<PAGE>
[GRAPHIC]
Smith Barney
Adjustable Rate
Government
Income Fund
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SEMI-ANNUAL REPORT
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November 30, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(R)
<PAGE>
Smith Barney [PHOTO]
Adjustable Rate
Government HEATH B.
Income Fund MCLENDON
Chairman
Dear Shareholder:
We are pleased to present the semi-annual report for the Smith Barney Adjustable
Rate Government Income Fund ("Fund") for the period ended November 30, 1998. The
prevailing economic and market conditions and a summary 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 below. We hope you find this
report to be useful and informative.
Performance Update
The Fund's investment objective is to seek high current income and to limit the
degree of fluctuation of its net asset value ("NAV") resulting from movements in
interest rates. The Fund invests in a portfolio of adjustable rate
mortgage-backed securities ("ARM"), U.S. government securities and asset-backed
securities ("ABS"). The Fund calculates an NAV daily and reports it for Class A
shares in national newspapers under the heading Smith Barney Funds A as
"AdjGvA."
As of November 30, 1998, the Fund's Class A shares had an NAV of $9.78. For the
six months ended November 30, 1998, the Fund's Class A shares posted a total
return of 1.84%, underperforming the Merrill Lynch 1-3 Year Treasury Index's
return of 3.16%. (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.) In our
view, the Fund's underperformance reflects the strong performance of U.S.
Treasury securities versus short duration fixed income alternatives over the
period. Yet, the Fund outperformed the six month performance average for
adjustable rate mortgage funds of 1.55% according to Lipper Inc., an independent
fund-tracking organization.
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Smith Barney Adjustable Rate Government Income Fund 1
<PAGE>
Bond Market Update
U.S. economic expansion continued unabated throughout the fourth quarter of 1997
and into the first quarter of 1998. Economic growth far exceeded the historical
non-inflationary level of 2%. Despite strong economic growth, inflation stayed
surprisingly subdued, permitting the Federal Reserve Board ("Fed") to remain on
the sidelines and leave interest rates unchanged during the reporting period.
The major concern of many investors during the first half of the Fund's fiscal
year was the economic crisis in Asia and its impact on the U.S. economy. While
currency and asset price devaluations in Asia have negative implications for
demand of U.S. products in the region, the low prices of Asian imports in the
U.S. are helping to keep a lid on inflation domestically. U.S. exports to Asia
have slowed, while the strength of the U.S. dollar caused inexpensive Asian
imports to flood the U.S. and exert downward price pressure on domestic goods.
The second half of the year witnessed virtually unparalleled market turbulence.
During the second quarter of 1998, GDP growth faltered to a 1.8% annual rate
(down from the 5% first quarter rate) due to slower output and an increasing
deficit created by a strong U.S. dollar. Although consumers continued their
spending domestically, demand for U.S. goods abroad faltered. The strong U.S.
dollar and ongoing weakness overseas, especially Asia, drove prices for U.S.
goods higher relative to foreign goods.
In the latter half of the year, U.S. GDP growth rebounded to a 3.3% annual pace.
However, the spreading instability in global financial markets began to rattle
investor confidence. The devaluation of the Russian ruble and the fear of a
possible devaluation of the Brazilian currency caused a flight-to-quality to
U.S. Treasury securities and caused the yields of other fixed income investments
to rise dramatically. In addition, the global financial markets witnessed a
growing credit crunch where even higher-grade securities were affected. This
dramatic shift in investor sentiment culminated in the near collapse of a
prominent hedge fund.
U.S. Treasury securities rallied throughout the third quarter of 1998 as
economic uncertainty drove many investors to the safety of U.S. Treasury
securities. This flight-to-quality sent U.S. Treasury yields to their lowest
levels since 1967. The deterioration of the global economic environment caused
the Fed to shift monetary policy during the quarter and provided a catalyst for
the strong stock market rally. In response to the financial fragility during
this period, the Fed eased interest rates on September 29, 1998 by 0.25% and by
another 0.25% on October 15, 1998 in an unusual between-meetings move. On
November 17, 1998, the Fed eased short-term interest rates once again by an
additional 0.25%, as an insurance against the threat of a resurgent credit
crunch.
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2 1998 Semi-Annual Report to Shareholders
<PAGE>
As a result of this turbulent market period,shorter-maturity U.S. Treasury
securities outperformed longer-maturity bonds as investors focused on the most
liquid portion of the maturity spectrum. The dramatic decline in yields was the
most pronounced in the 5-year U.S. Treasury note, which went down from 5.823% on
November 30, 1997 to 4.484% on November 30,1998.
In light of declining interest rates and faster prepayment rates during the
period, mortgage-backed securities underperformed the broader investment grade
bond market. As the yield on the 30-year U.S. Treasury bond declined to under
5%, mortgage rates fell to their lowest levels in more than thirty years. Heavy
prepayments on mortgage-backed securities placed pressure on prices. Hedge fund
deleveraging caused additional selling in the mortgage market, as securities
were sold to meet margin calls. Adjustable rate mortgage securities lagged U.S.
Treasuries as a flat yield curve (i.e., the narrow spread between the 2-year and
10-year yields) provided significant incentive for homeowners to refinance their
ARMs into fixed-rate mortgages.
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 to 1.5 years and
should result in a fund whose NAV performance is similar to that of a 1- or
2-year U.S. Treasury security. Changes in the prices and yields of these
Treasury securities affect the value of the Fund's securities. In addition to
interest rates, prepayment rates of the mortgage securities held in the Fund's
portfolio usually affects the Fund's NAV.
The Fund's assets are actively managed by BlackRock Financial Management Inc.
under the supervision of Smith Barney Strategy Advisers Inc., based on
BlackRock's relative value analysis of individual securities and market sectors.
In searching for relative value opportunities, we target securities and market
sectors within the short-duration market that have underperformed and that we
believe to have strong potential for price appreciation. During the reporting
period, the Fund increased its allocation to FHA Project Loans and AAA-rated
commercial mortgage-backed securities, both of which typically offer better
prepayment protection than residential mortgage securities.
Bond Market Outlook
Although visibly shaken during the recent market instability,consumer confidence
remains near record highs, consumer spending is still growing and GDP growth
remains healthy. However, we believe that a worsening trade gap and a slowdown
in manufacturing activity should place a drag on fourth quarter GDP and carry
into the first quarter of 1999. Fed chairman Greenspan's actions seem to reflect
his commitment to high liquidity within the bond markets. With
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Smith Barney Adjustable Rate Government Income Fund 3
<PAGE>
respect to mortgage-backed securities, we believe that the recent sell-off
represents an attractive opportunity to invest in this asset class as their
yields relative to U.S. Treasuries remains at historically high levels.
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 29, 1998
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4 1998 Semi-Annual Report to Shareholders
<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>
11/30/98 $9.86 $9.78 $0.22 $0.00 $0.00 1.84%+
- ----------------------------------------------------------------------------------------------
5/31/98 9.84 9.86 0.50 0.00 0.01 5.57
- ----------------------------------------------------------------------------------------------
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 $3.04 $0.01 $0.06
==============================================================================================
<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>
11/30/98 $9.84 $9.76 $0.26 $0.00 $0.00 1.81%+
- ----------------------------------------------------------------------------------------------
5/31/98 9.82 9.84 0.50 0.00 0.01 5.56
- ----------------------------------------------------------------------------------------------
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 $2.90 $0.01 $0.06
==============================================================================================
<CAPTION>
==============================================================================================
Historical Performance -- Class I 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>
11/30/98 $9.87 $9.80 $0.28 $0.00 $0.00 2.20%+
- ---------------------------------------------------------------------------------------------
5/31/98 9.85 9.87 0.56 0.00 0.01 6.12
- ---------------------------------------------------------------------------------------------
Inception(*) - 5/31/97 9.79 9.85 0.06 0.00 0.00 1.20+
=============================================================================================
Total $0.90 $0.00 $0.01
=============================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
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Smith Barney Adjustable Rate Government Income Fund 5
<PAGE>
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Average Annual Total Returns
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Without Sales Charges(1)
---------------------------------
Class A Class B Class I
================================================================================
Six Months Ended 11/30/98+ 1.84% 1.81% 2.20%
- --------------------------------------------------------------------------------
Year Ended 11/30/98 4.46 4.31 5.08
- --------------------------------------------------------------------------------
Inception(*) through 11/30/98 4.73 4.77 5.87
================================================================================
With Sales Charges(2)
---------------------------------
Class A Class B Class I
================================================================================
Six Months Ended 11/30/98+ 1.84% (3.15)% 2.20%
- --------------------------------------------------------------------------------
Year Ended 11/30/98 4.46 0.64 5.08
- --------------------------------------------------------------------------------
Inception(*) through 11/30/98 4.73 4.77 5.87
================================================================================
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Cumulative Total Returns
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Without Sales Charges(1)
================================================================================
Class A (Inception(*) through 11/30/98) 34.71%
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Class B (Inception(*) through 11/30/98) 32.65
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Class I (Inception(*) through 11/30/98) 9.75
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of any
applicable contingent deferred sales charges ("CDSC") with respect to
Class B shares. (The CDSC is based on any CDSC applicable to a previous
fund owned prior to exchange into this Fund.)
(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. (The CDSC is based on any CDSC applicable to a
previous fund owned prior to exchange into this Fund.)
(*) Inception dates for Class A, B and I shares are June 22, 1992, November
6, 1992 and April 18, 1997, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
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6 1998 Semi-Annual Report to Shareholders
<PAGE>
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Historical Performance (unaudited)
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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+
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June 1992 -- November 1998
[LINE GRAPH]
Smith Barney Adjustable Rate Lipper U.S. Government
Government Income Fund 1-Year Treasury Bill Index
---------------------------------------------------------
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
5/31/98 13,228 13,561
11/30/98 13,471 13,829
+ 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, 1998, 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.
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Smith Barney Adjustable Rate Government Income Fund 7
<PAGE>
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Portfolio Highlights (unaudited) November 30, 1998
- --------------------------------------------------------------------------------
Portfolio Breakdown
[PIE CHART]
Asset-Backed Securities 25.6%
Fixed Rate Collateralized Mortgage Obligations 11.9%
U.S. Treasury Obligations 3.5%
Fixed Rate Mortgage Pass-Through Securities 3.0%
Adjustable Rate Mortgage-Backed Securities 56.0%
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.
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8 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) November 30, 1998
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 56.0%
================================================================================
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 47.4%
Federal Home Loan Mortgage Corporation (FHLMC) -- 17.5%
$ 3,000,000 FHLMC Multi ARM, 6.230% due 7/1/01 $ 2,984,070
4,453,487 FHLMC One Month LIBOR, 8.082% due 6/1/25(*) 4,520,290
4,855,938 FHLMC One Year CMT ARM, 8.609% due 12/1/26(*) 4,928,777
4,278,704 FHLMC One Year CMT ARM, 8.361% due 1/1/27(*) 4,342,885
1,062,268 FHLMC Six Month LIBOR, 7.876% due 10/1/26 1,074,219
3,264,305 FHLMC Six Month LIBOR, 8.830% due 11/1/26(*) 3,326,523
998,669 FHLMC Six Month LIBOR, 7.784% due 7/1/27 1,014,279
5,647,044 FHLMC Strip, 6.317% due 6/1/28 5,647,044
- --------------------------------------------------------------------------------
Total Federal Home Loan Mortgage Corporation
(Cost -- $27,907,432) 27,838,087
================================================================================
Federal National Mortgage Association (FNMA) -- 17.9%
3,294,198 FNMA 11th COFI, 6.163% due 10/1/19(*) 3,325,163
1,908,087 FNMA One Year CMT ARM, 7.425% due 4/1/20 1,939,093
2,351,643 FNMA One Year CMT ARM, 7.436% due 4/1/20 2,380,310
2,944,584 FNMA One Year CMT ARM, 7.059% due 8/1/23(*) 2,990,608
2,643,535 FNMA One Year CMT ARM, 6.804% due 5/1/25(*) 2,663,362
6,632,135 FNMA One Year CMT ARM, 6.802% due 8/1/27 6,715,037
4,125,692 FNMA One Year CMT ARM, 7.540% due 8/1/27 4,185,019
2,593,650 FNMA One Year CMT ARM, 5.719% due 2/1/28 2,606,528
1,640,734 FNMA Six Month CD ARM, 7.393% due 6/1/24 1,658,683
- --------------------------------------------------------------------------------
Total Federal National Mortgage Association
(Cost -- $28,593,509) 28,463,803
================================================================================
Government National Mortgage Association (GNMA) -- 12.0%
432,212 GNMA II One Year CMT ARM, 6.875% due 3/20/17 437,615
1,235,671 GNMA II One Year CMT ARM, 6.875% due 6/20/17 1,251,896
5,529,475 GNMA II One Year CMT ARM, 6.875% due 3/20/21(*) 5,598,594
1,642,818 GNMA II One Year CMT ARM, 6.875% due 4/20/22 1,663,354
1,624,797 GNMA II One Year CMT ARM, 7.000% due 10/20/22 1,638,007
1,689,826 GNMA II One Year CMT ARM, 7.000% due 11/20/22 1,704,613
1,538,430 GNMA II One Year CMT ARM, 7.000% due 12/20/22 1,551,891
1,323,684 GNMA II One Year CMT ARM, 6.875% due 1/20/23 1,338,576
3,902,280 GNMA II One Year CMT ARM, 6.625% due 7/20/27(*) 3,924,250
- --------------------------------------------------------------------------------
Total Government National Mortgage Association
(Cost -- $19,245,779) 19,108,796
================================================================================
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost -- $75,746,720) 75,410,686
================================================================================
See Notes to Financial Statements.
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Smith Barney Adjustable Rate Government Income Fund 9
<PAGE>
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Schedule of Investments (unaudited) (continued) November 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
=======================================================================================
<S> <C> <C>
NON-AGENCY ADJUSTABLE RATE MORTGAGE OBLIGATIONS -- 8.6%
$ 1,350,000 Bayview Financial Acquisition Trust, Series 1998-B,
5.984% due 1/1/02 @+ $ 1,350,000
2,056,242 FHLMC Structured Pass Through Securities,
Series T-9, Class A1, 5.339% due 4/25/12+ 2,055,769
2,917,431 Independent National Mortgage Co., Series 1995-E,
Class A1, 7.303% due 4/25/25 2,941,150
Merit Securities Corp.:
215,622 Series 10, Class 2A1, 5.378% due 5/28/25+ 216,028
2,900,000 Series 11, Class 2A2 , 5.348% due 11/28/22+ 2,894,577
Sequoia Mortgage Trust, Class A1:
1,318,155 Series 1, 5.630% due 5/4/29+ 1,315,691
1,562,497 Series 2, 6.423% due 10/25/24+ 1,558,590
1,422,022 Structured Asset Securities Corp., Series 1998-C2A,
Class B, 5.362% due 1/25/13 @+ 1,411,357
- ---------------------------------------------------------------------------------------
TOTAL NON-AGENCY ADJUSTABLE RATE
MORTGAGE OBLIGATIONS
(Cost-- $8,106,599) 13,743,162
=======================================================================================
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost-- $83,853,319) 89,153,848
=======================================================================================
FIXED RATE COLLATERALIZED MORTGAGE OBLIGATIONS -- 11.9%
=======================================================================================
Non-Agency Fixed Rate CMOs -- 2.8%
1,271,321 Residential Asset Securitization Trust, Series 1998-A12,
Class A5, 6.750% due 11/25/28 1,274,740
978,596 Union Planters Mortgage Finance Corp.,
Series 1998-1, Class A1, 6.350% due 1/25/28(*) 982,570
Wilshire Funding Corp.:
1,137,689 Series 1997-WFC1, Class A1, 7.250% due 8/25/27 1,139,111
1,023,120 Series 1998-WFC2, Class A3, 7.000% due 12/28/37 1,023,764
- ---------------------------------------------------------------------------------------
Total Non-Agency Fixed Rate CMOs
(Cost-- $3,089,580) 4,420,185
=======================================================================================
Stripped Pass-Throughs -- 4.4%
625,109 FNMA Strips, Series D, Class 2, 11.000% due 4/1/09 688,201
1,981,423 FNMA Strips, Series F, Class 2, 11.500% due 5/1/09 2,163,457
1,412,654 FNMA Strips, Series G, Class 2, 11.500% due 3/1/09 1,541,997
2,412,044 FNMA Strips, Series I, Class 2, 11.500% due 4/1/09 2,647,218
- ---------------------------------------------------------------------------------------
Total Stripped Pass-Throughs
(Cost-- $7,049,686) 7,040,873
=======================================================================================
</TABLE>
See Notes to Financial Statements.
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10 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) November 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
============================================================================================
<S> <C> <C>
PAC IOs -- 2.4%
$ 1,481,443 First Union-Lehman Brothers, Series 1997-C1, Class IO,
yield to maturity 15.312% due 4/18/27 $ 1,476,896
117,292 FNMA, Series 1990-106, Class K, yield to maturity
17.720% due 9/25/20 167,155
182,817 FNMA, Series 1993-101, Class A, yield to maturity
7.117% due 6/25/08 181,443
1,007,337 JP Morgan Commercial Mortgage Finance Corp., Series 1997-C5,
Class X, yield to maturity 8.490% due 9/15/29 @ 1,048,310
1,002,660 LB Commercial Conduit Mortgage Trust, Series 1998-C4,
Class X, yield to maturity 9.600% due 9/15/23 1,004,700
- --------------------------------------------------------------------------------------------
Total PAC IOs
(Cost-- $3,791,549) 3,878,504
============================================================================================
PAC POs -- 2.3%
2,200,000 Chase Mortgage Finance Corp., Series 1998-S2, Class A1,
6.500% due 7/25/28 2,217,446
1,100,000 FHLMC, Series 2061, Class PH, 6.000% due 5/15/16 1,108,250
350,552 FNMA, Series 1997-32, Class AP, zero coupon due 5/25/18 340,035
- --------------------------------------------------------------------------------------------
Total PAC POs
(Cost-- $3,644,568) 3,665,731
============================================================================================
TOTAL FIXED RATE COLLATERALIZED
MORTGAGE OBLIGATIONS
(Cost-- $17,575,383) 19,005,293
============================================================================================
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- 3.0%
526,585 FHLMC Fifteen Year, 9.000% due 11/1/05 531,030
2,852,546 FNMA Ten Year, 6.000% due 1/1/04(*) 2,866,951
1,258,170 FNMA Thirty Year, 8.500% due 12/1/10(*) 1,316,360
- --------------------------------------------------------------------------------------------
TOTAL FIXED RATE MORTGAGE
PASS-THROUGH SECURITIES
(Cost-- $4,648,477) 4,714,341
============================================================================================
ASSET-BACKED SECURITIES -- 25.6%
1,700,000 Brazos Student Loan Finance Corp., Series 1995-B, Class A4,
5.490% due 12/1/25+ 1,678,750
939,395 Centex Home Equity, Series 1998-2, Class A6,
5.192% due 7/25/28+ 924,280
1,100,000 Contimortgage Home Equity Loan Trust, Series 1997-5,
Class A4, 6.580% due 6/15/19 1,107,172
Countrywide Home Equity:
1,147,766 Series 1997-D, Class A, 5.478% due 12/15/23+ 1,131,099
1,458,495 Series 1998-A, Class A, 5.468% due 3/15/24+ 1,437,070
772,882 Franchise Loan Trust, Series 1998-I, Class A1,
6.240% due 7/15/04 @ 775,054
</TABLE>
See Notes to Financial Statements.
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Smith Barney Adjustable Rate Government Income Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) November 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
============================================================================================
<S> <C> <C>
ASSET-BACKED SECURITIES -- 25.6% (continued)
$ 1,175,000 Green Tree Home Improvement Loan Trust, Series 1998-D,
Class HIA4, 6.200% due 6/15/29 $ 1,174,789
857,716 Heller Financial, Series 1998-1, Class A, 6.120% due 7/15/24 @+ 846,995
3,011,188 IFC SBA Loan-Backed Adjustable Rate Certificate, Series 1997-1,
Class A, 6.500% due 1/15/24 @ 2,993,302
934,522 IMC Home Equity Loan Trust, Series 1997-5, Class A1,
6.510% due 2/20/06 934,093
1,500,000 IMPAC Secured Assets CMN Owner Trust, Series 1998-1, Class A3,
6.520% due 8/25/10 1,503,570
1,157,269 Missouri Higher Education Loan Authority, Series 1997,
Class P, 5.180% due 7/25/08 # 1,133,036
The Money Store Business Loan Backed Certificates:
1,836,646 Series 1997-1, Class A, 6.399% due 4/15/28++ 1,827,464
1,178,276 Series 1997-2, Class A, 6.300% due 2/15/29++ 1,170,182
2,500,000 The Money Store Home Equity Trust, Series 1998-A, Class AH3,
6.175% due 8/15/12 2,498,875
1,391,639 The Money Store Residential Trust, Series 1998-I, Class A1,
6.405% due 3/15/06 1,391,209
2,494,045 Navistar Financial Corp. Owner Trust, Series 1998-A, Class A,
5.940% due 11/15/04 2,511,204
1,425,000 Newcourt Equipment Trust Securities, Series 1998-1, Class A1,
5.240% due 12/20/02 1,422,777
1,143,049 PBG Equipment Trust, Series 1A, Class A, 6.270% due 1/20/12 @ 1,146,627
1,500,000 PMC Capital Limited Partnership, Series 1998-1, Class A,
7.000% due 4/1/21 @++ 1,500,000
1,439,141 PMC Capital SBA Loan-Backed Adj. Rate Certificate,
Series 1997-1, Class A, 6.100% due 9/15/23 @++ 1,430,147
SMS Student Loan Trust:
1,484,547 Series 1994-A, Class A2, 6.012% due 7/25/11+ 1,480,836
1,800,000 Series 1997-A, Class A, 5.160% due 10/27/25 # 1,720,692
Standard Credit Card Master Trust:
2,000,000 Series 1994-4, Class A, 8.250% due 11/7/03(*) 2,157,780
1,075,000 Series 1995-3, Class A, 7.850% due 2/7/02(*) 1,112,045
2,024,178 SWB Loan-Backed Certificates, Series 1997-1, Class A,
6.350% due 8/15/22 @+ 2,010,273
1,826,479 TMS SBA Loan Trust, Series 1997-1, Class A,
6.238% due 1/25/25++ 1,815,063
- --------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost-- $47,882,396) 40,834,384
============================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) November 30, 1998
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY OBLIGATIONS -- 3.5%
$ 4,500,000 U.S. Treasury Note, 4.500% due 9/30/00(*) $ 4,494,240
975,000 U.S. Treasury Note, 6.500% due 8/31/01(*) 1,021,157
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost-- $5,519,427) 5,515,397
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $159,479,002**) $159,223,263
================================================================================
(*) Security segregated by custodian for reverse repurchase agreements and/or
futures contract commitments.
@ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
++ Variable rate security -- rate resets quarterly.
+ Variable rate security -- rate resets monthly.
# 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 Index 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
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) November 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost-- $159,479,002) $159,223,263
Cash 125,363
Interest receivable 1,082,529
Receivable for Fund shares sold 409,513
- ---------------------------------------------------------------------------------------------
Total Assets 160,840,668
- ---------------------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreement (Note 6) 41,861,000
Payable for securities purchased 7,159,458
Investment advisory fees payable 39,482
Interest payable 25,837
Distribution fees payable 19,146
Dividends payable 18,517
Administration fees payable 16,354
Payable to broker - variation margin 15,969
Accrued expenses 82,340
- ---------------------------------------------------------------------------------------------
Total Liabilities 49,238,103
- ---------------------------------------------------------------------------------------------
Total Net Assets $111,602,565
=============================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 11,414
Capital paid in excess of par value 118,878,337
Overdistributed net investment income (469,262)
Accumulated net realized loss on security transactions and futures contracts (6,579,387)
Net unrealized depreciation on investments and futures contracts (238,537)
- ---------------------------------------------------------------------------------------------
Total Net Assets $111,602,565
=============================================================================================
Shares Outstanding:
Class A 10,216,803
- ---------------------------------------------------------------------------------------------
Class B 223,379
- ---------------------------------------------------------------------------------------------
Class I 974,214
- ---------------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $9.78
- ---------------------------------------------------------------------------------------------
Class B (*) $9.76
- ---------------------------------------------------------------------------------------------
ClassI (and redemption price) $9.80
=============================================================================================
</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.
- --------------------------------------------------------------------------------
14 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1998
INVESTMENT INCOME:
Interest $4,357,563
Less: Interest expense (Note 6) (970,216)
- -------------------------------------------------------------------------------
Total Investment Income 3,387,347
- -------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 411,108
Investment advisory fees (Note 2) 225,338
Administration fees (Note 2) 112,669
Audit and legal fees 31,030
Shareholder and system servicing fees 28,388
Registration fees 17,500
Trustees' fees 8,773
Custody fees 5,715
Shareholder communication fees 1,290
Other 778
- -------------------------------------------------------------------------------
Total Expenses 842,589
- -------------------------------------------------------------------------------
Net Investment Income 2,544,758
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FUTURES CONTRACTS (NOTES
3 AND 10):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (14,327)
Futures contracts 214,966
- -------------------------------------------------------------------------------
Net Realized Gain 200,639
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Futures Contracts:
Beginning of period 530,014
End of period (238,537)
- -------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (768,551)
- -------------------------------------------------------------------------------
Net Loss on Investments and Futures Contracts (567,912)
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $1,976,846
===============================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1998 (unaudited) and the Year Ended May
31, 1998
<TABLE>
<CAPTION>
November 30 May 31
=========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,544,758 $ 5,848,012
Net realized gain 200,639 20,674
Increase (decrease) in net unrealized appreciation (768,551) 551,495
- -----------------------------------------------------------------------------------------
Increase in Net Assets From Operations 1,976,846 6,420,181
- -----------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (2,933,791) (6,060,510)
Capital -- (116,163)
- -----------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (2,933,791) (6,176,673)
- -----------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares 177,369,200 197,511,799
Net asset value of shares issued for
reinvestment of dividends 2,659,090 5,547,069
Cost of shares reacquired (180,195,916) (220,235,590)
- -----------------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (167,626) (17,176,722)
- -----------------------------------------------------------------------------------------
Decrease in Net Assets (1,124,571) (16,933,214)
NET ASSETS:
Beginning of period 112,727,136 129,660,350
- -----------------------------------------------------------------------------------------
End of period(*) $111,602,565 $112,727,136
=========================================================================================
(*) Includes overdistributed net investment income of: $(469,262) $(80,229)
=========================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Cash Flows (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1998
NET INCREASE IN CASH:
Cash Flows Used by Operating and Investing Activities:
Interest received $ 4,624,922
Operating expenses paid (940,959)
Sale of short-term securities 3,165,000
Purchases of long-term securities, net (148,414,997)
Proceeds from disposition of long-term securities and paydowns 130,391,582
Payments from futures transactions, net 214,966
- --------------------------------------------------------------------------------
Net Cash Flows Used By Operating and Investing Activities (11,457,319)
- --------------------------------------------------------------------------------
Cash Flows Provided by Financing Activities:
Proceeds from shares sold 182,110,194
Payments on shares redeemed (180,525,212)
Cash dividends paid to shareholders(*) (328,244)
Decrease in reverse repurchase agreements outstanding 11,538,000
Interest expense (1,212,056)
- --------------------------------------------------------------------------------
Net Cash Flows Provided By Financing Activities 11,582,682
- --------------------------------------------------------------------------------
Net Increase in Cash 125,363
Cash -- Beginning of Period 0
- --------------------------------------------------------------------------------
Cash-- End of Period $ 125,363
================================================================================
RECONCILIATION OF INCREASE IN NET ASSETS FROM
OPERATIONS TO NET CASH FLOWS PROVIDED BY OPERATING
AND INVESTING ACTIVITIES:
Increase in Net Assets From Operations $ 1,976,846
- --------------------------------------------------------------------------------
Increase in investments (21,276,043)
Decrease in variation margin 19,469
Increase in interest receivable (230,474)
Decrease in other assets 21,579
Increase in payable for securities purchased 7,159,458
Decrease in accrued expenses and other liabilities (98,370)
Interest expense 970,216
- --------------------------------------------------------------------------------
Total Adjustments (13,434,165)
- --------------------------------------------------------------------------------
Net Cash Flows Used By Operating and Investing Activities $(11,457,319)
================================================================================
(*) Exclusive of dividend reinvestment of $2,659,090.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 17
<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. At May 31, 1998, reclassifications
were made to the Fund's capital accounts to reflect permanent book/tax
differences and income and gains available for distributions under income tax
regulations. Accordingly, a portion of overdistributed net investment income
amounting to $31,701 was 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"), 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.
- --------------------------------------------------------------------------------
18 1998 Semi-Annual Report to Shareholders
<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.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to that
date, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as a member of the selling group.
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 the purchase of
a previously held fund (held by the shareholder prior to exchange into this
Fund) and declines thereafter by 1.00% per year until no CDSC is incurred. For
the six months ended November 30, 1998, CDSCs paid to SB for Class B shares were
approximately $1,000.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B, 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 and B 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, 1998, total Distribution Plan fees incurred were:
Class A Class B Class I
================================================================================
Distribution Plan Fees $397,153 $8,255 $5,700
================================================================================
All officers and one Trustee of the Fund are employees of SSB.
3. Investments
During the six months ended November 30,1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
paydowns and short-term securities) were as follows:
================================================================================
Purchases $157,196,458
- --------------------------------------------------------------------------------
Sales 105,935,127
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At November 30, 1998, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $338,986
Gross unrealized depreciation (594,725)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(255,739)
================================================================================
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 and accretion of income recognized on investment securities.
5. Repurchase Agreements
The Fund purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day) at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts equal to the repurchase price.
6. Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreement transactions for leveraging
purposes. A reverse repurchase agreement involves a sale by the Fund of
securities that it holds with an agreement by the Fund to 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.
- --------------------------------------------------------------------------------
20 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At November 30, 1998, the Fund had the following reverse repurchase agreements
outstanding:
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===========================================================================================
<S> <C> <C>
$16,335,000 Reverse Repurchase Agreement with Morgan Stanley Securities,
dated 11/30/98 bearing 5.250% to be repurchased at $16,537,486
on 2/23/99, collateralized by: $4,342,885 FHLMC One Year CMT
ARM, 8.169% due 1/1/27; $3,326,523 FHLMC Six Month LIBOR,
8.750% due 11/1/26; $4,520,290 FHLMC One Month LIBOR, 7.829%
due 6/1/25; $4,928,777 FHLMC One Year CMT ARM, 8.477% due
12/1/26. $16,335,000
13,385,000 Reverse Repurchase Agreement with Morgan Stanley Securities,
dated 11/24/98 bearing 5.120% to be repurchased
at $13,560,135 on 2/24/99, collateralized by: $2,990,608
FNMA One Year CMT ARM, 7.034% due 8/1/23; $5,598,594
GNMA II One Year CMT ARM, 6.875% due 3/20/21; $2,663,362
FNMA One Year CMT ARM, 6.805% due 5/1/25; $2,866,951
FNMA Ten Year, 6.000% due 1/1/04; $1,316,360
FNMA Thirty Year, 8.500% due 12/1/10. 13,385,000
4,511,250 Reverse Repurchase Agreement with Lehman Brothers Securities,
dated 11/25/98 bearing 4.650% to be repurchased
at $4,519,408 on 12/9/98, collateralized by: $4,494,240
U.S. Treasury Note, 4.500% due 9/30/00. 4,511,250
3,751,000 Reverse Repurchase Agreement with Goldman Sachs Securities,
dated 11/25/98 bearing 5.400% to be repurchased
at $3,801,639 on 2/23/99, collateralized by: $3,924,250
GNMA II One Year CMT ARM, 6.625% due 7/20/27. 3,751,000
3,135,000 Reverse Repurchase Agreement with Morgan Stanley Securities,
dated 11/24/98 bearing 5.170% to be repurchased
at $3,176,420 on 2/24/99, collateralized by: $3,325,163
FNMA 11th COFI, 6.153% due 10/1/19. 3,135,000
743,750 Reverse Repurchase Agreement with Aubrey Lanston Securities,
dated 11/30/98 bearing 5.050% to be repurchased
at $745,211 on 12/14/98, collateralized by: $1,021,157
U.S. Treasury Note, 6.500% due 8/31/01. 743,750
- -------------------------------------------------------------------------------------------
TOTAL REVERSE REPURCHASE AGREEMENTS $41,861,000
===========================================================================================
</TABLE>
During the six months ended November 30,1998,the maximum and average amount of
reverse repurchase agreements outstanding at month ends were as follows:
================================================================================
Maximum amount outstanding $44,789,000
- --------------------------------------------------------------------------------
Average amount outstanding $33,896,286
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Interest rates ranged from 4.45% to 5.68% during the year. Total market value of
the collateral for the reverse repurchase agreements is $45,319,160.
Interest expense for the six months ended November 30,1998 on borrowings by the
Fund under reverse repurchase agreements totalled $970,216.
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 received on the
sale, will generate income for the Fund exceeding the yield on the securities
sold.
At November 30, 1998, 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.
At November 30, 1998, 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 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.
- --------------------------------------------------------------------------------
22 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
As of November 30, 1998, the Fund had no open purchased put or call option
contracts.
When the 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, 1998, 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).
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
At November 30, 1998, 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 12/98 13 $1,514,805 $1,547,406 $32,601
Future contracts to sell:
U.S. 5 Year Note 12/98 49 5,539,210 5,554,609 (15,399)
- --------------------------------------------------------------------------------------
Net Unrealized Gain $17,202
======================================================================================
</TABLE>
11. Capital Loss Carryforward
As of May 31, 1998, the Fund had, for Federal income tax purposes, approximately
$6,653,000 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 2005
================================================================================
Carryforward Amounts $5,227,000 $570,000 $856,000
================================================================================
12. Shares of Beneficial Interest
At November 30, 1998, 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 shares are available for
purchase to certain 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, 1998, total paid-in capital amounted to the following for each
class:
Class A Class B Class I
================================================================================
Total Paid-in Capital $107,038,290 $2,276,245 $9,575,216
================================================================================
- --------------------------------------------------------------------------------
24 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1998 May 31, 1998
---------------------- ---------------------
Shares Amount Shares Amount
==========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 17,108,993 $ 168,481,905 17,994,228 $ 177,671,959
Shares issued on reinvestment 253,310 2,492,549 535,558 5,286,112
Shares redeemed (18,071,524) (177,920,695) (20,181,967) (199,250,209)
- ------------------------------------------------------------------------------------------
Net Decrease (709,221) $ (6,946,241) (1,652,181) $ (16,292,138)
==========================================================================================
Class B
Shares sold 104,023 $ 1,024,344 1,510,009 $ 14,871,528
Shares issued on reinvestment 4,905 48,156 11,333 111,706
Shares redeemed (98,876) (970,406) (1,654,704) (16,295,462)
- ------------------------------------------------------------------------------------------
Net Increase (Decrease) 10,052 $ 102,094 (133,362) $ (1,312,228)
==========================================================================================
Class I
Shares sold 797,939 $ 7,862,951 501,868 $ 4,952,454
Shares issued on reinvestment 12,044 118,385 14,785 146,158
Shares redeemed (132,422) (1,304,815) (465,215) (4,600,254)
- ------------------------------------------------------------------------------------------
Net Increase 677,561 $ 6,676,521 51,438 $ 498,358
==========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended May 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1998(1)(2) 1998 1997 1996 1995(2) 1994
=========================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $9.86 $9.84 $9.84 $9.88 $9.78 $9.96
- -----------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.22 0.49 0.43 0.56 0.47 0.37
Net realized and unrealized
gain (loss) (0.08) 0.04 0.08 (0.04) 0.13 (0.17)
- -----------------------------------------------------------------------------------------
Total Income From Operations 0.14 0.53 0.51 0.52 0.60 0.20
- -----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.22) (0.50) (0.46) (0.56) (0.49) (0.38)
Net realized gains -- -- -- -- (0.01) --
Capital -- (0.01) (0.05) -- -- --
- -----------------------------------------------------------------------------------------
Total Distributions (0.22) (0.51) (0.51) (0.56) (0.50) (0.38)
- -----------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.78 $9.86 $9.84 $9.84 $9.88 $9.78
- -----------------------------------------------------------------------------------------
Total Return 1.84%++ 5.57% 5.31% 5.48% 6.39% 2.05%
- -----------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $100 $108 $124 $156 $174 $284
- -----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 4.50%+ 4.94% 4.42% 5.66% 4.94% 3.72%
Interest expense 1.72+ 1.77 1.40 1.52 0.87 0.78
Other expenses 1.52+ 1.57 1.69 1.58 1.60 1.53
- -----------------------------------------------------------------------------------------
Portfolio Turnover Rate 76% 242% 288% 273% 524% 525%
=========================================================================================
</TABLE>
(1) For the six months ended November 30, 1998 (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.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
26 1998 Semi-Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended May 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1998(1)(2) 1998 1997 1996 1995(2) 1994
=============================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $9.84 $9.82 $9.84 $9.88 $9.78 $9.96
- ---------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.22 0.49 0.39 0.56 0.47 0.37
Net realized and unrealized
gain (loss) (0.04) 0.04 0.10 (0.04) 0.13 (0.17)
- ---------------------------------------------------------------------------------------------
Total Income From Operations 0.18 0.53 0.49 0.52 0.60 0.20
- ---------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.50) (0.46) (0.56) (0.49) (0.38)
Net realized gains -- -- -- -- (0.01) --
Capital -- (0.01) (0.05) -- -- --
- ---------------------------------------------------------------------------------------------
Total Distributions (0.26) (0.51) (0.51) (0.56) (0.50) (0.38)
- ---------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.76 $9.84 $9.82 $9.84 $9.88 $9.78
- ---------------------------------------------------------------------------------------------
Total Return 1.81%++ 5.56% 5.10% 5.48% 6.39% 2.05%
- ---------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $2,180 $2,099 $3,406 $5,712 $4,521 $8,422
- ---------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 4.45%+ 5.03% 4.32% 5.64% 4.92% 3.68%
Interest expense 1.72+ 1.77 1.40 1.52 0.87 0.78
Other expenses 1.55+ 1.63 1.71 1.60 1.63 1.57
- ---------------------------------------------------------------------------------------------
Portfolio Turnover Rate 76% 242% 288% 273% 524% 525%
=============================================================================================
</TABLE>
(1) For the six months ended November 30, 1998 (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.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 27
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout the year
ended May 31, except where noted:
Class I Shares 1998(1)(2) 1998 1997(3)
================================================================================
Net Asset Value, Beginning of Period $9.87 $9.85 $9.79
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.21 0.55 0.10
Net realized and unrealized gain (loss) (0.00) 0.04 0.02
- --------------------------------------------------------------------------------
Total Income from Operations 0.21 0.59 0.12
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (0.56) (0.06)
Capital -- (0.01) (0.00)(*)
- --------------------------------------------------------------------------------
Total Distributions (0.28) (0.57) (0.06)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $9.80 $9.87 $9.85
- --------------------------------------------------------------------------------
Total Return 2.20%++ 6.12% 1.20%++
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $9,543 $2,928 $2,416
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 4.83%+ 5.45% 5.60%+
Interest expense 1.72+ 1.77 1.40+
Other expenses 1.02+ 1.07 1.10+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 76% 242% 288%
================================================================================
(1) For the six months ended November 30, 1998 (unaudited).
(2) For the period from April 18, 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 1998 Semi-Annual Report to Shareholders
<PAGE>
SalomonSmithBarney
------------------
A member of citigroup[LOGO]
Trustees Distributor
Allan J. Bloostein CFBDS, Inc.
Martin Brody
Dwight B. Crane Custodian
Robert A. Frankel PNC Bank, N.A.
William R. Hutchinson
Heath B. McLendon, Chairman Shareholder
Servicing Agent
Charles F. Barber, Emeritus First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
Officers
Heath B. McLendon
President and
Chief Executive Officer
This report is submitted for the general
Lewis E. Daidone information of the shareholders of Smith
Senior Vice President Barney Adjustable Rate Government Income
and Treasurer Fund. It is not authorized for
distribution to prospective investors
Thomas M. Reynolds unless accompanied or preceded by a
Controller current Prospectus for the Fund, which
contains information concerning the
Christina T. Sydor Fund's investment policies and expenses
Secretary as well as other pertinent information.
Investment Adviser Salomon Smith Barney is a service mark
Smith Barney Strategy Advisers Inc. of Salomon Smith Barney Inc.
Administrator Smith Barney
Mutual Management Corp. Adjustable Rate
Government Income Fund
Sub-Investment Adviser 388 Greenwich Street, MF-2
BlackRock Financial New York, New York 10013
Management Inc.
345 Park Avenue www.smithbarney.com
New York, New York 10154
FD0301 1/99
