<PAGE>
[LOGO OF SMITH BARNEY MUTUAL FUNDS]
SMITH BARNEY ADJUSTABLE
RATE GOVERNMENT
INCOME FUND
STYLE PURE SERIES
ANNUAL REPORT
MAY 31, 2000
[LOGO OF SMITH BARNEY MUTUAL FUNDS]
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
<PAGE>
Smith Barney Adjustable Rate
Government Income Fund
--------------------------------------------------------------------------------
The Smith Barney Adjustable Rate Government Income Fund ("Fund") seeks to
provide high current income and to limit the degree of fluctuation of its net
asset value resulting from movements in interest rates. The Fund will invest
principally in adjustable rate securities and U.S. government securities.
Smith Barney Adjustable Rate Government
Income Fund Average Annual Total Returns
May 31, 2000
Without Sales Charges(1)
-----------------------------------------------------
Class A Class B Class I
================================================================================
One-Year 3.98% 3.86% 4.58%
--------------------------------------------------------------------------------
Five-Year 4.92 4.86 N/A
--------------------------------------------------------------------------------
Since Inception+ 4.64 4.66 5.40
================================================================================
With Sales Charges(2)
-----------------------------------------------------
Class A Class B Class I
================================================================================
One-Year 3.98% (1.06)% 4.58%
--------------------------------------------------------------------------------
Five-Year 4.92 4.70 N/A
--------------------------------------------------------------------------------
Since Inception+ 4.64 4.66 5.40
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. Class B shares reflect the deduction of a 5.00%
CDSC, which applies if shares are redeemed within one year from purchase.
Thereafter, the CDSC declines by 1.00% per year until no CDSC is incurred.
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 the original cost.
+ Inception dates for Class A, B and I shares are June 22, 1992, November 6,
1992 and April 18, 1997, respectively.
--------------------------------------------------------------------------------
FUND HIGHLIGHT
--------------------------------------------------------------------------------
While investing in bonds has recently been a challenge for investors due to the
rise in interest rates during the past year, the managers believe the market
conditions may improve over the near term and they feel the Federal Reserve
Board's monetary actions may ultimately slow economic conditions and make bonds
more appealing to many investors over time. (Of course, no guarantees can be
given that this in fact will occur.)
--------------------------------------------------------------------------------
NASDAQ SYMBOL
--------------------------------------------------------------------------------
Class A ARMGX
Class B ARMBX
Class I ARMZX
--------------------------------------------------------------------------------
WHAT'S INSIDE
--------------------------------------------------------------------------------
Shareholder Letter.......................................................... 1
Historical Performance...................................................... 3
Smith Barney Adjustable Rate Government Income Fund at a Glance............. 5
Schedule of Investments..................................................... 6
Statement of Assets and Liabilities......................................... 10
Statement of Operations..................................................... 11
Statements of Changes in Net Assets......................................... 12
Statement of Cash Flows..................................................... 13
Notes to Financial Statements............................................... 14
Financial Highlights........................................................ 20
Independent Auditors' Report................................................ 23
Tax Information............................................................. 24
<PAGE>
--------------------------------------------------------------------------------
Shareholder Letter
--------------------------------------------------------------------------------
[PHOTO]
Heath B. McLendon
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, 2000. In this report,
we have summarized the prevailing economic and market conditions and outlined
the investment team's portfolio strategy.1
Performance Update
The Fund's investment objective is to seek high current income and limit the
degree of fluctuation of its net asset value ("NAV") resulting from movements in
interest rates. The Fund seeks to achieve these objectives by investing
primarily in adjustable rate mortgage-backed securities ("ARMs"), U.S.
government securities and asset-backed securities. The Fund calculates its NAV
daily and reports the NAV of Class A shares in national newspapers under the
heading Smith Barney Funds A as "AdjGvA."
As of May 31, 2000, the Fund's Class A share NAV was $9.62. For the 12-month
period ended May 31, 2000, the Fund's Class A shares posted a total return of
3.98% without the effects of sales charges. In comparison, the Merrill Lynch 1-3
Year Treasury Index2 returned 4.16% and the Lipper Inc. U.S. Government 1-Year
Treasury Bill Index returned 5.51% for the same period. (Lipper, Inc. is an
independent fund-tracking organization.)
Bond Market Update
The Federal Reserve Board ("Fed") raised interest rates seven times for a total
of 175 basis points3 during the reporting period. Furthermore, the Federal Open
Market Committee ("FOMC")4, led by Alan Greenspan indicated at its last meeting
that it would implement more rate increases in the months to come, if necessary.
In addition, the plan by the U.S. Treasury to buyback more than $30 billion of
its long-term debt obligations has led to reduced supply in the market.
As such, the price of longer-term bonds increased in relation to their
shorter-term counterparts, resulting in an inverted yield curve. (The yield
curve is a graphical depiction of the relationship between the yield on bonds of
the same credit quality but different maturities.) Instead of a "normal" yield
curve, with yields rising steadily along with the maturity of U.S. Treasury
bonds, the highest yields were for shorter-term bonds. At the end of the
reporting period, the yield of the two-year Treasury was 6.89%. In comparison,
the yield of the ten-year Treasury was 6.44%.
Mortgage-backed securities outperformed the broader domestic investment grade5
bond markets during the period, as the Lehman Brothers Mortgage Bond Index6
posted a total return of 1.25% in comparison with the 2.11% return of the Lehman
Brothers Aggregate Bond Index7 during the reporting period. In the view of
BlackRock Financial Management ("BlackRock"), the Fund's sub-investment adviser,
pass-through securities are presently overpriced.
1 The information provided represents the opinion of the manager and is not
intended to be a forecast of future results. Further, there is no assurance
that certain securities will remain in or out of the portfolio.
2 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. An investor cannot invest directly in an index.
3 A basis point is 0.01% or one one-hundredth of a percent.
4 The FOMC is the committee that sets interest rate and credit policies for
the Federal Reserve System, the United States' central bank.
5 Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody's
Investors Service Inc. or AAA, AA, A, and BBB by Standard & Poor's Ratings
Group, or that have an equivalent rating by any nationally recognized
statistical rating organization or are determined by the manager to be of
equivalent quality.
6 The Lehman Brothers Mortgage Bond Index is a broad measure of the
performance of mortgage-backed bonds in the U.S. market. An investor cannot
invest directly in an index.
7 The Lehman Brothers Aggregate Bond Index is a broad measure of the
performance of taxable bonds in the U.S. market, with maturities of at
least one year. An investor cannot invest directly in an index.
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 1
<PAGE>
Investment Strategy
As previously noted, the Fund seeks to provide high current income and to limit
the degree of fluctuation of its NAV resulting from movements in interest rates.
The Fund uses a "targeted duration" approach that strives for a dollar-weighted
average life (or period until next interest rate reset date) between one and
three years. (Duration is a rough measure of the price sensitivity of a fixed
income security relative to a given change in interest rates.) The result may be
a fund whose NAV performance is similar to that of a one- or two-year U.S.
Treasury security. Changes in the prices and yields of these U.S. 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 usually
affect the Fund's NAV.
The Fund's assets are actively managed based on the relative value analysis of
individual securities and sectors of the Fund's subadviser. In searching for
relative value opportunities, the BlackRock team targets securities and market
sectors within the short duration market that have underperformed and may have
strong potential for price appreciation. (Of course, there is no guarantee that
these objectives will be achieved.)
During the reporting period, the Fund bought Student Loan Marketing Association
("SLMA") and Government National Mortgage Association ("GNMA") securities. GNMAs
have recently come down in price due in large part to investor uncertainty in
the one-year Collateralized Mortgage Obligtation ("CMO")8 market. The BlackRock
team continues to think that floating-rate mortgages and Small Business
Administration loans represent good investment opportunities due to their
compelling yield potential and potentially strong credit quality, and the Fund
added to its holdings opportunistically in these areas during the period.
Market Outlook
While investing in bonds has recently been a challenge for investors due to the
rise in interest rates during the past year, the managers believe the market
conditions may improve over the near term and they feel the Fed's monetary
actions may ultimately slow economic conditions and make bonds more appealing to
many investors over time. (Of course, no guarantees can be given that this in
fact will occur.)
Thank you for your investment in the Smith Barney Adjustable Rate Government
Income Fund. We look forward to continuing to helping you pursue your financial
goals in the new century.
Sincerely,
/s/ HEATH B. MCLENDON
HEATH B. MCLENDON
Chairman
June 14, 2000
----------
8 CMO is a mortgage-backed bond that separates mortgage pools into different
maturity classes, called tranches.
--------------------------------------------------------------------------------
2 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
Historical Performance -- Class A Shares
------------------------------------------------------------------------------------------------------
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>
5/31/00 $ 9.75 $9.62 $0.49 $0.00 $0.02 3.98%
------------------------------------------------------------------------------------------------------
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 $3.80 $0.01 $0.11
======================================================================================================
<CAPTION>
------------------------------------------------------------------------------------------------------
Historical Performance -- Class B Shares
------------------------------------------------------------------------------------------------------
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>
5/31/00 $9.74 $9.60 $0.49 $0.00 $0.02 3.86%
------------------------------------------------------------------------------------------------------
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 $3.61 $0.01 $0.11
======================================================================================================
<CAPTION>
------------------------------------------------------------------------------------------------------
Historical Performance -- Class I Shares
------------------------------------------------------------------------------------------------------
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>
5/31/00 $9.78 $9.66 $0.54 $0.00 $0.02 4.58%
------------------------------------------------------------------------------------------------------
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 $1.70 $0.00 $0.06
======================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 3
<PAGE>
--------------------------------------------------------------------------------
Average Annual Total Returns
--------------------------------------------------------------------------------
Without Sales Charges(1)
--------------------------------------
Class A Class B Class I
================================================================================
Year Ended 5/31/00 3.98% 3.86% 4.58%
--------------------------------------------------------------------------------
Five Years Ended 5/31/00 4.92 4.86 N/A
--------------------------------------------------------------------------------
Inception* through 5/31/00 4.64 4.66 5.40
================================================================================
With Sales Charges(2)
--------------------------------------
Class A Class B Class I
================================================================================
Year Ended 5/31/00 3.98% (1.06)% 4.58%
--------------------------------------------------------------------------------
Five Years Ended 5/31/00 4.92 4.70 N/A
--------------------------------------------------------------------------------
Inception* through 5/31/00 4.64 4.66 5.40
================================================================================
--------------------------------------------------------------------------------
Cumulative Total Returns
--------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (Inception* through 5/31/00) 43.39%
--------------------------------------------------------------------------------
Class B (Inception* through 5/31/00) 41.15
--------------------------------------------------------------------------------
Class I (Inception* through 5/31/00) 17.92
================================================================================
(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.
--------------------------------------------------------------------------------
4 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund at a Glance (unaudited)
--------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of the Smith Barney
Adjustable Rate Government Income Fund vs. Lipper U.S. Government 1-Year
Treasury Bill Index+
--------------------------------------------------------------------------------
June 1992 -- May 2000
[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
5/98 13,228 13,561
5/99 13,791 14,139
5/31/2000 14,339 14,837
+ 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, 2000, compared to the Lipper, 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. An investor may not invest directly in an index. 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.
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.
Portfolio Breakdown* As of May 31, 2000
--------------------------------------------------------------------------------
[GRAPH]
63.2% Adjustable Rate Mortgage-Backed
Securities
20.6% Asset-Backed Securities
8.6% Fixed Rate Mortgage Pass-Through
Securities
4.3% Fixed Rate Collateralized Mortgage
Obligations
3.3% U.S. Treasury Obligations
* As a percentage of total investments.
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 5
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===============================================================================================
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 63.2%
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 53.1%
<S> <C> <C>
Federal Home Loan Mortgage Corporation (FHLMC) -- 29.4%
$ 4,129,501 FHLMC Multi ARM, 6.702% due 7/1/01 (a) $ 4,081,764
1,912,314 FHLMC Six Month LIBOR, 8.363% due 10/1/26 1,951,765
1,849,911 FHLMC Six Month LIBOR, 8.259% due 7/1/27 1,882,284
6,153,991 FHLMC Five Year CMT ARM, 7.854% due 8/1/25 (a) 6,173,253
8,516,439 FHLMC Thirty Year CMT Hybrid ARM, 6.958% due 12/1/26 (a) 8,480,510
1,273,995 FHLMC Thirty Year CMT Hybrid ARM, 6.906% due 7/1/27 (a) 1,266,428
8,136,457 FHLMC Thirty Year CMT Hybrid ARM, 6.964% due 7/1/27 (a) 8,094,473
6,122,142 FHLMC Thirty Year CMT Hybrid ARM, 6.753% due 1/1/28 (a) 6,052,312
1,350,257 FHLMC Thirty Year CMT Hybrid ARM, 6.761% due 8/1/29 1,357,641
5,920,149 FHLMC Strip, Series 19, Class F, 6.067% due 6/1/28 (a) 5,895,166
-----------------------------------------------------------------------------------------------
Total Federal Home Loan Mortgage Corporation
(Cost -- $45,517,014) 45,235,596
===============================================================================================
Federal National Mortgage Association (FNMA) -- 11.9%
609,715 FNMA Six Month CD ARM, 7.944% due 6/1/24 620,385
5,323,754 FNMA Six Month CMT ARM, 7.995% due 7/1/24 (a) 5,410,266
1,667,198 FNMA One Year CMT ARM, 7.373% due 4/1/20 1,682,828
1,281,907 FNMA One Year CMT ARM, 7.445% due 4/1/20 1,305,392
1,856,992 FNMA One Year CMT ARM, 7.306% due 8/1/23 1,877,512
1,126,160 FNMA One Year CMT ARM, 7.257% due 6/1/25 (a) 1,136,363
3,973,468 FNMA One Year CMT ARM, 7.370% due 8/1/27 (a) 4,024,527
820,759 FNMA One Year CMT ARM, 7.495% due 2/1/28 826,914
1,395,876 FNMA Three Year CMT ARM, 7.633% due 9/1/21 1,417,107
-----------------------------------------------------------------------------------------------
Total Federal National Mortgage Association
(Cost -- $18,415,179) 18,301,294
===============================================================================================
Government National Mortgage Association (GNMA)-- 11.8%
319,076 GNMA II One Year CMT ARM, 7.375% due 3/20/17 (a) 319,548
2,075,897 GNMA II One Year CMT ARM, 6.375% due 6/20/17 (a) 2,078,284
3,685,318 GNMA II One Year CMT ARM, 7.375% due 3/20/21 (a) 3,690,457
1,188,777 GNMA II One Year CMT ARM, 7.125% due 10/20/22 (a) 1,187,362
2,648,148 GNMA II One Year CMT ARM, 7.125% due 12/20/22 (a) 2,645,023
898,163 GNMA II One Year CMT ARM, 7.375% due 1/20/23 (a) 899,466
3,516,435 GNMA II One Year CMT ARM, 6.375% due 5/20/23 3,509,859
1,317,262 GNMA II One Year CMT ARM, 6.375% due 6/20/23 (a) 1,318,737
2,601,838 GNMA II One Year CMT ARM, 7.375% due 1/20/24 2,600,253
-----------------------------------------------------------------------------------------------
Total Government National Mortgage Association
(Cost -- $18,409,058) 18,248,989
===============================================================================================
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost -- $82,341,251) 81,785,879
===============================================================================================
</TABLE>
See Notes to Financial Statements
--------------------------------------------------------------------------------
6 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
=====================================================================================================================
<S> <C> <C>
NON-AGENCY ADJUSTABLE RATE MORTGAGE OBLIGATIONS -- 10.1%
$ 1,515,442 Bank One Mortgage Backed Pass Through, Series 2000-2,
Class 2A, 7.020% due 3/15/30 $ 1,527,278
590,664 Franchise Loan Trust, Series 1998-I, Class A1, 6.240% due 7/15/04 (b) 567,988
1,402,260 Independent National Mortgage Corp., Series 1995-E, Class A1, 7.319% due 4/25/25 1,402,260
3,535,541 Merit Securities Corp., Series 11, Class 2A2, 6.911% due 11/28/22 (a)(c) 3,530,025
MLCC Mortgage Investors, Inc.:
459,053 Series 1999-A, Class A, 6.903% due 3/15/25 (c) 459,626
1,041,930 Series 1997-B, Class A, 6.802% due 3/16/26 (c) 1,040,950
1,652,749 Sasco Floating Rate Commercial Mortgage, Series 1999-C3,
Class A, 7.009% due 11/20/01 (c) 1,654,302
1,100,300 Sequoia Mortgage Trust, Class A1, Series 2, 6.147% due 10/25/24 (c) 1,093,423
1,199,553 Structured Asset Securities Corp., Series 1998-C2A, Class B,
6.930% due 1/25/01 (b)(c) 1,199,181
3,173,523 Washington Mutual, Series 2000-1, Class A1, 6.900% due 6/25/24 (c) 3,173,524
---------------------------------------------------------------------------------------------------------------------
TOTAL NON-AGENCY ADJUSTABLE RATE MORTGAGE OBLIGATIONS
(Cost -- $15,698,316) 15,648,557
=====================================================================================================================
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost -- $98,039,567) 97,434,436
=====================================================================================================================
FIXED RATE COLLATERALIZED MORTGAGE OBLIGATIONS -- 4.3%
Non-Agency Fixed Rate CMOs -- 1.2%
357,395 DLJ Mortgage Acceptance Corp., Series 1995-CF2, Class A1A,
6.650% due 12/17/27 (b) 354,358
356,908 Union Planters Mortgage Finance Corp., Series 1998-1, Class A1,
6.350% due 1/25/28 (a) 353,282
Wilshire Funding Corp.:
388,697 Series 1997-WFC1, Class A1, 7.250% due 8/25/27 381,409
722,717 Series 1998-WFC2, Class A3, 7.000% due 12/28/37 712,555
---------------------------------------------------------------------------------------------------------------------
Total Non-Agency Fixed Rate CMOs
(Cost -- $1,827,811) 1,801,604
=====================================================================================================================
PAC IOs -- 1.7%
21,370,167 First Union-Lehman Brothers, Series 1997-C1, Class IO,
yield to maturity 7.901% due 4/18/27 1,170,871
567,324 FNMA, Series 1993-101, Class A, yield to maturity 6.844% due 6/25/08 25,569
8,953,824 JP Morgan Commercial Mortgage Finance Corp., Series 1997-C5,
Class X, yield to maturity 8.211% due 9/15/29 (b) 591,579
25,094,100 LB Commercial Conduit Mortgage Trust, Series 1998-C4,
Class X, yield to maturity 9.290% due 9/15/23 853,199
---------------------------------------------------------------------------------------------------------------------
Total PAC IOs
(Cost -- $2,974,344) 2,641,218
=====================================================================================================================
</TABLE>
See Notes to Financial Statements
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 7
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
=====================================================================================================================
<S> <C> <C>
PAC POs -- 1.4%
$ 1,100,000 FHLMC, Series 2061, Class PH, 6.000% due 5/15/16 $ 1,071,829
1,122,507 FNMA, Series 1998-32, Class TB, 6.000% due 5/18/13 1,083,219
---------------------------------------------------------------------------------------------------------------------
Total PAC POs
(Cost -- $2,194,977) 2,155,048
=====================================================================================================================
TOTAL FIXED RATE COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost -- $6,997,132) 6,597,870
=====================================================================================================================
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- 8.6%
248,136 FHLMC Fifteen Year, 9.000% due 11/1/05 (a) 250,076
2,695,526 FHLMC Gold, 5.500% due 4/1/09 (a) 2,529,589
494,930 FHLMC Gold, 6.500% due 4/1/29 (a) 458,429
1,971,446 FHLMC Gold, 6.500% due 6/1/29 (a) 1,826,051
1,685,590 FNMA Ten Year, 6.000% due 1/1/04 (a) 1,620,274
1,272,979 FNMA Ten Year ARM, 8.000% due 8/1/09 (a) 1,263,826
1,771,688 FNMA Fifteen Year, 7.000% due 11/1/07 (a) 1,741,233
1,030,354 GNMA Ten Year, 6.000% due 12/15/08 (a) 981,247
1,302,140 GNMA Ten Year ARM, 7.000% due 10/15/09 (a) 1,272,438
1,308,763 GNMA Fifteen Year Platinum, 7.500% due 4/15/13 (a) 1,301,814
---------------------------------------------------------------------------------------------------------------------
TOTAL FIXED RATE MORTGAGE PASS-THROUGH SECURITIES
(Cost -- $13,442,765) 13,244,977
=====================================================================================================================
ASSET-BACKED SECURITIES -- 20.6%
1,705,000 Arcadia Automobile Receivables Trust, Series 1997-C, Class A5,
6.550% due 5/15/05 1,671,974
1,485,000 Brazos Student Loan Finance Corp., Series 1995-B, Class A4,
5.468% due 12/1/25 (c) 1,484,079
1,349,172 Business Loan Center, Series 1998-1, Class A, 6.750% due 4/2/25 (b) 1,350,022
1,400,000 Ford Credit Auto Owner Trust, Series 1999-C, Class A4, 6.080% due 9/16/02 (a) 1,379,434
660,591 Heller Financial, Series 1998-1, Class A, 6.541% due 7/15/24 (b)(c) 648,205
1,500,000 Huntington Auto Trust, Series 2000-A, Class A3, 7.330% due 7/15/04 1,492,260
1,850,200 Mellon Auto Grantor Trust, Series 2000-1, Class A, 7.180% due 10/15/06 1,838,636
2,547,292 Missouri Higher Education Loan Authority, Series 1997, Class P,
6.860% due 7/25/08 (d) 2,485,214
The Money Store Business Loan Backed Certificates:
1,313,469 Series 1997-1, Class A, 6.900% due 4/15/28 (e) 1,293,767
956,784 Series 1997-2, Class A, 6.800% due 2/15/29 (e) 944,824
1,750,000 Navistar Financial Corp. Owner Trust, Series 1999-A, Class A3, 5.950% due 4/15/03 1,717,730
961,287 Newcourt Equipment Trust Securities, Series 1998-1, Class A3,
5.240% due 12/20/02 947,916
768,102 PBG Equipment Trust, Series 1A, Class A, 6.270% due 1/20/12 (b) 736,902
1,232,137 PMC Capital Limited Partnership, Series 1998-1, Class A, 6.750% due 4/1/21 (b)(e) 1,232,138
798,117 PMC Capital SBA Loan-Backed Adjustable Rate Certificate,
Series 1997-1, Class A, 6.600% due 9/15/23 (e) 790,136
2,077,872 SBA Loan Backed Adjustable Rate Certificate, Series 1997-1,
Class A, 6.500% due 1/15/24 (e) 2,046,703
</TABLE>
See Notes to Financial Statements
--------------------------------------------------------------------------------
8 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Schedule of Investments (continued) May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==================================================================================================================
<S> <C> <C>
ASSET-BACKED SECURITIES -- 20.6% (continued)
$ 927,887 SFLC Inc., Series 1997-A, Class A3, 6.580% due 9/1/07 (d) $ 908,457
SLM Student Loan Trust:
1,100,000 Series 1999-3, Class A2, 6.470% due 7/25/12 (e) 1,097,336
1,400,000 Series 2000-1, Class A1L, 6.340% due 10/27/08 (e) 1,384,688
1,200,000 Series 2000-2, Class A1L, 6.406% due 7/25/08 (e) 1,175,808
1,198,935 SWB Loan-Backed Certificates, Series 1997-1, Class A, 6.850% due 8/15/22 (b)(e) 1,186,946
TMS SBA Loan Trust:
589,132 Series 1996-2, Class A, 6.275% due 4/15/24 (e) 583,241
1,310,315 Series 1997-1, Class A, 6.209% due 1/15/25 (e) 1,298,038
1,994,032 USAA Auto Loan Grantor Trust, Series 1991-1, Class A, 6.100% due 2/15/06 (a) 1,961,310
------------------------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $31,992,054) 31,655,764
==================================================================================================================
U.S. TREASURY OBLIGATIONS -- 3.3%
2,840,000 U.S. Treasury Notes, 6.500% due 2/28/02 2,826,283
285,000 U.S. Treasury Notes, 5.875% due 11/15/04 276,838
2,118,160 U.S. Treasury Notes, 3.625% due 1/15/08 (a) 2,039,343
------------------------------------------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost -- $5,145,239) 5,142,464
==================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $155,616,757*) $154,075,511
==================================================================================================================
</TABLE>
(a) Security is segregated by custodian for reverse repurchase agreements
and/or futures contracts.
(b) 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.
(c) Variable rate security -- rate resets monthly.
(d) Variable rate security -- rate resets weekly.
(e) Variable rate security -- rate resets quarterly.
* Aggregate cost for Federal income tax purposes is substantially the same.
Abbreviations used in the schedule:
------------------------------------------
ARM -- Adjustable Rate Mortgage
CD -- Certificate of Deposit
CMO -- Collateralized Mortgage Obligation
CMT -- Constant Maturity Treasury
CPI -- Consumer Price Index
IO -- Interest Only
LIBOR -- London Interbank Overnight Rate
PAC -- Planned Amortization Class
PO -- Principal Only
SBA -- Small Business Administration
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 9
<PAGE>
--------------------------------------------------------------------------------
Statement of Assets and Liabilities May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost -- $155,616,757) $154,075,511
Cash 202,810
Receivable for Fund shares sold 24,215,434
Receivable for securities sold 919,172
Interest receivable 1,165,366
----------------------------------------------------------------------------------------------
Total Assets 180,578,293
----------------------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreements (Note 6) 43,675,000
Payable for securities purchased 3,743,390
Payable for Fund shares purchased 359,842
Dividends payable 77,508
Interest payable 50,120
Investment advisory fees payable 47,012
Payable to broker - variation margin 45,628
Distribution fees payable 37,948
Administration fees payable 20,119
Deferred compensation payable 11,164
Accrued expenses 88,621
----------------------------------------------------------------------------------------------
Total Liabilities 48,156,352
----------------------------------------------------------------------------------------------
Total Net Assets $132,421,941
==============================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 13,751
Capital paid in excess of par value 141,024,090
Overdistributed net investment income (88,672)
Accumulated net realized loss on security transactions,
options and futures contracts (6,870,071)
Net unrealized depreciation on investments and futures contracts (1,657,157)
----------------------------------------------------------------------------------------------
Total Net Assets $132,421,941
==============================================================================================
Shares Outstanding:
Class A 10,190,746
-----------------------------------------------------------------------------------------
Class B 411,603
-----------------------------------------------------------------------------------------
Class I 3,148,378
=========================================================================================
Net Asset Value:
Class A (and redemption price) $9.62
-----------------------------------------------------------------------------------------
Class B * $9.60
-----------------------------------------------------------------------------------------
Class I (and redemption price) $9.66
==============================================================================================
</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.
--------------------------------------------------------------------------------
10 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations For the Year Ended May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest $10,219,575
Less: Interest expense (Note 6) (1,437,725)
----------------------------------------------------------------------------------------------------
Total Investment Income 8,781,850
----------------------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 868,274
Investment advisory fees (Note 2) 548,527
Administration fees (Note 2) 274,264
Registration fees 95,002
Audit and legal fees 71,309
Shareholder and system servicing fees 70,205
Shareholder communication fees 44,295
Trustees' fees 27,360
Custody 11,976
Other 12,124
----------------------------------------------------------------------------------------------------
Total Expenses 2,023,336
----------------------------------------------------------------------------------------------------
Net Investment Income 6,758,514
----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS AND FUTURES
CONTRACTS (NOTES 3, 9 AND 10):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (538,279)
Futures contracts 540,437
Options written 47,187
Options purchased (42,500)
----------------------------------------------------------------------------------------------------
Net Realized Gain 6,845
----------------------------------------------------------------------------------------------------
Change in Net Unrealized Depreciation of Investments and Futures Contracts:
Beginning of year (373,687)
End of year (1,657,157)
----------------------------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (1,283,470)
----------------------------------------------------------------------------------------------------
Net Loss on Investments, Options and Futures Contracts (1,276,625)
----------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 5,481,889
====================================================================================================
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 11
<PAGE>
--------------------------------------------------------------------------------
Statement of Changes in Net Assets For the Year Ended May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999
==============================================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 6,758,514 $ 5,137,904
Net realized gain 6,845 429,844
Increase in net unrealized depreciation (1,283,470) (903,701)
----------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 5,481,889 4,664,047
----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (6,939,255) (5,516,548)
Capital (319,174) (383,140)
----------------------------------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (7,258,429) (5,899,688)
----------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares 975,750,711 470,397,864
Net asset value of shares issued for reinvestment of dividends 6,185,978 5,255,979
Cost of shares reacquired (972,629,585) (462,253,961)
----------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 9,307,104 13,399,882
----------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets 7,530,564 12,164,241
NET ASSETS:
Beginning of year 124,891,377 112,727,136
----------------------------------------------------------------------------------------------------------------------------------
End of year* $ 132,421,941 $ 124,891,377
==================================================================================================================================
* Includes overdistributed net investment income of: $ (88,672) $ (60,564)
==================================================================================================================================
</TABLE>
See Notes to Financial Statements.
--------------------------------------------------------------------------------
2000 Annual Report to Shareholders 12
<PAGE>
--------------------------------------------------------------------------------
Statement of Cash Flows For the Year Ended May 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS USED BY OPERATING AND INVESTING ACTIVITIES:
Interest received $ 9,710,617
Operating expenses paid (1,929,613)
Purchases of short-term securities, net 19,370,637
Purchases of long-term securities, net (322,605,199)
Proceeds from disposition of long-term securities and paydowns 284,626,371
Payment from short sale transactions, net (86,561)
Proceeds from options transactions, net 4,687
Payment from futures transactions, net 540,437
--------------------------------------------------------------------------------------------------
Net Cash Flows Used By Operating and Investing Activities (10,368,624)
--------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from shares sold 958,467,401
Payments on shares redeemed (980,117,550)
Cash dividends paid to shareholders* (1,046,241)
Increase in reverse repurchase agreements outstanding 34,720,000
Interest expense (1,468,214)
--------------------------------------------------------------------------------------------------
Net Cash Flows Provided By Financing Activities 10,555,396
--------------------------------------------------------------------------------------------------
Net Increase in Cash 186,772
Cash, Beginning of Year 16,038
--------------------------------------------------------------------------------------------------
Cash, End of Year $ 202,810
==================================================================================================
RECONCILIATION OF INCREASE IN NET ASSETS FROM
OPERATIONS TO NET CASH FLOWS USED BY OPERATING
AND INVESTING ACTIVITIES:
Increase in Net Assets From Operations $ 5,481,889
--------------------------------------------------------------------------------------------------
Increase in investments (16,194,577)
Decrease in variation margin 47,925
Increase in interest receivable (522,356)
Decrease in other assets 37,585
Increase in receivable for securities sold (919,172)
Increase in payable for securities purchased 168,634
Increase in accrued expenses and other payables 93,723
Interest expense 1,437,725
--------------------------------------------------------------------------------------------------
Total Adjustments (15,850,513)
--------------------------------------------------------------------------------------------------
Net Cash Flows Used By Operating and Investing Activities $ (10,368,624)
==================================================================================================
</TABLE>
* Exclusive of dividend reinvestment of $6,185,978.
See Notes to Financial Statements.
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 13
<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, 2000, 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. 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
SSB Citi Fund Management LLC ("SSBC"), formerly known as SSBC Fund Management
Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), which, in
turn, is a subsidiary of Citigroup Inc. ("Citigroup"), 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.
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.
Effective October 1999, Citi Fiduciary Trust Company ("CFTC"), another
subsidiary of Citigroup, became the Fund's transfer agent and PFCP Global Fund
Services ("PFPC") became the Fund's sub-transfer agent. CFTC receives account
fees and asset-based fees that vary according to the size and type of account.
PFPC is responsible for shareholder recordkeeping and financial processing for
all shareholder accounts and is paid by CFTC. During the period October 1, 1999
through May 31, 2000, the Fund paid transfer agent fees of $36,801 to CFTC.
--------------------------------------------------------------------------------
14 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
CFBDS, Inc. ("CFBDS") acts as the Fund's distributor. Salomon Smith Barney Inc.
("SSB"), another subsidiary of SSBH, 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. In
addition, Class A shares have a 1.00% CDSC, which applies if redemption occurs
within the first year of purchase. This CDSC only applies to those purchases of
Class A shares which, when combined with current holdings of Class A shares,
equal or exceed $500,000 in the aggregate. These purchases do not incur an
initial sales charge. For the year ended May 31, 2000, CDSCs paid to SSB or
CFBDS for Class A and B shares were approximately $4,000 and 10,000,
respectively.
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, 2000,
total Distribution Plan fees incurred were:
Class A Class B Class I
================================================================================
Distribution Plan Fees $763,812 $24,354 $80,108
================================================================================
All officers and one Trustee of the Fund are employees of SSB.
3. Investments
During the year ended May 31, 2000, the aggregate cost of purchases and proceeds
from sales of investments (including maturities, but excluding paydowns and
short-term securities) were as follows:
================================================================================
Purchases $322,773,883
--------------------------------------------------------------------------------
Sales 251,773,938
================================================================================
At May 31, 2000, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 65,516
Gross unrealized depreciation (1,606,762)
--------------------------------------------------------------------------------
Net unrealized depreciation $(1,541,246)
================================================================================
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
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 15
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
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.
At May 31, 2000, the Fund had the following reverse repurchase agreements
outstanding:
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$17,542,000 Reverse Repurchase Agreement with Lehman Brothers, dated 5/23/00 bearing
6.560% to be repurchased at $17,637,896 on 6/23/00, collateralized by:
$4,081,764 FHLMC Multi ARM, 6.702% due 7/1/01; $8,480,510 FHLMC Thirty Year
CMT ARM, 6.958% due 12/1/26; $6,052,312 FHLMC Thirty Year CMT ARM,
6.753% due 1/1/28; $5,410,266 FNMA Six Month CMT ARM, 7.995% due 7/1/24. $17,542,000
2,060,000 Reverse Repurchase Agreement with Barclays Capital, dated 5/25/00 bearing
6.250% to be repurchased at $2,062,503 on 6/1/00, collateralized by
$2,039,343 U.S. Treasury-Note, 3.625% due 1/15/08. 2,060,000
12,785,000 Reverse Repurchase Agreement with Lehman Brothers, dated 5/25/00 bearing
6.560% to be repurchased at $12,817,616 on 6/8/00, collateralized by:
$2,529,589 FHLMC Gold, 5.500% due 4/1/09; $1,826,051 FHLMC Gold, 6.500% due 6/1/29;
$458,429 FHLMC Gold, 6.500% due 4/1/29; $250,076 FHLMC Fifteen Year, 9.000% due 11/1/05;
$1,741,233 FNMA Fifteen Year, 7.000% due 11/1/07; $620,385 FNMA Six Month CD ARM,
7.944% due 6/1/24; $1,263,826 FNMA Ten Year ARM, 8.000% due 8/1/09;
$1,301,814 GNMA Fifteen Year Platinum, 7.500% due 4/15/13; $981,247 GNMA Ten Year,
6.000% due 12/15/08; $1,272,438 GNMA Ten Year ARM, 7.000% due 10/15/09. 12,785,000
3,288,000 Reverse Repurchase Agreement with Lehman Brothers, dated 5/25/00 bearing 6.660%
interest to be purchased at $3,292,258 on 6/1/00, collateralized by:
$3,530,025 Merit Securities Corp., Series 11, Class 2A2, 6.911% due 11/28/22. 3,288,000
8,000,000 Reverse Repurchase Agreement with Lehman Brothers, dated 5/31/00 bearing
6.650% to be repurchased at $8,044,333 on 6/30/00, collateralized by:
$6,173,253 FHLMC Five Year CMT ARM, 7.854% due 8/1/25;
$8,094,473 FHLMC Thirty Year CMT ARM, 6.964% due 7/1/27. 8,000,000
-------------------------------------------------------------------------------------------------------------------------
Total Reverse Repurchase Agreements $43,675,000
=========================================================================================================================
During the year ended May 31, 2000, the maximum and average amount of reverse
repurchase agreements outstanding at month ends were as follows:
=========================================================================================================================
Maximum amount outstanding $53,877,569
-------------------------------------------------------------------------------------------------------------------------
Average amount outstanding $31,863,424
=========================================================================================================================
</TABLE>
Interest rates ranged from 4.45% to 6.66% during the year. Total market value of
the collateral for the reverse repurchase agreements is $56,107,034.
Interest expense for the year ended May 31, 2000 on borrowings by the Fund under
reverse repurchase agreements totalled $1,437,725.
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, 2000, the Fund had no open dollar roll transactions.
--------------------------------------------------------------------------------
16 2000 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, 2000, 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, 2000, the Fund had no purchased call or put 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.
The following covered call option transactions occurred during the year ended
May 31, 2000:
Number of
Contracts Premiums
================================================================================
Options written, outstanding
at May 31, 1999 0 $ 0
Options written during the
year ended May 31, 2000 40,000 47,188
Options expired (40,000) (47,188)
--------------------------------------------------------------------------------
Options written, outstanding
at May 31, 2000 0 $ 0
================================================================================
At May 31, 2000, the Fund did not hold any open written call option contracts.
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 17
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
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, 2000, the Fund had the following 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:
90-day Euro dollar 9/01 51 $11,808,189 $11,786,738 $ (21,451)
Futures contracts to sell:
U.S. 5 Year Note 9/00 72 6,997,430 7,026,750 (29,320)
U.S. 10 Year Note 6/00 51 4,879,469 4,944,609 (65,140)
---------------------------------------------------------------------------------------------------
Net Unrealized Loss $(115,911)
===================================================================================================
</TABLE>
11. Capital Loss Carryforward
At May 31, 2000, the Fund had, for Federal income tax purposes, approximately
$6,968,000 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 2008
================================================================================
Carryforward Amounts $5,203,000 $570,000 $856,000 $339,000
================================================================================
12. Shares of Beneficial Interest
At May 31, 2000, 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, 2000, total paid-in capital amounted to the following for each class:
Class A Class B Class I
================================================================================
Total Paid-in Capital $106,209,115 $4,075,399 $30,753,327
================================================================================
--------------------------------------------------------------------------------
18 2000 Annual Report to Shareholders
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements (continued)
--------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
May 31, 2000 May 31, 1999
----------------------------- ----------------------------
Shares Amount Shares Amount
===============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 92,526,301 $ 894,243,107 44,516,338 $ 436,543,260
Shares issued on reinvestment 463,664 4,481,900 486,309 4,768,104
Shares reacquired (92,817,202) (896,993,626) (45,910,688) (450,211,538)
-----------------------------------------------------------------------------------------------
Net Increase (Decrease) 172,763 $ 1,731,381 (908,041) $ (8,900,174)
===============================================================================================
Class B
Shares sold 523,502 $ 5,053,040 182,530 $ 1,790,348
Shares issued on reinvestment 15,774 152,084 9,608 94,027
Shares reacquired (319,677) (3,083,343) (213,461) (2,089,692)
-----------------------------------------------------------------------------------------------
Net Increase (Decrease) 219,599 $ 2,121,781 (21,323) $ (205,317)
===============================================================================================
Class I
Shares sold 7,874,201 $ 76,454,564 3,264,303 $ 32,064,256
Shares issued on reinvestment 159,997 1,551,994 40,183 393,848
Shares reacquired (7,472,344) (72,552,616) (1,014,615) (9,952,731)
-----------------------------------------------------------------------------------------------
Net Increase 561,854 $ 5,453,942 2,289,871 $ 22,505,373
===============================================================================================
</TABLE>
13. Subsequent Event
Effective June 5, 2000, the Board of Trustees of the Fund approved a
Distribution Agreement with SSB, replacing the Distribution Agreement with
CFBDS.
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 19
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights
--------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended May 31:
<TABLE>
<CAPTION>
Class A Shares 2000(1) 1999(1) 1998 1997 1996
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.75 $9.86 $9.84 $9.84 $9.88
--------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.46 0.45 0.49 0.43 0.56
Net realized and unrealized gain (loss) (0.08) (0.04) 0.04 0.08 (0.04)
--------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.38 0.41 0.53 0.51 0.52
--------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.49) (0.49) (0.50) (0.46) (0.56)
Capital (0.02) (0.03) (0.01) (0.05) --
-------------------------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.52) (0.51) (0.51) (0.56)
-------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.62 $9.75 $9.86 $9.84 $9.84
-------------------------------------------------------------------------------------------------------------
Total Return 3.98% 4.25% 5.57% 5.31% 5.48%
-------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $98 $98 $108 $124 $156
-------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 4.84% 4.55% 4.94% 4.42% 5.66%
Interest expense 1.03 1.80 1.77 1.40 1.52
Other expenses 1.61 1.52 1.57 1.69 1.58
Total expenses 2.64 3.32 3.34 3.09 3.10
Portfolio Turnover Rate 164% 155% 242% 288% 273%
=============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
--------------------------------------------------------------------------------
20 2000 Annual Report to Shareholders
<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 2000(1) 1999(1) 1998 1997 1996
============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.74 $9.84 $9.82 $9.84 $9.88
------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.48 0.45 0.49 0.39 0.56
Net realized and unrealized gain (loss) (0.11) (0.04) 0.04 0.10 (0.04)
------------------------------------------------------------------------------------------------------------
Total Income From Operations 0.37 0.41 0.53 0.49 0.52
------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.49) (0.48) (0.50) (0.46) (0.56)
Capital (0.02) (0.03) (0.01) (0.05) --
------------------------------------------------------------------------------------------------------------
Total Distributions (0.51) (0.51) (0.51) (0.51) (0.56)
------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.60 $9.74 $9.84 $9.82 $9.84
------------------------------------------------------------------------------------------------------------
Total Return 3.86% 4.30% 5.56% 5.10% 5.48%
------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,953 $1,871 $2,099 $3,406 $5,712
------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 4.93% 4.55% 5.03% 4.32% 5.64%
Interest expense 1.28 1.80 1.77 1.40 1.52
Other expenses 1.63 1.54 1.63 1.71 1.60
Total expenses 2.91 3.34 3.40 3.11 3.12
Portfolio Turnover Rate 164% 155% 242% 288% 273%
============================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 21
<PAGE>
--------------------------------------------------------------------------------
Financial Highlights (continued)
--------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended May 31:
<TABLE>
<CAPTION>
Class I Shares 2000(1) 1999(1) 1998 1997(2)
==================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.78 $9.87 $9.85 $9.79
--------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.52 0.45 0.55 0.10
Net realized and unrealized gain (loss) (0.08) 0.03 0.04 0.02
--------------------------------------------------------------------------------------------------
Total Income From Operations 0.44 0.48 0.59 0.12
--------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.54) (0.54) (0.56) (0.06)
Capital (0.02) (0.03) (0.01) (0.00)*
--------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.57) (0.57) (0.06)
--------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.66 $9.78 $9.87 $9.85
--------------------------------------------------------------------------------------------------
Total Return 4.58% 4.99% 6.12% 1.20%++
--------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $30,418 $25,298 $2,928 $2,416
--------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.38% 4.90% 5.45% 5.60%+
Interest expense 1.12 1.80 1.77 1.40+
Other expenses 1.10 1.03 1.07 1.10+
Total expenses 2.22 2.83 2.84 2.50+
Portfolio Turnover Rate 164% 155% 242% 288%
==================================================================================================
</TABLE>
(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.
--------------------------------------------------------------------------------
22 2000 Annual Report to Shareholders
<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, 2000, 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 five-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.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 2000, by correspondence with the custodian. As to
securities purchased or sold but not yet received or delivered, 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, 2000, 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 five-year period then ended,
in conformity with accounting principles generally accepted in the United States
of America.
[LOGO OF KPMG LLP]
New York, New York
July 13, 2000
--------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 23
<PAGE>
--------------------------------------------------------------------------------
Tax Information (unaudited)
--------------------------------------------------------------------------------
A total of 9.16% of the ordinary dividends paid by the Fund from net investment
income are derived from Federal obligations and may be exempt from taxation at
the state level.
--------------------------------------------------------------------------------
24 2000 Annual Report to Shareholders
<PAGE>
Smith Barney
Adjustable Rate
Government Income Fund
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
SSB Citi Fund Management LLC
Sub-Investment Adviser
BlackRock Financial Management Inc.
345 Park Avenue
New York, New York 10154
Distributor
CFBDS, Inc.
Custodian
PFPCTrust Company
Transfer Agent
Citi Fiduciary Trust Company
388 Greenwich Street, 22nd Floor
New York, New York 10013
Sub-Transfer Agent
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island 02940-9699
This report is submitted for the general information of the shareholders of
Smith Barney Adjustable Rate Government Income Fund, but it may also be used as
sales literature when preceded or accompanied by the current Prospectus, which
gives details about charges, expenses, investment objectives and operating
policies of the Fund. If used as sales material after August 31, 2000, this
report must be accompanied by performance information for the most recently
completed calendar quarter.
[LOGO OF SALOMON SMITH BARNEY]
Smith Barney Adjustable Rate
Government Income Fund
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com/mutualfunds
FD2224 7/00
