<PAGE>
[GRAPHIC]
Smith Barney
Adjustable Rate
Government
Income Fund
- --------------------------
ANNUAL REPORT
- --------------------------
May 31, 1999
Smith Barney Mutual Funds
<PAGE>
Smith Barney
Adjustable Rate [PHOTO]
Government Heath B. McLendon
Income Fund Chairman
Dear Shareholder:
We are pleased to present the annual report for the Smith Barney Adjustable Rate
Government Income Fund ("Fund") for the year ended May 31, 1999. 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 that follow. We hope you find this
report to be useful and informative.
Performance Update
The Adjustable Rate Government Income 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 changes in interest rates. The Fund aims to meet
these objectives by investing primarily in a portfolio of adjustable rate
mortgage-backed securities (ARMs), U.S. government securities and asset-backed
securities (ABS). Please note that the Fund calculates its NAV daily and the NAV
listing for its Class A shares appears in national newspapers under the heading
Smith Barney Funds A as "AdjGvA".
As of May 31, 1999, the Fund's Class A shares had an NAV of $9.75. For the
one-year period, the Fund's Class A shares posted a total return of 4.25%
without sales charges, underperforming the Merrill Lynch 1-3 Year Treasury
Index's return of 5.30%. (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.)
However, the Fund's performance was modestly higher than the Lipper U.S.
Government 1-Year Treasury Bill Index which posted a return of 4.22% over the
same period.
Bond Market Update
U.S. economic growth generally showed strength during the past twelve months,
spurred by investor confidence and three Federal Reserve Board ("Fed")
interest-rate cuts in the third quarter of 1998. Despite strong economic
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 1
<PAGE>
growth, inflation stayed surprisingly subdued until April, when the Consumer
Price Index ("CPI") rose 0.7% due to rising energy costs. On May 18, 1999, the
Fed announced that it had adopted a bias towards higher interest rates, citing a
concern that inflation might be accelerating.
Although yields at the end of the period are at similar levels to one year ago,
the past twelve months have seen two divergent stories in the U.S. Treasury
market, as interest rates rallied in the second half of 1998 before reversing in
1999. The impetus for the interest rate decline was the financial instability in
global markets, particularly Asia and Russia, which led to a flight-to-quality
to U.S. Treasury securities. This rally in the Treasury market pushed the yield
of the 30-year security under the 5.00% barrier to a historical low of 4.72% in
October. Since that point, rates have risen over 100 basis points, ending the
reporting period at 5.83% on June 9, 1999.
During the reporting period, spread products such as mortgages and asset-backed
securities modestly outperformed Treasuries, although they significantly
outperformed for the year to date in 1999 as interest rates have risen. For
example, the mortgages measured by the Lehman Brothers Mortgage Index posted a
4.88% total return for the one-year period ended May 31, 1999, as opposed to a
4.35% total return for the Lehman Brothers Treasury Index. So far in 1999,
however, the Lehman Brothers Mortgage Index has returned 1.32%, significantly
outperforming the negative 0.76% return for the Lehman Brothers Treasury Index.
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 that seeks a duration of approximately one year, resulting in
a fund whose NAV performance should be 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 portfolio is also a
factor affecting the Fund's NAV.
The Fund's assets are actively managed based on BlackRock's relative value
analysis of individual securities and sectors. In searching for relative value
opportunities, the BlackRock team targets securities and market sectors within
the short duration market that have underperformed and that they believe have
strong potential for price appreciation.
After finding value in the ARM and short fixed-rate mortgage markets during the
autumn of 1998, and significantly increasing exposure to these sectors, the
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2 1999 Annual Report to Shareholders
<PAGE>
general portfolio management theme during the latter stages of the reporting
period has been to reduce overall risk within the Fund. Specifically, the Fund
has lowered its spread risk by reducing its allocation to mortgage-backed
securities, principally in the ARM and CMO sectors.
As these sectors have outperformed comparable duration U.S. Treasuries during
1999, the Fund took advantage of the opportunity to realize gains by reducing
mortgage holdings and subsequently directing the proceeds into Treasuries.
Additionally, the Fund reduced its leverage during the period ending May 1999
with a modest cash position.
Market Outlook
BlackRock Financial Management Inc., the Fund's sub-investment advisor, expects
economic expansion to remain solid for the year, with annual Gross Domestic
Product growth softening only slightly from 3.0% to 3.5%. With the U.S. Treasury
curve currently reflecting the two Fed tightenings anticipated by the end of
1999, we believe rates should be range-bound until the economy shows significant
signs of slowing.
Asset-backed securities, which lagged the rallying Treasury market during 1998,
have outperformed comparable duration Treasuries in 1999 for the year to date.
The ABS market absorbed a large amount of supply in May, concentrated mostly in
autos, equipment loans and manufactured housing, which, in our view, indicates a
healthy market. BlackRock expects this outperformance to continue over the
balance of the year. Despite widening yield spreads during May, the team is also
positive on the mortgage-backed securities sector due to improving technicals,
specifically lower supply, and declining volatility.
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
June 9, 1999
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Smith Barney Adjustable Rate Government Income Fund 3
<PAGE>
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Historical Performance -- Class A Shares
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<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
5/31/99 $ 9.86 $ 9.75 $ 0.49 $ 0.00 $ 0.03 4.25%
- -----------------------------------------------------------------------------------------------
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 $ 3.31 $ 0.01 $ 0.09
===============================================================================================
</TABLE>
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Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
5/31/99 $ 9.84 $ 9.74 $ 0.48 $ 0.00 $ 0.03 4.30%
- -----------------------------------------------------------------------------------------------
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 $ 3.12 $ 0.01 $ 0.09
===============================================================================================
</TABLE>
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Historical Performance -- Class I Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===============================================================================================
<S> <C> <C> <C> <C> <C> <C>
5/31/99 $ 9.87 $ 9.78 $ 0.54 $ 0.00 $ 0.03 4.99%
- -----------------------------------------------------------------------------------------------
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 $ 1.16 $ 0.00 $ 0.04
===============================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
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4 1999 Annual Report to Shareholders
<PAGE>
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Average Annual Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
-------------------------------------
Class A Class B Class I
================================================================================
Year Ended 5/31/99 4.25% 4.30% 4.99%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/99 5.40 5.36 N/A
- --------------------------------------------------------------------------------
Inception* through 5/31/99 4.74 4.78 5.80
================================================================================
With Sales Charges(2)
-------------------------------------
Class A Class B Class I
================================================================================
Year Ended 5/31/99 4.25% (0.65)% 4.99%
- --------------------------------------------------------------------------------
Five Years Ended 5/31/99 5.40 5.20 N/A
- --------------------------------------------------------------------------------
Inception* through 5/31/99 4.74 4.78 5.80
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (Inception* through 5/31/99) 37.91%
- --------------------------------------------------------------------------------
Class B (Inception* through 5/31/99) 35.90
- --------------------------------------------------------------------------------
Class I (Inception* through 5/31/99) 12.75
================================================================================
(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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Smith Barney Adjustable Rate Government Income Fund 5
<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+
June 1992 -- May 1999
[LINE GRAPH]
Smith Barney Lipper U.S. Government 1-Year
Adjustable Rate Treasury
Government Income Fund 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
5/31/99 13,779 14,139
+ 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 May 31, 1999, 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.
- --------------------------------------------------------------------------------
6 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) May 31, 1999
- --------------------------------------------------------------------------------
Portfolio Breakdown
[PIE CHART]
Asset-Backed Securities 20.4%
Fixed Rate Collateralized Mortgage Obligations 12.5%
U.S. Treasury Obligations 6.0%
Fixed Rate Mortgage Pass-Through Securities 2.8%
Short-Term Investments 13.7%
Adjustable Rate Mortgage-Backed Securities 44.6%
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 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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Smith Barney Adjustable Rate Government Income Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
=====================================================================================================
<S> <C> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 44.6%
=====================================================================================================
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 37.7%
Federal Home Loan Mortgage Corporation (FHLMC) -- 6.3%
$ 2,477,701 FHLMC Multi ARM, 5.507% due 7/1/01* $ 2,466,873
780,758 FHLMC Six Month LIBOR, 7.260% due 10/1/26 791,985
796,106 FHLMC Six Month LIBOR, 7.217% due 7/1/27 808,048
4,608,259 FHLMC Strip, 5.894% due 6/1/28 4,608,259
- -----------------------------------------------------------------------------------------------------
Total Federal Home Loan Mortgage Corporation
(Cost -- $8,718,687) 8,675,165
=====================================================================================================
Federal National Mortgage Association (FNMA) -- 20.6%
2,717,804 FNMA 11th COFI, 6.024% due 10/1/19 2,736,503
1,555,854 FNMA One Year CMT ARM, 6.784% due 4/1/20 1,595,730
1,856,436 FNMA One Year CMT ARM, 6.992% due 4/1/20 1,888,348
2,484,487 FNMA One Year CMT ARM, 6.569% due 8/1/23 2,543,493
3,234,858 FNMA One Year CMT ARM, 7.038% due 7/1/24* 3,303,599
1,943,421 FNMA One Year CMT ARM, 6.837% due 5/1/25 1,962,856
3,000,560 FNMA One Year CMT ARM, 7.377% due 6/1/25* 3,023,065
5,828,098 FNMA One Year CMT ARM, 6.732% due 8/1/27* 5,930,090
2,699,993 FNMA One Year CMT ARM, 7.218% due 8/1/27* 2,747,243
1,720,435 FNMA One Year CMT ARM, 6.563% due 2/1/28 1,743,024
862,182 FNMA Six Month CD ARM, 6.908% due 6/1/24 874,580
- -----------------------------------------------------------------------------------------------------
Total Federal National Mortgage Association
(Cost -- $28,358,899) 28,348,531
=====================================================================================================
Government National Mortgage Association (GNMA) -- 10.8%
379,271 GNMA II One Year CMT ARM, 6.375% due 3/20/17* 388,278
2,499,294 GNMA II One Year CMT ARM, 6.875% due 6/20/17* 2,558,652
4,513,012 GNMA II One Year CMT ARM, 6.375% due 3/20/21* 4,620,196
1,408,063 GNMA II One Year CMT ARM, 6.875% due 4/20/22* 1,441,505
1,424,925 GNMA II One Year CMT ARM, 6.125% due 10/20/22* 1,453,423
1,909,328 GNMA II One Year CMT ARM, 6.125% due 11/20/22* 1,951,104
1,314,221 GNMA II One Year CMT ARM, 6.125% due 12/20/22* 1,341,333
1,112,030 GNMA II One Year CMT ARM, 6.375% due 1/20/23* 1,135,316
- -----------------------------------------------------------------------------------------------------
Total Government National Mortgage Association
(Cost -- $14,822,942) 14,889,807
=====================================================================================================
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost -- $51,900,528) 51,913,503
=====================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
=====================================================================================================
<S> <C> <C>
NON-AGENCY ADJUSTABLE RATE MORTGAGE OBLIGATIONS -- 6.9%
$ 1,190,989 Bayview Financial Acquistion Trust, Series 1998-B, Class A,
5.873% due 6/25/36@+ $ 1,190,989
715,546 Franchise Loan Trust, Series 1998-I, Class A1,
6.240% due 7/15/04@ 702,888
2,170,410 Independent National Mortgage Co., Series 1995-E, Class A1,
6.689% due 4/25/25 2,122,943
2,900,000 Merit Securities Corp., Series 11, Class 2A2,
5.218% due 11/28/22+ 2,897,274
1,319,018 Sequoia Mortgage Trust, Class A1, Series 2,
5.940% due 10/25/24+ 1,305,828
1,269,587 Structured Asset Securities Corp., Series 1998-C2A, Class B,
5.233% due 1/25/01@+ 1,265,220
- -----------------------------------------------------------------------------------------------------
TOTAL NON-AGENCY ADJUSTABLE RATE
MORTGAGE OBLIGATIONS
(Cost -- $9,598,974) 9,485,142
=====================================================================================================
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost -- $61,499,502) 61,398,645
=====================================================================================================
FIXED RATE COLLATERALIZED MORTGAGE OBLIGATIONS -- 12.5%
=====================================================================================================
Agency Fixed Rate CMOs -- 3.1%
2,000,000 FHLMC Series 2151, Class CP, 7.250% due 10/15/27 2,012,500
2,200,000 GNMA Series 1997-11, Class M, 8.000% due 5/16/24* 2,225,080
- -----------------------------------------------------------------------------------------------------
Total Agency Fixed Rate CMOs
(Cost -- $4,258,806) 4,237,580
=====================================================================================================
Non-Agency Fixed Rate CMOs -- 1.7%
713,378 Union Planters Mortgage Finance Corp.,
Series 1998-1, Class A1, 6.350% due 1/25/28* 718,058
Wilshire Funding Corp.:
764,928 Series 1997-WFC1, Class A1, 7.250% due 8/25/27 756,682
897,051 Series 1998-WFC2, Class A3, 7.000% due 12/28/37 887,237
- -----------------------------------------------------------------------------------------------------
Total Non-Agency Fixed Rate CMOs
(Cost -- $2,379,273) 2,361,977
=====================================================================================================
Stripped Pass-Through Securities -- 4.5%
545,226 FNMA Strips, Series D, Class 2, 11.000% due 4/1/09 594,465
1,739,653 FNMA Strips, Series F, Class 2, 11.500% due 5/1/09 1,915,236
1,220,501 FNMA Strips, Series G, Class 2, 11.500% due 3/1/09 1,336,827
2,129,245 FNMA Strips, Series I, Class 2, 11.500% due 4/1/09 2,328,861
- -----------------------------------------------------------------------------------------------------
Total Stripped Pass-Through Securities
(Cost -- $6,150,868) 6,175,389
=====================================================================================================
</TABLE>
See Notes to Financial Statements.
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Smith Barney Adjustable Rate Government Income Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
=====================================================================================================
<S> <C> <C>
PAC IOs -- 2.4%
$ 1,449,645 First Union-Lehman Brothers, Series 1997-C1, Class IO,
yield to maturity 15.312% due 4/18/27 $ 1,396,790
136,434 FNMA, Series 1993-101, Class A, yield to maturity
7.117% due 6/25/08 101,213
935,124 JP Morgan Commercial Mortgage Finance Corp., Series 1997-C5,
Class X, yield to maturity 8.490% due 9/15/29@ 947,655
977,103 LB Commercial Conduit Mortgage Trust, Series1998-C4,
Class X, yield to maturity 9.600% due 9/15/23 946,365
- -----------------------------------------------------------------------------------------------------
Total PAC IOs
(Cost -- $3,498,306) 3,392,023
=====================================================================================================
PAC POs -- 0.8%
1,100,000 FHLMC, Series 2061, Class PH, 6.000% due 5/15/16
(Cost -- $1,096,087) 1,091,783
=====================================================================================================
TOTAL FIXED RATE COLLATERALIZED
MORTGAGE OBLIGATIONS
(Cost -- $17,383,340) 17,258,752
=====================================================================================================
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- 2.8%
424,473 FHLMC Fifteen Year, 9.000% due 11/1/05 437,101
2,397,814 FNMA Ten Year, 6.000% due 1/1/04 2,393,330
1,045,765 FNMA Thirty Year, 8.500% due 12/1/10 1,093,808
- -----------------------------------------------------------------------------------------------------
TOTAL FIXED RATE MORTGAGE
PASS-THROUGH SECURITIES
(Cost -- $3,878,693) 3,924,239
=====================================================================================================
ASSET-BACKED SECURITIES -- 20.4%
1,475,081 Business Loan Center, Series 1998-1, Class A,
6.750% due 4/2/25@ 1,477,855
1,825,000 First Security Auto Owner Trust, Series 1999-2, Class A3,
6.000% due 10/15/03 1,821,003
1,175,000 Green Tree Home Improvement Loan Trust, Series 1998-D,
Class HIA4, 6.200% due 6/15/29 1,168,737
779,322 Heller Financial, Series 1998-1, Class A, 5.370% due 7/15/24@+ 768,607
2,667,699 IFC SBA Loan Backed Adjustable Rate Certificate, Series 1997-1,
Class A, 5.750% due 1/15/24@++ 2,646,038
1,500,000 MBNA Master Credit Card Trust, Series 1998-A, Class A,
5.012% due 8/15/05+ 1,498,590
1,029,838 Missouri Higher Education Loan Authority, Series 1997, Class P,
5.120% due 7/25/08# 1,019,220
The Money Store Business Loan Backed Certificates:
1,663,135 Series 1997-1, Class A, 5.650% due 4/15/28++ 1,658,976
1,138,441 Series 1997-2, Class A, 5.550% due 2/15/29++ 1,130,620
2,500,000 The Money Store Home Equity Trust, Series 1998-A, Class AH3,
6.175% due 8/15/12 2,504,250
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
=====================================================================================================
<S> <C> <C>
ASSET-BACKED SECURITIES -- 20.4% (continued)
$ 485,472 The Money Store Residential Trust, Series 1998-I, Class A1,
6.405% due 3/15/06 $ 485,015
1,750,000 Navistar Financial Corp., Owner Trust, Series 1999-A, Class A3,
5.950% due 4/15/03 1,745,625
1,425,000 Newcourt Equipment Trust Securities, Series 1998-1, Class A3,
5.240% due 12/20/02 1,413,187
1,029,437 PBG Equipment Trust, Series 1A, Class A, 6.270% due 1/20/12@ 1,016,086
1,385,599 PMC Capital Limited Partnership, Series 1998-1, Class A,
6.750% due 4/1/21@++ 1,385,599
1,266,961 PMC Capital SBA Loan-Backed Adjustable Rate Certificate,
Series 1997-1, Class A, 6.100% due 9/15/23@++ 1,270,129
1,075,000 Standard Credit Card Master Trust, Series 1995-3, Class A,
7.850% due 2/7/02 1,098,865
1,633,706 SWB Loan-Backed Certificates, Series 1997-1, Class A,
5.600% due 8/15/22@+ 1,624,524
TMS SBA Loan Trust:
772,094 Series 1996-2, Class A, 5.636% due 4/15/24++ 772,581
1,654,652 Series 1997-1, Class A, 5.538% due 1/15/25++ 1,646,379
- -----------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $28,244,182) 28,151,886
=====================================================================================================
U.S. TREASURY OBLIGATIONS -- 6.0%
1,337,492 U.S. Treasury Inflation Indexed Note, 3.625% due 7/15/02 1,336,302
800,000 U.S. Treasury Note, 6.500% due 8/31/01 817,112
2,400,000 U.S. Treasury Note, 6.250% due 2/28/02 2,440,176
415,000 U.S. Treasury Note, 5.500% due 3/31/03 412,423
2,943,000 U.S. Treasury Note, 8.750% due 11/15/08 3,273,823
- -----------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost -- $8,378,952) 8,279,836
=====================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
=====================================================================================================
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 13.7%
$ 18,875,000 Federal Home Loan Bank Discount Note, 4.720% due 6/1/99
(Cost -- $18,867,576) $ 18,867,576
- -----------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $138,252,245**) $137,880,934
=====================================================================================================
</TABLE>
* Security is 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.
Abbreviations used in the schedule:
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities May 31, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $138,252,245) $ 137,880,934
Cash 16,038
Receivable for Fund shares sold 6,932,124
Interest receivable 643,010
Receivable from broker - variation margin 2,297
Other receivables 37,585
- --------------------------------------------------------------------------------
Total Assets 145,511,988
- --------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreement (Note 6) 8,955,000
Payable for Fund shares purchased 7,847,807
Payable for securities purchased 3,574,756
Interest payable 80,609
Dividends payable 51,298
Investment advisory fees payable 36,871
Distribution fees payable 22,946
Administration fees payable 15,049
Accrued expenses 36,275
- --------------------------------------------------------------------------------
Total Liabilities 20,620,611
- --------------------------------------------------------------------------------
Total Net Assets $ 124,891,377
================================================================================
NET ASSETS:
Par value of shares of beneficial interest 12,797
Capital paid in excess of par value 132,037,114
Overdistributed net investment income (60,564)
Accumulated net realized loss from security
transactions and futures contracts (6,724,283)
Net unrealized depreciation on investments
and futures contracts (373,687)
- --------------------------------------------------------------------------------
Total Net Assets $ 124,891,377
================================================================================
Shares Outstanding:
Class A 10,017,983
- --------------------------------------------------------------------------------
Class B 192,004
- --------------------------------------------------------------------------------
Class I 2,586,524
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 9.75
- --------------------------------------------------------------------------------
Class B * $ 9.74
- --------------------------------------------------------------------------------
Class I (and redemption price) $ 9.78
================================================================================
* Redemption price is NAV of Class B shares reduced by a maximun 5.00% CDSC
if shares are redeemed within one year from initial purchase (See Note 2).
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended May 31, 1999
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 8,832,920
Less: Interest expense (Note 6) (2,024,812)
- --------------------------------------------------------------------------------
Total Investment Income 6,808,108
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 794,138
Investment advisory fees (Note 2) 445,192
Administration fees (Note 2) 222,596
Registration fees 77,954
Audit and legal 55,951
Shareholder and system servicing fees 46,484
Trustees' fees 18,053
Custody 9,836
- --------------------------------------------------------------------------------
Total Expenses 1,670,204
- --------------------------------------------------------------------------------
Net Investment Income 5,137,904
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (loss) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 10):
Realized Gain From:
Security transactions (excluding short-term securities) 286,960
Futures contracts 142,884
- --------------------------------------------------------------------------------
Net Realized Gain 429,844
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Futures Contracts:
Beginning of year 530,014
End of year (373,687)
- --------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (903,701)
- --------------------------------------------------------------------------------
Net Loss on Investments and Futures Contracts (473,857)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 4,664,047
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended May 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
=============================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 5,137,904 $ 5,848,012
Net realized gain 429,844 20,674
(Increase) decrease in net unrealized depreciation (903,701) 551,495
- ---------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 4,664,047 6,420,181
- ---------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (5,516,548) (6,060,510)
Capital (383,140) (116,163)
- ---------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (5,899,688) (6,176,673)
- ---------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares 470,397,864 197,511,799
Net asset value of shares issued
for reinvestment of dividends 5,255,979 5,547,069
Cost of shares reacquired (462,253,961) (220,235,590)
- ---------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions 13,399,882 (17,176,722)
- ---------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 12,164,241 (16,933,214)
NET ASSETS:
Beginning of year 112,727,136 129,660,350
- ---------------------------------------------------------------------------------------------
End of year* $ 124,891,377 $ 112,727,136
=============================================================================================
* Includes overdistributed net investment income of: $ (60,564) $ (80,229)
=============================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Statement of Cash Flows For the Year Ended May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOWS PROVIDED BY OPERATING AND INVESTING ACTIVITIES:
Interest received $ 10,073,861
Operating expenses paid (1,814,755)
Purchase of short-term securities, net (15,702,576)
Purchases of long-term securities, net (247,542,848)
Proceeds from disposition of long-term securities and paydowns 265,215,167
Proceeds from short sale transactions, net 7,859
Payment from futures transactions, net 142,884
- -------------------------------------------------------------------------------------
Net Cash Flows Provided By Operating and Investing Activities 10,379,592
- -------------------------------------------------------------------------------------
CASH FLOWS USED BY FINANCING ACTIVITIES:
Proceeds from shares sold 468,616,247
Payments on shares redeemed (454,735,450)
Cash dividends paid to shareholders* (664,471)
Decrease in reverse repurchase agreements outstanding (21,368,000)
Interest expense (2,211,880)
- -------------------------------------------------------------------------------------
Net Cash Flows Used By Financing Activities (10,363,554)
- -------------------------------------------------------------------------------------
Net Increase in Cash 16,038
Cash -- Beginning of Year 0
- -------------------------------------------------------------------------------------
Cash -- End of Year $ 16,038
=====================================================================================
RECONCILIATION OF INCREASE IN NET ASSETS FROM
OPERATIONS TO NET CASH FLOWS PROVIDED BY OPERATING
AND INVESTING ACTIVITIES:
Increase in Net Assets From Operations $ 4,664,047
- -------------------------------------------------------------------------------------
Decrease in investments 66,286
Decrease in variation margin 1,203
Decrease in interest receivable 209,045
Increase in other assets (16,006)
Increase in payable for securities purchased 3,574,756
Decrease in accrued expenses and other payables (144,551)
Interest expense 2,024,812
- -------------------------------------------------------------------------------------
Total Adjustments 5,715,545
- -------------------------------------------------------------------------------------
Net Cash Flows Provided By Operating and Investing Activities $ 10,379,592
=====================================================================================
</TABLE>
* Exclusive of dividend reinvestment of $5,255,979.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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, 1999, 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 $24,208 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
SSBC Fund Management Inc. ("SSBC"), formerly known as Mutual Management Corp., a
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as investment
adviser to the Fund. The Fund pays SSBC 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.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
SSBC 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. SSBC 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.
SSBC 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 year ended May 31, 1999, CDSCs paid to SSB or CFBDS for Class B shares were
approximately $4,000.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B, and 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 year ended May 31, 1999,
total Distribution Plan fees incurred were:
Class A Class B Class I
================================================================================
Distribution Plan Fees $758,225 $ 15,614 $ 20,299
================================================================================
All officers and one Trustee of the Fund are employees of SSB.
3. Investments
During the year ended May 31, 1999, the aggregate cost of purchases and proceeds
from sales of investments (including maturities, but excluding paydowns and
short-term securities) were as follows:
================================================================================
Purchases $251,117,604
- --------------------------------------------------------------------------------
Sales 213,339,541
================================================================================
- --------------------------------------------------------------------------------
18 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At May 31, 1999, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 267,496
Gross unrealized depreciation (638,807)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(371,311)
================================================================================
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 as
collateral under the reverse repurchase agreement.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At May 31, 1999, the Fund had the following reverse repurchase agreement
outstanding:
FACE
AMOUNT SECURITY VALUE
================================================================================
$8,955,000 Reverse Repurchase Agreement with Morgan
Stanley Securities, dated 3/24/99 bearing
4.910% to be repurchased at $9,067,365 on
6/24/99, collateralized by: $5,930,090
FNMA One Year CMT ARM, 6.732% due 8/1/27;
$2,747,243 FNMA One Year CMT ARM, 7.218%
due 8/1/27; $1,135,316 GNMA II One Year
CMT ARM, 6.375% due 1/20/23. $8,955,000
================================================================================
During the year ended May 31, 1999, the maximum and average amount of reverse
repurchase agreements outstanding at month ends were as follows:
================================================================================
Maximum amount outstanding $62,509,188
- --------------------------------------------------------------------------------
Average amount outstanding $35,005,591
================================================================================
Interest rates ranged from 4.45% to 5.68% during the year. Total market value of
the collateral for the reverse repurchase agreements is $9,812,649.
Interest expense for the year ended May 31, 1999 on borrowings by the Fund under
reverse repurchase agreements totalled $2,024,812.
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 May 31, 1999, the Fund had no open dollar roll transactions.
- --------------------------------------------------------------------------------
20 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 May 31, 1999, the Fund did not hold any 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.
At May 31, 1999, the Fund did not hold any 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.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 year ended May 31, 1999, 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).
At May 31, 1999, the Fund had the following open futures contracts:
<TABLE>
<CAPTION>
Expiration # of Basis Market Unrealized
Month/Year Contracts Value Value Loss
===============================================================================================
<S> <C> <C> <C> <C> <C>
Futures contracts to buy:
U.S. 10 Year Note 9/99 1 $ 112,563 $ 111,531 $ (1,032)
U.S. 5 Year Note 9/99 49 5,341,000 5,339,656 (1,344)
- -----------------------------------------------------------------------------------------------
Net Unrealized Loss $ (2,376)
===============================================================================================
</TABLE>
- --------------------------------------------------------------------------------
22 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
11. Capital Loss Carryforward
At May 31, 1999, the Fund had, for Federal income tax purposes, approximately
$6,629,000 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 $5,203,000 $ 570,000 $ 856,000
================================================================================
12. Shares of Beneficial Interest
At May 31, 1999, 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 May 31, 1999, total paid-in capital amounted to the following for each class:
Class A Class B Class I
================================================================================
Total Paid-in Capital $104,714,549 $ 1,961,221 $ 25,374,141
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 1999 May 31, 1998
-------------------------------- --------------------------------
Shares Amount Shares Amount
=============================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 44,516,338 $ 436,543,260 17,994,228 $ 177,671,959
Shares issued on reinvestment 486,309 4,768,104 535,558 5,286,112
Shares reacquired (45,910,688) (450,211,538) (20,181,967) (199,250,209)
- -------------------------------------------------------------------------------------------------------------
Net Decrease (908,041) $ (8,900,174) (1,652,181) $ (16,292,138)
=============================================================================================================
Class B
Shares sold 182,530 $ 1,790,348 1,510,009 $ 14,871,528
Shares issued on reinvestment 9,608 94,027 11,333 111,706
Shares reacquired (213,461) (2,089,692) (1,654,704) (16,295,462)
- -------------------------------------------------------------------------------------------------------------
Net Decrease (21,323) $ (205,317) (133,362) $ (1,312,228)
=============================================================================================================
Class I
Shares sold 3,264,303 $ 32,064,256 501,868 $ 4,952,454
Shares issued on reinvestment 40,183 393,848 14,785 146,158
Shares reacquired (1,014,615) (9,952,731) (465,215) (4,600,254)
- -------------------------------------------------------------------------------------------------------------
Net Increase 2,289,871 $ 22,505,373 51,438 $ 498,358
=============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
24 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended May 31:
<TABLE>
<CAPTION>
Class A Shares 1999(1) 1998 1997 1996 1995(1)
========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 9.86 $ 9.84 $ 9.84 $ 9.88 $ 9.78
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.45 0.49 0.43 0.56 0.47
Net realized and unrealized
gain (loss) (0.04) 0.04 0.08 (0.04) 0.13
- --------------------------------------------------------------------------------------------------------
Total Income From Operations 0.41 0.53 0.51 0.52 0.60
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.49) (0.50) (0.46) (0.56) (0.49)
Net realized gains -- -- -- -- (0.01)
Capital (0.03) (0.01) (0.05) -- --
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.52) (0.51) (0.51) (0.56) (0.50)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.75 $ 9.86 $ 9.84 $ 9.84 $ 9.88
- --------------------------------------------------------------------------------------------------------
Total Return 4.25% 5.57% 5.31% 5.48% 6.39%
- --------------------------------------------------------------------------------------------------------
Net Assets,
End of Year (millions) $ 98 $ 108 $ 124 $ 156 $ 174
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 4.55% 4.94% 4.42% 5.66% 4.94%
Interest expense 1.80 1.77 1.40 1.52 0.87
Other expenses 1.52 1.57 1.69 1.58 1.60
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 155% 242% 288% 273% 524%
========================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended May 31:
<TABLE>
<CAPTION>
Class B Shares 1999(1) 1998 1997 1996 1995(1)
========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 9.84 $ 9.82 $ 9.84 $ 9.88 $ 9.78
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.45 0.49 0.39 0.56 0.47
Net realized and unrealized
gain (loss) (0.04) 0.04 0.10 (0.04) 0.13
- --------------------------------------------------------------------------------------------------------
Total Income From Operations 0.41 0.53 0.49 0.52 0.60
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.48) (0.50) (0.46) (0.56) (0.49)
Net realized gains -- -- -- -- (0.01)
Capital (0.03) (0.01) (0.05) -- --
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.51) (0.51) (0.56) (0.50)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.74 $ 9.84 $ 9.82 $ 9.84 $ 9.88
- --------------------------------------------------------------------------------------------------------
Total Return 4.30% 5.56% 5.10% 5.48% 6.39%
- --------------------------------------------------------------------------------------------------------
Net Assets,
End of Year (000s) $ 1,871 $ 2,099 $ 3,406 $ 5,712 $ 4,521
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 4.55% 5.03% 4.32% 5.64% 4.92%
Interest expense 1.80 1.77 1.40 1.52 0.87
Other expenses 1.54 1.63 1.71 1.60 1.63
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 155% 242% 288% 273% 524%
========================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
- --------------------------------------------------------------------------------
26 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout the year
ended May 31:
Class I Shares 1999(1) 1998 1997(2)
================================================================================
Net Asset Value, Beginning of Year $ 9.87 $ 9.85 $ 9.79
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.45 0.55 0.10
Net realized and unrealized gain 0.03 0.04 0.02
- --------------------------------------------------------------------------------
Total Income From Operations 0.48 0.59 0.12
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.54) (0.56) (0.06)
Capital (0.03) (0.01) (0.00)*
- --------------------------------------------------------------------------------
Total Distributions (0.57) (0.57) (0.06)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.78 $ 9.87 $ 9.85
- --------------------------------------------------------------------------------
Total Return 4.99% 6.12% 1.20%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $25,298 $ 2,928 $ 2,416
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 4.90% 5.45% 5.60%+
Interest expense 1.80 1.77 1.40+
Other expenses 1.03 1.07 1.10+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 155% 242% 288%
================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(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.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
A total of 5.26% of the ordinary dividends paid by the Fund have been derived
from federal obligations and may be exempt from taxation at the state level.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 27
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of the
Smith Barney Adjustable Rate Government Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Smith Barney Adjustable Rate Government
Income Fund as of May 31, 1999, and the related statements of operations and
cash flows for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended and financial highlights for
each of the years in the four-year period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the year
ended May 31, 1995, were audited by other auditors whose report thereon, dated
July 26, 1995, expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1999, by correspondence with the custodian. As to securities purchased but
not yet received, we performed other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Smith Barney Adjustable Rate Government Income Fund as of May 31, 1999, the
results of its operations and cash flows for the year then ended, the changes in
its net assets for each of the years in the two-year period then ended and
financial highlights for each of the years in the four-year period then ended,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
July 15, 1999
- --------------------------------------------------------------------------------
28 1999 Annual Report to Shareholders
<PAGE>
SalomonSmithBarney
---------------------------
A member of citigroup[LOGO]
Trustees
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
William R. Hutchinson
Heath B. McLendon, Chairman
Charles F. Barber, Emeritus
Officers
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser
and Administrator
SSBC Fund Management Inc.
Sub-Investment Adviser
BlackRock Financial
Management Inc.
345 Park Avenue
New York, New York 10154
Distributor
CFBDS, Inc.
Custodian
PNC Bank, N.A.
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Adjustable Rate Government Income Fund. It is not authorized for
distribution to prospective investors unless accompanied or preceded by a
current Prospectus for the Fund, which contains information concerning the
Fund's investment policies and expenses as well as other pertinent information.
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney
Adjustable Rate
Government Income Fund
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD2224 7/99
