[GRAPHIC APPEARS HERE]
Smith Barney
Adjustable Rate
Government
Income Fund
- ------------------
SEMI-ANNUAL REPORT
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November 30, 1999
[LOGO OF SMITH BARNEY'S]
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
Smith Barney
Adjustable Rate
Government
Income Fund
[PHOTO]
HEATH B. MCLENDON
Chairman
Dear Shareholder:
We are pleased to present the semi-annual report for the Smith Barney Adjustable
Rate Government Income Fund ("Fund") for the period ended November 30, 1999. We
hope you find this report useful and informative. 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.
Performance Update
The Fund's investment objective is to seek high current income and to limit the
degree of fluctuation of its net asset value ("NAV") resulting from movements in
interest rates. The Fund 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 an NAV
daily and reports the Class A share's NAV listing in national newspapers under
the heading Smith Barney Funds A as "AdjGvA".
As of November 30, 1999, the Fund's Class A shares had an NAV of $9.65. For the
six-month period, the Fund's Class A shares posted a total return of 1.66%
without sales charges, underperforming the Merrill Lynch 1-3 Year U.S. Treasury
Index's return of 2.04%. (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.)
The Fund's performance was also slightly lower than the Lipper, Inc. U.S.
Government 1-Year Treasury Bill Index, which posted a return of 1.95% over the
same period. (Lipper, Inc. is a major fund-tracking organization.)
Bond Market Update
The U.S. economy continued to grow during the reporting period as U.S. exports
and manufacturing industries began to rebound. Additionally, consumer strength
remains an important contributor to U.S. economic growth as low unemployment and
rising personal income fuel domestic demand. Despite inflationary concerns as
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 1
measured by the Consumer Price Index ("CPI")1 and the Producer Price Index
("PPI")2 remaining relatively benign, the Federal Reserve Board ("Fed") adopted
a tightening bias and raised short-term interest rates in June, August and
November. Following the latest interest-rate hike, the Fed indicated that it
believed that growth "continues in excess of the economy's growth potential."
Nevertheless, the Fed adopted a neutral bias regarding inflation.
U.S. Treasury yields rose over the period, with the yield of the two-year
Treasury increasing by 60 basis points from 5.41% to 6.01%. (A basis point is a
measure of fluctuation of an investment equal to 1/100 of one percent or 0.01%.)
In the opinion of Blackrock Financial Management Inc. ("Blackrock"), the Fund's
sub-investment adviser, bond prices, which move inversely to their yields,
declined due to investor response to strong economic data and the overall
market's uncertainty regarding Fed policy. Recently, a weaker U.S. dollar,
higher commodity prices and strong gains in the U.S. and European stock markets
have also depressed overall demand for bonds.
Mortgage-backed securities outperformed the broader domestic investment-grade
fixed income markets during the period, as the Lehman Brothers Mortgage Bond
Index3 posted a 1.21% total return versus 0.72% for the Lehman Brothers
Aggregate Bond Index.4 Higher interest rates throughout the period helped to
alleviate prepayment fears and pushed mortgage rates above 8% for the first time
since 1997. Additionally, new mortgage issuance declined in response to lower
refinancing activity across all coupons, providing, in the investment team's
view, favorable technical conditions for mortgage-backed securities.
Investment Strategy
The investment objectives of the Fund are to seek to provide high current income
and to limit the degree of fluctuation of its net asset value resulting from
movements in interest rates.
Duration is a rough measure of the price sensitivity of a fixed income security
relative to a given change in interest rates. The Fund uses a "targeted
duration" approach which strives for a dollar weighted average life (or period
until next interest rate reset date) between one and three years, resulting in a
fund whose NAV performance should be similar to that of a one- or two-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 usually affect
the Fund's NAV.
- ------------
1 The CPI measures prices of a fixed basket of goods bought by a typical
consumer, including food, transportation, utilities, clothing, entertainment
and medical care.
2 The PPI measures the change in wholesale prices as released monthly by the
U.S. Bureau of Labor Statistics.
3 The Lehman Brothers Mortgage Bond Index is a broad measure of the performance
of mortgage-backed bonds in the U.S. market.
4 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.
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2 1999 Semi-Annual Report to Shareholders
The Fund's assets are actively managed based on the Fund's subadviser, 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 may have strong
potential for price appreciation. (Of course, past performance is not indicative
of future results.)
After generally maintaining the Fund's allocation to the ARMs sector steady for
nearly two years, the Fund became a net buyer of ARMs during the third quarter
of 1999 as that sector decreased in price due to higher new issuance. Higher
interest rates and a steeper yield curve have spurred the new issuance of ARMs,
with ARMs now accounting for nearly one third of all mortgage issuance versus
only 10% a year ago. (The yield curve measures the difference between short- and
long-term rates.) In particular, the BlackRock team found excellent relative
value in hybrid ARMs, which begin as fixed-rate mortgages and then convert into
adjustable-rate securities. The team continues to find floating-rate, asset-
backed securities and Small Business Administration Loans attractive due to
their compelling yields and potentially strong credit quality, and the Fund
added to its holdings in these areas.
Market Outlook
BlackRock expects that a neutral to negative stance on the bond market may be
warranted as economic pressures build. The combination of higher stock and
commodity prices, confident consumers, continued tightening of labor markets and
a global recovery that should boost U.S. exports and reduce the trade deficit
may lead to higher interest rates.
Despite the strength in the U.S. economy, increased productivity gains have so
far succeeded in offsetting inflationary pressures. For example, the PPI for
November 1999 rose marginally by 0.2%, illustrating that fierce competition is
keeping a lid on costs as the global economy continues to expand. However,
BlackRock believes that continued economic growth will invariably lead to
inflationary pressures and a possible rise in interest rates by the Fed in early
2000.
In closing, thank you for investing in the Smith Barney Adjustable Rate
Government Income Fund. We look forward to continuing to help you pursue your
financial goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
December 15,1999
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Smith Barney Adjustable Rate Government Income Fund 3
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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
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
======================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/99 $ 9.75 $9.65 $0.26 $0.00 $0.00 1.66%+
- --------------------------------------------------------------------------------------
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 $3.57 $0.01 $0.09
======================================================================================
</TABLE>
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Historical Performance -- Class B Shares
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<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
======================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/99 $ 9.74 $9.64 $0.26 $0.00 $0.00 1.66%+
- --------------------------------------------------------------------------------------
5/31/99 9.84 9.74 0.48 0.00 0.03 4.30
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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
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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 $3.38 $0.01 $0.09
======================================================================================
</TABLE>
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Historical Performance -- Class I Shares
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<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
======================================================================================
<S> <C> <C> <C> <C> <C> <C>
11/30/99 $ 9.78 $9.69 $0.28 $0.00 $0.00 2.00%+
- --------------------------------------------------------------------------------------
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 $1.44 $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 Semi-Annual Report to Shareholders
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Average Annual Total Returns
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Without Sales Charges(1)
----------------------------------
Class A Class B Class I
================================================================================
Six Months Ended 11/30/99+ 1.66% 1.66% 2.00%
- --------------------------------------------------------------------------------
Year Ended 11/30/99 4.07 4.15 4.79
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Five Years Ended 11/30/99 5.37 5.33 N/A
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Inception* through 11/30/99 4.64 4.68 5.46
================================================================================
With Sales Charges(2)
----------------------------------
Class A Class B Class I
================================================================================
Six Months Ended 11/30/99+ 1.66% (3.29)% 2.00%
- --------------------------------------------------------------------------------
Year Ended 11/30/99 4.07 (0.79) 4.79
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Five Years Ended 11/30/99 5.37 5.17 N/A
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Inception* through 11/30/99 4.64 4.68 5.46
================================================================================
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Cumulative Total Returns
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Without Sales Charges(1)
================================================================================
Class A (Inception* through 11/30/99) 40.20%
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Class B (Inception* through 11/30/99) 38.16
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Class I (Inception* through 11/30/99) 15.01
================================================================================
(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
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Historical Performance (unaudited)
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Growth of $10,000 Invested in Class A Shares of the
Smith Barney Adjustable Rate Government Income Fund vs.
Lipper U.S. Government 1-Year Treasury Bill Index+
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June 1992 -- November 1999
================================================================================
Label Smith Barney\Adjustable Rate U.S. 1-Year Treasury Bill
================================================================================
1 6/22/92 10,000 10,000
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2 5/93 10,389 10,306
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3 5/94 10,602 10,691
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4 5/95 11,280 11,329
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5 5/96 11,898 11,927
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6 5/97 12,530 12,587
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7 5/98 13,228 13,561
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8 5/31/99 13,972 14,139
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9 11/30/99 14,020 14,415
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+ Hypothetical illustration of $10,000 invested in Class A shares at
inception on June 22, 1992, assuming reinvestment of dividends and capital
gains, if any, at net asset value through November 30, 1999, 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.
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6 1999 Semi-Annual Report to Shareholders
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Portfolio Highlights (unaudited) Novemeber 30, 1999
- --------------------------------------------------------------------------------
Portfolio Breakdown*
[PIE CHART]
Asset-Backed Securities 22.7%
Fixed Rate Collateralized Mortgage Obligations 8.9%
U.S. Treasury Obligations 3.9%
Fixed Rate Mortgage Pass-Through Securities 3.6%
Short-Term Investments and Options Purchased 5.0%
Adjustable Rate Mortgage-Backed Securities 55.9%
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.
- -----------
* As a percentage of total investments.
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Smith Barney Adjustable Rate Government Income Fund 7
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Schedule of Investments (unaudited) November 30, 1999
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FACE
AMOUNT SECURITY VALUE
================================================================================
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 55.9%
================================================================================
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 49.0%
Federal Home Loan Mortgage Corporation (FHLMC) -- 17.7%
$ 4,129,501 FHLMC Multi ARM, 5.945% due 7/1/01 (a) $ 4,083,044
2,021,570 FHLMC Six Month LIBOR, 7.504% due 10/1/26 2,062,001
1,049,537 FHLMC Six Month LIBOR, 7.376% due 7/1/27 1,067,904
584,524 FHLMC One Year CMT ARM, 6.709% due 3/1/27 584,524
6,871,992 FHLMC Thirty Year CMT ARM, 6.958% due
12/1/26 (a) 6,897,762
5,990,676 FHLMC Thirty Year CMT ARM, 6.963% due
7/1/27 (a) 6,019,671
5,015,454 FHLMC Thirty Year CMT ARM, 6.759% due
1/1/28 (a) 5,010,740
6,524,133 FHLMC Strip, 5.653% due 6/1/28 6,483,357
- --------------------------------------------------------------------------------
Total Federal Home Loan Mortgage Corporation
(Cost -- $32,308,202) 32,209,003
================================================================================
Federal National Mortgage Association (FNMA) -- 22.8%
2,445,683 FNMA 11th COFI, 5.750% due 10/1/19 (a) 2,387,598
4,500,656 FNMA 11th COFI, 6.062% due 1/1/29 4,423,290
746,691 FNMA Six Month CD ARM, 7.476% due 6/1/24 757,891
1,399,272 FNMA One Year CMT ARM, 6.616% due 4/1/20 1,427,747
1,808,647 FNMA One Year CMT ARM, 6.869% due 4/1/20 1,835,777
2,061,002 FNMA One Year CMT ARM, 6.306% due 8/1/23 2,090,557
5,972,613 FNMA One Year CMT ARM, 7.239% due 7/1/24 (a) 6,065,965
1,513,400 FNMA One Year CMT ARM, 7.016% due 5/2/25 1,516,711
2,258,967 FNMA One Year CMT ARM, 7.102% due 6/1/25 (a) 2,287,205
4,637,563 FNMA One Year CMT ARM, 6.717% due 8/1/27 (a) 4,716,077
2,179,009 FNMA One Year CMT ARM, 7.035% due 8/1/27 (a) 2,228,036
1,383,802 FNMA One Year CMT ARM, 6.605% due 2/1/28 1,393,322
1,594,877 FNMA One Year CMT ARM, 5.808% due 3/1/29 1,549,524
5,600,194 FNMA One Year CMT ARM, 5.830% due 4/1/29 (a) 5,398,531
1,410,305 FNMA Three Year CMT ARM, 7.632% due 9/1/21 1,443,757
2,061,713 FNMA Thirty Year Assorted ARM, 6.086% due 5/1/29 2,009,057
- --------------------------------------------------------------------------------
Total Federal National Mortgage Association
(Cost -- $41,746,158) 41,531,045
================================================================================
Government National Mortgage Association (GNMA) -- 8.5%
336,201 GNMA II One Year CMT ARM, 6.375% due 3/20/17 (a) 338,675
2,276,827 GNMA II One Year CMT ARM, 6.375% due 6/20/17 (a) 2,293,221
3,993,367 GNMA II One Year CMT ARM, 6.375% due 3/20/21 (a) 4,033,270
1,289,799 GNMA II One Year CMT ARM, 6.125% due 10/20/22 (a) 1,304,568
3,915,702 GNMA II One Year CMT ARM, 6.125% due 11/20/22 (a) 3,960,537
1,183,244 GNMA II One Year CMT ARM, 6.125% due 12/20/22 (a) 1,196,816
See Notes to Financial Statements.
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8 1999 Semi-Annual Report to Shareholders
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Schedule of Investments (unaudited) (continued) Novemeber 30, 1999
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
Government National Mortgage Association (GNMA) -- 8.5% (continued)
$ 980,771 GNMA II One Year CMT ARM, 6.375% due 1/20/23 (a) $ 989,068
1,415,789 GNMA II One Year CMT ARM, 6.375% due 6/20/23 (a) 1,425,289
- --------------------------------------------------------------------------------
Total Government National Mortgage
Association (Cost -- $15,615,354) 15,541,444
================================================================================
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost -- $89,669,714) 89,281,492
================================================================================
NON-AGENCY ADJUSTABLE RATE MORTGAGE OBLIGATIONS -- 6.9%
1,030,986 Bayview Financial Acquisition Trust, Series
1998-B, Class A, 6.540% due 6/25/36 (b)(c) 1,036,791
653,243 Franchise Loan Trust, Series 1998-I, Class
A1, 6.240% due 7/15/04 (b) 636,435
1,719,396 Independent National Mortgage Co., Series
1995-E, Class A1, 6.605% due 4/25/25 1,646,321
4,948,123 Merit Securities Corp., Series 11, Class
2A2, 5.709% due 11/28/22 (a)(c) 4,937,237
1,999,208 Sasco Floating Rate Commercial Mortgage,
Series 1999-C3, Class A, 5.809% due 11/20/01 1,999,208
1,195,593 Sequoia Mortgage Trust, Class A1, Series 2,
6.690% due 10/25/24 (c) 1,186,996
1,217,756 Structured Asset Securities Corp., Series
1998-C2A, Class B, 5.910% due 1/25/01 (b)(c) 1,224,381
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TOTAL NON-AGENCY ADJUSTABLE RATE
MORTGAGE OBLIGATIONS
(Cost -- $12,783,890) 12,667,369
================================================================================
TOTAL ADJUSTABLE RATE
MORTGAGE-BACKED SECURITIES
(Cost -- $102,453,604) 101,948,861
================================================================================
FIXED RATE COLLATERALIZED MORTGAGE OBLIGATIONS -- 8.9%
================================================================================
Agency Fixed Rate CMOs -- 1.1%
1,980,829 GNMA Series 1997-11, Class M, 8.000% due
5/16/24 (a)
(Cost -- $2,020,013) 2,005,629
================================================================================
Non-Agency Fixed Rate CMOs -- 2.1%
385,247 DLJ Mortgage Acceptance Corp., Series
1995-CF2, Class A1A, 6.650% due 12/17/27 383,840
Mortgage Capital Funding:
1,348,590 Series 1998-MC2, Class A1, 6.325% due 10/18/07 1,302,333
200,000 Series 1998-MC2, Class A2, 6.423% due 5/18/08 189,140
529,735 Union Planters Mortgage Finance Corp., Series
1998-1, Class A1, 6.350% due 1/25/28 (a) 533,708
See Notes to Financial Statements.
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Smith Barney Adjustable Rate Government Income Fund 9
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) Novemeber 30, 1999
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
Non-Agency Fixed Rate CMOs -- 2.1% (continued)
Wilshire Funding Corp.:
$ 565,094 Series 1997-WFC1, Class A1, 7.250% due
8/25/27 $ 560,856
808,478 Series 1998-WFC2, Class A3, 7.000% due
12/28/37 803,172
- --------------------------------------------------------------------------------
Total Non-Agency Fixed Rate CMOs
(Cost -- $3,809,239) 3,773,049
================================================================================
Stripped Pass-Through Securities -- 2.9%
480,035 FNMA Strips, Series D, Class 2, 11.000% due
4/1/09 520,084
1,525,808 FNMA Strips, Series F, Class 2, 11.500% due
5/1/09 (a) 1,654,541
1,078,609 FNMA Strips, Series G, Class 2, 11.500% due
3/1/09 (a) 1,176,353
1,837,018 FNMA Strips, Series I, Class 2, 11.500% due
4/1/09 (a) 1,974,794
- --------------------------------------------------------------------------------
Total Stripped Pass-Through Securities
(Cost -- $5,358,225) 5,325,772
================================================================================
PAC IOs -- 1.6%
21,736,043 First Union-Lehman Brothers, Series
1997-C1, Class IO, yield to maturity
15.312% due 4/18/27 1,262,212
1,157,802 FNMA, Series 1993-101, Class A, yield to
maturity 7.117% due 6/25/08 52,529
9,204,807 JP Morgan Commercial Mortgage Finance
Corp., Series 1997-C5, Class X, yield
to maturity 8.490% due 9/15/29 (b) 635,408
25,235,907 LB Commercial Conduit Mortgage Trust,
Series 1998-C4, Class X, yield to maturity
9.600% due 9/15/23 905,969
- --------------------------------------------------------------------------------
Total PAC IOs
(Cost -- $3,119,711) 2,856,118
================================================================================
PAC POs -- 1.2%
1,100,000 FHLMC, Series 2061, Class PH, 6.000% due
5/15/16 1,078,627
1,150,000 GNMA, Series 1994-1, Class PE, 7.500% due
7/16/22 1,161,500
- --------------------------------------------------------------------------------
Total PAC POs
(Cost -- $2,274,672) 2,240,127
================================================================================
TOTAL FIXED RATE COLLATERALIZED
MORTGAGE OBLIGATIONS
(Cost -- $16,581,860) 16,200,695
================================================================================
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- 3.6%
324,640 FHLMC Fifteen Year, 9.000% due 11/1/05 331,145
2,895,028 FHLMC Gold, 5.500% due 4/1/09 (a) 2,758,412
1,441,569 FNMA Fifteen Year ARM, 8.000% due 8/1/09 (a) 1,458,911
2,018,733 FNMA Ten Year, 6.000% due 1/1/04 1,978,964
- --------------------------------------------------------------------------------
TOTAL FIXED RATE MORTGAGE
PASS-THROUGH SECURITIES
(Cost -- $6,566,599) 6,527,432
================================================================================
See Notes to Financial Statements.
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10 1999 Semi-Annual Report to Shareholders
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(Continued) November 30, 1999
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
ASSET-BACKED SECURITIES -- 22.7%
$ 1,560,000 Brazos Student Loan Finance Corp., Series
1995-B, Class A4, 5.680% due 12/1/25 (c) $ 1,559,033
1,418,969 Business Loan Center, Series 1998-1, Class A,
7.250% due 4/2/25 (b) 1,426,063
2,400,000 Discover Card Master Trust, Series 1996-4,
Class A, 5.775% due 10/16/13 (c) 2,401,872
1,825,000 First Security Auto Owner Trust, Series
1999-2, Class A3, 6.000% due 10/15/03 1,814,160
1,600,000 First USA Credit Card Master Trust, Series
1994-6, Class A, 5.725% due 10/15/03 (c) 1,604,496
Ford Credit Auto Owner Trust:
2,000,000 Series 1999-A, Class A4, 5.310% due 11/15/01 1,981,880
1,400,000 Series 1999-C, Class A4, 6.080% due 9/16/02 1,389,276
695,023 Heller Financial, Series 1998-1, Class A,
5.870% due 7/15/24 (b)(c) 687,239
Honda Auto Lease Trust:
1,276,444 Series 1998-A, Class A, 5.500% due 7/15/04 1,258,702
2,675,000 Series 1999-A, Class A4, 6.450% due 9/16/02 2,668,741
2,268,457 IFC SBA Loan Backed Adjustable Rate Certificate,
Series, 1997-1, Class A, 6.000% due 1/15/24 (b)(d) 2,245,772
2,841,463 Missouri Higher Education Loan Authority,
Series 1997, Class P, 5.860% due 7/25/08 (e) 2,804,524
The Money Store Business Loan Backed Certificates:
1,476,550 Series 1997-1, Class A, 6.500% due 4/15/28 (d) 1,469,168
1,108,003 Series 1997-2, Class A, 6.050% due 2/15/29 (d) 1,085,843
1,750,000 Navistar Financial Corp. Owner Trust, Series
1999-A, Class A3, 5.950% due 4/15/03 1,730,575
1,425,000 Newcourt Equipment Trust Securities, Series
1998-1, Class A3, 5.240% due 12/20/02 1,407,900
925,562 PBG Equipment Trust, Series 1A, Class A, 6.270%
due 1/20/12 (b) 901,849
1,362,987 PMC Capital Limited Partnership, Series 1998-1,
Class A, 6.750% due 4/1/21 (b)(d) 1,362,987
1,062,712 PMC Capital SBA Loan-Backed Adjustable Rate
Certificate, Series 1997-1, Class A, 6.350%
due 9/15/23 (b)(d) 1,054,083
SLM Student Loan Trust:
2,155,184 Series 1995-1, Class A1, 5.831% due 4/25/04 (e) 2,147,770
2,413,194 Series 1997-1, Class A1, 5.716% due 10/25/05 (e) 2,393,960
1,338,320 SWB Loan-Backed Certificates, Series 1997-1,
Class A, 6.100% due 8/15/22 (b)(c) 1,333,301
TMS SBA Loan Trust:
665,907 Series 1996-2, Class A, 5.623% due 4/15/24 (d) 664,242
1,443,444 Series 1997-1, Class A, 5.541% due 1/15/25 (d) 1,429,010
2,501,719 USAA Auto Loan Grantor Trust, Series 1991-1,
Class A, 6.100% due 2/15/06 2,485,308
- --------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $41,492,775) 41,307,754
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 11
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(Continued) November 30, 1999
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. TREASURY OBLIGATIONS -- 3.9%
$ 3,450,000 U.S. Treasury Notes, 5.875% due 11/30/01 $ 3,441,341
2,792,648 U.S. Treasury Notes, 3.373% due 1/15/07 2,659,160
1,032,090 U.S. Treasury Notes, 3.625% due 1/15/08 994,357
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost -- $7,107,490) 7,094,858
================================================================================
CONTRACTS SECURITY VALUE
================================================================================
OPTIONS PURCHASED -- 0.0%
16,000 U.S. Treasury Notes, Call @ 100.25 Expire 10/31/01
(Cost -- $42,500) 2,400
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
SHORT-TERM INVESTMENTS -- 5.0%
$ 9,150,000 Federal Home Loan Bank Discount Note, 5.610% due 12/1/99
(Cost -- $9,150,000) 9,150,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $183,394,828*) $182,232,000
================================================================================
(a) Security is segregated by custodian for reverse repurchase agreements
and/or futures contracts and options commitments.
(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 quarterly.
(e) 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
CD -- Certificate of Deposit
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
LIBOR -- London Interbank Overnight Rate
PAC -- Planned Amortization Class
PO -- Principal Only
SBA -- Small Business Administration
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1999 Semi-Annual Report to Shareholders
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) November 30, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $183,394,828) $182,232,000
Cash 6,999
Receivable for Fund shares sold 1,839,750
Interest receivable 1,128,534
- --------------------------------------------------------------------------------
Total Assets 185,207,283
- --------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreement (Note 6) 35,952,000
Dividends payable 78,662
Investment advisory fees payable 49,108
Interest payable 47,258
Payable to broker - variation margin 27,328
Administration fees payable 21,167
Options written (Note 9) 17,360
Accrued expenses 28,156
- --------------------------------------------------------------------------------
Total Liabilities 36,221,039
- --------------------------------------------------------------------------------
Total Net Assets $148,986,244
================================================================================
NET ASSETS:
Par value of shares of beneficial interest $ 15,421
Capital paid in excess of par value 157,545,821
Overdistributed net investment income (554,546)
Accumulated net realized loss on security
transactions and futures contracts (6,990,377)
Net unrealized depreciation on investments,
options and futures contracts (1,030,075)
- --------------------------------------------------------------------------------
Total Net Assets $148,986,244
================================================================================
Shares Outstanding:
Class A 11,280,306
------------------------------------------------------------------------------
Class B 349,547
------------------------------------------------------------------------------
Class I 3,790,859
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $9.65
------------------------------------------------------------------------------
Class B * $9.64
------------------------------------------------------------------------------
Class I (and redemption price) $9.69
================================================================================
* 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.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 13
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1999
INVESTMENT INCOME:
Interest $ 4,555,633
Less: Interest expense (Note 6) (293,700)
- --------------------------------------------------------------------------------
Total Investment Income 4,261,933
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 449,665
Investment advisory fees (Note 2) 279,482
Administration fees (Note 2) 139,741
Audit and legal 36,257
Shareholder and system servicing fees 33,830
Registration fees 19,542
Shareholder communication fees 17,881
Trustees' fees 10,166
Custody 6,050
Other 4,617
- --------------------------------------------------------------------------------
Total Expenses 997,231
- --------------------------------------------------------------------------------
Net Investment Income 3,264,702
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS,
OPTIONS AND FUTURES CONTRACTS (NOTES 3, 9 AND 10):
Realized Loss From:
Security transactions (excluding short-term securities) (222,546)
Futures contracts (43,548)
- --------------------------------------------------------------------------------
Net Realized Loss (266,094)
- --------------------------------------------------------------------------------
Change in Net Unrealized Depreciation of Investments,
Options and Futures Contracts:
Beginning of period (373,687)
End of period (1,030,075)
- --------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (656,388)
- --------------------------------------------------------------------------------
Net Loss on Investments, Options and Futures Contracts (922,482)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 2,342,220
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1999 Semi-Annual Report to Shareholders
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1999 (unaudited)
and the Year Ended May 31, 1999
November 30 May 31
================================================================================
OPERATIONS:
Net investment income $ 3,264,702 $ 5,137,904
Net realized gain (loss) (266,094) 429,844
Increase in net unrealized depreciation (656,388) (903,701)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,342,220 4,664,047
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,758,684) (5,516,548)
Capital -- (383,140)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (3,758,684) (5,899,688)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares 383,455,101 470,397,864
Net asset value of shares issued
for reinvestment of dividends 3,258,672 5,255,979
Cost of shares reacquired (361,202,442) (462,253,961)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 25,511,331 13,399,882
- --------------------------------------------------------------------------------
Increase in Net Assets 24,094,867 12,164,241
NET ASSETS:
Beginning of period 124,891,377 112,727,136
- --------------------------------------------------------------------------------
End of period* $ 148,986,244 $ 124,891,377
================================================================================
* Includes overdistributed net investment
income of: $ (554,546) $ (60,564)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 15
- --------------------------------------------------------------------------------
Statement of Cash Flows (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended November 30, 1999
CASH FLOWS USED BY OPERATING AND INVESTING ACTIVITIES:
Interest received $ 4,363,857
Operating expenses paid (1,009,941)
Sales of short-term securities, net 9,916,007
Purchases of long-term securities (181,820,269)
Proceeds from disposition of long-term securities and paydowns 122,933,739
Payment from short sale transactions, net (48,099)
Proceeds from options transactions, net 4,688
Payment from futures transactions, net (43,548)
- --------------------------------------------------------------------------------
Net Cash Flows Used By Operating and Investing Activities (45,703,566)
- --------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from shares sold 388,547,475
Payments on shares redeemed (369,050,249)
Cash dividends paid to shareholders* (472,648)
Increase in reverse repurchase agreements outstanding 26,997,000
Interest expense (327,051)
- --------------------------------------------------------------------------------
Net Cash Flows Provided By Financing Activities 45,694,527
- --------------------------------------------------------------------------------
Net Decrease in Cash (9,039)
Cash -- Beginning of Period 16,038
- --------------------------------------------------------------------------------
Cash -- End of Period $ 6,999
- --------------------------------------------------------------------------------
RECONCILIATION OF INCREASE IN NET ASSETS FROM
OPERATIONS TO NET CASH FLOWS PROVIDED BY OPERATING
AND INVESTING ACTIVITIES:
Increase in Net Assets From Operations $ 2,342,220
- --------------------------------------------------------------------------------
Increase in investments (44,351,066)
Decrease in variation margin 29,625
Increase in interest receivable (485,524)
Decrease in other assets 37,585
Decrease in payable for securities purchased (3,574,756)
Decrease in accrued expenses and other payables 4,650
Interest expense 293,700
- --------------------------------------------------------------------------------
Total Adjustments (48,045,786)
- --------------------------------------------------------------------------------
Net Cash Flows Used By Operating and Investing Activities $ (45,703,566)
================================================================================
* Exclusive of dividend reinvestment of $3,258,672.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1999 Semi-Annual Report to Shareholders
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Adjustable Rate Government Income Fund ("Fund"), a
Massachusetts business trust, is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company.
The significant accounting policies followed by the Fund are: (a) security
transactions are accounted for on trade date; (b) U.S. government agencies and
obligations are valued at the quoted bid price in the over-the-counter market;
corporate debt securities, mortgage-backed securities and asset-backed
securities are valued on the basis of valuations provided by dealers in those
instruments or by an independent pricing service approved by the Fund's Board of
Trustees; (c) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (d)
interest income, adjusted for accretion of original issue discount, is recorded
on an accrual basis; (e) dividends and distributions to shareholders are
recorded on the ex-dividend date; (f) gains or losses on the sale of securities
are calculated by using the specific identification method; (g) direct expenses
are charged to each class; management fees and general fund expenses are
allocated on the basis of relative net assets by class; (h) the Fund intends to
comply with the requirements of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies and to make distributions of
taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (i) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At May 31, 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
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.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 17
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(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-
today 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, Smith Barney Private Trust Company, another subsidiary
of Citigroup, became the Fund's transfer agent and PFPC Global Fund Services
became the Fund's sub-transfer agent. During the period October 1, 1999 through
November 30, 1999, the Fund paid transfer agent fees of $9,239 to Smith Barney
Private Trust Company.
CFBDS, Inc. 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. For
the six months ended November 30, 1999, CDSCs paid to SSB or CFBDS for Class B
shares were approximately $7,000.
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to
Class A, B, and I shares calculated at the annual rate of 0.25% of the average
daily net assets of each respective class. The Fund also pays a distribution fee
with respect to Class A and B shares calculated at an annual rate of 0.50% of
the average daily net assets of each class. For the six months ended November
30, 1999, total Distribution Plan fees incurred were:
Class A Class B Class I
================================================================================
Distribution Plan Fees $403,603 $8,880 $37,182
================================================================================
All officers and one Trustee of the Fund are employees of SSB.
- --------------------------------------------------------------------------------
18 1999 Semi-Annual Report to Shareholders
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
3. Investments
During the six months ended November 30, 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 $178,245,513
- --------------------------------------------------------------------------------
Sales 107,004,682
================================================================================
At November 30, 1999, aggregate gross unrealized appreciation and de preciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $ 141,299
Gross unrealized depreciation (1,304,127)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(1,162,828)
================================================================================
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.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 19
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
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.
At November 30, 1999, the Fund had the following reverse repurchase agreements
outstanding:
FACE
AMOUNT SECURITY VALUE
================================================================================
$ 3,504,000 Reverse Repurchase Agreement with Morgan
Stanley Securities, dated 11/18/99 bearing
5.550% to be repurchased at $3,519,125 on
12/16/99, collateralized by: $1,458,911
FNMA Fifteen Year, 8.000% due 8/1/09;
$2,758,412 FHLMC Gold, 5.500% due 4/1/09 $ 3,504,000
32,448,000 Reverse Repurchase Agreement with Morgan
Stanley Securities, dated 11/23/99 bearing
5.580% to be repurchased at $32,598,883 on
12/23/99, collateralized by: $6,019,671 FHLMC
Thirty Year CMT ARM, 6.963% due 7/1/27;
$6,897,762 FHLMC Thirty Year CMT ARM, 6.958%
due 12/1/26; $5,398,531 FNMA One Year ARM,
5.830% due 4/1/29; $5,010,740 FHLMC
Thirty Year CMT ARM, 6.759% due 1/1/28;
$6,065,965 FNMA One Year ARM, 7.239% due
7.239% due 7/1/24; $4,083,044 FHLMC
Multi ARM, 5.945% due 7/1/01 32,448,000
- --------------------------------------------------------------------------------
TOTAL REVERSE REPURCHASE AGREEMENTS $35,952,000
================================================================================
During the six months ended November 30, 1999, the maximum and average amount of
reverse repurchase agreements outstanding at month ends were as follows:
================================================================================
Maximum amount outstanding $39,034,494
- --------------------------------------------------------------------------------
Average amount outstanding $12,500,642
================================================================================
Interest rates ranged from 4.50% to 5.58% during the year. Total market value of
the collateral for the reverse repurchase agreements is $37,693,036.
Interest expense for the six months ended November 30, 1999 on borrowings by the
Fund under reverse repurchase agreements totalled $293,700.
- --------------------------------------------------------------------------------
20 1999 Semi-Annual Report to Shareholders
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
7. Dollar Roll Transactions
The Fund may enter into dollar roll transactions. A dollar roll transaction
involves a sale by the Fund of securities that it holds with an agreement by the
Fund to repurchase similar securities at an agreed upon price and date. The
securities repurchased will bear the same interest as those sold, but generally
will be collateralized by pools of mortgages with different prepayment histories
than those securities sold. Proceeds of the sale will be invested and the income
from these investments, together with any additional income received on the
sale, will generate income for the Fund exceeding the yield on the securities
sold.
At November 30, 1999, the Fund had no open dollar roll transactions.
8. Securities Traded on a To-Be-Announced Basis
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly the
face amount and maturity date in GNMA transactions. Securities purchased on a
TBA basis are not settled until they are delivered to the Fund, normally 15 to
45 days later. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other securities.
At November 30, 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 November 30, 1999, the Fund had one purchased call option contract with a
total cost of $42,500.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 21
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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 six months
ended November 30, 1999:
<TABLE>
<CAPTION>
Number
of
Contracts Premiums
=====================================================================================
<S> <C> <C>
Options written during the six months ended November 30, 1999 40,000 $ 47,188
Options cancelled in closing purchase transactions -- --
Options exercised -- --
- -------------------------------------------------------------------------------------
Options written, outstanding at November 30, 1999 40,000 $ 47,188
- -----================================================================================
</TABLE>
The following table represents the covered call option written contracts open at
November 30, 1999:
Number Strike
of Contracts Security Expiration Price Value
================================================================================
40,000 U.S. Treasury Note 6.000%
(Premium -- $47,188) 8/15/09 $100.43 $(17,360)
================================================================================
- --------------------------------------------------------------------------------
22 1999 Semi-Annual Report to Shareholders
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (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 November 30, 1999, the Fund had the following open futures contracts:
Expiration # of Basis Market Unrealized
Month/Year Contracts Value Value Gain (Loss)
================================================================================
Futures contracts to sell:
U.S. 5 Year Note 12/99 35 $3,793,011 $3,757,578 $ 35,433
U.S. 5 Year Note 3/00 26 2,580,500 2,573,594 6,906
U.S. 10 Year Note 12/99 21 2,288,016 2,295,243 (7,227)
U.S. 10 Year Note 3/00 60 5,916,876 5,849,063 67,813
- --------------------------------------------------------------------------------
Net Unrealized Gain $102,925
================================================================================
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
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 23
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
12. Shares of Beneficial Interest
At November 30, 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 November 30, 1999, total paid-in capital amounted to the following for each
class:
Class A Class B Class I
================================================================================
Total Paid-in Capital $117,001,822 $3,483,624 $37,075,796
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
November 30, 1999 May 31, 1999
----------------------------- ----------------------------
Shares Amount Shares Amount
=========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 35,864,071 $ 347,606,749 44,516,338 $ 436,543,260
Shares issued on
reinvestment 255,003 2,469,237 486,309 4,768,104
Shares reacquired (34,856,751) (337,788,713) (45,910,688) (450,211,538)
- -----------------------------------------------------------------------------------------
Net Increase (Decrease) 1,262,323 $ 12,287,273 (908,041) $ (8,900,174)
=========================================================================================
Class B
Shares sold 228,751 $ 2,211,801 182,530 $ 1,790,348
Shares issued on
reinvestment 5,688 54,976 9,608 94,027
Shares reacquired (76,896) (744,374) (213,461) (2,089,692)
- -----------------------------------------------------------------------------------------
Net Increase (Decrease) 157,543 $ 1,522,403 (21,323) $ (205,317)
=========================================================================================
Class I
Shares sold 3,456,024 $ 33,636,551 3,264,303 $ 32,064,256
Shares issued on
reinvestment 75,594 734,459 40,183 393,848
Shares reacquired (2,327,283) (22,669,355) (1,014,615) (9,952,731)
- -----------------------------------------------------------------------------------------
Net Increase 1,204,335 $ 11,701,655 2,289,871 $ 22,505,373
=========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
24 1999 Semi-Annual Report to Shareholders
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended May 31, except where noted:
<TABLE>
<CAPTION>
Class A Shares 1999(1)(2) 1999(2) 1998 1997 1996 1995(2)
========================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.75 $ 9.86 $ 9.84 $ 9.84 $ 9.88 $ 9.78
- ----------------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment income 0.21 0.45 0.49 0.43 0.56 0.47
Net realized and
unrealized gain (loss) (0.05) (0.04) 0.04 0.08 (0.04) 0.13
- ----------------------------------------------------------------------------------------
Total Income From
Operations 0.16 0.41 0.53 0.51 0.52 0.60
- ----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.49) (0.50) (0.46) (0.56) (0.49)
Net realized gains -- -- -- -- -- (0.01)
Capital -- (0.03) (0.01) (0.05) -- --
- ----------------------------------------------------------------------------------------
Total Distributions (0.26) (0.52) (0.51) (0.51) (0.56) (0.50)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.65 $ 9.75 $ 9.86 $ 9.84 $ 9.84 $ 9.88
- ----------------------------------------------------------------------------------------
Total Return 1.66%++ 4.25% 5.57% 5.31% 5.48% 6.39%
- ----------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $ 109 $ 98 $ 108 $ 124 $ 156 $ 174
- ----------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
Net investment income 4.56%+ 4.55% 4.94% 4.42% 5.66% 4.94%
Interest expense 0.42+ 1.80 1.77 1.40 1.52 0.87
Other expenses 1.52+ 1.52 1.57 1.69 1.58 1.60
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 71% 155% 242% 288% 273% 524%
========================================================================================
</TABLE>
(1) For the six months ended November 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 25
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year ended May 31, except where noted:
<TABLE>
<CAPTION>
Class B Shares 1999(1)(2) 1999(2) 1998 1997 1996 1995(2)
========================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.74 $ 9.84 $ 9.82 $ 9.84 $ 9.88 $ 9.78
- ----------------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment income 0.22 0.45 0.49 0.39 0.56 0.47
Net realized and
unrealized
gain (loss) (0.06) (0.04) 0.04 0.10 (0.04) 0.13
- ----------------------------------------------------------------------------------------
Total Income From
Operations 0.16 0.41 0.53 0.49 0.52 0.60
- ----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.26) (0.48) (0.50) (0.46) (0.56) (0.49)
Net realized gains -- -- -- -- -- (0.01)
Capital -- (0.03) (0.01) (0.05) -- --
- ----------------------------------------------------------------------------------------
Total Distributions (0.26) (0.51) (0.51) (0.51) (0.56) (0.50)
- ----------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 9.64 $ 9.74 $ 9.84 $ 9.82 $ 9.84 $ 9.88
- ----------------------------------------------------------------------------------------
Total Return 1.66%++ 4.30% 5.56% 5.10% 5.48% 6.39%
- ----------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $ 3,369 $ 1,871 $2,099 $3,406 $5,712 $ 4,521
- ----------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
Net investment income 4.58%+ 4.55% 5.03% 4.32% 5.64% 4.92%
Interest expense 0.42+ 1.80 1.77 1.40 1.52 0.87
Other expenses 1.64+ 1.54 1.63 1.71 1.60 1.63
- ----------------------------------------------------------------------------------------
Portfolio Turnover Rate 71% 155% 242% 288% 273% 524%
========================================================================================
</TABLE>
(1) For the six months ended November 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
26 1999 Semi-Annual Report to Shareholders
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout the year
ended May 31, except where noted:
<TABLE>
<CAPTION>
Class I Shares 1999(1)(2) 1999(2) 1998 1997(3)
===================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period $ 9.78 $ 9.87 $ 9.85 $ 9.79
- -----------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.25 0.45 0.55 0.10
Net realized and unrealized gain
(loss) (0.06) 0.03 0.04 0.02
- -----------------------------------------------------------------------------------
Total Income From Operations 0.19 0.48 0.59 0.12
- -----------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (0.54) (0.56) (0.06)
Capital -- (0.03) (0.01) (0.00)*
- -----------------------------------------------------------------------------------
Total Distributions (0.28) (0.57) (0.57) (0.06)
- -----------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.69 $ 9.78 $ 9.87 $ 9.85
- -----------------------------------------------------------------------------------
Total Return 2.00%++ 4.99% 6.12% 1.20%++
- -----------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 36,737 $25,298 $2,928 $ 2,416
- -----------------------------------------------------------------------------------
Ratios to Average Net Assets:
Net investment income 5.09%+ 4.90% 5.45% 5.60%+
Interest expense 0.42+ 1.80 1.77 1.40+
Other expenses 1.07+ 1.03 1.07 1.10+
- -----------------------------------------------------------------------------------
Portfolio Turnover Rate 71% 155% 242% 288%
===================================================================================
</TABLE>
(1) For the six months ended November 30, 1999 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method.
(3) 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.
- --------------------------------------------------------------------------------
Smith Barney Adjustable Rate Government Income Fund 27
[This page intentionally left blank]
[LOGO OF SALOMON SMITH BARNEY]
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
PNC Bank, N.A.
Transfer Agent
Smith Barney Private 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. 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
FundOs 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/mutualfunds
