pertinent information.
Administrator
Mutual Management Corp. Smith Barney
Adjustable Rate
Government
Income Fund
388 Greenwich Street
New York, New York 10013
www.smithbarney.com
FD0301 1/98
