November 29, 1999
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
This Statement of Additional Information ("SAI") is not
a prospectus and is meant to be read in conjunction with
the prospectus of the Smith Barney Managed Governments
Fund Inc. (the "fund") dated November 29, 1999, as
amended or supplemented from time to time (the
"prospectus"), and is incorporated by reference in its
entirety into the prospectus. Additional information
about the fund's investments is available in the fund's
annual and semi-annual reports to shareholders that are
incorporated herein by reference. The prospectus and
copies of the reports may be obtained free of charge by
contacting a Salomon Smith Barney Financial Consultant,
or by writing or calling Salomon Smith Barney Inc. at
the address or telephone number above.
TABLE OF CONTENTS
Directors and Executive Officers of the
Fund..2
Investment Objective and Management
Policies...5
Investment Restrictions...21
Investment Management and Other
Services....23
Portfolio Transactions....27
Portfolio Turnover....28
Purchase of Shares ....28
Redemption of Shares....36
Valuation of Shares....38
Exchange Privilege....39
Performance Data...40
Dividends, Distributions and
Taxes...44
Additional Information.....50
Financial Statements ..51
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
The names of the directors and executive officers of the
fund, together with information as to their principal
business occupations, are set forth below. The
executive officers of the fund are employees of
organizations that provide services to the fund. Each
director who is an "interested person" of the fund, as
defined in the 1940 Act, is indicated by an asterisk.
The address of the "non-interested" directors and
executive officers of the fund is 388 Greenwich Street,
New York, New York 10013.
Herbert Barg (Age 76). Director
Private Investor. Director or trustee of 18 investment
companies associated with Citigroup Inc. ("Citigroup")
His address is 273 Montgomery Avenue, Bala Cynwyd,
Pennsylvania 19004.
*Alfred J. Bianchetti (Age 76). Director
Retired; formerly Senior Consultant to Dean Witter
Reynolds Inc. Director or trustee of 13 investment
companies associated with Citigroup. His address is 19
Circle End Drive, Ramsey, New Jersey 07466.
Martin Brody (Age 78). Director
Consultant, HMK Associates; Retired Vice Chairman of the
Board of Restaurant Associates Corp. Director or trustee
of 22 investment companies associated with Citigroup.
His address is c/o HMK Associates, 30 Columbia Turnpike,
Florham Park, New Jersey 07932.
Dwight B. Crane (Age 62). Director
Professor, Harvard Business School. Director or trustee
of 25 investment companies associated with Citigroup.
His address is c/o Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163.
Burt N. Dorsett (Age 69). Director
Managing Partner of Dorsett McCabe Management. Inc., an
investment counseling firm; Director of Research
Corporation Technologies, Inc., a nonprofit patent
clearing and licensing firm. Director or trustee of 13
investment companies associated with Citigroup. His
address is 201 East 62nd Street, New York, New York
10021.
Elliot S. Jaffe (Age 73). Director
Chairman of the Board and President of The Dress Barn,
Inc. Director or trustee of 13 investment companies
associated with Citigroup. His address is 30 Dunnigan
Drive, Suffern, New York 10901.
Stephen E. Kaufman (Age 67). Director
Attorney. Director or trustee of 15 investment companies
associated with Citigroup. His address is 277 Park
Avenue, New York, New York 10172.
Joseph J. McCann (Age 69). Director
Financial Consultant; Retired Financial Executive, Ryan
Homes, Inc. Director or trustee of 13 investment
companies associated with Citigroup. His address is 200
Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon (Age 66). Chairman of the Board,
President and Chief Executive Officer
Managing Director of Salomon Smith Barney Inc.;
President of SSB Citi Fund Management LLC ("SSB Citi" or
the "manager") and Travelers Investment Adviser, Inc.
("TIA"); Chairman or Co-Chairman of the Board and
director or trustee of 64 investment companies
associated with Citigroup. His address is 388 Greenwich
Street, New York, New York 10013.
Cornelius C. Rose, Jr. (Age 66). Director
President, Cornelius C. Rose Associates, Inc., financial
consultants, and Chairman and Director of Performance
Learning Systems, an educational consultant. Director or
trustee of 13 investment companies associated with
Citigroup. His address is Meadowbrook Village, Building
4, Apt 6, West Lebanon, New Hampshire 03784.
Lewis E. Daidone (Age 42). Senior Vice President and
Treasurer
Managing Director of Salomon Smith Barney; Chief
Financial Officer of the Smith Barney Mutual Funds;
Director and Senior Vice President of SSB Citi and TIA.
Senior Vice President and Treasurer of 59 investment
companies associated with Citigroup.
James E. Conroy (Age 48). Vice President
Investment Officer of SSB Citi; Managing Director of
Salomon Smith Barney.
Paul Brook (Age 46). Controller
Director of Salomon Smith Barney; from 1997-1998
Managing Director of AMT Capital Services Inc.; prior to
1997 Partner with Ernst & Young LLP. Controller or
Assistant Treasurer of 43 investment companies
associated with Citigroup.
Christina T. Sydor (Age 48). Secretary
Managing Director of Salomon Smith Barney; General
Counsel and Secretary of SSB Citi and TIA. Secretary of
59 investment companies associated with Citigroup.
As of November 11, 1999, the directors and officers of
the funds, as a group, owned less than 1% of the
outstanding shares of beneficial interest of the fund.
To the best knowledge of the directors, as of November
11, 1999, the following shareholders or "groups" (as
such term is defined in Section 13(d) of the Securities
Exchange Act of 1934, as amended) owned beneficially or
of record more than 5% of the shares of the following
classes:
Shareholder
Class
Shares Held
Smith Barney Concert Series, Inc.
Balanced Portfolio
PNC Bank, NA Attn: Beverly
Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522
Y
Owned 4,317,941.460
43.97% of shares
Smith Barney Concert Series, Inc.
Conservative Port.
PNC Bank, NA Attn: Beverly
Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522
Y
Owned 1,822,455.241
18.55% of shares
Smith Barney Concert Series, Inc.
Select Balanced Portfolio
PNC Bank, NA Attn: Beverly
Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522
Y
Owned 1,512,391.232
15.40% of shares
Smith Barney Concert Series, Inc.
Income Portfolio
PNC Bank, NA Attn: Beverly
Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522
Y
Owned 1,105,236.707
11.25% of shares
Smith Barney Concert Series, Inc.
Select Conservative Portfolio
PNC Bank, NA Attn: Beverly
Timson
200 Stevens Drive, Suite 440
Lester, PA 19113-1522
Y
Owned 668,142.393
6.80% of shares
No officer, director or employee of Salomon Smith Barney
or any of its affiliates receives any compensation from
the fund for serving as an officer of the funds or
director of the fund. The fund pays each director who
is not an officer, director or employee of Salomon Smith
Barney or any of its affiliates a fee of $4,000 per
annum plus $500 per in-person meeting and $100 per
telephonic meeting. Each director emeritus who is not
an officer, director or employee of Salomon Smith Barney
or its affiliates receives a fee of $2,000 per annum
plus $250 per in-person meeting and $50 per telephonic
meeting. All directors are reimbursed for travel and
out-of-pocket expenses incurred to attend such meetings.
For the fiscal year ended July 31, 1999, the directors
of the fund were paid the following compensation:
Name of Person
Aggregate
Compensati
on
from Fund
Total
Pension or
Retirement
Benefits
Accrued
As part of
Fund
Expenses
Compensati
on
From Fund
And Fund
Complex
Paid to
Directors
Number of
Funds for
Which
Directors
Serve Within
Fund Complex
Herbert Barg **
$7,100
$0
$105,425
18
Alfred
Bianchetti * **
7,100
0
51,200
13
Martin Brody **
6,100
0
132,500
22
Dwight B. Crane
**
7,000
0
139,975
25
Burt N. Dorsett
**
7,100
0
51,200
13
Elliot S. Jaffe
**
6,100
0
47,550
13
Stephen E.
Kaufman **
7,100
0
96,400
15
Joseph J. McCann
**
7,100
0
51,200
13
Heath B.
McLendon *
0
- -
0
64
Cornelius C.
Rose, Jr. **
6,600
0
51,200
13
* Designates an "interested" director.
** Designates member of Audit Committee.
Upon attainment of age 80, fund directors are
required to change to emeritus status. Directors
emeritus are entitled to serve in emeritus status
for a maximum of 10 years. A director emeritus
may attend meetings but has no voting rights.
During the fund's last fiscal year, aggregate
compensation paid by the fund to directors
achieving emeritus status totaled $2,000.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The prospectus discusses the fund's investment objective
and the policies it employs to achieve its objective.
This section contains supplemental information
concerning the types of securities and other instruments
in which the fund may invest, the investment policies
and portfolio strategies that the fund may utilize and
certain risks attendant to such investments, policies
and strategies.
The investment objective of the fund is to provide
investors with high current income consistent with
liquidity and safety of capital. This objective may not
be changed without the approval of the holders of a
majority of the fund's shares. There can be no assurance
that the fund will achieve its investment objective.
The fund invests substantially all of its assets in U.S.
government securities and, under normal circumstances,
the fund is required to invest at least 65% of its
assets in such securities. The fund's portfolio of U.S.
government securities consists primarily of mortgage-
backed securities issued or guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA") and the Federal
Home Loan Mortgage Corporation ("FHLMC"). Assets not
invested in such mortgage-backed securities are invested
primarily in direct obligations of the United States
Treasury, such as Treasury Bills, Treasury Notes and
Treasury Bonds ("U.S. Treasury Securities"), and other
U.S. government securities. Obligations issued by U.S.
government agencies and instrumentalities include:
obligations that are supported by the full faith and
credit of the United States, such as GNMA certificates
and obligations of the General Services Administration
and Federal Maritime Administration; securities that are
supported by the right of the issuer to borrow from the
United States Treasury, such as securities of Federal
Home Loan Banks and others; and securities that are
supported only by the credit of the instrumentality,
such as FNMA and FHLMC certificates. Because the United
States government is not obligated by law to provide
support to an instrumentality that it sponsors, the fund
invests in obligations issued by such an instrumentality
only when SSB Citi Fund Management LLC ("SSB Citi")( the
"Manager") determines that the credit risk with respect
to the instrumentality does not make its securities
unsuitable for investment by the fund.
The composition and weighted average maturity of the
fund's portfolio will vary from time to time, based upon
the determination of the fund's management of how best
to further the fund's investment objective. The fund may
invest in U.S. government securities of all maturities:
short-term, intermediate-term and long-term. The fund
may invest without limit in securities of any issuer of
U.S. government securities, and may invest up to an
aggregate of 15% of its total assets in securities with
contractual or other restrictions on resale and other
instruments that are not readily marketable (such as
repurchase agreements with maturities in excess of seven
days). The fund may invest up to 5% of its net assets in
U.S. government securities for which the principal
repayment at maturity, while paid in U.S. dollars, is
determined by reference to the exchange rate between the
U.S. dollar and the currency of one or more foreign
countries ("Exchange Rate-Related Securities"). The
interest payable on these securities is denominated in
U.S. dollars and is not subject to foreign currency
risk. The fund also is authorized to borrow in an amount
of up to 10% of its total assets under unusual or
emergency circumstances, including when necessary to
meet redemptions, and to pledge its assets to the same
extent in connection with such borrowings. When the
manager believes that market conditions warrant, the
fund may, for temporary defensive purposes and without
limitation, invest in short-term instruments including
certificates of deposit of domestic banks and repurchase
agreements involving U.S. government securities.
Repurchase agreements also may be used as one of the
fund's normal investment techniques.
Mortgaged-Backed Government Securities
GNMA certificates are liquid securities and represent
ownership interests in a pool of mortgages issued by a
mortgage banker or other mortgagee. Distributions on
GNMA certificates include principal and interest
components. GNMA, a corporate instrumentality of the
U.S. Department of Housing and Urban Development,
guarantees timely payment of principal and interest on
GNMA certificates; this guarantee is deemed a general
obligation of the United States, backed by its full
faith and credit.
Each of the mortgages in a pool supporting a GNMA
certificate is insured by the Federal Housing
Administration or the Farmers Home Administration, or is
insured or guaranteed by the Veterans Administration.
The mortgages have maximum maturities of 40 years.
Government statistics indicate, however, that the
average life of the underlying mortgages is shorter, due
to scheduled amortization and unscheduled prepayments
(attributable to voluntary prepayments or foreclosures).
These statistics indicate that the average life of the
mortgages backing most GNMA certificates, which are
single-family mortgages with 25 to 30 year maturities,
ranges from two to ten years depending on the mortgages'
coupon rate, and yields on pools of single-family
mortgages are often quoted on the assumption that the
prepayment rate for any given pool will remain constant
over the life of the pool. (The actual maturity of
specific GNMA certificates will vary based on the
payment experience of the underlying mortgage pool.)
Based on this constant prepayment assumption, GNMA
certificates have had historical yields at least 3/4 of
1% greater than the highest grade corporate bonds.
Actual yield comparisons will vary with the prepayment
experience of specific GNMA certificates.
The fund also may invest in pass-through securities
backed by adjustable-rate mortgages, which have been
issued by GNMA, FNMA and FHLMC. These securities bear
interest at a rate which is adjusted monthly, quarterly
or annually. The prepayment experience of the mortgages
underlying these securities may vary from that for
fixed-rate mortgages.
The average maturity of FHLMC and FNMA mortgage-backed
pools, like GNMA mortgage-backed pools, varies with the
maturities of the underlying mortgage instruments, and a
pool's stated average life also may be shortened by
unscheduled payments on the underlying mortgages.
Factors affecting mortgage prepayments include the level
of interest rates, general economic and social
conditions, the location of the mortgaged property and
the age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to
accurately predict the average life of a particular
pool. As noted above, it is a common practice to assume
that prepayments will result in an average life ranging
from two to ten years for pools of fixed-rate 30-year
mortgages. Pools of mortgages with other maturities or
different characteristics will have varying average life
assumptions. The actual maturity of and realized yield
on specific FHLMC and FNMA certificates will vary based
on the prepayment experience of the underlying pool of
mortgages.
The GNMA certificates in which the fund will invest will
be of the "modified pass-through" type, which means that
the scheduled monthly interest and principal payments
related to mortgages in the pool backing the
certificates will be "passed-through" to investors.
Timely payment of principal and interest on GNMA
certificates is guaranteed by GNMA and backed by the
full faith and credit of the United States, but market
value and yield are not guaranteed
Mortgage participation certificates issued by FHLMC and
FNMA generally represent ownership interests in a pool
of fixed-rate conventional mortgages. Timely payment of
principal and interest on these certificates is
guaranteed solely by the issuer of the certificates.
FHLMC is a U.S. government-created entity controlled by
the Federal Home Loan Banks. FNMA is a
government-chartered corporation owned entirely by
private stockholders, which is subject to general
regulation by the Secretary of Housing and Urban
Development.
Mortgage-backed U.S. government securities differ from
conventional bonds in that principal is paid back to the
certificate holder over the life of the loan rather than
at maturity. As a result, the fund will receive monthly
scheduled payments of principal and interest. In
addition, the fund may receive unscheduled principal
payments representing prepayments on the underlying
mortgages, which will cause the maturity of and realized
yield on specific GNMA, FNMA and FHLMC certificates to
vary based on the prepayment experience of the
underlying pool of mortgages. The fund will reinvest all
payments and unscheduled prepayments of principal in
additional GNMA, FNMA and FHLMC certificates or other
U.S. government securities (which may have lower
interest rates than the balance of the obligations held
by the fund), and will distribute the interest to
shareholders in the form of monthly dividends.
To the extent they are purchased at par or at a
discount, GNMA certificates offer a high degree of
safety of principal investment because of the GNMA
guarantee, and other mortgage-backed U.S. government
securities also are believed to offer significant safety
of principal investment. If the fund buys
mortgage-backed U.S. government securities at a premium,
however, mortgage foreclosures and prepayments of
principal by mortgagors (which may be made at any time
without penalty) may result in some loss of the fund's
principal investment to the extent of the premium paid.
U.S. Government Securities
Direct obligations of the United States Treasury include
a variety of securities that differ in their interest
rates, maturities and dates of issuance. Treasury Bills
have maturities of less than one year, Treasury Notes
have maturities of one to ten years and Treasury Bonds
generally have maturities of greater than ten years at
the date of issuance.
In addition to direct obligations of the United States
Treasury, debt obligations of varying maturities issued
or guaranteed by the United States government or its
agencies or instrumentalities ("U.S. government
securities") include securities issued or guaranteed by
the Federal Housing Administration, Federal Financing
Bank, Export-Import Bank of the United States, Small
Business Administration, GNMA, General Services
Administration, Federal Home Loan Banks, FHLMC, FNMA,
Maritime Administration, Tennessee Valley Authority,
Resolution Trust Corporation, District of Columbia
Armory Board, Student Loan Marketing Association and
various institutions that previously were or currently
are part of the Farm Credit System (which has been
undergoing a reorganization since 1987). Because the
United States government is not obligated by law to
provide support to an instrumentality that it sponsors,
the fund will invest in obligations of such an
instrumentality only if SSB Citi determines that the
credit risk with respect to the instrumentality does not
make its securities unsuitable for investment by the
fund.
The fund may invest up to 5% of its net assets in U.S.
government securities for which the principal repayment
at maturity, while paid in U.S. dollars, is determined
by reference to the exchange rate between the U.S.
dollar and the currency of one or more foreign countries
("Exchange Rate-Related Securities"). Exchange Rate-
Related Securities are issued in a variety of forms,
depending on the structure of the principal repayment
formula. The principal repayment formula may be
structured so that the security-holder will benefit if a
particular foreign currency to which the security is
linked is stable or appreciates against the U.S. dollar.
In the alternative, the principal repayment formula may
be structured so that the securityholder benefits if the
U.S. dollar is stable or appreciates against the linked
foreign currency. Finally, the principal repayment
formula can be a function of more than one currency and,
therefore, be designed in either the aforementioned
forms or a combination of those forms.
Investment in Exchange Rate-Related Securities entails
special risks. There is the possibility of significant
changes in rates of exchange between the U.S. dollar and
any foreign currency to which an Exchange Rate-Related
Security is linked. If currency exchange rates do not
move in the direction or to the extent anticipated at
the time of purchase of the security, the amount of
principal repaid at maturity might be significantly
below the par value of the security, which might not be
offset by the interest earned by the fund over the term
of the security. The rate of exchange between the U.S.
dollar and other currencies is determined by the forces
of supply and demand in the foreign exchange markets.
These forces are affected by the international balance
of payments and other economic and financial conditions,
government intervention, speculation and other factors.
The imposition or modification of foreign exchange
controls by domestic or foreign governments or
intervention by central banks also could affect exchange
rates. Finally, there is no assurance that sufficient
trading interest to create a liquid secondary market
will exist for particular Exchange Rate-Related
Securities because of conditions in the debt and foreign
currency markets. Illiquidity in the forward exchange
market and the high volatility of the foreign exchange
market may from time to time combine to make it
difficult to sell an Exchange Rate-Related Security
prior to maturity without incurring a significant price
loss.
Forward Roll Transactions
In order to enhance current income, the fund may invest
up to 30% of its assets in forward roll transactions
with respect to mortgage-backed securities issued by
GNMA, FNMA and FHLMC. In a forward roll transaction, the
fund sells a mortgage security to a financial
institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security
from the institution at a later date at an agreed upon
price. The mortgage securities that are repurchased
will bear the same interest rate as those sold, but
generally will be collateralized by different pools of
mortgages with different prepayment histories than those
sold. During the period between the sale and repurchase,
the fund will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of
the sale will be invested in short-term instruments,
particularly repurchase agreements, and the income from
these investments, together with any additional fee
income received on the sale will generate income for the
fund exceeding the yield on the securities sold. Forward
roll transactions involve the risk that the market value
of the securities sold by the fund may decline below the
repurchase price of those securities. At the time the
fund enters into a forward roll transaction, it will
place in a segregated custodial account cash and liquid
debt securities having a value equal to the repurchase
price (including accrued interest) and will subsequently
monitor the account to insure that such equivalent value
is maintained.
Forward roll transactions involve the risk that the
market value of the securities sold by the fund may
decline below the repurchase price of the securities.
Forward roll transactions are considered borrowings by
the fund. Although investing the proceeds of these
borrowings in repurchase agreements or money market
instruments may provide the fund with the opportunity
for higher income, this leveraging practice will
increase the fund's exposure to capital risk and higher
current expenses. Any income earned from the securities
purchased with the proceeds of these borrowings that
exceeds the cost of the borrowings would cause the
fund's net asset value per share to increase faster than
would otherwise be the case; any decline in the value of
the securities purchased would cause the fund's net
asset value per share to decrease faster than would
otherwise be the case.
Writing Put and Call Options
The fund may from time to time write covered put and
call options on U.S. government securities in its
portfolio. The fund will realize a fee (referred to as a
"premium") when it writes an option. The fund will only
write covered put and call options, which means that for
so long as the fund remains obligated as the writer of
the option it will, in the case of a call option,
continue to own the underlying security and, in the case
of a put option, maintain an amount of cash or
high-grade liquid debt securities in a segregated
account equal to the exercise price of the option. A put
option embodies the right of its purchaser to compel the
writer of the option to purchase from the optionholder
an underlying security at a specified price at any time
during the option period. In contrast, a call option
embodies the right of its purchaser to compel the writer
of the option to sell the option holder an underlying
security at a specified price at any time during the
option period. Thus, the purchaser of a put option has
the right to compel the fund to purchase from it the
underlying security at the agreed-upon price for a
specified time period, while the purchaser of a call
option has the right to purchase from the fund the
underlying security owned by the fund at the agreed-upon
price for a specified time period.
Upon the exercise of a put option, the fund may suffer a
loss equal to the difference between the price at which
the fund is required to purchase the underlying security
and its market value at the time of the option exercise,
less the premium received for writing the option. Upon
the exercise of a call option, the fund may suffer a
loss equal to the excess of the security's market value
at the time of the option exercise over the fund's
acquisition cost of the security, less the premium
received for writing the option. The fund ordinarily
will write only covered put and call options for which a
secondary market exists on a national securities
exchange or in the over-the-counter market.
In order to realize a profit, to prevent an underlying
security from being called or to unfreeze an underlying
security (thereby permitting its sale or the writing of
a new option on the security prior to the option's
expiration), the fund may engage in a closing purchase
transaction. The fund will incur a loss if the cost of
the closing purchase transaction, plus transaction
costs, exceeds the premium received upon writing the
original option. To effect a closing purchase
transaction, the fund would purchase, prior to the
exercise of an option that it has written, an option of
the same series as that on which it desires to terminate
its obligation. There can be no assurance that the fund
will be able to effect a closing purchase transaction at
a time when it wishes to do so. The obligation of the
fund to purchase or deliver securities, respectively,
upon the exercise of a covered put or call option which
it has written terminates upon the effectuation of a
closing purchase transaction.
The principal reason for writing covered call options on
securities is to attempt to realize, through the receipt
of premiums, a greater return than would be realized on
the securities alone. In return for a premium, the
writer of a covered call option forfeits the right to
any appreciation in the value of the underlying security
above the strike price for the life of the option (or
until a closing purchase transaction can be effected).
Nevertheless, the call writer retains the risk of a
decline in the price of the underlying security.
Similarly, the principal reason for writing covered put
options is to realize income in the form of premiums.
The writer of a covered put option accepts the risk of a
decline in the price of the underlying security. The
size of the premium that the fund may receive may be
adversely affected as new or existing institutions,
including other investment companies, engage in or
increase their option-writing activities.
Options written by the fund normally will have
expiration dates between one and nine months from the
date written. The exercise price of the options may be
below, equal to, or above, the current market values of
the underlying securities at the times the options are
written. In the case of call options these exercise
prices are referred to as "in-the-money," "at-the-
money," and "out-of-the-money," respectively.
The fund may write (a) in-the-money call options when
the manager expects that the price of the underlying
security will remain flat or decline moderately during
the options period, (b) at-the-money call options when
the manager expects that the price of the underlying
security will remain flat or advance moderately during
the option period and (c) out-of-money call options when
the manager expects that the price of the security may
increase but not above a price equal to the sum of the
exercise price plus the premiums received from writing
the call option. In any of the preceding situations, if
the market price of the underlying security declined and
the security is sold at this lower price, the amount of
any realized loss will be offset wholly or in part by
the premium received. Out-of-money, at-the-money and
in-the-money put options (the reverse of call options as
to the relations of exercise price to market price) may
be utilized in the same market environments that such
call options are used in equivalent transactions.
So long as the obligation of the fund as the writer of
an option continues, the fund may be assigned an
exercise notice by the broker-dealer through which the
option was sold, requiring it to deliver, in the case of
a call, or take delivery of, in the case of a put, the
underlying security against payment of the exercise
price. This obligation terminates when the option
expires or the fund effects a closing purchase
transaction. The fund can no longer effect a closing
purchase transaction with respect to an option once it
has been assigned an exercise notice. To secure its
obligation to deliver the underlying security when it
writes a call option, or to pay for the underlying
security when it writes a put option, the fund will be
required to deposit in escrow the underlying security or
other assets in accordance with the rules of the Options
Clearing Corporation or similar clearing corporation and
the securities exchange on which the option is written.
An option position may be closed out only where there
exists a secondary market for an option of the same
series on a recognized securities exchange or in the
over-the-counter market. The fund expects to write
options only on national securities exchanges or in the
over-the-counter market.
The fund may realize a profit or loss upon entering into
a closing transaction. In cases in which the fund has
written an option, it will realize a profit if the cost
of the closing purchase transaction is less than the
premium received upon writing the original option and
will incur a loss if the cost of the closing purchase
transaction exceeds the premium received upon writing
the original option.
Purchasing Put and Call Options
Buying a put option on a U.S. government security will
give the fund the right to sell the security at a
particular price and may act to limit, until that right
expires, the fund's risk of loss through a decline in
the market value of the security. Any appreciation in
the value of the underlying security will be offset in
part by the amount of the premium the fund pays for the
put option and any related transaction costs. By
purchasing a put option on a security it does not own,
the fund would seek to benefit from a decline in the
market price of its investment portfolio generally. If
the market price of the underlying security remains
equal to or greater than the exercise price during the
life of the put option, the fund would lose its entire
investment in the put option. For a transaction of a
put option to be profitable, the market price of the
underlying security must decline sufficiently below the
exercise price to cover the premium and transaction
costs. The fund would not purchase a put option if, as
a result of the purchase, more than 10% of the fund's
assets would be invested in put options.
As the holder of a call option on a U.S. government
security, the fund would have the right to purchase the
underlying security at the exercise price at any time
during the option period. The fund would purchase a
call option to acquire the underlying security for its
portfolio. Utilized in this fashion, the purchase of
call options would enable the fund to fix its costs of
acquiring the underlying security at the exercise price
of the call option plus the premium paid. Pending
exercise of the call option, the fund could invest the
exercise price of the call option, which would otherwise
have been used for the immediate purchase of the
security, in short-term investments providing additional
current return. At times, the net costs of acquiring
securities in this manner may be less than the cost of
acquiring the securities directly. So long as it holds
such a call option rather than the underlying security
itself, the fund is partially protected from any
unexpected decline in the market price of the underlying
security and could allow the call options to expire,
incurring a loss only to the extent of the premium paid
for the option. The fund also could purchase call
options on U.S. government securities to increase its
return to investors at a time when the call is expected
to increase in value because of anticipated appreciation
of the underlying security. The fund would not purchase
a call option if, as a result of the purchase, more than
10% of the fund's assets would be invested in call
options.
The fund may enter into closing transactions with
respect to put and call options that it purchases,
exercise the options, or permit the options to expire.
Profit or loss from a closing transaction will depend on
whether the amount the fund received on the transaction
is more or less than the premium paid for the options
plus any related transaction costs.
Although the fund generally will purchase or write only
those options for which the Manager believes there is an
active secondary market so as to facilitate closing
transactions, there is no assurance sufficient trading
interest to create a liquid secondary market on a
securities exchange will exist for any particular
options or at any particular time, and for some options
no such secondary market may exist. A liquid secondary
market in an option may cease to exist for a variety of
reasons. In the past, for example, higher than
anticipated trading activity or order flow, or other
unforeseen events, have at times rendered certain of the
facilities of national securities exchanges inadequate
and resulted in the institution of special procedures,
such as trading rotations, restrictions on certain types
of orders or trading halts or suspensions in one or more
options. There can be no assurance that similar events,
or events may otherwise interfere with the timely
execution of customers' orders, will not recur.
In such event, it might not be possible to effect
closing transactions in particular options. If, as a
covered call option writer, the fund is unable to effect
a closing purchase transaction in a secondary market, it
will not be able to sell the underlying security until
the option expires or it delivers the underlying
security upon exercise.
Securities exchanges generally have established
limitations governing the maximum number of calls and
puts of each class which may be held or written, or
exercised within certain periods, by an investor or
group of investors acting in concert (regardless of
whether the options are written on the same or different
securities exchanges or are held, written or exercised
in one or more accounts or through one or more brokers).
It is possible that the fund and other clients of the
manager and certain of their affiliates may be
considered to be such a group. A securities exchange
may order the liquidation of positions found to be in
violations of these limits, and it may impose certain
other sanctions.
Additional risks exist with respect to certain of the
U.S. government securities for which the fund may write
covered call options. If the fund writes covered call
options on mortgage-backed securities, the securities it
holds as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover.
The fund will compensate for the decline in the value of
the cover by purchasing an appropriate additional amount
of those securities.
The trading market in options on U.S. governments
securities has varying degrees of depth for various
securities. The manager will attempt to take
appropriate measures to minimize risks relating to the
fund's writing and purchasing put and call options, but
there can be no assurance the fund will succeed in an
options program.
Zero Coupon Securities
The fund may invest in zero coupon bonds. A zero coupon
bond pays no interest in cash to its holder during its
life, although interest is accrued during that period.
Its value to an investor consists of the difference
between its face value at the time of maturity and the
price for which it was acquired, which is generally at
significantly less than its face value. Because such
securities usually trade at a deep discount, they will
be subject to greater fluctuations of market value in
response to changing interest rates than debt
obligations of comparable maturities which make periodic
distributions of interest. On the other hand, because
there are no periodic interest payments to be reinvested
prior to maturity, zero coupon securities eliminate
reinvestment risk and lock in a rate of return to
maturity.
Repurchase Agreements
The fund may engage in repurchase agreement transactions
on U.S. government securities with certain member banks
of the Federal Reserve System and with certain dealers
on the Federal Reserve Bank of New York's list of
reporting dealers. Under the terms of a typical
repurchase agreement, the fund would acquire an
underlying debt obligation for a relatively short period
(usually not more than one week) subject to an
obligation of the seller to repurchase, and the fund to
resell, the obligation at an agreed-upon price and time,
thereby determining the yield during the fund's holding
period. Under each repurchase agreement the selling
institution will be required to maintain the value of
the securities subject to the repurchase agreement at
not less than their repurchase price.
Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party,
including possible delays or restrictions upon the
fund's ability to dispose of the underlying securities,
the risk of a possible decline in the value of the
underlying securities during the period in which the
fund seeks to assert its rights to them, the risk of
incurring expenses associated with asserting those
rights and the risk of losing all or part of the income
from the agreement. SSB Citi, acting under the
supervision of the fund's Board of Directors, reviews on
an ongoing basis the value of the collateral and the
creditworthiness of those banks and dealers with which
the fund may enter into repurchase agreements to
evaluate potential risks.
Reverse Repurchase Agreements
The fund may enter into reverse repurchase agreements.
A reverse repurchase agreement involves the sale of a
money market instrument by the fund and its agreement to
repurchase the instrument at a specified time and price.
The fund will maintain a segregated account consisting
of U.S. government securities or cash or cash
equivalents to cover its obligations under reverse
repurchase agreements with broker-dealers and other
financial institutions. The fund will invest the
proceeds in other money market instruments or repurchase
agreements maturing not later than the expiration of the
reverse repurchase agreement. Under the Investment
Company Act of 1940, as amended, ("1940 Act") reverse
repurchase agreements may be considered borrowing by the
seller.
Reverse repurchase agreements create opportunities for
increased returns to the shareholders of the fund but,
at the same time, create special risk considerations.
Although the principal or stated value of such
borrowings will be fixed, the fund's assets may change
in value during the time the borrowing is outstanding.
To the extent the income or other gain derived from
securities purchased with borrowed funds exceeds the
interest or dividends the fund will have to pay in
respect thereof, the fund's net income or other gain
will be greater than if this type of leverage had not
been used. Conversely, if the income or other gain from
the incremental assets is not sufficient to cover this
cost, the net income or other gain of the fund will be
less than if the reverse repurchase agreement had not
been used.
The fund currently intends to invest not more than 33%
of its net assets in reverse repurchase agreements.
When-Issued Securities and Delayed Delivery Transactions
In order to secure what the manager considers to be an
advantageous price or yield, the fund may purchase U.S.
government securities on a when-issued basis or purchase
or sell U.S. government securities for delayed delivery.
The fund will enter into such purchase transactions for
the purpose of acquiring portfolio securities and not
for the purpose of leverage. Delivery of the securities
in such cases occurs beyond the normal settlement
periods, but no payment or delivery is made by the fund
prior to the reciprocal delivery or payment by the other
party to the transaction. In entering into a when-
issued or delayed-delivery transaction, the fund relies
on the other party to consummate the transaction and may
be disadvantaged if the other party fails to do so.
U.S. government securities normally are subject to
changes in value based upon changes, real or
anticipated, in the level of interest rates and, to a
lesser extent, the public's perception of the
creditworthiness of the issuers. In general, U.S.
government securities tend to appreciate when interest
rates decline and depreciate when interest rates rise.
Purchasing U.S. government securities on a when-issued
basis or delayed-delivery basis, therefore, can involve
the risk that the yields available in the market when
the delivery takes place may actually be higher than
those obtained in the transaction itself. Similarly,
the sale of U.S. government securities for delayed
delivery can involve the risk that the prices available
in the market when the delivery is made may actually be
higher than those obtained in the transaction itself.
The fund will at all times maintain in a segregated
account, cash or liquid securities equal to the amount
of the fund's when-issued or delayed-delivery
commitments. For the purpose of determining the
adequacy of the securities in the account, the deposited
securities will be valued at market or fair value. If
the market or fair value of such securities declines,
additional cash or securities will be placed in the
account on a daily basis so that the value of the
account will equal the amount of such commitments by the
fund. Placing securities rather than cash in the
account may have a leveraging effect on the fund's
assets. That is, to the extent that the fund remains
substantially fully invested in securities at the time
it has committed to purchase securities on a when-issued
basis, there will be greater fluctuation in its net
asset value than if it had set aside cash to satisfy its
purchase commitments. On the settlement date, the fund
will meet its obligations from then-available cash flow,
the sale of securities held in the separate account, the
sale of other securities or, although it normally would
not expect to do so, from the sale of the when-issued or
delayed-delivery securities themselves (which may have a
greater or lesser value than the fund's payment
obligations).
Lending of Portfolio Securities
Consistent with applicable regulatory requirements the
fund may lend securities from its portfolio to brokers,
dealers and other financial organizations. The fund may
not lend its portfolio securities to Salomon Smith
Barney or its affiliates without specific authorization
from the Securities and Exchange Commission (the "SEC").
Loans of portfolio securities by the fund will be
collateralized by cash, letters of credit or securities
issued or guaranteed by the United States government or
its agencies which are maintained at all times in an
amount equal to at least 100% of the current market
value of the loaned securities. From time to time, the
fund may return a part of the interest earned from the
investment of collateral received for securities loaned
to the borrower and/or a third party, which is
unaffiliated with the fund or with Salomon Smith Barney
and which is acting as a "finder."
In lending its portfolio securities, the fund can
increase its income by continuing to receive interest on
the loaned securities, as well as either investing the
cash collateral in short-term instruments or by
obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as
collateral. Requirements of the SEC currently provide
that the following conditions must be met whenever
portfolio securities are loaned: (a) the fund must
receive at least 100% cash collateral or equivalent
securities from the borrower; (b) the borrower must
increase such collateral whenever the market value of
the securities rises above the level of such collateral;
(c) the fund must be able to terminate the loan at any
time; (d) the fund must receive reasonable interest on
the loan, as well as an amount equal to any dividends,
interest or other distributions on the loaned
securities, and any increase in market value; (e) the
fund may pay only reasonable custodian fees in
connection with the loan; and (f) voting rights on the
loaned securities may pass to the borrower; however, if
a material event adversely affecting the investment
occurs, the fund's Board of Directors must terminate the
loan and regain the right to vote the securities. The
risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay
in receiving additional collateral or in the recovery of
the securities or possible loss of rights in the
collateral should the borrower fail financially. Loans
will be made to firms deemed by the manager to be of
good standing and will not be made unless, in the
judgment of the manager, the consideration to be earned
from such loans would justify the risk.
Transactions in Interest Rate Futures Contracts and
Related Options
The fund may enter into interest rate futures contracts
and options on interest rate futures contracts that are
traded on a U.S. exchange or board of trade. These
investments may be made by the fund for the purpose of
hedging against changes in the value of its portfolio
securities because of anticipated changes in interest
rates and market conditions and not for purposes of
speculation. The fund will not be permitted to enter
into futures and options contracts (other than those
considered bona fide hedging by the Commodity Futures
Trading Commission) for which aggregate initial margin
deposits and premiums exceed 5% of the fair market value
of the fund's assets, after taking into account
unrealized profits and unrealized losses on contracts
into which it has entered.
An interest rate futures contract provides for the
future sale by one party and the purchase by the other
party of a certain amount of specified interest rate
sensitive financial instruments (debt securities) at a
specified price, date, time and place.
The purpose of entering into a futures contract by the
fund is to protect the fund from fluctuations in
interest rates on securities without actually buying or
selling the securities. For example, if the fund owns
long-term U.S. government securities and interest rates
are expected to increase, the fund may enter into a
futures contract to sell U.S. Treasury Bonds. Such a
transaction would have much the same effect as the
fund's selling some of the long-term bonds in its
portfolio. If interest rates increase as anticipated,
the value of certain long-term U.S. government
securities in the portfolio would decline, but the value
of the fund's futures contracts would increase at
approximately the same rate, thereby keeping the net
asset value of the fund from declining as much as it may
have otherwise. Of course, because the value of
portfolio securities will far exceed the value of the
futures contracts sold by the fund, an increase in the
value of the futures contracts can only mitigate - but
not totally offset - the decline in the value of the
portfolio. If, on the other hand, the fund held cash
reserves and interest rates are expected to decline, the
fund may enter into futures contracts for the purchase
of U.S. government securities in anticipation of later
purchases of securities. The fund can accomplish
similar results by buying securities with long
maturities and selling securities with short maturities.
But by using futures contracts as an investment tool to
reduce risk, given the greater liquidity in the futures
market than in the cash market, it may be possible to
accomplish the same result more easily and more quickly.
No consideration will be paid or received by the fund
upon entering into a futures contract. Initially, the
fund will be required to deposit with the broker an
amount of cash or cash equivalents equal to
approximately 1% to 10% of the contract amount (this
amount is subject to change by the board of trade on
which the contract is traded and members of such board
of trade may charge a higher amount). This amount is
known as "initial margin" and is in the nature of a
performance bond or good faith deposit on the contract
which is returned to the fund, upon termination of the
futures contract, assuming that all contractual
obligations have been satisfied. Subsequent payments,
known as "variation margin," to and from the broker,
will be made daily as the price of the securities
underlying the futures contract fluctuates, making the
long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market."
In addition, when the fund enters into a long position
in futures or options on futures, it must deposit and
maintain in a segregated account with its custodian an
amount of cash or cash equivalents equal to the total
market value of such futures contract, less the amount
of initial margin for the contract and any profits on
the contract that may be held by the broker. At any
time prior to the expiration of a futures contract, the
fund may elect to close the position by taking an
opposite position, which will operate to terminate the
fund's existing position in the contract.
There are several risks in connection with the use of
futures contracts as a hedging device. Successful use
of futures contracts by the fund is subject to the
ability of the manager to predict correctly movements in
the direction of interest rates. These predictions
involve skills and techniques that may be different from
those involved in the management of the fund. In
addition, there can be no assurance that there will be a
perfect correlation between movements in the price of
the securities underlying the futures contract and
movements in the price of the securities which are the
subject of the hedge. A decision as to whether, when
and how to hedge involves the exercise of skill and
judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior
or unexpected trends in interest rates.
Although the fund intends to enter into futures
contracts only if there is an active market for such
contracts, there is no assurance that a liquid market
will exist for the contracts at any particular time.
Most domestic futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the
daily limit has been reached in a particular contract no
trades may be made that day at a price beyond that
limit. It is possible that futures contract prices
could move to the daily limit for several consecutive
trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
In such event, and in the event of adverse price
movements, the fund would be required to make daily cash
payments of variation margin. In such circumstances, an
increase in the value of the portion of the portfolio
being hedged, if any, may partially or completely offset
losses on the futures contract.
If the fund had hedged against the possibility of an
increase in interest rates adversely affecting the value
of securities held in its portfolio and rates decrease
instead, the fund will lose part or all of the benefit
of the increased value of securities which it has hedged
because it will have offsetting losses in its futures
positions. In addition, in such situations, if the fund
has insufficient cash, it may have to sell securities to
meet daily variation margin requirements at a time when
it may be disadvantageous to do so. These sales of
securities may, but will not necessarily, be at
increased prices which reflect the decline in interest
rates.
Purchasing Options. Options on interest rate futures
contracts are similar to options on securities, except
that an option on an interest rate futures contract
gives the purchaser the right, in return for the premium
paid, to assume a position in an interest rate futures
contract (rather than to purchase securities) at a
specified exercise price at any time prior to the
expiration date of the option. A call option gives the
purchaser of such option the right to take a long
position, and obligates its writer to take a short
position in a specified underlying futures contract at a
stated exercise price at any time prior to the
expiration date of the option. A purchaser of a put
option has the right to enter into a short position, and
the writer has the obligation to enter into a long
position in such contract at the exercise price during
the option period. If an option is exercised on the
last trading day prior to the expiration date of the
option, the settlement will be made entirely in cash
equal to the difference between the exercise price of
the option and the closing price of the interest rate
futures contract on the expiration date. The potential
loss related to the purchase of an option on interest
rate futures contracts is limited to the premium paid
for the option (plus transaction costs), and there are
no daily cash payments to reflect changes in the value
of the underlying contract. However, the value of the
option does change daily and that change is reflected in
the net asset value of the fund.
The purchase of put options on interest rate futures
contracts is analogous to the purchase of protective
puts on debt securities so as to hedge a portfolio of
debt securities against the risk of rising interest
rates. The fund may purchase put options on interest
rate futures contracts if the Manager anticipates a rise
in interest rates. Because of the inverse relationship
between trends in interest rates and the values of debt
securities, a rise in interest rates would result in a
decline in the value of the fund's portfolio securities.
Because the value of an interest rate futures contract
moves inversely in relation to changes in interest
rates, as is the case with debt securities, a put option
on such a contract becomes more valuable as interest
rates rise. By purchasing put options on interest rate
futures contracts at a time when the Manager expects
interest rates to rise, the fund would seek to realize a
profit to offset the loss in value of its portfolio
securities, without the need to sell such securities.
The fund may purchase call options on interest rate
futures contracts if the Manager anticipates a decline
in interest rates. Historically, unscheduled
prepayments on mortgage-backed securities (such as GNMA
certificates) have increased in periods of declining
interest rates, as mortgagors have sought to refinance
at lower interest rates. As a result, if the fund
purchases such securities at a premium prior to a period
of declining interest rates, the subsequent prepayments
at par will reduce the yield on such securities by
magnifying the effect of the premium in relationship to
the principal amount of securities, and may, under
extreme circumstances, result in a loss to the fund.
This effect may not be offset by any appreciation in
value in a debt security normally attributable to the
interest rate decline. To protect itself against the
possible erosion of principal on securities purchased at
a premium, the fund may purchase call options on
interest rate futures. The option would increase in
value as interest rates decline, thereby tending to
offset any reductions of the yield on portfolio
securities purchased at a premium resulting from the
effect of prepayments on the amortization of such
premiums.
Writing Options. The fund may write put and call
options on interest rate futures contracts other than as
part of closing sale transactions, in order to increase
its ability to hedge against changes in interest rates.
A call option gives the purchaser of such option the
right to take a long position, and obliges the fund as
its writer to take a short position in a specified
underlying futures contract at a stated exercise price
at any time prior to the expiration date of the option.
A purchaser of a put option has the right to take a
short position, and obligates the fund as the writer to
take a long position in such contract at the exercise
price during the option period.
The writing of a call option on a futures contract
constitutes a partial hedge against declining prices of
the debt securities which are deliverable upon exercise
of the futures contract. If the futures price at
expiration is below the exercise price, the fund will
retain the full amount of the option premium, which
provides a partial hedge against any decline that may
have occurred in the fund's holdings of debt securities.
If a put option is exercised, the net cost to the fund
of the debt securities acquired by it will be reduced by
the amount of the option premium received. Of course,
if market prices have declined, the fund's purchase
price upon exercise of the option may be greater than
the price at which the debt securities might be
purchased in the cash market, and, therefore, a loss may
be realized when the difference between the exercise
price and the market value of the debt securities is
greater than the premium received for writing the
option.
As is currently the case with respect to its purchases
of futures, the fund will write put and call options on
interest rate futures contracts only as a hedge against
changes in the value of its securities that may result
from market conditions, and not for purposes of
speculation.
When the fund writes a call or a put option, it will be
required to deposit initial margin and variation margin
pursuant to brokers' requirements similar to those
applicable to interest rate futures contracts described
above. In addition, net option premiums received for
writing options will be included as initial margin
deposits. At any time prior to the expiration of the
option, the fund may elect to close the position.
In addition to the risks that apply to all options
transactions, there are several special risks relating
to options on interest rate futures contracts. These
risks include the lack of assurance of perfect
correlation between price movements in the option on
interest rate futures, on the one hand, and price
movements in the portfolio securities that are the
subject of the hedge, on the other hand. In addition,
the fund's writing of put and call options on interest
rate futures will be based upon predictions as to
anticipated interest rate trends, which predictions
could prove to be inaccurate. The ability to establish
and close out positions on such options will be subject
to the maintenance of a liquid market, and there can be
no assurance that such a market will be maintained or
that closing transactions will be effected. Moreover,
the option may not be subject to daily price fluctuation
limits while the underlying futures contract is subject
to such limits, and as a result normal pricing
relationships between options and the underlying futures
contract may not exist when the future is trading at its
price limit. In addition, there are risks specific to
writing (as compared to purchasing) such options.
Under policies adopted by the Board of Directors, the
fund's investment in premiums paid for call and put
options at any one time may not exceed 5% of the value
of the fund's total assets.
INVESTMENT RESTRICTIONS
Restrictions numbered 1 through 7 below have been
adopted by the fund as fundamental policies. These
restrictions cannot be changed without approval by the
holders of a majority of the outstanding shares of the
fund, defined as the lesser of (a) 67% or more of the
shares present at a meeting if the holders of more than
50% of the outstanding shares are present in person or
by proxy or (b) more than 50% of the fund's outstanding
shares. The remaining restrictions may be changed by a
vote of the fund's Board of Directors at any time.
The fund will not:
1. Invest in a manner that would cause it to fail to
be a "diversified company" under the 1940 Act and
the rules, regulations and orders thereunder.
2. Issue "senior securities" as defined in the 1940
Act and the rules, regulations and orders
thereunder, except as permitted under the 1940 Act
and the rules, regulations and orders thereunder
3. Invest more than 25% of its total assets in
securities, the issuers of which are in the same
industry. For purposes of this limitation, U.S.
government securities (including its agencies and
instrumentalities) and securities of state or
municipal governments and their political
subdivisions are not considered to be issued by
members of any industry.
4. Borrow money, except that (a) the fund may borrow
from banks for temporary or emergency (not
leveraging) purposes, including the meeting of
redemption requests which might otherwise require
the untimely disposition of securities, and (b) the
fund may, to the extent consistent with its
investment policies, enter into reverse repurchase
agreements, forward roll transactions and similar
investment strategies and techniques. To the
extent that it engages in transactions described in
(a) and (b), the fund will be limited so that no
more than 33 1/3% of the value of its total assets
(including the amount borrowed), valued at the
lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time
the borrowing is made, is derived from such
transactions.
5. Make loans. This restriction does not apply to:
(a) the purchase of debt obligations in which the
fund may invest consistent with its investment
objectives and policies; (b) repurchase agreements;
and (c) loans of its portfolio securities, to the
fullest extent permitted under the 1940 Act.
6. Engage in the business of underwriting securities
issued by other persons, except to the extent that
the fund may technically be deemed to be an
underwriter under the Securities Act of 1933, as
amended, in disposing of portfolio securities.
7. Purchase or sell real estate, real estate
mortgages, commodities or commodity contracts, but
this restriction shall not prevent the fund from
(a) investing in securities of issuers engaged in
the real estate business or the business of
investing in real estate (including interests in
limited partnerships owning or otherwise engaging
in the real estate business or the business of
investing in real estate) and securities which are
secured by real estate or interests therein; (b)
holding or selling real estate received in
connection with securities it holds or held; (c)
trading in futures contracts and options on futures
contracts (including options on currencies to the
extent consistent with the funds' investment
objective and policies); or (d) investing in real
estate investment trust securities.
8. Purchase any securities on margin (except for such
short-term credits as are necessary for the
clearance of purchases and sales of portfolio
securities) or sell any securities short (except
"against the box"). For purposes of this
restriction, the deposit or payment by the fund of
underlying securities and other assets in escrow
and collateral agreements with respect to initial
or maintenance margin in connection with futures
contracts and related options and options on
securities, indexes or similar items is not
considered to be the purchase of a security on
margin.
9. Purchase or sell oil, gas or other mineral
exploration or development programs.
10. Purchase restricted securities, illiquid
securities (such as repurchase agreements with
maturities in excess of seven days) or other
securities which are not readily marketable if
more than 15% of the total assets of the fund
would be invested in such securities.
11. Purchase any security if as a result the
fund would then have more than 5% of its total
assets (taken at current value) invested in
securities of companies that have been in
continuous operations for fewer than three years,
except that this restriction will not apply to
U.S. government securities. (For purposes of this
restriction, issuers include predecessors,
sponsors, controlling persons, general partners
and guarantors of underlying assets.)
12. Make investments for the purpose of
exercising control or management.
13. Engage in the purchase or sale of put, call,
straddle or spread options or in the writing of
such options, except that (a) the fund may
purchase and sell options on U.S. government
securities, write covered put and call options on
U.S. government securities and enter into closing
transactions with respect to such options and (b)
the fund may sell interest rate futures contracts
and write put and call options on interest rate
futures contracts.
Certain restrictions listed above permit the fund
without shareholder approval to engage in investment
practices that the fund does not currently pursue. The
fund has no present intention of altering its current
investment practices as otherwise described in the
prospectus and this SAI and any future change in those
practices would require Board approval and appropriate
disclosure to investors. If a percentage restriction is
complied with at the time of an investment, a later
increase or decrease in the percentage of assets
resulting from a change in the values of portfolio
securities or in the amount of the fund's assets will
not constitute a violation of such restriction.
Diversified Classification
The fund is classified as a diversified fund under the
1940 Act. In order to be classified as a diversified
investment company under the 1940 Act, the fund may not,
with respect to 75% of its assets, invest more than 5%
of its total assets in the securities of any one issuer
(except U.S. government securities) or own more than 10%
of the outstanding voting securities of any one issuer.
For the purposes of diversification under the 1940 Act,
the identification of the issuer of securities depends
upon the terms and conditions of the security. When the
assets and revenues of an agency, authority,
instrumentality or other political subdivision are
separate from those of the government creating the
issuing entity and the security is backed only by the
assets and revenues of such entity, such entity is
deemed to be the sole issuer. Similarly, in the case of
a private activity bond, if that bond is backed only by
the assets and revenues of the nongovernmental user,
then such nongovernmental user is deemed to be the sole
issuer. If, however, in either case, the creating
government or some other entity guarantees a security,
such a guarantee would be considered a separate security
and is to be treated as an issue of such government or
other entity.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment Adviser and Administrator
SSB Citi (formerly SSBC Fund Management Inc.) serves as
investment adviser to the fund pursuant to a written
agreement (the "Investment Advisory Agreement"), which
was approved by the fund's Board of Directors, including
a majority of the directors who are not interested
persons of the fund or Salomon Smith Barney (the
"independent directors"). Subject to the supervision and
direction of the fund's Board of Directors, the Manager
manages the fund's portfolio in accordance with the
fund's stated investment objective and policies, makes
investment decisions for the fund, places orders to
purchase and sell securities, and employs professional
portfolio managers and securities analysts who provide
research services to the fund. The Manager pays the
salary of any officer and employee who is employed by
both it and the trust. The Manager bears all expenses
in connection with the performance of its services. SSB
Citi is a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc. ("Holdings"), which in turn is a
wholly owned subsidiary of Citigroup Inc. ("Citigroup").
SSB Citi (through predecessor entities) has been in the
investment counseling business since 1968 and renders
investment advice to a wide variety of individual,
institutional and investment company clients that had
aggregate assets under management as of October 31, 1999
in excess of $206 billion.
As compensation for SSB Citi's investment advisory
services rendered to the fund, the fund pays a fee
computed daily and paid monthly at the following annual
rates of the Fund's average daily net assets: 0.45% of
the value of the fund's average daily net assets up to
$1 billion and 0.415% of the value of the fund's average
daily net assets in excess of $1 billion. For the
fiscal years ended July 31, 1999, 1998 and 1997, the
fund paid $2,421,062, $2,503,412 and $2,661,308,
respectively, in investment advisory fees.
SSB Citi also serves as administrator to the fund
pursuant to a written agreement (the "Administration
Agreement"), which has been approved by the fund's Board
of Directors, including a majority of the independent
directors of the fund. SSB Citi pays the salary of any
officer and employee who is employed by both it and the
fund and bears all expenses in connection with the
performance of its services.
As administrator SSB Citi will: (a) assist in
supervising all aspects of the fund's operations; (b)
supply the fund with office facilities (which may be in
SSB Citi's own offices), statistical and research data,
data processing services, clerical, accounting and
bookkeeping services, including, but not limited to, the
calculation of (i) the net asset value of shares of the
fund, (ii) applicable deferred sales charges and similar
fees and charges and (iii) distribution fees, internal
auditing and legal services, internal executive and
administrative services, and stationary and office
supplies; and (c) prepare reports to shareholders of the
fund, tax returns and reports to and filings with the
SEC and state blue sky authorities.
As compensation for administrative services rendered to
the fund, SSB Citi receives a fee computed daily and
paid monthly at the following annual rates: 0.20% of the
value of the fund's average daily net assets up to $1
billion and 0.185% of the value of the fund's average
daily net assets in excess of $1 billion. For the
fiscal years ended July 31, 1999, 1998 and 1997, the
fund paid $1,076,027, $1,112,627, and $1,182,804,
respectively in administration fees.
The fund bears expenses incurred in its operation
including: taxes, interest, brokerage fees and
commissions, if any; fees of Directors who are not
officers, directors, shareholders or employees of
Salomon Smith Barney or SSB Citi; SEC fees and state
Blue Sky qualification fees; charges of custodians;
transfer and dividend disbursing agent's fees; certain
insurance premiums; outside auditing and legal expenses;
costs of maintaining corporate existence; investor
services (including allocated telephone and personnel
expenses); costs of preparation and printing of
prospectuses and statements of additional information
for regulatory purposes and for distribution to existing
shareholders; costs of shareholders' reports and
shareholder meetings; and meetings of the officers or
Board of Directors of the fund.
Auditors
KPMG LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the fund's independent auditor to
examine and report on the fund's financial statements
and highlights for the fiscal year ending July 31, 2000.
Custodian and Transfer Agent.
PNC Bank, National Association ("PNC" or "custodian"),
located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania, 19103, serves as the custodian of the
fund. Under its custody agreement with the fund, PNC
holds the fund's securities and keeps all necessary
accounts and records. For its services, PNC receives a
monthly fee based upon the month-end market value of
securities held in custody and also receives securities
transactions charges. The assets of the fund are held
under bank custodianship in compliance with the 1940
Act.
First Data Investors Services Group, Inc. ("First Data"
or "transfer agent"), located at Exchange Place, Boston,
Massachusetts 02109, serves as the fund's transfer
agent. Under the transfer agency agreement, the
transfer agent maintains the shareholder account records
for the fund, handles certain communications between
shareholders and the fund and distributes dividends and
distributions payable by the fund. For these services,
the transfer agent receives a monthly fee computed on
the basis of the number of shareholder accounts it
maintains for the fund during the month, and is
reimbursed for out-of-pocket expenses.
DISTRIBUTOR
CFBDS, Inc., located at 20 Milk Street, Boston,
Massachusetts 02109-5408 serves as the fund's
distributor pursuant to a written agreement dated
October 8, 1998 (the "Distribution Agreement") which was
approved by the fund's Board of Directors, including a
majority of the independent directors on July 15, 1998.
Prior to the merger of Travelers Group, Inc. and
Citicorp Inc. on October 8, 1998, Salomon Smith Barney
served as the fund's distributor.
For the period ended July 31, 1998 through October 7,
1998, the aggregate dollar amount of commissions on
Class A shares was $31,000 all of which was paid to
Salomon Smith Barney. For the period October 8, 1998
through July 31, 1999 the aggregate dollar amount of
commissions on Class A shares was $149,000, $134,100 of
which was paid to Salomon Smith Barney.
For the period July 31, 1998 through October 7, 1998 the
aggregate dollar amount of commissions on Class L shares
was $5,000, all of which was paid to Salomon Smith
Barney. For the period October 8, 1998 through July 31,
1999 the aggregate dollar amount of commissions on Class
L shares was $20,000, $18,000 of which was paid to
Salomon Smith Barney.
For the years ended July 31, 1997, July 31, 1998 and
July 31, 1999, Salomon Smith Barney or its predecessor
received from shareholders $1,000, $1,000 and $11,000,
respectively, in Deferred Sales Charges on the
redemption of Class A shares.
For the years ended July 31, 1997, July 31, 1998 and
July 31, 1999, Salomon Smith Barney or its predecessor
received from shareholders $173,000, $141,000 and
$73,000, respectively, in Deferred Sales Charges on the
redemption of Class B shares.
For the years ended July 31, 1997, July 31, 1998 and
July 31, 1999, Salomon Smith Barney or its predecessor
received from shareholders $1,000, $1,000 and $1,000,
respectively, in Deferred Sales Charges on the
redemption of Class L shares.
When payment is made by the investor before the
settlement date, unless otherwise noted by the investor,
the funds will be held as a free credit balance in the
investor's brokerage account and Salomon Smith Barney
may benefit from the temporary use of the funds. The
fund's Board of Directors has been advised of the
benefits to Salomon Smith Barney resulting from these
settlement procedures and will take such benefits into
consideration when reviewing the Investment Advisory
Agreement for continuance.
Distribution Arrangements. To compensate Salomon Smith
Barney for the services it provides and for the expense
it bears, the fund has adopted a services and
distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. Under the Plan, the fund pays
Salomon Smith Barney a service fee, accrued daily and
paid monthly, calculated at the annual rate of 0.25% of
the value of the fund's average daily net assets
attributable to the Class A, Class B and Class L shares.
In addition, the fund pays Salomon Smith Barney a
distribution fee with respect to the Class B and Class L
shares primarily intended to compensate Salomon Smith
Barney for its initial expense of paying financial
consultants a commission upon sales of those shares.
The Class B and Class L distribution fee is calculated
at the annual rate of 0.50% and 0.45%, respectively of
the value of the fund's average daily net assets
attributable to the shares of the respective class.
The following service and distribution fees were
incurred during the periods indicated:
DISTRIBUTION PLAN FEES
Year
Ended 7/31/99
Year
Ended 7/31/98
Year
Ended 7/31/97
Class A
$ 886,006
$ 975,661
$ 1,078,042
Class B
535,706
631,602
775,428
Class L
29,353
16,373
10,458
For the year ended July 31, 1999, Salomon Smith Barney
incurred distribution expenses totaling $442,477,
consisting of $13,069 for advertising, $1,315 for
printing and mailing of Prospectuses, $2,786 for
interest expense, $252,927 branch expenses, $152,380 for
total compensation to Salomon Smith Barney Financial
Consultants, and in accruals for interest on the excess
of Salomon Smith Barney expenses incurred in
distribution of the fund's shares over the sum of the
distribution fees and deferred sales charges received by
Salomon Smith Barney from the fund.
Under its terms, the Plan continues from year to year,
provided such continuance is approved annually by vote
of the fund's Board of Directors, including a majority
of the independent directors. The Plan may not be
amended to increase the amount of the service and
distribution fees without shareholder approval, and all
amendments of the Plan also must be approved by the
directors and independent directors in the manner
described above. The Plan may be terminated with
respect to a class of the fund at any time, without
penalty, by vote of a majority of the independent
directors or by vote of a majority (as defined in the
1940 Act) of the outstanding voting securities of the
class. Pursuant to the Plan, Salomon Smith Barney will
provide the fund's Board of Directors with periodic
reports of amounts expended under the Plan and the
purpose for which such expenditures were made.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the fund are
made by the manager, subject to the overall review of
the fund's Board of Directors. Although investment
decisions for the fund are made independently from those
of the other accounts managed by the manager,
investments of the type the fund may make also may be
made by those other accounts. When the fund and one or
more other accounts managed by the manager are prepared
to invest in, or desire to dispose of, the same
security, available investments or opportunities for
sales will be allocated in a manner believed by the
manager to be equitable to each. In some cases, this
procedure may adversely affect the price paid or
received by the fund or the size of the position
obtained or disposed of by the fund.
Allocation of transactions on behalf of the fund,
including their frequency, to various dealers is
determined by the manager in its best judgment and in a
manner deemed fair and reasonable to the fund's
shareholders. The primary considerations of the manager
in allocating transactions are availability of the
desired security and the prompt execution of orders in
an effective manner at the most favorable prices.
Subject to these considerations, dealers that provide
supplemental investment research and statistical or
other services to the manager may receive orders for
portfolio transactions by the fund. Information so
received is in addition to, and not in lieu of, services
required to be performed by the manager, and the fees of
the manager are not reduced as a consequence of their
receipt of the supplemental information. The
information may be useful to the manager in serving both
the fund and other clients, and conversely, supplemental
information obtained by the placement of business of
other clients may be useful to the manager in carrying
out its obligations to the fund.
The fund will not purchase securities during the
existence of any underwriting or selling group relating
to the securities, of which the manager is a member,
except to the extent permitted by the SEC. Under
certain circumstances, the fund may be at a disadvantage
because of this limitation in comparison with other
funds that have similar investment objectives but that
are not subject to a similar limitation.
The fund does not pay any brokerage commissions for
portfolio transactions:
PORTFOLIO TURNOVER
The fund generally does not engage in short-term trading
but intends to purchase securities for long-term capital
appreciation. The fund's annual portfolio turnover rate
is not expected to exceed 100%. A portfolio turnover
rate of 100% would occur if all of the securities in the
fund's portfolio were replaced once during a period of
one year. The portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio
securities for the year by the monthly average value of
portfolio securities. Securities with remaining
maturities of one year or less at the date of
acquisition are excluded from the calculation. For the
fiscal years ended July 31, 1999, 1998 and 1997, the
fund's portfolio turnover rate was 205%, 363% and 121%,
respectively.
Future portfolio turnover rates may vary greatly from
year to year as well as within a particular year and may
be affected by cash requirements for redemptions of the
fund's shares. Portfolio turnover rates will largely
depend on the level of purchases and redemptions of fund
shares. Higher portfolio turnover rates can result in
corresponding increases in brokerage commissions. In
addition, to the extent the fund realizes net short-term
capital gains as the result of more portfolio
transactions, distributions of such gains would be
taxable to shareholders as ordinary income.
PURCHASE OF SHARES
Sales Charge Alternatives
The following classes of shares are available for
purchase. See the Prospectus for a discussion of
factors to consider in selecting which Class of shares
to purchase.
Class A Shares. Class A shares are sold to investors at
the public offering price, which is the net asset value
plus an initial sales charge as follows:
Amount of
Investment
Sales Charge as a
%
Of Transaction
Sales Charge as a
%
of Amount
Invested
Dealers'
Reallowance as %
of Offering Price
Less than $25,000
4.50
4.71
4.00
$ 25,000 - 49,999
4.00
4.17
3.60
50,000 - 99,999
3.50
3.63
3.15
100,000 - 249,999
2.50
2.56
2.25
250,000 - 499,999
1.50
1.52
1.35
500,000 and over
*
*
*
* Purchases of Class A shares of $500,000 or more
will be made at net asset value without any
initial sales charge, but will be subject to a
deferred sales charge of 1.00% on redemptions made
within 12 months of purchase. The deferred sales
charge on Class A shares is payable to Salomon
Smith Barney, which compensates Salomon Smith
Barney Financial Consultants and other dealers
whose clients make purchases of $500,000 or more.
The deferred sales charge is waived in the same
circumstances in which the deferred sales charge
applicable to Class B and Class L shares is
waived. See "Deferred Sales Charge Alternatives"
and "Waivers of Deferred Sales Charge."
Members of the selling group may receive up to 90% of
the sales charge and may be deemed to be underwriters of
the fund as defined in the 1933 Act. The reduced sales
charges shown above apply to the aggregate of purchases
of Class A shares of the fund made at one time by "any
person," which includes an individual and his or her
immediate family, or a trustee or other fiduciary of a
single trust estate or single fiduciary account.
Class B Shares. Class B shares are sold without an
initial sales charge but are subject to a Deferred Sales
Charge payable upon certain redemptions. See "Deferred
Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an initial
sales charge of 1.00% (which is equal to 1.01% of the
amount invested) and are subject to a Deferred Sales
Charge payable upon certain redemptions. See "Deferred
Sales Charge Provisions" below. Until June 22, 2001
purchases of Class L shares by investors who were
holders of Class C shares of the fund on June 12, 1998
will not be subject to the 1% initial sales charge.
Class Y Shares. Class Y shares are sold without an
initial sales charge or Deferred Sales Charge and are
available only to investors investing a minimum of
$15,000,000 (except purchases of Class Y shares by Smith
Barney Concert Allocation Series Inc., for which there
is no minimum purchase amount).
General
Investors may purchase shares from a Salomon Smith
Barney Financial Consultant or a broker that clears
through Salomon Smith Barney ("Dealer Representative").
In addition, certain investors, including qualified
retirement plans purchasing through certain Dealer
Representatives, may purchase shares directly from the
fund. When purchasing shares of the fund, investors
must specify whether the purchase is for Class A, Class
B, Class L or Class Y shares. Salomon Smith Barney and
Dealer Representatives may charge their customers an
annual account maintenance fee in connection with a
brokerage account through which an investor purchases or
holds shares. Accounts held directly at First Data are
not subject to a maintenance fee.
Investors in Class A, Class B and Class L shares may
open an account in the fund by making an initial
investment of at least $1,000 for each account, or $250
for an IRA or a Self-Employed Retirement Plan, in the
fund. Investors in Class Y shares may open an account by
making an initial investment of $15,000,000. Subsequent
investments of at least $50 may be made for all Classes.
For participants in retirement plans qualified under
Section 403(b)(7) or Section 401(c) of the Code, and for
shareholders purchasing shares of the fund through the
Systematic Investment Plan on a monthly basis, the
minimum initial investment requirement for Class A,
Class B and Class L shares and subsequent investment
requirement for all such Classes is $25. For
shareholders purchasing shares of the fund through the
Systematic Investment Plan on a quarterly basis, the
minimum initial investment required for Class A, Class B
and Class L shares and the subsequent investment
requirement for all Classes is $50. There are no
minimum investment requirements for Class A shares for
employees of Citigroup and its subsidiaries, including
Salomon Smith Barney, unitholders who invest
distributions from a UIT sponsored by Salomon Smith
Barney, and Directors/Trustees of any of the Smith
Barney Mutual Funds, and their spouses and children. The
fund reserves the right to waive or change minimums, to
decline any order to purchase its shares and to suspend
the offering of shares from time to time. Shares
purchased will be held in the shareholder's account by
First Data. Share certificates are issued only upon a
shareholder's written request to First Data.
Purchase orders received by the fund or a Salomon Smith
Barney Financial Consultant prior to the close of
regular trading on the NYSE, on any day the fund
calculates its net asset value, are priced according to
the net asset value determined on that day (the ''trade
date''). Orders received by a Dealer Representative
prior to the close of regular trading on the NYSE on any
day the fund calculates its net asset value, are priced
according to the net asset value determined on that day,
provided the order is received by the fund or the fund's
agent prior to its close of business. For shares
purchased through Salomon Smith Barney or a Dealer
Representative purchasing through Salomon Smith Barney,
payment for shares of the fund is due on the third
business day after the trade date. In all other cases,
payment must be made with the purchase order.
Systematic Investment Plan. Shareholders may make
additions to their accounts at any time by purchasing
shares through a service known as the Systematic
Investment Plan. Under the Systematic Investment Plan,
Salomon Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly
basis or at least $50 on a quarterly basis to charge the
shareholder's account held with a bank or other
financial institution on a monthly or quarterly basis as
indicated by the shareholder, to provide for systematic
additions to the shareholder's fund account. A
shareholder who has insufficient funds to complete the
transfer will be charged a fee of up to $25 by Salomon
Smith Barney or First Data. The Systematic Investment
Plan also authorizes Salomon Smith Barney to apply cash
held in the shareholder's Salomon Smith Barney brokerage
account or redeem the shareholder's shares of a Smith
Barney money market fund to make additions to the
account. Additional information is available from the
fund or a Salomon Smith Barney Financial Consultant or a
Dealer Representative.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers. Purchases of Class A
shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to (i)
Board Members and employees of Citigroup and its
subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including
retired Board Members and employees); the immediate
families of such persons (including the surviving spouse
of a deceased Board Member or employee); and to a
pension, profit-sharing or other benefit plan for such
persons and (ii) employees of members of the National
Association of Securities Dealers, Inc., provided such
sales are made upon the assurance of the purchaser that
the purchase is made for investment purposes and that
the securities will not be resold except through
redemption or repurchase; (b) offers of Class A shares
to any other investment company to effect the
combination of such company with the fund by merger,
acquisition of assets or otherwise; (c) purchases of
Class A shares by any client of a newly employed Salomon
Smith Barney Financial Consultant (for a period up to 90
days from the commencement of the Financial Consultant's
employment with Salomon Smith Barney), on the condition
the purchase of Class A shares is made with the proceeds
of the redemption of shares of a mutual fund which (i)
was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial
Consultant and (iii) was subject to a sales charge; (d)
purchases by shareholders who have redeemed Class A
shares in the fund (or Class A shares of another Smith
Barney Mutual Fund that is offered with a sales charge)
and who wish to reinvest their redemption proceeds in
the fund, provided the reinvestment is made within 60
calendar days of the redemption; (e) purchases by
accounts managed by registered investment advisory
subsidiaries of Citigroup; (f) direct rollovers by plan
participants of distributions from a 401(k) plan offered
to employees of Citigroup or its subsidiaries or a
401(k) plan enrolled in the Smith Barney 401(k) Program
(Note: subsequent investments will be subject to the
applicable sales charge); (g) purchases by a separate
account used to fund certain unregistered variable
annuity contracts; (h) investments of distributions from
or proceeds from a sale of a UIT sponsored by Salomon
Smith Barney; (i) purchases by investors participating
in a Salomon Smith Barney fee-based arrangement; and (j)
purchases of Class A shares by Section 403(b) or Section
401(a) or (k) accounts associated with Copeland
Retirement Programs. In order to obtain such discounts,
the purchaser must provide sufficient information at the
time of purchase to permit verification that the
purchase would qualify for the elimination of the sales
charge.
Right of Accumulation. Class A shares of the fund may
be purchased by ''any person'' (as defined above) at a
reduced sales charge or at net asset value determined by
aggregating the dollar amount of the new purchase and
the total net asset value of all Class A shares of the
fund and of other Smith Barney Mutual Funds that are
offered with a sales charge as currently listed under
''Exchange Privilege'' then held by such person and
applying the sales charge applicable to such aggregate.
In order to obtain such discount, the purchaser must
provide sufficient information at the time of purchase
to permit verification that the purchase qualifies for
the reduced sales charge. The right of accumulation is
subject to modification or discontinuance at any time
with respect to all shares purchased thereafter.
Letter of Intent - Class A Shares. A Letter of Intent
for an amount of $50,000 or more provides an opportunity
for an investor to obtain a reduced sales charge by
aggregating investments over a 13 month period, provided
the investor refers to such Letter when placing orders.
For purposes of a Letter of Intent, the ''Amount of
Investment'' as referred to in the preceding sales
charge table includes (i) all Class A shares of the fund
and other Smith Barney Mutual Funds offered with a sales
charge acquired during the term of the letter plus (ii)
the value of all Class A shares previously purchased and
still owned. Each investment made during the period
receives the reduced sales charge applicable to the
total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the
difference between the sales charges applicable to the
purchases made and the charges previously paid, or an
appropriate number of escrowed shares will be redeemed.
The term of the Letter will commence upon the date the
Letter is signed, or at the option of the investor, up
to 90 days before such date. Please contact a Salomon
Smith Barney Financial Consultant or First Data to
obtain a Letter of Intent application.
Letter of Intent - Class Y Shares. A Letter of Intent
may also be used as a way for investors to meet the
minimum investment requirement for Class Y shares
(except purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no
minimum purchase amount). Such investors must make an
initial minimum purchase of $5,000,000 in Class Y shares
of the fund and agree to purchase a total of $15,000,000
of Class Y shares of the fund within 13 months from the
date of the Letter. If a total investment of $15,000,000
is not made within the 13-month period, all Class Y
shares purchased to date will be transferred to Class A
shares, where they will be subject to all fees
(including a service fee of 0.25%) and expenses
applicable to the fund's Class A shares, which may
include a Deferred Sales Charge of 1.00%. Please contact
a Salomon Smith Barney Financial Consultant or First
Data for further information.
Deferred Sales Charge Provisions
''Deferred Sales Charge Shares'' are: (a) Class B
shares; (b) Class L shares; and (c) Class A shares that
were purchased without an initial sales charge but are
subject to a Deferred Sales Charge. A Deferred Sales
Charge may be imposed on certain redemptions of these
shares.
Any applicable Deferred Sales Charge will be assessed on
an amount equal to the lesser of the original cost of
the shares being redeemed or their net asset value at
the time of redemption. Deferred Sales Charge Shares
that are redeemed will not be subject to a Deferred
Sales Charge to the extent that the value of such shares
represents: (a) capital appreciation of fund assets; (b)
reinvestment of dividends or capital gain distributions;
(c) with respect to Class B shares, shares redeemed more
than five years after their purchase; or (d) with
respect to Class L shares and Class A shares that are
Deferred Sales Charge Shares, shares redeemed more than
12 months after their purchase.
Class L shares and Class A shares that are Deferred
Sales Charge Shares are subject to a 1.00% Deferred
Sales Charge if redeemed within 12 months of purchase.
In circumstances in which the Deferred Sales Charge is
imposed on Class B shares, the amount of the charge will
depend on the number of years since the shareholder made
the purchase payment from which the amount is being
redeemed. Solely for purposes of determining the number
of years since a purchase payment, all purchase payments
made during a month will be aggregated and deemed to
have been made on the last day of the preceding Salomon
Smith Barney statement month. The following table sets
forth the rates of the charge for redemptions of Class B
shares by shareholders, except in the case of Class B
shares held under the Smith Barney 401(k) Program, as
described below. See ''Smith Barney 401(k) and
ExecChoiceTM Programs.''
Year Since Purchase Payment Was
Made
Deferred Sales Charge
First
4.50%
Second
4.00
Third
3.00
Fourth
2.00
Fifth
1.00
Sixth through eight
0.00
Class B shares will convert automatically to Class A
shares eight years after the date on which they were
purchased and thereafter will no longer be subject to
any distribution fees. There will also be converted at
that time such proportion of Class B Dividend Shares
owned by the shareholders as the total number of his or
her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than
Class B Dividend Shares) owned by the shareholder.
In determining the applicabilty of any Deferred Sales
Charge, it will be assumed that a redemption is made
first of shares representing capital appreciation, next
of shares representing the reinvestment of dividends and
capital gain distributions and finally of other shares
held by the shareholder for the longest period of time.
The length of time that Deferred Sales Charge Shares
acquired through an exchange have been held will be
calculated from the date the shares exchanged were
initially acquired in one of the other Smith Barney
Mutual Funds, and fund shares being redeemed will be
considered to represent, as applicable, capital
appreciation or dividend and capital gain distribution
reinvestments in such other funds. For Federal income
tax purposes, the amount of the Deferred Sales Charge
will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount
of any Deferred Sales Charge will be paid to Salomon
Smith Barney.
To provide an example, assume an investor purchased 100
Class B shares of the fund at $10 per share for a cost
of $1,000. Subsequently, the investor acquired 5
additional shares of the fund through dividend
reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his or
her investment. Assuming at the time of the redemption
the net asset value had appreciated to $12 per share,
the value of the investor's shares would be $1,260 (105
shares at $12 per share). The Deferred Sales Charge
would not be applied to the amount which represents
appreciation ($200) and the value of the reinvested
dividend shares ($60). Therefore, $240 of the $500
redemption proceeds ($500 minus $260) would be charged
at a rate of 4.00% (the applicable rate for Class B
shares) for a total Deferred Sales Charge of $9.60.
Waivers of Deferred Sales Charge
The Deferred Sales Charge will be waived on: (a)
exchanges (see ''Exchange Privilege''); (b) automatic
cash withdrawals in amounts equal to or less than 1.00%
per month of the value of the shareholder's shares at
the time the withdrawal plan commences (see ''Automatic
Cash Withdrawal Plan'') (but, automatic cash withdrawals
in amounts equal to or less than 2.00% per month of the
value of the shareholder's shares will be permitted for
withdrawal plans established prior to November 7, 1994);
(c) redemptions of shares within 12 months following the
death or disability of the shareholder; (d) redemptions
of shares made in connection with qualified
distributions from retirement plans or IRAs upon the
attainment of age 591/2; (e) involuntary redemptions; and
(f) redemptions of shares to effect a combination of the
fund with any investment company by merger, acquisition
of assets or otherwise. In addition, a shareholder who
has redeemed shares from other Smith Barney Mutual Funds
may, under certain circumstances, reinvest all or part
of the redemption proceeds within 60 days and receive
pro rata credit for any Deferred Sales Charge imposed on
the prior redemption.
Deferred Sales Charge waivers will be granted subject to
confirmation (by Salomon Smith Barney in the case of
shareholders who are also Salomon Smith Barney clients
or by First Data in the case of all other shareholders)
of the shareholder's status or holdings, as the case may
be.
Smith Barney 401(k) and ExecChoiceTM Programs
Investors may be eligible to participate in the Smith
Barney 401(k) Program or the Smith Barney ExecChoiceTM
Program. To the extent applicable, the same terms and
conditions, which are outlined below, are offered to all
plans participating (''Participating Plans'') in these
programs.
The fund offers to Participating Plans Class A and Class
L shares as investment alternatives under the Smith
Barney 401(k) and ExecChoiceTM Programs. Class A and
Class L shares acquired through the Participating Plans
are subject to the same service and/or distribution fees
as the Class A and Class L shares acquired by other
investors; however, they are not subject to any initial
sales charge or Deferred Sales Charge. Once a
Participating Plan has made an initial investment in the
fund, all of its subsequent investments in the fund must
be in the same Class of shares, except as otherwise
described below.
Class A Shares. Class A shares of the fund are offered
without any sales charge or Deferred Sales Charge to any
Participating Plan that purchases $1,000,000 or more of
Class A shares of one or more funds of the Smith Barney
Mutual Funds.
Class L Shares. Class L shares of the fund are offered
without any sales charge or Deferred Sales Charge to any
Participating Plan that purchases less than $1,000,000
of Class L shares of one or more funds of the Smith
Barney Mutual Funds.
401(k) and ExecChoiceTM Plans Opened On or After June 21,
1996. If, at the end of the fifth year after the date
the Participating Plan enrolled in the Smith Barney
401(k) Program or the Smith Barney ExecChoiceTM Program,
a Participating Plan's total Class L holdings in all
non-money market Smith Barney Mutual Funds equal at
least $1,000,000, the Participating Plan will be offered
the opportunity to exchange all of its Class L shares
for Class A shares of the fund. For Participating Plans
that were originally established through a Salomon Smith
Barney retail brokerage account, the five-year period
will be calculated from the date the retail brokerage
account was opened. Such Participating Plans will be
notified of the pending exchange in writing within 30
days after the fifth anniversary of the enrollment date
and, unless the exchange offer has been rejected in
writing, the exchange will occur on or about the 90th
day after the fifth anniversary date. If the
Participating Plan does not qualify for the five-year
exchange to Class A shares, a review of the
Participating Plan's holdings will be performed each
quarter until either the Participating Plan qualifies or
the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year
after the date a Participating Plan enrolled in the
Smith Barney 401(k) Program, if a Participating Plan's
total Class L holdings in all non-money market Smith
Barney Mutual Funds equal at least $500,000 as of the
calendar year-end, the Participating Plan will be
offered the opportunity to exchange all of its Class L
shares for Class A shares of the fund. Such Plans will
be notified in writing within 30 days after the last
business day of the calendar year and, unless the
exchange offer has been rejected in writing, the
exchange will occur on or about the last business day of
the following March.
Any Participating Plan in the Smith Barney 401(k) or the
Smith Barney ExecChoiceTM Programs, whether opened before
or after June 21, 1996, that has not previously
qualified for an exchange into Class A shares will be
offered the opportunity to exchange all of its Class L
shares for Class A shares of the fund, regardless of
asset size, at the end of the eighth year after the date
the Participating Plan enrolled in the Smith Barney
401(k) Program. Such Plans will be notified of the
pending exchange in writing approximately 60 days before
the eighth anniversary of the enrollment date and,
unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary
date. Once an exchange has occurred, a Participating
Plan will not be eligible to acquire additional Class L
shares of the fund, but instead may acquire Class A
shares of the fund. Any Class L shares not converted
will continue to be subject to the distribution fee.
Participating Plans wishing to acquire shares of the
fund through the Smith Barney 401(k) Program or the
Smith Barney ExecChoiceTM Program must purchase such
shares directly from the transfer agent. For further
information regarding these Programs, investors should
contact a Salomon Smith Barney Financial Consultant.
Determination of Public Offering Price
The fund offers its shares to the public on a continuous
basis. The public offering price for a Class A and
Class Y share of the fund is equal to the net asset
value per share at the time of purchase, plus for Class
A shares an initial sales charge based on the aggregate
amount of the investment. The public offering price for
a Class L share (and Class A share purchases, including
applicable rights of accumulation, equaling or exceeding
$500,000) is equal to the net asset value per share at
the time of purchase and no sales charge is imposed at
the time of purchase. A Deferred Sales Charge, however,
is imposed on certain redemptions of Class L shares, and
Class A shares when purchased in amounts exceeding
$500,000. The method of computation of the public
offering price is shown in each fund's financial
statements, incorporated by reference in their entirety
into this SAI.
REDEMPTION OF SHARES
The right of redemption of shares of the fund may be
suspended or the date of payment postponed (a) for any
periods during which the NYSE is closed (other than for
customary weekend and holiday closings), (b) when
trading in the markets the fund normally utilizes is
restricted, or an emergency exists, as determined by the
SEC, so that disposal of the fund's investments or
determination of its net asset value is not reasonably
practicable or (c) for any other periods as the SEC by
order may permit for the protection of the fund's
shareholders.
If the shares to be redeemed were issued in certificate
form, the certificates must be endorsed for transfer (or
be accompanied by an endorsed stock power) and must be
submitted to First Data together with the redemption
request. Any signature appearing on a share
certificate, stock power or written redemption request
in excess of $10,000 must be guaranteed by an eligible
guarantor institution such as a domestic bank, savings
and loan institution, domestic credit union, member bank
of the Federal Reserve System or member firm of a
national securities exchange. Written redemption
requests of $10,000 or less do not require a signature
guarantee unless more than one such redemption request
is made in any 10-day period or the redemption proceeds
are to be sent to an address other than the address of
record. Unless otherwise directed, redemption proceeds
will be mailed to an investor's address of record.
First Data may require additional supporting documents
for redemptions made by corporations, executors,
administrators, directors or guardians. A redemption
request will not be deemed properly received until First
Data receives all required documents in proper form.
If a shareholder holds shares in more than one Class,
any request for redemption must specify the Class being
redeemed. In the event of a failure to specify which
Class, or if the investor owns fewer shares of the Class
than specified, the redemption request will be delayed
until the transfer agent receives further instructions
from Salomon Smith Barney, or if the shareholder's
account is not with Salomon Smith Barney, from the
shareholder directly. The redemption proceeds will be
remitted on or before the third business day following
receipt of proper tender, except on any days on which
the NYSE is closed or as permitted under the 1940 Act,
in extraordinary circumstances. Generally, if the
redemption proceeds are remitted to a Salomon Smith
Barney brokerage account, these funds will not be
invested for the shareholder's benefit without specific
instruction and Salomon Smith Barney will benefit from
the use of temporarily uninvested funds. Redemption
proceeds for shares purchased by check, other than a
certified or official bank check, will be remitted upon
clearance of the check, which may take up to fifteen
days or more.
Distribution in Kind
If the Board of Directors of the fund determines that it
would be detrimental to the best interests of the
remaining shareholders to make a redemption payment
wholly in cash, the fund may pay, in accordance with SEC
rules, any portion of a redemption in excess of the
lesser of $250,000 or 1.00% of the fund's net assets by
a distribution in kind of portfolio securities in lieu
of cash. Shareholders may incur brokerage commissions
when they subsequently sell those securities.
Automatic Cash Withdrawal Plan
An automatic cash withdrawal plan (the "Withdrawal
Plan") is available to shareholders of the fund who own
shares of the fund with a value of at least $10,000 and
who wish to receive specific amounts of cash monthly or
quarterly. Withdrawals of at least $50 may be made
under the Withdrawal Plan by redeeming as many shares of
the fund as may be necessary to cover the stipulated
withdrawal payment. Any applicable Deferred Sales
Charge will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of
a shareholder's shares at the time the Withdrawal Plan
commences. (With respect to Withdrawal Plans in effect
prior to November 7, 1994, any applicable Deferred Sales
Charge will be waived on amounts withdrawn that do not
exceed 2.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan commences). To
the extent withdrawals exceed dividends, distributions
and appreciation of a shareholder's investment in a
fund, continued withdrawal payments will reduce the
shareholder's investment, and may ultimately exhaust it.
Withdrawal payments should not be considered as income
from investment in a fund. Furthermore, as it generally
would not be advantageous to a shareholder to make
additional investments in the fund at the same time he
or she is participating in the Withdrawal Plan,
purchases by such shareholders in amounts of less than
$5,000 ordinarily will not be permitted.
Shareholders of a fund who wish to participate in the
Withdrawal Plan and who hold their shares of the fund in
certificate form must deposit their share certificates
with the transfer agent as agent for Withdrawal Plan
members. All dividends and distributions on shares in
the Withdrawal Plan are reinvested automatically at net
asset value in additional shares of the fund involved.
A shareholder who purchases shares directly through the
transfer agent may continue to do so and applications
for participation in the Withdrawal Plan must be
received by the transfer agent no later than the eighth
day of the month to be eligible for participation
beginning with that month's withdrawal. For additional
information, shareholders should contact a Salomon Smith
Barney Financial Consultant.
Waivers of Deferred Sales Charge
The Deferred Sales Charge will be waived on: (a)
exchanges (see "Exchange Privilege" in the prospectus);
(b) automatic cash withdrawals in amounts equal to or
less than 1.00% per month of the value of the
shareholder's shares at the time the withdrawal plan
commences (see "Automatic Cash Withdrawal Plan in the
prospectus") (but, automatic cash withdrawals in amounts
equal to or less than 2.00% per month of the value of
the shareholder's shares will be permitted for
Withdrawal Plans established prior to November 7, 1994);
(c) redemptions of shares within 12 months following the
death or disability of the shareholder; (d) redemptions
of shares made in connection with qualified
distributions from retirement plans or IRAs upon the
attainment of age 591/2 ; (e) involuntary redemptions; and
(f) redemptions of shares to effect a combination of the
fund with any investment company by merger, acquisition
of assets or otherwise. In addition, a shareholder who
has redeemed shares from other Smith Barney Mutual F
unds may, under certain circumstances, reinvest all or
part of the redemption proceeds within 60 days and
receive pro rata credit for any Deferred Sales Charge
imposed on the prior redemption. Deferred Sales Charge
waivers will be granted subject to confirmation (by
Salomon Smith Barney in the case of shareholders who are
also Salomon Smith Barney clients or by the transfer
agent in the case of all other shareholders) of the
shareholder's status or holdings, as the case may be.
Additional Information Regarding Telephone Redemption
And Exchange Program
Neither the fund nor its agents will be liable for
following instructions communicated by telephone that
are reasonably believed to be genuine. The fund and its
agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions
(for example, a shareholder's name and account number
will be required and phone calls may be recorded). The
fund reserves the right to suspend, modify or
discontinue the telephone redemption and exchange
program or to impose a charge for this service at any
time following at least seven (7) days' prior notice to
shareholders.
VALUATION OF SHARES
Each class's net asset value per share is calculated on
each day, Monday through Friday, except days on which
the NYSE is closed. The NYSE currently is scheduled to
be closed on New Year's Day, Martin Luther King, Jr.
Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday or subsequent Monday when
one of these holidays falls on a Saturday or Sunday,
respectively. Because of the differences in
distribution fees and class-specific expenses, the per
share net asset value of each class may differ. The
following is a description of the procedures used by the
fund in valuing its assets.
Generally, the fund's investments are valued at market
value or, in the absence of a market value with respect
to any securities, at fair value as determined by or
under the direction of the fund's Board of Directors.
Short-term investments that mature in 60 days or less
are valued at amortized cost whenever the fund's Board
of Directors determines that amortized cost is the fair
value of those instruments.
Securities listed on a national securities exchange will
be valued on the basis of the last sale on the date on
which the valuation is made or, in the absence of sales,
at the mean between the closing bid and asked prices.
Over-the-counter securities will be valued at the mean
between the closing bid and asked prices on each day,
or, if market quotations for those securities are not
readily available, at fair value, as determined in good
faith by the fund's Board of Directors. Short-term
obligations with maturities of 60 days or less are
valued at amortized cost, which constitutes fair value
as determined by the fund's Board of Directors.
Amortized cost involves valuing an instrument at its
original cost to the fund and thereafter assuming a
constant amortization to maturity of any discount or
premium, regardless of the effect of fluctuating
interest rates on the market value of the instrument.
All other securities and other assets of the fund will
be valued at fair value as determined in good faith by
the fund's Board of Directors.
The fund's net asset value per share is determined as of
the close of regular trading on the NYSE, on each day
that the NYSE is open, by dividing the value of the
fund's net assets attributable to each class by the
total number of shares of the class outstanding.
EXCHANGE PRIVILEGE
Shareholders of any of the Smith Barney Mutual Funds may
exchange all or part of their shares for shares of the
same Class of other Smith Barney Mutual Funds, on the
basis of relative net asset value per share at the time
of exchange as follows:
A. Class A and Class Y shares of the fund may be
exchanged without a sales charge for the
respective shares of any of the Smith Barney
Mutual Funds.
B. Class B shares of any fund may be exchanged
without a sales charge. Class B shares of the
fund exchanged for Class B shares of another Smith
Barney Mutual Fund will be subject to the higher
applicable Deferred Sales Charge of the two funds
and, for purposes of calculating Deferred Sales
Charge rates and conversion periods, will be
deemed to have been held since the date the shares
being exchanged were deemed to be purchased.
C. Class L shares of any fund may be exchanged
without a sales charge. For purposes of Deferred
Sales Charge applicability, Class L shares of the
fund exchanged for Class C shares of another Smith
Barney Mutual Fund will be deemed to have been
owned since the date the shares being exchanged
were deemed to be purchased.
The exchange privilege enables shareholders in any Smith
Barney Mutual Fund to acquire shares of the same Class
in a fund with different investment objectives when they
believe a shift between funds is an appropriate
investment decision. This privilege is available to
shareholders residing in any state in which the fund
shares being acquired may legally be sold. Prior to any
exchange, the shareholder should obtain and review a
copy of the current prospectus of each fund into which
an exchange is being considered. Prospectuses may be
obtained from a Salomon Smith Barney Financial
Consultant.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are
redeemed at the then-current net asset value and,
subject to any applicable Deferred Sales Charge, the
proceeds are immediately invested, at a price as
described above, in shares of the fund being acquired.
Salomon Smith Barney reserves the right to reject any
exchange request. The exchange privilege may be
modified or terminated at any time after written notice
to shareholders.
Additional Information Regarding the Exchange Privilege.
Although the exchange privilege is an important benefit,
excessive exchange transactions can be detrimental to
the fund's performance and its shareholders. The
manager may determine that a pattern of frequent
exchanges is excessive and contrary to the best
interests of the fund's other shareholders. In this
event, the fund may, at its discretion, decide to limit
additional purchases and/or exchanges by a shareholder.
Upon such a determination, the fund will provide notice
in writing or by telephone to the shareholder at least
15 days prior to suspending the exchange privilege and
during the 15 day period the shareholder will be
required to (a) redeem his or her shares in the fund or
(b) remain invested in the fund or exchange into any of
the funds of the Smith Barney Mutual Funds ordinarily
available, which position the shareholder would be
expected to maintain for a significant period of time.
All relevant factors will be considered in determining
what constitutes an abusive pattern of exchanges.
PERFORMANCE DATA
From time to time the fund may advertise its total
return and average annual total return in advertisements
and/or other types of sales literature. These figures
are computed separately for Class A, Class B, Class L
and Class Y shares of the fund. These figures are based
on historical earnings and are not intended to indicate
future performance. Total return is computed for a
specified period of time assuming deduction of the
maximum sales charge, if any, from the initial amount
invested and reinvestment of all income dividends and
capital gain distributions on the reinvestment dates at
prices calculated as stated in the prospectus, then
dividing the value of the investment at the end of the
period so calculated by the initial amount invested and
subtracting 100%. The standard average annual total
return, as prescribed by the SEC is derived from this
total return, which provides the ending redeemable
value. Such standard total return information may also
be accompanied with nonstandard total return information
for differing periods computed in the same manner but
without annualizing the total return or taking sales
charges into account. The fund may also include
comparative performance information in advertising or
marketing its shares. Such performance information may
include data from Lipper Analytical Services, Inc. and
other financial publications.
From time to time, the fund may quote a fund's yield or
total return in advertisements or in reports and other
communications to shareholders. The fund may include
comparative performance information in advertising or
marketing the fund's shares. Such performance
information may include the following industry and
financial publications- Barron's, Business Week, CDA
Investment Technologies, Inc., Changing Times, Forbes,
Fortune, Institutional Investor, Investors Daily, Money,
Morningstar Mutual Fund Values, The New York Times, USA
Today and The Wall Street Journal. To the extent any
advertisement or sales literature of the fund describes
the expenses or performance of any Class it will also
disclose such information for the other Classes.
Average Annual Total Return
A fund's "average annual total return," as described
below, is computed according to a formula prescribed by
the SEC. The formula can be expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical
initial payment of $1,000.
T = average annual total
return.
n = number of years.
ERV = Ending Redeemable
Value of a
hypothetical $1,000
investment made at
the beginning of a
1-, 5- or 10-year
period at the end of
a 1-, 5- or 10-year
period (or
fractional portion
thereof), assuming
reinvestment of all
dividends and
distributions.
The ERV assumes complete redemption of the hypothetical
investment at the end of the measuring period. A fund's
net investment income changes in response to
fluctuations in interest rates and the expenses of the
fund.
Class A's average annual total return was as follows for
the periods indicated:
(3.95)% for the one-year period ended July 31, 1999
4.83% per annum during the five-year period ended July
31, 1999
6.73% per annum during the ten-year period ended July
31, 1999
7.88% for the period from inception (November 6, 1991)
through July 31, 1999
The average annual total return figures assume that the
maximum 4.50% sales charge has been deducted from the
investment at the time of purchase. If the maximum
sales charge had not been deducted, Class A's average
annual total return for those same periods would have
been 0.58%, 5.80%, 7.21% and 8.21%, respectively.
Class B's average annual total return was as follows for
the periods indicated:
(4.22)% for the one-year period ended July 31, 1999
5.09% per annum during the five-year period ended July
31, 1999
5.27% for the period from inception (November 6, 1992)
through July 31, 1999
The average annual total return figures assume that the
maximum applicable Deferred Sales Charge has been
deducted from the investment at the time of redemption.
If the maximum Deferred Sales Charge had not been
deducted, Class B's average annual total return for
those same periods would have been 0.06%, 5.25% and
5.27%, respectively.
Class L's average annual total return was as follows for
the periods indicated:
(1.80)% for the one-year period ended July 31, 1999
5.08% per annum during the five-year period ended July
31, 1999
4.29% for the period from inception (June 29, 1993)
through July 31, 1999
The average annual total return figures assume that the
maximum applicable Deferred Sales Charge has been
deducted from the investment at the time of redemption.
If the maximum initial and Deferred Sales Charge had not
been deducted, Class L's average annual total return for
those same periods would have been 0.15%, 5.30% and
4.46%, respectively.
Class Y's average annual total return was as follows for
the period indicated:
0.92% for the one-year period ended July 31,1999
5.03% for the period from inception (February 7, 1996)
through July 31,1999
Class Y shares do not incur initial sales charges or
Deferred Sales Charges.
Aggregate Total Return
The fund's "aggregate total return," as described below,
represents the cumulative change in the value of an
investment in the fund for the specified period and is
computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial
payment of $10,000.
ERV = Ending Redeemable Value of
a hypothetical $10,000
investment made at the
beginning of the 1-, 5- or
10-year period at the end
of the 1-, 5- or 10-year
period (or fractional
portion thereof), assuming
reinvestment of all
dividends and
distributions.
The ERV assumes complete redemption of the hypothetical
investment at the end of the measuring period.
Class A's aggregate total return was as follows for the
periods indicated:
(3.95)% for the one-year period ended July 31, 1999
26.61% for the five-year period ended July 31, 1999
91.73% for the ten-year period ended July 31, 1999
These aggregate total return figures assume the maximum
4.50% sales charge has been deducted from the investment
at the time of purchase. If the maximum sales charge
had not been deducted, Class A's aggregate total return
for those same periods would have been 0.58%, 32.58% and
100.7%, respectively.
Class B's aggregate total return was as follows for the
periods indicated:
(4.22)% for the one-year period ended July 31, 1999
28.17% for the five-year period ended July 31, 1999
41.29% for the period from inception (November 6, 1992)
through July 31, 1999.
These aggregate total return figures assume that the
maximum applicable Deferred Sales Charge has been
deducted from the investment at the time of redemption.
If the maximum applicable Deferred Sales Charge had not
been deducted, Class B's aggregate total return for
those same periods would have been 0.06 %, 29.14% and
41.29%, respectively.
Class L's aggregate total return was as follows for the
periods indicated:
(1.8)% for the one-year period ended July 31, 1999
28.11% for the five-year period ended July 31, 1999
29.18% for the period from inception (June 29, 1993)
through July 31, 1999
These aggregate total return figures assume that the
maximum applicable Deferred Sales Charge has been
deducted from the investment at the time of redemption
If the maximum applicable Deferred Sales Charge had not
been deducted, Class L's aggregate total return for
those same periods would have been 0.15%, 29.44% and
30.45%, respectively.
Class Y's aggregate total return was as follows for the
period indicated:
0.92% for the one-year period ended July 31, 1999
18.6% for the period from inception (February 7, 1996)
through July 31,1999
Class Y shares do not incur sales charges or Deferred
Sales Charges.
Performance will vary from time to time depending upon
market conditions, the composition of the fund's
portfolio and operating expenses and the expenses
exclusively attributable to the Class. Consequently,
any given performance quotation should not be considered
representative of the Class's performance for any
specified period in the future. Because performance
will vary, it may not provide a basis for comparing an
investment in the Class with certain bank deposits or
other investments that pay a fixed yield for a stated
period of time. Investors comparing a Class's
performance with that of other mutual funds should give
consideration to the quality and maturity of the
respective investment companies' portfolio securities.
It is important to note that the total return figures
set forth above are based on historical earnings and are
not intended to indicate future performance. Each
Class's net investment income changes in response to
fluctuations in interest rates and the expenses of the
fund.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
The fund's policy is to distribute its net investment
income monthly and net realized capital gains, if any,
annually. The fund may also pay additional dividends
shortly before December 31 from certain amounts of
undistributed ordinary and capital gains realized, in
order to avoid a Federal excise tax liability.
If a shareholder does not otherwise instruct, dividends
and capital gains distributions will be reinvested
automatically in additional shares of the same Class at
net asset value, subject to no sales charge or deferred
sales charge. A shareholder may change the option at
any time by notifying his Salomon Smith Barney Financial
Consultant or Dealer Representative. Shareholders whose
accounts are held directly at First Data should notify
First Data in writing, requesting a change to this
reinvestment option
The per share dividends on Class B and Class L shares of
the fund may be lower than the per share dividends on
Class A and Class Y shares principally as a result of
the distribution fee applicable with respect to Class B
and Class L shares. The per share dividends on Class A
shares of the fund may be lower than the per share
dividends on Class Y shares principally as a result of
the service fee applicable to Class A shares.
Distributions of capital gains, if any, will be in the
same amount for Class A, Class B, Class L and Class Y
shares.
Taxes
The following is a summary of the material United States
federal income tax considerations regarding the
purchase, ownership and disposition of shares of a fund.
Each prospective shareholder is urged to consult his own
tax adviser with respect to the specific federal, state,
local and foreign tax consequences of investing in a
fund. The summary is based on the laws in effect on the
date of this SAI, which are subject to change.
The Fund and Its Investments
The fund intends to continue to qualify to be treated as
a regulated investment company each taxable year under
the Internal Revenue Code of 1986, as amended (the
"Code"). To so qualify, the fund must, among other
things: (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments
with respect to securities loans, and gains from the
sale or other disposition of stock or securities or
foreign currencies, or other income (including, but not
limited to, gains from options, futures or forward
contracts) derived with respect to its business of
investing in such stock, securities or currencies; and
(b) diversify its holdings so that, at the end of each
quarter of the fund's taxable year, (i) at least 50% of
the market value of the fund's assets is represented by
cash, securities of other regulated investment
companies, United States government securities and other
securities, with such other securities limited, in
respect of any one issuer, to an amount not greater than
5% of the fund's assets and not greater than 10% of the
outstanding voting securities of such issuer and (ii)
not more than 25% of the value of its assets is invested
in the securities (other than United States government
securities or securities of other regulated investment
companies) of any one issuer or any two or more issuers
that the fund controls and are determined to be engaged
in the same or similar trades or businesses or related
trades or businesses. The fund expects that all of its
foreign currency gains will be directly related to its
principal business of investing in stocks and
securities.
As a regulated investment company, the fund will not be
subject to United States federal income tax on its net
investment income (i.e., income other than its net
realized long- and short-term capital gains) and its net
realized long- and short-term capital gains, if any, it
distributes to its shareholders, provided an amount
equal to at least 90% of the sum of its investment
company taxable income (i.e., 90% of its taxable income
minus the excess, if any, of its net realized long-term
capital gains over its net realized short-term capital
losses (including any capital loss carryovers), plus or
minus certain other adjustments as specified in the
Code) and its net tax-exempt income for the taxable year
is distributed in compliance with the Code's timing and
other requirements but will be subject to tax at regular
corporate rates on any taxable income or gains it does
not distribute.
The Code imposes a 4% nondeductible excise tax on the
fund to the extent it does not distribute by the end of
any calendar year at least 98% of its net investment
income for that year and 98% of the net amount of its
capital gains (both long-and short-term) for the one-
year period ending, as a general rule, on October 31 of
that year. For this purpose, however, any income or
gain retained by the fund that is subject to corporate
income tax will be considered to have been distributed
by year-end. In addition, the minimum amounts that must
be distributed in any year to avoid the excise tax will
be increased or decreased to reflect any
underdistribution or overdistribution, as the case may
be, from the previous year. The fund anticipates it will
pay such dividends and will make such distributions as
are necessary in order to avoid the application of this
tax.
If, in any taxable year, the fund fails to qualify as a
regulated investment company under the Code or fails to
meet the distribution requirement, it would be taxed in
the same manner as an ordinary corporation and
distributions to its shareholders would not be
deductible by the fund in computing its taxable income.
In addition, in the event of a failure to qualify, the
fund's distributions, to the extent derived from the
fund's current or accumulated earnings and profits would
constitute dividends (eligible for the corporate
dividends-received deduction) which are taxable to
shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have
been treated in the shareholders' hands as long-term
capital gains. If the fund fails to qualify as a
regulated investment company in any year, it must pay
out its earnings and profits accumulated in that year in
order to qualify again as a regulated investment
company. In addition, if the fund failed to qualify as
a regulated investment company for a period greater than
one taxable year, the fund may be required to recognize
any net built-in gains (the excess of the aggregate
gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated)
in order to qualify as a regulated investment company in
a subsequent year.
The fund's transactions in foreign currencies, forward
contracts, options and futures contracts (including
options and futures contracts on foreign currencies)
will be subject to special provisions of the Code
(including provisions relating to "hedging transactions"
and "straddles") that, among other things, may affect
the character of gains and losses realized by the fund
(i.e., may affect whether gains or losses are ordinary
or capital), accelerate recognition of income to the
fund and defer fund losses. These rules could therefore
affect the character, amount and timing of distributions
to shareholders. These provisions also (a) will require
the fund to mark-to-market certain types of positions in
its portfolio (i.e., treat them as if they were closed
out) and (b) may cause the fund to recognize income
without receiving cash with which to pay dividends or
make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise
taxes. The fund will monitor its transactions, will
make the appropriate tax elections and will make the
appropriate entries in its books and records when it
acquires any foreign currency, forward contract, option,
futures contract or hedged investment in order to
mitigate the effect of these rules and prevent
disqualification of the fund as a regulated investment
company.
The fund's investment in Section 1256 contracts, such as
regulated futures contracts, most forward currency
forward contracts traded in the interbank market and
options on most stock indices, are subject to special
tax rules. All section 1256 contracts held by the fund
at the end of its taxable year are required to be marked
to their market value, and any unrealized gain or loss
on those positions will be included in the fund's income
as if each position had been sold for its fair market
value at the end of the taxable year. The resulting gain
or loss will be combined with any gain or loss realized
by the fund from positions in section 1256 contracts
closed during the taxable year. Provided such positions
were held as capital assets and were not part of a
"hedging transaction" nor part of a "straddle," 60% of
the resulting net gain or loss will be treated as long-
term capital gain or loss, and 40% of such net gain or
loss will be treated as short-term capital gain or loss,
regardless of the period of time the positions were
actually held by the fund.
Foreign Investments. Dividends or other income
(including, in some cases, capital gains) received by
the fund from investments in foreign securities may be
subject to withholding and other taxes imposed by
foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate
such taxes in some cases. The fund will not be eligible
to elect to treat any foreign taxes paid by it as paid
by its shareholders, who therefore will not be entitled
to credits for such taxes on their own tax returns.
Foreign taxes paid by the fund will reduce the return
from the fund's investments.
Passive Foreign Investment Companies. If the fund
purchases shares in certain foreign investment entities,
called "passive foreign investment companies" (a
"PFIC"), it may be subject to United States federal
income tax on a portion of any "excess distribution" or
gain from the disposition of such shares even if such
income is distributed as a taxable dividend by the fund
to its shareholders. Additional charges in the nature of
interest may be imposed on the fund in respect of
deferred taxes arising from such distributions or gains.
If the fund were to invest in a PFIC and elected to
treat the PFIC as a "qualified electing fund" under the
Code, in lieu of the foregoing requirements, the fund
might be required to include in income each year a
portion of the ordinary earnings and net capital gains
of the qualified electing fund, even if not distributed
to the fund, and such amounts would be subject to the
90% and excise tax distribution requirements described
above. In order to make this election, the fund would
be required to obtain certain annual information from
the passive foreign investment companies in which it
invests, which may be difficult or not possible to
obtain.
Alternatively, the fund may make a market-to-market that
would result in the fund being treated as if it had sold
and repurchased all of the PFIC stock at the end of each
year. In this case, the fund would report gains as
ordinary income and would deduct losses as ordinary
losses to the extent of previously recognized gains.
The election, once made, would be effective for all
subsequent taxable years of the fund, unless revoked
with the consent of the IRS. By making the election, the
fund could potentially ameliorate the adverse tax
consequences with respect to its ownership of shares in
a PFIC, but in any particular year might be required to
recognize income in excess of the distributions it
receives from PFICs and its proceeds from dispositions
of PFIC company stock. The fund may have to distribute
this "phantom" income and gain to satisfy its
distribution requirement and to avoid imposition of the
4% excise tax.
The fund will make the appropriate tax elections, if
possible, and take any additional steps necessary to
mitigate the effect of these rules.
Taxation of United States Shareholders
Dividends and Distributions. Any dividend declared by
the fund in October, November or December of any
calendar year and payable to shareholders of record on a
specified date in such a month shall be deemed to have
been received by each shareholder on December 31 of such
calendar year and to have been paid by the fund not
later than such December 31, provided such dividend is
actually paid by the fund during January of the
following calendar year. The fund intends to distribute
annually to its shareholders substantially all of its
investment company taxable income, and any net realized
long-term capital gains in excess of net realized short-
term capital losses (including any capital loss
carryovers). The fund currently expects to distribute
any excess annually to its shareholders. However, if
the fund retains for investment an amount equal to all
or a portion of its net long-term capital gains in
excess of its net short-term capital losses and capital
loss carryovers, it will be subject to a corporate tax
(currently at a rate of 35%) on the amount retained. In
that event, the fund will designate such retained
amounts as undistributed capital gains in a notice to
its shareholders who (a) will be required to include in
income for United Stares federal income tax purposes, as
long-term capital gains, their proportionate shares of
the undistributed amount, (b) will be entitled to credit
their proportionate shares of the 35% tax paid by the
fund on the undistributed amount against their United
States federal income tax liabilities, if any, and to
claim refunds to the extent their credits exceed their
liabilities, if any, and (c) will be entitled to
increase their tax basis, for United States federal
income tax purposes, in their shares by an amount equal
to 65% of the amount of undistributed capital gains
included in the shareholder's income. Organizations or
persons not subject to federal income tax on such
capital gains will be entitled to a refund of their pro
rata share of such taxes paid by the fund upon filing
appropriate returns or claims for refund with the
Internal Revenue Service (the "IRS").
Dividends of net investment income and distributions of
net realized short-term capital gains are taxable to a
United States shareholder as ordinary income, whether
paid in cash or in shares. Distributions of net-long-
term capital gains, if any, that the fund designates as
capital gains dividends are taxable as long-term capital
gains, whether paid in cash or in shares and regardless
of how long a shareholder has held shares of the fund.
Dividends and distributions paid by the fund
attributable to dividends on stock of U.S. corporations
received by the fund, with respect to which the fund
meets certain holding period requirements, will be
eligible for the deduction for dividends received by
corporations. Distributions in excess of the fund's
current and accumulated earnings and profits will, as to
each shareholder, be treated as a tax-free return of
capital to the extent of a shareholder's basis in his
shares of the fund, and as a capital gain thereafter (if
the shareholder holds his shares of the fund as capital
assets).
Shareholders receiving dividends or distributions in the
form of additional shares should be treated for United
States federal income tax purposes as receiving a
distribution in the amount equal to the amount of money
that the shareholders receiving cash dividends or
distributions will receive, and should have a cost basis
in the shares received equal to such amount.
Investors considering buying shares just prior to a
dividend or capital gain distribution should be aware
that, although the price of shares just purchased at
that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may
nevertheless be taxable to them.
If the fund is the holder of record of any stock on the
record date for any dividends payable with respect to
such stock, such dividends are included in the fund's
gross income not as of the date received but as of the
later of (a) the date such stock became ex-dividend with
respect to such dividends (i.e., the date on which a
buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (b) the date the
fund acquired such stock. Accordingly, in order to
satisfy its income distribution requirements, the fund
may be required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an
earlier year than would otherwise be the case.
Sales of Shares. Upon the sale or exchange of his
shares, a shareholder will realize a taxable gain or
loss equal to the difference between the amount realized
and his basis in his shares. Such gain or loss will be
treated as capital gain or loss, if the shares are
capital assets in the shareholder's hands, and will be
long-term capital gain or loss if the shares are held
for more than one year and short-term capital gain or
loss if the shares are held for one year or less. Any
loss realized on a sale or exchange will be disallowed
to the extent the shares disposed of are replaced,
including replacement through the reinvesting of
dividends and capital gains distributions in the fund,
within a 61-day period beginning 30 days before and
ending 30 days after the disposition of the shares. In
such a case, the basis of the shares acquired will be
increased to reflect the disallowed loss. Any loss
realized by a shareholder on the sale of a fund share
held by the shareholder for six months or less will be
treated for United States federal income tax purposes as
a long-term capital loss to the extent of any
distributions or deemed distributions of long-term
capital gains received by the shareholder with respect
to such share.
If a shareholder incurs a sales charge in acquiring
shares of the fund, disposes of those shares within 90
days and then acquires shares in a mutual fund for which
the otherwise applicable sales charge is reduced by
reason of a reinvestment right (e.g., an exchange
privilege), the original sales charge will not be taken
into account in computing gain/loss on the original
shares to the extent the subsequent sales charge is
reduced. Instead, the disregarded portion of the
original sales charge will be added to the tax basis in
the newly acquired shares. Furthermore, the same rule
also applies to a disposition of the newly acquired
shares made within 90 days of the second acquisition.
This provision prevents a shareholder from immediately
deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Backup Withholding. The fund may be required to
withhold, for United States federal income tax purposes,
31% of the dividends, distributions and redemption
proceeds payable to shareholders who fail to provide the
fund with their correct taxpayer identification number
or to make required certifications, or who have been
notified by the IRS that they are subject to backup
withholding. Certain shareholders are exempt from
backup withholding. Backup withholding is not an
additional tax and any amount withheld may be credited
against a shareholder's United States federal income tax
liabilities.
Notices. Shareholders will be notified annually by the
fund as to the United States federal income tax status
of the dividends, distributions and deemed distributions
attributable to undistributed capital gains (discussed
above in "Dividends and Distributions") made by the fund
to its shareholders. Furthermore, shareholders will
also receive, if appropriate, various written notices
after the close of the fund's taxable year regarding the
United States federal income tax status of certain
dividends, distributions and deemed distributions that
were paid (or that are treated as having been paid) by
the fund to its shareholders during the preceding
taxable year.
Other Taxation
Distributions also may be subject to additional state,
local and foreign taxes depending on each shareholder's
particular situation.
The foregoing is only a summary of certain material tax
consequences affecting the fund and its shareholders.
Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences
to them of an investment in the fund.
ADDITIONAL INFORMATION
Fund History.
The Fund was incorporated on June 15, 1984 under the
name Shearson Government Mortgage Income Fund Inc. On
January 20, 1988, November 4, 1992, July 30, 1993 and
October 14, 1994, the Fund changed its name to Shearson
Lehman Managed Governments Inc., Shearson Lehman
Brothers Managed Governments Fund, Smith Barney Shearson
Managed Governments Fund Inc. and Smith Barney Managed
Governments Fund Inc., respectively.
Minimum Account Size. The fund reserves the right to
liquidate involuntarily any shareholder's account in the
fund if the aggregate net asset value of the shares held
in the fund account is less than $500. (If a shareholder
has more than one account in the fund, each account must
satisfy the minimum account size.) The fund, however,
will not redeem shares based solely on market reductions
in net asset value. Before the fund exercises such
right, shareholders will receive written notice and will
be permitted 60 days to bring accounts up to the minimum
to avoid involuntary liquidation.
Voting rights. The fund does not hold annual
shareholder meetings. There normally will be no meeting
of shareholders for the purpose of electing directors
unless and until such time as less than a majority of
the directors holding office have been elected by
shareholders. The directors will call a meeting for any
purpose upon written request of shareholders holding at
least 10% of the fund's outstanding shares and the fund
will assist shareholders in calling such a meeting as
required by the 1940 Act. When matters are submitted for
shareholder vote, shareholders of each class will have
one vote for each full share owned and a proportionate
fractional vote for any fractional share held of that
class. Generally, shares of the fund will be voted on a
fund-wide basis on all matters except matters affecting
only the interests of one or more of the classes.
Annual and semi-annual reports. The fund sends its
shareholders a semi-annual report and an audited annual
report, which include listings of the investment
securities held by the fund at the end of the period
covered. In an effort to reduce the fund's printing and
mailing costs, the fund plans to consolidate the mailing
of its semi-annual and annual reports by household. This
consolidation means that a household having multiple
accounts with the identical address of record will
receive a single copy of each report. Shareholders who
do not want this consolidation to apply to their
accounts should contact their Salomon Smith Barney
Financial Consultant or the transfer agent.
FINANCIAL STATEMENTS
The fund's annual report for the fiscal year ended July
31, 1999 is incorporated herein by reference in its
entirety. The annual report was filed on September 25,
1999, Accession Number 91155-99-000663.
OTHER INFORMATION
In an industry where the average portfolio manager has
seven years of experience (source: ICI, 1998), the
portfolio managers of Smith Barney Mutual Funds average
21 years in the industry and 15 years with the firm.
Smith Barney Mutual Funds offers more than 60 mutual
funds. We understand that many investors prefer an
active role in allocating the mix of funds in their
portfolio, while others want the asset allocation
decisions to be made by experienced managers.
That's why we offer four "styles" of fund management
that can be tailored to suit each investor's unique
financial goals.
Style Pure Series
Our Style Pure Series funds stay fully invested
within their asset class and investment style,
enabling investors to make asset allocation
decisions in conjunction with their Salomon Smith
Barney Financial Consultant.
Classic Investor Series
Our Classic Investor Series funds offer a range of
equity and fixed income strategies that seek to
capture opportunities across asset classes and
investment styles using disciplined investment
approaches.
The Concert Allocation Series
As a fund of funds, investors can select a Concert
Portfolio that may help their investment needs.
As needs change, investors can easily choose
another long-term, diversified investment from our
Concert family.
Special Discipline Series
Our Special Discipline Series funds are designed
for investors who are looking beyond more
traditional market categories: from natural
resources to a roster of state-specific municipal
funds.
APPENDIX A
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states
and political subdivisions. Ratings are assigned to
general obligation and revenue bonds. General
obligation bonds are usually secured by all resources
available to the municipality and the factors outlined
in the rating definitions below are weighed in
determining the rating. Because revenue bonds in
general are payable from specifically pledged revenues,
the essential element in the security for a revenue bond
is the quantity and quality of the pledged revenues
available to pay debt service.
Although an appraisal of most of the same factors that
bear on the quality of general obligation bond credit is
usually appropriate in the rating analysis of a revenue
bond, other factors are important, including
particularly the competitive position of the municipal
enterprise under review and the basic security
covenants. Although a rating reflects S&P's judgment as
to the issuer's capacity for the timely payment of debt
service, in certain instances it may also reflect a
mechanism or procedure for an assured and prompt cure of
a default, should one occur, i.e., an insurance program,
Federal or state guarantee or the automatic withholding
and use of state aid to pay the defaulted debt service.
AAA
Prime - These are obligations of the highest quality.
They have the strongest capacity for timely payment of
debt service.
General Obligation Bonds - In a period of economic
stress, the issuers will suffer the smallest declines in
income and will be least susceptible to autonomous
decline. Debt burden is moderate. A strong revenue
structure appears more than adequate to meet future
expenditure requirements. Quality of management appears
superior.
Revenue Bonds - Debt service coverage has been, and is
expected to remain, substantial. Stability of the
pledged revenues is also exceptionally strong, due to
the competitive position of the municipal enterprise or
to the nature of the revenues. Basic security
provisions (including rate covenant, earnings test for
issuance of additional bonds, and debt service reserve
requirements) are rigorous. There is evidence of
superior management.
AA
High Grade - The investment characteristics of general
obligation and revenue bonds in this group are only
slightly less marked than those of the prime quality
issues. Bonds rated "AA'' have the second strongest
capacity for payment of debt service.
A
Good Grade - Principal and interest payments on bonds in
this category are regarded as safe. This rating
describes the third strongest capacity for payment of
debt service. It differs from the two higher ratings
because:
General Obligation Bonds - There is some weakness,
either in the local economic base, in debt burden, in
the balance between revenues and expenditures, or in
quality of management. Under certain adverse
circumstances, any one such weakness might impair the
ability of the issuer to meet debt obligations at some
future date.
Revenue Bonds - Debt service coverage is good, but not
exceptional. Stability of the pledged revenues could
show some variations because of increased competition or
economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent.
Management performance appears adequate.
BBB
Medium Grade - Of the investment grade ratings, this is
the lowest.
General Obligation Bonds - Under certain adverse
conditions, several of the above factors could
contribute to a lesser capacity for payment of debt
service. The difference between "A'' and "BBB" ratings
is that the latter shows more than one fundamental
weakness, or one very substantial fundamental weakness,
whereas the former shows only one deficiency among the
factors considered.
Revenue Bonds - Debt coverage is only fair. Stability
of the pledged revenues could show substantial
variations, with the revenue flow possibly being subject
to erosion over time. Basic security provisions are no
more than adequate. Management performance could be
stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance,
as predominately speculative with respect to capacity to
pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree
of speculation and CC the highest degree of speculation.
While such bonds will likely have some quality and
protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
C
The rating C is reserved for income bonds on which no
interest is being paid.
D
Bonds rated D are in default, and payment of interest
and/or repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of
a plus or a minus sign, which is used to show relative
standing within the major rating categories, except in
the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less
are usually given note ratings (designated SP-1, -2 or -
3) by S&P to distinguish more clearly the credit quality
of notes as compared to bonds. Notes rated SP-1 have a
very strong or strong capacity to pay principal and
interest. Those issues determined to possess
overwhelming safety characteristics are given the
designation of SP-1+. Notes rated SP-2 have a
satisfactory capacity to pay principal and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and
are generally referred to as "gilt edge.'' Interest
payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the
various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa
Bonds that are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they
comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in
Aaa securities.
A
Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium-
grade obligations. Factors giving security to principal
and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment
sometime in the future.
Baa
Bonds that are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor
poorly secured; interest payments and principal security
appear adequate for the present but certain protective
elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds
lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative
elements; their future cannot be considered as well
assured. Often the protection of interest and principal
payments may be very moderate and thereby not well
safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in
this class.
B
Bonds that are rated B generally lack characteristics of
the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. These
issues may be in default or present elements of danger
may exist with respect to principal or interest.
Ca
Bonds that are rated Ca represent obligations that are
speculative in a high degree. These issues are often in
default or have other marked short-comings.
C
Bonds that are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade
(MIG) and for variable rate demand obligations are
designated Variable Moody's Investment Grade (VMIG).
This distinction is in recognition of the differences
between short- and long-term credit risk. Loans bearing
the designation MIG 1 or VMIG 1 are of the best quality,
enjoying strong protection by established cash flows of
funds for their servicing, from established and broad-
based access to the market for refinancing, or both.
Loans bearing the designation MIG 2 or VMIG 2 are of
high quality, with margins of protection ample although
not as large as the preceding group. Loans bearing the
designation MIG 3 or VMIG 3 are of favorable quality,
with all security elements accounted for but lacking the
undeniable strength of the preceding grades. Liquidity
and cash flow may be narrow and market access for
refinancing is likely to be less well established.
Description of S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second
highest, commercial paper rating assigned by S&P. Paper
rated A-1+ must have either the direct credit support of
an issuer or guarantor that possesses excellent long-
term operating and financial strengths combined with
strong liquidity characteristics (typically, such
issuers or guarantors would display credit quality
characteristics which would warrant a senior bond rating
of "AA-'' or higher), or the direct credit support of an
issuer or guarantor that possesses above-average long-
term fundamental operating and financing capabilities
combined with ongoing excellent liquidity
characteristics. Paper rated A-1 by S&P has the
following characteristics: liquidity ratios are adequate
to meet cash requirements; long-term senior debt is
rated "A'' or better; the issuer has access to at least
two additional channels of borrowing; basic earnings and
cash flow have an upward trend with allowance made for
unusual circumstances; typically, the issuer's industry
is well established and the issuer has a strong position
within the industry; and the reliability and quality of
management are unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry
or industries and an appraisal of speculative-type risks
which may be inherent in certain areas; (3) evaluation
of the issuer's products in relation to competition and
customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trend of earnings over a
period of ten years; (7) financial strength of a parent
company and the relationships which exist with the
issuer; and (8) recognition by the management of
obligations which may be present or may arise as a
result of public interest questions and preparations to
meet such obligations.
SMITH BARNEY
MANAGED GOVERNMENTS
FUND INC.
November 29, 1999
SMITH BARNEY MANAGED GOVERNMENTS FUND INC.
388 Greenwich Street
New York, NY 10013
SALOMON SMITH BARNEY
A Member of Citigroup
[Symbol]
53
