Registration
No. 2-96408
811-4254
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 40 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended X
Amendment No. 43 X
SMITH BARNEY INCOME FUNDS
(formerly known as Smith Barney Shearson Income Funds)
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 723-9218
Christina T. Sydor, Esq.
Secretary
Smith Barney Income Funds
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
immediately upon filing pursuant to Rule 485(b)
X on November 7, 1994 pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
on pursuant to Rule 485(a)
The Registrant has previously filed a declaration of indefinite
registration of its shares pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended. Registrant's Rule 24f-2 Notice for the
fiscal year ended July 31,
1994 was filed electronically on September 30, 1994.
SMITH BARNEY INCOME FUNDS
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A.
Item No. Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Information Financial
Highlights
4. General Description of Registrant Cover Page;
Prospectus Summary;
Investment Objective and
Management Policies;
Additional Information
5. Management of the Fund Management of the Trust and
the Fund;
Distributor; Additional
Information;
Annual Report
6. Capital Stock and Other Securities Investment Objective
and Management Policies;
Dividends, Distributions and
Taxes;
Additional Information
7. Purchase of Securities Being Offered Purchase of Shares;
Redemption of Shares; Valuation
of Shares;
Exchange Privilege ;
Minimum Account Size;
Distributor; Exchange Privilege
8. Redemption or Repurchase Purchase of Shares;
Redemption of Shares;
Exchange Privilege
9. Legal Proceedings Not Applicable
Part B
Item No. Statement of Additional
Information Caption
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History Distributor;
Additional Information
13. Investment Objectives and Policies Investment Objectives
and Management
Policies
14. Management of the Fund Management of the Trust and
the Funds;
Distributor
15. Control Persons and Principal Holders of Management of the
Trust and the Funds
Securities
16. Investment Advisory and Other Services Management of the
Trust and the Funds;
Distributor
17. Brokerage Allocation Investment Objectives and
Management Policies
18. Capital Stock and Other Securities Purchase of Shares;
Redemption of Shares;
Taxes
19. Purchase, Redemption and Pricing of Purchase of Shares;
Redemption of Shares; Securities Being Offered
Valuation of Shares; Exchange Privilege;
Distributor
20. Tax Status Taxes
21. Underwriters Distributor
22. Calculation of Performance Data Performance Data
23. Financial Statements Financial Statements
<PAGE>
P R O S P E C T U S
S M I T H B A R N E Y
Convertible
Fund
N O V E M B E R 7 , 1 9 9 4
PROSPECTUS BEGINS ON PAGE ONE
[LOGO]
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- --------------------------------------------------------------------
PROSPECTUS NOVEMBER 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The Smith Barney Convertible Fund (the "Fund") is a diversified fund that
seeks current income and capital appreciation by investing in convertible
securities and in combinations of nonconvertible fixed-income securities and
warrants or call options that together resemble convertible securities. The Fund
is one of a number of funds, each having distinct investment objectives and
policies, making up Smith Barney Income Funds (the "Trust"). The Trust is an
open-end management investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other investment funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Trust at
the telephone number set forth above or by contacting a Smith Barney Financial
Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- ----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
- ----------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
- ----------------------------------------------------------------------
VALUATION OF SHARES 25
- ----------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 25
- ----------------------------------------------------------------------
PURCHASE OF SHARES 27
- ----------------------------------------------------------------------
EXCHANGE PRIVILEGE 38
- ----------------------------------------------------------------------
REDEMPTION OF SHARES 42
- ----------------------------------------------------------------------
MINIMUM ACCOUNT SIZE 43
- ----------------------------------------------------------------------
PERFORMANCE 44
- ----------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 45
- ----------------------------------------------------------------------
DISTRIBUTOR 47
- ----------------------------------------------------------------------
ADDITIONAL INFORMATION 48
- ----------------------------------------------------------------------
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE
DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
2
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE
PROSPECTUS.
SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks current income and capital appreciation by investing in
convertible securities and in combinations of nonconvertible fixed-income
securities and warrants or call options that together resemble convertible
securities ("synthetic convertible securities"). Under normal circumstances, the
Fund will invest at least 65% of its assets in convertible securities, and may
invest up to 35% of its assets in synthetic convertible securities and in equity
and debt securities that are not convertible into common stock. See "Investment
Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which when
combined with current holdings of Class A shares offered with a sales charge
equal or exceed $500,000 in the aggregate, will be made at net asset value with
no sales charge, but will be subject to a contingent deferred sales charge
("CDSC") of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary -- Reduced or No Initial Sales Charge."
CLASS B SHARES. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares are subject to an annual service fee of
3
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
0.25% and an annual distribution fee of 0.50% of the average daily net assets of
the Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
CLASS B SHARES CONVERSION FEATURE. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the date
of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class B
shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Class C shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
CLASS Y SHARES. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
INTENDED HOLDING PERIOD. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charge and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and Class C shares are sold without any initial sales charge so the entire
purchase price is immediately invested
4
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
in the Fund. Any investment return on these additional invested amounts may
partially or wholly offset the higher annual expenses of these Classes. Because
the Fund's future return cannot be predicted, however, there can be no assurance
that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or
distribution fee. The maximum purchase amount for Class A shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
REDUCED OR NO INITIAL SALES CHARGE. The initial sales charge on Class A shares
may be waived for certain eligible purchasers, and the entire purchase price
will be immediately invested in the Fund. In addition, Class A share purchases,
which when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no initial sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase. The $500,000 aggregate investment
may be met by adding the purchase to the net asset value of all Class A shares
held in funds sponsored by Smith Barney Inc. ("Smith Barney") listed under
"Exchange Privilege." Class A share purchases may also be eligible for a reduced
initial sales charge. See "Purchase of Shares." Because the ongoing expenses of
Class A shares may be lower than those for Class B and Class C shares,
purchasers eligible to purchase Class A shares at net asset value or at a
reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
5
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program, which is generally designed to assist plan sponsors
in the creation and operation of retirement plans under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as other types
of participant directed, tax-qualified employee benefit plans (collectively,
"Participating Plans"). Class A, Class B, Class C and Class Y shares are
available as investment alternatives for Participating Plans. See "Purchase of
Shares -- Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, Smith
Barney, a broker that clears securities transactions through Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group. Direct purchases by certain retirement plans may be made through
the Fund's transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a
subsidiary of First Data Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $5,000,000. 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(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes is $25. The minimum initial investment requirement for Class A,
Class B and Class C shares and the subsequent investment requirement for all
Classes through the Systematic Investment Plan described below is $100. There is
no minimum investment requirement in Class A for unitholders who invest
distributions from a unit investment trust ("UIT") sponsored by Smith Barney.
See "Purchase of Shares."
6
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $100. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Mutual Funds Management Inc.
("SBMFM") serves as the Fund's investment adviser. SBMFM provides investment
advisory and management services to investment companies affiliated with Smith
Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of The Travelers Inc.
("Travelers"), a diversified financial services holding company engaged, through
its subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services.
SBMFM also serves as the Fund's administrator and The Boston Company Advisors,
Inc. ("Boston Advisors") serves as the Fund's sub-administrator. Boston Advisors
is an indirect wholly owned subsidiary of The Boston Company, Inc. ("TBC"),
which in turn is a wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values, next determined, plus any applicable sales charge
differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly from net investment
income and distributions of net realized capital gains, if any, are declared and
paid annually. See "Dividends, Distributions and Taxes."
7
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a PRO
RATA basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The market value of fixed-income
securities, which constitute a major part of the investments of the Fund, may
vary inversely in response to changes in prevailing interest rates. The foreign
securities in which the Fund may invest may be subject to certain risks in
addition to those inherent in domestic investments. The medium-or lower-rated
securities in which the Fund may invest, some of which have speculative
characteristics, may be subject to greater market fluctuations and greater risk
of loss of income or principal than higher-rated securities. The Fund may employ
investment techniques which involve certain other risks, including entering into
repurchase agreements, engaging in when-issued and delayed-delivery
transactions, lending portfolio securities, entering into options on securities
and short sales "against the box." See "Investment Objective and Management
Policies."
8
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES THE FOLLOWING EXPENSE TABLE LISTS THE COSTS AND
EXPENSES AN
INVESTOR WILL INCUR EITHER DIRECTLY OR INDIRECTLY AS A SHAREHOLDER OF THE
FUND,
BASED ON THE MAXIMUM SALES CHARGE OR MAXIMUM CDSC THAT MAY BE INCURRED
AT THE
TIME OF PURCHASE OR REDEMPTION AND, UNLESS OTHERWISE NOTED, THE FUND'S
OPERATING
EXPENSES FOR ITS MOST RECENT FISCAL YEAR:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC
(as a percentage of original cost or redemption
proceeds whichever is lower) None* 5.00% 1.00% None
-------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.70% 0.70% 0.70% 0.70%
12b-1 fees** 0.25% 0.75% 0.70% None
Other expenses*** 0.45% 0.43% 0.45% 0.45%
-------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.40% 1.88% 1.85% 1.15%
-------------------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current holdings of Class A shares
offered with a sales charge, equal or exceed $500,000 in the aggregate, will be made at
net asset value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months.
**Upon conversion of Class B shares to Class A shares, such shares will no longer be
subject to a distribution fee. Class C shares do not have a conversion feature and,
therefore, are subject to an ongoing distribution fee. As a result, long-term
shareholders of Class C shares may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities Dealers, Inc.
***For Class C and Class Y shares, "Other expenses" have been estimated based on expenses
incurred by Class A shares, because Class C shares had no shareholder activity and Class
Y shares were not available for purchase prior to November 7, 1994.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum charges
imposed on purchases or redemptions of Fund shares and investors may actually
pay lower or no charges, depending on the amount purchased and, in the case of
Class B, Class C and certain Class A shares, the length of time the shares are
held and whether the shares are held through the Smith Barney 401(k) Program.
See "Purchase of Shares" and "Redemption of Shares." Smith Barney receives an
annual 12b-1 service fee of 0.25% of the value of average daily net assets of
Class A shares. Smith Barney also
9
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
receives, with respect to Class B shares, an annual 12b-1 fee of 0.75% of the
value of average daily net assets of that Class, consisting of a 0.50%
distribution fee and a 0.25% service fee. For Class C shares, Smith Barney
receives an annual 12b-1 fee of 0.70% of the value of average daily net assets,
consisting of a 0.45% distribution fee and a 0.25% service fee. "Other expenses"
in the above table include fees for shareholder services, custodial fees, legal
and accounting fees, printing costs and registration fees.
EXAMPLE THE FOLLOWING EXAMPLE IS INTENDED TO ASSIST AN INVESTOR IN
UNDERSTANDING
THE VARIOUS COSTS THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR
INDIRECTLY.
THE EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT THE
LEVELS SET
FORTH IN THE TABLE ABOVE. SEE "PURCHASE OF SHARES," "REDEMPTION OF SHARES"
AND
"MANAGEMENT OF THE TRUST AND THE FUND."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each time
period:
Class A $64 $92 $123 $210
Class B 69 89 112 207
Class C 29 58 100 217
Class Y 12 37 63 140
An investor would pay the following
expenses on the same investment,
assuming the same annual return and no
redemption:
Class A 64 92 123 210
Class B 19 59 102 207
Class C 19 58 100 217
Class Y 12 37 63 140
-----------------------------------------------------------------------------------
<FN>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- ---------------------------------------------
FINANCIAL HIGHLIGHTS
THE FOLLOWING INFORMATION HAS BEEN AUDITED BY COOPERS & LYBRAND L.L.P.,
INDEPENDENT ACCOUNTANTS, WHOSE REPORT THEREON APPEARS IN THE FUND'S
ANNUAL
REPORT DATED JULY 31, 1994. THE INFORMATION SET OUT BELOW SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES THAT ALSO
APPEAR IN
THE FUND'S ANNUAL REPORT, WHICH IS INCORPORATED BY REFERENCE INTO THE
STATEMENT
OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $14.99 $13.82
- ----------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.72 0.49
Net realized and unrealized gain/(loss) on investments (0.42) 1.22
- ----------------------------------------------------------------------------------
Total from investment operations 0.30 1.71
Less distributions:
Distributions from net investment income (0.70) (0.50)
Distributions in excess of net investment income (0.03) (0.01)
Distributions in excess of net realized gains -- (0.03)
- ----------------------------------------------------------------------------------
Total distributions (0.73) (0.54)
- ----------------------------------------------------------------------------------
Net asset value, end of period $14.56 $14.99
- ----------------------------------------------------------------------------------
Total return++ 1.99% 12.63%
- ----------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $2,294 $1,655
Ratio of net investment income to average net assets 4.80% 4.86%+
Ratio of operating expenses to average net assets 1.40% 1.37%+
Portfolio turnover rate 54% 95%
- ----------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
+ Annualized.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
</TABLE>
11
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
7/31/94 7/31/93 7/31/92
<S> <C> <C> <C>
Net Asset Value, beginning of year $14.99 $13.84 $12.51
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.65 0.61 0.64
Net realized and unrealized gain/(loss) on
investments (0.42) 1.20 1.35
--------------------------------------------------------------------------------
Total from investment operations 0.23 1.81 1.99
Less distributions:
Distributions from net investment income (0.64) (0.60) (0.64)
Distributions in excess of net investment
income (0.02) (0.02) --
Distributions from net realized gains -- -- --
Distributions in excess of net realized gains -- (0.04) --
Distributions from capital -- -- (0.02)
--------------------------------------------------------------------------------
Total distributions (0.66) (0.66) (0.66)
--------------------------------------------------------------------------------
Net asset value, end of year $14.56 $14.99 $13.84
--------------------------------------------------------------------------------
Total return++ 1.50% 13.40% 16.25%
--------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $85,190 $74,857 $57,120
Ratio of operating expenses to average net
assets 1.88% 2.00% 1.88%
Ratio of net investment income to average net
assets 4.32% 4.20% 4.76%
Portfolio turnover rate 54% 95% 77%
--------------------------------------------------------------------------------
<FN>
* On November 6, 1992, the Fund commenced selling Class A shares. All shares
previously in existence were designated as Class B shares.
** Annualized expense ratio before waiver of fees by investment adviser and
sub-investment adviser and administrator was 1.82%.
+ Annualized.
++ Total return represents aggregate total return for the periods indicated and
does not reflect any applicable sales charge.
</TABLE>
12
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
7/31/91 7/31/90 7/31/89 7/31/88 7/31/87*
<S> <C> <C> <C> <C>
$12.21 $13.80 $13.04 $13.93 $13.00
--------------------------------------------------------------------------
0.68 0.79 0.85 0.87 0.63
0.33 (1.40) 0.78 (0.64) 0.95
--------------------------------------------------------------------------
1.01 (0.61) 1.63 0.23 1.58
(0.68) (0.83) (0.86) (0.85) (0.62)
-- -- -- -- --
-- (0.11) (0.01) (0.27) (0.03)
-- -- -- -- --
(0.03) (0.04) -- -- --
--------------------------------------------------------------------------
(0.71) (0.98) (0.87) (1.12) (0.65)
--------------------------------------------------------------------------
$12.51 $12.21 $13.80 $13.04 $13.93
--------------------------------------------------------------------------
8.86% (4.53)% 13.09% 2.22% 12.34%
--------------------------------------------------------------------------
$65,523 $97,157 $153,137 $172,587 $235,685
1.92% 1.85% 1.74% 1.75% 1.78%+**
5.81% 6.10% 6.41% 6.74% 5.85%+
26% 24% 32% 45% 21%
--------------------------------------------------------------------------
</TABLE>
PRIOR TO NOVEMBER 7, 1994, THE FUND HAD NO SHAREHOLDER ACTIVITY FOR CLASS C
SHARES (PREVIOUSLY DESIGNATED AS CLASS D SHARES) AND DID NOT OFFER CLASS Y
SHARES. ACCORDINGLY, NO COMPARABLE FINANCIAL INFORMATION IS AVAILABLE AT
THIS
TIME FOR THESE CLASSES.
13
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is current income and capital appreciation.
The Fund's investment objective may not be changed without the approval of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund's investment objective will be achieved.
The Fund seeks to achieve its objective by investing in convertible securities
and "synthetic convertible securities." Under normal circumstances, the Fund
will invest at least 65% of its assets in convertible securities. The Fund is
not required to sell securities to conform to this 65% limitation and may retain
on a temporary basis securities received upon conversion of convertible
securities or upon exercise of warrants or call options that are components of
synthetic convertible securities to permit their orderly disposition, to
establish long-term holding periods for tax purposes or for other reasons. The
Fund will not invest in fixed-income securities that are rated lower than B by
Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P") or, if unrated, deemed by SBMFM to be comparable to securities rated
lower than B. The Fund may invest up to 35% of its assets in synthetic
convertible securities and in equity and debt securities that are not
convertible into common stock and, for temporary defensive purposes when deemed
appropriate by the Fund's investment adviser in light of current market
conditions, may invest in these securities without limitation. In seeking to
achieve its investment objective, the Fund may write covered call options on a
small portion of its assets, lend portfolio securities and enter into short
sales "against the box." The Fund may utilize up to 10% of its assets to
purchase put options on securities for hedging purposes and may invest up to 10%
of its assets in foreign securities. Special considerations associated with the
Fund are described under "Risk Factors and Special Considerations."
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed information
concerning these strategies and their related risks is contained in the
Statement of Additional Information.
14
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
In the future, the Fund may desire to employ additional investment strategies,
including such hedging strategies as entering into futures contracts and related
options. The Fund will do so only upon 60 days' notice to shareholders and in
conformity with its investment restrictions.
LENDING OF PORTFOLIO SECURITIES. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets taken at value. Loans
of portfolio securities will be collateralized by cash, letters of credit or
U.S. government securities that are maintained at all times in an amount at
least equal to the current market value of the loaned securities. Any gain or
loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Fund.
SHORT SALES AGAINST THE BOX. The Fund may make short sales of common stock if,
at all times when a short position is open, the Fund owns the stock or owns
preferred stocks or debt securities convertible or exchangeable, without payment
of further consideration, into the shares of common stock sold short. Short
sales of this kind are referred to as short sales "against the box." The
broker-dealer that executes a short sale generally invests cash proceeds of the
sale until they are paid to the Fund. Arrangements may be made with the
broker-dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds. The Fund will segregate the common stock or
convertible or exchangeable preferred stock or debt securities in a special
account with Boston Safe Deposit and Trust Company ("Boston Safe"), the Trust's
custodian. The Fund may utilize up to 50% of its assets as collateral for short
sales against the box. The extent to which the Fund may make short sales of
common stocks may be limited by the requirements contained in the Code for
qualification as a regulated investment company. See "Dividends, Distributions
and Taxes."
COVERED OPTION WRITING. The Fund may write call options on securities. The
Fund realizes fees (referred to as "premiums") for granting the rights evidenced
by the options. A call option embodies the right of its purchaser to compel the
writer of the option to sell to the option holder an underlying security at a
specified price at any time during the option period. Thus, the purchaser of a
call option written by the Fund 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.
15
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Upon the exercise of a call option written by the Fund, 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 will write only covered
options. Accordingly, whenever the Fund writes a call option, it will continue
to own or have the present right to acquire the underlying security for as long
as it remains obligated as the writer of the option.
The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or to unfreeze an
underlying security (thereby permitting its sale or the writing of a new option
on the security prior to the outstanding option's expiration). To effect a
closing purchase transaction, the Fund would purchase, prior to the holder's
exercise of an option that the Fund has written, an option of the same series as
that on which the Fund desires to terminate its obligation. The obligation of
the Fund under an option that it has written would be terminated by a closing
purchase transaction, but the Fund would not be deemed to own an option as the
result of the transaction. There can be no assurance that the Fund will be able
to effect closing purchase transactions at a time when it wishes to do so. To
facilitate closing purchase transactions, however, the Fund will write options
only if a secondary market for the options exists on a domestic securities
exchange or in the over-the-counter market.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The Fund may purchase put and
call options that are traded on a domestic securities exchange. The Fund may
utilize up to 10% of its assets to purchase put options on portfolio securities
and may do so at or about the same time that it purchases the underlying
security or at a later time. By buying a put, the Fund limits the risk of loss
from a decline in the market value of the security until the put expires. Any
appreciation in the value of the yield otherwise available from the underlying
security, however, will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. Call options may be
purchased by the Fund in order to acquire the underlying securities for the Fund
at a price that avoids any additional cost that would result from a substantial
increase in the market value of a security. The Fund also may purchase call
options to increase its return to investors at a time when the call is expected
to increase in value due to anticipated appreciation of the underlying security.
16
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Prior to their expirations, put and call options may be sold in closing sale
transactions (sales by the Fund, prior to the exercise of options that it has
purchased, or options of the same series), and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the option plus the related transaction costs.
ADDITIONAL INVESTMENTS
MONEY MARKET INSTRUMENTS. When SBMFM believes that market conditions warrant,
the Fund may adopt a temporary defensive posture and may invest in short-term
instruments without limitation. Short-term instruments in which the Fund may
invest include: U.S. government securities; certain bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loan associations and similar institutions);
commercial paper rated no lower than A-2 by S&P or Prime-2 by Moody's or the
equivalent from another major rating service or, if unrated, of an issuer having
an outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements as described below.
U.S. GOVERNMENT SECURITIES. The U.S. government securities in which the Fund
may invest include: direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds), and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association ("GNMA") certificates); 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 securities that are
supported by the credit of the instrumentality. Treasury Bills have maturities
of less than 1 year, Treasury Notes have maturities of 1 to 10 years and
Treasury Bonds generally have maturities of greater than 10 years at the date of
issuance. Certain U.S. government securities, such as those issued or guaranteed
by GNMA, Federal National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC"), are mortgage-related securities. U.S. government
securities generally do not involve the credit risks associated with other types
of interest-bearing securities, although, as a result, the yields available from
U.S. government securities are generally lower than the yields available from
interest-bearing corporate securities.
17
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions 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. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. 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. SBMFM or Boston Advisors, acting
under the supervision of the Board of Trustees, 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.
CERTAIN INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days and (b) time deposits maturing from two business days through
seven calendar days. Not withstanding the foregoing, the Fund shall not invest
more than 10% of its net assets on securities excluding those subject to Rule
144A under the Securities Act of 1933, as amended, that are restricted. In
addition, the Fund may invest up to 5% of its assets in the securities of
issuers which have been in continuous operation for less than three years. The
Fund also may borrow from banks for temporary or emergency purposes, but not for
investment purposes, in an amount up to 10% of its total assets, and may pledge
its assets to the same extent in connection with such borrowings. Whenever these
borrowings exceed 5% of the value of the Fund's total assets, the Fund will not
make any additional
18
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
investments. Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Trust's Board of Trustees. A complete list of investment
restrictions that identifies additional restrictions that cannot be changed
without the approval of the majority of the Fund's outstanding shares is
contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
CONVERTIBLE SECURITIES AND SYNTHETIC CONVERTIBLE SECURITIES. Convertible
securities are fixed-income securities that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, also will react to variations in
the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the
19
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
holder to benefit from increases in the market price of the underlying common
stock. However, there can be no assurance of capital appreciation because
securities prices fluctuate.
Convertible securities generally are subordinated to other similar but non-
convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotations System. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risks normally involved in holding the
securities comprising the synthetic convertible security.
MEDIUM-, LOW- AND UNRATED SECURITIES. The Fund may invest in medium- or
low-rated securities and unrated securities of comparable quality. Generally,
these securities offer a higher current yield than the yield offered by
higher-rated securities but involve greater volatility of price and risk of loss
of income and principal, including the probability of default by or bankruptcy
of the issuers of such securities. Medium- and low-rated and comparable unrated
securities (a) will likely have some quality and protective characteristics
that, in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of
20
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the obligation. Accordingly, it is possible that these types of factors could,
in certain instances, reduce the value of securities held by the Fund, with a
commensurate effect on the value of the Fund's shares. Therefore, an investment
in the Fund should not be considered as a complete investment program and may
not be appropriate for all investors.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium- and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional expenses
to the extent that it is required to seek recovery upon a default in the payment
of principal or interest on its portfolio holdings. In addition, the markets in
which medium- and low-rated or comparable unrated securities are traded
generally are more limited than those in which higher-rated securities are
traded. The existence of limited markets for these securities may restrict the
availability of securities for the Fund to purchase and also may have the effect
of limiting the ability of the Fund to (a) obtain accurate market quotations for
purposes of valuing securities and calculating net asset value and (b) sell
securities at their fair value either to meet redemption requests or to respond
to changes in the economy or the financial markets. The market for medium- and
low-rated and comparable unrated securities is relatively new and has not
weathered a major economic recession. The effect that such a recession might
have on such securities is not known. Any such recession, however, could likely
disrupt severely the market for such securities and adversely affect the value
of such securities. Any such economic downturn also could adversely affect the
ability of the issuers of such securities to repay principal and pay interest
thereon.
21
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities which are rated B generally lack characteristics of the desirable
investment and assurance of interest and principal payments over any long period
of time may be small.
In light of these risks, SBMFM, in evaluating the creditworthiness of an
issue, whether rated or unrated, will take various factors into consideration,
which may include, as applicable, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
The Fund's fixed-income security holdings (as rated by Moody's) for the fiscal
year ended July 31, 1994 were composed as follows: 0.44% rated Aaa; 2.39% rated
Aa; 4.98% rated A; 7.44% rated Baa; 15.30% rated Ba; 3.29% rated B; and 8.11% in
non-rated securities. The percentages were calculated on a dollar weighted
average basis by determining monthly the percentage of the Fund's net assets
invested in each rating category and does not necessarily indicate what the
composition of the Fund's holdings will be in subsequent years.
OPTIONS. Option writing for the Fund may be limited by position and exercise
limits established by the national securities exchanges and the National
Association of Securities Dealers, Inc. (the "NASD") and by requirements in the
Code for qualification as a regulated investment company (see "Dividends,
Distributions and Taxes"). The Fund may write covered call options to generate
current income. In addition, the Fund may enter into options transactions as
hedges to reduce investment risk, generally by making an investment expected to
move in the opposite direction of a portfolio position. A hedge is designed to
offset a loss on a portfolio position with a gain on the hedge position; at the
same time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset by a loss on the hedge position. The Fund bears
the risk that the
22
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
prices of the securities being hedged will not move in the same amount as the
hedge. The Fund will engage in hedging transactions only when deemed advisable
by its investment adviser. Successful use by the Fund of options will depend on
SBMFM's ability to correctly predict movements in the direction of the
securities underlying the option used as a hedge. Losses incurred in hedging
transactions and the costs of these transactions will affect the Fund's
performance.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options only if there appears to be a liquid
secondary market for the options purchased or sold, for some options no such
secondary market may exist or the market may cease to exist.
SECURITIES OF UNSEASONED ISSUERS. Securities in which the Fund may invest may
have limited marketability and, therefore, may be subject to wide fluctuations
in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an
established market share.
FOREIGN SECURITIES. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Fund may
be adversely affected by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with respect to
certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Fund, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that could reduce
the yield on such securities. Because the Fund may invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may adversely affect the value of portfolio
securities and the
23
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
appreciation or depreciation of investments. Investment in foreign securities
also may result in higher expenses due to the cost of converting foreign
currency to U.S. dollars, the payment of fixed brokerage commissions on foreign
exchanges, which generally are higher than commissions on domestic exchanges,
and the expense of maintaining securities with foreign custodians, and the
imposition of transfer taxes or transaction charges associated with foreign
exchanges.
Corporate securities in which the Fund may invest include corporate
fixed-income securities of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
and preferred stock.
Certain of the corporate fixed-income securities in which the Fund may invest
may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting their holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when its investment adviser
believes it desirable to do so. The Fund's investments in illiquid securities
are subject to the risk that should the Fund desire to sell any of these
securities when a ready buyer is not available at a price that the Fund deems
representative of their value, the value of the Fund's net assets could be
adversely affected.
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transactions in securities and options on behalf of the Fund
are placed by SBMFM with broker-dealers that SBMFM selects, including Smith
Barney and other affiliated brokers. The Fund may utilize Smith Barney or a
Smith Barney affiliated broker in connection with a purchase or sale of
securities when SBMFM believes that the broker's charge for the transactions
does not exceed usual and customary levels.
24
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- --------------------------------------------------------------------
VALUATION OF SHARES
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. Net asset value is calculated separately for Class A,
B, C and Y.
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 Trustees. Short-term
investments that mature in 60 days or less are valued at amortized cost whenever
the Trustees determine that amortized cost reflects fair value of those
instruments. Amortized cost valuation involves valuing an instrument at its
cost, initially and, thereafter, assuming a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuating interest rates
or the market value of the instrument. Further information regarding the Fund's
valuation policies is contained in the Statement of Additional Information.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gain payable to shareholders. The Fund's policy is to distribute its
investment income (that is, income other than its net realized capital gains)
and net realized capital gains, if any, once a year, normally at the end of the
year in which earned or at the beginning of the next year.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. In order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution shortly before December 31 in each year of any undistributed
ordinary income or capital gains and expects to pay any other dividends and
distributions necessary to avoid the application of this tax.
25
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- ---------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The per share dividends on Class B and Class C 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 C
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 C and Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a regulated investment company under the Code. Dividends
paid from net investment income and distributions of net realized short-term
capital gains are taxable to shareholders as ordinary income, regardless of how
long shareholders have held their Fund shares and whether such dividends and
distributions are received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains will be taxable to
shareholders as long-term capital gains, regardless of how long shareholders
have held Fund shares and whether such distributions are received in cash or are
reinvested in additional Fund shares. Furthermore, as a general rule, a
shareholder's gain or loss on a sale or redemption of Fund shares will be a
long-term capital gain or loss if the shareholder has held the shares for more
than one year and will be a short-term capital gain or loss if the shareholder
has held the shares for one year or less. Some of the Fund's dividends declared
from net investment income may qualify for the Federal dividends-received
deduction for corporations.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Each shareholder also will receive, if
appropriate, various written notices after the close of the Fund's prior taxable
year as to the Federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's prior taxable
year. Shareholders should consult their tax advisors about the status of the
Fund's dividends and distributions for state and local tax liabilities.
26
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- --------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL
The Fund offers four classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without an
initial sales charge but are subject to a CDSC payable upon certain redemptions.
Class Y shares are sold without an initial sales charge or a CDSC and are
available only to investors investing a minimum of $5,000,000. See "Prospectus
Summary -- Alternative Purchase Arrangements" for a discussion of factors to
consider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group, except for investors purchasing shares of the Fund through a qualified
retirement plan who may do so directly through TSSG. When purchasing shares of
the Fund, investors must specify whether the purchase is for Class A, Class B,
Class C or Class Y shares. No maintenance fee will be charged by the Fund in
connection with a brokerage account through which an investor purchases or holds
shares.
Investors in Class A, Class B and Class C shares may open an account 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 $5,000,000. 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(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes in the Fund is $25. For the Fund's
Systematic Investment Plan, the minimum initial investment requirement for Class
A, Class B and Class C shares and the subsequent investment requirement for all
Classes is $100. There are no minimum investment requirements for Class A shares
for employees of Travelers and its subsidiaries, including Smith Barney,
Trustees of the Fund and their spouses and children and unitholders who invest
distributions from a UIT sponsored by Smith Barney. The Fund reserves the right
to waive or change minimums, to decline any order to purchase its shares and to
suspend the
27
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
offering of shares from time to time. Shares purchased will be held in the
shareholder's account by the Fund's transfer agent, TSSG. Share certificates are
issued only upon a shareholder's written request to TSSG.
Purchase orders received by Smith Barney 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. Orders received by
dealers or Introducing Brokers 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 Smith
Barney prior to Smith Barney's close of business (the "trade date"). Currently,
payment for Fund shares is due on the fifth business day (the "settlement date")
after the trade date. The Fund anticipates that, in accordance with regulatory
changes, beginning on or about June 1, 1995, the settlement date will be the
third business day after the trade date.
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, Smith Barney or TSSG is authorized through
preauthorized transfers of $100 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide 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 Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's 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 Smith Barney Financial Consultant.
28
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are as
follows:
<TABLE>
<CAPTION>
DEALERS
SALES CHARGE AS SALES CHARGE AS REALLOWANCE AS
% OF % OF AMOUNT % OF OFFERING
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED PRICE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Less than $25,000 5.00% 5.26% 4.50%
$25,000 -- $49,999 4.00% 4.17% 3.60%
$50,000 -- $99,999 3.50% 3.63% 3.15%
$100,000 -- $249,999 3.00% 3.09% 2.70%
$250,000 -- $499,999 2.00% 2.04% 1.80%
$500,000 and over* * * *
- -------------------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current holdings of Class A shares offered with
a
sales charge, equal or exceed $500,000 in the aggregate, will be made at net asset value without any
initial sales charge, but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The CDSC on Class A shares is payable to Smith Barney, which compensates Smith Barney
Financial Consultants and other dealers whose clients make purchases of $500,000 or more. The CDSC
is
waived in the same circumstances in which the CDSC applicable to Class B and Class C shares is
waived.
See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
</TABLE>
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 Securities Act of
1933, as amended.
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, his or her spouse and children, or a trustee or other fiduciary of a
single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares held in funds sponsored by Smith Barney that are offered with
a sales charge listed under "Exchange Privilege."
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 of Class A shares to Trustees
of the Fund and employees of Travelers and its subsidiaries, or the spouses and
children of such persons (including the surviving spouse of a
29
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
deceased Trustee or employee, and retired Trustees or employees), or sales to
any trust, pension, profit-sharing or other benefit plan for such persons
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
re-sold except through redemption or repurchase; (b) offers of Class A shares to
any other investment company in connection with 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 Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with 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) shareholders who have redeemed Class A shares in the Fund (or
Class A shares of another Fund of the Smith Barney Mutual Funds that are offered
with a sales charge equal to or greater than the maximum sales charge of the
Fund) and who wish to reinvest their redemption proceeds in the Fund, provided
the reinvestment is made within 60 calendar days of the redemption; (e) accounts
managed by registered investment advisory subsidiaries of Travelers; and (f)
investments of distributions from a UIT sponsored by Smith Barney. 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 funds sponsored by Smith Barney which are offered with
a sales charge 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.
30
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based upon
the aggregate sales of Class A shares of Smith Barney Mutual Funds offered with
a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer- or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
31
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
A Letter of Intent for amounts 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 that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the "Amount Invested" as referred to
in the preceding sales charge table includes purchases of all Class A shares of
the Fund and other funds of the Smith Barney Mutual Funds offered with a sales
charge over the 13 month period based on the total amount of intended purchases
plus the value of all Class A shares previously purchased and still owned. An
alternative is to compute the 13 month period starting up to 90 days before the
date of execution of a Letter of Intent. 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 sale charges applicable to the purchases
made and the charges previously paid, or an appropriate number of escrowed
shares will be redeemed. New Letters of Intent will be accepted beginning
January 1, 1995. Please contact a Smith Barney Financial Consultant or TSSG to
obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares which when combined with Class A shares offered
with a sales charge currently held by an investor equal or exceed $500,000 in
the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC 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
32
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
five years after their purchase; or (d) with respect to Class C shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC 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 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
purchases by Participating Plans, as described below. See "Purchase of Shares --
Smith Barney 401(k) Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C>
- ----------------------------------------------------------------------------------
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- ----------------------------------------------------------------------------------
</TABLE>
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 also will be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder 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. Shareholders who held Class B shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World Income Fund") on
July 15, 1994 and who subsequently exchange those shares for Class B shares of
the Fund will be offered the opportunity
33
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
to exchange all such Class B shares for Class A shares of the Fund four years
after the date on which those shares were deemed to have been purchased. Holders
of such Class B shares will be notified of the pending exchange in writing
approximately 30 days before the fourth anniversary of the purchase date and,
unless the exchange has been rejected in writing, the exchange will occur on or
about the fourth anniversary date. See "Prospectus Summary -- Alternative
Purchase Arrangements -- Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that 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 CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 additional
shares 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 CDSC 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 CDSC
The CDSC 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 below) (provided, however, that 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 that were
34
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
established prior to November 7, 1994); (c) redemptions of shares within 12
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares in connection with 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 funds of the 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 CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by TSSG in the case of
all other shareholders) of the shareholder's status or holdings, as the case may
be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. To the extent
applicable, the same terms and conditions are offered to all Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class Y
shares as investment alternatives under the Smith Barney 401(k) Program. Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different sales
charge and CDSC schedules than, the Class A, Class B and Class C shares acquired
by other investors. Similar to those available to other investors, Class Y
shares acquired through the Smith Barney 401(k) Program are not subject to any
initial sales charge, CDSC or service or distribution fee. 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 initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k)
35
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Program after November 7, 1994 are subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the date the
Participating Plan first enrolled in the Smith Barney 401(k) Program.
CLASS B SHARES. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if the Participating Plan
terminates within eight years of the date the Participating Plan first enrolled
in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith Barney
401(k) Program, it will be offered the opportunity to exchange all of its Class
B shares for Class A shares of the Fund. 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 the
exchange has occurred, a Participating Plan will not be eligible to acquire
additional Class B shares of the Fund but instead may acquire Class A shares of
the Fund. If the Participating Plan elects not to exchange all of its Class B
shares at that time, each Class B share held by the Participating Plan will have
the same conversion feature as Class B shares held by other investors. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or more funds of the Smith
Barney Mutual Funds. Class C shares acquired through the Smith Barney 401(k)
Program after November 7, 1994 are subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the date the
Participating Plan first enrolled in the Smith Barney 401(k) Program. In any
year after the date a Participating Plan enrolled in the Smith Barney 401(k)
Program, if its total Class C holdings 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 C 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
36
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
unless the exchange offer has been rejected in writing, the exchange will occur
on or about the last business day of the following March. Once the exchange has
occurred, a Participating Plan will not be eligible to acquire Class C shares of
the Fund but instead may acquire Class A shares of the Fund. Class C shares not
converted will continue to be subject to the distribution fee.
CLASS Y SHARES. Class Y shares of the Fund are offered without any service or
distribution fees, sales charge or CDSC to any Participating Plan that purchases
$5,000,000 or more of Class Y shares of one or more funds of the Smith Barney
Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gain
distributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the preceding year and, with respect to Class B shares, increases in the net
asset value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number of
years since those shareholders made the purchase payment from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
37
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For further
information regarding the Smith Barney 401(k) Program, investors should contact
a Smith Barney Financial Consultant.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the Fund into which exchanges are made, and
a sales charge differential may apply.
<TABLE>
<C> <S>
FUND NAME
GROWTH FUNDS
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
GROWTH AND INCOME FUNDS
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Smith Barney World Funds--International Balanced Portfolio
</TABLE>
38
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government Portfolio
+++ Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Funds, Inc.--Utility Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
MUNICIPAL BOND FUNDS
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds--California Limited Term Portfolio
Smith Barney Muni Funds--California Portfolio
* Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
* Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New Jersey Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
</TABLE>
39
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
MONEY MARKET FUNDS
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc.--Cash Portfolio
++ Smith Barney Money Funds, Inc.--Government Portfolio
*** Smith Barney Money Funds, Inc.--Retirement Portfolio
+++ Smith Barney Muni Funds--California Money Market Portfolio
+++ Smith Barney Muni Funds--New York Money Market Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
<FN>
------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the Fund through
the Smith Barney 401(k) Program may exchange those shares for Class C
shares of this Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class C shares
of this Fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
</TABLE>
CLASS A EXCHANGES. Class A shares of Smith Barney Mutual Funds sold without a
sales charge or with a maximum sales charge of less than the maximum charged by
other Smith Barney Mutual Funds will be subject to the appropriate "sales charge
differential" upon the exchange of such shares for Class A shares of a Fund sold
with a higher sales charge. The "sales charge differential" is limited to a
percentage rate no greater than the excess of the sales charge rate applicable
to purchases of shares of the mutual fund being acquired in the exchange over
the sales charge rate(s) actually paid on the mutual fund shares relinquished in
the exchange and on any predecessor of those shares. For purposes of the
exchange privilege, shares obtained through automatic reinvestment of dividends
and capital gain distributions are treated as having paid the same sales charges
applicable to the shares on which the dividends or distributions were paid;
however, except in the case of the Smith Barney 401(k) Program, if no sales
charge was imposed upon the initial purchase of the shares, any shares obtained
through automatic reinvestment will be subject to a sales charge differential
upon exchange.
CLASS B EXCHANGES. In the event a Class B shareholder (unless such shareholder
was a Class B shareholder of the Short-Term World Income Fund on July 15, 1994)
wishes to exchange all or a portion of his or her shares in any of the funds
imposing a higher CDSC than that imposed by
40
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
the Fund, the exchanged Class B shares will be subject to the higher applicable
CDSC. Upon an exchange, the new Class B shares will be deemed to have been
purchased on the same date as the Class B shares of the Fund that have been
exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that have
been exchanged.
CLASS Y EXCHANGES. Class Y shareholders of the Fund who wish to exchange all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
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. SBMFM 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, SBMFM will notify
Smith Barney and Smith Barney may, at its discretion, decide to limit additional
purchases and/or exchanges by a shareholder. Upon such a determination, Smith
Barney 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 listed above, 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.
Exchanges will be processed at the net asset value next determined, plus any
applicable sales charge differential. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the shares
of the fund exchanged, no signature guarantee is required. A capital gain or
loss for tax purposes will be realized upon the exchange, depending upon the
cost or other basis of shares redeemed. Before exchanging shares, investors
should read the current prospectus describing the shares to be acquired. The
Fund reserves the right to modify or discontinue exchange privileges upon 60
days' prior notice to shareholders.
41
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- --------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
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 Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the seventh day following receipt of
proper tender, except on any days on which the NYSE is closed or as permitted
under the Investment Company Act of 1940, as amended ("1940 Act"), in
extraordinary circumstances. The Fund anticipates that, in accordance with
regulatory changes, beginning on or about June 1, 1995, payment will be made on
the third business day after receipt of proper tender. Generally, if the
redemption proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the shareholder's benefit without specific
instruction and 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 ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Convertible Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
42
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
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 TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power 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. TSSG may require
additional supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $100 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month of the shareholder's shares subject to the CDSC.) For further
information regarding the automatic cash withdrawal plan, shareholders should
contact a Smith Barney Financial Consultant.
- --------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
43
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
MINIMUM ACCOUNT SIZE (CONTINUED)
Fund account is less than $500. (If a shareholder has more than one account in
this 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 automatic redemption.
- --------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30 day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30 day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming that the amount of income
is generated each month over a one-year period and is compounded semi-annually.
The annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of sales
literature. These figures are computed separately for Class A, Class B, Class C
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 this 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
44
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
PERFORMANCE (CONTINUED)
information for differing periods computed in the same manner but without
annualizing the total return or taking sales charges into account. The Fund
calculates current dividend return for each Class by annualizing the most recent
monthly distribution and dividing by the net asset value or the maximum public
offering price (including sales charge) on the last day of the period for which
current dividend return is presented. The current dividend return for each Class
may vary from time to time depending on market conditions, the composition of
its investment portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return should be
considered when comparing a Class' current return to yields published for other
investment companies and other investment vehicles. 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. The Fund will include performance data for
Class A, Class B, Class C and Class Y shares in any advertisement or information
including performance data of the Fund.
- --------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
administrator, sub-administrator, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to the Fund's investment adviser,
administrator and sub-administrator. The Statement of Additional Information
contains background information regarding each Trustee and executive officer of
the Trust.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the advisory agreement,
effective November 7, 1994, from its affiliate, Mutual Management
45
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Corp. (Mutual Management Corp. and SBMFM are both wholly owned subsidiaries of
Smith Barney Holdings Inc. ("Holdings")). Investment advisory services continue
to be
provided to the Fund by the same portfolio managers who had provided services
under the agreement with Mutual Management Corp. SBMFM (through its predecessor
entities) has been in the investment counseling business since 1934 and is a
registered investment adviser. SBMFM renders investment advice to investment
companies that had aggregate assets under management as of September 30, 1994 in
excess of $52.4 billion.
Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM 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. For
advisory services rendered to the Fund, the Fund pays SBMFM a fee at the annual
rate of 0.50% of the value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
Jack Levande, an Investment Officer of SBMFM and Vice President and Investment
Officer of the Fund, and Robert Swab, an Investment Officer of SBMFM, have
managed the day-to-day operations of the Fund, including making all investment
decisions since it commenced operations.
Mr. Levande's and Mr. Swab's management discussions and analysis, and
additional performance information regarding the Fund during the fiscal year
ended July 31, 1994 are included in the Annual Report dated July 31, 1994. A
copy of the Annual Report may be obtained upon request and without charge from a
Smith Barney Financial Consultant or by writing or calling the Fund at the
address or phone number listed on page one of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of .20% of the value of the Fund's
average daily net assets.
46
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to investment
companies which had aggregate assets under management as of September 30, 1994
in excess of $48.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a Sub-Administration Agreement dated May 4, 1994, Boston
Advisors is paid a portion of the fee paid by the Fund to SBMFM at a rate agreed
upon from time to time between Boston Advisors and SBMFM.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York, 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an annual service
fee with respect to Class A, Class B and Class C shares of the Fund at the
annual rate of 0.25% of the average daily net assets of the respective Class.
Smith Barney is also paid an annual distribution fee with respect to Class B and
Class C shares at the annual rate of 0.50% and 0.45%, respectively, of the
average daily net assets attributable to those Classes. Class B shares which
automatically convert to Class A shares eight years after the date of original
purchase will no longer be subject to distribution fees. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder accounts
and, in the case of Class B and Class C shares, to cover expenses primarily
intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to potential
investors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distribution
of shares;
47
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
interest and/or carrying charges; and indirect and overhead costs of Smith
Barney associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Trust's Board of
Trustees will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series having
a $.001 per share par value. When matters are submitted for shareholder vote,
shareholders of each Class of each Fund 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 Trust vote by individual fund on all matters
except (a) matters affecting only the interest of one or more of the funds, in
which case only shares of the affected Fund or funds would be entitled to vote,
or (b) when the 1940 Act requires that shares of the funds be voted in the
aggregate. Similarly, shares of the Fund will be voted generally on a Fund-wide
basis except matters affecting the interests of one Class of shares.
Each Class represents identical interests in the Fund's investment portfolio.
As a result, the Classes have the same rights, privileges and preferences,
48
<PAGE>
SMITH BARNEY
CONVERTIBLE FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
except with respect to: (a) the designation of each Class; (b) the effect of the
respective sales charges for each Class; (c) the distribution and/or service
fees borne by each Class; (d) the expenses allocable exclusively to each Class;
(e) voting rights on matters exclusively affecting a single Class; (f) the
exchange privilege of each Class; and (g) the conversion feature of the Class B
shares. The Board of Trustees does not anticipate that there will be any
conflicts among the interests of the holders of the different Classes of shares
of the Fund. The Trustees, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose for
voting on the written request of shareholders holding at least 10% of the
Trust's outstanding shares.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Trust's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves as
the Trust's transfer agent.
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 Trust plans to consolidate the mailing of the Fund's
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. In addition, the Trust also plans to
consolidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (e.g., individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their Smith
Barney Financial Consultants or TSSG.
49
<PAGE>
[LOGO]
SMITH BARNEY
CONVERTIBLE
FUND
388 Greenwich Street
New York, New York 10013
Fund 17, 178, 247
FD 0213 J4
[LOGO]
[TEXT]
<PAGE> 1
_______________________________________________________________
P R O S P E C T U S
SMITH BARNEY
DIVERSIFIED
STRATEGIC
INCOME
FUND
NOVEMBER 7, 1994
Prospectus begins on page one
SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
________________________________________________________________
<PAGE> 2
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS November 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Diversified Strategic Income Fund (the "Fund"), a diversified
fund, seeks high current income primarily through investment in fixed-income
securities. The Fund attempts to achieve this objective by allocating and
reallocating its assets primarily among various types of fixed-income securities
selected by its investment adviser on the basis of an analysis of economic and
market conditions and the relative risks and opportunities of those types of
fixed-income securities. The Fund is one of a number of funds, each having
distinct investment objectives and policies, making up the Smith Barney Income
Funds (the "Trust"). The Trust is an open-end, management investment company
commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the telephone
number set forth above or by contacting a Smith Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
GREENWICH STREET ADVISORS
Investment Adviser
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Sub-Investment Adviser
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE> 3
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
--------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
--------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
--------------------------------------------------------------------------
VALUATION OF SHARES 29
--------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 30
--------------------------------------------------------------------------
PURCHASE OF SHARES 32
--------------------------------------------------------------------------
EXCHANGE PRIVILEGE 42
--------------------------------------------------------------------------
REDEMPTION OF SHARES 46
--------------------------------------------------------------------------
MINIMUM ACCOUNT SIZE 48
--------------------------------------------------------------------------
PERFORMANCE 48
--------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 49
--------------------------------------------------------------------------
DISTRIBUTOR 51
--------------------------------------------------------------------------
ADDITIONAL INFORMATION 52
--------------------------------------------------------------------------
</TABLE>
2
<PAGE> 4
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks high current income primarily through investment in
fixed-income securities. The Fund attempts to achieve this objective by
allocating and reallocating its assets primarily among various types of fixed-
income securities selected by its investment adviser on the basis of an analysis
of economic and market conditions and the relative risks and opportunities of
those types of fixed-income securities. See "Investment Objective and Management
Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. In
addition, a fifth Class, Class Z shares, which is offered pursuant to a separate
prospectus, is offered exclusively to (a) tax-exempt employee benefit and
retirement plans of Smith Barney Inc. ("Smith Barney") and its affiliates and
(b) unit investment trusts ("UITs") sponsored by Smith Barney and its
affiliates. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which when
combined with current holdings of Class A shares offered with a sales charge
equal or exceed $500,000 in the aggregate, will be made at net asset value with
no sales charge, but will be subject to a contingent deferred sales charge
("CDSC") of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary--Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and 1.00% each year thereafter to zero. This CDSC may be waived
for certain redemptions. Class B shares are subject to an annual service fee of
0.25% and an annual distribution fee of 0.50% of the average daily net
3
<PAGE> 5
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
assets of the Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. This CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Class C shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and Class C shares are sold without any initial sales charge so the entire
purchase price is immediately invested in the Fund. Any investment return on
these additional invested amounts may partially or wholly offset the higher
annual expenses of these Classes. Because the Fund's future return cannot be
predicted, however, there can be no assurance that this would be the case.
4
<PAGE> 6
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or
distribution fee. The maximum purchase amount for Class A shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases which when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, will be made at
net asset value with no initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all Class
A shares held in funds sponsored by Smith Barney listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program, which is generally designed to assist plan sponsors
in the creation and operation of retirement plans under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as
5
<PAGE> 7
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
other types of participant directed, tax-qualified employee benefit plans
(collectively, "Participating Plans"). Class A, Class B, Class C and Class Y
shares are available as investment alternatives for Participating Plans. See
"Purchase of Shares -- Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Barney
on a fully disclosed basis (an "Introducing Broker") or an investment dealer in
the selling group. Direct purchases by certain retirement plans may be made
through the Fund's transfer agent, The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed
Retirement Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. 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(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes is $25. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes through the Systematic Investment Plan
described below is $100. See "Purchases of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $100. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND Greenwich Street Advisors, a division of Smith Barney
Mutual Funds Management Inc. ("Greenwich Street Advisors"), serves as the Fund's
investment adviser. Smith Barney Mutual Funds Management Inc. ("SBMFMI")
provides investment advisory and management services to investment companies
affiliated with Smith Barney. SBMFMI is a wholly owned subsidiary of Smith
Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of The
Travelers Inc. ("Travelers"), a diversified financial services holding company
engaged, through its subsidiaries, principally in four
6
<PAGE> 8
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
business segments: Investment Services, Consumer Finance Services, Life
Insurance Services and Property & Casualty Insurance Services.
Smith Barney Global Capital Management Inc. ("Global Capital Management")
serves as a sub-investment adviser to the Fund. Global Capital Management is a
wholly owned subsidiary of Holdings.
SBMFMI serves as the Fund's administrator and The Boston Company Advisors,
Inc. ("Boston Advisors") serves as the Fund's sub-administrator. Boston Advisors
is a wholly owned subsidiary of The Boston Company, Inc. ("TBC"), which is in
turn a wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). See
"Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined, plus any applicable sales charge differential.
See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are declared
daily and paid on the last business day of the Smith Barney statement month.
Distributions of net realized long-and short-term capital gains, if any, are
declared and paid annually after the end of the fiscal year in which they are
earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Funds investment objective will be achieved. General changes in interest rates
will result in increases or decreases in the market value of the obligations
held by the Fund. The Fund may invest up to 35% of its assets in corporate
fixed-income securities of domestic issuers rated Ba or lower by Moody's
Investors Service, Inc. ("Moody's") or BB or lower by Standard & Poor's
Corporation ("S&P") or in nonrated securities deemed by Greenwich Street
Advisors to be of comparable quality. The Fund may invest in fixed-income
7
<PAGE> 9
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
securities rated as low as Caa by Moody's or CCC by S&P. Securities that are
rated Ba by Moody's or BB by S&P have speculative characteristics with respect
to capacity to pay interest and repay principal. Securities that are rated B
generally lack characteristics of a desirable investment and assurance of
interest and principal payments over any long period of time may be small.
Securities that are rated Caa or CCC are of poor standing. These issues may be
in default or present elements of danger may exist with respect to principal or
interest. Although medium-or low-rated securities offer a higher current yield
than the yield offered by higher rated securities, they involve greater
volatility of price and risk of loss of income and principal, including the
probability of default by or bankruptcy of the issuers of such securities.
Medium-and low-rated and comparable unrated securities (a) will likely have some
quality and protective characteristics that, in the judgment of the rating
organization, are outweighed by large uncertainties of major risk exposures to
adverse conditions and (b) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. The Fund's investing in the securities of foreign
issuers involves special risks and considerations not typically associated with
investing in domestic issuers. These risks include differences in accounting,
auditing and financial reporting standards, generally higher commission rates on
foreign portfolio transactions, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations,
political instability that could affect domestic investments in foreign
countries and potential restrictions on the flow of international capital.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility and changes in
foreign exchange rates will affect the value of those securities held by the
Fund that are denominated or quoted in currencies other than the U.S. dollar.
Certain of the investments held by the Fund and certain of the investment
strategies that the Fund may employ might expose it to certain risks. The
investments presenting the Fund with risks are mortgage-related securities,
medium-or low-rated securities, as described above, foreign securities, as
described above, and securities of unseasoned issuers. The investment strategies
presenting the Fund with risks are entering in repurchase agreements and reverse
repurchase agreements, entering into forward roll transactions, purchasing or
selling securities on a when-issued or delayed-delivery basis, lending portfolio
securities, entering into transactions involving options and futures contracts
and entering into currency transactions. See "Investment Objective and
Management Policies."
8
<PAGE> 10
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the costs and expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and, unless otherwise noted, the Fund's operating
expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed
on purchases (as a percentage
of offering price) 4.50% None None None
Maximum CDSC
(as a percentage of original
cost or redemption
proceeds, whichever is lower) None* 4.50% 1.00% None
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management fees 0.63% 0.63% 0.63% 0.63%
12b-1 fees** 0.25 0.75 0.70 None
Other expenses*** 0.22 0.19 0.19 0.22
- --------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.10% 1.57% 1.52% 0.85%
- --------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in
the aggregate, will be made at net asset value with no sales charge, but
will be subject to a CDSC of 1.00% on redemptions made within 12 months.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
*** For Class Y shares, "Other expenses" have been estimated based on
expenses incurred by the Class A shares because Class Y shares were not
available for purchase prior to November 7, 1994.
The sales charge and CDSC set forth in the above table are the maximum
charges imposed upon purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class C and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
Program. See "Purchase of Shares" and "Redemption of Shares." Smith Barney
receives an annual 12b-1 service fee of 0.25% of the value of average daily net
assets of Class A shares. Smith Barney also receives, with respect to Class B
shares, an annual 12b-1 fee of 0.75% of the value of the average daily net
assets of that Class, consisting of a 0.50% distribution fee and a 0.25% service
fee. For Class C shares, Smith Barney receives an annual 12b-1 fee of .70% of
the value of average daily net assets of this Class, consisting of a 0.45%
9
<PAGE> 11
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
distribution fee and a 0.25% service fee. "Other expenses" in the above table
include fees for shareholder services, custodial fees, legal and accounting
fees, printing costs and registration fees.
Global Capital Management has voluntarily waived sub-investment advisory
fees in the aggregate amount equal to .02% of the Fund's average daily net
assets. This has the effect of lowering the Fund's overall expense ratio and
increasing the returns otherwise available to investors. If Global Capital
Management had not elected to voluntarily waive fees and reimburse expenses, the
Fund's total operating expenses for the 1994 fiscal year, as a percentage of
average daily net assets, would have been 1.12%, 1.59%, 1.54% and 0.87% for
Class A shares, Class B shares, Class C shares and Class Y shares, respectively.
EXAMPLE The following example is intended to assist an investor in
understanding the various costs that an investor in the Fund will bear directly
or indirectly. The example assumes payment by the Fund of operating expenses at
the levels set forth in the table above. See "Purchase of Shares," "Redemption
of Shares" and "Management of the Trust and the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
An investor would pay the
following expenses on a
$1,000 investment, assuming
(1) 5.00% annual return and
(2) redemption at the end of
each time period:
Class A $ 56 $ 78 $103 $ 173
Class B 61 80 96 174
Class C 25 48 83 181
Class Y 9 27 47 105
An investor would pay the
following expenses on the
same investment, assuming
the same annual return and
no redemption:
Class A 56 78 103 173
Class B 16 50 86 174
Class C 15 48 83 181
Class Y 9 27 47 105
- --------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
10
<PAGE> 12
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Except where otherwise noted, the following information has been audited by
Coopers & Lybrand, independent accountants, whose report thereon appears in the
Fund's Annual Report dated July 31, 1994. The information set out below should
be read in conjunction with the financial statements and related notes that also
appear in the Fund's Annual Report, which is incorporated by reference into the
Statement of Additional Information.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94++ 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 8.41 $ 8.24
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.63 0.47
Net realized and unrealized gain/(loss) on investments (0.52) 0.27
- -------------------------------------------------------------------------------------
Total from investment operations 0.11 0.74
Less distributions:
Distributions from net investment income (0.56) (0.45)
Distributions in excess of net investment income (0.06) --
Distributions from net realized gains (0.10) (0.12)
Distributions from capital (0.04) --
- -------------------------------------------------------------------------------------
Total distributions (0.76) (0.57)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 7.76 $ 8.41
- -------------------------------------------------------------------------------------
Total return+ 1.16% 9.30 %
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $76,019 $48,334
Ratio of operating expenses to average net assets 1.10%*** 1.10 **
Ratio of net investment income to average net assets 7.67% 8.26 **
Portfolio turnover rate 93% 116 %
- -------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
*** Annualized expense ratio before waiver of fees by the sub-investment adviser
was 1.12% for the year ended July 31, 1994.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-investment
adviser was $0.63 for the year ended July 31, 1994.
11
<PAGE> 13
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
7/31/94++ 7/31/93 7/31/92 7/31/91 7/31/90*
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.41 $ 8.55 $ 7.98 $ 8.06 $ 8.00
- ------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.59 0.65 0.68 0.71 0.41
Net realized and unrealized
gain/(loss) on investments (0.51) (0.07) 0.64 0.07 0.05
- ------------------------------------------------------------------------------------------
Total from investment operations 0.08 0.58 1.32 0.78 0.46
Less distributions:
Distributions from net investment
income (0.54) (0.58) (0.68) (0.71) (0.40)
Distributions in excess of net
investment income (0.06) -- -- -- --
Distributions from net realized
gains (0.10) (0.14) -- (0.06) --
Distributions from capital (0.03) -- (0.07) (0.09) --
- ------------------------------------------------------------------------------------------
Total distributions (0.73) (0.72) (0.75) (0.86) (0.40)
- ------------------------------------------------------------------------------------------
Net asset value, end of year $ 7.76 $ 8.41 $ 8.55 $ 7.98 $ 8.06
- ------------------------------------------------------------------------------------------
Total return+ 0.66% 7.28% 17.12% 10.42% 6.00%
- ------------------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of year (in
000's) $2,468,922 $2,105,089 $1,464,744 $502,571 $179,496
Ratio of operating expenses to
average net assets 1.57%*** 1.59% 1.62% 1.63% 1.74%**
Ratio of net investment income to
average net assets 7.20% 7.77% 7.99% 9.21% 9.59%**
Portfolio turnover rate 93% 116% 125% 131% 56%
- ------------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced operations on December 28, 1989. Those shares in existence
prior to November 6, 1992 were designated as Class B shares.
** Annualized.
*** Annualized expense ratio before waiver of fees by the sub-investment adviser
was 1.59% for the year ended July 31, 1994.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sale charge.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-investment
adviser was $0.59 for the year ended July 31, 1994.
12
<PAGE> 14
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94++ 7/31/93*
<S> <C> <C>
Net asset value, beginning of period $ 8.41 $ 8.36
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income+++ 0.55 0.22
Net realized and unrealized gain (loss) on investments (0.47) 0.06
- -------------------------------------------------------------------------------------
Total from investment operations 0.08 0.28
Less distributions:
Distributions from net investment income (0.54) (0.20)
Distributions in excess of net investment income (0.06) --
Distributions from net realized gains (0.10) (0.03)
Distributions from capital (0.03) --
- -------------------------------------------------------------------------------------
Total Distributions (0.73) (0.23)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 7.76 $ 8.41
- -------------------------------------------------------------------------------------
Total return+ 0.66% 3.41%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $1,065 $ 11
Ratio of operating expenses to average net assets 1.57%*** 1.50%**
Ratio of net investment income to average net assets 7.20% 7.87%**
Portfolio turnover rate 93% 116%
- -------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced selling Class C shares (previously designated as Class D
shares) on March 19, 1993.
** Annualized.
*** Annualized expense ratio before waiver of fees by the sub-investment adviser
was 1.58% for the year ended July 31, 1994.
+ Total return represents aggregate total return for the period indicated.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-investment
adviser was $0.55 for the year ended July 31, 1994.
Prior to November 7, 1994, the Fund did not offer Class Y shares and
accordingly, no comparable financial information is available at this time for
that Class.
13
<PAGE> 15
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is high current income primarily through
investment in fixed-income securities. In attempting to achieve its objective,
the Fund allocates and reallocates its assets primarily among various types of
fixed-income securities selected by Greenwich Street Advisors. The types of
fixed-income securities among which the Fund's assets will be primarily
allocated are: obligations issued or guaranteed as to principal and interest by
the United States government ("U.S. government securities"); mortgage-related
securities issued by various governmental and non-governmental entities;
domestic and foreign corporate securities; and foreign government securities.
The Fund's investment objective may be changed only with the approval of the
holders of a majority of the Fund's outstanding shares. There can be no
assurance that the Fund will achieve its investment objective.
The allocation and reallocation of the Fund's assets will be undertaken by
Greenwich Street Advisors on the basis of its analysis of economic and market
conditions and the relative risks and opportunities of particular types of
fixed-income securities. In general, the particular types of fixed-income
securities selected for investment by the Fund at any given time will be those
that, in the view of Greenwich Street Advisors, offer the highest income
available at the time. The Fund typically would not invest in fixed-income
securities offering the highest income potential if Greenwich Street Advisors
determined that the income potential is not sufficient to justify the higher
risks associated with the securities.
At any given time, the Fund may be entirely or only partially invested in a
particular type of fixed-income security. Under normal conditions, at least 65%
of the Fund's assets will be invested in fixed-income securities, which for this
purpose will include non-convertible preferred stocks. The Fund generally will
invest in intermediate-and long-term fixed-income securities with the result
that, under normal market conditions, the weighted average maturity of the
Fund's securities is expected to be between five and 12 years.
Mortgage-related securities in which the Fund may invest include mortgage
obligations collateralized by mortgage loans or mortgage pass-through
certificates. Under current market conditions, the Fund's holdings of
mortgage-related securities may be expected to consist primarily of securities
issued or guaranteed by Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC"). The composition of the Fund's investments in mortgage-
related securities, however, will vary from time to time based upon the
determination of Greenwich Street Advisors on how best to achieve the Fund's
14
<PAGE> 16
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
investment objective taking into account factors such as the liquidity and
yield of various mortgage-related securities. Mortgage-related securities held
by the Fund generally will be rated no lower than Aa by Moody's or AA by S&P or,
if not rated, will be of equivalent investment quality as determined by
Greenwich Street Advisors. Greenwich Street Advisors also may consider the
ratings, if any, assigned to mortgage-related securities by recognized rating
agencies other than Moody's and S&P.
The Fund typically will purchase a corporate debt security if Greenwich
Street Advisors believes that the yield and, to a lesser extent, the potential
for capital appreciation, of the security are sufficiently attractive in light
of the risks of ownership of the security. In determining whether the Fund
should invest in particular debt securities, Greenwich Street Advisors will
consider factors such as: the price, coupon and yield to maturity; the credit
quality of the issuer; the issuer's available cash flow and the related coverage
ratios; the property, if any, securing the obligation; and the terms of the debt
securities, including the subordination, default, sinking fund and early
redemption provisions. Greenwich Street Advisors also will review the ratings,
if any, assigned to the securities by Moody's, S&P or other recognized rating
agencies. Greenwich Street Advisors' judgment as to credit quality of a debt
security may differ, however, from that suggested by the ratings published by a
rating service.
The Fund may invest up to 35% of its assets in corporate fixed-income
securities of domestic issuers rated Ba or lower by Moody's or BB or lower by
S&P or in nonrated securities deemed by Greenwich Street Advisors to be of
comparable quality. The Fund may invest in fixed-income securities rated as low
as Caa by Moody's or CCC by S&P.
Corporate fixed-income securities of foreign issuers in which the Fund may
invest will include securities of companies, wherever organized, that have their
principal business activities and interests outside the United States. Foreign
government securities in which the Fund may invest consist of fixed-income
securities issued by foreign governments. In general, the Fund may invest in
debt securities issued by foreign governments or any of their political
subdivisions that are considered stable by Global Capital Management. Up to 5%
of the Fund's assets, however, may be invested in foreign securities issued by
countries with developing economies.
The Fund may invest in fixed-income securities issued by supranational
organizations, which are entities designated or supported by a government or
governmental entity to promote economic development, and include, among others,
the Asian Development Bank, the European Coal and Steel Community,
15
<PAGE> 17
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the European Economic Community and the World Bank. These organizations have
no taxing authority and are dependent upon their members for payments of
interest and principal. Moreover, the lending activities of supranational
entities are limited to a percentage of their total capital (including "callable
capital" contributed by members at an entity's call), reserves and net income.
ADDITIONAL INVESTMENTS
Money Market Instruments. Up to 20% of the Fund's assets may be invested in
cash and money market instruments at any time. In addition, when Greenwich
Street Advisors believes that market conditions warrant, the Fund may invest in
short-term instruments without limitation for temporary defensive purposes.
Short-term instruments in which the Fund may invest include: U.S. government
securities; certain bank obligations (including certificates of deposit, time
deposits and bankers' acceptances of domestic or foreign banks, domestic savings
and loan associations and similar institutions); commercial paper rated no lower
than Prime-2 by Moody's or A-2 by S&P or the equivalent from another major
rating service or, if unrated, of an issuer having an outstanding, unsecured
debt issue then rated within the three highest rating categories; and repurchase
agreements with respect to the securities in which the Fund may invest. The Fund
will invest in obligations of a foreign bank or foreign branch of a domestic
bank only if Greenwich Street Advisors determines that the obligations present
minimum credit risks. These obligations may be traded in the United States or
outside the United States, but will be denominated in U.S. dollars.
U.S. Government Securities. The U.S. government securities in which the
Fund may invest include, direct obligations of the United States Treasury (such
as Treasury Bills, Treasury Notes and Treasury Bonds), and obligations issued by
U.S. government agencies and instrumentalities, including: securities that are
supported by the full faith and credit of the United States (such as GNMA
certificates); 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 securities that are supported by the credit of the instrumentality
(such as FNMA and FHLMC bonds). Treasury Bills have maturities of less than one
year, Treasury Notes have maturities of one to 10 years and Treasury Bonds
generally have maturities of greater than 10 years at the date of issuance.
Certain U.S. government securities, such as those issued or guaranteed by GNMA,
FNMA and FHLMC, are mortgage-related securities. U.S. government securities
generally do not involve the credit risks associated with other types of
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Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
interest-bearing securities, although, as a result, the yields available
from U.S. government securities are generally lower than the yields available
from interest-bearing corporate securities.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained in
the Statement of Additional Information.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions 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. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. 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. Greenwich Street Advisors, Global
Capital Management, SBMFMI or Boston Advisors, acting under the supervision of
the Trust's Board of Trustees, 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
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is
considered a borrowing by the Fund, involves a sale by the Fund of securities
that it holds concurrently with an agreement by the Fund to repurchase the same
securities at an agreed-upon price and date. The Fund typically will invest the
proceeds of a reverse repurchase agreement in money market instruments or
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The Fund
will enter into a reverse repurchase agreement for leverage purposes only when
the interest income to be earned from the investment of the proceeds is greater
than the interest expense of the transaction. The Fund also may use the proceeds
of reverse repurchase agreements to provide liquidity to meet redemption
requests when the sale of the Fund's securities is considered to be
disadvantageous.
Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related 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 forward roll transactions, it will place in a
segregated account with the Trust's custodian, Boston Safe Deposit and Trust
Company ("Boston Safe"), cash, U.S. government securities or high grade debt
obligations 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.
When-Issued Securities and Delayed-Delivery Transactions. In order to
secure yields or prices deemed advantageous at the time, the Fund may purchase
or sell securities on a when-issued or delayed-delivery basis. The Fund will
enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. In such transactions delivery of
the securities occurs beyond the normal settlement periods, but no payment or
delivery is made by the Fund prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value of securities
purchased or sold
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Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on the
dates when the investments are actually delivered to the buyers. The Fund will
establish with Boston Safe a segregated account consisting of cash, U.S.
government securities or other high-grade debt obligations in an amount equal to
the amount of its when-issued and delayed-delivery commitments. Placing
securities rather than cash in the segregated account may have a leveraging
effect on the Fund's net assets.
Lending of Portfolio Securities. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets taken at value. Loans
of portfolio securities by the Fund will be collateralized by cash, letters of
credit or U.S. government securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities. Any
gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Fund. The Fund will
segregate the common stock or convertible or exchangeable preferred stock or
debt securities in a special account with Boston Safe.
Covered Option Writing. The Fund may purchase and sell put, call and other
types of option securities that are traded on domestic or foreign exchanges or
the over-the-counter market including, but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options. The Fund may realize fees (referred to as "premiums") for granting the
rights evidenced by the options. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option holder
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 to the option holder an underlying security at
a specified price at any time during the option period. Thus, the purchaser of a
put option written by the Fund 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 written by the Fund 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 call option written by the Fund, the Fund may suffer
a loss equal to the excess of the security's market value at the time of the
option
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Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
exercise over the option's exercise price, less the premium received for
writing the option.
The Fund will write only covered options. Thus, whenever the Fund writes a
call option, it will continue to own or have the present right to acquire the
underlying security for as long as it remains obligated as the writer of the
option. To support its obligation to purchase the underlying security if a put
option is exercised, the Fund will either (a) deposit with Boston Safe in a
segregated account cash, U.S. government securities or other high-grade debt
obligations having a value at least equal to the exercise price of the
underlying securities or (b) continue to own an equivalent number of puts of the
same "series" (that is, puts on the same underlying security having the same
exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same "class" (that is, puts on the same
underlying security) with exercise prices greater than those that it has written
(or, if the exercise prices of the puts that it holds are less than the exercise
prices of those that it has written, it will deposit the difference with Boston
Safe in a segregated account).
Purchasing Put and Call Options on Securities. The Fund may utilize up to
15% of its assets to purchase options and may do so at or about the same time
that it purchases the underlying security or at a later time. In purchasing
option securities, the Fund will trade only with counterparties of high standing
in terms of credit quality and commitment to the market. Risks associated with
options transactions and foreign futures contracts are described below under
"Special Considerations."
Futures Contracts and Options on Futures Contracts. The Fund may enter into
futures contracts or related options that are traded on domestic and foreign
exchanges or boards of trade as well as the over-the-counter market with respect
to options on such futures contracts. A futures contract provides for the future
sale by one party and the purchase by the other party of a certain amount of
specified debt security at a specified price, date, time and place. The Fund may
enter into futures contracts to sell debt securities when Greenwich Street
Advisors believes that the value of the Fund's debt securities will decrease.
The Fund may enter into futures contracts to purchase debt securities when
Greenwich Street Advisors anticipates purchasing the underlying debt securities
on behalf of the Fund and believes that prices will rise before the purchases
will be made. When the Fund enters into a futures contract to purchase an
underlying security, an amount of cash, U.S. government securities or other
high-grade debt securities, equal to the market value of the contract, will be
deposited in a
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SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
segregated account with Boston Safe to collateralize the position, thereby
insuring that the use of the contract is unleveraged. The Fund will not enter
into futures contracts for speculation and will enter into futures contracts
that are traded on a domestic or foreign exchange or board of trade as well as
the over-the-counter market.
An option on a futures contact, as contrasted with the direct investment in
a futures contract, gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract at a specified exercise price
at any time prior to the expiration date of the option. A call option gives the
purchaser of the option the right to enter into a futures contract to buy and
obliges the writer to enter into a futures contract to sell the underlying debt
securities. A put option gives the purchaser the right to sell and obliges the
writer to buy the underlying contract.
The Fund may purchase put options on futures contracts to hedge its
portfolio of debt securities against the risk of rising interest rates, and may
purchase call options on futures contracts to hedge against a decline in
interest rates. The Fund may write put and call options on futures contracts in
entering into closing sale transactions and to increase its ability to hedge
against changes in interest rates. The Fund will write put and call options on
futures contracts that are traded on a domestic or foreign exchange or board of
trade as well as the over-the-counter market.
Currency Exchange Transactions and Options on Foreign Currencies. The Fund
will conduct its currency exchange transactions either on a spot (that is, cash)
basis at the rate prevailing in the currency exchange market or through entering
into forward contracts to purchase or sell currencies. The Fund's dealings in
forward currency exchange and options on foreign currencies are limited to
hedging involving either specific transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of the currency
increase.
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SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may purchase and sell put, call and other types of options on
foreign currencies that are traded on domestic or foreign exchanges or in the
over-the-counter market, including but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options.
The Fund may purchase put options on a foreign currency in which securities
held by the Fund are denominated to protect against a decline in the value of
the currency in relation to the currency in which the exercise price is
denominated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the
purchaser, in return for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying currency at a specified price during
the term of the option. Although the purchase of an option on a foreign currency
may constitute an effective hedge by the Fund against fluctuations in the
exchange rates, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies purchased by the Fund may be traded on
domestic and foreign exchanges or over-the-counter.
CERTAIN INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) time deposits maturing from two business days through seven
calendar days and (c) to the extent that a liquid secondary market does not
exist for the instruments, futures contracts and options on those contracts.
Notwithstanding the foregoing, the Fund shall not invest more than 10% of its
net assets in securities (excluding those subject to Rule 144A under the
Securities Act of 1933, as amended) that are restricted. In addition, the Fund
may invest up to 5% of its assets in the securities of issuers that have been in
continuous operation for less than three years. The Fund also may borrow from
banks for temporary or emergency purposes, but not for investment purposes, in
an amount up to 10% of its total assets, and may pledge its assets to the same
extent in connection with such borrowings. Whenever these borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not make any additional
investments. Immediately after any borrowing (including reverse repurchase
22
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SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
agreements and forward roll transactions) by the Fund, the Fund will
maintain an asset coverage of at least 300% with respect to all of its
borrowings. Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Trust's Board of Trustees. A complete list of investment
restrictions that identifies additional restrictions that cannot be changed
without the approval of a majority of the Fund's outstanding shares is contained
in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Medium-, Low-and Unrated Securities. The Fund may invest in medium-or
low-rated securities and unrated securities of comparable quality. Generally,
these securities offer a higher current yield than the yield offered by
higher-rated securities but involve greater volatility of price and risk of loss
of income and principal, including the probability of default by or bankruptcy
of the issuers of such securities. Medium-and low-rated and comparable unrated
securities (a) will likely have some quality and protective characteristics
that, in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Thus, it is
possible that these types of factors could, in certain instances, reduce the
value of securities held by the Fund with a commensurate effect on the value of
the Fund's shares. Therefore, an investment in the Fund should not be considered
as a complete investment program and may not be appropriate for all investors.
While the market values of medium-and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium-and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium-and low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium-and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
senior indebtedness. The Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of principal
or interest on its portfolio holdings. In addition, the markets in which medium-
and low-rated or comparable unrated securities are traded generally are more
limited than those in which higher-rated securities are traded. The existence of
limited markets for these securities may restrict the availability of securities
for the Fund to purchase and also may have the effect of limiting the ability of
the Fund to (a) obtain accurate market quotations for purposes of valuing
securities and calculating net asset value and (b) sell securities at their fair
value either to meet redemption requests or to respond to changes in the economy
or the financial markets. The market for medium-and low-rated and comparable
unrated securities is relatively new and has not fully weathered a major
economic recession. Any such recession, however, could likely disrupt severely
the market for such securities and adversely affect the value of such
securities. Any such economic downturn also could adversely affect the ability
of the issuers of such securities to repay principal and pay interest thereon.
Fixed-income securities, including medium-and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities that are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities that are rated B generally lack characteristics of a desirable
investment and assurance of interest and principal payments over any long period
of time may be small. Securities that are rated Caa or CCC are of poor standing.
These issues may be in default or present elements of danger may exist with
respect to principal or interest.
In light of the risks described above, Greenwich Street Advisors, in
evaluating the creditworthiness of an issue, whether rated or unrated, will take
various factors into consideration, which may include, as applicable, the
issuer's financial resources, its sensitivity to economic conditions and trends,
the operating history of and the community support for the facility financed by
the issue, the ability of the issuer's management and regulatory matters.
Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide fluctua-
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tions in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an
established market share.
Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations that are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of limitations on the repatriation of
currencies or other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers and the lack of uniform
accounting, auditing and financial reporting standards or of other regulatory
practices and requirements comparable to those applicable to domestic companies.
The yield of the Fund may be adversely affected by fluctuations in value of one
or more foreign currencies relative to the U.S. dollar. Moreover, securities of
many foreign companies and their markets may be less liquid and their prices
more volatile than those of securities of comparable domestic companies. In
addition, with respect to certain foreign countries, the possibility exists of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Fund, including the withholding of
dividends. Foreign securities may be subject to foreign government taxes that
could reduce the yield on such securities. Because the Fund will invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may adversely affect the value of
portfolio securities and the appreciation or depreciation of investments.
Investment in foreign securities also may result in higher expenses due to the
cost of converting foreign currency to U.S. dollars, the payment of fixed
brokerage commissions on foreign exchanges, which generally are higher than
commissions on domestic exchanges, the expense of maintaining securities with
foreign custodians, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.
Corporate securities in which the Fund may invest include corporate fixed-
income securities of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
and preferred stock. The Fund's investments in each of equipment lease or
equipment trust certificates will not exceed 5% of its assets.
Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
25
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
corporate fixed-income securities that have conversion or exchange rights
permitting their holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees or
costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer a
higher rate of interest than government and government-related pools because no
direct or indirect guarantees of payments are applicable with respect to the
former pools. Timely payment of interest and principal in these pools, however,
may be supported by various forms of private insurance or guarantees, including
individual loan, title, pool and hazard insurance. There can be no assurance
that the private insurers can meet their obligations under the policies. Prompt
payment of principal and interest on GNMA mortgage pass-through certificates is
backed by the full faith and credit of the United States. FNMA guaranteed
mortgage pass-through certificates and FHLMC participation certificates are
solely the obligations of those entities but are supported by the discretionary
authority of the United States government to purchase the agencies' obligations.
Collateralized mortgage obligations are a type of bond secured by an underlying
pool of mortgages or mortgage pass-through certificates that are structured to
direct payments on underlying collateral to different series or classes of the
obligations.
To the extent that the Fund purchases mortgage-related securities at a
premium, 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. The Fund's yield may be
affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related
mortgage pools, generally will fluctuate in response to market interest rates.
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Securities of Developing Countries. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the fixed-income markets of developing
countries involves exposure to economic structures that are generally less
diverse and mature, and to political systems that can be expected to have less
stability, than those of developed countries. Historical experience indicates
that the markets of developing countries have been more volatile than the
markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
Non-Publicly Traded and Illiquid Securities. The Fund's sale of securities
that are not publicly traded is typically restricted under the Federal
securities laws. As a result, the Fund may be forced to sell these securities at
less than fair market value or may not be able to sell them when Greenwich
Street Advisors believes it desirable to do so. The Fund's investments in
illiquid securities are subject to the risk that should the Fund desire to sell
any of these securities when a ready buyer is not available at a price that the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected.
Options. Because option premiums paid or received by the Fund are small in
relation to the market value of the investments underlying the options, buying
and selling options can result in large amounts of leverage. The leverage
offered by trading in options may cause the Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
Upon the exercise of a put option written by the Fund, 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 written by the Fund, 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 exercise price of the option less the premium received for writing the
option.
The Fund may engage in a closing purchase transaction to realize a profit,
to prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option that the Fund has written, an option
of the same series as that on which the Fund desired to terminate its
obligation.
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The obligation of the Fund under an option that it has written would be
terminated by a closing purchase transaction, but the Fund would not be deemed
to own an option as a result of the transaction. No assurance can be given that
the Fund will be able to effect closing transactions at a time when it wishes to
do so. If the Fund cannot enter into a closing transaction, the Fund may be
required to hold a security that it might otherwise have sold, in which case it
would continue to be at market risk on the security and could face higher
transaction costs, including brokerage commissions.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options or financial futures only if there
appears to be a liquid secondary market for the options or futures sold or
purchased, for some options or futures no such secondary market may exist or the
market may cease to exist.
Futures and Options on Futures. Investments in futures and options on
futures made by the Fund will be made solely for the purpose of hedging against
the effects of changes in the value of its portfolio securities due to
anticipated changes in interest rates and when the transactions are economically
appropriate to the reduction of risks inherent in the management of the Fund.
The Fund may not enter into futures and options contracts for which aggregate
initial margin deposits and premium paid for unexpired options exceed 5% of the
fair market value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. No assurance can be given that a correlation will
exist between price movements in the underlying securities on the one hand, and
price movements in the securities which are the subject of the hedge, on the
other hand. Positions in futures contracts and options on futures contracts may
be closed out only on the exchange or board of trade on which they were entered
into, and no assurance can be given that an active market will exist for a
particular contract or option at any particular time. Losses incurred in hedging
transactions and the costs of these transactions will affect the Fund's
performance.
Foreign Commodity Exchanges. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the
Commodity Futures Trading Commission and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges may be
principal markets so that no common clearing facility exists and a trader may
28
<PAGE> 30
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
look only to the broker for performance of the contract. In addition, unless
the Fund hedges against fluctuations in the exchange rate between the U.S.
dollar and the currencies in which trading is done on foreign exchanges, any
profits that the Fund might realize in trading could be eliminated by adverse
changes in the exchange rate, or the Fund could incur losses as a result of
those changes.
Foreign Currency. Although the foreign currency market may not necessarily
be more volatile than the market in other commodities, the foreign currency
market offers less protection against defaults in the forward trading of
currencies than is available when trading in currencies occurs on an exchange.
Because a forward currency contract is not guaranteed by an exchange or clearing
house, a default on the contract would deprive the Fund of unrealized profits or
force the Fund to cover its commitments for purchase or resale, if any, at the
current market price.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the Fund will be
executed by a number of brokers and dealers, including Smith Barney and certain
of its affiliated brokers. The Fund may use Smith Barney or a Smith Barney
affiliated broker in connection with a purchase or sale of securities when
Greenwich Street Advisors believes that the charge for the transaction does not
exceed usual and customary levels. The Fund also may use Smith Barney as a
commodities broker in connection with entering into futures contracts and
commodity options. Smith Barney has agreed to charge the Fund commodity
commissions at rates comparable to those charged by Smith Barney to its most
favored clients for comparable trades in comparable accounts.
- --------------------------------------------------------------------------------
VALUATION OF SHARES
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.
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 Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges,
29
<PAGE> 31
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
except that when an occurrence subsequent to the time a value was so established
is likely to have changed such value, then the fair market value of those
securities will be determined by consideration of other factors by or under the
direction of the Board of Trustees or its delegates. A security that is traded
primarily on a domestic or foreign stock exchange is valued at the last sale
price on that exchange or, if there were no sales during the day, at the current
quoted bid price. Over-the-counter securities are valued on the basis of the bid
price at the close of business on each day. Investments in U.S. government
securities (other than short-term securities) are valued at the average of the
quoted bid and asked prices in the over-the-counter market. Short-term
investments that mature in 60 days or less are valued at amortized cost whenever
the Trustees determine that amortized cost reflects fair value of those
investments. An option generally is valued at the last sale price or, in the
absence of the last sale price, the last offer price. The value of a futures
contract equals the unrealized gain or loss on the contract, which is determined
by marking the contract to the current settlement price for a like contract
acquired on the day on which the futures contract is being valued. A settlement
price may not be used if the market makes a limit move with respect to a
particular commodity or if the underlying securities market experiences
significant price fluctuations after the determination of the settlement price.
In such event, the futures contract will be valued at a fair market price to be
determined by or under the direction of the Board of Trustees. Further
information regarding the Trust's valuation policies with respect to the Fund is
contained in the Statement of Additional Information.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amount of dividends from net investment income and distributions
of capital gains payable to shareholders.
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 CDSC. Dividends and
distributions are treated the same for tax purposes whether taken in cash or
reinvested in additional shares. The Fund declares dividends daily consisting of
estimated daily net investment income, and pays dividends monthly. Any net
realized gains, after utilization of capital loss carryforwards, will be
distributed
30
<PAGE> 32
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
at least annually, and net realized short-term capital gains (including
short-term capital gains from options transactions, if any) may be paid more
frequently, with the distribution of dividends from net investment income.
The per share dividends on Class B and Class C 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 C
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 C and Class Y shares.
In addition, as determined by the Board of Trustees, distributions of the
Fund may include a return of capital. Shareholders will be notified of the
amount of any distribution that represents a return of capital. In order to
comply with a calendar year distribution requirement under the Code, it may be
necessary for the Fund to make distributions at times other than those set forth
above.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined on a fund by fund basis, rather than on a
Trust wide basis. The Fund intends to qualify each year as a regulated
investment company under Subchapter M of the Code. To meet those requirements,
the Fund may need to restrict the degree to which it engages in short-term
trading and transactions in options. If the Fund qualifies as a regulated
investment company and meets certain distribution requirements, the Fund will
not be subject to Federal income tax on its net investment income and net
capital gains that it distributes to its shareholders.
Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Distributions of long-term capital gain will be taxable to
shareholders as long-term capital gain, whether paid in cash or reinvested in
additional shares, and regardless of the length of time the investor has held
his or her shares of the Fund. Dividends and distributions paid by the Fund will
not qualify for the Federal dividends-received deduction for corporate
shareholders.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other foreign taxes. The payment of these taxes will
31
<PAGE> 33
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
reduce the amount of dividends and distributions paid to the Fund's
shareholders. Each shareholder of the Fund will receive a statement annually
from the Trust, which will set forth separately the aggregate dollar amount of
dividends and capital gains distributed to the shareholder by the Fund with
respect to the prior calendar year.
Shareholders should consult their tax advisors about the status of the
Fund's dividends and distributions for Federal, state and local tax liabilities.
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL
The Fund offers five Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or a CDSC
and are available only to investors investing a minimum of $5,000,000. Class Z
shares are offered without a sales charge, CDSC, or service or distribution fee,
exclusively to: (a) tax-exempt employee benefit and retirement plans of Smith
Barney and its affiliates and (b) certain UITs sponsored by Smith Barney and its
affiliates. Investors meeting either of these criteria who are interested in
acquiring Class Z shares should contact a Smith Barney Financial Consultant for
a Class Z Prospectus. See "Prospectus Summary--Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group, except for investors purchasing shares of the Fund through a
qualified retirement plan who may do so directly through TSSG. When purchasing
shares of the Fund, investors must specify whether the purchase is for Class A,
Class B, Class C or Class Y shares. No maintenance fee will be charged by the
Fund in connection with a brokerage account through which an investor purchases
or holds shares.
Investors in Class A, Class B and Class C shares may open an account 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 $5,000,000. Subse-
32
<PAGE> 34
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
quent 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(a) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $100. There are no minimum
investment requirements for Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, or Trustees of the Trust 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
the Trust's transfer agent, TSSG. Share certificates are issued only upon a
shareholder's written request to TSSG.
Purchase orders received by Smith Barney 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. Orders received
by dealers or Introducing Brokers 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
Smith Barney prior to Smith Barney's close of business (the "trade date").
Currently, payment for Fund shares is due on the fifth business day (the
"settlement date") after the trade date. The Fund anticipates that, in
accordance with regulatory changes, beginning on or about January 1, 1995, the
settlement date will be the third business day after the trade date.
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, Smith Barney or TSSG is authorized through
preauthorized transfers of $100 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide 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 Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's Smith
Barney brokerage account or redeem the shareholder's shares of a Smith Barney
money market fund to make additions to the account.
33
<PAGE> 35
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Additional information is available from the Fund or a Smith Barney Financial
Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
DEALERS REALLOWANCE
SALES CHARGE AS % OF SALES CHARGE AS % AS % OF OFFERING
AMOUNT OF INVESTMENT OFFERING PRICE OF AMOUNT INVESTED PRICE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------
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 * * *
- -------------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, will be made at net asset value without any initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The CDSC on Class A shares is payable to Smith Barney, which
compensates Smith Barney Financial Consultants and other dealers whose clients
make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B and Class C shares is
waived. See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
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 Securities Act of
1933, as amended.
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, his or her spouse and children, or a trustee or other fiduciary
of a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares held in funds sponsored by Smith Barney that are offered with
a sales charge listed under "Exchange Privilege."
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 of Class A shares to Trustees
of the Trust and employees of Travelers and its subsidiaries, or the spouses and
children of such persons (including the surviving spouse of a deceased Trustee
or employee, and retired Trustees or employees), or sales to any trust, pension,
34
<PAGE> 36
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
profit-sharing or other benefit plan for such persons 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 re-sold except through
redemption or repurchase; (b) offers of Class A shares to any other investment
company in connection with 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 Smith Barney Financial Consultant (for a period
up to 90 days from the commencement of the Financial Consultant's employment
with 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)
shareholders who have redeemed Class A shares in the Fund (or Class A shares of
another fund of the Smith Barney Mutual Funds that are offered with a sales
charge equal to or greater than the maximum sales charge of the Fund) and who
wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 60 calendar days of the redemption; and (e) accounts
managed by registered investment advisory subsidiaries of Travelers. 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 funds sponsored by Smith Barney, which are offered
with a sales charge 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.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
35
<PAGE> 37
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative--Class A Shares," and will be based upon
the aggregate sales of Class A shares of Smith Barney Mutual Funds offered with
a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer-or partnership-sanctioned plan meeting
certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts 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 that 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 purchases of all Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds offered
36
<PAGE> 38
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
with a sales charge over the 13 month period based on the total amount of
intended purchases plus the value of all Class A shares previously purchased and
still owned. An alternative is to compute the 13 month period starting up to 90
days before the date of execution of a Letter of Intent. 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. New Letters of Intent will be accepted
beginning January 1, 1995. Please contact a Smith Barney Financial Consultant or
TSSG to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares which when combined with Class A shares
offered with a sales charge currently held by an investor equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the cost of shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC 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 C shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC 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
Smith Barney statement month.
37
<PAGE> 39
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
The following table sets forth the rates of the charge for redemptions of Class
B shares by shareholders, except in the case of purchases by Participating
Plans, as described below. See "Purchase of Shares--Smith Barney 401(k)
Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C> <C>
- ------------------------------------------------
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- ------------------------------------------------
</TABLE>
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 also will be converted at that time such
portion of Class B Dividend Shares owned by the shareholder 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. Shareholders who held Class B shares of Smith Barney Shearson
Short-Term World Income Fund (the "Short-Term World Income Fund") on July 15,
1994 and who subsequently exchange those shares for Class B shares of the Fund
will be offered the opportunity to exchange all such Class B shares for Class A
shares of the Fund four years after the date on which those shares were deemed
to have been purchased. Holders of such Class B shares will be notified of the
pending exchange in writing approximately 30 days before the fourth anniversary
of the purchase date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the fourth anniversary date. See "Prospectus
Summary--Alternative Purchase Arrangements--Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other applicable 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 CDSC will
38
<PAGE> 40
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
reduce the gain or increase the loss, as the case may be, on the amount realized
on redemption. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares 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 CDSC 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 CDSC
The CDSC 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 below) (provided, however, that 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 that were 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 59 1/2;
(e) involuntary redemptions; and (f) redemptions of shares in connection with 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 funds of the 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 CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by TSSG in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
39
<PAGE> 41
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k)
Program, which is generally designed to assist plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. To the extent
applicable, the same terms and conditions are offered to all Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class
Y shares as investment alternatives under the Smith Barney 401(k) Program. Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different sales
charge and CDSC schedules than, the Class A, Class B and Class C shares acquired
by other investors. Similar to those available to other investors, Class Y
shares acquired through the Smith Barney 401(k) Program are not subject to any
initial sales charge, CDSC or service or distribution fee. 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 initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of redemption proceeds, if the
Participating Plan terminates within four years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Class B Shares. Class B shares of the Fund are offered to any
Participating Plan that purchases less than $250,000 of one or more funds of the
Smith Barney Mutual Funds. Class B shares acquired through the Smith Barney
401(k) Program are subject to a CDSC of 3.00% of redemption proceeds, if the
Participating Plan terminates within eight years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the
Smith Barney 401(k) Program, it will be offered the opportunity to exchange all
of its Class B shares for Class A shares of the Fund. 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 the exchange has occurred, a Participating Plan will not be eligible
to
40
<PAGE> 42
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
acquire additional Class B shares of the Fund but instead may acquire Class A
shares of the Fund. If the Participating Plan elects not to exchange all of its
Class B shares at that time, each Class B share held by the Participating Plan
will have the same conversion feature as Class B shares held by other investors.
See "Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of the Fund are offered to any
Participating Plan that purchases from $250,000 to $499,999 of one or more funds
of the Smith Barney Mutual Funds. Class C shares acquired through the Smith
Barney 401(k) Program after November 7, 1994 will be subject to a CDSC of 1.00%
of redemption proceeds, if the Participating Plan terminates within four years
of the date the Participating Plan first enrolled in the Smith Barney 401(k)
Program. In any year after the date a Participating Plan enrolled in the Smith
Barney 401(k) Program, if its total Class C holdings 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 C 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.
Once the exchange has occurred, a Participating Plan will not be eligible to
acquire Class C shares of the Fund but instead may acquire Class A shares of the
Fund. Class C shares not converted will continue to be subject to the
distribution fee.
Class Y Shares. Class Y shares of the Fund are offered without any service
or distribution fees, sales charge or CDSC to any Participating Plan that
purchases $5,000,000 or more of Class Y shares of one or more funds of the Smith
Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gain
distributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the preceding year and, with respect to Class B shares, increases in the net
asset value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
41
<PAGE> 43
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number of
years since those shareholders made the purchase payment from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For further
information regarding the Smith Barney 401(k) Program, investors should contact
a Smith Barney Financial Consultant.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A,
Class B and Class C shares are subject to minimum investment requirements and
all shares are subject to the other requirements of the fund into which
exchanges are made and a sales charge differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
42
<PAGE> 44
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Smith Barney World Funds--International Balanced Portfolio
Income Funds
** Smith Barney Adjustable Rate Government Income Fund
* Smith Barney Funds, Inc.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government Portfolio
+++ Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Funds, Inc.--Utility Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Municipal Bonds Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds--California Limited Term Portfolio
43
<PAGE> 45
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds--California Portfolio
* Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
* Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New Jersey Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc.--Cash Portfolio
++ Smith Barney Money Funds, Inc.--Government Portfolio
*** Smith Barney Money Funds, Inc.--Retirement Portfolio
+++ Smith Barney Municipal Money Fund, Inc.
+++ Smith Barney Muni Funds--California Money Market Portfolio
+++ Smith Barney Muni Funds--New York Money Market Portfolio
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the Fund through
the Smith Barney 401(k) Program may exchange those shares for Class C
shares of this fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class C shares
of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
Class A Exchanges. Class A shares of Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less than the maximum
charged by other Smith Barney Mutual Funds will be subject to the appropriate
"sales charge differential" upon the exchange of such shares for Class A shares
of a fund sold with a higher sales charge. The "sales charge differential" is
limited to a percentage rate no greater than the excess of the sales charge rate
applicable to purchases of shares of the mutual fund being acquired in the
exchange over the sales charge rate(s) actually paid on the mutual fund shares
relinquished in the exchange and on any predecessor of those shares. For
purposes of the exchange privilege, shares obtained through automatic reinvest-
44
<PAGE> 46
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
ment of dividends and capital gain distributions are treated as having paid the
same sales charges applicable to the shares on which the dividends or
distributions were paid; however, except in the case of the Smith Barney 401(k)
Program, if no sales charge was imposed upon the initial purchase of the shares,
any shares obtained through automatic reinvestment will be subject to a sales
charge differential upon exchange.
Class B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in any
of the funds imposing a higher CDSC than that imposed by the Fund, the exchanged
Class B shares will be subject to the higher applicable CDSC. Upon an exchange,
the new Class B shares will be deemed to have been purchased on the same date as
the Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
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. Greenwich Street
Advisors 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,
Greenwich Street Advisors will notify Smith Barney and Smith Barney may, at its
discretion, decide to limit additional purchases and/or exchanges by a
shareholder. Upon such a determination, Smith Barney 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.
Exchanges will be processed at the net asset value next determined, plus
any applicable sales charge differential. Redemption procedures discussed below
are
45
<PAGE> 47
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the shares
of the fund exchanged, no signature guarantee is required. A capital gain or
loss for tax purposes will be realized upon the exchange, depending upon the
cost or other basis of shares redeemed. Before exchanging shares, investors
should read the current prospectus describing the shares to be acquired. The
Fund reserves the right to modify or discontinue exchange privileges upon 60
days' prior notice to shareholders.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
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 Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the seventh 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. The Fund anticipates that, in
accordance with regulatory changes, beginning on or about June 1, 1995, payment
will be made on the third business day after receipt of proper tender.
Generally, if the redemption proceeds are remitted to a Smith Barney brokerage
account, these funds will not be invested for the shareholder's benefit without
specific instruction and 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 ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
46
<PAGE> 48
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Diversified Strategic Income Fund Inc.
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
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 TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power 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. TSSG may require
additional supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $100 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month of the shareholder's shares subject to the CDSC.) For further
information regarding the automatic cash withdrawal plan, shareholders should
contract a Smith Barney Financial Consultant.
47
<PAGE> 49
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate 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
this 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 automatic redemption.
- --------------------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C 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 this 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
48
<PAGE> 50
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
PERFORMANCE (CONTINUED)
account. The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. 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. The
Fund will include performance data for Class A, Class B, Class C and Class Y
shares in any advertisement or information including performance data of the
Fund.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the companies that furnish services to the
Trust and the Fund, including agreements with the Fund's distributor, investment
adviser, sub-investment adviser, administrator, sub-administrator, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's investment adviser, sub-investment adviser, administrator and
sub-administrator. The Statement of Additional Information contains background
information regarding each Trustee and executive officer of the Fund.
INVESTMENT ADVISER--GREENWICH STREET ADVISORS
Greenwich Street Advisors, located at 388 Greenwich Street, New York, New
York 10013, serves as the Fund's investment adviser. Greenwich Street Advisors
(through its predecessors) has been in the investment counseling business since
1934 and is a division of SBMFMI. SBMFMI is a registered investment adviser
whose principal executive offices are located at 388 Greenwich Street, New York,
New York 10013. Greenwich Street Advisors renders investment advice to
investment companies that had aggregate assets under management as of September
30, 1994 in excess of $45.8 billion.
49
<PAGE> 51
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Subject to the supervision and direction of the Trust's Board of Trustees,
Greenwich Street Advisors manages the Fund's portfolio in accordance with the
Fund's 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 service to the
Fund.
SUB-INVESTMENT ADVISER--GLOBAL CAPITAL MANAGEMENT
Global Capital Management, located at 10 Piccadilly, London W1V 9LA, United
Kingdom, serves as the Fund's sub-investment adviser pursuant to a sub-
investment advisory agreement dated March 22, 1994. Global Capital Management
has agreed to waive 50% of its investment advisory fee until such time as the
Fund's Board of Trustees and Global Capital Management mutually agree otherwise.
Global Capital Management has been in the investment counseling business since
1988 and renders advice to client companies with aggregate assets under
management, as of September 30, 1994 in excess of $1.11 billion.
In its capacity as a sub-investment adviser, Global Capital Management is
responsible for and selects the Fund's investments in foreign securities and
selects the brokers and dealers that execute the Fund's investments in foreign
securities.
PORTFOLIO MANAGEMENT
John C. Bianchi and James E. Conroy, both Managing Directors of Greenwich
Street Advisors, have served as Vice Presidents and Investment Officers of the
Fund since it commenced operations. Along with Victor S. Filatov, an Investment
Officer of the Fund since March 21, 1994 and President of Global Capital
Management, they manage the day-to-day operations of the Fund, including making
all domestic investment decisions.
Mr. Bianchi's and Mr. Conroy's management discussions and analysis, and
additional performance information regarding the Fund during the fiscal year
ended July 31, 1994 are included in the Annual Report dated July 31, 1994. A
copy of the Annual Report may be obtained upon request and without charge from a
Smith Barney Financial Consultant or by writing or calling the Fund at the
address or phone number listed on page one of this Prospectus.
Victor S. Filatov, International Strategist and President of Global Capital
Management, is responsible for managing the day-to-day operations of the Fund's
investments in foreign securities. Prior to 1993, Mr. Filatov was Business
50
<PAGE> 52
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Coordinator and head of European Fixed Income Research for J.P. Morgan
Securities Inc.
ADMINISTRATOR--SBMFMI
SBMFMI serves as the Fund's administrator and generally assists in all
aspects of the Fund's administration and operation. SBMFMI provides investment
management and administration services to investment companies that had
aggregate assets under management as of September 30, 1994 in excess of $9.5
billion. For administration services rendered to the Fund, the Fund pays SBMFMI
a fee at the annual rate of .20% of the value of the Fund's average daily net
assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides advisory,
investment management, administrative and/or sub-administrative services to
investment companies, which had aggregate assets under management as of
September 30, 1994, in excess of $48.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFMI in all aspects of the Fund's administration and
operation. Under a Sub-Administration Agreement dated May 4, 1994, Boston
Advisors is paid a portion of the fee paid by the Fund to SBMFMI at a rate
agreed upon from time to time between Boston Advisors and SBMFMI. Prior to May
4, 1994, Boston Advisors served as the Fund's administrator.
- --------------------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an annual service
fee with respect to Class A, Class B and Class C shares of the Fund at the
annual rate of 0.25% of the average daily net assets of the respective Class.
Smith Barney is also paid an annual distribution fee with respect to Class B and
Class C shares at the annual rate of 0.50% and 0.45%, respectively, of the
average daily net assets attributable to those Classes. Class B shares which
automatically convert
51
<PAGE> 53
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
to Class A shares eight years after the date of original purchase will no
longer be subject to distribution fee. The fees are used by Smith Barney to pay
its Financial Consultants for servicing shareholder accounts and, in the case of
Class B and Class C shares, to cover expenses primarily intended to result in
the sale of those shares. These expenses include: advertising expenses; the cost
of printing and mailing prospectuses to potential investors; payments to and
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Trust's Board of
Trustees will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." The Trust may issue an unlimited number of shares of beneficial
interest, of separate series with a par value of $.001 per share. The Fund
offers shares of beneficial interest currently classified into five Classes --
A, B, C, Y and Z.
Each Class of shares represents identical interests in the Fund's investment
portfolio. As a result, the Classes have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service
52
<PAGE> 54
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
fees borne by each Class pursuant to the Plan; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Trust's Board of Trustees does not anticipate
that there will be any conflicts among the interests of the holders of the
different Classes. The Trustees, on an ongoing basis, will consider whether any
such conflict exists and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
of each Fund 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 Trust vote by individual fund on all matters except (a) matters affecting
only the interests of one or more of the funds, in which case only shares of the
affected fund or funds would be entitled to vote or (b) when the 1940 Act
requires that shares of the funds be voted in the aggregate. Similarly, shares
of the Fund will be voted generally on a Fund-wide basis except matters
affecting the interests of one Class of shares.
Normally there will be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. Shareholders of
record of no less than two-thirds of the outstanding shares of the Trust may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. The Trustees 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.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Trust's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent.
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 reporting period. In an effort to reduce the Fund's printing and
mailing costs, the Trust plans to consolidate the mailing of the Fund's 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. In addition, the Trust also plans to
53
<PAGE> 55
SMITH BARNEY
Diversified Strategic Income Fund
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
consolidate the mailing of the Fund's Prospectus so that a shareholder
having multiple accounts (that is, individual, IRA and/or Self-Employed
Retirement Plan accounts) will receive a single Prospectus annually.
Shareholders who do not want this consolidation to apply to their accounts
should contact a Smith Barney Financial Consultant or TSSG.
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Trust
or the distributor. This Prospectus does not constitute an offer by the Fund or
the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
54
<PAGE> 56
____________________________________________________________________
A Member of Travelers Groups
SMITH BARNEY
DIVERSIFIED STRATEGIC
INCOME FUND
388 Greenwich Street
New York, New York 10013
Fund 128,175,211
Recycled FD0239J4
Recyclable
____________________________________________________________________
<PAGE> 57
SMITH BARNEY
Diversified Strategic Income Fund
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Stephen Treadway
President
Richard P. Roelofs
Executive Vice President
John C. Bianchi
Vice President
and Investment Officer
James E. Conroy
Vice President
and Investment Officer
Pauline Barrett
Investment Officer
Victor S. Filatov
Investment Officer
Christine T. Sydor
Secretary
Lewis E. Daidone
Treasurer
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Greenwich Street Advisors
Division of Mutual
Management Corp.
Two World Trade Center
New York, New York 10048
SUB-INVESTMENT ADVISER
Smith Barney Global Capital
Management Inc.
10 Piccadilly
London W1V 9LA
United Kingdom
ADMINISTRATOR
Smith, Barney Advisors, Inc.
1345 Avenue of the Americas,
New York, New York 10105
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and Trust
Company
One Boston Place
Boston, Massachusetts 02108
59
[/TEXT]
[/DOCUMENT]
<PAGE>
P R O S P E C T U S
S M I T H B A R N E Y
Exchange
Reserve
Fund
N O V E M B E R 7 , 1 9 9 4
PROSPECTUS BEGINS ON PAGE ONE
[LOGO]
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ---------------------------------------------------------------------------
PROSPECTUS NOVEMBER 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Exchange Reserve Fund (the "Fund"), a diversified fund, seeks to
maximize current income to the extent consistent with the preservation of
capital and the maintenance of liquidity by investing in a diversified portfolio
of high quality money market instruments.
SHARES OF THE FUND ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE
IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE
OF $1.00 PER SHARE.
The Fund is one of a number of funds, each having distinct investment
objectives and policies making up the Smith Barney Income Funds (the "Trust").
The Trust is an open-end management investment company commonly referred to as a
mutual fund. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the telephone
number set forth above or by contacting your Smith Barney Financial Consultant.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including distribution fees and expenses, which prospective investors
will find helpful in making an investment decision. Investors are encouraged to
read this Prospectus carefully and retain it for future reference.
Additional information about the Fund is contained in a Statement of
Additional Information dated November 7, 1994, as amended or supplemented from
time to time, that is available upon request and without charge by calling or
writing the Trust at the telephone number or address set forth above, or by
contacting your Smith Barney Financial Consultant. The Statement of Additional
Information has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
----------------------------------------------------------------
FINANCIAL HIGHLIGHTS 7
----------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 9
----------------------------------------------------------------
VALUATION OF SHARES 14
----------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 14
----------------------------------------------------------------
PURCHASE OF SHARES 16
----------------------------------------------------------------
EXCHANGE PRIVILEGE 21
----------------------------------------------------------------
REDEMPTION OF SHARES 24
----------------------------------------------------------------
MINIMUM ACCOUNT SIZE 25
----------------------------------------------------------------
YIELD INFORMATION 26
----------------------------------------------------------------
MANAGEMENT OF THE FUND AND THE TRUST 26
----------------------------------------------------------------
DISTRIBUTOR 28
----------------------------------------------------------------
ADDITIONAL INFORMATION 29
----------------------------------------------------------------
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR THE
DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
2
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE
PROSPECTUS.
SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVE The Fund is an open-end diversified management investment
company that seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity by investing in high
quality short-term money market instruments. See "Investment Objective and
Management Policies."
PURCHASE OF SHARES Shares of the Fund may be acquired by the general public only
through the exchange of Class B or Class C shares of other of the Smith Barney
Mutual Funds. Class B or Class C shares of the Fund acquired through exchange
are subject to the CDSC, if any, of the shares with which the exchange is made.
All Class B and Class C shares are subject to an annual distribution fee of .50%
of the value of average daily net assets of the Fund. Eight years after the date
of their original purchase, Class B shares will be automatically redeemed at net
asset value and the redemption proceeds will be reinvested, at net asset value,
in Class A shares of Smith Barney Money Funds Inc. -- Cash Portfolio ("Cash
Portfolio"). Upon this conversion, the shares will no longer be subject to the
annual distribution fee.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program (the "401(k) Program") which is generally designed
to assist plan sponsors in the creation and operation of retirement plans under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), as
well as other types of participant directed, tax-qualified employee benefit
plans (collectively, "Participating Plans"). See "Purchase of Shares -- Smith
Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, Smith
Barney Inc. ("Smith Barney"), a broker that clears securities through Smith
Barney on a fully disclosed basis (an "Introducing Broker") or an investment
dealer in the selling group. Direct purchases by certain retirement plans may be
made through the Fund's transfer agent, The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data Corporation. See "Purchase of Shares."
3
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
INVESTMENT MINIMUMS Investors may open an account by making an initial
investment of at least $1,000 for each account, or $250 for an individual
retirement account ("IRA") or a Self-Employed Retirement Plan. Subsequent
investments of at least $50 may be made for both Classes. For participants in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial and subsequent investment requirement is $25. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day that the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management Inc. (the "Manager")
serves as the Fund's investment adviser and administrator. The Manager is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is
a wholly owned subsidiary of The Travelers Inc. ("Travelers"), a diversified
financial services holding company engaged, through its subsidiaries principally
in four business segments: Investment Services, Consumer Finance Services, Life
Insurance Services and Property & Casualty Insurance Services. See "Management
of the Trust and the Fund."
The Boston Company Advisors, Inc. ("Boston Advisors") serves as the Fund's
sub-administrator. Boston Advisors is a wholly owned subsidiary of The Boston
Company, Inc. ("TBC"), which in turn is an indirect wholly owned subsidiary of
Mellon Bank Corporation ("Mellon"). See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of other funds of the Smith Barney Mutual Funds at the respective net
asset values next determined, plus any applicable sales charge differential. See
"Exchange Privilege."
DIVIDENDS AND DISTRIBUTIONS Dividends are declared daily and paid monthly from
net investment income. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of the Fund
will be reinvested automatically in additional shares at current net asset value
unless otherwise specified by an investor. Shares acquired by dividend and
distribution reinvestment will not be subject to any CDSC.
4
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
Class B shares acquired through dividend and distribution reinvestments will
become eligible for conversion to Class A shares of Cash Portfolio. See
"Dividends, Distributions and Taxes."
SPECIAL CONSIDERATIONS AND RISK FACTORS There is no assurance that the Fund will
achieve its investment objective. In light of the fees and CDSC imposed on Class
B and Class C shares, an investment in the Fund should be viewed as part of a
long-term investment in the Smith Barney Mutual Funds. Investors seeking only to
invest in a money market fund and who do not expect to re-exchange Fund shares
for Class B shares of other of the Smith Barney Mutual Funds should consider
more suitable investments, including other money market funds offered to the
public by Smith Barney. See "Investment Objective and Management Policies" and
"Purchase of Shares."
THE FUND'S EXPENSES THE FOLLOWING EXPENSE TABLE LISTS THE COSTS AND
EXPENSES
THAT AN INVESTOR WILL INCUR, EITHER DIRECTLY OR INDIRECTLY, AS A SHAREHOLDER
OF
THE FUND, BASED ON THE MAXIMUM CDSC THAT MAY BE INCURRED AT THE TIME OF
REDEMPTION AND, UNLESS OTHERWISE NOTED, THE FUND'S OPERATING EXPENSES FOR
ITS
MOST RECENT YEAR:
<TABLE>
<CAPTION>
CLASS B CLASS C
<S> <C> <C>
-----------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum CDSC
(as a percentage of original cost or redemption
proceeds, whichever is lower) 5.00% 1.00%
-----------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees .50% .50%
12b-1 fee* .50 .50
Other expenses** .26 .26
-----------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.26% 1.26%
-----------------------------------------------------------------------------
<FN>
*Upon conversion, Class B shares will no longer be subject to a distribution
fee. Class C shares do not have a conversion feature and, therefore, are
subject to an ongoing distribution fee. As a result, long-term shareholders
of Class C shares may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc.
**For Class C shares "Other expenses" have been estimated based on the
expenses incurred by Class B shares because Class C shares were not
available for purchase prior to November 7, 1994.
</TABLE>
5
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
The CDSC set forth in the above table is the maximum CDSC imposed by any of
the funds of the Smith Barney Mutual Funds participating in the exchange
program. Investors may pay actual charges of less than 5% depending on the CDSC
of the Class B shares with which the exchange was made, the length of time the
Class B shares are held, and whether the Class B shares are held through the
401(k) Program. See "Redemption of Shares." Smith Barney receives an annual
12b-1 distribution fee of .50% of the Fund's average daily net assets. "Other
expenses" in the above table include fees for shareholder services, custodial
fees, legal and accounting fees, printing costs and registration fees.
EXAMPLE THE FOLLOWING EXAMPLE IS INTENDED TO ASSIST AN INVESTOR IN
UNDERSTANDING THE VARIOUS COSTS THAT AN INVESTOR IN THE FUND WILL BEAR
DIRECTLY
OR INDIRECTLY. THE EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING
EXPENSES AT
THE LEVELS SET FORTH IN THE ABOVE TABLE. SEE "PURCHASE OF SHARES," AND
"MANAGEMENT OF THE FUND AND THE TRUST."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
Assumes complete redemption at maximum
applicable CDSC at end of each time
period
Class B $ 63 $ 70 $ 79 $ 135
Class C 23 40 69 152
Assumes no redemption
Class B $ 13 $ 40 $ 69 $ 135
Class C 13 40 69 152
--------------------------------------------------------------------------------
<FN>
*Ten year figures assume exchange of Class B shares for Class A shares of Smith
Barney Money Funds, Inc. -- Cash Portfolio at the end of the eighth year
following the date of original purchase of such Class B shares. Accordingly,
the expenses reflected above utilize the expenses of a Class A share of Cash
Portfolio.
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
6
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE FOLLOWING INFORMATION HAS BEEN AUDITED BY COOPERS & LYBRAND L.L.P.,
INDEPENDENT ACCOUNTANTS, WHOSE REPORT THEREON APPEARS IN THE FUND'S
ANNUAL
REPORT DATED JULY 31, 1994. THIS INFORMATION SHOULD BE READ IN CONJUNCTION
WITH
THE FINANCIAL STATEMENTS AND RELATED NOTES THAT ALSO APPEAR IN THE FUND'S
ANNUAL
REPORT, WHICH IS INCORPORATED BY REFERENCE INTO THE STATEMENT OF
ADDITIONAL
INFORMATION.
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
7/31/94 7/31/93 7/31/92 7/31/91
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.0216 0.0212 0.0400 0.0618
-------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.0216) (0.0212) (0.0400) (0.0618)
-------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments 0.0002 0.0000 0.0000 0.0000
-------------------------------------------------------------------------------------
Net Asset Value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Total return+ 2.18% 2.15% 4.06% 6.36%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $252,246 $166,262 $225,476 $426,862
Ratio of net investment income to average net
assets 2.24% 2.16% 4.13% 6.27%
Ratio of operating expenses to average net
assets 1.26% 1.25% 1.22% 1.17%
-------------------------------------------------------------------------------------
<FN>
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
</TABLE>
PRIOR TO NOVEMBER 7, 1994, THE FUND DID NOT OFFER CLASS C SHARES AND,
ACCORDINGLY, NO COMPARABLE FINANCIAL INFORMATION IS AVAILABLE AT THIS TIME
FOR
THAT CLASS.
7
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
7/31/90 7/31/89 7/31/88 7/31/87 7/31/86*
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.0740 0.0802 0.0566 0.0460 0.0032
-------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.0740) (0.0802) (0.0566) (0.0460)
(0.0032)
-------------------------------------------------------------------------------------
Net realized and unrealized gain on
investments 0.0000 0.0000 0.0000 0.0000 0.0001
-------------------------------------------------------------------------------------
Net Asset Value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------------------------------------------------------------------------------------
Total return+ 7.62% 8.32% 5.85% 4.69% 0.32%
-------------------------------------------------------------------------------------
Ratios to average net assets/ supplemental
data:
Net assets, end of year (in 000's) $686,756 $829,743 $215,731 $ 83,366 $ 2,778
Ratio of net investment income to average net
assets 7.42% 8.36% 5.69% 4.96% 4.78%**
Ratio of operating expenses to average net
assets 1.15% 1.22% 1.46% 1.61% 1.50%**
-------------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on July 8, 1986.
** Annualized.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
</TABLE>
8
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. This investment
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's investment
objective will be achieved.
The Fund attempts to achieve its investment objective by investing in
short-term money market instruments, including: securities issued or guaranteed
by the United States government, its agencies and instrumentalities ("U.S.
government securities"); repurchase agreements with respect to the foregoing;
bank time deposits, certificates of deposit and bankers' acceptances; and high
grade commercial paper. The following is a brief description of the kinds of
instruments in which the Fund may invest:
U.S. GOVERNMENT SECURITIES in which the Fund may invest include: direct
obligations of the United States Treasury such as Treasury Bills, Treasury Notes
and Treasury Bonds; obligations which are supported by the full faith and credit
of the United States such as Government National Mortgage Association
pass-through certificates; obligations which are supported by the right of the
issuer to borrow from the United States Treasury, such as securities of Federal
Home Loan Banks; and obligations which are supported by the credit of the
instrumentality, such as Federal National Mortgage Association and Federal Home
Loan Mortgage Association bonds. Because the United States government is not
obligated by law to provide support for an instrumentality that it sponsors, the
Fund will invest in obligations issued by such an instrumentality only when the
Fund's investment adviser determines that the credit risk with respect to the
instrumentality does not make its securities unsuitable for investment by the
Fund.
CERTIFICATES OF DEPOSIT, TIME DEPOSITS AND BANKERS' ACCEPTANCES in which the
Fund may invest generally are limited to those instruments issued by domestic
and foreign banks, savings and loan associations and other banking institutions
having total assets in excess of $1 billion. Certificates of deposit ("CDs") are
short-term negotiable obligations of commercial banks; time deposits ("TDs") are
non-negotiable deposits maintained in banking institutions for specified periods
of time at stated interest rates; and bankers' acceptances are time drafts drawn
on commercial banks by borrowers usually in connection with international
transactions. The Fund may invest in U.S. dollar-denominated bank obligations,
such as CDs, bankers'
9
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
acceptances and TDs, including instruments issued or supported by the credit of
domestic or foreign banks or savings institutions having total assets at the
time of purchase in excess of $1 billion. The Fund generally will invest at
least 25% of its assets in these securities. The Fund will invest in an
obligation of a foreign bank or foreign branch of a domestic bank only if the
Fund's investment adviser deems the obligation to present minimal credit risks.
Nevertheless, this kind of obligation entails risks that are different from
those of investments in domestic obligations of domestic banks due to
differences in political, regulatory and economic systems and conditions. The
Fund will not purchase TDs maturing in more than seven calendar days and will
limit to no more than 10% of its assets its investment in TDs maturing from two
business days through seven calendar days.
COMMERCIAL PAPER in which the Fund may invest is limited to direct obligations
of issuers that at the time of purchase are Eligible Securities (as defined
below under "Fund Quality and Diversification") that are (a) rated by at least
one nationally recognized statistical rating organization ("NRSRO") in the
highest rating category for short-term debt securities or (b) comparable unrated
securities. The Fund will not purchase commercial paper of any foreign issuer if
after such purchase more than 20% of the value of the Fund's assets would
consist of commercial paper of foreign issuers. The Fund also may invest in
variable rate master demand notes, which are unsecured demand notes typically
purchased directly from large corporate issuers providing for variable amounts
of principal indebtedness and periodic adjustments in the interest rate
according to the terms of the instrument. Demand notes normally are not traded
in a secondary market. However, the Fund may demand payment of principal and
accrued interest in full at any time without penalty. In addition, while demand
notes generally are not rated, their issuers must satisfy the same criteria as
those set forth above for issuers of commercial paper. The Manager will consider
the earning power, cash flow and other liquidity ratios of issuers of demand
notes and continually will monitor their financial ability to meet payment on
demand.
CERTAIN INVESTMENT POLICIES
PRICE AND PORTFOLIO MATURITY. The Fund invests only in securities which are
purchased with and payable in U.S. dollars and which have (or, pursuant to
regulations adopted by the SEC, will be deemed to have) remaining
10
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
maturities of thirteen months or less at the date of purchase by the Fund. For
this purpose, variable rate master demand notes (as described above under
"Commercial Paper"), which are payable on demand or, under certain conditions,
at specified periodic intervals not exceeding thirteen months, in either case on
not more than 30 days' notice, will be deemed to have remaining maturities of
thirteen months or less. The Fund maintains a dollar-weighted average portfolio
maturity of 90 days or less. The Fund follows these policies to maintain a
constant net asset value of $1.00 per share, although there is no assurance that
it can do so on a continuing basis.
FUND QUALITY AND DIVERSIFICATION. The Fund will limit its investments to
securities that the Trust's Board of Trustees determines present minimal credit
risks and which are "Eligible Securities" at the time of acquisition by the
Fund. The term Eligible Securities includes securities rated by the "Requisite
NRSROs" in one of the two highest short-term rating categories, securities of
issuers that have received such ratings with respect to other short-term debt
securities and comparable unrated securities. "Requisite NRSROs" means (a) any
two NRSROs that have issued a rating with respect to a security or class of debt
obligations of an issuer, or (b) one NRSRO, if only one NRSRO has issued such a
rating at the time that the Fund acquires the security. If the Fund acquires
securities that are unrated or that have been rated by a single NRSRO, the
acquisition must be approved or ratified by the Trust's Board of Trustees. The
NRSROs currently designated as such by the SEC are Standard & Poor's
Corporation, Moody's Investors Service, Inc., Thomson BankWatch, Fitch Investors
Services, Inc., Duff & Phelps Inc. and IBCA Limited and its affiliate, IBCA,
Inc. A discussion of the ratings categories of the NRSROs is contained in the
Appendix to the Statement of Additional Information.
The Fund generally may not invest more than 5% of its total assets in the
securities of any one issuer, except for U.S. government securities. In
addition, the Fund may not invest more than 5% of its total assets in Eligible
Securities that have not received the highest rating from the Requisite NRSROs
and comparable unrated securities ("Second Tier Securities") and may not invest
more than 1% of its total assets in the Second Tier Securities of any one
issuer. The Fund may invest more than 5% (but no more than 25%) of the
then-current value of the Fund's total assets in the securities of a single
issuer for a period of up to three business days, provided that (a) the
securities are rated by the Requisite NRSROs in the
11
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
highest short-term rating category, are securities of issuers that have received
such rating with respect to other short-term debt securities or are comparable
unrated securities, and (b) the Fund does not make more than one such investment
at any one time.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund would
acquire a U.S. government security 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. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The Fund will enter into repurchase agreements with banks
which are the issuers of instruments acceptable for purchase by the Fund and
certain dealers on the Federal Reserve Bank of New York's list of reporting
dealers. 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. The
Fund's investment adviser or administrator, acting under the supervision of the
Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers with which the
Fund enters into repurchase agreements to evaluate potential risks.
CERTAIN INVESTMENT GUIDELINES
The Fund will concentrate its investments in the banking industry except
during temporary defensive periods. Up to 25% of the assets of the Fund may be
invested at any time in the obligations of issuers conducting their principal
business activities in any industry other than banking. The Fund may not acquire
more than 10% of the voting or any other class of securities of any one issuer,
except that U.S. government securities may be purchased without regard to these
limits. In addition, the Fund may invest
12
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
up to an aggregate of 10% of its total assets in illiquid securities with
contractual or other restrictions on resale and other instruments which are not
readily marketable, including: (a) repurchase agreements providing for
settlement in more than seven days after notice by the Fund and (b) TDs maturing
from two business days through seven calendar days. Up to 5% of the Fund's
assets may be invested in the securities of issuers that have been in continuous
operation for less than three years. The Fund also is authorized to borrow in an
amount of up to 10% of its total assets for temporary or emergency purposes, but
not for leverage, and to pledge its assets to the same extent in connection with
such borrowings. Whenever borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not make any additional investments. A more detailed
description of these policies, together with an enumeration of additional
investment restrictions which the Fund has adopted and which cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
shares, is contained in the Statement of Additional Information.
SPECIAL CONSIDERATIONS AND RISK FACTORS
The Fund will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Fund. The market value of the obligations held by the Fund can be expected to
vary inversely to changes in the prevailing interest rates. Investors also
should recognize that, in periods of declining interest rates, the Fund's yield
will tend to be somewhat higher than prevailing market rates and, in periods of
rising interest rates, the Fund's yield will tend to be somewhat lower. Also,
when interest rates are falling, the inflow of net new money to the Fund from
the continuous sale of its shares will likely be invested in instruments
producing lower yields than the balance of its portfolio, thereby reducing the
Fund's current yield. In periods of rising interest rates, the opposite can be
expected to occur. In addition, securities in which the Fund will invest may not
yield as high a level of current income as might be achieved by investing in
securities with less liquidity and safety and longer maturities.
Investments in foreign banks or foreign issuers present certain risks,
including those resulting from fluctuations in currency exchange rates,
revaluation of currencies, future political and economic developments and the
possible imposition of currency exchange blockages or other foreign
13
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
governmental laws or restrictions and reduced availability of public
information. Foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements applicable to domestic issuers. In addition, there may be less
publicly available information about a foreign bank than about a domestic bank.
- --------------------------------------------------------------------
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of regular
trading on the NYSE, and is computed by dividing the value of the Fund's net
assets attributable to each Class by the total number of shares of the Class
outstanding. The Fund employs the amortized cost method of valuing portfolio
securities and intends to use its best efforts to continue to maintain a
constant net asset value of $1.00 per share.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amount of dividends from net investment income and distributions
of capital gains payable to shareholders.
The Fund declares dividends daily consisting of substantially all of its net
investment income, and pays dividends monthly. Any net realized gains will be
distributed at least annually. If a shareholder does not otherwise instruct,
dividends and capital gains will be reinvested automatically in additional
shares of the same Class at net asset value subject to no CDSC. Dividends and
distributions are treated the same for tax purposes whether taken in cash or
reinvested in additional shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
federal tax purposes, the amount of investment income and capital gains
14
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
earned will be determined on a fund-by-fund basis, rather than on a Trust-wide
basis. The Fund intends to continue to qualify as a regulated investment company
under Subchapter M of the Code. In any taxable year in which the Fund so
qualifies and distributes at least 90% of its investment company taxable income
(which includes, among other items, dividends, interest and the excess of any
net short-term capital gains over net long-term capital losses), the Fund (but
not its shareholders) generally will be relieved of federal income tax on the
investment company taxable income and net realized capital gains (the excess of
net long-term capital gains over net short-term capital losses), if any,
distributed to shareholders. In order to qualify as a regulated investment
company, the Fund will be required to meet various Code requirements.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. In order
to avoid application of the excise tax, the Fund intends to make its
distributions in accordance with this requirement.
Distributions of any investment company taxable income are taxable to
shareholders as ordinary income. Distributions of any net capital gains
designated by the Fund as capital gain dividends are taxable to shareholders as
long-term capital gain regardless of the length of time a shareholder may have
held shares of the Fund.
Dividends (including capital gain dividends) declared by the Fund in October,
November or December of any calendar year to shareholders of record on a date in
such a month will be deemed to have been received by shareholders on December 31
of that calendar year, provided that the dividend is actually paid by the Fund
during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by redemption, sale or
exchange), a shareholder generally will realize a taxable gain or loss. Such
gain or loss generally will be a capital gain or loss if the shares are capital
assets in the shareholder's hands, and generally will be long-term or short-term
depending upon the shareholder's holding period for the shares. Any loss
realized by a shareholder on disposition of Fund shares held by the shareholder
for six months or less will be treated as long-term capital loss to the extent
of any distributions of capital gain dividends received by the shareholder with
respect to such shares.
15
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Shareholders will be notified annually about the amounts of dividends and
distributions, including the amounts (if any) for that year which have been
designated as capital gain dividends. Dividends and distributions and gains
realized upon a disposition of Fund shares may also be subject to state, local
or foreign taxes depending on each shareholder's particular situation. Dividends
consisting of interest from obligations of the United States government and
certain of its agencies and instrumentalities may be exempt from all state and
local income taxes. Shareholders should consult their tax advisors for specific
information on the tax consequences of particular types of distributions.
- --------------------------------------------------------------------
PURCHASE OF SHARES
Fund shares may be acquired only through exchanges with Class B and Class C
shares of other funds of the Smith Barney Mutual Funds, except that Class B
shares may be acquired directly by participants in the 401(k) Program
("Participating Plans") and certain qualified and non-qualified retirement
programs (collectively with Participating Plans, "Benefit Plans"). Investors
purchasing Class B shares of the Fund through a Benefit Plan may do so directly
through the Trust's transfer agent, The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data Corporation. Class B shares or Class C
shares acquired through exchange are subject to the CDSC, if any, of the shares
with which the exchange is made. Class B shares purchased directly by
Participating Plans are subject to a CDSC of 3%. Class B shares acquired
directly by a Participating Plan other than a Benefit Plan will be subject to
the CDSC as set forth below. See "Purchase of Shares -- Smith Barney 401(k)
Program" and "Shareholder Services."
In light of the distribution fee imposed on Class B shares and Class C shares,
an investment in the Fund should be viewed as part of a long-term investment in
the Smith Barney Mutual Funds. Investors seeking only to invest in a money
market fund and who do not expect to exchange Fund shares for shares of other
funds of the Smith Barney Mutual Funds should consider more suitable
investments, including other money market funds offered by Smith Barney.
16
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
The Fund employs a distribution method which differs from that of certain
other mutual funds that invest in money market instruments. Before investing in
the Fund, among other things, investors should consider that certain other funds
with an investment objective and policies similar to those of the Fund do not
pay distribution expenses or impose any sales charge.
Purchase orders received by Smith Barney 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. Orders received by
dealers or Introducing Brokers 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 Smith
Barney prior to Smith Barney's close of business (the "trade date"). Currently,
payment for Fund shares is due on the fifth business day (the "settlement date")
after the trade date. The Fund anticipates that, in accordance with regulatory
changes, beginning on or about June 1, 1995, the settlement date will be the
third business day after the trade date.
DEFERRED SALES CHARGE
Class B shares sold directly to Participating Plans other than a Benefit Plan
will be assessed a CDSC on an amount equal to the lesser of the cost of the
shares being redeemed or their net asset value at the time of redemption. Such
shares that are redeemed will not be subject to a CDSC to the extent that the
value of such shares represents: (a) capital appreciation of Fund assets; (b)
reinvestment of dividends or capital gain distributions; and (c) shares redeemed
more than five years after their purchase. The amount of the CDSC will depend on
the number of years since the shareholder made the purchase payment from which
the amount is being redeemed. Solely for the purpose of determining the number
of years since a purchase payment, all purchase payments made during a month
will be aggregated and deemed
17
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
to have been made on the last day of the preceding Smith Barney statement month.
The following table sets forth the rates of the charge for redemptions of Class
B shares by shareholders.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENT WAS MADE CDSC
<S> <C>
- ----------------------------------------------------------------------------------
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- ----------------------------------------------------------------------------------
</TABLE>
Class B shares will convert automatically to Class A shares of Cash Portfolio
eight years after the date on which they were purchased and will thereafter 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 shareholder as the
total number of his or her Class B shares converting at the time bears to to the
total number of outstanding Class B shares (other than Class B Dividend Shares)
owned by the shareholder. Shareholders who held Class B shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World Income Fund") on
July 15, 1994 and who subsequently exchange those shares for Class B shares of
the Fund will be offered the opportunity to exchange all such Class B shares for
Class A shares of the Cash Portfolio four years after the date on which those
shares were deemed to have been purchased. Holders of such Class B shares will
be notified of the pending exchange in writing approximately 30 days before the
fourth anniversary of the purchase date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the fourth anniversary
date.
The length of time that Class B or Class C shares subject to a CDSC have been
held will be calculated from the date that the shares were initially acquired in
the Fund or 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
18
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
CDSC will reduce the gain or increase the loss, as the case may be, on the
amount realized on redemption. The amount of any CDSC will be paid to Smith
Barney.
WAIVERS OF CDSC
The CDSC 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 below) (provided, however, that 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 that were established prior to November 7, 1994);
(c) redemptions of shares within 12 months following the death or disability of
the shareholder; (d) involuntary redemptions; and (e) redemptions of shares in
connection with a combination of the Fund with any investment company by merger,
acquisition of assets or otherwise. In addition, a shareholder who has redeemed
proceeds within 60 days and receive pro rata credit for any CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in case
of shareholders who are also Smith Barney clients or by TSSG in the case of all
shareholders) of the shareholder's status or holdings, as the case may be.
SMITH BARNEY 401(K) PROGRAM
Shareholders investing in the Fund may be eligible to participate in the Smith
Barney 401(k) Program, which is generally designed to assist plan sponsors in
the creation and operation of retirement plans qualified under Section 401(a) of
the Code. It is anticipated that Participating Plans will purchase Class B
shares of the Fund as part of a multi-fund investment program. Participating
Plans may acquire shares of the Fund only through an exchange from Class B
shares of another fund in the Smith Barney Mutual Funds or through direct
investment only if they hold Class B shares of another of the Smith Barney
Mutual Funds.
The Fund offers to Participating Plans Class B shares as investment
alternatives under the Smith Barney 401(k) Program. Class B shares acquired
through the Smith Barney 401(k) Program are subject to the same service
19
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
and/or distribution fees as, but different sales charge and CDSC schedules than,
the Class B shares acquired by other investors. 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 B SHARES. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if the Participating Plan
terminates within eight years of the date the Participating Plan first enrolled
in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith Barney
401(k) Program, the Participating Plan will be offered the opportunity to
exchange all of its Class B shares for Class A shares of Cash Portfolio. Such
Plan 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 the exchange has occurred, a Participating Plan will not
be eligible to acquire additional Class B shares of the Fund but instead may
acquire Class A shares of Cash Portfolio. If the Participating Plan elects not
to exchange all of its Class B shares at that time, each Class B share held by
the Participating Plan will have the same conversion feature as Class B shares
held by other investors. See "Purchase of Shares -- Deferred Sales Charge
Alternatives."
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gain
distributions, plus with respect to Class B shares, increases in the net asset
value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number of
years since those shareholders made the purchase payment from which the amount
is being redeemed.
20
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For further
information regarding the Smith Barney 401(k) Program, investors should contact
a Smith Barney Financial Consultant.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges are subject to minimum investment requirements and other
requirements of the fund into which exchanges are made and a sales charge
differential may apply.
<TABLE>
<C> <S>
FUND NAME
---------------------------------------------------------------------------------
GROWTH FUNDS
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Capital Appreciation Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
</TABLE>
21
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
GROWTH AND INCOME FUNDS
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Smith Barney World Funds, Inc. -- International Balanced Portfolio
INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
MUNICIPAL BOND FUNDS
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds -- California Limited Term Portfolio
Smith Barney Muni Funds -- California Portfolio
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
</TABLE>
22
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
<FN>
- ------------------------
* Available for exchange with Class C shares of the Fund.
** Available for exchange with Class B and Class C shares of the Fund. In
addition, shareholders who own Class C shares of the Fund in a Smith Barney
401(k) Program may exchange those shares for Class C shares of this fund.
</TABLE>
CLASS B EXCHANGES. In the event a Class B shareholder (unless such shareholder
was a Class B shareholder of the Short-Term World Fund on July 15, 1994) wishes
to exchange all or a portion of his or her shares in any of the funds imposing a
CDSC higher than that imposed by the Fund, the exchanged Class B shares will be
subject to the higher applicable CDSC. Upon an exchange, the new Class B shares
will be deemed to have been purchased on the same date as the Class B shares of
the Fund that have been exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that have
been exchanged.
Exchanges will be processed at the net asset value next determined after the
redemption proceeds are available. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the shares
of the fund exchanged, no signature guarantee is required. A capital gain or
loss for tax purposes will be realized upon the exchange, depending upon the
cost or other basis of shares redeemed. Before exchanging shares, investors
should read the current prospectus describing the shares to be acquired. The
Fund reserves the right to modify or discontinue exchange privileges upon 60
days' prior notice to shareholders.
23
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- --------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
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 Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the seventh day following receipt of
proper tender, except on a day on which the NYSE is closed or as permitted under
the 1940 Act in extraordinary circumstances. The Fund anticipates that, in
accordance with regulatory changes, beginning on or about June 1, 1995, payment
will be made on the third business day after receipt of proper tender.
Generally, if the redemption proceeds are remitted to a Smith Barney brokerage
account, these funds will not be invested for the shareholder's benefit without
specific instruction and 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 ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Exchange Reserve Fund
Class B or Class C (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's
24
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
account number and (c) be signed by each registered owner exactly as the shares
are registered. 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 TSSG together with the redemption request.
Any signature appearing on a redemption request, share certificate or stock
power 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. TSSG
may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or guardians. A redemption
request will not be deemed properly received until TSSG receives all required
documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $100 monthly or quarterly. Retirement
plan accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds. Any applicable CDSC will not be waived on amounts withdrawn by a
shareholder that exceed 1.00% per month of the value of the shareholder's shares
subject to the CDSC at the time the withdrawal plan commences. With respect to
withdrawal plans in effect prior to November 7, 1994, any applicable CDSC will
be waived on amounts withdrawn that do not exceed 2.00% per month of the
shareholder's shares subject to a CDSC. For further information regarding the
automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.
- --------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate 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
this Fund, each account must satisfy the minimum account size.) The
25
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
MINIMUM ACCOUNT SIZE (CONTINUED)
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 automatic redemption.
- --------------------------------------------------------------------
YIELD INFORMATION
From time to time the Fund may advertise its yield and effective yield of
Class B and Class C shares. THESE YIELD FIGURES ARE BASED ON HISTORICAL EARNINGS
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. The yield of a Class refers
to the net investment income generated by an investment in the Class over a
specific seven-day period (which will be stated in the advertisement). This net
investment income is then annualized. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the Class
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of the assumed reinvestment.
- --------------------------------------------------------------------
MANAGEMENT OF THE FUND AND THE TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all
significant agreements between the Trust and the companies that furnish services
to the Fund, including agreements with its investment adviser, administrator,
sub-administrator, custodian and transfer agent. The day-to-day operations of
the Fund are delegated to its investment adviser, administrator and
sub-administrator. The Statement of Additional Information contains general
background information regarding each Trustee and executive officer of the Fund.
INVESTMENT ADVISER
The Manager is located at 388 Greenwich Street, New York, New York 10013, and
serves as the Fund's investment adviser pursuant to a transfer of
26
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
MANAGEMENT OF THE FUND AND THE TRUST (CONTINUED)
the advisory agreement effective November 7, 1994, from its affiliate, Mutual
Management Corp. (Mutual Management Corp. and the Manager are both wholly owned
subsidiaries of Holdings.) Investment advisory services continue to be provided
to the Fund by the same portfolio managers who had provided services under the
agreement with Mutual Management Corp. The Manager (through its predecessors)
has been in the investment counseling business since 1934 and is a registered
investment adviser. The Manager renders investment advice to investment
companies that had aggregate assets under management as of September 30, 1994 in
excess of $52.4 billion.
Subject to the supervision and direction of the Trust's Board of Trustees, the
Manager manages the Fund in accordance with the Fund's stated investment
objective and policies, makes investment decisions for the Fund, places orders
to purchase and sell securities on behalf of the Fund and employs professional
portfolio managers and securities analysts who provide research services to the
Fund. For investment services rendered, the Fund pays the Manager a fee at the
annual rate of 0.30% of the Fund's average daily net assets.
ADMINISTRATOR
The Manager also serves as the Fund's administrator and oversees all aspects
of the Fund's administration and operation. For administration services
rendered, the Fund pays the Manager a fee at the annual rate of .20% of the
Fund's average daily net assets.
SUB-ADMINISTRATOR
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to investment
companies having aggregate assets under management, as of September 30, 1994, in
excess of $48.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists the Manager in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated May 4, 1994, Boston
Advisors is paid a portion of the fee paid by the Fund to the
27
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------
MANAGEMENT OF THE FUND AND THE TRUST (CONTINUED)
Manager at a rate agreed upon from time to time between Boston Advisors and the
Manager. Prior to May 4, 1994, Boston Advisors served as the Fund's
administrator.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the Act (the "Plan"), Smith Barney is paid a distribution fee with
respect to Class B and Class C shares of the Fund at the annual rate of 0.50% of
the average daily net assets of each respective Class' shares. Class B shares
that automatically convert to Class A shares of Cash Portfolio eight years after
the date of original purchase will no longer be subject to distribution fees.
The fees are used by Smith Barney to pay its Financial Consultants and to cover
expenses primarily intended to result in the sale of shares. These expenses
include: advertising expenses; the cost of printing and mailing prospectuses to
potential investors; payments to and expenses of Smith Barney Financial
Consultants and other persons who provide support services in connection with
the distribution of shares; interest and/or carrying charges; and indirect and
overhead costs of Smith Barney associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
Payments under the Plan are not tied exclusively to the distribution expenses
actually incurred by Smith Barney, and such payments may exceed distribution
expenses actually incurred by Smith Barney. The Board of Trustees evaluates the
appropriateness of the Plan and its payment terms on a continuing basis and in
doing so considers all relevant factors, including expenses borne by Smith
Barney and amounts received under the Plan and the proceeds of CDSC.
28
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series having
a $.001 per share par value. When matters are submitted for shareholder vote,
shareholders of each fund of the Trust will have one vote for each full share
owned and a proportionate, fractional vote for any fractional share held.
Generally, shares of the Trust vote by individual funds on all matters except
(a) matters affecting only the interests of one or more of the funds, in which
case only shares of the affected fund or funds would be entitled to vote, or (b)
when the 1940 Act requires that shares of the funds be voted in the aggregate.
The Trust does not hold annual meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. The Trustees will
call a meeting for any purpose upon the written request of holders of at least
10% of the Fund's outstanding shares.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, is located at One Boston Place, Boston, Massachusetts 02108, and serves
as custodian of the Trust's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves as
the Trust's transfer agent.
The Trust sends to each shareholder of the Fund a semi-annual report and an
audited annual report, each of which includes a list of the investment
securities held by the Trust. 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. In addition, the Fund also plans to consolidate the mailing
of its Prospectus so that a shareholder having multiple accounts will receive a
single Prospectus annually. Any shareholder who does not want this consolidation
to apply to his or her account should contact his or her Financial Consultant or
the Trust's transfer agent. Shareholders may seek information regarding the
Trust, including the current performance of the Fund, from their Smith Barney
Financial Consultants.
29
<PAGE>
[LOGO]
SMITH BARNEY
EXCHANGE
RESERVE
FUND
388 Greenwich Street
New York, New York 10013
Fund 26
FD 0213 J4
[LOGO]
<PAGE>
P R O S P E C T U S
S M I T H B A R N E Y
Global
Bond
Fund
N O V E M B E R 7 , 1 9 9 4
PROSPECTUS BEGINS ON PAGE ONE
[LOGO]
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
PROSPECTUS NOVEMBER 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Global Bond Fund (the "Fund"), a diversified fund, seeks current
income and capital appreciation by investing primarily in bonds, debentures and
notes of foreign and domestic issuers in the U.S. dollar and foreign currency
bond and money markets.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up the Smith Barney Income Funds (the "Trust").
The Trust is an open-end, management investment company commonly referred to as
a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
which prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other investment funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Fund at
the telephone number set forth above or by contacting a Smith Barney Financial
Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above, or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Investment Adviser
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
----------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
----------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 15
----------------------------------------------------------------
VALUATION OF SHARES 29
----------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 30
----------------------------------------------------------------
PURCHASE OF SHARES 32
----------------------------------------------------------------
EXCHANGE PRIVILEGE 44
----------------------------------------------------------------
REDEMPTION OF SHARES 48
----------------------------------------------------------------
MINIMUM ACCOUNT SIZE 50
----------------------------------------------------------------
PERFORMANCE 50
----------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 51
----------------------------------------------------------------
DISTRIBUTOR 53
----------------------------------------------------------------
ADDITIONAL INFORMATION 55
----------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE
PROSPECTUS.
SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks current income and capital appreciation by investing
primarily in bonds, debentures and notes of foreign and domestic issuers. At
least 85% of the obligations of companies in which the Fund invests will have an
outstanding debt issue rated no lower than Aa by Moody's Investors Services,
Inc. ("Moody's") or AA by Standard & Poor's Corporation ("S&P") or comparable
unrated securities. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A, which when
combined with current holdings of Class A shares offered with a sales charge
equal or exceed $500,000 in the aggregate, will be made at net asset value with
no sales charge, but will be subject to a contingent deferred sales charge
("CDSC") of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary -- Reduced or No Initial Sales Charge."
CLASS B SHARES. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after Purchase and 1.00% each year thereafter to zero. This CDSC may be waived
for certain redemptions. Class B shares are subject to an annual service fee of
0.25% and an annual distribution fee of 0.50% of the
3
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
average daily net assets of the Class. The Class B shares' distribution fee may
cause that Class to have higher expenses and pay lower dividends than Class A
shares.
CLASS B SHARES CONVERSION FEATURE. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the date
of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class B
shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. This CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Class C shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
CLASS Y SHARES. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
INTENDED HOLDING PERIOD. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates,
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an investment
alternative, Class B and Class C shares are
4
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
sold without any initial sales charge so their entire purchase price is
immediately invested in the Fund. Any investment return on these additional
invested amounts would partially or wholly offset the higher annual expenses of
these Classes. Because the Fund's future return cannot be predicted, however,
there can be no assurance that this would be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to any sales charge, CDSC or service or distribution fee.
The maximum purchase amount for Class A shares is $4,999,999, Class B shares is
$249,999 and Class C shares is $499,999. There is no maximum purchase amount for
Class Y shares.
REDUCED OR NO INITIAL SALES CHARGE. The initial sales charge on Class A shares
may be waived for certain eligible purchasers, and the entire purchase price
will be immediately invested in the Fund. In addition, Class A share purchases
which when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no initial sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase. The $500,000 aggregate investment
may be met by adding the purchase to the net asset value of all Class A shares
held in funds sponsored by Smith Barney Inc. ("Smith Barney") listed under
"Exchange Privilege." Class A share purchases may also be eligible for a reduced
initial sales charge. See "Purchase of Shares." Because the ongoing expenses of
Class A shares may be lower than those for Class B and Class C shares,
purchasers eligible to purchase Class A shares at net asset value or at a
reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
5
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program, which is generally designed to assist plan sponsors
in the creation and operation of retirement plans under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as other types
of participant directed, tax-qualified employee benefit plans (collectively,
"Participating Plans"). Class A, Class B, Class C and Class Y shares are
available as investment alternatives for Participating Plans. See "Purchase of
Shares -- Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, Smith
Barney, a broker that clears securities transactions through Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group. Direct purchases by certain retirement plans may be made through
the Fund's transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a
subsidiary of First Data Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $5,000,000. 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(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes is $25. The minimum initial investment for Class A, Class B and
Class C shares and the subsequent investment requirement for all Classes through
the Systematic Investment Plan described below is $100. See "Purchase of
Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $100. See
"Purchase of Shares."
6
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Global Capital Management Inc.
("Global Capital Management"), serves as the Fund's investment adviser. Global
Capital Management is an indirect wholly owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of The
Travelers Inc. ("Travelers"), a diversified financial services holding company
engaged, through its subsidiaries, principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance Services and
Property & Casualty Insurance Services.
Smith Barney Mutual Funds Management Inc. ("SBMFM") serves as the Fund's
administrator and The Boston Company Advisors, Inc. ("Boston Advisors") serves
as the Fund's sub-administrator. Boston Advisors is a wholly owned subsidiary of
The Boston Company, Inc. ("TBC"), which in turn is an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). See "Management of the Trust
and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset value next determined, plus any applicable sales charge differential.
See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are declared
and paid monthly. Distributions of net realized long-and short-term capital
gains, if any, are declared and paid annually after the end of the fiscal year
in which they are earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be
7
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
subject to any sales charge or CDSC. Class B shares acquired through dividend
and distribution reinvestments will become eligible for conversion to Class A
shares on a PRO RATA basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. The market value of fixed-income
securities, which constitute a major part of the investments of the Fund, may
vary inversely in response to changes in prevailing interest rates. The foreign
securities in which the Fund invests may be subject to certain risks in addition
to those inherent in domestic investments. The Fund may employ investment
techniques which involve certain other risks, including entering into repurchase
agreements, engaging in when-issued and delayed-delivery transactions, lending
portfolio securities, purchasing and writing options on securities, entering
into forward currency contracts and options on currencies, and entering into
futures contracts and options on futures contracts. See "Investment Objective
and Management Policies."
8
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES THE FOLLOWING EXPENSE TABLE LISTS THE COSTS AND
EXPENSES AN
INVESTOR WILL INCUR EITHER DIRECTLY OR INDIRECTLY AS A SHAREHOLDER OF THE
FUND,
BASED ON THE MAXIMUM SALES CHARGE OR MAXIMUM CDSC THAT MAY BE INCURRED
AT THE
TIME OF PURCHASE OR REDEMPTION AND, UNLESS OTHERWISE NOTED, THE FUND'S
OPERATING
EXPENSES FOR ITS MOST RECENT FISCAL YEAR:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None None None
Maximum CDSC (as a percentage of redemption
proceeds, whichever is lower) None* 4.50% 1.00% None
-------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management fees .69 .69 .69 .69
12b-1 fees*** .25 .75 .70 None
Other expenses**** .64 .62 1.04 .64
-------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.58% 2.06% 2.43% 1.33%
-------------------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current holdings of Class A
shares offered with a sales charge, equal or exceed $500,000 in the aggregate, will be
made at net asset value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months.
**The annual operating expenses for Class C shares have been restated to reflect a
reduction of the annual 12b-1 fee from 0.75% of average daily net assets to 0.70% of
average daily net assets.
***Upon conversion of Class B shares to Class A shares, such shares will no longer be
subject to a distribution fee. Class C shares do not have a conversion feature and,
therefore, are subject to an ongoing distribution fee. As a result, long-term
shareholders of Class C shares may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities Dealers,
Inc.
****For Class Y shares, "Other expenses" have been estimated based on expenses incurred by
Class A shares because Class Y shares were not available for purchase prior to November
7, 1994.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum charges
imposed upon purchases or redemptions of Fund shares and investors may actually
pay lower or no charges depending on the amount purchased and, in the case of
Class B, Class C and certain Class A shares, the length of time the shares are
held and whether the shares are held through the Smith Barney 401(k) Program.
See "Purchase of Shares" and "Redemption of Shares." Smith Barney receives an
annual 12b-1 service fee of 0.25% of the value of average daily net assets of
Class A shares. Smith Barney also receives, with respect to Class B shares, an
annual 12b-1 fee of 0.75% of the value of the average daily net assets of that
Class, consisting of a 0.50% distribution fee and a 0.25% service fee. For Class
C shares, Smith Barney receives an annual 12b-1 fee of .70% of the value of
average daily net assets of this Class, consisting of a 0.45% distribution fee
9
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
and a 0.25% service fee. "Other expenses" in the above table include fees for
shareholder services, custodial fees, legal and accounting fees, printing costs
and registration fees.
Global Capital Management has voluntarily waived investment advisory fees in
the aggregate amount equal to 0.11% of the Fund's average daily net assets. This
has the effect of lowering the Fund's overall expense ratio and increasing the
returns otherwise available to investors. If Global Capital Management had not
elected to voluntarily waive fees and reimburse expenses, the Fund's total
operating expenses for the 1994 fiscal year, as a percentage of average daily
net assets, would have been 1.69%, 2.17%, 2.54% and 1.44% for Class A shares,
Class B shares, Class C shares and Class Y shares, respectively.
EXAMPLE THE FOLLOWING EXAMPLE IS INTENDED TO ASSIST AN INVESTOR IN
UNDERSTANDING THE VARIOUS COSTS THAT AN INVESTOR IN THE FUND WILL BEAR
DIRECTLY
OR INDIRECTLY. THE EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING
EXPENSES AT
THE LEVELS SET FORTH IN THE TABLE ABOVE. SEE "PURCHASE OF SHARES,"
"REDEMPTION
OF SHARES" AND "MANAGEMENT OF THE TRUST AND THE FUND."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each time period:
Class A $60 $93 $127 $225
Class B $66 $95 $121 $227
Class C $35 $76 $130 $277
Class Y $14 $42 $ 73 $160
You would pay the following expenses on
the same investment, assuming the same
annual return and no redemption:
Class A 60 93 127 225
Class B 21 65 111 227
Class C 25 76 130 277
Class Y 14 42 73 160
-----------------------------------------------------------------------------------
<FN>
*Ten-year figures assume conversion of Class B shares to Class A shares at the end
of the eighth year following the date of purchase.
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
EXCEPT WHERE OTHERWISE NOTED, THE FOLLOWING INFORMATION HAS BEEN AUDITED
BY
COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS, WHOSE REPORT THEREON
APPEARS
IN THE FUND'S ANNUAL REPORT DATED JULY 31, 1994. THE INFORMATION SET OUT
BELOW
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED
NOTES
THAT ALSO APPEAR IN THE FUND'S ANNUAL REPORT DATED JULY 31, 1994, WHICH IS
INCORPORATED BY REFERENCE INTO THE STATEMENT OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94# ## 7/31/93*++
<S> <C> <C>
Net Asset Value, beginning of period $ 16.53 $16.32
-----------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.84*** 0.61
Net realized and unrealized gain on investments (0.90) 0.60
-----------------------------------------------------------------------------------
Total from investment operations (0.06) 1.21
Less distributions:
Distributions from net investment income: (0.88) (0.88)
Distributions in excess of net investment income (0.10) (0.12)
Distributions from net realized gains (0.30) --
Distributions from capital (0.03) --
-----------------------------------------------------------------------------------
Total distributions (1.31) (1.00)
-----------------------------------------------------------------------------------
Net Asset Value, end of period $ 15.16 $16.53
-----------------------------------------------------------------------------------
Total return+ (0.67)% 7.70%
-----------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $39,491 $2,389
Ratio of operating expenses to average net assets 1.58%+++ 1.71%**
Ratio of net investment income to average net assets 5.24% 5.37%**
Portfolio turnover rate 257% 216%
-----------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992.
**Annualized.
***Net investment income per share before waiver of fees by investment adviser for
the year ended July 31, 1994 was $0.82.
+Total return represents aggregate total return for the period indicated and does
not reflect any applicable sales charge.
++Per share amounts have been calculated using the average share method, which
more appropriately presents the per share data for the period since the use of
the undistributed method does not accord with results of operations.
+++Annualized expense ratio before waiver of fees by investment adviser for the
year ended July 31, 1994 was 1.69%.
#As of March 21, 1994, the Fund changed its investment adviser from Lehman
Brothers Global Asset Management to its current investment adviser.
##The calculated per share amounts do not reflect the actual results of operations
due to the timing of the merger.
</TABLE>
11
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
7/31/94# ## 7/31/93+++
<S> <C> <C>
Net Asset Value, beginning of year $ 16.53 $ 16.32
----------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.25*** 0.79
Net realized and unrealized gain/(loss) on investments (0.41) 0.57
----------------------------------------------------------------------------------
Total from investment operations (0.16) 1.36
Less distributions:
Distributions from net investment income (0.80) (1.01)
Distributions in excess of net investment income (0.09) (0.14)
Distributions from net realized gains (0.30) --
Distributions from capital (0.02) --
----------------------------------------------------------------------------------
Total distributions (1.21) (1.15)
----------------------------------------------------------------------------------
Net Asset Value, end of year $ 15.16 $ 16.53
----------------------------------------------------------------------------------
Total return+ (1.19)% 8.67%
----------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $82,989 $66,418
Ratio of operating expenses to average net assets 2.06%++ 2.22%
Ratio of net investment income to average net assets 4.75% 4.85%
Portfolio turnover rate 257% 216%
----------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on October 27, 1986. The Fund commenced selling
Class A shares on November 6, 1992 and Class C shares (previously designated as
Class D shares) on February 4, 1993. Those shares in existence prior to
November 6, 1992 were designated Class B shares.
**Annualized.
***Net investment income per share before waiver of fees by investment adviser
and/or sub-investment adviser and administrator and distributor for the year
ended July 31, 1994 and period ended July 31, 1987 were $0.24 and $0.23,
respectively.
+Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
++Annualized expense ratio before waiver of fees by investment adviser and/or
sub-investment adviser and administrator and distributor for the year ended
July 31, 1994 and period ended July 31, 1987 were 2.17% and 2.00%,
respectively.
+++Per share amounts have been calculated using the average share method, which
more appropriately presents the per share data for the period since the use of
the undistributed method does not accord with results of operations.
#As of March 21, 1994, the Fund changed its investment adviser from Lehman
Brothers Global Asset Management Limited to its current investment adviser.
##The calculated per share amounts do not reflect the actual results of
operations due to the timing of the merger.
</TABLE>
12
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
7/31/92 7/31/91 7/31/90 7/31/89 7/31/88 7/31/87*
<S> <C> <C> <C> <C> <C>
$ 15.24 $ 16.79 $ 16.60 $ 16.70 $ 16.35 $ 15.00
------------------------------------------------------------------
0.94 1.12 1.04 1.05 0.94 0.24***
1.43 (0.17) 0.29 0.02 0.73 1.35
------------------------------------------------------------------
2.37 0.95 1.33 1.07 1.67 1.59
(0.94) (1.39) (1.14) (0.94) (0.85) (0.24)
-- -- -- -- -- --
(0.26) -- -- (0.23) (0.47) --
(0.09) (1.11) -- -- -- --
------------------------------------------------------------------
(1.29) (2.50) (1.14) (1.17) (1.32) (0.24)
------------------------------------------------------------------
$ 16.32 $ 15.24 $ 16.79 $ 16.60 $ 16.70 $ 16.35
------------------------------------------------------------------
16.11% 6.02% 8.43% 6.66% 10.53% 10.57%
------------------------------------------------------------------
$51,627 $48,951 $61,732 $101,273 $154,362 $162,757
2.02% 1.99% 2.04% 1.96% 2.00% 1.84%**++
5.87% 6.65% 5.95% 5.82% 5.55% 4.61%**
230% 397% 309% 374% 241% 112%
------------------------------------------------------------------
</TABLE>
13
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94# ## 7/31/93*++
<S> <C> <C>
Net Asset Value, beginning of period $ 16.53 $15.98
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.29*** 0.45
Net realized and unrealized gain on investments (0.45) 0.61
-------------------------------------------------------------------------------------
Total from investment operations (0.16) 0.99
Less distributions:
Distributions from net investment income (0.80) (0.39)
Distributions in excess of net investment income (0.09) (0.05)
Distributions from net realized gains (0.30) --
Distributions from capital (0.02) --
-------------------------------------------------------------------------------------
Total distributions (1.21) (0.44)
-------------------------------------------------------------------------------------
Net Asset Value, end of period $ 15.16 $16.53
-------------------------------------------------------------------------------------
Total return+ (1.19)% 6.19%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 28 $ 23
Ratio of operating expenses to average net assets 2.48%+++ 2.18%**
Ratio of net investment income to average net assets 4.34% 4.89%**
Portfolio turnover rate 257% 216%
-------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class C shares (previously designated as Class D shares) on February
4, 1993.
**Annualized.
***Net investment income per share before waiver of fees by investment adviser for the year ended
July 31, 1994 was $0.29.
+Total return represents aggregate total return for the period indicated.
++Per share amounts have been calculated using the average share method, which more appropriately
presents the per share data for the period since the use of the undistributed method does not
accord with results of operations.
+++Annualized expense ratio before waiver of fees by investment adviser for the year ended July
31, 1994 was 2.59%
#As of March 21, 1994, the Fund changed its investment adviser from Lehman Brothers Global Asset
Management Limited to its current investment adviser.
##The calculated per share amounts do not reflect the actual results of operations due to the
timing of the merger.
</TABLE>
PRIOR TO NOVEMBER 7, 1994, THE FUND DID NOT OFFER CLASS Y SHARES AND
ACCORDINGLY, NO COMPARABLE FINANCIAL INFORMATION IS AVAILABLE AT THIS TIME
FOR
THAT CLASS.
14
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is current income and capital appreciation.
The Fund's investment objective may be changed only with the approval of a
majority of the Fund's outstanding shares. The Fund will seek to achieve this
objective by investing at least 65% of its assets in bonds, debentures and notes
of United States and foreign issuers. The Fund's assets may include obligations
issued, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities"), obligations of foreign
governments or their political subdivisions, agencies or instrumentalities, and
obligations of international banking institutions and related government
agencies, such as the European Investment Bank, the Asian Development Bank, the
Inter-American Development Bank and the International Bank for Reconstruction
and Development. These institutions generally were created to promote
international trade and economic growth in developing countries, and their
obligations are supported by the credit of the institutions themselves. At least
85% of the obligations of companies in which the Fund invests will have an
outstanding debt issue rated no lower than Aa by Moody's or AA by S&P or, if
unrated, will be determined to be of comparable quality by Global Capital
Management, although up to 15% of these obligations may be of companies rated as
low as A by Moody's or S&P or deemed to be of comparable quality. Up to 20% of
the Fund's assets may be invested in money market instruments. The Fund's
investment objective may be changed only with the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund will achieve its investment objective.
In pursuit of its investment objective, the Fund invests in a diversified
portfolio of issuers located throughout the world. The Fund intends to diversify
broadly among countries and, under normal circumstances, to invest at least 65%
of its assets in the securities of issuers collectively having their principal
business activities in no fewer than three countries other than the United
States. The Fund's assets will consist predominantly of securities denominated
in the following currencies: the British pound, the Canadian dollar, the U.S.
dollar, the German mark, the French franc, the Swiss franc, the Japanese yen,
the Dutch guilder and the European Currency Unit. (The European Currency Unit is
a weighted composite of the currencies of member states of the European Monetary
System.) The Fund may invest up to 5% of its assets in the securities of
companies in or governments of developing countries. In order to mitigate the
effects of uncertainty in future exchange rates, the Fund may engage in currency
exchange transactions,
15
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
purchase options on foreign currencies and enter into currency futures contracts
and related options. When the Fund's investment adviser determines it to be
appropriate to assume a temporary defensive posture, the Fund may restrict the
securities markets in which its assets will be invested, and may increase the
proportion of its assets invested in obligations of companies incorporated in
and having their principal activities in the United States. The Fund also may
lend portfolio securities, purchase or sell securities on a when-issued or
delayed-delivery basis, write put and call options on securities and, for
hedging purposes, purchase put options on securities and currencies and enter
into interest rate and currency futures contracts and related options and
forward currency contracts. Special considerations associated with the Fund's
investments are described under "Risk Factors and Special Considerations."
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed information
concerning these strategies and their related risks is contained in the
Statement of Additional Information.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
any portfolio securities on a when-issued or delayed-delivery basis. The Fund
will enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. In such transactions, delivery
of the securities occurs beyond the normal settlement periods, but no payment or
delivery is made by the Fund prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the investments are actually delivered to the
buyers. The Fund will establish a segregated account consisting of cash, U.S.
government securities or other high-grade debt obligations in an amount equal to
the amount of its when-issued and delayed-delivery commitments. Placing
securities rather than cash in the segregated account may have a leveraging
effect on the Fund's net assets. The Fund will not accrue income with respect to
a when-issued security prior to its stated delivery date.
16
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
LENDING OF PORTFOLIO SECURITIES. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. Such loans, if
and when made, may not exceed 20% of the Fund's assets taken at value. Loans of
portfolio securities will be collateralized by cash, letters of credit or U.S.
government securities that are maintained at all times in an amount at least
equal to the current market value of the loaned securities. Any gain or loss in
the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Fund.
COVERED OPTION WRITING. The Fund may write put and call options on securities.
The Fund realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder 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 to the option holder an underlying security at a specified price
at any time during the option period. Thus, the purchaser of a put option
written by the Fund 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 written by the Fund 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 written by the Fund, 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.
The Fund will write only covered options. Accordingly, whenever the Fund
writes a call option, it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated as the
writer of the option. To support its obligation to purchase the underlying
security if a put option is exercised, the Fund will either (a) deposit with
Boston Safe Deposit and Trust Company ("Boston Safe") in a segregated account
cash, U.S. government securities or other high-grade debt obligations having a
value at least equal to the exercise price of the underlying securities or (b)
continue to own an equivalent number of puts of the same "series" (that is, puts
on the same underlying security having the same exercise prices and expiration
dates as those written by the Fund), or an
17
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
equivalent number of puts of the same "class" (that is, puts on the same
underlying security) with exercise prices greater than those that it has written
(or, if the exercise prices of the puts that it holds are less than the exercise
prices of those that it has written, it will deposit the difference with Boston
Safe in a segregated account).
The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option that the Fund has written, an option
of the same series as that on which the Fund desires to terminate its
obligation. The obligation of the Fund under an option that it has written would
be terminated by a closing purchase transaction, but the Fund would not be
deemed to own an option as the result of the transaction. There can be no
assurance that the Fund will be able to effect closing purchase transactions at
a time when it wishes to do so. To facilitate closing purchase transactions,
however, the Fund ordinarily will write options only if a secondary market for
the options exists on a domestic securities exchange or in the over-the-counter
market.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The Fund may purchase and sell
put, call and other types of option securities that are traded on domestic or
foreign exchanges or the over-the-counter market including, but not limited to,
"spread" options, "knock-out" options, "knock-in" options and "average rate" or
"look-back" options. The Fund may utilize up to 15% of its assets to purchase
options and may do so at or about the same time that it purchases the underlying
security or at a later time. In purchasing option securities, the Fund will
trade only with counterparties of high standing in terms of credit quality and
commitment to the market. Risks associated with options transactions and foreign
futures contracts are described below under "Special Considerations."
By buying a put, the Fund limits the risk of loss from a decline in the market
value of the security until the put expires. Any appreciation in the value of
the yield otherwise available from the underlying security, however, will be
partially offset by the amount of the premium paid for the put option and any
related transaction costs. Call options may be purchased by
18
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the Fund in order to acquire the underlying securities for the Fund at a price
that avoids any additional cost that would result from a substantial increase in
the market value of a security. The Fund also may purchase call options to
increase its return to investors at a time when the call is expected to increase
in value due to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing sale
transactions (sales by the Fund, prior to the exercise of options that it has
purchased, or options of the same series), and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the option plus the related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To the extent permitted by
the policies of state securities authorities in states where shares of the Fund
are qualified for offer and sale, the Fund may enter into futures contracts or
related options that are traded on domestic and foreign exchanges or boards of
trade. 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 debt
security at a specified price, date, time and place. The Fund may enter into
futures contracts to sell debt securities or currency when Global Capital
Management believes that the value of the Fund's debt securities will decrease.
An option on an interest rate futures contract, as contrasted with the direct
investment in a futures contract, gives the purchaser the right, in return for
the premium paid, to assume a position in an interest rate futures contract at a
specified exercise price at any time prior to the expiration date of the option.
A call option gives the purchaser of the option the right to enter into a
futures contract to buy and obliges the writer to enter into a futures contract
to sell the underlying debt securities. A put option gives the purchaser the
right to sell and obliges the writer to buy the underlying contract. A foreign
currency futures contract of the type that the Fund may invest in provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified foreign currency at a specified price, date, time and
place, and an option on a foreign currency futures contract gives the purchaser
the right, in return for the premium paid, to assume a position in a foreign
currency futures contract at a specified exercise price at any time prior to the
expiration date of the option. The Fund may enter into futures contracts to
purchase debt securities or currency when Global Capital Management anticipates
purchasing the underlying debt securities or currency and believes that prices
will
19
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
rise before the purchases will be made. When the Fund enters into a futures
contract to purchase an underlying security or currency, an amount of cash, U.S.
government securities or other high-grade debt securities, equal to the market
value of the contract, will be deposited in a segregated account with the
Trust's custodian to collateralize the position, thereby insuring that the use
of the contract is unleveraged.
The Fund may purchase put options on futures contracts to hedge its portfolio
against the risk of rising interest rates or currency prices, and may purchase
call options on interest rate futures contracts to hedge against a decline in
interest rates or currency prices. The Fund may write put and call options on
futures contracts in entering into closing sale transactions and to increase its
ability to hedge against changes in interest rates or currency values.
CURRENCY EXCHANGE TRANSACTIONS AND OPTIONS ON FOREIGN CURRENCIES. In order
to
protect against uncertainty in the level of future exchange rates, the Fund may
engage in currency exchange transactions and purchase exchange-traded put and
call options on foreign currencies. The Fund will conduct its currency exchange
transactions either on a spot (i.e., cash) basis at the rate prevailing in the
currency exchange market or through entering into forward contracts to purchase
or sell currencies. The Fund's dealings in forward currency exchange and options
on foreign currencies are limited to hedging involving either specific
transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of the currency
increase.
The Fund may purchase a call option on a foreign currency to hedge against an
adverse exchange rate of the currency in which a security that it anticipates
purchasing is denominated in relation to the currency in which the exercise
price is denominated. An option on a foreign currency gives the purchaser, in
return for a premium, the right to sell, in the case of a put,
20
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
and buy, in the case of a call, the underlying currency at a specified price
during the term of the option. Although the purchase of an option on a foreign
currency may constitute an effective hedge by the Fund against fluctuations in
the exchange rates, in the event of rate movements adverse to the Fund's
position, the Fund may forfeit the entire amount of the premium plus related
transaction costs.
Although the foreign currency forward market may not necessarily be more
volatile than the market in other commodities, the foreign currency forward
market offers less protection against defaults in the trading of currencies than
is available when trading in currencies occurs on an exchange. Because a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits or force the Fund
to cover its commitments for the purchase or resale, if any, at the current
market price.
ADDITIONAL INVESTMENTS
MONEY MARKET INSTRUMENTS. When Global Capital Management believes that market
conditions warrant, the Fund may adopt a temporary defensive posture and may
invest in short-term instruments without limitation. Short-term instruments in
which the Fund may invest include United States government securities; certain
bank obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loan associations
and similar institutions); commercial paper rated no lower than A-2 by S&P or
Prime-2 by Moody's or the equivalent from another major rating service or, if
unrated, of an issuer having an outstanding, unsecured debt issue then rated
within the three highest rating categories; and repurchase agreements as
described below.
UNITED STATES GOVERNMENT SECURITIES. The U.S. government securities in which
the Fund may invest include: direct obligations of the United States Treasury
(such as Treasury Bills, Treasury Notes and Treasury Bonds), and obligations
issued by U.S. government agencies and instrumentalities, including securities
that are supported by the full faith and credit of the United States (such as
Government National Mortgage Association, ("GNMA") certificates); securities
that are supported by the right of the issuer to borrow from the United States
Treasury (such as securities of
21
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Federal Home Loan Banks); and securities that are supported by the credit of the
instrumentality (such as Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") bonds). Treasury Bills have
maturities of less than 1 year, Treasury Notes have maturities of 1 to 10 years
and Treasury Bonds generally have maturities of greater than 10 years at the
date of issuance. Certain U.S. government securities, such as those issued or
guaranteed by GNMA, FNMA and the FHLMC, are mortgage-related securities. U.S.
government securities generally do not involve the credit risks associated with
other types of interest-bearing securities, although, as a result, the yields
available from U.S. government securities are generally lower than the yields
available from interest-bearing corporate securities.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions 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. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. 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. Global Capital Management or
SBMFM, acting under the supervision of the Trust's Board of Trustees, 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.
22
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
CERTAIN INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable. Notwithstanding the foregoing, the Fund shall not invest
more than 10% of its net assets in securities (excluding those subject to Rule
144A under the Securities Act of 1933, as amended) that are restricted. In
addition, the Fund may invest up to 5% of its assets in the securities of
issuers which have been in continuous operation for less than three years. The
Fund also may borrow from banks for temporary or emergency purposes, but not for
investment purposes, in an amount up to 10% of its total assets, and may pledge
its assets to the same extent in connection with such borrowings. Whenever these
borrowings exceed 5% of the value of the Fund's total assets, the Fund will not
make any additional investments. Except for the limitations on borrowing, the
investment guidelines set forth in this paragraph may be changed at any time
without shareholder consent by vote of the Trust's Board of Trustees. A complete
list of investment restrictions that identifies additional restrictions that
cannot be changed without the approval of the majority of the Fund's outstanding
shares is contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
OPTIONS. Option writing for the Fund may be limited by position and exercise
limits established by the national securities exchanges and the National
Association of Securities Dealers, Inc. (the "NASD") and by requirements in the
Code for qualification as a regulated investment company (see "Dividends,
Distributions and Taxes"). The Fund may write covered put and call options to
generate current income. In addition, the Fund may enter into options
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position. A
hedge is designed to offset a loss on a portfolio position with a gain on the
hedge position; at the same time, however, a properly correlated hedge will
result in a gain on the portfolio position being offset by a loss on the hedge
position. The Fund bears the risk that the prices of the securities being hedged
will not move in the same amount as the hedge. The Fund will engage in hedging
transactions only when deemed advisable by Global Capital Management. Successful
use by the Fund of options will depend on Global Capital Management's
23
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ability to correctly predict movements in the direction of the stock or currency
underlying the option used as a hedge. Losses incurred in hedging transactions
and the costs of these transactions will affect the Fund's performance.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write stock options or options on currencies only if
there appears to be a liquid secondary market for the options purchased or sold,
for some options no such secondary market may exist or the market may cease to
exist.
Because option premiums paid or received by the Fund are small in relation to
the market value of the investments underlying the options, buying and selling
options can result in large amounts of leverage. The leverage offered by trading
in options may cause the Fund's net asset value to be subject to more frequent
and wider fluctuation than would be the case if the Fund did not invest in
options.
The Fund may write put and covered call options on securities. The Fund could
realize fees (referred to as "premiums") for granting the rights evidenced by
the options. A put option embodies the right of its purchaser to compel the
writer of the option to purchase from the option holder 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.
Upon the exercise of a put option written by the Fund, 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 written by the Fund, 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 exercise price of the option less the premium received for writing the
option.
Whenever the Fund writes a call option it will continue to own or have the
present right to acquire the underlying security for as long as it remains
obligated as the writer of the option. To support its obligation to purchase the
underlying security if a put option is exercised, the Fund will either (a)
deposit
24
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
with the Fund's custodian in a segregated account, cash, U.S. government
securities or other high-grade debt obligations having a value at least equal to
the exercise price of the underlying securities or (b) continue to own an
equivalent number of puts of the same "series" (that is, puts on the underlying
security having the same exercise prices and expiration dates as those written
by the Fund), or an equivalent number of puts of the same "Class" (that is, puts
on the same underlying security with exercise prices greater than those that it
has written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with the
Fund's custodian in a segregated account.)
The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option that the Fund has written, an option
of the same series as that on which the Fund desired to terminate its
obligation. The obligation of the Fund under an option that it has written would
be terminated but a closing purchase transaction, by the Fund would not be
deemed to own an option as a result of the transaction. No assurance can be
given that the Fund will be able to effect closing transactions at a time when
it wishes to do so. If the Fund cannot enter into a closing transaction, the
Fund may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security and could face
higher transaction costs, including brokerage commissions.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options or financial futures only if there
appears to be a liquid secondary market for the options or futures sold or
purchased, for some options or futures no such secondary market may exist or the
market may cease to exist.
FUTURES AND OPTIONS ON FUTURES. When deemed advisable by its investment
adviser, the Fund may enter into futures contracts or related options that are
traded on domestic and foreign exchanges or boards of trade as well as the
over-the-counter market with respect to options on such futures contracts. Such
investments, if any, by the Fund will be made primarily for
25
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in interest rates or currency
values and when the transactions are economically appropriate to the reduction
of risks inherent in the management of the Fund. The Fund may enter into futures
contracts and options on futures contracts (a) without limit for bona fide
hedging purposes and (b) for other purposes provided the aggregate initial
margin deposits and premium paid for unexpired options do not exceed 5% of the
fair market value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
With respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract always will be covered by cash and
cash equivalents set aside plus accrued profits held at the futures commission
merchant.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities or currency, on
the one hand, and price movements in the securities which are the subject of the
hedge, on the other hand. Positions in futures contracts and options on futures
contracts may be closed out only on the exchange or board of trade on which they
were entered into, and there can be no assurance that an active market will
exist for a particular contract or option at any particular time. Losses
incurred in hedging transactions and the costs of these transactions will affect
the Fund's performance.
FOREIGN COMMODITY EXCHANGES. Unlike trading on domestic commodity exchanges,
trading on foreign commodity exchanges is not regulated by the CFTC and may be
subject to greater risks than trading on domestic exchanges. For example, some
foreign exchanges may be principal markets so that no common clearing facility
exists and a trader may look only to the broker for performance of the contract.
In addition, unless the Fund hedges against fluctuations in the exchange rate
between the U.S. dollar and the currencies in which trading is done on foreign
exchanges, any profits that the Fund might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Fund could incur
losses as a result of those changes.
SECURITIES OF UNSEASONED ISSUERS. Securities in which the Fund may invest may
have limited marketability and, therefore, may be subject to wide
26
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
fluctuations in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.
FOREIGN SECURITIES. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Fund may
be adversely affected by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with respect to
certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal of
funds or other assets of the Fund, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that could reduce
the yield on such securities. Because the Fund will invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may adversely affect the value of portfolio
securities and the appreciation or depreciation of investments. Investment in
foreign securities also may result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions on
domestic exchanges, and the expense of maintaining securities with foreign
custodians, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.
Corporate securities in which the Fund may invest include corporate
fixed-income securities of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
and preferred stock.
27
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Certain of the corporate fixed-income securities in which the Fund may invest
may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting their holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
FOREIGN CURRENCY. Although the foreign currency market may not necessarily be
more volatile than the market in other commodities, the foreign currency market
offers less protection against defaults in the forward trading of currencies
than is available when trading in currencies occurs on an exchange. Because a
forward currency contract is not guaranteed by an exchange or clearing house, a
default on the contract would deprive the Fund of unrealized profits or force
the Fund to cover its commitments for purchase or resale, if any, at the current
market price.
SECURITIES OF DEVELOPING COUNTRIES. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when Global Capital Management
believes it desirable to do so. The Fund's investments in illiquid securities
are subject to the risk that should the Fund desire to sell any of these
securities when a ready buyer is not available at a price that the Fund deems
representative of their value, the value of the Fund's net assets could be
adversely affected.
28
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transactions in securities and options on behalf of the Fund
are placed by Global Capital Management with broker-dealers that Global Capital
Management selects, including Smith Barney and other affiliated brokers. The
Fund may utilize Smith Barney or a Smith Barney affiliated-broker in connection
with a purchase or sale of securities when Global Capital Management believes
that the broker's charge for the transactions does not exceed usual and
customary levels. The same standard applies to the use of Smith Barney as a
commodities broker in connection with entering into options and futures
contracts.
Under certain market conditions, the Fund may experience high portfolio
turnover as a result of its investment strategies. For example, the exercise of
a substantial number of the options written by the Fund and the purchase or sale
of securities by the Fund in anticipation of a rise or decline in interest rates
could result in high portfolio turnover. Short-term gains realized from
portfolio transactions are taxable to shareholders as ordinary income. In
addition, higher portfolio turnover rates can result in corresponding increases
in brokerage commissions for the Fund. The Fund will not consider portfolio
turnover rate a limiting factor in making investment decisions consistent with
its objective and policies.
- --------------------------------------------------------------------
VALUATION OF SHARES
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.
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 Trust's Board of Trustees. Portfolio
securities that are traded primarily on foreign exchanges generally are valued
at the preceding closing values of the securities on their respective exchanges,
except that when an occurrence subsequent to the time that a value was so
established is likely to have changed that value, then the fair market value of
those securities will be determined by consideration of other
29
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
factors by or under the direction of the Trust's Board of Trustees or its
delegates. A security that is traded primarily on a domestic or foreign stock
exchange is valued at the last sale price on that exchange or, if there were no
sales during the day, at the current quoted bid price. Over-the-counter
securities are valued on the basis of the bid price at the close of business on
each day. Investments in U.S. government securities (other than short-term
securities) are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short-term investments that mature in 60 days or less
are valued at amortized cost whenever the Trustees determine that amortized cost
reflects fair value of those investments. An option generally is valued at the
last sale price or, in the absence of the last sale price, the last offer price.
Further information regarding the Fund's valuation policies is contained in the
Statement of Additional Information.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amount of dividends from net investment income and distributions
of capital gains payable to shareholders.
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 CDSC. Dividends and
distributions are treated the same for tax purposes whether taken in cash or
reinvested in additional shares. The Fund declares and pays dividends monthly
out of net investment income. Any net realized gains, after utilization of
capital loss carryforwards, will be distributed at least annually, and net
realized short-term capital gains (including short-term capital gains from
options transactions, if any) may be paid more frequently, with the distribution
of dividends from net investment income.
The per share dividends on Class B and Class C shares 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 C shares. The per
share dividends on Class A shares of the fund may be
30
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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, B, C and Y shares.
In addition, as determined by the Board of Trustees, distributions of the Fund
may include a return of capital. Shareholders will be notified of the amount of
any distribution that represents a return of capital. In order to comply with a
calendar year distribution requirement under the Code, it may be necessary for
the Fund to make distributions at times other than those set forth above.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined on a fund by fund basis, rather than on a
Trust wide basis. The Fund intends to continue to qualify as a regulated
investment company under Subchapter M of the Code. To meet those requirements,
the Fund may need to restrict the degree to which it engages in short-term
trading and transactions in options. If the Fund qualifies as a regulated
investment company and meets certain distribution requirements, the Fund will
not be subject to Federal income tax on its net investment income and net
capital gains that it distributes to its shareholders.
Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Distributions of long-term capital gain will be taxable to
shareholders as long-term whether paid in cash or reinvested in additional
shares, and regardless of the length of time that the investor has held his or
her shares of the Fund.
Distributions of capital gain or dividends received from foreign corporations
will not qualify for the Federal dividends-received deduction for corporate
shareholders (the "Corporate Deduction"). The Fund anticipates that most of its
dividends will not qualify for the Corporate Deduction. Each shareholder will
receive a statement annually from the Trust, which
31
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
will set forth separately the aggregate dollar amount of dividends and capital
gain distributed to the shareholder by the Fund with respect to the prior
calendar year.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
If the Fund qualifies as a regulated investment company under the Code and
more than 50% of the Fund's total assets at the close of the Fund's fiscal year
consist of stock or securities of foreign corporations, the Fund will be
eligible and intends to file an annual election with the Internal Revenue
Service pursuant to which shareholders of the Fund will be required to include
their respective PRO RATA portions of such foreign taxes in computing their
taxable incomes and then take an amount equal to those foreign taxes as a
deduction from their income or use them as foreign tax credits against their
federal income taxes. Shortly after the end of any year in which it makes such
an election, the Fund will report to its shareholders the amount per share of
such foreign tax that must be included in each shareholder's gross income and
will be available for the credit or deduction. No deduction for foreign taxes
may be claimed by a shareholder of the Fund who does not itemize deductions.
Depending on the shareholder's tax situation, certain limitations will be
imposed on the extent to which the credit (but not the deduction) for foreign
taxes may be claimed.
Shareholders are urged to consult their tax advisors regarding the application
of Federal, state and local tax laws to their specific situation before
investing in the Fund.
- --------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL
The Fund offers four classes of shares. Class A shares are sold to investors
with an initial sales charge and Class B and Class C shares are sold without an
initial sales charge but with higher ongoing expenses and a CDSC payable upon
certain redemptions. Class Y shares are sold without an initial sales charge or
a CDSC, and are available only to investors investing
32
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
a minimum of $5,000,000. See "Prospectus Summary -- Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group, except for investors purchasing shares of the Fund through a qualified
retirement plan who may do so directly through TSSG. When purchasing shares of
the Fund, investors must specify whether the purchase is for Class A, Class B,
Class C or Class Y shares. No maintenance fee will be charged by the Fund in
connection with a brokerage account through which an investor purchases or holds
shares.
Investors in Class A, Class B and Class C shares may open an account 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 $5,000,000. 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(a) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $100. There are no minimum
investment requirements for Class A shares, for employees of Travelers and its
subsidiaries, including Smith Barney or Trustees of the Trust 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
the Trust's transfer agent, TSSG. Share certificates are issued only upon a
shareholder's written request to TSSG.
Purchase orders received by Smith Barney 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. Orders received by
dealers or Introducing Brokers 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
33
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
order is received by Smith Barney prior to Smith Barney's close of business (the
"trade date"). Currently, payment for Fund shares is due on the fifth business
day (the "settlement date") after the trade date. The Fund anticipates that, in
accordance with regulatory changes, beginning on or about June 1, 1995, the
settlement date will be the third business day after the trade date.
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, Smith Barney or TSSG is authorized through
preauthorized transfers of $100 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide 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 Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's 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 Smith Barney Financial Consultant.
34
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are as
follows:
<TABLE>
<CAPTION>
SALES CHARGE AS %
SALES CHARGE AS % OF AMOUNT DEALERS
REALLOWANCE AS %
AMOUNT OF INVESTMENT* OF OFFERING PRICE INVESTED OF
OFFERING PRICE
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
Less than $25,000 4.50% 4.71% 4.05%
$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 more* * * *
- -------------------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current holdings of Class A shares offered with
a sales
charge, equal or exceed $500,000 in the aggregate, will be made at net asset value without any initial
sales
charge, but will be subject to a CDSC of 1.00% on redemptions made within 12 months of purchase. The
CDSC on
Class A shares is payable to Smith Barney, which compensates Smith Barney Financial Consultants and
other
dealers whose clients make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in
which the CDSC applicable to Class B and Class C shares is waived. See "Deferred Sales Charge
Alternatives"
and "Waivers of CDSC."
</TABLE>
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 Securities Act of
1933, as amended.
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, his or her spouse and children, or a trustee or other fiduciary of a
single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares held in funds sponsored by Smith Barney that are offered with
a sales charge listed under "Exchange Privilege."
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 of Class A shares to Trustees
of the Trust and employees of Travelers and its subsidiaries, or the spouses and
children of such persons (including the surviving spouse of a
35
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
deceased Trustee or employee, and retired Trustees or employees), or sales to
any trust, pension, profit-sharing or other benefit plan for such persons
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
re-sold except through redemption or repurchase; (b) offers of Class A shares to
any other investment company in connection with 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 Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with 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) shareholders who have redeemed Class A shares in the Fund (or
Class A shares of another fund of the Smith Barney Mutual Funds that are offered
with a sales charge equal to or greater than the maximum sales charge of the
Fund) and who wish to reinvest their redemption proceeds in the Fund, provided
the reinvestment is made within 60 calendar days of the redemption; and (e)
accounts managed by registered investment advisory subsidiaries of Travelers. 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 funds sponsored by Smith Barney, which are offered
with a sales charge 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.
36
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer of partnership-sanctioned plan meeting
certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
37
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
A Letter of Intent for amounts 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 that 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 purchases of all Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds offered
with a sales charge over the 13-month period based on the total amount of
intended purchases plus the value of all Class A Shares previously purchased and
still owned. An alternative is to compute the 13-month period starting up to 90
days before the date of execution of a Letter of Intent. 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. New Letters of Intent will be accepted
beginning January 1, 1995. Please contact a Smith Barney Financial Consultant or
TSSG to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
CDSC Shares are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares which when combined with Class A shares offered
with an initial sales charge currently held by an investor equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC to the
extent that the value of such shares represents: (a) capital appreciation of
Fund assets; (b) reinvestment of dividends or capital gains distributions; (c)
with respect to Class B shares, shares redeemed more than
38
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
five years after their purchase; or (d) with respect to Class C shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC 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 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
purchases by Participating Plans, as described below. See "Purchase of Shares --
Smith Barney 401(k) Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENT WAS MADE CDSC
<S> <C>
- ----------------------------------------------------------------------------------
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- ----------------------------------------------------------------------------------
</TABLE>
Class B shares will automatically convert 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 also will be converted at that time such portion
of Class B Dividend Shares owned by the shareholder 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. Shareholders who held Class B shares of Smith Barney Shearson
Short-Term World Income Fund (the "Short-Term World Income Fund") on July 15,
1994 and who subsequently exchange those shares for Class B shares of the Fund
will be offered the opportunity to exchange all such Class B shares for Class A
shares of the Fund four
39
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
years after the date on which those shares were deemed to have been purchased.
Holders of such Class B shares will be notified of the pending exchange in
writing approximately 30 days before the fourth anniversary of the purchase date
and, unless the exchange has been rejected in writing, the exchange will occur
on or about the fourth anniversary date. See "Prospectus Summary -- Alternative
Purchase Arrangements -- Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that 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 CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 additional
shares 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 CDSC 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 CDSC
The CDSC 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 below) (provided, however, that 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 that were established prior to November 7, 1994);
(c) redemptions of shares within 12
40
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares in connection with 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 funds of the 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 CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by TSSG in the case of
all other shareholders) of the shareholder's status or holdings, as the case may
be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. To the extent
applicable, the same terms and conditions are offered to all Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class Y
shares as investment alternatives under the Smith Barney 401(k) Program. Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different sales
charge and CDSC schedules than, the Class A, Class B and Class C shares acquired
by other investors. Similar to those available to other investors, Class Y
shares acquired through the Smith Barney 401(k) Program are not subject to any
initial sales charge, CDSC, or service or distribution fees. 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 initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of
41
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
redemption proceeds, if the Participating Plan terminates within four years of
the date the Participating Plan first enrolled in the Smith Barney 401(k)
Program.
CLASS B SHARES. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds in the Smith Barney
Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if the Participating Plan
terminates within eight years of the date the Participating Plan first enrolled
in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith Barney
401(k) Program, it will be offered the opportunity to exchange all of its Class
B shares for Class A shares of the Fund. 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 the
exchange has occurred, a Participating Plan will not be eligible to acquire
additional Class B shares of the Fund but instead may acquire Class A shares of
the Fund. If the Participating Plan elects not to exchange all of its Class B
shares at that time, each Class B share held by the Participating Plan will have
the same conversion feature as Class B shares held by other investors. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or more funds of the Smith
Barney Mutual Funds. Class C shares acquired through the Smith Barney 401(k)
Program after November 7, 1994 will be subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the date the
Participating Plan first enrolled in the Smith Barney 401(k) Program. In any
year after the date a Participating Plan enrolled in the Smith Barney 401(k)
Program, if its total Class C holdings 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 C 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
42
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
occur on or about the last business day of the following March. Once the
exchange has occurred, a Participating Plan will not be eligible to acquire
Class C shares of the Fund but instead may acquire Class A shares of the Fund.
Class C shares not converted will continue to be subject to the distribution
fee.
CLASS Y SHARES. Class Y shares of the Fund are offered without any service or
distribution fees, sales charge or CDSC to any Participating Plan that purchases
over $5,000,000 of Class Y shares of one or more funds of the Smith Barney
Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gains
distributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the preceding year and, with respect to Class B shares, increases in the net
asset value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number of
years since those shareholders made the purchase payment from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
43
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For further
information regarding the Smith Barney 401(k) Program, investors should contact
a Smith Barney Financial Consultant.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges are made and
a sales charge differential may apply.
<TABLE>
<C> <S>
FUND NAME
---------------------------------------------------------------------------------
GROWTH FUNDS
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
GROWTH AND INCOME FUNDS
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
</TABLE>
44
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
Smith Barney World Funds -- International Balanced Portfolio
INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
MUNICIPAL BOND FUNDS
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- California Portfolio
* Smith Barney Muni Funds -- California Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
</TABLE>
45
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
MONEY MARKET FUNDS
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio.
+++ Smith Barney Municipal Money Fund, Inc.
<FN>
------------------------
*Available for exchange with Class A, Class C and Class Y shares of the Fund.
**Available for exchange with Class A, Class B and Class C shares of the Fund.
In addition, shareholders who own Class C shares of the Fund in a Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
fund.
***Available for exchange with Class A shares of the Fund.
+Available for exchange with Class B and Class C shares of the Fund.
++Available for exchange with Class A, Class C and Class Y shares of the Fund.
In addition, shareholders who own Class C shares of the Fund in a Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
fund.
+++Available for exchange with Class A and Class Y Shares of the Fund.
</TABLE>
CLASS A EXCHANGES. Class A shares of Smith Barney Mutual Funds sold without a
sales charge or with a maximum sales charge of less than the maximum charged by
other Smith Barney Mutual Funds will be subject to the appropriate "sales charge
differential" upon the exchange of such shares for Class A shares of a fund sold
with a higher sales charge. The "sales charge differential" is limited to a
percentage rate no greater than the excess of the sales charge rate applicable
to purchases of shares of the mutual fund being acquired in the exchange over
the sales charge rate(s) actually paid on the mutual fund shares relinquished in
the exchange and on any predecessor of those shares. For purposes of the
exchange privilege, shares obtained through automatic reinvestment of dividends
and capital gain distributions are treated as having paid the same sales charges
applicable to the shares on which the dividends or distributions were paid;
however, except in the case of the Smith Barney 401(k) Program, if no sales
charge was imposed upon the initial purchase of the shares, any shares obtained
through automatic reinvestment will be subject to a sales charge differential
upon exchange.
46
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
CLASS B EXCHANGES. In the event a Class B shareholder (unless such shareholder
was a Class B shareholder of the Short-Term World Income Fund on July 15, 1994)
wishes to exchange all or a portion of his or her shares in any of the funds
imposing a CDSC higher than that imposed by the Fund, the exchanged Class B
shares will be subject to the higher applicable CDSC. Upon an exchange, the new
Class B shares will be deemed to have been purchased on the same date as the
Class B shares of the Fund that have been exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that have
been exchanged.
CLASS Y EXCHANGES. Class Y shareholders of the Fund who wish to exchange all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
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. Global Capital
Management 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,
Global Capital Management will notify Smith Barney and Smith Barney may, at its
discretion, decide to limit additional purchases and/ or exchanges by the
shareholder. Upon such a determination, Smith Barney 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.
Exchanges will be processed at the net asset value next determined, plus any
applicable sales charge differential. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the shares
of the fund exchanged, no signature guarantee is
47
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
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 Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the seventh day following receipt of
proper tender, except on any days on which the NYSE is closed or as permitted
under the Investment Company Act of 1940, as amended (the "1940 Act"), in
extraordinary circumstances. The Fund anticipates that, in accordance with
regulatory changes, beginning on or about June 1, 1995, payment will be made on
the third business day after a redemption request is made. Generally, if the
redemption proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the shareholder's benefit without specific
instruction and 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 ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares
48
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
other than those held by Smith Barney as custodian may be redeemed through an
investor's Financial Consultant, Introducing Broker or dealer in the selling
group by submitting a written request for redemption to:
Smith Barney Global Bond Fund
Class A, B, C or Y (please specify)
c/o The Shareholders Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
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 TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power 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. TSSG may require
additional supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $100 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month
49
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
of the shareholder's shares subject to the CDSC.) For further information
regarding the automatic cash withdrawal plan, shareholders should contact a
Smith Barney Financial Consultant.
- --------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate 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
this 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 automatic redemption.
- --------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated in these shares over the
30-day period identified in the advertisement and is computed by dividing the
net investment income per share earned by the Class during the period by the
maximum public offering price per share on the last day of the period. This
income is "annualized" by assuming that the amount of income is generated each
month over a one-year period and is compounded semi-annually. The annualized
income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time, the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of sales
literature. These figures are computed separately for Class A, Class B, Class C
and Class Y shares of the Fund. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
50
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PERFORMANCE (CONTINUED)
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 this 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 calculates current dividend return
for each Class by annualizing the most recent monthly distribution and dividing
by the net asset value or the maximum public offering price (including sales
charge) on the last day of the period for which current dividend return is
presented. The current dividend return for each Class may vary from time to time
depending on market conditions, the composition of its investment portfolio and
operating expenses. These factors and possible differences in the methods used
in calculating current dividend return should be considered when comparing a
Class' current return to yields published for other investment companies and
other investment vehicles. 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. The Fund will include performance data for Class A, Class B, Class
C and Class Y shares in any advertisement of information including performance
data of the Fund.
- --------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and companies that furnish services to the Trust and the Fund,
including agreements with its distributor, investment adviser, administrator,
sub-administrator, custodian and transfer agent. The day-to-day operations of
the Fund are delegated to the Fund's investment
51
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
adviser, administrator and sub-administrator. The Statement of Additional
Information contains background information regarding the Trustees and executive
officers of the Trust.
INVESTMENT ADVISER--GLOBAL CAPITAL MANAGEMENT
Global Capital Management, located at 10 Piccadilly, London W1V 9LA, United
Kingdom, serves as the Fund's investment adviser, pursuant to an investment
advisory agreement dated March 22, 1994. Global Capital Management has been in
the investment counseling business since 1988 and renders investment advice to
institutional clients and investment companies with aggregate assets under
management, as of September 30, 1994, in excess of $1.11 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
Global Capital Management manages the Fund in accordance with its 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. For
investment advisory services rendered to the Fund, the Fund pays Global Capital
Management a fee at the annual rate of 0.60% of the value of the Fund's average
daily net assets. Global Capital Management has agreed to waive a portion of its
investment advisory fee until such time as the Trust's Board of Trustees and
Global Capital Management mutually agree otherwise. For the fiscal year ended
July 31, 1994, Global Capital Management was paid a fee equal to 0.49% of the
Fund's average daily net assets.
PORTFOLIO MANAGEMENT
Victor S. Filatov, International Strategist and President of Global Capital
Management, was elected by the Board of Trustees on January 20, 1994 to serve as
Vice President and Investment Officer of the Fund. Mr. Filatov is responsible
for managing the day-to-day operations of the Fund, including the making of all
investment decisions. Prior to 1993, Mr. Filatov was Business Coordinator and
head of European Fixed Income Research for J.P. Morgan Securities Inc.
A management discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1994 is
52
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
included in its Annual Report dated July 31, 1994. A copy of the Annual Report
may be obtained upon request without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR--SBMFM
SBMFM serves as the Fund's administrator and oversees all aspects of the
Fund's administration. SBMFM provides investment management and administration
services to investment companies that had aggregate assets under management, as
of September 30, 1994, in excess of $9.5 billion. For administration services
rendered to the Fund, the Fund pays SBMFM a fee at the annual rate of 0.20% of
the value of the Fund's average daily net assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors is located at One Boston Place, Boston, Massachusetts 02108,
and serves as the Fund's administrator. Boston Advisors provides advisory,
investment management, investment advisory and/or administrative services to
investment companies, which had aggregate assets under management, as of
September 30, 1994, in excess of $48.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Boston Advisors is paid a portion of the fee paid by the Fund to
SBMFM at a rate agreed upon from time to time between Boston Advisors and SBMFM.
Prior to May 4, 1994, Boston Advisors served as the Fund's administrator.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney
53
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
is paid a service fee with respect to Class A, Class B and Class C shares of the
Fund at the annual rate of 0.25% of the average daily net assets of the
respective Class. Smith Barney is also paid an annual distribution fee with
respect to Class B and Class C shares at the annual rate of 0.50% and 0.45%,
respectively, of the average daily net assets attributable to those Classes.
Class B shares that automatically convert to Class A shares eight years after
the date of original purchase, these shares will no longer be subject to
distribution fees. The fees are used by Smith Barney to pay its Financial
Consultants for servicing shareholder accounts and, in the case of Class B and
Class C shares, to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost of printing
and mailing prospectuses to potential investors; payments to and expenses of
Smith Barney Financial Consultants and other persons who provide support
services in connection with the distribution of shares; interest and/or carrying
charges; and indirect and overhead costs of Smith Barney associated with the
sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Trust's Board of
Trustees will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
54
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust is registered with the SEC as a diversified, open-end
management company. The Trust may issue an unlimited number of shares of
beneficial interest of separate series having a $.001 per share par value. The
Fund offers shares of beneficial interest currently classified into four Classes
- -- A, B, C and Y.
Each Class of Fund shares represents an identical interest in the Fund's
investment portfolio. As a result, the Classes have the same rights, privileges
and preferences, except with respect to: (a) the designation of each Class; (b)
the effect of the respective sales charges for each Class; (c) the distribution
and/or service fees borne by each Class pursuant to the Plan; (d) the expenses
allocable exclusively to each Class; (e) voting rights on matters exclusively
affecting a single Class; (f) the exchange privilege of each Class; and (g) the
conversion feature of the Class B shares. The Trust's Board of Trustees does not
anticipate that there will be any conflicts among the interests of the holders
of the different Classes. The Trustees, on an ongoing basis, will consider
whether any such conflict exists and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class of
the Fund 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 Trust vote by individual fund on all matters except (a) matters affecting
only the interest of one or more of the funds, in which case only shares of the
affected fund or funds would be entitled to vote, or (b) when the 1940 Act
requires that shares of the funds be voted in the aggregate. Similarly, shares
of the Fund will be voted generally on a Fund-wide basis except on matters
affecting the interests of one Class of shares.
Normally, there will be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. Shareholders of
record of no less than two-thirds of the outstanding shares of the Trust may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. The Trustees will call a meeting
for any purpose upon written request of holders of 10% of the Trust's
outstanding shares and the Fund will assist shareholders in calling such a
meeting as required by the 1940 Act.
55
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Trust's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves as
the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which include listings of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Trust plans to consolidate the mailing of the
Fund's 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. In addition, the Trust also plans to
consolidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (e.g., individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their account should contact a Smith Barney
Financial Consultant or TSSG.
---------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
TRUST
OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND
OR
THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
56
<PAGE>
[LOGO]
SMITH BARNEY
GLOBAL
BOND
FUND
388 Greenwich Street
New York, New York 10013
Fund 102, 193, 253
FD 0232 J4
[LOGO]
<PAGE>
P R O S P E C T U S
-------------------------------------------------------------------
S M I T H B A R N E Y
HIGH
INCOME
FUND
N O V E M B E R 7, 1 9 9 4
PROSPECTUS BEGINS ON PAGE ONE
LOGO
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- --------------------------------------------------------------------
PROSPECTUS NOVEMBER 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney High Income Fund (the "Fund") seeks to provide shareholders with
high current income by investing in a diversified portfolio of high-yielding
corporate bonds, debentures and notes.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up the Smith Barney Income Funds (the "Trust").
The Trust is an open-end management investment company commonly referred to as a
mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other investment funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Trust at
the telephone number set forth above or by contacting a Smith Barney Financial
Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
----------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
----------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
----------------------------------------------------------------
VALUATION OF SHARES 27
----------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 27
----------------------------------------------------------------
PURCHASE OF SHARES 30
----------------------------------------------------------------
EXCHANGE PRIVILEGE 41
----------------------------------------------------------------
REDEMPTION OF SHARES 45
----------------------------------------------------------------
MINIMUM ACCOUNT SIZE 47
----------------------------------------------------------------
PERFORMANCE 47
----------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 48
----------------------------------------------------------------
DISTRIBUTOR 50
----------------------------------------------------------------
ADDITIONAL INFORMATION 51
----------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE
PROSPECTUS.
SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks high current income by investing primarily in a diversified
portfolio of high-yielding corporate bonds, debentures and notes denominated in
U.S. dollars and foreign currencies. Although growth of capital is not an
investment objective of the Fund, Smith Barney Mutual Funds Management Inc.
("SBMFM") may consider potential for growth as one factor, among others, in
selecting investments for the Fund. Up to 40% of the Fund's assets may be
invested in fixed-income obligations of foreign issuers, and up to 20% of its
assets may be invested in common stock or other equity or equity-related
securities, including convertible securities, preferred stock, warrants and
rights. Securities purchased by the Fund generally will be rated in the lower
rating categories of recognized rating agencies, as low as Caa by Moody's
Investors Service, Inc. ("Moody's") or D by Standard & Poor's Corporation
("S&P"), or in unrated securities of comparable quality. See "Investment
Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. In
addition, a fifth Class, Class Z shares, which is offered pursuant to a separate
prospectus, is offered exclusively to (a) tax-exempt employee benefit and
retirement plans of Smith Barney Inc. ("Smith Barney") and its affiliates and
(b) unit investment trusts ("UITs") sponsored by Smith Barney and its
affiliates. See "Purchase of Shares" and "Redemption of Shares."
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.50% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A
3
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
shares, which when combined with current holdings of Class A shares offered with
a sales charge equal or exceed $500,000 in the aggregate, will be made at net
asset value with no sales charge, but will be subject to a contingent deferred
sales charge ("CDSC") of 1.00% on redemptions made within 12 months of purchase.
See "Prospectus Summary -- Reduced or No Initial Sales Charge."
CLASS B SHARES. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and 1.00% each year thereafter to zero. This CDSC may be waived
for certain redemptions. Class B shares are subject to an annual service fee of
0.25% and an annual distribution fee of 0.50% of the average daily net assets of
the Class. The Class B shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
CLASS B SHARES CONVERSION FEATURE. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the date
of the original purchase. Upon conversion, these shares will no longer be
subject to an annual distribution fee. In addition, a certain portion of Class B
shares that have been acquired through the reinvestment of dividends and
distributions ("Class B Dividend Shares") will be converted at that time. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Class C shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
CLASS Y SHARES. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fee.
4
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
INTENDED HOLDING PERIOD. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an investment
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or
distribution fee. The maximum purchase amount for Class A shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
REDUCED OR NO INITIAL SALES CHARGE. The initial sales charge on Class A shares
may be waived for certain eligible purchasers, and the entire purchase price
will be immediately invested in the Fund. In addition, Class A share purchases,
which when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, may be made at net asset value
with no initial sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase. The $500,000 aggregate investment
may be met by adding the purchase to the net asset value of all Class A shares
held in funds sponsored by
5
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
Smith Barney listed under "Exchange Privilege." Class A share purchases may also
be eligible for a reduced initial sales charge. See "Purchase of Shares."
Because the ongoing expenses of Class A shares may be lower than those for Class
B and Class C shares, purchasers eligible to purchase Class A shares at net
asset value or at a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program, which is generally designed to assist plan sponsors
in the creation and operation of retirement plans under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as other types
of participant directed, tax-qualified employee benefit plans (collectively,
"Participating Plans"). Class A, Class B, Class C and Class Y shares are
available as investment alternatives for Participating Plans. See "Purchase of
Shares -- Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, Smith
Barney, a broker that clears securities transactions through Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group. Direct purchases by certain retirement plans may be made through
the Fund's transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a
subsidiary of First Data Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an
6
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
account for an initial investment of $5,000,000. 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(a) of the Code, the minimum
initial investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $25. The minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes through the Systematic
Investment Plan described below is $100. There is no minimum investment
requirement for Class A for unitholders who invest distributions from a UIT
sponsored by Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $100. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND SBMFM serves as the Fund's investment adviser. SBMFM
provides investment advisory and management services to investment companies
affiliated with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of The
Travelers Inc. ("Travelers"), a diversified financial services holding company
engaged, through its subsidiaries, principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance Services and
Property & Casualty Insurance Services.
SBMFM also serves as the Fund's administrator and The Boston Company Advisors,
Inc. ("Boston Advisors") serves as the Fund's sub-administrator. Boston Advisors
is a wholly owned subsidiary of The Boston Company, Inc. ("TBC"), which in turn
is a wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). See
"Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset values next determined, plus any applicable sales charge differential.
See "Exchange Privilege."
7
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are paid
monthly and distributions of net realized capital gains are paid annually. See
"Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a PRO
RATA basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The market value of fixed-income
securities, which constitute a major part of the investments of the Fund, may
vary inversely in response to changes in prevailing interest rates. The foreign
securities in which the Fund may invest may be subject to certain risks in
addition to those inherent in domestic investments. The medium-or lower-rated
securities in which the Fund may invest, some of which have speculative
characteristics, may be subject to greater market fluctuations and greater risk
of loss of income or principal than higher-rated securities. The Fund may employ
investment techniques which involve certain other risks, including entering into
repurchase agreements, engaging in when-issued and delayed-delivery
transactions, lending portfolio securities and entering into options on futures
contracts and currencies. See "Investment Objective and Management Policies."
8
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES THE FOLLOWING EXPENSE TABLE LISTS THE COSTS AND
EXPENSES
THAT AN INVESTOR WILL INCUR EITHER DIRECTLY OR INDIRECTLY AS A SHAREHOLDER
OF
THE FUND, BASED ON THE MAXIMUM SALES CHARGE OR MAXIMUM CDSC THAT MAY BE
INCURRED
AT THE TIME OF PURCHASE OR REDEMPTION AND, UNLESS OTHERWISE NOTED, THE
FUND'S
OPERATING EXPENSES FOR ITS MOST RECENT FISCAL YEAR:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None None None
Maximum CDSC
(as a percentage of original cost or redemption
proceeds, whichever is lower) None* 4.50% 1.00% None
-------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.70% 0.70% 0.70% 0.70%
12b-1 fees** 0.25 0.75 0.70 None
Other expenses*** 0.16 0.15 0.16 0.16
-------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.11 1.60 1.56 0.86
-------------------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current holdings of Class A shares offered
with
a sales charge, equal or exceed $500,000 in the aggregate, will be made at net asset value with no
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within 12 months.
**Upon conversion of Class B shares to Class A shares, such shares will no longer be subject to a
distribution fee. Class C shares do not have a conversion feature and, therefore, are subject to an
ongoing distribution fee. As a result, long-term shareholders of Class C shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
***For Class C and Class Y shares, "Other expenses" have been estimated based on expenses incurred by
the Class A shares because Class C shares have had no shareholder activity and Class Y shares were
not available for purchase prior to November 7, 1994.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum charges
imposed on purchases or redemptions of Fund shares and investors may actually
pay lower or no charges depending on the amount purchased and, in the case of
Class B, Class C and certain Class A shares, the length of time the shares are
held and whether the shares are held through the Smith Barney 401(k) Program.
See "Purchase of Shares" and "Redemption of Shares." Smith Barney receives an
annual 12b-1 service fee of 0.25% of the value of average daily net assets of
Class A shares. Smith Barney also receives, with respect to Class B shares, an
annual 12b-1 fee of 0.75% of
9
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
the value of average daily net assets of that Class, consisting of a 0.50%
distribution fee and a 0.25% service fee. For Class C shares, Smith Barney
receives an annual 12b-1 fee of 0.70% of the value of average daily net assets
of this Class, consisting of a 0.45% distribution fee and a 0.25% service fee.
"Other expenses" in the above table include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration fees.
EXAMPLE THE FOLLOWING EXAMPLE IS INTENDED TO ASSIST AN INVESTOR IN
UNDERSTANDING
THE VARIOUS COSTS THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR
INDIRECTLY.
THE EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT THE
LEVELS SET
FORTH IN THE TABLE ABOVE. SEE "PURCHASE OF SHARES," "REDEMPTION OF SHARES"
AND
"MANAGEMENT OF THE TRUST AND THE FUND."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each time
period:
Class A $56 $79 $103 $174
Class B 61 80 97 177
Class C 26 49 85 186
Class Y 9 27 48 106
An investor would pay the following
expenses on the same investment,
assuming the same annual return and no
redemption:
Class A 56 79 103 174
Class B 16 50 87 177
Class C 16 49 85 186
Class Y 9 27 48 106
-----------------------------------------------------------------------------------
<FN>
*Ten-year figures assume conversion of Class B shares to Class A shares at the end
of the eighth year following the date of purchase.
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
EXCEPT WHERE OTHERWISE NOTED, THE FOLLOWING INFORMATION HAS BEEN AUDITED
BY
COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS, WHOSE REPORT THEREON
APPEARS
IN THE FUND'S ANNUAL REPORT DATED JULY 31, 1994. THE INFORMATION SET OUT
BELOW
SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED
NOTES
THAT ALSO APPEAR IN THE FUND'S ANNUAL REPORT, WHICH IS INCORPORATED BY
REFERENCE
INTO THE STATEMENT OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94 7/31/93*+++
<S> <C> <C>
Net Asset Value, beginning of period $ 12.01 $ 11.03
-------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 1.08 0.75
Net realized and unrealized gain/(loss) on investments (0.81) 1.09
-------------------------------------------------------------------------------------
Total from investment operations 0.27 1.84
Less distributions:
Distributions from net investment income (1.06) (0.82)
Distributions in excess of net investment income (0.06) (0.04)
-------------------------------------------------------------------------------------
Total distributions (1.12) (0.86)
-------------------------------------------------------------------------------------
Net Asset Value, end of period $ 11.16 $ 12.01
-------------------------------------------------------------------------------------
Total return++ 2.11% 17.29%
-------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $223,678 $242,371
Ratio of operating expenses to average net assets 1.11% 1.16%+
Ratio of net investment income to average net assets 9.27% 9.52%+
Portfolio turnover rate 98% 95%
-------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class A shares on November 6, 1992.
+Annualized.
++Total return represents aggregate total return for the period indicated and does not
reflect any applicable sales charges.
+++Per share amounts have been calculated using the monthly average share method, which
more appropriately presents the per share data for the period since the use of the
undistributed method does not accord with results of operations.
</TABLE>
11
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED
7/31/94 7/31/93+++ 7/31/92
<S> <C> <C> <C>
Net Asset Value, beginning
of year $ 12.01 $ 11.15 $ 10.05
- --------------------------------------------------------------------
Income from investment
operations:
Net investment income 1.02 1.08 1.11
Net realized and
unrealized gain/(loss) on
investments (0.81) 0.88 1.16
- --------------------------------------------------------------------
Total from investment
operations 0.21 1.96 2.27
Less distributions:
Distributions from net
investment income (1.00) (1.05) (1.11)
Distributions in excess of
net investment income (0.06) (0.05) --
Distributions from net
realized capital gains -- -- --
Distributions from capital -- -- (0.06)
- --------------------------------------------------------------------
Total distributions (1.06) (1.10) (1.17)
- --------------------------------------------------------------------
Net Asset Value, end of
year $ 11.16 $ 12.01 $ 11.15
- --------------------------------------------------------------------
Total return++ 1.60% 18.55% 23.86%
- --------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of year
(in 000's) $509,608 $448,639 $304,035
Ratios of operating
expenses to average net
assets 1.60% 1.66% 1.65%#
Ratio of net investment
income to average net
assets 8.77% 9.02% 10.52%
Portfolio turnover rate 98% 95% 137%
- --------------------------------------------------------------------
<FN>
*The Fund commenced operations on September 2, 1986. On November 6,
1992, the Fund commenced selling Class A shares. Those shares in
existence prior to November 6, 1992 were designated as Class B
shares.
**Annualized expense ratio before waiver of fees by investment
adviser and sub-investment adviser and administrator was 1.77%.
+Annualized.
++Total return represents aggregate total return for the period
indicated and does not reflect any applicable sales charge.
+++Per share amounts have been calculated using the monthly average
share method, which more appropriately presents the per share
data for the period since the use of the undistributed method
does not accord with results of operations.
#The annualized operating expense ratio excludes interest expense.
The annualized ratio including interest expense was 1.66% for the
year ended July 31, 1992.
</TABLE>
PRIOR TO NOVEMBER 7, 1994, THE FUND HAD NO SHAREHOLDER ACTIVITY FOR CLASS C
SHARES (PREVIOUSLY DESIGNATED AS CLASS D SHARES) AND DID NOT OFFER CLASS Y
SHARES. ACCORDINGLY, NO COMPARABLE FINANCIAL INFORMATION IS AVAILABLE AT
THIS
TIME FOR THESE CLASSES.
12
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
7/31/91 7/31/90 7/31/89 7/31/88 7/31/87*
<S> <C> <C> <C> <C>
$ 10.59 $ 13.36 $ 14.01 $ 14.26 $14.00
--------------------------------------------------------------------
1.27 1.53 1.61 1.53 1.03
(0.52) (2.68) (0.73) (0.20) 0.29
--------------------------------------------------------------------
0.75 (1.15) 0.88 1.33 1.32
(1.27) (1.61) (1.53) (1.54) (1.03)
-- -- -- -- --
-- -- -- (0.04) (0.03)
(0.02) (0.01) -- -- --
--------------------------------------------------------------------
(1.29) (1.62) (1.53) (1.58) (1.06)
--------------------------------------------------------------------
$ 10.05 $ 10.59 $ 13.36 $ 14.01 $14.26
--------------------------------------------------------------------
8.82% (8.66)% 6.60% 10.06% 9.55%
--------------------------------------------------------------------
$238,588 $323,139 $609,862 $434,272 $221,683
1.75% 1.68% 1.63% 1.64% 1.74%+**
13.30% 12.93% 11.93% 11.12% 9.49%+
112% 43% 74% 5% 19%
--------------------------------------------------------------------
</TABLE>
13
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is high current income. The Fund's investment
objective may be changed only with the approval of the holders of a majority of
the Fund's outstanding shares. There can be no assurance that the Fund will
achieve its objective. Although growth of capital is not an investment objective
of the Fund, SBMFM may consider potential for growth as one factor, among
others, in selecting investments for the Fund. The Fund will seek high current
income by investing, under normal circumstances, at least 65% of its assets in
high-yielding corporate bonds, debentures and notes denominated in U.S. dollars
or foreign currencies. Up to 40% of the Fund's assets may be invested in
fixed-income obligations of foreign issuers, and up to 20% of its assets may be
invested in common stock or other equity or equity-related securities, including
convertible securities, preferred stock, warrants and rights. Securities
purchased by the Fund generally will be rated in the lower rating categories of
recognized rating agencies, as low as Caa by Moody's or D by S&P, or in unrated
securities that SBMFM deems of comparable quality. However, the Fund will not
purchase securities rated lower than B by both Moody's and S&P unless,
immediately after such purchase, no more than 10% of its total assets are
invested in such securities. The Fund may hold securities with higher ratings
when the yield differential between low-rated and higher-rated securities
narrows and the risk of loss may be reduced substantially with only a relatively
small reduction in yield. The Fund also may invest in higher-rated securities
when SBMFM believes that a more defensive investment strategy is appropriate in
light of market or economic conditions. The Fund also may lend its portfolio
securities, purchase or sell securities on a when-issued or delayed-delivery
basis and write covered call options on securities. In order to mitigate the
effects of uncertainty in future exchange rates, the Fund may engage in currency
exchange transactions and purchase options on foreign currencies. The Fund also
may hedge against the effects of changes in the value of its investments by
purchasing put and call options on interest rate futures contracts. Special
considerations associated with the Fund's investments are described below.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed information
concerning these strategies and their related risks is contained in the
Statement of Additional Information.
14
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
COVERED OPTION WRITING. The Fund may write call options on securities. The
Fund realizes fees (referred to as "premiums") for granting the rights evidenced
by the options. A call option embodies the right of its purchaser to compel the
writer of the option to sell to the option holder an underlying security at a
specified price at any time during the option period. Thus, the purchaser of a
call option written by the Fund 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 call option written by the Fund, 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 will write only covered options. Accordingly, whenever the Fund
writes a call option, it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated as the
writer of the option.
The Fund may engage in a closing purchase transaction to realize a profit or
to unfreeze an underlying security (thereby permitting its sale or the writing
of a new option on the security prior to the outstanding option's expiration).
To effect a closing purchase transaction, the Fund would purchase, prior to the
holder's exercise of an option the Fund has written, an option of the same
series as that on which the Fund desires to terminate its obligation. The
obligation of the Fund under an option it has written would be terminated by a
closing purchase transaction, but the Fund would not be deemed to own an option
as the result of the transaction. There can be no assurance the Fund will be
able to effect closing purchase transactions at a time when it wishes to do so.
To facilitate closing purchase transactions, however, the Fund ordinarily will
write options only if a secondary market for the options exists on a domestic
securities exchange or in the over-the-counter market.
CONVERTIBLE SECURITIES AND SYNTHETIC CONVERTIBLE SECURITIES. Convertible
securities are fixed-income securities that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities
generally, the market value of convertible securities tends to decline as
15
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, also will react to variations in
the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. However,
there can be no assurance of capital appreciation because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but non-
convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred
16
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
stocks with warrants or stock call options. The options that will form elements
of synthetic convertible securities will be listed on a securities exchange or
on the National Association of Securities Dealers Automated Quotation Systems.
The two components of a synthetic convertible security, which will be issued
with respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risk normally involved in holding the
securities comprising the synthetic convertible security.
ADDITIONAL INVESTMENTS
MONEY MARKET INSTRUMENTS. When SBMFM believes that market conditions warrant,
the Fund may adopt a temporary defensive posture and may invest in short-term
instruments without limitation. Short-term instruments in which the Fund may
invest include: U.S. government securities; certain bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loan associations and similar institutions);
commercial paper rated no lower than A-2 by S&P or Prime-2 by Moody's or the
equivalent from another major rating service or, if unrated, of an issuer having
an outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements as described below.
UNITED STATES GOVERNMENT SECURITIES. U.S. government securities are
obligations of, or guaranteed by, the United States government, its agencies or
instrumentalities. The U.S. government securities in which the Fund may invest
include: direct obligations of the United States Treasury (such as Treasury
Bills, Treasury Notes and Treasury Bonds) and obligations issued by U.S.
government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association ("GNMA") certificates); 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 securities that are
supported by the credit of the instrumentality (such as Federal National
Mortgage Association ("FNMA") and Federal Home Loan
17
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Mortgage Corporation ("FHLMC") bonds). Treasury Bills have maturities of less
than 1 year, Treasury Notes have maturities of 1 to 10 years and Treasury Bonds
generally have maturities of greater than 10 years at the date of issuance.
Certain U.S. government securities, such as those issued or guaranteed by GNMA,
FNMA and FHLMC, are mortgage-related securities. U.S. government securities
generally do not involve the credit risks associated with other types of
interest-bearing securities, although, as a result, the yields available from
U.S. government securities are generally lower than the yields available from
interest-bearing corporate securities.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the Fund 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.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including interest. Repurchase agreements could involve
certain risks in the event of default or insolvency of the other party,
including possible delays in 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.
SBMFM or Boston Advisors, acting under the supervision of the Trust's Board of
Trustees, 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.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. When deemed advisable by
SBMFM, the Fund may enter into futures contracts or related options that are
traded on a domestic exchange or board of trade. Such investments, if any, by
the Fund will be made solely for the purpose of hedging against the effects of
changes in the value of the portfolio securities
18
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
due to anticipated changes in interest rates, currency values and market
conditions and when the transactions are economically appropriate to the
reduction of risks inherent in the management of the Fund. The Fund may not
enter into futures and options contracts for which aggregate initial margin
deposits and premium paid for unexpired options to establish such positions that
are not bona fide hedging positions (as defined by the Commodity Futures Trading
Commission), exceed 5% of the fair market value of the Fund's assets after
taking into account unrealized profits and unrealized losses on futures
contracts into which it has entered. With respect to each long position in a
futures contract or option thereon, the underlying commodity value of such
contract always will be covered by cash and cash equivalents set aside plus
accrued profits held in a segregated account.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand. Positions in futures contracts and options on futures
contracts may be closed out only on the exchange or board of trade on which they
were entered into, and there can be no assurance that an active market will
exist for a particular contract or option at any particular time. Losses
incurred in hedging transactions and the costs of these transactions will affect
the Fund's performance.
FOREIGN SECURITIES. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Fund may
be adversely affected by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with respect to
certain foreign
19
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
countries, there is the possibility of expropriation, nationalization,
confiscatory taxation and limitations on the use or removal of funds or other
assets of the Fund, including the withholding of dividends. Foreign securities
may be subject to foreign government taxes that could reduce the yield on such
securities. Because the Fund will invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may adversely affect the value of portfolio securities and the
appreciation or depreciation of investments. Investments in foreign securities
also may result in higher expenses due to the cost of converting foreign
currency to U.S. dollars, the payment of fixed brokerage commissions on foreign
exchanges, which generally are higher than commissions on domestic exchanges,
and the expense of maintaining securities with foreign custodians, and the
imposition of transfer taxes or transaction charges associated with foreign
exchanges.
Corporate securities in which the Fund may invest include corporate
fixed-income securities of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
and preferred stock.
Certain of the corporate fixed-income securities in which the Fund may invest
may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting the holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
CURRENCY EXCHANGE TRANSACTIONS AND OPTIONS ON FOREIGN CURRENCIES. In order
to
protect against uncertainty in the level of future exchange rates, the Fund may
engage in currency exchange transactions and purchase exchange-traded put and
call options on foreign currencies. The Fund will conduct its currency exchange
transactions either on a spot (i.e., cash) basis at the rate prevailing in the
currency exchange market or through entering into forward contracts to purchase
or sell currencies. The Fund's dealings in forward currency exchange and options
on foreign currencies are limited to hedging involving either specific
transactions or portfolio positions.
20
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of the currency
increase.
The Fund may purchase put options on a foreign currency in which securities
held by the Fund are denominated to protect against a decline in the value of
the currency in relation to the currency in which the exercise price is
denominated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the
purchaser, in return for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying currency at a specified price during
the term of the option. Although the purchase of an option on a foreign currency
may constitute an effective hedge by the Fund against fluctuations in the
exchange rates, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies purchased by the Fund may be traded on
domestic and foreign exchanges or traded over-the-counter.
Although the foreign currency market may not necessarily be more volatile than
the market in other commodities, the foreign currency market offers less
protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Because a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits or force the Fund
to cover its commitments for purchase or resale, if any, at the current market
price.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
any portfolio securities on a when-issued or delayed-delivery
21
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
basis. The Fund will enter into a when-issued transaction for the purpose of
acquiring portfolio securities and not for the purpose of leverage. In such
transactions, delivery of the securities occurs beyond the normal settlement
periods, but no payment or delivery is made by the Fund prior to the actual
delivery or payment by the other party to the transaction. Due to fluctuations
in the value of securities purchased or sold on a when-issued or
delayed-delivery basis, the yields obtained on such securities may be higher or
lower than the yields available in the market on the dates when the investments
are actually delivered to the buyers. The Fund will establish a segregated
account consisting of cash, U.S. government securities or other high grade debt
obligations in an amount equal to the amount of its when-issued and
delayed-delivery commitments. Placing securities rather than cash in the
segregated account may have a leveraging effect on the Fund's net assets. The
Fund will not accrue income with respect to a when-issued security prior to its
stated delivery date.
LENDING OF PORTFOLIO SECURITIES. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets taken at value. Loans
of portfolio securities will be collateralized by cash, letters of credit or
U.S. government securities that are maintained at all times in an amount at
least equal to the current market value of the loaned securities.
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when SBMFM believes it desirable to
do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund desire to sell any of these securities when a ready buyer
is not available at a price that the Fund deems representative of its value, the
value of the Fund's net assets could be adversely affected.
SECURITIES OF DEVELOPING COUNTRIES. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile
22
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
than the markets of the more mature economies of developed countries; however,
such markets often have provided higher rates of return to investors.
CERTAIN INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) time deposits maturing from two business days through seven
calendar days, and (c) to the extent that a liquid secondary market does not
exist for the instruments, futures contracts and options thereon.
Notwithstanding the foregoing, the Fund shall not invest more than 10% of its
net assets in securities (excluding those subject to Rule 144A under the
Securities Act of 1933, as amended) that are restricted. In addition, the Fund
may invest up to 5% of its assets in the securities of issuers which have been
in continuous operation for less than three years. The Fund also may borrow from
banks for temporary or emergency purposes, but not for investment purposes, in
an amount up to 10% of its total assets, and may pledge its assets to the same
extent in connection with such borrowings. Whenever these borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not make any additional
investments. Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Trust's Board of Trustees. A complete list of investment
restrictions that identifies additional restrictions that cannot be changed
without the approval of the majority of the Fund's outstanding shares is
contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
OPTIONS. The Fund may enter into options transactions primarily as hedges to
reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset by a loss on the hedge position. The Fund bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedge. The Fund will
23
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
engage in hedging transactions only when deemed advisable by SBMFM. Successful
use by the Fund of options will depend on SBMFM's ability to correctly predict
movements in the direction of the stock underlying the option used as a hedge.
Losses incurred in hedging transactions and the costs of these transactions will
affect the Fund's performance.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase options only if there appears to be a liquid secondary
market for the options purchased or sold, for some options no such secondary
market may exist or the market may cease to exist.
MEDIUM-, LOW- AND UNRATED SECURITIES. The Fund may invest up to 10% of its
assets in medium- or low-rated securities and unrated securities of comparable
quality. Generally, these securities offer a higher return potential than
higher-rated securities but involve greater volatility of price and risk of loss
of income and principal. Generally, these securities offer a higher current
yield than the yield offered by higher-rated securities, but involve greater
volatility of price and risk of loss of income and principal, including the
probability of default or bankruptcy of the issuers of such securities. Medium-
and low-rated and comparable unrated securities will likely have large
uncertainties or major risk exposures to adverse conditions and are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held by the Fund, with a commensurate effect on the
value of the Fund's shares.
The markets in which medium- and low-rated or comparable unrated securities
are traded generally are more limited than those in which higher-rated
securities are traded. The existence of limited markets for these securities may
restrict the availability of securities for the Fund to purchase and also may
have the effect of limiting the ability of the Fund to (a) obtain accurate
market quotations for purposes of valuing securities and calculating net asset
value and (b) sell securities at their fair value either to meet redemption
requests or to respond to changes in the economy or the financial markets. The
market for medium- and low-rated and comparable unrated securities has not fully
weathered a major economic recession. Any
24
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
such economic downturn could adversely affect the value of such securities and
the ability of the issuers of these securities to repay principal and pay
interest thereon.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium- and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional expenses
to the extent that it is required to seek recovery upon a default in the payment
of principal or interest on its portfolio holdings.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities which are rated B generally lack characteristics of a desirable
investment and assurance of interest and principal payments over any long period
of time may be small. Securities which are rated Caa or CCC or below are of poor
standing. Those issues may be in default or present elements of danger with
respect to principal or interest. Securities rated C by Moody's and D by S&P are
in the lowest rating class and indicate that payments are in default or that a
bankruptcy petition has been filed with
25
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
respect to the issuer or that the issuer is regarded as having extremely poor
prospects. See the Appendix in the Trust's Statement of Additional Information
on bond ratings by Moody's and S&P.
In light of these risks, SBMFM, in evaluating the creditworthiness of an
issue, whether rated or unrated, will take various factors into consideration,
which may include, as applicable, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
The Fund's holdings in fixed-income securities (as rated by Moody's) for the
fiscal year ended July 31, 1994 were composed as follows: 0.74% rated Baa; 16.9%
rated Ba; 65.19% rated B; 2.98% rated Caa; and 3.8% in non-rated securities. The
percentages were calculated on a dollar weighted average basis by determining
monthly the percentage of the Fund's net assets invested in each rating category
and do not necessarily indicate what the composition of the Fund's holdings will
be in subsequent years.
SECURITIES OF UNSEASONED ISSUERS. Securities in which the Fund may invest may
have limited marketability and, therefore, may be subject to wide fluctuations
in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an
established market share.
PORTFOLIO TRANSACTIONS
All orders for transactions in securities and options on behalf of the Fund
are placed by SBMFM with brokers and dealers (including Smith Barney) that SBMFM
selects. The Fund may utilize Smith Barney or a Smith Barney-affiliated broker
in connection with a purchase or sale of securities when SBMFM believes that the
broker's charge for the transactions does not exceed usual and customary levels.
The same standard applies to the use of Smith Barney as a commodities broker in
connection with entering into options and futures contracts.
26
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- ---------------------------------------------------------------------------
VALUATION OF SHARES
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. Net asset value is calculated separately for Class A,
B, C and Y shares.
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 Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Trust's Board of Trustees or delegates. A security
that is traded primarily on an exchange is valued at the last sale price of that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the last
sale price, the last offer price. Further information regarding the Fund's
valuation policies is contained in the Statement of Additional Information.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders.
27
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If a shareholder does not otherwise instruct, dividends and distributions will
be reinvested automatically in additional shares of the same Class at net asset
value, subject to no sales charge or CDSC. Dividends from net investment income,
if any, of the Fund will be declared monthly and paid on the last day of the
Smith Barney statement month. The Fund's final distribution for each calendar
year will include any remaining net investment income and net realized long-and
short-term capital gains realized during the year and deemed undistributed
during the year for Federal income tax purposes. In order to avoid the
application of a 4% nondeductible excise tax measured with respect to certain
undistributed amounts of ordinary income and capital gains, the Fund may make
any additional distributions as may be necessary to avoid the application of
this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
The per share dividends on Class B and Class C shares of the Fund may be lower
than the per share dividends on Class A and Y shares principally as a result of
the distribution fee applicable with respect to Class B and Class C 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 C and Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital
28
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
gains earned by the Fund will be determined without regard to the earnings of
the other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Code. To meet
those requirements, the Fund may need to restrict the degree to which it engages
in short-term trading and transactions in options. If the Fund qualifies as a
regulated investment company and meets certain distribution requirements, the
Fund will not be subject to Federal income tax on its net investment income and
net capital gains that it distributes to its shareholders.
Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Furthermore, as a general rule, distributions of long-term
capital gain will be taxable to shareholders as long-term capital gain, whether
paid in cash or reinvested in additional shares, and regardless of the length of
time that the investor has held his or her shares of the Fund.
Distributions of capital gains or dividends received from foreign corporations
will not qualify for the Federal dividends-received deduction for corporate
shareholders (the "Corporate Deduction"). The Fund anticipates that most of its
dividends will not qualify for the Corporate Deduction. Each shareholder will
receive a statement annually from the Trust, which will set forth separately the
aggregate dollar amount of dividends and capital gains distributed to the
shareholder by the Fund with respect to the prior calendar year.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders are urged to consult their tax advisors regarding the application
of Federal, state and local tax laws to their specific situation before
investing in the Fund.
29
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- --------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL The Fund offers five Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or a CDSC
and are available only to investors investing a minimum of $5,000,000. Class Z
shares are offered without a sales charge, CDSC, or service or distribution fee,
exclusively to: (a) tax-exempt employee benefit and retirement plans of Smith
Barney and its affiliates and (b) certain UITs sponsored by Smith Barney and its
affiliates. Investors meeting either of these criteria who are interested in
acquiring Class Z shares should contact a Smith Barney Financial Consultant for
a Class Z Prospectus. See "Prospectus Summary -- Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, with an Introducing Broker or with an investment dealer in
the selling group, except for investors purchasing shares of the Fund through a
qualified retirement plan who may do so directly through TSSG. When purchasing
shares of the Fund, investors must specify whether the purchase is for Class A,
Class B, Class C or Class Y shares. No maintenance fee will be charged by the
Fund in connection with a brokerage account through which an investor purchases
or holds shares.
Investors in Class A, Class B and Class C shares may open an account 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 $5,000,000. 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(a) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $100. There are no minimum
investment requirements for Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, unitholders who invest distributions from
a UIT sponsored by Smith Barney and Trustees of the Trust and their spouses and
children. The Fund reserves the right to waive or change
30
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
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 the Trust's transfer agent, TSSG. Share certificates
are issued only upon a shareholder's written request to TSSG.
Purchase orders received by Smith Barney 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. Orders received by
dealers or Introducing Brokers 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 Smith
Barney prior to Smith Barney's close of business (the "trade date"). Currently,
payment for Fund shares is due on the fifth business day (the "settlement date")
after the trade date. The Fund anticipates that, in accordance with regulatory
changes, beginning on or about June 1, 1995, the settlement date will be the
third business day after the trade date.
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, Smith Barney or TSSG is authorized through
preauthorized transfers of $100 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide 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 Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's 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 Smith Barney Financial Consultant.
31
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are as
follows:
<TABLE>
<CAPTION>
SALES DEALERS
CHARGE AS REALLOWANCE
% OF AS % OF
SALES CHARGE AS % AMOUNT OFFERING
AMOUNT OF INVESTMENT OF OFFERING PRICE INVESTED PRICE
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
Less than $25,000 4.50% 4.71% 4.05%
$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 * * *
- -------------------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current holdings of Class A shares
offered with a sales charge equal or exceed $500,000 in the aggregate, will be made at net
asset value without any initial sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase. The CDSC on Class A shares is payable to
Smith Barney, which compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same circumstances in
which the CDSC applicable to Class B and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and "Waivers of CDSC."
</TABLE>
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 Securities Act of
1933, as amended.
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, his or her spouse and children, or a trustee or other fiduciary of a
single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares held in funds sponsored by Smith Barney that are offered with
a sales charge listed under "Exchange Privilege."
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 of Class A shares to Trustees
of the Trust and employees of Travelers and its subsidiaries, or the
32
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
spouses and children of such persons (including the surviving spouse of a
deceased Trustee or employee, and retired Trustees or employees); (b) offers of
Class A shares to any other investment company in connection with 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
Smith Barney Financial Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment with 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) shareholders who have
redeemed Class A shares in the Fund (or Class A shares of another fund of the
Smith Barney Mutual Funds that are offered with a sales charge equal to or
greater than the maximum sales charge of the Fund) and who wish to reinvest
their redemption proceeds in the Fund, provided the reinvestment is made within
60 calendar days of the redemption; (e) accounts managed by registered
investment advisory subsidiaries of Travelers; and (f) investments of
distributions from a UIT sponsored by Smith Barney. 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 funds sponsored by Smith Barney which are offered with
a sales charge 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.
33
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer-or partnership-sanctioned plan meeting
certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
34
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
A Letter of Intent for amounts 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 that 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 purchases of all Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds offered
with a sales charge over a 13 month period based on the total amount of intended
purchases plus the value of all Class A shares previously purchased and still
owned. An alternative is to compute the 13 month period starting up to 90 days
before the date of execution of a Letter of Intent. 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. New Letters of Intent will be accepted beginning
January 1, 1995. Please contact a Smith Barney Financial Consultant or TSSG to
obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares which when combined with Class A shares offered
with a sales charge currently held by an investor equal or exceed $500,000 in
the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC 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
35
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
five years after their purchase; or (d) with respect to Class C shares and Class
A shares that are CDSC Shares, shares redeemed more than 12 months after their
purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC 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 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
purchases by Participating Plans, as described below. See "Purchase of Shares --
Smith Barney 401(k) Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C>
- ----------------------------------------------------------------------------------
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- ----------------------------------------------------------------------------------
</TABLE>
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 also will be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder 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. Shareholders who held Class B shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World Income Fund") on
July 15, 1994 and who subsequently exchange those shares for Class B shares of
the Fund will be offered the opportunity to exchange all such Class B shares for
Class A shares of the Fund four
36
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
years after the date on which those shares were deemed to have been purchased.
Holders of such Class B shares will be notified of the pending exchange in
writing approximately 30 days before the fourth anniversary of the purchase date
and, unless the exchange has been rejected in writing, the exchange will occur
on or about the fourth anniversary date. See "Prospectus Summary -- Alternative
Purchase Arrangements -- Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that 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 CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 additional
shares 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 CDSC 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 CDSC
The CDSC 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 below) (provided, however, that 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 that were established prior to November 7, 1994);
(c) redemptions of shares within 12
37
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
months following the death or disability of the shareholder; (d) redemption of
shares made in connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary redemptions; and (f)
redemptions of shares in connection with 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 funds of the 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 CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by TSSG in the case of
all other shareholders) of the shareholder's status or holdings, as the case may
be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. To the extent
applicable, the same terms and conditions are offered to all Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class Y
shares as investment alternatives under the Smith Barney 401(k) Program. Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different sales
charge and CDSC schedules than, the Class A, Class B and Class C shares acquired
by other investors. Similar to those available to other investors, Class Y
shares acquired through the Smith Barney 401(k) Program are not subject to any
initial sales charge, CDSC or service or distribution fee. 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 initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of
38
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
redemption proceeds, if the Participating Plan terminates within four years of
the date the Participating Plan first enrolled in the Smith Barney 401(k)
Program.
CLASS B SHARES. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if the Participating Plan
terminates within eight years of the date the Participating Plan first enrolled
in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith Barney
401(k) Program, it will be offered the opportunity to exchange all of its Class
B shares for Class A shares of the Fund. 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 the
exchange has occurred, a Participating Plan will not be eligible to acquire
additional Class B shares of the Fund but instead may acquire Class A shares of
the Fund. If the Participating Plan elects not to exchange all of its Class B
shares at that time each Class B share held by the Participating Plan will have
the same conversion feature as Class B shares held by other investors. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or more funds of the Smith
Barney Mutual Funds. Class C shares acquired through the Smith Barney 401(k)
Program after November 7, 1994 are subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the date the
Participating Plan first enrolled in the Smith Barney 401(k) Program. In any
year after the date a Participating Plan enrolled in the Smith Barney 401(k)
Program, if its total Class C holdings 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 C 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
39
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
occur on or about the last business day of the following March. Once the
exchange has occurred, a Participating Plan will not be eligible to acquire
Class C shares of the Fund but instead may acquire Class A shares of the Fund.
Class C shares not converted will continue to be subject to the distribution
fee.
CLASS Y SHARES. Class Y shares of the Fund are offered without any service or
distribution fee, sales charge or CDSC to any Participating Plan that purchases
$5,000,000 or more of Class Y shares of one or more funds of the Smith Barney
Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gain
distributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the preceding year and, with respect to Class B shares, increases in the net
asset value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number of
years since those shareholders made the purchase payment from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
40
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For further
information regarding the Smith Barney 401(k) Program, investors should contact
a Smith Barney Financial Consultant.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges are made, and
a sales charge differential may apply.
<TABLE>
<C> <S>
FUND NAME
---------------------------------------------------------------------------------
GROWTH FUNDS
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
GROWTH AND INCOME FUNDS
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Smith Barney World Funds, Inc. -- International Balanced Portfolio
</TABLE>
41
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney Investment Grade Bond Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
MUNICIPAL BOND FUNDS
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds -- California Limited Term Portfolio
Smith Barney Muni Funds -- California Portfolio
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
</TABLE>
42
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
MONEY MARKET FUNDS
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
<FN>
------------------------
*Available for exchange with Class A, Class C and Class Y shares of the Fund.
**Available for exchange with Class A, Class B and Class Y shares of the Fund.
In addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class C shares of
this fund.
***Available for exchange with Class A shares of the Fund.
+Available for exchange with Class B and Class C shares of the Fund.
++Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
fund.
+++Available for exchange with Class A and Class Y shares of the Fund.
</TABLE>
CLASS A EXCHANGES. Class A shares of Smith Barney Mutual Funds sold without a
sales charge or with a maximum sales charge of less than the maximum charged by
other Smith Barney Mutual Funds will be subject to the appropriate "sales charge
differential" upon the exchange of such shares for Class A shares of a fund sold
with a higher sales charge. The "sales charge differential" is limited to a
percentage rate no greater than the excess of the sales charge rate applicable
to purchases of shares of the mutual fund being acquired in the exchange over
the sales charge rate(s) actually paid on the mutual fund shares relinquished in
the exchange and on any predecessor of those shares. For purposes of the
exchange privilege, shares obtained through automatic reinvestment of dividends
and capital gain distributions are treated as having paid the same sales charges
applicable to the shares on which the dividends or distributions were paid;
however, except in the case of the Smith Barney 401(k) Program, if no sales
charge was imposed upon the initial purchase of the shares, any shares obtained
through automatic reinvestment will be subject to a sales charge differential
upon exchange.
CLASS B EXCHANGES. In the event a Class B shareholder (unless such shareholder
was a Class B shareholder of the Short-Term World Income Fund on July 15, 1994)
wishes to exchange all or a portion of his or her shares in any of the funds
imposing a higher CDSC than that imposed by
43
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
the Fund, the exchanged Class B shares will be subject to the higher applicable
CDSC. Upon an exchange, the new Class B shares will be deemed to have been
purchased on the same date as the Class B shares of the Fund that have been
exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that have
been exchanged.
CLASS Y EXCHANGES. Class Y shareholders of the Fund who wish to exchange all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
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. SBMFM 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, SBMFM will notify
Smith Barney and Smith Barney may, at its discretion, decide to limit additional
purchases and/or exchanges by a shareholder. Upon such a determination, Smith
Barney 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.
Exchanges will be processed at the net asset value next determined, plus any
applicable sales charge differential. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the shares
of the fund exchanged, no signature guarantee is required. A capital gain or
loss for tax purposes will be realized upon the exchange, depending upon the
cost or other basis of shares redeemed. Before
44
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
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 Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the seventh 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. The Fund anticipates that, in
accordance with regulatory changes, beginning on or about June 1, 1995, payment
will be made on the third business day after receipt of proper tender.
Generally, if the redemption proceeds are remitted to a Smith Barney brokerage
account, these funds will not be invested for the shareholder's benefit without
specific instruction and 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 ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares
45
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
other than those held by Smith Barney as custodian may be redeemed through an
investor's Financial Consultant, Introducing Broker or dealer in the selling
group or by submitting a written request for redemption to:
Smith Barney High Income Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
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 TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power 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. TSSG may require
additional supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $100 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month
46
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
of the shareholder's shares subject to the CDSC.) For further information
regarding the automatic cash withdrawal plan, shareholders should contact a
Smith Barney Financial Consultant.
- --------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate 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
this 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 automatic redemption.
- --------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum public offering price per share on the last day
of the period. This income is "annualized" by assuming the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of sales
literature. These figures are computed separately for Class A, Class B, Class C
and Class Y shares of the Fund. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
47
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
PERFORMANCE (CONTINUED)
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 this 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 calculates current dividend return
for each Class by annualizing the most recent monthly distribution and dividing
by the net asset value or the maximum public offering price (including sales
charge) on the last day of the period for which current dividend return is
presented. The current dividend return for each Class may vary from time to time
depending on market conditions, the composition of its investment portfolio and
operating expenses. These factors and possible differences in the methods used
in calculating current dividend return should be considered when comparing a
Class' current return to yields published for other investment companies and
other investment vehicles. 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. The Fund will include performance data for Class A, Class B, Class
C and Class Y shares in any advertisement or information including performance
data of the Fund.
- --------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser and
administrator, sub-administrator, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to the
48
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Fund's investment adviser, administrator and sub-administrator. The Statement of
Additional Information contains background information regarding each Trustee
and executive officer of the Trust.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the advisory agreement,
effective November 7, 1994, from its affiliate, Mutual Management Corp. (Mutual
Management Corp. and SBMFM are both wholly owned subsidiaries of Holdings).
Investment advisory services continue to be provided to the Fund by the same
portfolio managers who had provided services under the agreement with Mutual
Management Corp. SBMFM (through its predecessor entities) has been in the
investment counseling business since 1934 and is a registered investment
adviser. SBMFM renders investment advice to investment companies that had
aggregate assets under management as of September 30, 1994 in excess of $52.4
billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's 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. Under an
investment advisory agreement, the Fund pays SBMFM a monthly fee at the annual
rate of 0.50% of the value of the Fund's average daily net assets. For the
fiscal year ended July 31, 1994, the Fund paid investment advisory fees to
Mutual Management Corp. in an amount equal to 0.50% of the value of its average
daily net assets.
PORTFOLIO MANAGEMENT
John C. Bianchi, an Investment Officer of SBMFM, has served as Investment
Officer of the Fund since 1988 and is responsible for managing its day-to-day
operations, including the making of investment decisions.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended July 31, 1994 is included in the
Annual Report dated July 31, 1994. A copy of the Annual
49
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Report may be obtained upon request without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. Pursuant to an administration agreement with the Fund,
SBMFM is paid a fee at the annual rate of 0.20% of the Fund's average daily net
assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to investment
companies that had aggregate assets under management as of September 30, 1994,
in excess of $48.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated May 4, 1994, Boston
Advisors is paid a portion of the fee paid by the Fund to SBMFM at a rate agreed
upon from time to time between Boston Advisors and SBMFM. Prior to May 4, 1994,
Boston Advisors served as the Fund's administrator.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York, 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an annual service
fee with respect to Class A, Class B and Class C shares of the Fund at the
annual rate of 0.25% of the average daily net assets of the respective Class.
Smith Barney is also paid an annual
50
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
distribution fee with respect to Class B and Class C shares at the annual rate
of 0.50% and 0.45%, respectively, of the average daily net assets attributable
to those Classes. Class B shares which automatically convert to Class A shares
eight years after the date of original purchase will no longer be subject to
distribution fees. The fees are used by Smith Barney to pay its Financial
Consultants for servicing shareholder accounts and, in the case of Class B and
Class C shares, to cover expenses primarily intended to result in the sale of
those shares. These expenses include: advertising expenses; the cost of printing
and mailing prospectuses to potential investors; payments to and expenses of
Smith Barney Financial Consultants and other persons who provide support
services in connection with the distribution of shares; interest and/or carrying
charges; and indirect and overhead costs of Smith Barney associated with the
sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Trust's Board of
Trustee's will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest of separate series having
a $.001 per share par value. When matters are
51
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
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 Trust vote by
individual fund on all matters except (a) matters affecting only the interest of
one or more of the funds, in which case only shares of the affected fund or
funds would be entitled to vote, or (b) when the 1940 Act requires that shares
of the funds be voted in the aggregate. Similarly, shares of the Fund will be
voted generally on a Fund-wide basis except on matters affecting the interests
of one Class of shares.
Each Class of Fund shares represents identical interests in the Fund's
investment portfolio. As such, they have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution and/
or service fees, if any, borne by each Class; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Trust's Board of Trustees does not anticipate
that there will be any conflicts among the interests of the holders of the
different Classes. The Trustees, on an ongoing basis, will consider whether any
such conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will be no
meetings of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, is located at One Boston Place, Boston, Massachusetts 02108, and serves
as custodian of the Trust's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves as
the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Trust plans to consolidate the mailing of the
Fund's semi-annual and annual reports by household. This consolidation means
that a household having multiple accounts with the identical
52
<PAGE>
SMITH BARNEY
HIGH INCOME FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
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
Smith Barney Financial Consultants or the Fund's transfer agent.
-------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST OR
THE
DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
53
<PAGE>
[LOGO]
SMITH BARNEY
HIGH INCOME
FUND
388 Greenwich Street
New York, New York 10013
Fund 28, 185, 243
FD 0220 J4
[LOGO]
<PAGE>
P R O S P E C T U S
S M I T H B A R N E Y
Premium
Total
Return
Fund
N O V E M B E R 7 , 1 9 9 4
PROSPECTUS BEGINS ON PAGE ONE
[LOGO]
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- ---------------------------------------------------------------------------
PROSPECTUS November 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Premium Total Return Fund (the "Fund"), a diversified fund, seeks
to provide shareholders with total return, consisting of long-term capital
appreciation and income, by investing primarily in a diversified portfolio of
dividend-paying common stocks. The Fund also purchases put and call options and
writes covered put and call options on securities it holds and on stock indexes
primarily as a hedge to reduce investment risk. The Fund is one of a number of
funds, each having distinct investment objectives and policies, making up Smith
Barney Income Funds (the "Trust"). The Trust is an open-end management
investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other investment funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Fund at
the telephone number set forth above, or by contacting a Smith Barney Financial
Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY STRATEGY ADVISERS INC.
Investment Adviser
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
---------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
---------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 15
---------------------------------------------------------------------
VALUATION OF SHARES 24
---------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 25
---------------------------------------------------------------------
PURCHASE OF SHARES 26
---------------------------------------------------------------------
EXCHANGE PRIVILEGE 38
---------------------------------------------------------------------
REDEMPTION OF SHARES 42
---------------------------------------------------------------------
MINIMUM ACCOUNT SIZE 44
---------------------------------------------------------------------
PERFORMANCE 44
---------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 45
---------------------------------------------------------------------
DISTRIBUTOR 47
---------------------------------------------------------------------
ADDITIONAL INFORMATION 48
---------------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE
PROSPECTUS.
SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks total return by investing primarily in a diversified
portfolio of dividend-paying common stocks. The Fund may engage in various
portfolio strategies involving options to seek to increase its return and to
hedge its portfolio against movements in the equity markets and interest rates.
See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchases of Shares" and "Redemption of Shares."
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% and are subject to an annual service fee of 0.25% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which when
combined with current holdings of Class A shares offered with a sales charge
equal or exceed $500,000 in the aggregate, will be made at net asset value with
no sales charge, but will be subject to a contingent deferred sales charge
("CDSC") of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary -- Reduced or No Initial Sales Charge."
CLASS B SHARES. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.50% of the average daily net assets of the Class. The
Class B shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares.
CLASS B SHARES CONVERSION FEATURE. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the date
of the original purchase. Upon conversion, these shares will no
3
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Class C shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
CLASS Y SHARES. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should consider
the following factors, as well as any other relevant facts and circumstances:
INTENDED HOLDING PERIOD. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an investment
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are
4
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
subject to an ongoing distribution fee. Thus, Class B shares may be more
attractive than Class C shares to investors with longer term investment
outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or
distribution fee. The maximum purchase amount for Class A shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
REDUCED OR NO INITIAL SALES CHARGE. The initial sales charge on Class A shares
may be waived for certain eligible purchasers, and the entire purchase price
will be immediately invested in the Fund. In addition, Class A share purchases,
which when combined with current holdings of Class A shares offered with a sales
charge equal or exceed $500,000 in the aggregate, will be made at net asset
value with no initial sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase. The $500,000 aggregate investment
may be met by adding the purchase to the net asset value of all Class A shares
offered with a sales charge held in funds sponsored by Smith Barney Inc. ("Smith
Barney") listed under "Exchange Privilege." Class A share purchases may also be
eligible for a reduced initial sales charge. See "Purchase of Shares." Because
the ongoing expenses of Class A shares may be lower than those for Class B and
Class C shares, purchasers eligible to purchase Class A shares at net asset
value or at a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
5
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program, which is generally designed to assist plan sponsors
in the creation and operation of retirement plans under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as other types
of participant directed, tax-qualified employee benefit plans (collectively,
"Participating Plans"). Class A, Class B, Class C and Class Y shares are
available as investment alternatives for Participating Plans. See "Purchase of
Shares -- Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor, Smith
Barney, a broker that clears securities transactions through Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an investment dealer in the
selling group. Direct purchases by certain retirement plans may be made through
the Fund's transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a
subsidiary of First Data Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open an
account by making an initial investment of at least $1,000 for each account, or
$250 for an individual retirement account ("IRA") or a Self-Employed Retirement
Plan. Investors in Class Y shares may open an account for an initial investment
of $5,000,000. 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(a) of the Code, the minimum initial investment requirement for
Class A, Class B and Class C shares and the subsequent investment requirement
for all Classes is $25. The minimum initial investment requirement for Class A,
Class B and Class C shares and the subsequent investment requirement for all
Classes through the Systematic Investment Plan described below is $100. See
"Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $100. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
6
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
MANAGEMENT OF THE FUND Smith Barney Strategy Advisers Inc. ("Strategy Advisers")
serves as the Fund's investment adviser. Strategy Advisers is a wholly owned
subsidiary of Smith Barney Mutual Funds Management Inc. ("SBMFM"). SBMFM
provides investment advisory and management services to investment companies
affiliated with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of The
Travelers Inc. ("Travelers"), a diversified financial services holding company
engaged, through its subsidiaries principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance Services and
Property & Casualty Insurance Services.
SBMFM also serves as the Fund's administrator. The Boston Company Advisors,
Inc. ("Boston Advisors") serves as the Fund's sub-administrator and sub-adviser.
Boston Advisors is a wholly owned subsidiary of The Boston Company Inc. ("TBC"),
which in turn is a wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset value next determined, plus any applicable sales charge differential.
See "Exchange Privilege."
VALUATION OF SHARES The net asset value of the Fund for the prior day generally
is quoted daily in the financial section of most newspapers and is also
available from any Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly generally from net
investment income and annually from net realized capital gains. See "Dividends,
Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor, in
additional shares of the same Class at current net asset value. Shares acquired
by dividend and distribution reinvestments will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a PRO
RATA basis. See "Dividends, Distributions and Taxes."
7
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. The Fund may employ investment
techniques which involve certain risks, including entering into repurchase
agreements, reverse repurchase agreements and forward roll transactions,
engaging in when-issued and delayed-delivery transactions, lending portfolio
securities, covered option writing, and options contracts on securities and
indices. See "Investment Objective and Management Policies."
THE FUND'S EXPENSES THE FOLLOWING EXPENSE TABLE LISTS THE COSTS AND
EXPENSES AN
INVESTOR WILL INCUR EITHER DIRECTLY OR INDIRECTLY AS A SHAREHOLDER OF THE
FUND,
BASED ON THE MAXIMUM SALES CHARGE OR MAXIMUM CDSC THAT MAY BE INCURRED
AT THE
TIME OF PURCHASE OR REDEMPTION AND, UNLESS OTHERWISE NOTED, THE FUND'S
OPERATING
EXPENSES FOR ITS MOST RECENT FISCAL YEAR:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC
(as a percentage of original cost or redemption
proceeds, whichever is lower) None* 5.00% 1.00% None
-------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSE
(as a percentage of average net assets)
Management fees 0.75% 0.75% 0.75% 0.75%
12b-1 fees** 0.25% 0.75% 0.70% None
Other expenses*** 0.19% 0.16% 0.10% 0.19
-------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.19% 1.66% 1.55% 0.94%
-------------------------------------------------------------------------------------
<FN>
*Purchase of Class A shares, which when combined with current holdings of Class A shares offered
with
a sales charge equal or exceed $500,000 in the aggregate, will be made at net asset value with no
sales charge, but will be subject to a CDSC of 1.00% on redemptions made within 12 months.
**Upon conversion of Class B shares to Class A shares, such shares will no longer be subject to a
distribution fee. Class C shares do not have a conversion feature and, therefore, are subject to an
ongoing distribution fee. As a result, long-term shareholders of Class C shares may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
***For Class Y shares, "Other Expenses" have been estimated based on expenses incurred by the Class A
shares because Class Y shares were not available for purchase prior to November 7, 1994.
</TABLE>
8
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
The sales charge and CDSC set forth in the above table are the maximum charges
imposed on purchases or redemptions of Fund shares and investors may actually
pay lower or no charges, depending on the amount purchased and, in the case of
Class B, Class C shares and certain Class A shares, the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
Program. See "Purchase of Shares" and "Redemption of Shares." Smith Barney
receives an annual 12b-1 service fee of 0.25% of the value of average daily net
assets of Class A shares. Smith Barney also receives, with respect to Class B
shares, an annual 12b-1 fee of 0.75% of the value of average daily net assets of
that Class, consisting of a 0.50% distribution fee and a 0.25% service fee. With
respect to Class C shares, Smith Barney receives an annual 12b-1 fee of 0.70% of
the value of the average daily net assets, consisting of a 0.45% distribution
fee and a 0.25% service fee. "Other expenses" in the above table include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees.
EXAMPLE THE FOLLOWING EXAMPLE IS INTENDED TO ASSIST AN INVESTOR IN
UNDERSTANDING
THE VARIOUS COSTS THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR
INDIRECTLY.
THE EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT THE
LEVELS SET
FORTH IN THE TABLE ABOVE. SEE "PURCHASE OF SHARES," "REDEMPTION OF SHARES"
AND
"MANAGEMENT OF THE FUND."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each time
period:
Class A $62 $86 $112 $187
Class B 67 82 100 184
Class C 26 49 84 185
Class Y 10 30 52 115
An investor would pay the following
expenses on the same investment,
assuming the same annual return and no
redemption:
Class A $62 $86 $112 $187
Class B 17 52 90 184
Class C 16 49 84 185
Class Y 10 30 52 115
-------------------------------------------------------------------------------------
<FN>
*Ten-year figures assume conversion of Class B shares to Class A shares at the end of
the eighth year following the date of purchase.
</TABLE>
9
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00% THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
EXCEPT WHERE OTHERWISE NOTED, THE FOLLOWING INFORMATION HAS BEEN AUDITED
BY
COOPERS & LYBRAND, INDEPENDENT ACCOUNTANTS, WHOSE REPORT THEREON
APPEARS IN THE
FUND'S ANNUAL REPORT DATED JULY 31, 1994. THE INFORMATION SET OUT BELOW
SHOULD
BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES
THAT ALSO
APPEAR IN THE FUND'S ANNUAL REPORT, WHICH IS INCORPORATED BY REFERENCE INTO
THE
STATEMENT OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94#+++ 7/31/93*+++
<S> <C> <C>
Net asset value, beginning of period $ 15.65 $ 15.15
- --------------------------------------------------------------------
Income from investment operations:
Net investment income 0.33 0.19
Net realized and unrealized gain on
investments 0.99 1.33
- --------------------------------------------------------------------
Total from investment operations 1.32 1.52
Distributions to shareholders:
Distributions from net investment income (0.31) (0.17)
Distributions in excess of net investment
income (0.24) (0.03)
Distributions from net realized capital
gains (0.52) (0.44)
Distributions in excess of net realized
capital gains -- (0.05)
Distributions from capital++ (0.21) (0.33)
- --------------------------------------------------------------------
Total Distributions (1.28) (1.02)
- --------------------------------------------------------------------
Net asset value, end of period $ 15.69 $ 15.65
- --------------------------------------------------------------------
Total return+ 8.65% 10.31%
- --------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $67,699 $39,677
Ratio of operating expenses to average net
assets 1.19% 1.20%**
Ratio of net investment income to average
net assets 2.05% 1.64%**
Portfolio turnover rate 34% 55%
- --------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations.
# As of July 15, 1994, the Fund changed its investment adviser from Boston
Advisors to its current investment adviser, Strategy Advisers. Boston
Advisers is currently the sub-investment adviser to the Fund.
</TABLE>
11
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
7/31/94#+++ 7/31/93+++
<S> <C> <C>
Net Asset Value, beginning of year $ 15.65 $ 15.21
- ----------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.25 0.23
Net realized and unrealized gain/(loss) on investments 1.00 1.47
- ----------------------------------------------------------------------------------
Total from investment operations 1.25 1.70
Less Distributions:
Distributions from net investment income (0.27) (0.16)
Distributions in excess of net investment income (0.22) (0.03)
Distributions from net realized capital gains (0.52) (0.57)
Distributions in excess of net realized capital gains -- (0.06)
Distributions from capital++ (book basis) -- --
Distributions from capital++ (tax basis) (0.20) (0.44)
- ----------------------------------------------------------------------------------
Total Distributions (1.21) (1.26)
- ----------------------------------------------------------------------------------
Net Asset Value, end of year $ 15.69 $ 15.65
- ----------------------------------------------------------------------------------
Total return+ 8.12% 11.68%
- ----------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $1,697,394 $1,230,737
Ratio of operating expenses to average net assets 1.66% 1.69%
Ratio of net investment income to average net assets 1.58% 1.16%
Portfolio turnover rate 34% 55%
- ----------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on September 16, 1985. On November 6, 1992,
the Fund commenced selling Class A shares. Those shares in existence prior
to November 6, 1992 were designated as Class B shares.
** Annualized.
+ Total return represents aggregate total return for the periods indicated
and does not reflect any applicable CDSC.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations.
# As of July 15, 1994, the Fund changed its investment adviser from Boston
Advisors to its current investment adviser, Strategy Advisers. Boston
Advisors is currently the sub-investment adviser to the Fund.
</TABLE>
12
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
7/31/92 7/31/91 7/31/90+++ 7/31/89 7/31/88 7/31/87 7/31/86*
<S> <C> <C> <C> <C> <C> <C>
$ 14.26 $ 13.30 $ 13.98 $ 12.90 $ 14.47 $ 14.52 $ 13.00
-------------------------------------------------------------------------------------
0.22 0.24 0.22 0.56 0.51 0.28 0.43
1.93 1.92 0.38 2.00 (0.62) 1.37 2.27
-------------------------------------------------------------------------------------
2.15 2.16 0.60 2.56 (0.11) 1.65 2.70
(0.22) (0.24) (0.22) (0.89) (0.18) (0.28) (0.42)
-- -- -- -- -- -- --
-- -- -- (0.26) (1.28) (1.42) (0.76)
-- -- -- -- -- -- --
(0.98) (0.96) (1.06) (0.33) -- -- --
-- -- -- -- -- -- --
-------------------------------------------------------------------------------------
(1.20) (1.20) (1.28) (1.48) (1.46) (1.70) (1.18)
-------------------------------------------------------------------------------------
$ 15.21 $ 14.26 $ 13.30 $ 13.98 $ 12.90 $ 14.47 $ 14.52
-------------------------------------------------------------------------------------
15.68% 17.53% 4.62% 21.49% 0.21% 12.07% 21.28%
-------------------------------------------------------------------------------------
$585,049 $470,381 $507,762 $599,849 $585,634 $960,898 $533,487
1.69% 1.75% 1.78% 1.75% 1.70% 1.74% 1.87%**
1.53% 1.84% 1.66% 4.17% 3.58% 1.97% 2.99%**
57% 43% 47% 41% 56% 294% 212%
-------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94#+++ 7/31/93*+++
<S> <C> <C>
Net Asset Value, beginning of period $15.65 $15.45
- -------------------------------------------------------------------
Income from investment operations:
Net investment income 0.23 0.05
Net realized and unrealized gain on
investments 1.02 0.35
- -------------------------------------------------------------------
Total from investment operations 1.25 0.40
Less Distributions:
Distributions from net investment income (0.27) (0.03)
Distributions in excess of net investment
income (0.22) (0.01)
Distributions from net realized capital
gains (0.52) (0.08)
Distributions in excess of net realized
capital gains -- (0.01)
Distributions from capital++ (0.20) (0.07)
- -------------------------------------------------------------------
Total distributions (1.21) (0.20)
- -------------------------------------------------------------------
Net Asset Value, end of period $15.69 $15.65
- -------------------------------------------------------------------
Total return+ 8.12% 2.60%
- -------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $1,878 $ 357
Ratio of net investment income to average
net assets 1.60% 1.31%**
Ratio of operating expenses to average net
assets 1.65% 1.54%**
Portfolio turnover rate 34% 55%
- -------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares (previously designated as Class D
shares) on June 1, 1993.
** Annualized.
+ Total return represents aggregate total return for the periods indicated.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since use of the undistributed method does not accord with results of
operations.
# As of July 15, 1994, the Fund changed its investment adviser from Boston
Advisors to its current investment adviser, Strategy Advisers. Boston
Advisers is currently the sub-investment adviser to the Fund.
</TABLE>
PRIOR TO NOVEMBER 7, 1994, THE FUND DID NOT OFFER CLASS Y SHARES AND
ACCORDINGLY, NO COMPARABLE FINANCIAL INFORMATION IS AVAILABLE AT THIS TIME
FOR
THAT CLASS.
14
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is total return. The Fund's investment
objective may be changed only with the approval of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund will achieve its
investment objective. The Fund will seek its objective by investing primarily in
a diversified portfolio of dividend-paying common stocks. The Fund may engage in
various portfolio strategies involving options to seek to increase its return
and to hedge its portfolio against movements in the equity markets and interest
rates. Because the Fund seeks total return by emphasizing investments in
dividend-paying common stocks, it will not have as much investment flexibility
as total return funds which may pursue their objective by investing in both
income and equity stocks without such an emphasis. The Fund also may invest up
to 10% of its assets in: (a) medium- or low-rated securities or unrated
securities of comparable quality. Medium- and low-rated securities are
securities rated less than investment grade by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"). See "Risk Factors and
Special Considerations--Medium-, Low- and Unrated Securities" below; (b)
interest-paying debt securities, such as obligations issued or guaranteed as to
principal and interest by the United States government ("U.S. government
securities"); and (c) other securities, including convertible bonds, convertible
preferred stock and warrants. In addition, the Fund will limit its investments
in warrants to 5% of its net assets. The Fund also may lend its portfolio
securities and enter into "short sales against the box." Special considerations
associated with the Fund's investment strategies are described below.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed information
concerning these strategies and their related risks is contained in the
Statement of Additional Information.
In the future, the Fund may desire to employ additional investment strategies,
including hedging strategies such as entering into futures contracts and related
options. The Fund will do so only upon 60 days' notice to shareholders and in
conformity with its investment restrictions.
SHORT SALES AGAINST THE BOX. The Fund may make short sales of common stock if,
at all times when a short position is open, the Fund owns the stock or owns
preferred stocks or debt securities convertible or exchangeable,
15
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
without payment of further consideration, into the shares of common stock sold
short. Short sales of this kind are referred to as "short sales against the
box." The broker-dealer that executes a short sale generally invests cash
proceeds of the sale until they are paid to the Fund. Arrangements may be made
with the broker-dealer to obtain a portion of the interest earned by the broker
on the investment of short sale proceeds. The Fund will segregate the common
stock or convertible or exchangeable preferred stock or debt securities in a
special account with Boston Safe Deposit and Trust Company ("Boston Safe"), the
Fund's custodian. Not more than 10% of the Fund's net assets (taken at current
value) may be held as collateral for such sales at any one time. The extent to
which the Fund may make short sales of common stocks may be limited by the
requirements contained in the Code for qualification as a regulated investment
company. See "Dividends, Distributions and Taxes."
COVERED OPTION WRITING. The Fund may write put and call options on securities.
The Fund realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder 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 to the option holder an underlying security at a specified price
at any time during the option period. Thus, the purchaser of a put option
written by the Fund 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 written by the Fund 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 written by the Fund, 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 written by the Fund, 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 Portfolio's acquisition cost of the security, less the premium received for
writing the option.
The Fund will write only covered options. Accordingly, whenever the Fund
writes a call option, it will continue to own or have the present right
16
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
to acquire the underlying security for as long as it remains obligated as the
writer of the option. To support its obligation to purchase the underlying
security if a put option is exercised, the Fund will either (a) deposit with
Boston Safe in a segregated account cash, U.S. government securities or other
high grade debt obligations having a value at least equal to the exercise price
of the underlying securities or (b) continue to own an equivalent number of puts
of the same "series" (that is, puts on the same underlying security having the
same exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same "class" (that is, puts on the same
underlying security) with exercise prices greater than those that it has written
(or, if the exercise prices of the puts that it holds are less than the exercise
prices of those that it has written, it will deposit the difference with Boston
Safe in a segregated account).
The Fund may engage in a closing purchase transaction to realize a profit, to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option the Fund has written, an option of
the same series as that on which the Fund desires to terminate its obligation.
The obligation of the Fund under an option it has written would be terminated by
a closing purchase transaction, but the Fund would not be deemed to own an
option as the result of the transaction. There can be no assurance the Fund will
be able to effect closing purchase transactions at a time when it wishes to do
so. To facilitate closing purchase transactions, however, the Fund ordinarily
will write options only if a secondary market for the options exists on a
domestic securities exchange or in the over-the-counter market.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The Fund may utilize up to 10%
of its assets to purchase put options on portfolio securities and may do so at
or about the same time that it purchases the underlying security or at a later
time. By buying a put, the Fund limits the risk of loss from a decline in the
market value of the security until the put expires. Any appreciation in the
value of, or in the yield otherwise available from the underlying security,
however, will be partially offset by the amount of the premium paid for the put
option and any related transaction costs. The Fund may utilize up to 10% of its
assets to purchase call options on portfolio securities. Call options may be
purchased by the Fund in order to
17
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
acquire the underlying securities for the Fund at a price that avoids any
additional cost that would result from a substantial increase in the market
value of a security. The Fund also may purchase call options to increase its
return to investors at a time when the call is expected to increase in value due
to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing sale
transactions (sales by the Fund, prior to the exercise of options it has
purchased, of options of the same series), and profit or loss from the sale will
depend on whether the amount received is more or less than the premium paid for
the option plus the related transaction costs.
STOCK INDEX OPTIONS. The Fund may purchase and write exchange-listed put and
call options on stock indexes primarily to hedge against the effects of
market-wide price movements. A stock index measures the movement of a certain
group of stocks by assigning relative values to the common stocks included in
the index. (Examples of well-known stock indexes are the Standard & Poor's Daily
Price Index of 500 Common Stocks and the NYSE Composite Index.) Options on stock
indexes are similar to options on securities. However, because options on stock
indexes do not involve the delivery of an underlying security, the option
represents the holder's right to obtain from the writer in cash a fixed multiple
of the amount by which the exercise price exceeds (in the case of a put) or is
less than (in the case of a call) the closing value of the underlying index on
the exercise date.
The advisability of using stock index options to hedge against the effects of
market-wide movements will depend on the extent of diversification of the Fund's
stock investments and the sensitivity of its stock investments to factors
influencing the underlying index. The effectiveness of purchasing or writing
stock index options as a hedging technique will depend upon the extent to which
price movements in the portion of the Fund being hedged correlate with price
movements in the stock index selected.
When the Fund writes an option on a stock index, it will deposit cash or cash
equivalents or a combination of both in an amount equal to the market value of
the option in a segregated account with Boston Safe, and will maintain the
account while the option is open.
18
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
ADDITIONAL INVESTMENTS
MONEY MARKET INSTRUMENTS When Strategy Advisers and Boston Advisors believe
that market conditions warrant, the Fund may adopt a temporary defensive posture
and invest in short-term instruments without limitation. Short-term instruments
in which the Fund may invest include U.S. government securities; certain bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loan associations
and similar institutions); commercial paper rated no lower than A-2 by S&P or
Prime-2 by Moody's or the equivalent from another major rating service or, if
unrated, of an issuer having an outstanding, unsecured debt issue then rated
within the three highest rating categories; and repurchase agreements as
described below.
UNITED STATES GOVERNMENT SECURITIES. U.S. government securities are
obligations of, or guaranteed by, the United States government, its agencies or
instrumentalities. The U.S. government securities in which the Fund may invest
include: direct obligations of the United States Treasury (such as Treasury
Bills, Treasury Notes and Treasury Bonds) and obligations issued by U.S.
government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as Government
National Mortgage Association ("GNMA") certificates); 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 securities that are
supported by the credit of the instrumentality (such as Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC") bonds). Treasury Bills have maturities of less than 1 year, Treasury
Notes have maturities of 1 to 10 years and Treasury Bonds generally have
maturities of greater than 10 years at the date of issuance. Certain U.S.
government securities, such as those issued or guaranteed by GNMA, FNMA and
FHLMC, are mortgage-related securities. U.S. government securities generally do
not involve the credit risks associated with other types of interest-bearing
securities, although, as a result, the yields available from U.S. government
securities are generally lower than the yields available from interest-bearing
corporate securities.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the Fund and with certain dealers on the Federal Reserve Bank
19
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
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.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including interest. 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.
Strategy Advisers, SBMFM or Boston Advisors, acting under the supervision of the
Trust's Board of Trustees, 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.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
any portfolio securities on a when-issued or delayed-delivery basis. The Fund
will enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. In such transactions, delivery
of the securities occurs beyond the normal settlement periods, but no payment or
delivery is made by the Fund prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the investments are actually delivered to the
buyers. The Fund will establish a segregated account consisting of cash, U.S.
government securities or other high grade debt obligations in an amount equal to
the amount of its when-issued and delayed-delivery commitments. Placing
securities rather than cash in the segregated account may have a leveraging
effect on the Fund's net assets. The Fund will not accrue income with respect to
a when-issued security prior to its stated delivery date.
20
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
LENDING OF PORTFOLIO SECURITIES. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets taken at value. Loans
of portfolio securities will be collateralized by cash, letters of credit or
U.S. government securities that are maintained at all times in an amount at
least equal to the current market value of the loaned securities.
CERTAIN INVESTMENT GUIDELINES
Up to 10% of the assets of the Fund may be invested in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) time deposits maturing from two business days through seven
calendar days and (c) to the extent that a liquid secondary market does not
exist for the instruments, futures contracts and options thereon. In addition,
the Fund may invest up to 5% of its assets in the securities of issuers which
have been in continuous operation for less than three years. The Fund also may
borrow from banks for temporary or emergency purposes, but not for investment
purposes, in an amount up to 10% of its total assets, and may pledge its assets
to the same extent in connection with such borrowings. Whenever these borrowings
exceed 5% of the value of the Fund's total assets, the Fund will not make any
additional investments. Except for the limitations on borrowing, the investment
guidelines set forth in this paragraph may be changed at any time without
shareholder consent by vote of the Trust's Board of Trustees. A complete list of
investment restrictions that identifies additional restrictions that cannot be
changed without the approval of the majority of the Fund's outstanding shares is
contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
OPTIONS. The Fund may enter into options transactions primarily as hedges to
reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset by a loss on the hedge position. The Fund bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedge. The Fund will engage in hedging transactions only when
deemed advisable by Strategy Advisers and Boston Advisors. Successful use by the
Fund
21
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
of options will depend on Strategy Advisers' and Boston Advisors' ability to
correctly predict movements in the direction of the stock or index underlying
the option used as a hedge. Losses incurred in hedging transactions and the
costs of these transactions will affect the Fund's performance.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write stock options and options on stock index
options only if there appears to be a liquid secondary market for the options
purchased or sold, for some options no such secondary market may exist or the
market may cease to exist.
MEDIUM-, LOW- AND UNRATED SECURITIES. The Fund may invest up to 10% of its
assets in medium- or low-rated securities and unrated securities of comparable
quality. Generally, these securities offer a higher return potential than
higher-rated securities but involve greater volatility of price and risk of loss
of income and principal. The issuers of such securities may be in default or
bankruptcy at the time of purchase or may have a high probability of future
default or bankruptcy. Medium- and low-rated and comparable unrated securities
will likely have large uncertainties or major risk exposures to adverse
conditions and are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of the
obligation. Accordingly, it is possible that these types of factors could, in
certain instances, reduce the value of securities held by the Fund, with a
commensurate effect on the value of the Fund's shares.
The markets in which medium- and low-rated or comparable unrated securities
are traded generally are more limited than those in which higher-rated
securities are traded. The existence of limited markets for these securities may
restrict the availability of securities for the Fund to purchase and also may
have the effect of limiting the ability of the Fund to (a) obtain accurate
market quotations for purposes of valuing securities and calculating net asset
value and (b) sell securities at their fair value either to meet redemption
requests or to respond to changes in the economy or the financial markets. The
market for certain medium- and low-rated and comparable unrated securities has
not fully weathered a major economic recession. Any such economic downturn could
adversely affect the value of such securities and the ability of the issuers of
these securities to repay principal and pay interest thereon.
22
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium-and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional expenses
to the extent that it is required to seek recovery upon a default in the payment
of principal or interest on its portfolio holdings.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities which are rated B generally lack characteristics of a desirable
investment and assurance of interest and principal payments over any long period
of time may be small. Securities which are rated Caa or CCC or below are of poor
standing. Those issues may be in default or present elements of danger with
respect to principal or interest. Securities rated C by Moody's and D by S&P are
in the lowest rating class and indicate that payments are in default or that a
bankruptcy petition has been filed with respect to the issuer or that the issuer
is regarded as having extremely poor prospects. See the Appendix in the Trust's
Statement of Additional Information on bond ratings by Moody's and S&P.
23
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
In light of these risks, Strategy Advisers and Boston Advisors, in evaluating
the creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of and the community support for the facility financed by the
issue, the ability of the issuer's management and regulatory matters.
SECURITIES OF UNSEASONED ISSUERS. Securities in which the Fund may invest may
have limited marketability and, therefore, may be subject to wide fluctuations
in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an
established market share.
PORTFOLIO TRANSACTIONS
All orders for transactions in securities and options on behalf of the Fund
are placed by Strategy Advisers and Boston Advisors with broker-dealers that
Strategy Advisers and Boston Advisors select, including Smith Barney and other
affiliated brokers. The Fund may utilize Smith Barney or a Smith
Barney-affiliated broker in connection with a purchase or sale of securities
when Strategy Advisers and Boston Advisors believe that the broker's charge for
the transactions does not exceed usual and customary levels. The same standard
applies to the use of Smith Barney as a commodities broker in connection with
entering into options and futures contracts.
- --------------------------------------------------------------------
VALUATION OF SHARES
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.
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 Trust's Board of Trustees. Short-
term investments that mature in 60 days or less are valued at amortized cost
24
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
whenever the Trustees determine that amortized cost reflects fair value of those
instruments. Further information regarding the Fund's valuation policies is
contained in the Statement of Additional Information.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from net investment income and
distributions of capital gains payable to shareholders.
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 CDSC. Dividends from net
investment income, if any, of the Fund will be declared monthly and paid on the
last day of the Smith Barney statement month. The Fund's final distribution for
each calendar year will include any remaining net investment income and net
realized long-and short-term capital gains realized during the year and deemed
undistributed during the year for Federal income tax purposes. In order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains, the Fund may make an additional
distribution shortly before December 31 in each year of any undistributed
ordinary income or capital gains and expects to pay any other dividends and
distributions necessary to avoid the application of this tax.
The per share dividends on Class B and Class C 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 C
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 C and Class Y shares.
25
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
TAXES
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from net investment
income and distributions of net realized short-term capital gains are taxable to
shareholders as ordinary income, regardless of how long shareholders have held
their Fund shares and whether such dividends and distributions are received in
cash or reinvested in additional Fund shares. Distributions of net realized
long-term capital gains will be taxable to shareholders as long-term capital
gains, regardless of how long shareholders have held Fund shares and whether
such distributions are received in cash or are reinvested in additional Fund
shares. Furthermore, as a general rule, a shareholder's gain or loss on a sale
or redemption of Fund shares will be a long-term capital gain or loss if the
shareholder has held the shares for more than one year and will be a short-term
capital gain or loss if the shareholder has held the shares for one year or
less. Some of the Fund's dividends declared from net investment income may
qualify for the Federal dividends-received deduction for corporations.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Each shareholder also will receive, if
appropriate, various written notices after the close of the Fund's prior taxable
year as to the Federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's prior taxable
year. Shareholders should consult their tax advisors about the status of the
Fund's dividends and distributions for state and local tax liabilities.
- --------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL. The Fund offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or CDSC,
and are available only to investors investing a minimum of $5,000,000. See
"Prospectus Summary -- Alternative Purchase Arrangements" for a discussion of
factors to consider in selecting which Class of shares to purchase.
26
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, an Introducing Broker or an investment dealer in the selling
group, except for investors purchasing shares of the Fund through a qualified
retirement plan who may do so directly through TSSG. When purchasing shares of
the Fund, investors must specify whether the purchase is for Class A, Class B,
Class C or Class Y shares. No maintenance fee will be charged by the Fund in
connection with a brokerage account through which an investor purchases or holds
shares.
Investors in Class A, Class B and Class C shares may open an account 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 $5,000,000. 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(a) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $100. There are no minimum
investment requirements for Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, Trustees of the Trust 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
the Fund's transfer agent, TSSG. Share certificates are issued only upon a
shareholder's written request to TSSG.
Purchase orders received by Smith Barney 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. Orders received by
dealers or Introducing Brokers 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 Smith
Barney prior to Smith Barney's close of business (the "trade date"). Currently,
payment for Fund shares is due on the fifth business day (the "settlement date")
after the trade date. The Fund
27
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
anticipates that, in accordance with regulatory changes, beginning on or about
June 1, 1995, the settlement date will be the third business day after the trade
date.
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, Smith Barney or TSSG is authorized through
preauthorized transfers of $100 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide 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 Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's 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 Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are as
follows:
<TABLE>
<CAPTION>
SALES DEALERS
CHARGE REALLOWANCE
AS % AS %
OF OF
SALES CHARGE AS % AMOUNT OFFERING
AMOUNT OF INVESTMENT OF OFFERING PRICE INVESTED PRICE
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Less than $25,000 5.00% 5.26% 4.50%
$25,000 -- $49,999 4.00% 4.17% 3.60%
$50,000 -- $99,999 3.50% 3.63% 3.15%
$100,000 -- $249,999 3.00% 3.09% 2.70%
$250,000 -- $499,999 2.00% 2.04% 1.80%
$500,000 and over * * *
- ------------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, will be made at net asset value without any initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months
of purchase. The CDSC on Class A shares is payable to Smith Barney, which
compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B and Class C shares is
waived. See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
</TABLE>
28
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
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 Securities Act of
1933, as amended.
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, his or her spouse and children, or a trustee or other fiduciary of a
single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares offered with a sales charge held in funds sponsored by Smith
Barney listed under "Exchange Privilege."
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 of Class A shares to Trustees
of the Trust and employees of Travelers and its subsidiaries, or the spouses and
children of such persons (including the surviving spouse of a deceased Trustee
or employee, and retired Trustees or employees), or sales to any trust, pension,
profit-sharing or other benefit plan for such persons 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 re-sold except through
redemption or repurchase; (b) offers of Class A shares to any other investment
company in connection with 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 Smith Barney Financial Consultant (for a period
up to 90 days from the commencement of the Financial Consultant's employment
with 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)
shareholders who have redeemed Class A shares in the Fund (or Class A shares of
another of the Smith Barney Mutual Funds that are offered with a sales charge
equal to or greater than the maximum sales charge of the Fund) and who wish to
reinvest their redemption proceeds in the Fund, provided the reinvestment is
made within 60 calendar days of the redemption; and (e) accounts managed by
registered investment advisory subsidiaries of
29
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Travelers. 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 funds sponsored by Smith Barney that are offered with
a sales charge 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.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares," and will be based
upon the aggregate sales of Class A shares of certain Smith Barney Mutual Funds
offered with a sales charge to, and share holdings of, all members of the group.
To be eligible for such reduced sales charges or to purchase at net asset value,
all purchases must be pursuant to an employer-or partnership-sanctioned plan
meeting certain requirements. One such requirement is that the plan must be open
to specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also
30
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
purchase Class A shares at the reduced sales charge applicable to the group as a
whole. The sales charge is based upon the aggregate dollar value of Class A
shares offered with a sales charge that have been previously purchased and are
still owned by the group, plus the amount of the current purchase. A "qualified
group" is one which (a) has been in existence for more than six months, (b) has
a purpose other than acquiring Fund shares at a discount and (c) satisfies
uniform criteria which enable Smith Barney to realize economies of scale in its
costs of distributing shares. A qualified group must have more than 10 members,
must be available to arrange for group meetings between representatives of the
Fund and the members, and must agree to include sales and other materials
related to the Fund in its publications and mailings to members at no cost to
Smith Barney. In order to obtain such reduced sales charge or to purchase at net
asset value, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. Approval of group purchase reduced sales charge plans is subject
to the discretion of Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts 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 that 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 purchases of all Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds offered
with a sales charge over the 13 month period based on the total amount of
intended purchases plus the value of all Class A shares previously purchased and
still owned. An alternative is to compute the 13 month period starting up to 90
days before the date of execution of a Letter of Intent. 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. New Letters of Intent will be accepted
beginning January 1, 1995. Please contact a Smith Barney Financial Consultant or
TSSG to obtain a Letter of Intent application.
31
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an initial
sales charge so that the full amount of an investor's purchase payment may be
immediately invested in the Fund. A CDSC, however, may be imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b) Class C
shares; and (c) Class A shares which when combined with Class A shares offered
with a sales charge currently held by an investor equal or exceed $500,000 in
the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of the
cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC 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 C shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC Shares are subject to a 1.00%
CDSC if redeemed within 12 months of purchase. In circumstances in which the
CDSC 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 Smith
Barney statement month. The following table sets forth the rates of the charge
for redemptions of Class B
32
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
shares by shareholders, except in the case of purchases by Participating Plans,
as described below. See "Purchase of Shares -- Smith Barney 401(k) Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C>
- ----------------------------------------------------------------------------------
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- ----------------------------------------------------------------------------------
</TABLE>
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 also will be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder 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. Shareholders who held Class B shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World Income Fund") on
July 15, 1994 and who subsequently exchange those shares for Class B shares of
the Fund will be offered the opportunity to exchange all such Class B shares for
Class A shares of the Fund four years after the date on which those shares were
deemed to have been purchased. Holders of such Class B shares will be notified
of the pending exchange in writing approximately 30 days before the fourth
anniversary of the purchase date and, unless the exchange has been rejected in
writing, the exchange will occur on or about the fourth anniversary date. See
"Prospectus Summary -- Alternative Purchase Arrangements -- Class B Shares
Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that 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
33
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
other funds. For Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount realized on
redemption. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor acquired 5 additional
shares 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 CDSC 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 CDSC
The CDSC 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 below) (provided, however, that 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 that were established prior to November 7, 1994);
(c) redemptions of shares within 12 months following the death or disability of
the shareholder; (d) redemption of shares made in connection with qualified
distributions from retirement plans or IRAs upon the attainment of age 59 1/2;
(e) involuntary redemptions; and (f) redemptions of shares in connection with 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 of the 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 CDSC imposed on the prior redemption.
34
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by TSSG in the case of
all other shareholders) of the shareholder's status or holdings, as the case may
be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. To the extent
applicable, the same terms and conditions are offered to all Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class Y
shares as investment alternatives under the Smith Barney 401(k) Program. Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different sales
charge and CDSC schedules than, the Class A, Class B and Class C shares acquired
by other investors. Similar to those available to other investors, Class Y
shares acquired through the Smith Barney 401(k) Program are not subject to any
initial sales charge, CDSC or service or distribution fee. 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 initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of redemption proceeds, if the
Participating Plan terminates within four years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
CLASS B SHARES. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Program
are subject to a CDSC of 3.00% of
35
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
redemption proceeds, if the Participating Plan terminates within eight years of
the date the Participating Plan first enrolled in the Smith Barney 401(k)
Program.
Eight years after the date the Participating Plan enrolled in the Smith Barney
401(k) Program, it will be offered the opportunity to exchange all of its Class
B shares for Class A shares of the Fund. 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 the
exchange has occurred, a Participating Plan will not be eligible to acquire
additional Class B shares of the Fund but instead may acquire Class A shares of
the Fund. If the Participating Plan elects not to exchange all of its Class B
shares at that time, each Class B share held by the Participating Plan will have
the same conversion feature as Class B shares held by other investors. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
CLASS C SHARES. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or more funds of the Smith
Barney Mutual Funds. Class C shares acquired through the Smith Barney 401(k)
Program after November 7, 1994 are subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the date the
Participating Plan first enrolled in the Smith Barney 401(k) Program. Each year
after the date a Participating Plan enrolled in the Smith Barney 401(k) Program,
if its total Class C holdings 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 C 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. Once the
exchange has occurred, a Participating Plan will not be eligible to acquire
Class C shares of the Fund but instead may acquire Class A shares of the Fund.
Class C shares not converted will continue to be subject to the distribution
fee.
36
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
CLASS Y SHARES. Class Y shares of the Fund are offered without any service or
distribution fees, sales charge or CDSC to any Participating Plan
that purchases $5,000,000 or more of Class Y shares of one or more funds of the
Smith Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gain
distributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the preceding year and, with respect to Class B shares, increases in the net
asset value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years.Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number of
years since those shareholders made the purchase payment from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
37
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- ---------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For further
information regarding the Smith Barney 401(k) Program, investors should contact
a Smith Barney Financial Consultant.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at the
net asset value next determined for shares of the same Class in the following
funds of the Smith Barney Mutual Funds, to the extent shares are offered for
sale in the shareholder's state of residence. Exchanges of Class A, Class B and
Class C shares are subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges are made and
a sales charge differential may apply.
<TABLE>
<C> <S>
FUND NAME
---------------------------------------------------------------------------------
GROWTH FUNDS
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -- Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
GROWTH AND INCOME FUNDS
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Smith Barney World Funds, Inc. -- International Balanced Portfolio
</TABLE>
38
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities
Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
MUNICIPAL BOND FUNDS
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds -- California Limited Term Portfolio
Smith Barney Muni Funds -- California Portfolio
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
</TABLE>
39
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<C> <S>
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
MONEY MARKET FUNDS
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
+++ Smith Barney Muni Funds -- California Money Market Portfolio
+++ Smith Barney Muni Funds -- New York Money Market Portfolio
<FN>
------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the Fund.
** Available for exchange with Class A, Class B and Class Y shares of the Fund.
In addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class C shares of
this fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
</TABLE>
CLASS A EXCHANGES. Class A shares of Smith Barney Mutual Funds sold without a
sales charge or with a maximum sales charge of less than the maximum charged by
other Smith Barney Mutual Funds will be subject to the appropriate "sales charge
differential" upon the exchange of such shares for Class A shares of a fund sold
with a higher sales charge. The "sales charge differential" is limited to a
percentage rate no greater than the excess of the sales charge rate applicable
to purchases of shares of the mutual fund being acquired in the exchange over
the sales charge rate(s) actually paid on the mutual fund shares relinquished in
the exchange and on any predecessor of those shares. For purposes of the
exchange privilege, shares obtained through automatic reinvestment of dividends
and capital gains distributions are treated as having paid the same sales
charges applicable to the shares on which the dividends or distributions were
paid; however, except in the case of the Smith Barney 401(k) Program, if no
sales charge was imposed upon the initial purchase of the shares, any shares
obtained through automatic reinvestment will be subject to a sales charge
differential upon exchange.
40
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
CLASS B EXCHANGES. In the event a Class B shareholder (unless such shareholder
was a Class B shareholder of the Short-Term World Income Fund on July 15, 1994)
wishes to exchange all or a portion of his or her shares in any of the funds
imposing a higher CDSC than that imposed by the Fund, the exchanged Class B
shares will be subject to the higher applicable CDSC. Upon an exchange, the new
Class B shares will be deemed to have been purchased on the same date as the
Class B shares of the Fund that have been exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that have
been exchanged.
CLASS Y EXCHANGES. Class Y shareholders of the Fund who wish to exchange all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
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. Strategy Advisers
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, Strategy
Advisers will notify Smith Barney and Smith Barney may, at its discretion,
decide to limit additional purchases and/or exchanges by a shareholder. Upon
such a determination, Smith Barney 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.
Exchanges will be processed at the net asset value next determined, plus any
applicable sales charge differential. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the shares
of the fund exchanged, no signature guarantee is
41
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
required. A capital gain or loss for tax purposes will be realized upon the
exchange, depending upon the cost or other basis of shares redeemed. Before
exchanging shares, investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
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 Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the seventh day following receipt of
proper tender, except on any days on which the NYSE is closed or as permitted
under the Investment Company Act of 1940 (the "1940 Act") in extraordinary
circumstances. The Fund anticipates that, in accordance with regulatory changes,
beginning on or about June 1, 1995, payment will be made on the third business
day after receipt of proper tender. Generally, if the redemption proceeds are
remitted to a Smith Barney brokerage account, these funds will not be invested
for the shareholder's benefit without specific instruction and 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 ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares
42
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
other than those held by Smith Barney as custodian may be redeemed through an
investor's Financial Consultant, Introducing Broker or dealer in the selling
group or by submitting a written request for redemption to:
Smith Barney Premium Total Return Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
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 TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power 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. TSSG may require
additional supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $100 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month
43
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
of the shareholder's shares subject to the CDSC.) For further information
regarding the automatic cash withdrawal plan, shareholders should contact a
Smith Barney Financial Consultant.
- --------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate 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
this 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 automatic redemption.
- --------------------------------------------------------------------
PERFORMANCE
TOTAL RETURN
From time to time the Fund may include its total return, average annual total
return and current dividend return in advertisements and/or other types of sales
literature. These figures are computed separately for Class A, Class B, Class C
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 this 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 calculates current dividend return for each Class by
annualizing the most
44
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PERFORMANCE (CONTINUED)
recent monthly distribution and dividing by the net asset value or the maximum
public offering price (including sales charge) on the last day of the period for
which current dividend return is presented. The current dividend return for each
Class may vary from time to time depending on market conditions, the composition
of its investment portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return should be
considered when comparing a Class' current return to yields published for other
investment companies and other investment vehicles. 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. The Fund will include performance data for
Class A, Class B, Class C and Class Y shares in any advertisement or information
including performance data of the Fund.
- --------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the companies that furnish services to the Trust and the
Fund, including agreements with the Fund's distributor, investment adviser,
sub-investment adviser, administrator, sub-administrator, custodian and transfer
agent. The day-to-day operations of the Fund are delegated to the Fund's
investment adviser, sub-investment adviser, administrator and sub-administrator.
The Statement of Additional Information contains background information
regarding each Trustee and executive officer of the Trust.
INVESTMENT ADVISER--STRATEGY ADVISERS
Strategy Advisers, located at 388 Greenwich Street, New York, New York 10013,
serves as the Fund's investment adviser. Strategy Advisers has been in the
investment counseling business since 1968 and is a wholly owned subsidiary of
SBMFM. SBMFM is a registered investment adviser whose principal executive
offices are located at 388 Greenwich Street, New York,
45
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
New York 10013. Strategy Advisers renders investment advice to investment
companies that had aggregate assets under management as of September 30, 1994 in
excess of $3 billion. For advisory services rendered to the Fund, under an
Advisory Agreement dated July 15, 1994, the Fund pays Strategy Advisers a fee at
the annual rate of 0.55% of the value of the Fund's average daily net assets.
From its fee, Strategy Advisers pays Boston Advisors a fee of 0.275% of the
value of the Fund's average daily net assets, for its services as sub-investment
adviser.
ADMINISTRATOR--SBMFM
SBMFM serves as the Fund's administrator and generally assists in all aspects
of the Fund's administration and operation. SBMFM provides investment management
and administration services to investment companies that had aggregate assets
under management as of September 30, 1994 in excess of $9.5 billion.
As the Fund's administrator, SBMFM oversees all aspects of the Fund's
administration and operations. Pursuant to an administration agreement with the
Fund, SBMFM is paid a fee at the annual rate of 0.20% of the Fund's average
daily net assets.
SUB-INVESTMENT ADVISER AND SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-investment adviser and sub-administrator. Boston
Advisors provides investment management, investment advisory and/ or
administrative services to investment companies that had aggregate total assets
under management as of September 30, 1994, in excess of $48.6 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
Strategy Advisers and Boston Advisors manage the Fund's portfolio in accordance
with the Fund's investment objective and policies, make investment decisions for
the Fund, place orders to purchase and sell securities and employ professional
portfolio managers and securities analysts who provide research services to the
Fund. Boston Advisors also calculates the net asset value of the Fund's shares
and generally assists SBMFM in all
46
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
aspects of the Fund's administration and operation. Under a sub-administration
agreement dated May 4, 1994, Boston Advisors is paid a portion of the fee paid
by the Fund to SBMFM at a rate agreed upon from time to time between Boston
Advisors and SBMFM. Prior to May 4, 1994, Boston Advisors served as the Fund's
administrator.
PORTFOLIO MANAGEMENT
John Fullerton, Senior Vice President of Boston Advisors, has served as
Investment Administrator (portfolio manager) of the Fund since it commenced
operations and manages the day-to-day operations of the Fund, including the
oversight of all investment decisions. In addition, Harry Rosenbluth, who also
serves as Investment Administrator, assists Mr. Fullerton in the management of
the Fund. Mr. Rosenbluth has managed investment portfolios since 1986 and has
been directly involved with the management of the Fund since 1992. It is
expected that Mr. Fullerton will be taking a sabbatical during 1995. In his
absence, it is anticipated that Mr. Rosenbluth will assume responsibility for
day-to-day management of the Fund.
Management's discussion and analysis and additional performance information
regarding the Fund during the fiscal year ended July 31, 1994 is included in the
Annual Report dated July 31, 1994. A copy of the Annual Report may be obtained
upon request without charge from a Smith Barney Financial Consultant or by
writing or calling the Fund at the address or phone number listed on page one of
this Prospectus.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A, Class B and Class C shares of the Fund at the annual rate of
0.25% of the average daily net assets of the
47
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
respective Class. Smith Barney is also paid a distribution fee with respect to
Class B and Class C shares at the annual rate of 0.50% and 0.45% of the average
daily net assets attributable to each of those Classes, respectively. Class B
shares that automatically convert to Class A shares eight years after the date
of original purchase will no longer be subject to a distribution fee. The fees
are used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and, in the case of Class B and Class C shares, to cover
expenses primarily intended to result in the sale of those shares. These
expenses include: advertising expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and expenses of Smith Barney
Financial Consultants and other persons who provide support services in
connection with the distribution of shares; interest and/or carrying charges;
and indirect and overhead costs of Smith Barney associated with the sale of Fund
shares, including lease, utility, communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include, a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Trust's Board of
Trustees will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust offers shares of beneficial interest
48
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
currently classified into four Classes -- A, B, C and Y. Each Class of shares
represents identical interests in the Fund's investment portfolio. As a result,
the Classes have the same rights, privileges and preferences, except with
respect to: (a) the designation of each Class; (b) the effect of the respective
sales charges, if any, for each Class; (c) the distribution and/or service fees
if any, borne by each Class pursuant to the plan; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Trust's Board of Trustees does not anticipate
that there will be any conflicts among the interests of the holders of the
different Classes of shares of the Fund. The Trustees, on an ongoing basis, will
consider whether any such conflict exists and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class of
each fund 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 Trust vote by individual fund on all matters except (a) matters affecting
only the interest of one or more of the funds, in which case only shares of the
affected fund or funds would be entitled to vote, or (b) when the 1940 Act
requires that shares of the funds be voted in the aggregate. Similarly, shares
of the Fund will be voted generally on a Fund-wide basis except on matters
affecting the interests of one Class of shares.
Normally, there will be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. Shareholders of
record of no less than two-thirds of the outstanding shares of the Trust may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. The Trustees will call a meeting
for any purpose upon written request of shareholders holding at least 10% of the
Fund's outstanding shares and the Trust will assist shareholders in calling such
a meeting as required by the 1940 Act.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Trust's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves as
the Fund's transfer agent.
49
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a listing of the investment securities held by
the Fund at the end of the reporting period. In an effort to reduce the printing
and mailing costs, the Trust plans to consolidate the mailing of the Fund's
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. In addition, the Trust also plans to
consolidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (that is, individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their Smith
Barney Financial Consultants or TSSG.
-------------------
Shareholders may seek information regarding the Funds from their Smith Barney
Financial Consultant.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST OR
THE
DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE
SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
50
<PAGE>
[LOGO]
SMITH BARNEY
PREMIUM TOTAL
RETURN FUND
388 Greenwich Street
New York, New York 10013
Fund 17, 178, 247
FD 0232 J4
[LOGO]
<PAGE>
P R O S P E C T U S
SMITH BARNEY
TAX-
EXEMPT
INCOME
FUND
NOVEMBER 7, 1994
Prospectus begins on page one
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS November 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Tax-Exempt Income Fund (the "Fund") is a diversified fund that
seeks to maximize current income exempt from Federal income taxes by investing
primarily in municipal bonds and notes. The Fund is one of a number of funds,
each having distinct investment objectives and policies, making up Smith Barney
Income Funds (the "Trust"). The Trust is an open-end management investment
company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the telephone
number set forth above or by contacting a Smith Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PROSPECTUS SUMMARY 3
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
---------------------------------------------------------------------------
MUNICIPAL SECURITIES 24
---------------------------------------------------------------------------
VALUATION OF SHARES 25
---------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 26
---------------------------------------------------------------------------
PURCHASE OF SHARES 29
---------------------------------------------------------------------------
EXCHANGE PRIVILEGE 36
---------------------------------------------------------------------------
REDEMPTION OF SHARES 40
---------------------------------------------------------------------------
MINIMUM ACCOUNT SIZE 42
---------------------------------------------------------------------------
PERFORMANCE 42
---------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 44
---------------------------------------------------------------------------
DISTRIBUTOR 45
---------------------------------------------------------------------------
ADDITIONAL INFORMATION 46
---------------------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks maximum current income exempt from Federal income taxes by
investing primarily in intermediate-and long-term municipal bonds and notes
rated A, Baa or Ba by Moody's Investors Service, Inc. ("Moody's") or A, BBB or B
by Standard & Poor's Corporation ("S&P"). Intermediate-and long-term bonds have
remaining maturities at the time of purchase of between three and twenty years.
See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three Classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. See
"Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 4.00% and are subject to an annual service fee of 0.15% of
the average daily net assets of the Class. The initial sales charge may be
reduced or waived for certain purchases. Purchases of Class A shares, which when
combined with current holdings of Class A shares offered with a sales charge
equal or exceed $500,000 in the aggregate, will be made at net asset value with
no sales charge, but will be subject to a contingent deferred sales charge
("CDSC") of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary--Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by 0.50% the first year
after purchase and by 1.00% each year thereafter to zero. This CDSC may be
waived for certain redemptions. Class B shares are subject to an annual service
fee of 0.15% and an annual distribution fee of 0.50% of the average daily net
assets of the Class. The Class B shares' distribution fee may cause that Class
to have higher expenses and pay lower dividends than Class A shares.
3
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.15% and an annual
distribution fee of 0.55% of the average daily net assets of the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The Class C shares'
distribution fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares. Purchases of Class C shares, which when combined
with current holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value with no sales
charge, and will be subject to a CDSC of 1.00% on redemptions made within 12
months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an alternative, Class
B and Class C shares are sold without any initial sales charge so the entire
purchase price is immediately invested in the Fund. Any investment return on
these additional invested amounts may partially or wholly offset the higher
annual expenses of these Classes. Because the Fund's future return cannot be
predicted, however, there can be no assurance that this would be the case.
4
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to any initial sales charge, CDSC or service or
distribution fees. The maximum purchase amount for Class A shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price would be immediately invested in the Fund. In addition, Class A share
purchases, which when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, will be made at
net asset value with no initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all Class
A shares held in funds sponsored by Smith Barney Inc. ("Smith Barney"), listed
under "Exchange Privilege." Class A share purchases may also be eligible for a
reduced initial sales charge. See "Purchase of Shares." Because the ongoing
expenses of Class A shares may be lower than those for Class B and Class C
shares, purchasers eligible to purchase Class A shares at net asset value or at
a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through
5
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
Smith Barney on a fully disclosed basis (an "Introducing Broker") or an
investment dealer in the selling group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account.
Investors in Class Y shares may open an account for an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes.
The minimum initial investment requirement for Class A, Class B and Class C
shares and the subsequent investment requirement for all Classes through the
Systematic Investment Plan described below is $100. There is no minimum
investment requirement in Class A for unitholders who invest distributions from
a unit investment trust ("UIT") sponsored by Smith Barney investing in Class A,
Class B or Class C shares. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $100. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Mutual Funds Management Inc.
("SBMFM"), serves as the Fund's investment adviser. SBMFM provides investment
advisory and management services to investment companies affiliated with Smith
Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.,
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
("Travelers"), a diversified financial services company engaged, through its
subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services.
SBMFM also serves as the Fund's administrator and The Boston Company
Advisors, Inc. ("Boston Advisors") serves as the Fund's sub-administrator.
Boston Advisors is a wholly owned subsidiary of The Boston Company, Inc.
("TBC"), which in turn is an indirect wholly owned subsidiary of Mellon Bank
Corporation, ("Mellon"). See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds at the respective
net asset value next determined, plus any applicable sales charge differential.
See "Exchange Privilege."
6
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
VALUATION OF SHARES Net asset value of the Fund for the prior day generally is
quoted daily in the financial section of most newspapers and is also available
from Smith Barney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are declared
daily and paid on the last business day of the Smith Barney statement month.
Distributions of net realized long-and short-term capital gains, if any, are
declared and paid annually after the end of the fiscal year in which they were
earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically, unless otherwise specified by an
investor, in additional shares of the same Class at current net asset value.
Shares acquired by dividend and distribution reinvestments will not be subject
to any sales charge or CDSC. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to Class A shares
on a pro rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the Fund
will achieve its investment objective. General changes in interest rates will
result in increases or decreases in the market value of the obligations held by
the Fund. The Fund may invest up to 35% of its assets in obligations rated Ba or
below by Moody's or BB or below by S&P or in nonrated securities deemed by SBMFM
to be of comparable quality, commonly known as "junk bonds." In addition, the
Fund may invest in obligations rated as low as Caa by Moody's or CCC by S&P.
Securities that are rated B generally lack characteristics of the desirable
investment and assurance of interest and principal payments over any long period
of time may be small. Securities that are rated Caa or CCC are of poor standing.
These issues may be in default or present elements of danger may exist with
respect to principal or interest. Although medium-or low-rated securities of the
type in which the Fund may invest offer a higher current yield than the yield
offered by higher rated securities, they involve greater volatility of price and
risk of loss of income and principal, including the probability of default by or
bankruptcy of the issuers of such securities. Medium-and low-rated and
comparable unrated securities (a) will likely have some quality and protective
characteristics that, in the judgment of the rating organizations, are
outweighed by large uncertainties of major risk exposures to adverse conditions
and (b) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the obligation.
The Fund has the right to invest up to 20% of its net assets in state and local
obligations that are "private activity bonds," the income for which may be
7
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
taxable as a specific preference item for purposes of the Federal alternative
minimum tax. Certain of the investments held by the Fund and certain of the
investment strategies that the Fund may employ might expose it to certain risks.
See "Investment Objective and Management Policies -- Certain Portfolio
Strategies."
THE FUND'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Fund, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption, unless otherwise noted, the
Fund's operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.00% None None None
Maximum CDSC
(as a percentage of original cost or redemption
proceeds, whichever is lower) None* 4.50% 1.00% None
- ---------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.60% 0.60% 0.60% 0.60%
12b-1 fees** 0.15 0.65 0.70 None
Other expenses*** 0.09 0.08 0.09 0.09
- ---------------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.84% 1.33% 1.39% 0.69%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, will be made at net asset value with no sales charge, but will be
subject to a CDSC of 1.00% on redemptions made within 12 months.
** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more than
the economic equivalent of the maximum front-end sales charge permitted by
the National Association of Securities Dealers, Inc.
*** For Class C and Class Y shares, "Other expenses" have been estimated based
on expenses incurred by Class A shares because Class C and Class Y shares
were not available for purchase prior to November 7, 1994.
8
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges depending on the amount purchased and, in the
case of Class B, Class C and certain Class A shares, the length of time the
shares are held. See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an annual 12b-1 service fee of 0.15% of the value of average
daily net assets of Class A shares. Smith Barney also receives with respect to
Class B shares, an annual 12b-1 fee of 0.65% of the value of average daily net
assets of that Class, consisting of a 0.50% distribution fee and a 0.15% service
fee and with respect to Class C shares, Smith Barney receives an annual 12b-1
fee of 0.70% of the value of average daily net assets of that Class, consisting
of a 0.55% distribution fee and a 0.15% service fee. "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
9
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
EXAMPLE The following example is intended to assist an investor in
understanding the various costs that an investor in the Fund will bear directly
or indirectly. The example assumes payment by the Fund of operating expenses at
the levels set forth in the table above. See "Purchase of Shares," "Redemption
of Shares" and "Management of the Trust and the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual
return and (2) redemption at the end of each time
period:
Class A $48 $66 $85 $140
Class B 59 72 83 147
Class C 24 44 76 167
Class Y 7 22 38 86
An investor would pay the following expenses on the
same investment, assuming the same annual return
and no redemption:
Class A 48 $66 $85 $140
Class B 14 42 73 147
Class C 14 44 76 167
Class Y 7 22 38 86
- -------------------------------------------------------------------------------------
</TABLE>
*Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following information has been audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report thereon appears in the Fund's Annual
Report dated July 31, 1994. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report, which is incorporated by reference into the Statement
of Additional Information.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94 7/31/93*+++
------- -----------
<S> <C> <C>
Operating performance:
Net asset value, beginning of period $18.24 $ 17.45
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 1.06 0.78
Net realized and unrealized gain/(loss) on investments (0.85 ) 1.00
- -------------------------------------------------------------------------------------
Total from investment operations 0.21 1.78
- -------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (1.02 ) (0.80)
Distributions in excess of net investment income (0.04 ) (0.03)
Distributions from net realized gains (0.13 ) (0.16)
- -------------------------------------------------------------------------------------
Total distributions (1.19 ) (0.99)
- -------------------------------------------------------------------------------------
Net asset value, end of period $17.26 $ 18.24
- -------------------------------------------------------------------------------------
Total return++ 1.14% 10.24%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $17,792 $13,508
Ratio of operating expenses to average net assets 0.84% 0.86%+
Ratio of net investment income to average net assets 5.83% 6.03%+
Portfolio turnover rate 39% 34%
- -------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced selling Class A shares on November 6, 1992.
+ Annualized
++ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charge.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period since the use of the undistributed method does not accord with
results of operations.
11
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
JULY 31, JULY 31, JULY 31, JULY 31, JULY 31,
1994 1993+++ 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Operating performance:
Net asset value, beginning of
year $18.24 $18.00 $16.97 $16.98 $17.31
- -------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.96 0.98 1.04 1.10 1.12
Net realized and unrealized
gain/(loss) on investments (0.85) 0.45 1.17 0.10 (0.30)
- -------------------------------------------------------------------------------------------
Total from investment
operations 0.11 1.43 2.21 1.20 0.82
- -------------------------------------------------------------------------------------------
Less distributions:
Distributions from net
investment income (0.92) (0.98) (1.04) (1.10) (1.12)
Distributions in excess of
net investment income (0.04) (0.04) -- -- --
Distributions from net
realized gains (0.13) (0.17) (0.14) (0.11) (0.03)
- -------------------------------------------------------------------------------------------
Total distributions (1.09) (1.19) (1.18) (1.21) (1.15)
- -------------------------------------------------------------------------------------------
Net asset value, end of year $17.26 $18.24 $18.00 $16.97 $16.98
- -------------------------------------------------------------------------------------------
Total return++ 0.60% 8.28% 13.50% 7.40% 4.95%
- -------------------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of year (in
000's) $1,069,466 $1,108,093 $871,339 $639,340 $573,930
Ratio of operating expenses
to average net assets 1.33% 1.38% 1.45%## 1.45% 1.47%
Ratio of net investment
income to average net
assets 5.34% 5.52% 5.96% 6.48% 6.57%
Portfolio turnover rate 39% 34% 61% 44% 29%
</TABLE>
- --------------------------------------------------------------------------------
## The annualized operating expense ratio excludes interest expense. The
annualized ratio including interest expense was 1.46% for the year ended
July 31, 1992.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable CDSC.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations.
12
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
ENDED ENDED ENDED PERIOD
JULY 31, JULY 31, JULY 31, ENDED
1989 1988 1987 7/31/86*
<S> <C> <C> <C> <C>
Operating Performance:
Net asset value, beginning of year $16.44 $16.48 $16.30 $15.00
- ----------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 1.13 1.13 1.10 1.04
Net realized and unrealized gain on
investments 0.88 0.02 0.18 1.30
- ----------------------------------------------------------------------------------------
Total from investment operations 2.01 1.15 1.28 2.34
- ----------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (1.13) (1.13) (1.10) (1.04)
Distributions in excess of net investment
income -- -- -- --
Distributions from net realized gains (0.01) (0.06) -- --
- ----------------------------------------------------------------------------------------
Total distributions (1.14) (1.19) (1.10) (1.04)
- ----------------------------------------------------------------------------------------
Net asset value, end of year $17.31 $16.44 $16.48 $16.30
- ----------------------------------------------------------------------------------------
Total return++ 12.68% 7.32% 7.90% 15.89%
- ----------------------------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $557,518 $451,262 $453,158 $349,527
Ratio of operating expenses to average net
assets 1.44% 1.43% 1.57% 1.53%+**
Ratio of net investment income to average
net assets 6.70% 6.99% 6.43% 6.88%+
Portfolio turnover rate 21% 12% 16% 6%
</TABLE>
- --------------------------------------------------------------------------------
* The Fund commenced operations on September 16, 1985. Those shares in
existence prior to November 6, 1992 were designated as Class B shares.
** Annualized expense ratio before waiver of fees by investment adviser,
sub-investment adviser and administrator and distributor was 1.58%.
+ Annualized
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable CDSC.
Prior to November 7, 1994, the Fund did not offer Class C or Class Y shares
and, accordingly, no comparable financial information is available at this time
for those Classes.
13
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is the maximization of current income
exempt from Federal income taxes. Under normal market conditions, the Fund will
invest at least 80% of its net assets in (a) "Municipal Bonds," which generally
are intermediate-and long-term debt obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, or
multistate agencies or authorities and (b) Municipal Leases, which generally are
participations in intermediate-and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts for
property or equipment. Under normal market conditions, the Fund's assets will be
invested primarily in Municipal Bonds and municipal leases (collectively,
"Municipal Securities") rated A, Baa or Ba by Moody's, or A, BBB or BB by S&P,
or in unrated Municipal Securities that are deemed to be of comparable quality
by SBMFM. Up to 35% of the Fund's assets may be invested in Municipal Securities
rated Ba or below by Moody's or BB or below by S&P or, if unrated, judged by
SBMFM, to be of comparable quality. The Fund's investment objective may be
changed only with the approval of the holders of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund will achieve its
investment objective.
The Fund may invest without limit in "municipal leases," which generally
are participations in intermediate-and short-term debt obligations issued by
municipalities consisting of leases or installment purchase contracts for
property or equipment. Municipal leases may take the form of a lease or an
installment purchase contract issued by state and local government authorities
to obtain funds to acquire a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment and other capital assets.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percent-
14
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
age of the Fund's assets that may be invested in municipal lease obligations. In
evaluating municipal lease obligations, SBMFM will consider such factors as it
deems appropriate, which may include: (a) whether the lease can be canceled; (b)
the ability of the lease obligee to direct the sale of the underlying assets;
(c) the general creditworthiness of the lease obligor; (d) the likelihood that
the municipality will discontinue appropriating funding for the leased property
in the event such property is no longer considered essential by the
municipality; (e) the legal recourse of the lease obligee in the event of such a
failure to appropriate funding; (f) whether the security is backed by a credit
enhancement such as insurance; and (g) any limitations which are imposed on the
lease obligor's ability to utilize substitute property or services rather than
those covered by the lease obligation.
Under normal circumstances, the Fund may invest up to 20% of its net assets
in "private activity bonds." Interest income on certain types of private
activity bonds issued after August 7, 1986 to finance nongovernmental activities
is a specific tax preference item for purposes of Federal individual and
corporate alternative minimum taxes. Individual and corporate shareholders may
be subject to a Federal alternative minimum tax to the extent that the Fund's
dividends are derived from interest on these bonds. These private activity bonds
are included in the term "Municipal Securities" for purposes of determining
compliance with the 80% test described above. Dividends derived from interest
income on all Municipal Securities are a component of the "adjusted current
earnings" item for purposes of the Federal corporate alternative minimum tax.
The Fund may invest in short-term obligations ("Temporary Investments"),
some of which may not be tax-exempt. Included among the Temporary Investments
are tax-exempt notes rated within the four highest grades by Moody's or S&P;
tax-exempt commercial paper rated no lower than A-2 by S&P or Prime-2 by
Moody's; and taxable money market instruments. At no time will more than 20% of
the Fund's assets be invested in Temporary Investments unless SBMFM temporarily
has adopted a defensive investment posture. In addition, the Fund may enter into
municipal bond index futures contracts and options on interest rate futures
contracts for hedging purposes. The Fund also may acquire variable rate demand
notes, purchase securities on a when-issued basis and enter into stand-by
commitments with respect to portfolio securities.
15
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ADDITIONAL INVESTMENTS
Money Market Instruments. Under normal conditions, the Fund may invest up
to 20% of its assets in Temporary Investments, including taxable money market
instruments. In addition, when SBMFM believes that market conditions warrant,
the Fund may invest in Temporary Investments without limitation for defensive
purposes. Short-term instruments in which the Fund may invest include
obligations issued or guaranteed as to principal and interest by the United
States government ("U.S. government securities"), certain bank obligations
including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loan associations and similar
institutions); commercial paper rated no lower than Prime-2 by Moody's or A-2 by
S&P or the equivalent from another major national rating service or, if unrated,
of an issuer having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements with respect to the
securities in which the Fund may invest. The Fund will invest in obligations of
a foreign bank or foreign branch of a domestic bank only if SBMFM determines
that the obligations present minimum credit risks. These obligations may be
traded in the United States or outside the United States, but will be
denominated in U.S. dollars.
U.S. Government Securities. The U.S. government securities in which the
Fund may invest include direct obligations of the United States Treasury (such
as Treasury Bills, Treasury Notes and Treasury Bonds), and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States; securities that are
supported by the right of the issuer to borrow from the United States Treasury;
and securities that are supported by the credit of the instrumentality. Treasury
Bills have maturities of less than one year, Treasury Notes have maturities of
one to 10 years and Treasury Bonds generally have maturities of greater than 10
years at the date of issuance. U.S. government securities generally do not
involve the credit risks associated with other types of interest-bearing
securities, although, as a result, the yields available from U.S. government
securities are generally lower than the yields available from interest-bearing
corporate securities.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
16
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
information concerning these strategies and their related risks is contained in
the Statement of Additional Information.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions 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. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. 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. SBMFM or Boston Advisors, acting
under the supervision of the Trust's Board of Trustees, 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. Investments by the Fund in repurchase agreements, if any, may
be limited by the restrictions on the Fund's investment in taxable investments.
When-Issued Securities. New issues of Municipal Securities are frequently
offered on a when-issued basis, which means that delivery and payment for such
securities normally take place within 45 days after the date of commitment to
purchase. The payment obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer enters into the
commitment. Municipal Securities, like other investments made by the Fund, may
decline or appreciate in value before their actual delivery to the Fund. Due to
the fluctuations in the value of securities purchased and sold on a when-issued
basis, the yields obtained on these securities may be higher or lower than the
yields available in the market on the date when the investments actually are
delivered to the buyers. The Fund will not accrue income with respect to a
when-issued security prior to its stated delivery date. The Fund will establish
a segregated
17
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
account with the Trust's custodian, Boston Safe Deposit and Trust Company
("Boston Safe") consisting of cash, U.S. government securities or other high
grade debt obligations in an amount equal to the amount of the purchase price of
the when-issued securities. Placing securities rather than cash in the
segregated account may have a leveraging effect on the Fund's net assets. The
Fund generally will make commitments to purchase Municipal Securities on a when-
issued basis only with the intention of actually acquiring the securities, but
the Fund may sell these securities before the delivery date if it is deemed
advisable.
Futures Contracts and Options on Futures Contracts. A municipal bond index
futures contract of the type in which the Fund may trade is based on an index of
long-term, tax-exempt municipal bonds. The contract is an agreement under which
two parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract was originally
written. An option on an interest rate futures contract, as contrasted with the
direct investment in a futures contract, gives the purchaser the right, in
return for the premium paid, to assume a position in an interest rate futures
contract at a specified exercise price at any time prior to the expiration date
of the option. A call option gives the purchaser of the option the right to
enter into a futures contract to buy and obliges the writer to enter into a
futures contract to sell the underlying debt securities. A put option gives the
purchaser the right to sell and obliges the writer to buy the underlying
contract. The Fund may purchase put options on interest rate futures contracts
to hedge its portfolio securities against the risk of rising interest rates, and
may purchase call options on interest rate futures contracts to hedge against a
decline in interest rates. The Fund may write put and call options on interest
rate futures contracts in entering into closing sale transactions and to
increase its ability to hedge against changes in interest rates. The Fund will
write put and call options only on interest rate future contracts that are
traded on a domestic exchange or board of trade.
Variable Rate Demand Notes. Municipal Securities purchased by the Fund may
include variable rate demand notes issued by industrial development authorities
and other governmental entities. Although variable rate demand notes are
frequently not rated by credit rating agencies, unrated notes purchased by the
Fund will be determined by SBMFM to be of comparable quality at the time of
purchase to instruments rated "high quality" (that is, within the two highest
ratings) by any major rating service. In addition, while no active secondary
market may exist with respect to a particular variable rate demand
18
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
note purchased by the Fund, the Fund may, upon the notice specified in the note,
demand payment of the principal of and accrued interest on the note at any time
and may resell the note at any time to a third party. The absence of such an
active secondary market, however, could make it difficult for the Fund to
dispose of the variable rate demand note involved in the event that the issuer
of the note defaulted on its payment obligations, and the Fund could, for this
or other reasons, suffer a loss to the extent of the default.
Stand-by Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal Securities held in its portfolio. Under a stand-by
commitment, a dealer agrees to purchase, at the Fund's option, specified
Municipal Securities at a specified price. The Fund may pay for stand-by
commitments either separately in cash or by paying a higher price for the
securities acquired with the commitment, thus increasing the cost of the
securities and reducing the yield otherwise available for them. The Fund intends
to enter into stand-by commitments only with brokers, dealers and banks that, in
the view of SBMFM, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, SBMFM will periodically
review relevant financial information concerning the issuer's assets,
liabilities and contingent claims. The Fund will acquire stand-by commitments
solely to facilitate portfolio liquidity and does not intend to exercise its
rights thereunder for trading purposes.
CERTAIN INVESTMENT GUIDELINES
The Fund may be invested up to 10% of its total assets in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) time deposits maturing from two business days through seven
calendar days and (c) futures contracts and options on them and certain variable
rate demand notes, to the extent that a liquid secondary market does not exist
for these instruments. Notwithstanding the foregoing, the Fund shall not invest
more than 10% of its assets in securities (excluding those subject to Rule 144A
under the Securities Act of 1933, as amended, that are determined to be liquid
by SBMFM) that are restricted. In addition, the Fund may invest up to 5% of its
assets in the securities of issuers that have been in continuous operation for
less than three years. The Fund also may borrow from banks for temporary or
emergency purposes, but not for investment purposes, in an amount up to 10% of
its total assets, and may pledge its assets to the same extent in connection
with such borrowings. Whenever these borrowings exceed 5% of the
19
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
value of the Fund's total assets, the Fund will not make any additional
investments. Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Trust's Board of Trustees. A complete list of investment
restrictions that identifies additional restrictions that cannot be changed
without the approval of the majority of the Fund's outstanding shares is
contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations,
such as those described below:
Municipal Securities. Even though Municipal Securities are
interest-bearing investments that promise a stable stream of income, their
prices are inversely affected by changes in interest rates and, therefore, are
subject to the risk of market price fluctuations. The values of Municipal
Securities with longer remaining maturities typically fluctuate more than those
of similarly rated Municipal Securities with shorter remaining maturities. The
values of fixed-income securities also may be affected by changes in the credit
rating or financial condition of the issuing entities.
Opinions relating to the validity of Municipal Securities and to the
exemption of interest on them from Federal income taxes are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
SBMFM will review the proceedings relating to the issuance of Municipal
Securities or the basis for opinions of counsel. The Fund may invest without
limit in debt obligations that are repayable out of revenues generated from
economically related projects or facilities or debt obligations whose issuers
are located in the same state. Sizable investments in these obligations could
involve an increased risk to the Fund should any of such related projects or
facilities experience financial difficulties.
Municipal Leases. Municipal leases, like other municipal debt obligations,
are subject to the risk of non-payment. The ability of issuers of municipal
leases to make timely lease payments may be adversely impacted in general
economic downturns and as relative governmental cost burdens are allocated and
reallocated among Federal, state and local governmental units. Such non-payment
would result in a reduction of income to the Fund, and could result in a
reduction in the value of the municipal lease experiencing non-payment and a
potential decrease in the net asset value of the Fund. Issuers of municipal
leases
20
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
might seek protection under the bankruptcy laws. In the event of bankruptcy of
such an issuer, the Fund could experience delays and limitations with respect to
the collection of principal and interest on such municipal leases and the Fund
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its right in the event of a default in lease
payments, the Fund may take possession of and manage the assets securing the
issuer's obligations on such securities, which may increase the Fund's operating
expenses and adversely affect the net asset value of the Fund. Any income
derived from the Fund's ownership or operation of such assets may not be tax-
exempt.
Potential Legislation. In past years, the United States government has
enacted various laws that have restricted or diminished the income tax exemption
on various types of Municipal Securities and may enact other similar laws in the
future. If any such laws are enacted that would reduce the availability of
Municipal Securities for investment by the Fund so as to affect the Fund's
shareholders adversely, the Trustees will reevaluate the Fund's investment
objective and policies and might submit possible changes in the Fund's structure
to Fund shareholders for their consideration. If legislation were enacted that
would treat a type of Municipal Securities as taxable for Federal income tax
purposes, the Fund would treat the security as a permissible taxable Temporary
Investment within the applicable limits set forth in this Prospectus.
Medium-, Low-and Unrated Securities. The Fund may invest in medium-or
low-rated securities commonly known as "junk bonds," and unrated securities of
comparable quality. Generally, these securities offer a higher current yield
than the yield offered by higher-rated securities, but involve greater
volatility of price and risk of loss of income and principal, including the
probability of default by or bankruptcy of the issuers of such securities.
Medium-and low-rated and comparable unrated securities (a) will likely have some
quality and protective characteristics that, in the judgment of the rating
organization, are outweighed by large uncertainties or major risk exposures to
adverse conditions and (b) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. These types of factors could, in certain instances,
reduce the value of securities held by the Fund with a commensurate effect on
the value of the Fund's shares. Therefore, an investment in the Fund should not
be considered as a complete investment program and may not be appropriate for
all investors.
21
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
While the market values of medium-and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium-and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium-and low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium-and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional expenses
to the extent that it is required to seek recovery upon a default in the payment
of principal or interest on its portfolio holdings. In addition, the markets in
which medium-and low-rated securities are traded are generally more limited than
those in which higher-rated securities are traded. The existence of limited
markets for these securities may restrict the availability of securities for the
Fund to purchase and also may have the effect of limiting the ability of the
Fund (a) to obtain accurate market quotations for purposes of valuing securities
and calculating net asset value and (b) to sell securities at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets. The market for medium-and low-rated and comparable
unrated securities is relatively new and has not fully weathered a major
economic recession. Any such recession, however, could likely disrupt severely
the market for such securities, adversely affect the value of such securities
and also could adversely affect the ability of the issuers of such securities to
repay principal and pay interest thereon.
Fixed-income securities, including medium-and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities that are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities that are rated B generally lack characteristics of the desirable
investment, and assurance of interest and principal payments over any long
period of
22
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
time may be small. Securities that are rated Caa by Moody's or CCC by S&P are of
poor standing. These issues may be in default or present elements of danger may
exist with respect to principal or interest.
In light of these risks described above, SBMFM, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration. Those factors may include, as applicable, the
issuer's financial resources, its sensitivity to economic conditions and trends,
the operating history of and the community support for the facility financed by
the issue, the ability of the issuer's management and regulatory matters.
Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.
Non-Publicly Traded and Illiquid Securities. The Fund's sale of securities
that are not publicly traded is typically restricted under the Federal
securities laws. As a result, the Fund may be forced to sell these securities at
less than fair market value or may not be able to sell them when SBMFM believes
it desirable to do so. The Fund's investments in illiquid securities are subject
to the risk that should the Fund desire to sell any of these securities when a
ready buyer is not available at a price that the Fund deems representative of
their value, the value of the Fund's net assets could be adversely affected.
Futures and Options on Futures. When deemed advisable by SBMFM, the Fund
may enter into futures contracts or related options that are traded on a
domestic exchange or board of trade. Such investments, if any, by the Fund will
be made solely for the purpose of hedging against the effects of changes in the
value of its portfolio securities due to anticipated changes in interest rates
and market conditions and when the transactions are economically appropriate to
the reduction of risks inherent in the management of the Fund. The Fund may not
enter into futures and options contracts for which aggregate initial margin
deposits and premiums paid for unexpired options exceed 5% of the fair market
value of the Fund's assets, after taking into account unrealized profits and
unrealized losses on futures contracts into which the Fund has entered.
The use of futures contracts and options on those contracts as a hedging
device involves several risks. No assurance can be given that a correlation will
exist between price movements in the underlying securities or index, on the one
hand, and price movements in the securities that are the subject of the hedge,
on
23
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the other hand. Positions in futures contracts and options on those contracts
may be closed out only on the exchange or board of trade on which they were
entered into, and no assurance can be given that an active market will exist for
a particular contract or option at any particular time. Losses incurred in
hedging transactions and the costs of these transactions will affect the Fund's
performance. Furthermore, because any interest earned from transactions in
municipal bond index futures contracts and options on interest rate futures
contracts will be taxable, it is anticipated that the Fund will invest in these
instruments only in unusual circumstances, such as when SBMFM anticipates an
extreme change in interest rates or market conditions.
PORTFOLIO TRANSACTIONS
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be maintained.
Usually no brokerage commissions, as such, are paid by the Fund for
purchases and sales undertaken through principal transactions, although the
price paid usually includes an undisclosed compensation to the dealer acting as
agent. The prices paid to underwriters of newly issued securities usually
include a concession paid by the issuer to the underwriter, and purchases of
after-market securities from dealers ordinarily are executed at a price between
the bid and asked price.
Transactions on behalf of the Fund are allocated to various dealers by
SBMFM in its best judgment. The primary consideration is prompt and effective
execution of orders at the most favorable price. Subject to that primary
consideration, dealers may be selected for research, statistical or other
services to enable SBMFM to supplement its own research and analysis with the
views and information of other securities firms.
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES
The term "Municipal Securities" generally is understood to include debt
obligations issued to obtain funds for various public purposes, the interest on
which qualifies, in the opinion of bond counsel to the issuer, as excluded from
gross income for Federal income tax purposes. In addition, Municipal Securities
24
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
MUNICIPAL SECURITIES (CONTINUED)
may include "private activity bonds" if the proceeds from such bonds are used
for the construction, equipment, repair or improvement of privately operated
industrial or commercial facilities, and the interest paid on such bonds may be
excluded from gross income for Federal income tax purposes. Current Federal tax
laws place substantial limitations on the aggregate amount of such bonds that
any given state may issue.
CLASSIFICATIONS
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise or other specific revenue source, but not from the
general taxing power. Sizeable investments in such obligations could involve an
increased risk to the Fund should any of such related facilities experience
financial difficulties. Private activity bonds are in most cases revenue bonds
and generally do not carry the pledge of the credit of the issuing municipality.
There are, of course, variations in the security of Municipal Securities, both
within a particular classification and between classifications.
- --------------------------------------------------------------------------------
VALUATION OF SHARES
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 that Class outstanding.
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 Trust's Board of Trustees.
Short-term investments that mature in 60 days or less are valued at amortized
cost whenever the Trust's Board of Trustees determine that amortized cost
reflects fair value of those investments. Amortized cost valuation involves
valuing an instrument at its cost initially and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. Further
information regarding the Fund's valuation policies is contained in the
Statement of Additional Information.
25
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders.
The Fund declares dividends from its net investment income (that is, income
other than its net realized long-and short-term capital gains) on each day that
the Fund is open for business and pays dividends on the last business day of the
Smith Barney statement month. Distributions of net realized long-and short-term
capital gains, if any, are declared and paid annually after the end of the
fiscal year in which they have been earned.
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 CDSC. In addition, in
order to avoid the application of a 4% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the Fund may make an
additional distribution shortly before December 31 of each year of any
undistributed ordinary income or capital gains and expects to make any other
distributions as are necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended ("1940 Act") and other applicable laws, a notice will accompany any
distribution paid from sources other than net investment income. In the event
the Fund distributes amounts in excess of its net investment income and net
realized capital gains, such distributions may have the effect of decreasing the
Fund's total assets, which may increase the Fund's expense ratio.
The per share dividends on Class B shares and Class C shares may be lower
than the per share dividends on Class A and Y shares principally as a result of
the distribution fee applicable with respect to Class B and Class C shares. The
per share dividends on Class A shares of the Fund may be lower than the per
share dividends on Class Y 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 Classes A, B, C and Y.
26
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Internal Revenue
Code of 1986, as amended. Dividends paid from the Fund's net investment income
(other than dividends derived from interest earned on qualifying tax-exempt
obligations as described below) and distributions of the Fund's net realized
short-term capital gains are taxable to shareholders as ordinary income,
regardless of how long shareholders in the Fund have held their shares and
whether the dividends or distributions are received in cash or reinvested in
additional shares of the Fund. Distributions of the Fund's net realized
long-term capital gains will be taxable to shareholders as long-term capital
gains, regardless of how long shareholders have held their shares of the Fund
and whether the distributions are received in cash or are reinvested in
additional Fund shares. In addition, as a general rule, a shareholder's gain or
loss on a sale or redemption of shares of the Fund will be a long-term capital
gain or loss if the shareholder has held the shares for more than one year and
will be a short-term capital gain or loss if the shareholder has held the shares
for one year or less. The per share dividends and distributions on Class A
shares will be higher than the per share dividends and distributions on Class B
shares as a result of lower distribution and transfer agency fees applicable to
Class A shares.
Dividends paid by the Fund that are derived from interest earned on
qualifying tax-exempt obligations are expected to be "exempt-interest" dividends
that shareholders may exclude from their gross incomes for Federal income tax
purposes if the Fund satisfies certain asset percentage requirements. Any
exempt-interest dividends of a Fund derived from interest on Municipal
Securities, the interest on which is a specific tax preference item for Federal
income tax purposes, will be a specific tax preference item for purposes of the
Federal individual and corporate alternative minimum taxes. In addition, all
exempt-interest dividends will be a component of the "current earnings"
adjustment item for purposes of the Federal corporate alternative minimum income
tax and corporate shareholders may incur a larger Federal environmental tax
liability through the receipt of dividends and distributions from the Fund.
Statements as to the tax status of the dividends and distributions received
by shareholders of the Fund are mailed annually. These statements set forth the
27
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
dollar amount of income excluded from Federal income taxes and the dollar
amount, if any, subject to Federal income taxes. These statements will also
designate the amount of exempt-interest dividends that are a specific preference
item for purposes of the Federal individual and corporate alternative minimum
taxes and will indicate the shareholder's share of the investment expenses of
the Fund. The Fund notifies its shareholders annually as to the interest
excluded from Federal income taxes earned by the Fund with respect to those
states and possessions in which the Fund has or had investments.
Shareholders should consult their tax advisors with specific reference to
their own tax situations. Shareholders of the Fund should in particular consult
their tax advisors about the status of the Fund's dividends and distributions
for state and local tax purposes in order to assess the consequences of
investing in the Fund under state and local laws generally and to determine
whether dividends paid by the Fund are exempt from any otherwise applicable
state or local income taxes.
TAX-EXEMPT INCOME VS. TAXABLE INCOME
The table below shows individual taxpayers how to translate the tax savings
from investments such as the Fund into an equivalent return from a taxable
investment. The yields used below are for illustration only and are not intended
to represent current or future yields for the Fund, which may be higher or lower
than those shown.
<TABLE>
<CAPTION>
FEDERAL
MARGINAL TAX-EXEMPT YIELD
TAXABLE INCOME TAX RATE* 2.00% 3.00% 4.00% 5.00% 6.00%
7.00%
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SINGLE JOINT EQUIVALENT TAXABLE YIELD
$ 22,750 $ 38,000 15.00% 2.67 % 4.01 % 5.35 % 6.68 % 8.02 % 9.36%
22,751-55,100 38,001-91,850 28.00 3.16 4.73 6.31 7.89 9.47 11.05
55,101-115,000 91,851-140,000 31.00 3.29 4.94 6.59 8.23 9.88 11.53
115,001-250,000 140,001-250,000 36.00 3.55 5.33 7.10 8.88 10.65 12.43
over 250,000 over 250,000 39.60 3.76 5.54 7.53 9.41 11.29 13.17
</TABLE>
- --------------------------------------------------------------------------------
* The Federal tax rates shown are those currently in effect for 1994. The
calculations assume that no income will be subject to the Federal
alternative minimum tax.
28
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL
The Fund offers four Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or a CDSC,
and are available only to investors investing a minimum of $5,000,000. See
"Prospectus Summary--Alternative Purchase Arrangements" for a discussion of
factors to consider in selecting which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group. When purchasing shares of the Fund, investors must specify
whether the purchase is for Class A, Class B, Class C or Class Y shares. No
maintenance fee will be charged by the Fund in connection with a brokerage
account through which an investor purchases or holds shares.
Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account in the Fund.
Investors in Class Y shares may open an account by making an initial investment
of $5,000,000. Subsequent investments of at least $50 may be made for all
Classes. For the Fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $100. There are no minimum
investment requirements for Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, unitholders who invest distributions from
a UIT sponsored by Smith Barney and Trustees of the Trust 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 the
Fund's transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a
subsidiary of First Data Corporation. Share certificates are issued only upon a
shareholder's written request to TSSG.
Purchase orders received by Smith Barney 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. Orders received
by dealers or Introducing Brokers 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
Smith Barney prior to Smith Barney's close of business (the "trade date").
29
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Currently, payment for Fund shares is due on the fifth business day (the
"settlement date") after the trade date. The Fund anticipates that, in
accordance with regulatory changes, beginning on or about June 1, 1995, the
settlement date will be the third business day after the trade date.
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, Smith Barney or TSSG is authorized through
preauthorized transfers of $100 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide 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 Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's 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 Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<TABLE>
<CAPTION>
DEALERS
SALES CHARGE SALES CHARGE REALLOWANCE
AS % OF AS % OF AS % OF
AMOUNT OF INVESTMENT OFFERING PRICE AMOUNT INVESTED OFFERING
PRICE
<S> <C> <C> <C>
-------------------------------------------------------------------------------------
Less than $25,000 4.00% 4.17% 3.60%
$25,000-$49,999 3.50% 3.63% 3.15%
$50,000-$99,999 3.00% 3.09% 2.70%
$100,000-$249,999 2.50% 2.56% 2.25%
$250,000-$499,999 1.50% 1.52% 1.35%
$500,000 and over * * *
-------------------------------------------------------------------------------------
</TABLE>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made at net asset value without any initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months of
purchase. The CDSC on Class A shares is payable to Smith Barney, which
compensates Smith Barney Financial Consultants and other dealers whose clients
make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B and Class C shares is
waived. See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
30
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
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 Securities Act of
1933, as amended.
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, his or her spouse and children, or a trustee or other fiduciary
of a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares held in funds sponsored by Smith Barney that are offered with
a sales charge listed under "Exchange Privilege."
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 of Class A shares to Trustees
of the Trust and employees of Travelers and its subsidiaries, or to the spouses
and children of such persons (including the surviving spouse of a deceased
Trustee or employee, and retired Trustees or employees); (b) offers of Class A
shares to any other investment company in connection with 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 Smith Barney
Financial Consultant (for a period up to 90 days from the commencement of the
Financial Consultant's employment with 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) shareholders who have redeemed Class A shares in
the Fund (or Class A shares of another fund of the Smith Barney Mutual Funds
that are offered with a sales charge equal to or greater than the maximum sales
charge of the Fund) and who wish to reinvest their redemption proceeds in the
Fund, provided the reinvestment is made within 60 calendar days of the
redemption; (e) accounts managed by registered investment advisory subsidiaries
of Travelers; and (f) investments of distributions from a UIT sponsored by Smith
Barney. 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.
31
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
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 asset value of all Class A
shares of the Fund and of funds sponsored by Smith Barney which are offered with
a sales charge 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.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternatives--Class A Shares," and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer or partnership-sanctioned plan meeting
certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions. Smith
Barney may also offer a reduced sales charge or net asset value purchase for
aggregating related fiduciary accounts under such conditions that Smith Barney
will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
32
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts 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 that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the "Amount Invested" as referred to
in the preceding sales charge table includes purchases of all Class A shares of
the Fund and other funds of the Smith Barney Mutual Funds offered with a sales
charge over a 13 month period based on the total amount of intended purchases
plus the value of all Class A shares previously purchased and still owned. An
alternative is to compute the 13 month period starting up to 90 days before the
date of execution of a Letter of Intent. 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. New Letters of Intent will be accepted beginning
January 1, 1995. Please contact a Smith Barney Financial Consultant or TSSG to
obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares which when combined with Class A shares
offered with a sales charge currently held by an investor equal or exceed
$500,000 in the aggregate.
33
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Any applicable CDSC will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC 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 C shares and Class A shares, that are
CDSC Shares, shares redeemed more than 12 months after their purchase.
Class C and Class A shares that are CDSC Shares are subject to a 1.00% CDSC
if redeemed within 12 months of purchase. In circumstances in which the CDSC 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 Smith Barney
statement month. The following table sets forth the rates of the charge for
redemptions of Class B shares by shareholders.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
<S> <C> <C>
-------------------------------------------------------------------------------------
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- -------------------------------------------------------------------------------------
</TABLE>
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 shareholder 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. Shareholders who held Class B shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World Income Fund") on
July 15, 1994 and who subsequently exchange those shares
34
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
for Class B shares of the Fund will be offered the opportunity to exchange all
such Class B shares for Class A shares of the Fund four years after the date on
which those shares were deemed to have been purchased. Holders of such Class B
shares will be notified of the pending exchange in writing approximately 30 days
before the fourth anniversary of the purchase date and, unless the exchange has
been rejected in writing, the exchange will occur on or about the fourth
anniversary date. See "Prospectus Summary -- Alternative Purchase
Arrangements--Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that 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 CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares 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 CDSC 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 CDSC
The CDSC 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 shareholders's shares at the time the withdrawal plan commences
(see below) (provided, however, that 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 that were established prior to November 7, 1994);
(c) redemptions of shares within 12 months following the death or disability of
the shareholder; (d) involuntary redemptions; and (e) redemptions of shares in
connection with a combination of the Fund with any investment company by merger,
acquisition of assets or otherwise. In addition, a
35
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
shareholder who has redeemed shares from other funds of the 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 CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by TSSG in the
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A,
Class B and Class C shares are subject to minimum investment requirements and
all shares are subject to the other requirements of the Fund into which
exchanges are made, and a sales charge differential may apply.
FUND NAME
<TABLE>
<S> <C>
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
</TABLE>
36
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<S> <C>
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Smith Barney World Funds, Inc.--International Balanced Portfolio
Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government Portfolio
Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities
++ Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Funds, Inc.--Utility Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Municipal Bond Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds--California Limited Term Portfolio
Smith Barney Muni Funds--California Portfolio
* Smith Barney Muni Funds--Florida Limited Term Portfolio
</TABLE>
37
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<S> <C>
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
* Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New Jersey Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc.--Cash Portfolio
++ Smith Barney Money Funds, Inc.--Government Portfolio
*** Smith Barney Money Funds, Inc.--Retirement Portfolio
++ Smith Barney Muni Funds--California Money Market Portfolio
++ Smith Barney Muni Funds--New York Money Market Portfolio
++ Smith Barney Municipal Money Market Fund, Inc.
</TABLE>
- --------------------------------------------------------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund.
Class A Exchanges. Class A shares of Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less than the maximum
charged by other Smith Barney Mutual Funds will be subject to the appropriate
"sales charge differential" upon the exchange of such shares for Class A shares
of a fund sold with a higher sales charge. The "sales charge differential" is
limited to a percentage rate no greater than the excess of the sales charge rate
applicable to purchases of shares of the mutual fund being acquired in the
exchange over the sales charge rate(s) actually paid on the mutual fund shares
relinquished in the exchange and on any predecessor of those shares. For
purposes of the exchange privilege, shares obtained through automatic
reinvestment of dividends and capital gains distributions are treated as having
paid the same sales charges applicable to the shares on which the dividends or
distributions were paid; however, if no sales charge was imposed upon the
initial
38
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
purchase of the shares, any shares obtained through automatic reinvestment will
be subject to a sales charge differential upon exchange.
Class B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in any
of the funds imposing a higher CDSC than that imposed by the Fund, the exchanged
Class B shares will be subject to the higher applicable CDSC. Upon an exchange,
the new Class B shares will be deemed to have been purchased on the same date as
the Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
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. SBMFM 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, SBMFM will
notify Smith Barney and Smith Barney may, at its discretion, decide to limit
additional purchases and/or exchanges by a shareholder. Upon such a
determination, Smith Barney 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.
Exchanges will be processed at the net asset value next determined, plus
any applicable sales charge differential. Redemption procedures discussed below
are also applicable for exchanging shares, and exchanges will be made upon
receipt of all supporting documents in proper form. If the account registration
of the shares of the fund being acquired is identical to the registration of the
shares of the fund exchanged, no signature guarantee is required. A capital gain
or loss for
39
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
tax purposes will be realized upon the exchange, depending upon the cost or
other basis of shares redeemed. Before exchanging shares, investors should read
the current prospectus describing the shares to be acquired. The Fund reserves
the right to modify or discontinue exchange privileges upon 60 days' prior
notice to shareholders.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
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 Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the seventh 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. The Fund anticipates that, in
accordance with regulatory changes, beginning on or about June 1, 1995, payment
will be made on the third business day after receipt of proper tender.
Generally, if the redemption proceeds are remitted to a Smith Barney brokerage
account, these funds will not be invested for the shareholder's benefit without
specific instruction and 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 ten days or more.
40
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or a dealer in a selling group or by
submitting a written request for redemption to:
Smith Barney Tax-Exempt Income Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
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 TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power 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. TSSG may require
additional supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $100 monthly or quarterly. The withdrawal plan
will be carried over on exchanges between funds or Classes of the Fund. Any
applicable CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares subject to the
CDSC at the time the withdrawal plan commences. (With respect to withdrawal
plans in effect prior to November 7, 1994, any applicable CDSC will be waived on
amounts withdrawn that do not exceed 2.00% per month of the shareholder's shares
subject to the CDSC.) For further information regarding
41
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
the automatic cash withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.
- --------------------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate 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
this 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 automatic redemption.
- --------------------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30-day "yield" and
"equivalent taxable yield" of each Class of shares. The yield refers to the
income generated by an investment in those shares over the 30-day period
identified in the advertisement and is computed by dividing the net investment
income per share earned by the Class during the period by the maximum offering
price per share on the last day of the period. This income is "annualized" by
assuming that the amount of income is generated each month over a one-year
period and is compounded semi-annually. The annualized income is then shown as a
percentage of the net asset value.
The equivalent taxable yield demonstrates the yield on a taxable investment
necessary to produce an after-tax yield equal to the Fund's tax-exempt yield for
each Class. It is calculated by increasing the yield shown to the extent
necessary to reflect the payment of taxes at specified tax rates. Thus, the
equivalent taxable yield always will exceed the Fund's yield. For more
information on equivalent taxable yields, refer to the table under "Dividends,
Distributions and Taxes."
42
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
PERFORMANCE (CONTINUED)
TOTAL RETURN
From time to time the Fund may include the Fund's total return, average
annual total return and current dividend return in advertisements and/or other
types of sales literature. These figures are computed separately for Class A,
Class B, Class C 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 gains distributions on the reinvestment
dates at prices calculated as stated in this 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 calculates current dividend return for each
Class by annualizing the most recent monthly distribution and dividing by the
net asset value or the maximum public offering price (including sales charge) on
the last day of the period for which current dividend return is presented. The
current dividend return for each Class may vary from time to time depending on
market conditions, the composition of its investment portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating current dividend return should be considered when comparing a Class'
current return to yields published for other investment companies and other
investment vehicles. 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. or similar independent
services that monitor the performance of mutual funds or other industry
publications. The Fund will include performance data for Class A, Class B, Class
C and Class Y shares in any advertisement or information including performance
data of the Fund.
43
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and companies that furnish services to the Trust
and the Fund, including agreements with the Fund's distributor, investment
adviser, administrator, sub-administrator, custodian and transfer agent. The
day-to-day operations of the Fund are delegated to the Fund's investment
adviser, administrator and sub-administrator. The Statement of Additional
Information contains background information regarding each Trustee and executive
officer of the Fund.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the advisory agreement
effective November 7, 1994, from its affiliate, Mutual Management Corp. (Mutual
Management Corp. and SBMFM are both wholly owned subsidiaries of Holdings.)
Investment advisory services continue to be provided to the Fund by the same
portfolio manager who provided services under the agreement with Mutual
Management Corp. SBMFM (through predecessor entities) has been in the investment
counseling business since 1934 and is a registered investment adviser. SBMFM
renders investment advice to investment companies that had aggregate assets
under management as of September 30, 1994 in excess of $52.4 billion.
Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM 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. For
investment advisory services rendered, the Fund pays SBMFM a monthly fee at the
annual rate of 0.40% of the value of its average daily net assets.
PORTFOLIO MANAGEMENT
Lawrence T. McDermott, an Investment Officer of SBMFM, has served as Vice
President and Investment Officer of the Fund since it commenced operations and
manages the day to day operations of the Fund, including making all investment
decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1994 is
included in
44
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
the Annual Report dated July 31, 1994. A copy of the Annual Report may be
obtained upon request and without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR--SBMFM
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered, the Fund pays
SBMFM a fee at the annual rate of 0.20% of the value of its average daily net
assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to investment
companies that had aggregate assets under management as of September 30, 1994,
in excess of $48.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated May 4, 1994, Boston
Advisors is paid a portion of the administration fee paid by the Fund to SBMFM
at a rate agreed upon from time to time between Boston Advisors and SBMFM. Prior
to May 4, 1994, Boston Advisors served as the Fund's administrator.
- --------------------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A, Class B and Class C shares of the Fund at the annual rate of
0.15% of the average daily net assets of the respective Class. Smith Barney is
also paid a distribution fee with respect to Class B and Class C shares at the
annual rate of 0.50% and 0.55%, respectively, of the average daily net assets
attributable to those Classes. Class B shares which automatically convert to
45
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
Class A shares eight years after the date of original purchase will no longer be
subject to a distribution fee. The fees are used by Smith Barney to pay its
Financial Consultants for servicing shareholder accounts and, in the case of
Class B and Class C shares, to cover expenses primarily intended to result in
the sale of those shares. These expenses include: advertising expenses; the cost
of printing and mailing prospectuses to potential investors; payments to and
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest and/or
carrying charges; and indirect and overhead costs of Smith Barney associated
with the sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Fund's Board of Trustees
will evaluate the appropriateness of the Plan and its payment terms on a
continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts Business Trust." Each Class of the Fund represents identical
interests in the Fund's investment portfolio. As a result, the Classes have the
same rights, privileges and preferences, except with respect to: (a) the
designation of each Class; (b) the impact of the respective sales charges, if
any, for each Class; (c) the distribution and/or service fees, if any, borne by
each Class pursuant to the Plan; (d) the expenses allocable exclusively to each
Class; (e) voting rights on matters exclusively affecting a single Class; (f)
the exchange privileges of each Class; and (g) the conversion feature of the
Class B shares.
46
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
The Trust's Board of Trustees does not anticipate that there will be any
conflicts among the interests of the holders of the different Classes of shares
of the Fund. The Trustees, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
of each Fund 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 Trust vote by individual fund on all matters except (a) matters affecting
only the interests of one or more of the funds, in which case only shares of the
affected fund or funds would be entitled to vote or (b) when the 1940 Act
requires that shares of the funds be voted in the aggregate. Similarly, shares
of the Fund will be voted generally on a Fund-wide basis except on matters
affecting the interests of one Class of shares.
The Trust does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose upon
the written request of holders of 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.
Boston Safe an indirect wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Trust's investments.
TSSG, is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which includes a listing of the investment securities held by the Fund
at the end of the reporting period. In an effort to reduce the Fund's printing
and mailing costs, the Trust plans to consolidate the mailing of the Fund's
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
47
<PAGE>
SMITH BARNEY
Tax-Exempt Income Fund
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
consolidation to apply to their account should contact their Smith Barney
Financial Consultant or the Trust's transfer agent.
------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Trust or the
distributor. This Prospectus does not constitute an offer by the Fund or the
distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such an offer or solicitation in any such jurisdiction.
48
<PAGE>
<LOGO>
A Member of Travelers Group
TAX-
EXEMPT
INCOME
FUND
308 Greenwich Street
New York, New York 10013
Recycled Fund 18,187
Recyclable FD0214J4
<PAGE>
P
R SMITH BARNEY
O UTILITIES
S FUND
P
NOVEMBER 7, 1994
E
C Prospectus begins on page one
T
U
S
[LOGO] SMITH BARNEY MUTUAL FUNDS
INVESTING FOR YOUR FUTURE.
EVERYDAY.
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS November 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The Smith Barney Utilities Fund (the "Fund") is a diversified fund that
seeks current income by investing in equity and debt securities of utility
companies selected by the Fund's investment adviser. Long-term capital
appreciation is a secondary objective of the Fund. The Fund is one of a number
of funds, each having distinct investment objectives and policies, making up the
Smith Barney Income Funds (the "Trust"). The Trust is an open-end management
investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and expenses,
that prospective investors will find helpful in making an investment decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the telephone
number set forth above or by contacting a Smith Barney Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Utilities Fund
<TABLE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<S> <C>
PROSPECTUS SUMMARY 3
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
---------------------------------------------------------------------------
VALUATION OF SHARES 27
---------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 28
---------------------------------------------------------------------------
PURCHASE OF SHARES 30
---------------------------------------------------------------------------
EXCHANGE PRIVILEGE 40
---------------------------------------------------------------------------
REDEMPTION OF SHARES 44
---------------------------------------------------------------------------
MINIMUM ACCOUNT SIZE 46
---------------------------------------------------------------------------
PERFORMANCE 46
---------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 47
---------------------------------------------------------------------------
DISTRIBUTOR 49
---------------------------------------------------------------------------
ADDITIONAL INFORMATION 50
---------------------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management investment
company that seeks current income by investing in the equity and debt securities
of companies in the utility industries. Long-term capital appreciation is a
secondary objective. The utility industries are comprised of companies
principally engaged (that is, at least 50% of a company's assets, gross income
or net profits results from utility operations or the company is regulated as a
utility by a government agency or authority) in the manufacture, production,
generation, transmission and sale of electric and gas energy and companies
principally engaged in the communications field, including entities such as
telephone, telegraph, satellite, microwave and other companies regulated by
governmental agencies as utilities that provide communication facilities for the
public benefit, but not including those in public broadcasting. Under normal
circumstances, the Fund will invest at least 65% of its assets in equity and
debt securities of companies in the utility industries and will concentrate in
excess of 25% of its assets in the securities of these companies. See
"Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, is offered
only to investors meeting an initial investment minimum of $5,000,000. In
addition, a fifth Class, Class Z shares, which is offered pursuant to a separate
prospectus, is offered exclusively to (a) tax-exempt employee benefit and
retirement plans of Smith Barney Inc. ("Smith Barney") and its affiliates and
(b) unit investment trusts ("UITs") sponsored by Smith Barney and its
affiliates. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% imposed at the time of purchase and are subject to
an annual service fee of 0.25% of the average daily net assets of the Class. The
initial sales charge may be reduced or waived for certain purchases. Purchases
of Class A shares, which when combined with current holdings of Class A shares
offered with a sales charge equal or exceed $500,000 in the aggregate, will be
3
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
made at net asset value with no sales charge, but will be subject to a
contingent deferred sales charge ("CDSC") of 1.00% on redemptions made within 12
months of purchase. See "Prospectus Summary--Reduced or No Initial Sales
Charge."
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1.00% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.50% of the average daily net assets of the Class. The
Class B shares' distribution fee may cause that Class to have higher expenses
and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will convert
automatically to Class A shares, based on relative net asset value, eight years
after the date of the original purchase. Upon conversion, these shares will no
longer be subject to an annual distribution fee. In addition, a certain portion
of Class B shares that have been acquired through the reinvestment of dividends
and distributions ("Class B Dividend Shares") will be converted at that time.
See "Purchase of Shares -- Deferred Sales Charge Alternative."
Class C Shares. Class C shares are sold at net asset value with no initial
sales charge. They are subject to an annual service fee of 0.25% and an annual
distribution fee of 0.45% of the average daily net assets of the Class C shares,
and investors pay a CDSC of 1.00% if they redeem Class C shares within 12 months
of purchase. This CDSC may be waived for certain redemptions. The Class C
shares' distribution fee may cause that Class to have higher expenses and pay
lower dividends than Class A shares. Purchases of Class C shares, which when
combined with current holdings of Class C shares of the Fund equal or exceed
$500,000 in the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on redemptions made
within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge or CDSC. They are not subject to any service
or distribution fees.
4
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
In deciding which Class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class of shares is more
beneficial to an investor depends on the amount and intended length of his or
her investment. Shareholders who are planning to establish a program of regular
investment may wish to consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares are subject to
lower ongoing expenses over the term of the investment. As an investment
alternative, Class B and Class C shares are sold without any initial sales
charge so the entire purchase price is immediately invested in the Fund. Any
investment return on these additional invested amounts may partially or wholly
offset the higher annual expenses of these Classes. Because the Fund's future
return cannot be predicted, however, there can be no assurance that this would
be the case.
Finally, investors should consider the effect of the CDSC period and any
conversion rights of the Classes in the context of their own investment time
frame. For example, while Class C shares have a shorter CDSC period than Class B
shares, they do not have a conversion feature, and therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or service or
distribution fee. The maximum purchase amount for Class A shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999. There is no maximum
purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales charge on Class A
shares may be waived for certain eligible purchasers, and the entire purchase
price will be immediately invested in the Fund. In addition, Class A share
purchases, which when combined with current holdings of Class A shares offered
with a sales charge equal or exceed $500,000 in the aggregate, will be made at
net asset value with no initial sales charge, but will be subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The $500,000 aggregate
investment may be met by adding the purchase to the net asset value of all Class
A shares held in funds sponsored by Smith Barney listed under "Exchange
Privilege." Class A share purchases may also be eligible for a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing expenses of
5
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
Class A shares will be lower than those for Class B and Class C shares,
purchasers eligible to purchase Class A shares at net asset value or at a
reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees for
each Class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program, which is generally designed to assist plan sponsors
in the creation and operation of retirement plans under Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as well as other types
of participant directed, tax-qualified employee benefit plans (collectively,
"Participating Plans"). Class A, Class B, Class C and Class Y shares are
available as investment alternatives for Participating Plans. See "Purchase of
Shares--Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clears securities transactions through Smith Barney
on a fully disclosed basis (an "Introducing Broker") or an investment dealer in
the selling group. Direct purchases by certain retirement plans may be made
through the Fund's transfer agent, The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares may open
an account by making an initial investment of at least $1,000 for each account,
or $250 for an individual retirement account ("IRA") or a Self-Employed
Retirement Plan. Investors in Class Y shares may open an account for an initial
investment of $5,000,000. 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(a) of the Code, the minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
investment requirement for all Classes is $25. The minimum initial investment
requirement for Class A, Class B and Class C shares and the subsequent
6
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
investment requirement for all Classes through the Systematic Investment Plan
described below is $100. There is no minimum investment required in Class A for
unitholders who invest distributions from a UIT sponsored by Smith Barney. See
"Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic Investment
Plan under which they may authorize the automatic placement of a purchase order
each month or quarter for Fund shares in an amount of at least $100. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Mutual Funds Management Inc.
("SBMFM"), serves as the Fund's investment adviser. SBMFM provides investment
advisory and management services to investment companies affiliated with Smith
Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
("Travelers"), a diversified financial services holding company engaged, through
its subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services.
SBMFM also serves as the Fund's administrator. The Boston Company Advisors,
Inc. ("Boston Advisors") serves as the Fund's sub-administrator. Boston Advisors
is a wholly owned subsidiary of The Boston Company, Inc. ("TBC"), which in turn
is a wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). See
"Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
Class of certain other funds of the Smith Barney Mutual Funds. Certain exchanges
may be subject to a sales charge differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund generally is quoted daily in
the financial section of most newspapers and is also available from Smith Barney
Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income are declared
daily and paid monthly. Distributions of net realized capital gains are paid
annually, although distributions of short-term capital gains may be paid more
frequently than annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a Class
will be reinvested automatically, unless otherwise specified by an investor,
7
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
in additional shares of the same Class at current net asset value. Shares
acquired by dividend and distribution reinvestments will not be subject to any
sales charge or CDSC. Class B shares acquired through dividend and distribution
reinvestments will become eligible for conversion to Class A shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that the
Fund's investment objective will be achieved. Because the Fund concentrates its
investments in one sector, its portfolio may be subject to greater risk and
market fluctuations than a portfolio of securities representing a broader range
of investment alternatives. The Fund will be affected by general changes in
interest rates which will result in increases or decreases in the market value
of the debt securities held by the Fund; the market value of the debt securities
held by the Fund can be expected to vary inversely to changes in prevailing
interest rates. The Fund may invest up to 10% of its assets in lower-rated
fixed-income securities, which securities (a) will likely have some quality and
protective characteristics that, in the judgment of a rating organization, are
outweighed by large uncertainties or major risk exposures to adverse conditions
and (b) are predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the securities.
Certain of the investments held by the Fund and certain of the investment
strategies and techniques that the Fund may employ might expose it to certain
risks. The investments presenting the Fund with risks are low-rated securities,
as described above, foreign securities and non-publicly traded and illiquid
securities. The investment strategies and techniques presenting the Fund with
risks are entering in repurchase agreements, lending portfolio securities,
engaging in short sales against the box and entering into transactions involving
options and futures contracts. See "Investment Objectives and Management
Policies."
8
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
<TABLE>
THE FUND'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Fund, based on the maximum sales charge or maximum CDSC that may be
incurred at the time of purchase or redemption and, unless otherwise noted, the
Fund's operating expenses for its most recent fiscal year:
<CAPTION>
CLASS A CLASS B CLASS C CLASS Y
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None None None
Maximum CDSC
(as a percentage of original cost or redemption
proceeds, whichever is lower) None* 5.00% 1.00% None
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management fees 0.65% 0.65% 0.65% 0.65%
12b-1 fees*** 0.25 0.75 0.70 None
Other expenses**** 0.17 0.14 0.08 0.17
- --------------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.07% 1.54% 1.43% 0.82%
- --------------------------------------------------------------------------------------------
<FN>
* Purchases of Class A shares, which when combined with current holdings of
Class A shares offered with a sales charge equal or exceed $500,000 in the
aggregate, will be made at net asset value with no sales charge, but will
be subject to a CDSC of 1.00% on redemptions made within 12 months.
** The annual fund operating expenses for Class C shares have been restated to
reflect a reduction of the 12b-1 fee from 0.75% of average net assets to
0.70%.
*** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
**** For Class Y shares, "Other expenses" have been based on expenses incurred
by the Class A shares because Class Y shares were not available for
purchase prior to November 7, 1994.
</TABLE>
The sales charge and CDSC set forth in the above table are the maximum
charges imposed on purchases or redemptions of Fund shares and investors may
actually pay lower or no charges, depending on the amount purchased and, in the
case of Class B, Class C and certain Class A shares the length of time the
shares are held and whether the shares are held through the Smith Barney 401(k)
Program. See "Purchase of Shares" and "Redemption of Shares." Smith Barney
receives an annual 12b-1 service fee of 0.25% of the value of average daily net
assets of Class A shares. Smith Barney also receives an annual 12b-1 fee of
0.75% of the value of average daily net assets of Class B shares, consisting of
a 0.50% distribution fee and a 0.25% service fee. In Class C shares, Smith
Barney receives an annual 12b-1 fee of 0.70% of the value of average daily net
assets of this Class, consisting of a 0.45% distribution fee and a 0.25% service
fee. "Other expenses" in the above table include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration fees.
9
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
<TABLE>
EXAMPLE The following example is intended to assist an investor in
understanding the various costs that an investor in the Fund will bear directly
or indirectly. The example assumes payment by the Fund of operating expenses at
the levels set forth in the table above. See "Purchase of Shares," "Redemption
of Shares" and "Management of the Trust and the Fund."
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment, assuming (1) 5.00% annual
return and (2) redemption at the end of each time
period:
Class A $ 60 $ 82 $106 $174
Class B 66 79 94 171
Class C 25 45 78 171
Class Y 8 26 46 101
An investor would pay the following expenses on the
same investment, assuming the same annual return
and no redemption:
Class A 60 82 106 174
Class B 16 49 84 171
Class C 15 45 78 171
Class Y 8 26 46 101
- --------------------------------------------------------------------------------------
<FN>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
</TABLE>
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Except where otherwise noted, the following information has been audited by
Coopers & Lybrand L.L.P., independent accountants, whose report thereon appears
in the Fund's Annual Report dated July 31, 1994. The information set out below
should be read in conjunction with the financial statements and related notes
that also appear in the Fund's Annual Report, which is incorporated by reference
into the Statement of Additional Information.
<TABLE>
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 15.97 $ 14.36
- --------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.56 0.66
Net realized and unrealized gain/(loss) on investments (1.92) 1.72
- --------------------------------------------------------------------------------------
Total from investment operations (1.36) 2.38
- --------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.80) (0.63)
Distributions in excess of net investment income (0.03) (0.01)
Distributions from net realized capital gains (0.50) (0.13)
- --------------------------------------------------------------------------------------
Total distributions (1.33) (0.77)
- --------------------------------------------------------------------------------------
Net Asset Value, end of period $ 13.28 $ 15.97
- --------------------------------------------------------------------------------------
Total return++ (8.99)% 17.01%
- --------------------------------------------------------------------------------------
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $41,458 $53,856
Ratio of operating expenses to average net assets 1.07% 1.07%+
Ratio of net investment income to average net assets 5.54% 5.67%+
Portfolio turnover rate 28% 37%
- --------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
+ Annualized.
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
</TABLE>
11
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<CAPTION>
YEAR YEAR PERIOD YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
7/31/94 7/31/93 7/31/92# 2/28/92 2/28/91 2/28/90 2/28/89*
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning
of year $15.97 $14.83 $13.95 $13.21 $12.93 $12.09 $12.00
- ------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.75 0.79 0.35 0.82 0.88 0.87 0.64
Net realized and
unrealized
gain/(loss) on invest-
ments (2.19) 1.30 0.89 0.94 0.40 1.08 0.17
- ------------------------------------------------------------------------------------------------------------
Total from investment
operations (1.44) 2.09 1.24 1.76 1.28 1.95 0.81
- ------------------------------------------------------------------------------------------------------------
Less distributions:
Distributions from net
investment income (0.72) (0.79) (0.35) (0.84) (0.90) (0.90) (0.57)
Distributions in excess
of net investment
income (0.03) (0.01) -- -- -- -- --
Distributions from net
realized capital gains (0.50) (0.15) -- (0.15) (0.10) (0.21) (0.15)
Distributions from
capital -- -- (0.01) (0.03) -- -- --
- ------------------------------------------------------------------------------------------------------------
Total distributions (1.25) (0.95) (0.36) (1.02) (1.00) (1.11) (0.72)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value,
end of year $13.28 $15.97 $14.83 $13.95 $13.21 $12.93 $12.09
- ------------------------------------------------------------------------------------------------------------
Total return++ (9.52%) 14.69% 8.98% 13.63% 10.46% 16.34% 6.80%
- ------------------------------------------------------------------------------------------------------------
Ratios to average
net assets/
Supplemental Data:
Net assets, end of year
(in 000's) $1,822,546 $2,765,858 $1,721,312 $1,274,853 $707,272 $603,739 $416,320
Ratio of operating
expenses
to average net assets 1.54% 1.56% 1.57%+ 1.58% 1.65% 1.70% 1.77%+
Ratio of net investment
income to average
net assets 5.07% 5.17% 5.78%+ 6.04% 6.89% 6.83% 6.99%+
Portfolio turnover rate 28% 37% 10% 33% 31% 50% 46%
- ------------------------------------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on March 28, 1988. On November 6, 1992 the Fund
commenced selling Class A shares and Class Z shares (previously designated as
Class C shares). Those shares in existence prior to November 6, 1992 were
designated as Class B shares.
+ Annualized.
[/R]
++ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charge.
[/R]
# During the period from March 1, 1992 through July 31, 1992, the Fund changed
its fiscal year end to July 31. Prior to this, the Fund's fiscal year end was
February 28.
</TABLE>
12
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $15.97 $15.17
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.73 0.35
Net realized and unrealized gain/(loss) on investments (2.17) 0.86
- -------------------------------------------------------------------------------------
Total from investment operations (1.44) 1.21
- -------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.72) (0.38)
Distributions in excess of net investment income (0.03) (0.01)
Distributions from net realized capital gains (0.50) (0.02)
- -------------------------------------------------------------------------------------
Total distributions (1.25) (0.41)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $13.28 $15.97
- -------------------------------------------------------------------------------------
Total return++ (9.52)% 8.08%
- -------------------------------------------------------------------------------------
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $1,894 $ 252
Ratio of operating expenses to average net assets 1.48% 1.49%+
Ratio of net investment income to average net assets 5.13% 5.25%+
Portfolio turnover rate 28% 37%
- -------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares (previously designated as Class D
shares) on February 4, 1993.
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
</TABLE>
Prior to November 7, 1994, the Fund did not offer Class Y shares and
accordingly, no comparable financial data is available at this time for that
Class.
13
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
INVESTMENT OBJECTIVE
The primary investment objective of the Fund is to provide current income.
Long-term capital appreciation is a secondary objective. The Fund's investment
objectives may be changed only with the approval of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund will achieve its
investment objectives.
INVESTMENT POLICIES
The Fund seeks to achieve its objectives by investing in equity and debt
securities of companies in the utility industries. For purposes of this
Prospectus, the utility industries are deemed to be comprised of companies
principally engaged (that is, at least 50% of a company's assets, gross income
or net profits results from utility operations or the company is regulated as a
utility by a government agency or authority) in the manufacture, production,
generation, transmission and sale of electric and gas energy and companies
principally engaged in the communications field, including entities such as
telephone, telegraph, satellite, microwave and other companies regulated by
governmental agencies as utilities that provide communication facilities for the
public benefit, but not including those in public broadcasting. The Fund will
invest primarily in utility equity and debt securities that have a high expected
rate of return, as determined by the Fund's investment adviser, SBMFM. Under
normal market conditions, the Fund will invest at least 65% of its assets in
such securities. The Fund may invest up to 35% of its assets in equity and debt
securities of non-utility companies believed to afford a reasonable opportunity
for achieving the Fund's investment objectives. When SBMFM believes that market
conditions warrant, the Fund may adopt a temporary defensive posture and may
invest, without limit, in: debt securities (whether or not they are utility
securities) such as rated or unrated bonds, debentures and commercial paper,
United States government securities and money market instruments. The Fund may
invest up to 10% of its assets in securities rated BB or B by Standard & Poor's
Corporation ("S&P") or Ba or B by Moody's Investors Service, Inc. ("Moody's")
whenever SBMFM believes that the incremental yield on such securities is
advantageous to the Fund in comparison to the additional risk involved.
Securities rated BBB/Baa are considered medium grade obligations, neither highly
protected nor poorly secured. Interest payments and principal security of
BBB/Baa rated securities appear adequate for the present but certain protective
elements may be lacking or may be unreliable over any great length of time.
BBB/Baa rated securities lack outstanding investment characteristics and
14
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
may in fact have speculative characteristics. The yields on lower-rated fixed-
income securities generally are higher than the yields available on higher-rated
securities. See "Risk Factors and Special Considerations" below. In addition,
the Fund may enter into repurchase agreements.
INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
The Fund has the ability to engage in a number of specialized investment
strategies and techniques designed to enable the Fund to achieve its investment
objectives. Included among these strategies are lending its portfolio
securities, selling securities "short against the box," writing covered call and
secured put options, as well as purchasing options on securities, purchasing and
selling interest rate futures contracts, options on futures contracts, stock
index put and call options and stock index futures contracts, each of which is
discussed below.
United States Government Securities. United States government securities
are obligations of, or guaranteed by, the United States government, its agencies
or instrumentalities ("U.S. government securities"). These include bills,
certificates of indebtedness, notes and bonds issued by the United States
Treasury or by agencies or instrumentalities of the United States government.
Some U.S. government securities, such as Treasury bills and bonds, are supported
by the full faith and credit of the United States; others, such as those of
Federal Home Loan Banks, are supported by the right of the issuer to borrow from
the United States Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the United
States government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. U.S. government securities generally do not
involve the credit risks associated with other types of interest-bearing
securities, although, as a result, the yields available from U.S. government
securities are generally lower than the yields available from interest-bearing
corporate securities.
Repurchase Agreements. The Fund may engage in repurchase agreements 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. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
15
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
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 right 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. SBMFM or Boston Advisors, acting under the
supervision of the Trust's Board of Trustees, reviews on an ongoing basis the
value of the collateral and creditworthiness of those banks and dealers with
which the Fund enters into repurchase agreements to evaluate potential risks.
Lending Portfolio Securities. The Fund is authorized to lend its portfolio
securities to brokers, dealers and other financial organizations. The Fund's
loans of securities will be collateralized by cash, letters of credit or U.S.
government securities that are maintained at all times in an amount at least
equal to the current market value of the loaned securities. By lending its
securities, the Fund seeks to generate income by continuing to receive interest
on the loaned securities, by 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.
Short Sales Against the Box. The Fund may make short sales (except to the
extent of 5% of the Fund's net assets) if at all times when a position is open,
the Fund owns the stock or owns preferred stock or debt securities convertible
or exchangeable without payment of further consideration for, securities of the
same issue as the securities sold short. Short sales of this kind are referred
to as "against the box." Short sales against the box are used to defer
recognition of capital gains or losses.
Options Activities. The Fund may write (that is, sell) call options
("calls") if the calls are covered throughout the life of the option. A call is
covered if the Fund (a) owns the optioned securities, (b) maintains in a
segregated account with the Trust's custodian, Boston Safe Deposit and Trust
Company ("Boston Safe"), cash, cash equivalents or U.S. government securities
with a value sufficient to meet the Fund's obligations under the call, or (c)
owns an offsetting call option. The aggregate value of the obligations
underlying calls on securities which are written by the Fund and covered with
cash, cash equivalents or U.S. government securities, together with the
aggregate value of
16
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the obligations underlying put options written by the Fund, will not exceed 50%
of the Fund's net assets. When the Fund writes a call, it receives a premium and
gives the purchaser the right to buy the underlying security at any time during
the call period (usually not more than nine months in the case of common stock
or fifteen months in the case of U.S. government securities) at a fixed exercise
price regardless of market price changes during the call period. If the call is
exercised, the Fund forgoes any gain from an increase in the market price of the
underlying security over the exercise price. The Fund may purchase calls on
securities. The Fund also may purchase and sell stock index calls which differ
from calls on individual securities in that they are settled in cash based on
the values of the securities in the underlying index, rather than by delivery of
the underlying securities. In writing a call on a stock index, the Fund receives
a premium and agrees that during the call period purchasers of a call, upon
exercise of the call, will receive an amount of cash if the closing level of the
stock index upon which the call is based is greater than the exercise price of
the call. When the Fund buys a call on a stock index, it pays a premium and
during the call period the Fund, upon exercise of the call, receives an amount
of cash if the closing level of the stock index upon which the call is based is
greater than the exercise price of the call.
The Fund may write and purchase put options ("puts"). When the Fund writes
a put, it receives a premium and gives the purchaser of the put the right to
sell the underlying security to the Fund at the exercise price at any time
during the option period. When the Fund purchases a put, it pays a premium in
return for the right to sell the underlying security at the exercise price at
any time during the option period. For the purchase of a put to be profitable,
the market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs, unless the put is
sold in a closing sale transaction; otherwise, the purchase of the put
effectively increases the cost of the security and thus reduces its yield. The
Fund also may purchase and sell stock index puts, which differ from puts on
individual securities in that they are settled in cash based on the values of
the securities in the underlying index, rather than by delivery of the
underlying securities. Purchase of a stock index put is designed to protect
against a decline in the value of the Fund's portfolio generally, rather than an
individual security in the portfolio. Stock index puts are sold primarily to
realize income from the premiums received on the sale of such options. If any
put is not exercised or sold, it will become worthless on its expiration date.
The Fund will not purchase puts or calls on securities if more than 5% of its
assets would be invested in premiums on puts and calls, not
17
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
including that portion of the premium which reflects the value of the securities
owned by the Fund and underlying a put at the time of purchase.
The Fund may write puts on securities only if they are "secured." A put is
"secured" if the Fund maintains cash, cash equivalents or U.S. government
securities with a value equal to the exercise price in a segregated account or
holds a put on the same underlying security at an equal or greater exercise
price. The aggregate value of the obligations underlying puts written by the
Fund, together with the aggregate value of the obligations underlying calls on
securities which are written by the Fund and covered with cash, cash equivalents
or U.S. government securities, will not exceed 50% of the Fund's net assets. The
Fund also may write "straddles," which are combinations of secured puts and
covered calls on the same underlying security.
The Fund will realize a gain (or loss) on a closing purchase transaction
with respect to a call or put previously written by the Fund if the premium,
plus commission costs, paid to purchase the call or put is less (or greater)
than the premium, less commission costs, received on the sale of the call or
put. A gain also will be realized if a call or put which the Fund has written
lapses unexercised, because the Fund would retain the premium. See "Dividends,
Distributions and Taxes" below. The Fund will purchase and sell only options
which are listed on a national securities exchange and will write options only
through a national options clearing organization.
There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options on U.S.
government securities is relatively new, so that it is impossible to predict to
what extent liquid markets will develop or continue. See the Statement of
Additional Information for a further discussion of risks involved in options
trading, and particular risks applicable to options trading on U.S. government
securities, including risks involved in options trading on Government National
Mortgage Association ("GNMA") certificates and the characteristics and risks of
stock index options transactions.
Futures Contracts--General. The Fund may not purchase futures contracts or
related options if, immediately thereafter, more than 30% of the Fund's total
assets would be so invested. In purchasing and selling futures contracts and
related options, the Fund will comply with rules and interpretations of the
Commodity Futures Trading Commission ("CFTC"), under which the Fund is excluded
from regulation as a "commodity pool." CFTC regulations require, among other
things, that (a) futures and related options be used solely for bona
18
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
fide hedging purposes (or that the underlying commodity value of the Fund's long
positions not exceed the sum of certain identified liquid investments) and (b)
the Fund not enter into futures and related options for which the aggregate
initial margin and premiums exceed 5% of the fair market value of the Fund's
assets. In order to prevent leverage in connection with the purchase of futures
contracts by the Fund, an amount of cash and cash equivalents equal to the
market value of futures contracts purchased will be maintained in a segregated
account with Boston Safe. The Fund will engage only in futures contracts and
related options which are listed on a national commodities exchange.
Interest Rate Futures Contracts. The Fund may purchase and sell interest
rate futures contracts as a hedge against changes in interest rates. An interest
rate futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. Interest rate futures contracts are
traded on designated "contracts markets" which, through their clearing
corporations, guarantee performance of the contracts. Currently, there are
interest rate futures contracts based on securities such as long-term Treasury
bonds, Treasury notes, GNMA certificates and three-month Treasury bills.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into an interest rate futures
contract for the sale of securities has an effect similar to the actual sale of
securities, although sale of the interest rate futures contract might be
accomplished more easily and quickly. For example, if the Fund holds long-term
U.S. government securities and SBMFM anticipates a rise in long-term interest
rates, the Fund could, in lieu of disposing of its portfolio securities, enter
into interest rate futures contracts for the sale of similar long-term
securities. If interest rates increased and the value of the Fund's securities
declined, the value of the Fund's interest rate futures contracts would
increase, thereby protecting the Fund by preventing the net asset value from
declining as much as it otherwise would have declined. Similarly, entering into
interest rate futures contracts for the purchase of securities has an effect
similar to the actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying securities. For
example, if SBMFM expects long-term interest rates to decline, the Fund might
enter into interest rate futures contracts for the purchase of long-term
securities, so that it could gain rapid market exposure that may offset
anticipated increases in the cost of securities that it intends to purchase,
while continuing to hold higher-yielding short-term securities or waiting for
the long-term market to stabilize.
19
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may purchase and sell listed put and call options on interest rate
futures contracts. 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 (a long position if the option is a call and a
short position if the option is a put), at a specified exercise price at any
time during the option period. When an option on a futures contract is
exercised, delivery of the interest rate futures position is accompanied by cash
representing the difference between the current market price of the interest
rate futures contract and the exercise price of the option. The Fund may
purchase put options on interest rate futures contracts in lieu of, and for the
same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying interest rate
futures contract in the same manner as it purchases "protective puts" on
securities. The purchase of call options on interest rate futures contracts is
intended to serve the same purpose as the actual purchase of the futures
contract, and the Fund will set aside cash and cash equivalents sufficient to
purchase the amount of portfolio securities represented by the underlying
futures contracts. See "Options Activities" and "Dividends, Distributions and
Taxes."
Stock Index Futures Contracts. The Fund may purchase and sell stock index
futures contracts. These transactions, if any, by the Fund will be made solely
for the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in market conditions and will be
made when the transactions are economically appropriate to the reduction of
risks inherent in the management of the Fund. A stock index futures contract is
an agreement under which two parties agree to take or make delivery of the
amount of cash based on the difference between the value of a stock index at the
beginning and at the end of the contract period. When the Fund enters into a
stock index futures contract, it must make an initial deposit, known as "initial
margin," as a partial guarantee of its performance under the contract. As the
value of the stock index fluctuates, either party to the contract is required to
make additional margin deposits, known as "variation margin," to cover any
additional obligation that it may have under the contract. The Fund may not at
any time commit more than 5% of its total assets to initial margin deposits on
futures contracts.
Successful use of stock index futures contracts by the Fund is subject to
certain special risk considerations. A liquid stock index futures market may not
be available when the Fund seeks to offset adverse market movements. In
addition, there may be an imperfect correlation between movements in the
20
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
securities included in the index and movements in the securities in the Fund.
Successful use of stock index futures contracts is further dependent on SBMFM's
ability to predict correctly movements in the direction of the stock markets and
no assurance can be given that its judgment in this respect will be correct.
Risks in the purchase and sale of stock index futures are further referred to in
the Statement of Additional Information.
Foreign Securities and American Depositary Receipts. The Fund may purchase
foreign securities or American Depositary Receipts ("ADRs"). ADRs are U.S.
dollar-denominated receipts issued generally by domestic banks and representing
the deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States.
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. Additionally, dividends payable on foreign
securities may be subject to foreign taxes withheld prior to distribution.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility. Changes in
foreign exchange rates will affect the value of those securities which are
denominated or quoted in currencies other than the U.S. dollar. Many of the
foreign securities held by the Fund will not be registered with, nor will the
issuers thereof be subject to the reporting requirements of, the SEC.
Accordingly, there may be less publicly available information about the
securities and the foreign company or government issuing them than is available
about a domestic company or government entity. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment positions.
Non-Publicly Traded and Illiquid Securities. The sale of securities that
are not publicly traded is typically restricted under the Federal securities
laws. As a result, the Fund may be forced to sell these securities at less than
fair market value or may not be able to sell them when SBMFM believes it
desirable to do so. The Fund's investments in illiquid securities are subject to
the risk that
21
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that the Fund deems representative of their value, the
value of the Fund's net assets could be adversely affected.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with
respect to the Fund that may not be changed without approval of a majority of
the Fund's outstanding shares. The fundamental investment restrictions adopted
by the Trust prohibit the Fund from:
1. Purchasing the securities of any issuer (other than U.S. government
securities) if as a result more than 5% of the value of the Fund's total
assets would be invested in the securities of the issuer, except that up to
25% of the value of the Fund's total assets may be invested without regard
to this 5% limitation.
2. Purchasing more than 10% of the voting securities of any one issuer,
provided that this limitation shall not apply to investments in U.S.
government securities.
3. Purchasing securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin by the
Fund.
4. Making short sales of securities or maintaining a short position,
except to the extent of 5% of the Fund's net assets and except that the
Fund may engage in such activities without limit if, at all times when a
short position is open, the Fund owns an equal amount of the securities or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and at least equal in
amount to, the securities sold short.
5. Borrowing money, including reverse repurchase agreements, except that
the Fund may borrow from banks for temporary or emergency (not leveraging)
purposes including the meeting of redemption requests that might otherwise
require the untimely disposition of securities, in an amount not exceeding
20% of the value of the Fund's total assets (including the amount borrowed)
valued at market less liabilities (not including the amount borrowed) at
the time the borrowing is made. Whenever borrow-
22
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ings exceed 5% of the value of the Fund's total assets, the Fund will not
make any additional investments.
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than
10% of the value of the Fund's total assets as security for any
indebtedness. For purposes of this restriction (a) the deposit of assets in
escrow in connection with the writing of covered put or call options and
the purchase of securities on a when-issued or delayed-delivery basis and
(b) collateral arrangements with respect to (i) the purchase and sale of
stock options, options on foreign currencies and options on stock indexes
and (ii) initial or variation margin for futures contracts will not be
deemed to be pledges of the Fund's assets.
7. Investing in commodities, except that the Fund may purchase or write
futures contracts and options on futures contracts as described in this
Prospectus.
8. Making loans to others, except through the purchase of qualified debt
obligations, loans of portfolio securities and the entry into repurchase
agreements.
9. Concentrating in any industry, except that the Fund will concentrate in
excess of 25% of its assets in the securities of companies within the
utility industries.
In addition, the Fund will not purchase restricted securities, illiquid
securities (such as repurchase agreements with maturities in excess of seven
days) or other securities that are not readily marketable if more than 10% of
the total assets of the Fund would be invested in such securities.
Certain other investment restrictions, including fundamental restrictions
as well as restrictions that may be changed without a shareholder vote, adopted
by the Trust are described in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the Fund will be
executed by a number of brokers and dealers, including Smith Barney and certain
of its affiliated brokers. The Fund may use Smith Barney or a Smith Barney-
affiliated broker in connection with a purchase or sale of securities when SBMFM
believes that the charge for the transaction does not exceed usual and customary
levels. The Fund also may use Smith Barney as a commodities broker in connection
with entering into futures contracts and commodity options. Smith Barney has
agreed to charge the Fund commodity commissions at rates
23
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
comparable to those charged by Smith Barney to its most favored clients for
comparable trades in comparable accounts.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves special considerations, such as those
described below:
General. Investment in the Fund may involve above-average risk of loss
because of, among other things, the Fund's use of strategies and techniques that
may be considered to be speculative. The strategy followed by the Fund and
certain of the strategies and techniques used by the Fund depend on forecasts
made by Greenwich Street Advisors that may or may not prove to be correct.
Low-Rated Securities. Low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment of
the rating organization, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (b) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the securities.
While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values of
higher-rated securities, the market values of certain low-rated and comparable
unrated securities also tend to be more sensitive to individual corporate
development and changes in economic conditions than higher-rated securities. In
addition, low-rated securities and comparable unrated securities generally
present a higher degree of credit risk. Issuers of low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because low-rated and comparable unrated
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Fund may incur additional expenses to the
extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings. The existence of limited
markets for low-rated and comparable unrated securities may diminish the Fund's
ability to (a) obtain accurate market quotations for purposes of valuing such
securities and calculating its net asset value and (b) sell the securities at
fair value either to meet redemption requests or to respond to changes in the
economy or in the financial markets.
24
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
thus resulting in a decreased return to the Fund.
The market for certain low-rated and comparable unrated securities is
relatively new and has not fully weathered a major economic recession. Any such
economic downturn could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
Investment in Utility Securities. Because the Fund concentrates its
investments in one sector, its portfolio may be subject to greater risk and
market fluctuations than a portfolio of securities representing a broader range
of investment alternatives. The Fund is particularly subject to risks that are
inherent to the utility industries that make up this sector, including
difficulty in obtaining an adequate return on invested capital, difficulty in
financing large construction programs during an inflationary period,
restrictions on operations and increased cost and delays attributable to
environmental considerations and regulation, difficulty in raising capital in
adequate amounts on reasonable terms in periods of high inflation and unsettled
capital markets, increased costs and reduced availability of certain types of
fuel, occasional reduced availability and high costs of natural gas for resales,
the effects of energy conservation, the effects of a national energy policy and
lengthy delays and greatly increased costs and other problems associated with
the design, construction, licensing, regulation and operation of nuclear
facilities for electric generation, including, among other considerations, the
problems associated with the use of radioactive materials and the disposal of
radioactive wastes. There are substantial differences between the regulatory
practices and policies of various jurisdictions, and any given regulatory agency
may make major shifts in policy from time to time. There is no assurance that
regulatory authorities will grant rate increases in the future or that such
increases will be adequate to permit the payment of dividends on common stocks.
Additionally, existing and possible future regulatory legislation may make it
even more difficult for these utilities to obtain adequate relief. Certain of
the issuers of securities held by the Fund may own or operate nuclear generating
facilities. Governmental authorities may from time to time review existing
policies, and impose additional requirements governing the licensing,
construction and operation of nuclear power plants.
25
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Each of the risks referred to above could adversely affect the ability and
inclination of public utilities to declare or pay dividends and the ability of
holders of common stock to realize any value from the assets of the issuer upon
liquidation or bankruptcy. All of the utilities which are issuers of the
securities held by the Fund have been experiencing one or more of these problems
in varying degrees. Moreover, price disparities within selected utility groups
and discrepancies in relation to averages and indices have occurred frequently
for reasons not directly related to the general movements or price trends of
utility common stocks. Causes of these discrepancies include changes in the
overall demand for and supply of various securities (including the potentially
depressing effect of new stock offerings), and changes in investment objectives,
market expectations or cash requirements of other purchasers and sellers of
securities.
Interest Rate Risk. The Fund will be affected by general changes in
interest rates which will result in increases or decreases in the market value
of the debt securities held by the Fund. The market value of the debt securities
held by the Fund can be expected to vary inversely to changes in prevailing
interest rates.
Options on Securities. Because option premiums paid by the Fund are small
in relation to the market value of the investments underlying the options,
buying put options can result in large amounts of leverage. The leverage offered
by trading in options could cause the Fund's net asset value to be subject to
more frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
No assurance can be given that the Fund will be able to effect closing
transactions at a time when it wishes to do so. If the Fund cannot enter into a
closing transaction, the Fund will continue to be subject to the risk that a put
option it has purchased will decline in value or become worthless as a result of
any increase in the value of the underlying security. The Fund also could face
higher transaction costs, including brokerage commissions.
Lending of Portfolio Securities. The risk associated with lending
portfolio securities, as with other extensions of credit, consists of possible
loss of rights in the collateral should the borrower fail financially.
Short Sales. Possible losses from short sales differ from losses that
could be incurred from a purchase of a security, because losses from short sales
may be unlimited, whereas losses from purchases can equal only the total amount
invested.
26
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Futures Transactions. The use of futures contracts as a hedging device
involves several risks. No assurance can be given that a correlation will exist
between price movements in the stock index and price movements in the securities
that are the subject of the hedge; the risk of imperfect correlation increases
as the composition of the securities held by the Fund diverges from the
securities included in the applicable stock index. Positions in futures
contracts may be closed out only on the exchange on which they were entered into
(or through a linked exchange) and no secondary market exists for those
contracts. In addition, although the Fund intends to enter into futures
contracts only if an active market exists for the contracts, no assurance can be
given that an active market will exist for the contracts at any particular time.
Certain exchanges do not permit trading in particular contracts at prices that
represent a fluctuation in price during a single day's trading beyond a certain
set limit. If prices fluctuate during a single day's trading beyond those
limits, the Fund could be prevented from promptly liquidating unfavorable
positions and thus be subjected to losses. Losses incurred in hedging
transactions and the costs of these transactions will affect the Fund's
performance. Successful use of stock index futures by the Fund for hedging
purposes is subject to the ability of SBMFM to correctly predict movements in
the direction of the stock market.
- --------------------------------------------------------------------------------
VALUATION OF SHARES
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.
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 Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-
27
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
the-counter securities are valued on the basis of the bid price at the close of
business on each day. Investments in U.S. government securities (other than
short-term securities) are valued at the average of the quoted bid and asked
prices in the over-the-counter market. Short-term investments that mature in 60
days or less are valued at amortized cost whenever the Trustees determine that
amortized cost reflects fair value of those investments. An option generally is
valued at the last sale price or, in the absence of the last sale price, the
last offer price. The value of a futures contract equals the unrealized gain or
loss on the contract, which is determined by marking the contract to the current
settlement price for a like contract acquired on the day on which the stock
index futures contract is being valued. A settlement price may not be used if
the market makes a limited move with respect to a particular commodity or if the
underlying securities market experiences significant price fluctuations after
the determination of the settlement price. In such event, the futures contract
will be valued at a fair market price to be determined by or under the direction
of the Board of Trustees. Further information regarding the Trust's valuation
policies with respect to the Fund is contained in the Statement of Additional
Information.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value, subject to no sales charge or CDSC. Dividends from net
investment income, if any, of the Fund will be declared each day that the Trust
is open for business and will be paid on the last day of the Smith Barney
statement month. Distributions of any net long-term capital gains earned by the
Fund will be made annually after the close of the fiscal year in which they are
earned. Distributions of short-term capital gains may be paid more frequently
with dividends from net investment income. In order to avoid the application of
a 4% nondeductible excise tax measured with respect to certain undistributed
amounts of ordinary income and capital gains, the Fund may make such additional
distributions as may be necessary to avoid the application of this tax.
28
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
The per share dividends on Class B and Class C shares may be lower than the
per share dividends on Class A and Y shares principally as a result of the
distribution fee applicable with respect to Class B and Class C 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 C and Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under the Code. To meet
those requirements, the Fund may need to restrict the degree to which it engages
in short-term trading, short sales of securities and transactions in options. If
the Fund qualifies as a regulated investment company and meets certain
distribution requirements, the Fund will not be subject to Federal income tax on
its net investment income and net capital gains that it distributes to its
shareholders.
Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Distributions of long-term capital gain will be taxable to
shareholders as long-term capital gain, whether paid in cash or reinvested in
additional shares, and regardless of the length of time the investor has held
his or her shares of the Fund. Generally, dividends of investment income (to the
29
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
extent derived from most types of dividends from domestic corporations) from the
Fund will qualify for the Federal dividends-received deduction for corporate
shareholders. Each shareholder of the Fund will receive a statement annually
from the Trust, which will set forth separately the aggregate dollar amount of
dividends and capital gains distributed to the shareholder by the Fund with
respect to the prior calendar year and the amount of the distributions that
qualifies for the dividends-received deduction.
Shareholders should consult their tax advisors about the status of the
Fund's dividends and distributions for Federal, state and local tax liabilities.
- --------------------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL
The Fund offers five Classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but are subject to a CDSC payable upon certain
redemptions. Class Y shares are sold without an initial sales charge or a CDSC
and are available only to investors investing a minimum of $5,000,000. Class Z
shares are offered without a sales charge, CDSC, or service or distribution fee,
exclusively to: (a) tax-exempt employee benefit and retirement plans of Smith
Barney and its affiliates and (b) certain UITs sponsored by Smith Barney and its
affiliates. Investors meeting either of these criteria who are interested in
acquiring Class Z shares should contact a Smith Barney Financial Consultant for
a Class Z Prospectus. See "Prospectus Summary--Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting which Class
of shares to purchase.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, an Introducing Broker or an investment dealer in
the selling group, except for investors purchasing shares of the Fund through a
qualified retirement plan who may do so directly through TSSG. When purchasing
shares of the Fund, investors must specify whether the purchase is for Class A,
Class B, Class C or Class Y shares. No maintenance fee will be charged by the
Fund in connection with a brokerage account through which an investor purchases
or holds shares.
30
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Investors in Class A, Class B and Class C shares may open an account 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 $5,000,000. 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(a) of the
Code, the minimum initial investment requirement for Class A, Class B and Class
C shares and the subsequent investment requirement for all Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the minimum initial
investment requirement for Class A, Class B and Class C shares and the
subsequent investment requirement for all Classes is $100. There are no minimum
investment requirements for Class A shares for employees of Travelers and its
subsidiaries, including Smith Barney, Trustees of the Trust and their spouses
and children and unitholders who invest distributions from a UIT sponsored by
Smith Barney. 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
the Fund's transfer agent, TSSG. Share certificates are issued only upon a
shareholder's written request to TSSG.
Purchase orders received by Smith Barney 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. Orders received
by dealers or Introducing Brokers 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
Smith Barney prior to Smith Barney's close of business (the "trade date").
Payment for Fund shares is due on the fifth business day (the "settlement date")
after the trade date. The Fund anticipates that, in accordance with regulatory
changes, beginning on or about June 1, 1995, the settlement date will be the
third business day after the trade date.
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, Smith Barney or TSSG is authorized through
preauthorized transfers of $100 or more to charge the regular bank account or
other financial institution indicated by the shareholder on a monthly or
quarterly basis to provide systematic additions to the shareholder's Fund
31
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
account. A shareholder who has insufficient funds to complete the transfer will
be charged a fee of up to $25 by Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the shareholder's 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 Smith Barney Financial Consultant.
<TABLE>
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as follows:
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALERS
% OF % OF AMOUNT REALLOWANCE AS
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED % OF OFFERING
PRICE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $25,000 5.00% 5.26% 4.50%
$25,000-$49,999 4.00% 4.21% 3.60%
$50,000-$99,999 3.50% 3.63% 3.15%
$100,000-$249,999 3.00% 3.09% 2.70%
$250,000-$499,999 2.00% 2.04% 1.80%
$500,000 and more * * *
------------------------------------------------------------------------------------------------
<FN>
* Purchases of Class A shares which, when combined with current holdings of
Class A shares offered with a sales charge, equal or exceed $500,000 in the
aggregate, will be made at net asset value without any initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions made within 12 months
of purchase. The CDSC on Class A shares is payable to Smith Barney, which
compensates Smith Barney Financial Consultants and other dealers whose
clients make purchases of $500,000 or more. The CDSC is waived in the same
circumstances in which the CDSC applicable to Class B and Class C shares is
waived. See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
</TABLE>
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 Securities Act of
1933, as amended.
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, his or her spouse and children, or a trustee or other fiduciary
of a single trust estate or single fiduciary account. The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value of
all Class A shares held in funds sponsored by Smith Barney that are offered with
a sales charge listed under "Exchange Privilege."
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 of Class A shares to Trustees
of
32
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
the Trust and employees of Travelers and its subsidiaries, or the spouses and
children of such persons (including the surviving spouse of a deceased Trustee
or employee, and retired Trustees or employees), or sales to any trust, pension,
profit-sharing or other benefit plan for such persons 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 re-sold except through
redemption or repurchase; (b) offers of Class A shares to any other investment
company in connection with 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 Smith Barney Financial Consultant (for a period
up to 90 days from the commencement of the Financial Consultant's employment
with 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)
shareholders who have redeemed Class A shares in the Fund (or Class A shares of
another fund of the Smith Barney Mutual Funds that are offered with a sales
charge equal to or greater than the maximum sales charge of the Fund) and who
wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 60 calendar days of the redemption; (e) accounts
managed by registered investment advisory subsidiaries of Travelers; and (f)
investments from a UIT sponsored by Smith Barney. 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 asset value of all Class A
shares of the Fund and of funds sponsored by Smith Barney, which are offered
with a sales charge 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.
33
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes the
minimum initial investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set forth above
under "Initial Sales Charge Alternative -- Class A Shares" and will be based
upon the aggregate sales of Class A shares of Smith Barney Mutual Funds offered
with a sales charge to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net asset value, all
purchases must be pursuant to an employer-or partnership-sanctioned plan meeting
certain requirements. One such requirement is that the plan must be open to
specified partners or employees of the employer and its subsidiaries, if any.
Such plan may, but is not required to, provide for payroll deductions, IRAs or
investments pursuant to retirement plans under Sections 401 or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net asset value purchase
for aggregating related fiduciary accounts under such conditions that Smith
Barney will realize economies of sales efforts and sales related expenses. An
individual who is a member of a qualified group may also purchase Class A shares
at the reduced sales charge applicable to the group as a whole. The sales charge
is based upon the aggregate dollar value of Class A shares offered with a sales
charge that have been previously purchased and are still owned by the group,
plus the amount of the current purchase. A "qualified group" is one which (a)
has been in existence for more than six months, (b) has a purpose other than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enable Smith Barney to realize economies of scale in its costs of distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the members,
and must agree to include sales and other materials related to the Fund in its
publications and mailings to members at no cost to Smith Barney. In order to
obtain such reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of
Smith Barney.
34
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
A Letter of Intent for amounts 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 that 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 purchases of all Class
A shares of the Fund and other funds of the Smith Barney Mutual Funds offered
with a sales charge over the 13-month period based on the total amount of
intended purchases plus the value of all Class A shares previously purchased and
still owned. An alternative is to compute the 13-month period starting up to 90
days before the date of execution of a Letter of Intent. 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. New Letters of Intent will be accepted
beginning January 1, 1995. Please contact a Smith Barney Financial Consultant or
TSSG to obtain a Letter of Intent application.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without an
initial sales charge so that the full amount of an investor's purchase payment
may be immediately invested in the Fund. A CDSC, however, may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a) Class B shares; (b)
Class C shares; and (c) Class A shares which, when combined with Class A shares
offered with a sales charge currently held by an investor, equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to the lesser of
the cost of the shares being redeemed or their net asset value at the time of
redemption. CDSC Shares that are redeemed will not be subject to a CDSC 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 C shares and Class A shares that are CDSC
Shares, shares redeemed more than 12 months after their purchase.
Class C shares and Class A shares that are CDSC shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In circumstances in which
the CDSC is imposed on Class B shares, the amount of the charge will
35
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
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
proceeding 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 purchases by Participating Plans, as described below. See "Purchase
of Shares--Smith Barney 401(k) Program.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- ------------------------------------------------------------------------------
<S> <C>
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- -------------------------------------------------------------------------------
</TABLE>
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 also will be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder 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. Shareholders who held Class B shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World Income Fund") that
were held on July 15, 1994 and who subsequently exchange those shares for Class
B shares of the Fund will be offered the opportunity to exchange all such Class
B shares for Class A shares of the Fund four years after the date on which those
shares were deemed to have been purchased. Holders of such Class B shares will
be notified of the pending exchange in writing approximately 30 days before the
fourth anniversary of the purchase date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the fourth anniversary
date. See "Prospectus Summary--Alternative Purchase Arrangements--Class B Shares
Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were
36
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
initially acquired in one of the other applicable 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 CDSC will
reduce the gain or increase the loss, as the case may be, on the amount realized
on redemption. The amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares 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 CDSC 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 CDSC
The CDSC 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 shareholders's shares at the time the withdrawal plan commences
(see below) (provided, however, that 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 that were established prior to November 7, 1994);
(c) redemptions of shares within 12 months following the death or disability of
the shareholder; (d) redemption of shares made in connection with qualified
distributions from retirement plans or IRAs upon the attainment of age 59 1/2;
(e) involuntary redemptions; and (f) redemptions of shares in connection with 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 funds of the 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 CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by TSSG in the
37
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
case of all other shareholders) of the shareholder's status or holdings, as the
case may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k)
Program, which is generally designed to assist plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. To the extent
applicable, the same terms and conditions are offered to all Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class
Y shares as investment alternatives under the Smith Barney 401(k) Program. Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different sales
charge and CDSC schedules than, the Class A, Class B and Class C shares acquired
by other investors. Similar to those available to other investors, Class Y
shares acquired through the Smith Barney 401(k) Program are not subject to any
initial sales charge, CDSC or service or distribution fee. 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 initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of redemption proceeds, if the
Participating Plan terminates within four years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Class B Shares. Class B shares of the Fund are offered to any
Participating Plan that purchases less than $250,000 of one or more funds of the
Smith Barney Mutual Funds. Class B shares acquired through the Smith Barney
401(k) Program are subject to a CDSC of 3.00% of redemption proceeds, if the
Participating Plan terminates within eight years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith
Barney 401(k) Program, it will be offered the opportunity to exchange all of its
Class B shares for Class A shares of the Fund. Such Plans will be notified of
the pending exchange in writing approximately 60 days before the eighth
anniversary of the
38
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
enrollment date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary date. Once the exchange
has occurred, a Participating Plan will not be eligible to acquire additional
Class B shares of the Fund but instead may acquire Class A shares of the Fund.
If the Participating Plan elects not to exchange all of its Class B shares at
that time, each Class B share held by the Participating Plan will have the same
conversion feature as Class B shares held by other investors. See "Purchase of
Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of the Fund are offered to any
Participating Plan that purchases from $250,000 to $499,999 of one or more funds
of the Smith Barney Mutual Funds. Class C shares acquired through the Smith
Barney 401(k) Program after November 7, 1994 are subject to a CDSC of 1.00% of
redemption proceeds, if the Participating Plan terminates within four years of
the date the Participating Plan first enrolled in the Smith Barney 401(k)
Program. In any year after the date a Participating Plan enrolled in the Smith
Barney 401(k) Program, if its total Class C holdings 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 C 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.
Once the exchange has occurred, a Participating Plan will not be eligible to
acquire Class C shares of the Fund but instead may acquire Class A shares of the
Fund. Class C shares not converted will continue to be subject to the
distribution fee.
Class Y Shares. Class Y shares of the Fund are offered without any service
or distribution fees, sales charge or CDSC to any Participating Plan that
purchases $5,000,000 or more of Class Y shares of one or more funds of the Smith
Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gain
distributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the
39
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
preceding year and, with respect to Class B shares, increases in the net asset
value of the shareholder's Class B shares above the purchase payments made
during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to other shareholders, which depends on the number of
years since those shareholders made the purchase payment from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an employee in the
Participating Plan to the extent permitted under Section 401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by the Participating
Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For further
information regarding the Smith Barney 401(k) Program, investors should contact
a Smith Barney Financial Consultant.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A,
Class B and Class C shares are subject to minimum investment requirements and
all shares are subject to the other requirements of the fund into which
exchanges are made and a sales charge differential may apply.
<TABLE>
FUND NAME
<S> <C>
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney European Fund
</TABLE>
40
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<S> <C>
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.--Capital Appreciation Portfolio
Smith Barney Global Opportunities Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney World Funds, Inc.--International Balanced Portfolio
Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government Portfolio
+++ Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Funds, Inc.--Utility Portfolio
Smith Barney Global Bond Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Municipal Bond Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
* Smith Barney Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
</TABLE>
41
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<S> <C>
Smith Barney Massachusetts Municipals Fund
* Smith Barney Muni Funds--California Limited Term Portfolio
Smith Barney Muni Funds--California Portfolio
* Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
* Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New Jersey Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc.--Cash Portfolio
++ Smith Barney Money Funds, Inc.--Government Portfolio
*** Smith Barney Money Funds, Inc.--Retirement Portfolio
+++ Smith Barney Municipal Money Market Fund, Inc.
+++ Smith Barney Muni Funds--California Money Market Portfolio
+++ Smith Barney Muni Funds--New York Money Market Portfolio
- --------------------------------------------------------------------------------
<FN>
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the Fund through
the Smith Barney 401(k) Program may exchange those shares for Class C
shares of this fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A and Class Y shares of the Fund. In
addition, shareholders who own Class C shares of the Fund through the
Smith Barney 401(k) Program may exchange those shares for Class C shares
of this fund.
+++ Available for exchange with Class A and Class Y shares of the Fund.
</TABLE>
Class A Exchanges. Class A shares of Smith Barney Mutual Funds sold
without a sales charge or with a maximum sales charge of less than the maximum
charged by the Fund will be subject to the appropriate "sales charge
differential" upon the exchange of such shares for Class A shares of the Fund or
other funds sold with a higher sales charge. The "sales charge differential" is
limited to a percentage rate no greater than the excess of the sales charge rate
applicable to
42
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
purchases of shares of the mutual fund being acquired in the exchange over the
sales charge rate(s) actually paid on the mutual fund shares relinquished in the
exchange and on any predecessor of those shares. For purposes of the exchange
privilege, shares obtained through automatic reinvestment of dividends and
capital gain distributions are treated as having paid the same sales charges
applicable to the shares on which the dividends or distributions were paid;
however, except in the case of the Smith Barney 401(k) Program, if no sales
charge was imposed upon the initial purchase of the shares, any shares obtained
through automatic reinvestment will be subject to a sales charge differential
upon exchange.
Class B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or her shares in any
of the funds imposing a higher CDSC than that imposed by the Fund, the exchanged
Class B shares will be subject to the higher applicable CDSC. Upon an exchange,
the new Class B shares will be deemed to have been purchased on the same date as
the Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
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. SBMFM 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, SBMFM will
notify Smith Barney and Smith Barney may, at its discretion, decide to limit
additional purchases and/or exchanges by a shareholder. Upon such a
determination, Smith Barney 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.
43
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
Exchanges will be processed at the net asset value next determined, plus
any applicable sales charge differential, after the redemption proceeds are
available. Redemption procedures discussed below are also applicable for
exchanging shares, and exchanges will be made upon receipt of all supporting
documents in proper form. If the account registration of the shares of the fund
being acquired is identical to the registration of the shares of the fund
exchanged, no signature guarantee is required. A capital gain or loss for tax
purposes will be realized upon the exchange, depending upon the cost or other
basis of shares redeemed. Before exchanging shares, investors should read the
current prospectus describing the shares to be acquired. The Fund reserves the
right to modify or discontinue exchange privileges upon 60 days' prior notice to
shareholders.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value next determined.
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 Fund's transfer
agent receives further instructions from Smith Barney, or if the shareholder's
account is not with Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the seventh 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. The Fund anticipates that, in
accordance with regulatory changes, beginning on or about June 1, 1995, payment
will be made on the third business day after receipt of proper tender.
Generally, if the redemption proceeds are remitted to a Smith Barney brokerage
account, these funds will not be invested for the shareholder's benefit without
specific instruction and 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 ten days or more.
44
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Utilities Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
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 TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power 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. TSSG may require
additional supporting documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive cash payments of at least $100 monthly or quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. The withdrawal plan will be carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per month of the value of
the shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to November 7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not exceed
2.00% per month of the shareholder's shares subject to the
45
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
CDSC.) For further information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
- --------------------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate 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
this 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 automatic redemption.
- --------------------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30-day "yield" of each Class of
shares. The Fund's yield refers to the income generated by an investment in
those shares over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the Class
during the period by the maximum offering price per share on the last day of the
period. This income is "annualized" by assuming that the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types of
sales literature. These figures are computed separately for Class A, Class B,
Class C 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 gains distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount invested
46
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
PERFORMANCE (CONTINUED)
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 calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the last
day of the period for which current dividend return is presented. The current
dividend return for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a Class' current
return to yields published for other investment companies and other investment
vehicles. 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. The
Fund will include performance data for Class A, Class B, Class C and Class Y
shares in any advertisement or information including performance data of the
Fund.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the companies that furnish services to the
Trust and the Fund, including agreements with the Fund's distributor, investment
adviser and administrator, sub-administrator, custodian and transfer agent. The
day-to-day operations of the Fund are delegated to the Fund's investment
adviser, administrator and sub-administrator. The Statement of Additional
Information contains background information regarding each Trustee and executive
officer of the Trust.
INVESTMENT ADVISER -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the advisory agreement,
effective November 7, 1994, from its affiliate, Mutual Management
47
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Corp. (Mutual Management Corp. and SBMFM are both wholly owned subsidiaries of
Holdings). Investment advisory services continue to be provided to the Fund by
the same portfolio managers who had provided services under the agreement with
Mutual Management Corp. SBMFM (through predecessor entities) has been in the
investment counseling business since 1934 and is a registered investment
adviser. SBMFM renders investment advice to investment companies that had
aggregate assets under management as of September 30, 1994 in excess of $52.4
billion.
Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's 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. For investment
advisory services rendered to the Fund, the Fund pays SBMFM a fee at the annual
rate of 0.45% of the value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
Jack S. Levande, an Investment Officer of SBMFM, has served as Vice
President and Investment Officer of the Fund since it commenced operations and
manages the day-to-day operations of the Fund, including making all investment
decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1994 is
included in the Annual Report dated July 31, 1994. A copy of the Annual Report
may be obtained upon request without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of 0.20% of the value of the Fund's
average daily net assets.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to investment
companies that had aggregate assets under management as of
48
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
September 30, 1994, in excess of $48.6 billion. Boston Advisors calculates the
net asset value of the Fund's shares and generally assists SBMFM in all aspects
of the Fund's administration and operation. Boston Advisors is paid a portion of
the fee paid by the Fund to SBMFM at a rate agreed upon from time to time
between Boston Advisors and SBMFM.
- --------------------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid an annual service
fee with respect to Class A, Class B and Class C shares of the Fund at the
annual rate of 0.25% of the average daily net assets of the respective Class.
Smith Barney is also paid an annual distribution fee with respect to Class B and
Class C shares at the annual rate of 0.50% and 0.45%, respectively, of the
average daily net assets attributable to these Classes. Class B shares that
automatically convert to Class A shares eight years after the date of original
purchase will no longer be subject to distribution fees. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder accounts
and, in the case of Class B and Class C shares, to cover expenses primarily
intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to potential
investors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distribution
of shares; interest and/or carrying charge; and indirect and overhead costs of
Smith Barney associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
Actual distribution and shareholder service expenses for Class B and Class
C shares of the Fund for any given year may exceed the fees received pursuant to
the Plan and will be carried forward and paid by the Fund in future years so
long as the Plan is in effect. Interest is accrued monthly on such carryforward
amounts at a rate comparable to that paid by Smith Barney for bank borrowings.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee paid by the investor or Smith Barney at the
49
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
time of sale and, with respect to Class A, Class B and Class C shares, a
continuing fee for servicing shareholder accounts for as long as a shareholder
remains a holder of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution expenses actually incurred. The Trust's Board of
Trustee's will evaluate the appropriateness of the Plan and its payment terms on
a continuing basis and in so doing will consider all relevant factors, including
expenses borne by Smith Barney, amounts received under the Plan and proceeds of
the CDSC.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws of the
Commonwealth of Massachusetts and is an entity commonly known as a
"Massachusetts business trust." The Trust offers shares of beneficial interest
of separate series having a $.001 per share par value. Shares of beneficial
interest of the Fund are currently classified into five Classes: A, B, C, Y and
Z. 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 Trust
vote by individual fund on all matters except (a) matters affecting only the
interest of one or more of the funds, in which case only shares of the affected
fund or funds would be entitled to vote, or (b) when the 1940 Act requires that
shares of the funds be voted in the aggregate. Similarly, shares of the Fund
will be voted generally on a Fund-wide basis except matters affecting the
interests of one Class of shares.
Each Class of Fund shares represents identical interests in the Fund's
investment portfolio. As such, they have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b) the
effect of the respective sales charges for each Class; (c) the distribution
and/or service fees, if any, borne by each Class; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of the Class B shares. The Trust's Board of Trustees does not anticipate
that there will be any conflicts among the interests of the holders of the
different Classes. The
[/R]
50
<PAGE>
SMITH BARNEY
Utilities Fund
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
Trustees, on an ongoing basis, will consider whether any such conflict exists
and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will be
no meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have been
elected by shareholders.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, is located at One Boston Place, Boston, Massachusetts 02108, and
serves as custodian of the Trust's investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a list of the investment securities held by the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Trust plans to consolidate the mailing of the
Fund's 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. In addition, the Trust also plans to
consolidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (e.g., individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts should contact their Smith
Barney Financial Consultants or the Fund's transfer agent.
------------------------
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Trust or the
distributor. This Prospectus does not constitute an offer by the Trust or the
distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
51
<PAGE>
SMITH BARNEY
------------
A member of TravelersGroup[tiny red umbrella]
SMITH BARNEY
UTILITIES FUND
288 Greenwich Street
New York, New York 10018
Fund 178, 175, 174, 210
Recycled
Recyclable
FD229J4
<PAGE>
_______________________________________________________________________________
PROSPECTUS
Smith Barney
DIVERSIFIED
STRATEGIC
INCOME
FUND
Class Z Shares
NOVEMBER 7, 1994
Prospectus begins on page one
<LOGO>
Investing for your future.
Every day.
_______________________________________________________________________________
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
PROSPECTUS November 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Diversified Strategic Income Fund (the "Fund") a diversified
fund, seeks high current income primarily through investment in fixed-income
securities. The Fund attempts to achieve this objective by allocating and
reallocating its assets primarily among various types of fixed-income securities
selected by its investment adviser on the basis of an analysis of economic and
market conditions and the relative risks and opportunities of those types of
fixed-income securities.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up Smith Barney Income Funds (the "Trust"). The
Trust is an open-end, management investment company commonly referred to as a
mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including expenses, that prospective investors will find helpful in
making an investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.
The Class Z shares described in this Prospectus (previously designated as
Class C shares) are currently offered exclusively for sale to tax-exempt
employee benefit and retirement plans of Smith Barney Inc. ("Smith Barney") or
any of its affiliates ("Qualified Plans") and to certain unit investment trusts
sponsored by Smith Barney or any of its affiliates ("Smith Barney UITs").
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Sub-Investment Adviser
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
<TABLE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<S> <C>
THE FUND'S EXPENSES 3
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 4
---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
---------------------------------------------------------------------------
VALUATION OF SHARES 21
---------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 22
---------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES 23
---------------------------------------------------------------------------
EXCHANGE PRIVILEGE 24
---------------------------------------------------------------------------
PERFORMANCE 25
---------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 27
---------------------------------------------------------------------------
ADDITIONAL INFORMATION 30
---------------------------------------------------------------------------
</TABLE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Trust
or the distributor. This Prospectus does not constitute an offer by the Fund or
the distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
2
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
<TABLE>
- --------------------------------------------------------------------------------
THE FUND'S EXPENSES
The following expense table lists the costs and expenses an investor will incur
either directly or indirectly as a shareholder of Class Z shares of the Fund,
based on the Fund's operating expenses for its most recent fiscal year:
<CAPTION>
AS A % OF
AVERAGE NET ASSETS
<S> <C>
- -------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
Management fees (net of fee waiver) .63
Other expenses .12
- -------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES .75%
- -------------------------------------------------------------------------------------
</TABLE>
The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and the Fund." "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
Smith Barney Global Capital Management Inc. ("Global Capital Management")
has voluntarily waived sub-investment advisory fees in the aggregate amount
equal to .02% of the Fund's average daily net assets. This has the effect of
lowering the Fund's overall expense ratio and increasing the returns otherwise
available to investors. If Global Capital Management has not elected to
voluntarily waive fees and reimburse expenses, the Fund's total operating
expenses for the 1994 fiscal year, as a percentage of average daily net assets,
would have been 0.77% for Class Z shares.
<TABLE>
EXAMPLE The following example is intended to assist an investor in
understanding the various costs that an investor in the Fund will bear directly
or indirectly. The example assumes payment by the Fund of operating expenses at
the levels set forth in the table above. See "Purchase and Redemption of Shares"
and "Management of the Trust and the Fund."
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
An investor would pay the following expenses
on a $1,000 investment in Class Z shares of
the Fund, assuming (1) 5% annual return and
(2) redemption at the end of each time
period: $8 $24 $42 $93
- --------------------------------------------------------------------------------------------
<FN>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
</TABLE>
3
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
<TABLE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended July 31, 1994 is for the
Fund's Class Z Shares and has been audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report thereon appears in the Fund's Annual
Report dated July 31, 1994. The information set forth below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's 1994 Annual Report, which is incorporated by reference into the
Statement of Additional Information.
FOR A CLASS Z SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<Caption)
YEAR PERIOD
ENDED ENDED
7/31/94++ 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 8.41 $ 8.24
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.68+++ 0.51
Net realized and unrealized gain/(loss) on investments (0.54) 0.25
- -------------------------------------------------------------------------------------
Total from investment operations 0.14 0.76
Less distributions:
Distributions from net investment income (0.59) (0.47)
Distributions in excess of net investment income (0.06) --
Distributions from net realized gains (0.10) (0.12)
Distributions from capital (0.04) --
- -------------------------------------------------------------------------------------
Total distributions (0.79) (0.59)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 7.76 $ 8.41
- -------------------------------------------------------------------------------------
Total return+ 1.43 % 9.47%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $11,552 $11,803
Ratio of expenses to average net assets 0.75%*** 0.80**
Ratio of net income to average net assets 8.02% 8.56**
Portfolio turnover rate 93% 116%
- -------------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class Z shares (previously designated as Class C
shares) on November 6, 1992.
** Annualized.
*** Annualized expense ratio before waiver of fees by the sub-investment adviser
was 0.77% for the year ended July 31, 1994.
+ Total return represents aggregate total return for the period indicated.
++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since the use of the undistributed method did not accord with results of
operations for all classes of shares.
+++ Net investment income per share before waiver of fees by the sub-investment
adviser was $0.68 for the year ended July 31, 1994.
</TABLE>
4
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is high current income primarily
through investment in fixed-income securities. In attempting to achieve its
objective, the Fund allocates and reallocates its assets primarily among various
types of fixed-income securities selected by Smith Barney Mutual Funds
Management Inc. ("SBMFM"). The types of fixed-income securities among which the
Fund's assets will be primarily allocated are: obligations issued or guaranteed
as to principal and interest by the United States government ("U.S. government
securities"); mortgage-related securities issued by various governmental and
non-governmental entities; domestic and foreign corporate securities; and
foreign government securities. The Fund's investment objective may be changed
only with the approval of the holders of a majority of the Fund's outstanding
shares. There can be no assurance that the Fund will achieve its investment
objective.
The allocation and reallocation of the Fund's assets will be undertaken by
SBMFM on the basis of its analysis of economic and market conditions and the
relative risks and opportunities of particular types of fixed-income securities.
In general, the particular types of fixed-income securities selected for
investment by the Fund at any given time will be those that, in the view of
SBMFM, offer the highest income available at the time. The Fund typically would
not invest in fixed-income securities offering the highest income potential if
SBMFM determined that the income potential is not sufficient to justify the
higher risks associated with the securities.
At any given time, the Fund may be entirely or only partially invested in a
particular type of fixed-income security. Under normal conditions, at least 65%
of the Fund's assets will be invested in fixed-income securities, which for this
purpose will include non-convertible preferred stocks. The Fund generally will
invest in intermediate-and long-term fixed-income securities with the result
that, under normal market conditions, the weighted average maturity of the
Fund's securities is expected to be between five and 12 years.
Mortgage-related securities in which the Fund may invest include mortgage
obligations collateralized by mortgage loans or mortgage pass-through
certificates. Under current market conditions, the Fund's holdings of
mortgage-related securities may be expected to consist primarily of securities
issued or guaranteed by Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC"). The composition of the Fund's investments in mortgage-
related securities, however, will vary from time to time based upon the
determination of SBMFM on how best to achieve the Fund's investment
5
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
objective taking into account factors such as the liquidity and yield of
various mortgage-related securities. Mortgage-related securities held by the
Fund generally will be rated no lower than Aa by Moody's Investors Service, Inc.
("Moody's") or AA by Standard & Poor's Corporation ("S&P") or, if not rated,
will be of equivalent investment quality as determined by SBMFM. SBMFM also may
consider the ratings, if any, assigned to mortgage-related securities by
recognized rating agencies other than Moody's and S&P.
The Fund typically will purchase a corporate debt security if SBMFM believes
that the yield and, to a lesser extent, the potential for capital appreciation,
of the security are sufficiently attractive in light of the risks of ownership
of the security. In determining whether the Fund should invest in particular
debt securities, SBMFM will consider factors such as: the price, coupon and
yield to maturity; the credit quality of the issuer; the issuer's available cash
flow and the related coverage ratios; the property, if any, securing the
obligation; and the terms of the debt securities, including the subordination,
default, sinking fund and early redemption provisions. SBMFM also will review
the ratings, if any, assigned to the securities by Moody's, S&P or other
recognized rating agencies. SBMFM's judgment as to credit quality of a debt
security may differ, however, from that suggested by the ratings published by a
rating service.
The Fund may invest up to 35% of its assets in corporate fixed-income
securities of domestic issuers rated Ba or lower by Moody's or BB or lower by
S&P or in nonrated securities deemed by SBMFM to be of comparable quality. The
Fund may invest in fixed-income securities rated as low as Caa by Moody's or CCC
by S&P.
Corporate fixed-income securities of foreign issuers in which the Fund may
invest will include securities of companies, wherever organized, that have their
principal business activities and interests outside the United States. Foreign
government securities in which the Fund may invest consist of fixed-income
securities issued by foreign governments. In general, the Fund may invest in
debt securities issued by foreign governments or any of their political
subdivisions that are considered stable by Global Capital Management. Up to 5%
of the Fund's assets, however, may be invested in foreign securities issued by
countries with developing economies.
The Fund may invest in fixed-income securities issued by supranational
organizations, which are entities designated or supported by a government or
governmental entity to promote economic development, and include, among others,
the Asian Development Bank, the European Coal and Steel Community,
6
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the European Economic Community and the World Bank. These organizations have
no taxing authority and are dependent upon their members for payments of
interest and principal. Moreover, the lending activities of supranational
entities are limited to a percentage of their total capital (including "callable
capital" contributed by members at an entity's call), reserves and net income.
ADDITIONAL INVESTMENTS
Money Market Instruments. Up to 20% of the Fund's assets may be invested in
cash and money market instruments at any time. In addition, when SBMFM believes
that market conditions warrant, the Fund may invest in short-term instruments
without limitation for temporary defensive purposes. Short-term instruments in
which the Fund may invest include: U.S. government securities; certain bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loan associations
and similar institutions); commercial paper rated no lower than Prime-2 by
Moody's or A-2 by S&P or the equivalent from another major rating service or, if
unrated, of an issuer having an outstanding, unsecured debt issue then rated
within the three highest rating categories; and repurchase agreements with
respect to the securities in which the Fund may invest. The Fund will invest in
obligations of a foreign bank or foreign branch of a domestic bank only if SBMFM
determines that the obligations present minimum credit risks. These obligations
may be traded in the United States or outside the United States, but will be
denominated in U.S. dollars.
U.S. Government Securities. The U.S. government securities in which the
Fund may invest include, direct obligations of the United States Treasury (such
as Treasury Bills, Treasury Notes and Treasury Bonds), and obligations issued by
U.S. government agencies and instrumentalities, including: securities that are
supported by the full faith and credit of the United States (such as GNMA
certificates); 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 securities that are supported by the credit of the instrumentality
(such as FNMA and FHLMC bonds). Treasury Bills have maturities of less than one
year, Treasury Notes have maturities of one to 10 years and Treasury Bonds
generally have maturities of greater than 10 years at the date of issuance.
Certain U.S. government securities, such as those issued or guaranteed by GNMA,
FNMA and FHLMC, are mortgage-related securities. U.S. government securities
generally do not involve the credit risks associated with other types of
interest-bearing securities, although, as a result, the yields available from
U.S.
7
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
government securities are generally lower than the yields available from
interest-bearing corporate securities.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained in
the Statement of Additional Information.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions 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. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. 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. SBMFM, Global Capital Management
or the sub-administrator, The Boston Company Advisors, Inc. ("Boston Advisors"),
acting under the supervision of the Trust's Board of Trustees, 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
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is
considered a borrowing by the Fund, involves a sale by the Fund of securities
that it holds concurrently with an agreement by the Fund to repurchase the same
securities at an agreed-upon price and date. The Fund typically will invest
8
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the proceeds of a reverse repurchase agreement in money market instruments
or repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The Fund
will enter into a reverse repurchase agreement for leverage purposes only when
the interest income to be earned from the investment of the proceeds is greater
than the interest expense of the transaction. The Fund also may use the proceeds
of reverse repurchase agreements to provide liquidity to meet redemption
requests when the sale of the Fund's securities is considered to be
disadvantageous.
Forward Roll Transactions. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage-related 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 forward roll transactions, it will place in a
segregated account with the Trust's custodian, Boston Safe Deposit and Trust
Company ("Boston Safe"), cash, U.S. government securities or high grade debt
obligations 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.
When-Issued Securities and Delayed-Delivery Transactions. In order to
secure yields or prices deemed advantageous at the time, the Fund may purchase
or sell securities on a when-issued or delayed-delivery basis. The Fund will
enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. In such transactions delivery of
the securities occurs beyond the normal settlement periods, but no payment or
delivery is
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Diversified Strategic Income Fund --
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
made by the Fund prior to the actual delivery or payment by the other party
to the transaction. Due to fluctuations in the value of securities purchased or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on the
dates when the investments are actually delivered to the buyers. The Fund will
establish with Boston Safe a segregated account consisting of cash, U.S.
government securities or other high grade debt obligations in an amount equal to
the amount of its when-issued and delayed-delivery commitments. Placing
securities rather than cash in the segregated account may have a leveraging
effect on the Fund's net assets.
Lending of Portfolio Securities. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets taken at value. Loans
of portfolio securities by the Fund will be collateralized by cash, letters of
credit or U.S. government securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities. Any
gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Fund. The Fund will
segregate the common stock or convertible or exchangeable preferred stock or
debt securities in a special account with Boston Safe.
Covered Option Writing. The Fund may purchase and sell put, call and other
types of option securities that are traded on domestic or foreign exchanges or
the over-the-counter market including, but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options. The Fund may realize fees (referred to as "premiums") for granting the
rights evidenced by the options. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option holder
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 to the option holder an underlying security at
a specified price at any time during the option period. Thus, the purchaser of a
put option written by the Fund 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 written by the Fund 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.
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Diversified Strategic Income Fund --
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Upon the exercise of a call option written by the Fund, 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 option's exercise price, less the premium received for
writing the option.
The Fund will write only covered options. Thus, whenever the Fund writes a
call option, it will continue to own or have the present right to acquire the
underlying security for as long as it remains obligated as the writer of the
option. To support its obligation to purchase the underlying security if a put
option is exercised, the Fund will either (a) deposit with Boston Safe in a
segregated account cash, U.S. government securities or other high grade debt
obligations having a value at least equal to the exercise price of the
underlying securities or (b) continue to own an equivalent number of puts of the
same "series" (that is, puts on the same underlying security having the same
exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same "class" (that is, puts on the same
underlying security) with exercise prices greater than those that it has written
(or, if the exercise prices of the puts that it holds are less than the exercise
prices of those that it has written, it will deposit the difference with Boston
Safe in a segregated account).
Purchasing Put and Call Options on Securities. The Fund may utilize up to
15% of its assets to purchase options and may do so at or about the same time
that it purchases the underlying security or at a later time. In purchasing
option securities, the Fund will trade only with counterparties of high standing
in terms of credit quality and commitment to the market. Risks associated with
options transactions and foreign futures contracts are described below under
"Special Considerations."
Futures Contracts and Options on Futures Contracts. The Fund may enter into
futures contracts or related options that are traded on domestic and foreign
exchanges or boards of trade as well as the over-the-counter market with respect
to options on such futures contracts. A futures contract provides for the future
sale by one party and the purchase by the other party of a certain amount of
specified debt security at a specified price, date, time and place. The Fund may
enter into futures contracts to sell debt securities when SBMFM believes that
the value of the Fund's debt securities will decrease. The Fund may enter into
futures contracts to purchase debt securities when SBMFM anticipates purchasing
the underlying debt securities on behalf of the Fund and believes that prices
will rise before the purchases will be made. When the Fund enters into a futures
contract to purchase an underlying security, an amount of cash,
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Diversified Strategic Income Fund --
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
U.S. government securities or other high grade debt securities, equal to the
market value of the contract, will be deposited in a segregated account with
Boston Safe to collateralize the position, thereby insuring that the use of the
contract is unleveraged. The Fund will not enter into futures contracts for
speculation and will enter into futures contracts that are traded on a domestic
or foreign exchange or board of trade as well as the over-the-counter market.
An option on a futures contact, as contrasted with the direct investment in
a futures contract, gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract at a specified exercise price
at any time prior to the expiration date of the option. A call option gives the
purchaser of the option the right to enter into a futures contract to buy and
obliges the writer to enter into a futures contract to sell the underlying debt
securities. A put option gives the purchaser the right to sell and obliges the
writer to buy the underlying contract.
The Fund may purchase put options on futures contracts to hedge its
portfolio of debt securities against the risk of rising interest rates, and may
purchase call options on futures contracts to hedge against a decline in
interest rates. The Fund may write put and call options on futures contracts in
entering into closing sale transactions and to increase its ability to hedge
against changes in interest rates. The Fund will write put and call options on
future contracts that are traded on a domestic or foreign exchange or board of
trade as well as the over-the-counter market.
Currency Exchange Transactions and Options on Foreign Currencies. The Fund
will conduct its currency exchange transactions either on a spot (that is, cash)
basis at the rate prevailing in the currency exchange market or through entering
into forward contracts to purchase or sell currencies. The Fund's dealings in
forward currency exchange and options on foreign currencies are limited to
hedging involving either specific transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
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Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
to limit any potential gain that might result should the value of the
currency increase.
The Fund may purchase and sell put, call and other types of options on
foreign currencies that are traded on domestic or foreign exchanges or in the
over-the-counter market, including but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options.
The Fund may purchase put options on a foreign currency in which securities
held by the Fund are denominated to protect against a decline in the value of
the currency in relation to the currency in which the exercise price is
denominated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the
purchaser, in return for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying currency at a specified price during
the term of the option. Although the purchase of an option on a foreign currency
may constitute an effective hedge by the Fund against fluctuations in the
exchange rates, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies purchased by the Fund may be traded on
domestic and foreign exchanges or traded over-the-counter.
CERTAIN INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) time deposits maturing from two business days through seven
calendar days and (c) to the extent that a liquid secondary market does not
exist for the instruments, futures contracts and options on those contracts.
Notwithstanding the foregoing, the Fund shall not invest more than 10% of its
net assets in securities (excluding those subject to Rule 144A under the
Securities Act of 1933, as amended) that are restricted. In addition, the Fund
may invest up to 5% of its assets in the securities of issuers that have been in
continuous operation for less than three years. The Fund also may borrow from
banks for temporary or emergency purposes, but not for investment purposes,
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Diversified Strategic Income Fund --
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- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
in an amount up to 10% of its total assets, and may pledge its assets to the
same extent in connection with such borrowings. Whenever these borrowings exceed
5% of the value of the Fund's total assets, the Fund will not make any
additional investments. Immediately after any borrowing (including reverse
repurchase agreements and forward roll transactions) by the Fund, the Fund will
maintain an asset coverage of at least 300% with respect to all of its
borrowings. Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Trust's Board of Trustees. A complete list of investment
restrictions that identifies additional restrictions that cannot be changed
without the approval of the majority of the Fund's outstanding shares is
contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Medium-, Low-and Unrated Securities. The Fund may invest in medium-or
low-rated securities and unrated securities of comparable quality. Generally,
these securities offer a higher current yield than the yield offered by
higher-rated securities but involve greater volatility of price and risk of loss
of income and principal, including the probability of default by or bankruptcy
of the issuers of such securities. Medium-and low-rated and comparable unrated
securities (a) will likely have some quality and protective characteristics
that, in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Thus, it is
possible that these types of factors could, in certain instances, reduce the
value of securities held by the Fund with a commensurate effect on the value of
the Fund's shares. Therefore, an investment in the Fund should not be considered
as a complete investment program and may not be appropriate for all investors.
While the market values of medium-and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium-and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium-and low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of
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Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
financing available to them so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such issuers
is significantly greater because medium-and low-rated and comparable unrated
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Fund may incur additional expenses to the
extent that it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings. In addition, the markets in
which medium-and low-rated or comparable unrated securities are traded generally
are more limited than those in which higher-rated securities are traded. The
existence of limited markets for these securities may restrict the availability
of securities for the Fund to purchase and also may have the effect of limiting
the ability of the Fund to (a) obtain accurate market quotations for purposes of
valuing securities and calculating net asset value and (b) sell securities at
their fair value either to meet redemption requests or to respond to changes in
the economy or the financial markets. The market for medium-and low-rated and
comparable unrated securities is relatively new and has not fully weathered a
major economic recession. Any such recession, however, could likely disrupt
severely the market for such securities and adversely affect the value of such
securities. Any such economic downturn also could adversely affect the ability
of the issuers of such securities to repay principal and pay interest thereon.
Fixed-income securities, including medium-and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities that are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities that are rated B generally lack characteristics of a desirable
investment and assurance of interest and principal payments over any long period
of time may be small. Securities that are rated Caa or CCC are of poor standing.
These issues may be in default or present elements of danger may exist with
respect to principal or interest.
In light of the risks described above, SBMFM, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
financial resources,
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Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
its sensitivity to economic conditions and trends, the operating history of
and the community support for the facility financed by the issue, the ability of
the issuer's management and regulatory matters.
Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.
Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations that are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of limitations on the repatriation of
currencies or other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers and the lack of uniform
accounting, auditing and financial reporting standards or of other regulatory
practices and requirements comparable to those applicable to domestic companies.
The yield of the Fund may be adversely affected by fluctuations in value of one
or more foreign currencies relative to the U.S. dollar. Moreover, securities of
many foreign companies and their markets may be less liquid and their prices
more volatile than those of securities of comparable domestic companies. In
addition, with respect to certain foreign countries, the possibility exists of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Fund, including the withholding of
dividends. Foreign securities may be subject to foreign government taxes that
could reduce the yield on such securities. Because the Fund will invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may adversely affect the value of
portfolio securities and the appreciation or depreciation of investments.
Investment in foreign securities also may result in higher expenses due to the
cost of converting foreign currency to U.S. dollars, the payment of fixed
brokerage commissions on foreign exchanges, which generally are higher than
commissions on domestic exchanges, the expense of maintaining securities with
foreign custodians, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.
Corporate securities in which the Fund may invest include corporate fixed-
income securities of both domestic and foreign issuers, such as bonds, deben-
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Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tures, notes, equipment lease certificates, equipment trust certificates,
and preferred stock. The Fund's investments in each of equipment lease or
equipment trust certificates will not exceed 5% of its assets.
Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting their holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
Mortgage-Related Securities. Mortgage-related securities provide a monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees or
costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer a
higher rate of interest than governmental and government-related pools because
no direct or indirect guarantees of payments are applicable with respect to the
former pools. Timely payment of interest and principal in these pools, however,
may be supported by various forms of private insurance or guarantees, including
individual loan, title, pool and hazard insurance. There can be no assurance
that the private insurers can meet their obligations under the policies. Prompt
payment of principal and interest on GNMA mortgage pass-through certificates is
backed by the full faith and credit of the United States. FNMA guaranteed
mortgage pass-through certificates and FHLMC participation certificates are
solely the obligations of those entities but are supported by the discretionary
authority of the United States government to purchase the agencies' obligations.
Collateralized mortgage obligations are a type of bond secured by an underlying
pool of mortgages or mortgage pass-through certificates that are structured to
direct payments on underlying collateral to different series or classes of the
obligations.
To the extent that the Fund purchases mortgage-related securities at a
premium, mortgage foreclosures and prepayments of principal by mortgagors
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Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
(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. The Fund's
yield may be affected by reinvestment of prepayments at higher or lower rates
than the original investment. In addition, like other debt securities, the
values of mortgage-related securities, including government and
government-related mortgage pools, generally will fluctuate in response to
market interest rates.
Securities of Developing Countries. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the fixed-income markets of developing
countries involves exposure to economic structures that are generally less
diverse and mature, and to political systems that can be expected to have less
stability, than those of developed countries. Historical experience indicates
that the markets of developing countries have been more volatile than the
markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
Non-Publicly Traded and Illiquid Securities. The Fund's sale of securities
that are not publicly traded is typically restricted under the Federal
securities laws. As a result, the Fund may be forced to sell these securities at
less than fair market value or may not be able to sell them when SBMFM believes
it desirable to do so. The Fund's investments in illiquid securities are subject
to the risk that should the Fund desire to sell any of these securities when a
ready buyer is not available at a price that the Fund deems representative of
their value, the value of the Fund's net assets could be adversely affected.
Options. Because option premiums paid or received by the Fund are small in
relation to the market value of the investments underlying the options, buying
and selling options can result in large amounts of leverage. The leverage
offered by trading in options may cause the Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
Upon the exercise of a put option written by the Fund, 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 written by the Fund, the Fund may suffer a loss equal to the
excess
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Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
of the security's market value at the time of the option exercise over the
exercise price of the option less the premium received for writing the option.
The Fund may engage in a closing purchase transaction to realize a profit,
to prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze and underlying security (thereby permitting its sale or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would purchase,
prior to the holder's exercise of an option that the Fund has written, an option
of the same series as that on which the Fund desired to terminate its
obligation. The obligation of the Fund under an option that it has written would
be terminated by a closing purchase transaction, but the Fund would not be
deemed to own an option as a result of the transaction. No assurance can be
given that the Fund will be able to effect closing transactions at a time when
it wishes to do so. If the Fund cannot enter into a closing transaction, the
Fund may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security and could face
higher transaction costs, including brokerage commissions.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options or financial futures only if there
appears to be a liquid secondary market for the options or futures sold or
purchased, for some options or futures no such secondary market may exist or the
market may cease to exist.
Futures and Options on Futures. Investments in futures and options on
futures made by the Fund will be made solely for the purpose of hedging against
the effects of changes in the value of its portfolio securities due to
anticipated changes in interest rates and when the transactions are economically
appropriate to the reduction of risks inherent in the management of the Fund.
The Fund may not enter into futures and options contracts for which aggregate
initial margin deposits and premium paid for unexpired options exceed 5% of the
fair market value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. No assurance can be given that a correlation will
exist between price movements in the underlying securities on the one hand, and
price movements in the securities which are the subject of the hedge, on the
other hand. Positions in futures contracts and options on futures contracts may
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Diversified Strategic Income Fund --
Class Z Shares
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
be closed out only on the exchange or board of trade on which they were
entered into, and no assurance can be given that an active market will exist for
a particular contract or option at any particular time. Losses incurred in
hedging transactions and the costs of these transactions will affect the Fund's
performance.
Foreign Commodity Exchanges. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the
Commodity Futures Trading Commission and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges may be
principal markets so that no common clearing facility exists and a trader may
look only to the broker for performance of the contract. In addition, unless the
Fund hedges against fluctuations in the exchange rate between the U.S. dollar
and the currencies in which trading is done on foreign exchanges, any profits
that the Fund might realize in trading could be eliminated by adverse changes in
the exchange rate, or the Fund could incur losses as a result of those changes.
Foreign Currency. Although the foreign currency market may not necessarily
be more volatile than the market in other commodities, the foreign currency
market offers less protection against defaults in the forward trading of
currencies than is available when trading in currencies occurs on an exchange.
Because a forward currency contract is not guaranteed by an exchange or clearing
house, a default on the contract would deprive the Fund of unrealized profits or
force the Fund to cover its commitments for purchase or resale, if any, at the
current market price.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the Fund will be
executed by a number of brokers and dealers, including Smith Barney. The Fund
may use Smith Barney in connection with a purchase or sale of securities when
SBMFM believes that the charge for the transaction does not exceed usual and
customary levels. The Fund also may use Smith Barney as a commodities broker in
connection with entering into futures contracts and commodity options. Smith
Barney has agreed to charge the Fund commodity commissions at rates comparable
to those charged by Smith Barney to its most favored clients for comparable
trades in comparable accounts.
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Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
VALUATION OF SHARES
The net asset value per share of Class Z shares is determined as of the
close of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), on
each day that the NYSE is open, by dividing the value of the Fund's net assets
attributable to Class Z by the number of shares of the Class outstanding. The
per share net asset value of Class Z shares may be higher than those of other
Classes because of the lower expenses attributable to Class Z shares.
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 Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Board of Trustees or its delegates. A security that
is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the last
sale price, the last offer price. The value of a futures contract equals the
unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the day
on which the futures contract is being valued. A settlement price may not be
used if the market makes a limit move with respect to a particular commodity or
if the underlying securities market experiences significant price fluctuations
after the determination of the settlement price. In such event, the futures
contract will be valued at a fair market price to be determined by or under the
direction of the Board of Trustees. Further information regarding the Trust's
valuation policies with respect to the Fund is contained in the Statement of
Additional Information.
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Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders. Dividends and distributions will be
reinvested automatically for each shareholder's account at net asset value in
additional Class Z shares of the Fund, unless the shareholder instructs the Fund
to pay dividends and distributions in cash. Dividends from net investment
income, if any, of the Fund will be declared each day that the Fund is open for
business and will be paid on the last day of the Smith Barney statement month.
Distributions of any net long-term capital gains earned by the Fund will be made
annually after the close of the fiscal year in which they are earned.
Distributions of short-term capital gains may be paid more frequently with
dividends from net investment income. The Fund is subject to a 4% nondeductible
excise tax measured with respect to certain undistributed amounts of net
investment income and capital gains. If it is in the best interests of
shareholders, the Fund expects to make such additional distributions shortly
before December 31 in each year as may be necessary to avoid the application of
this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined on a fund by fund basis, rather than on a
Trust wide basis. The Fund has qualified and intends to continue to qualify each
year as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended. To meet those requirements, the Fund may need
to restrict the degree to which it engages in short-term trading and
transactions in options. If the Fund qualifies as a regulated investment company
and meets certain distribution requirements, the Fund will not be subject to
22
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Federal income tax on its net investment income and net capital gains that
it distributes to its shareholders.
Dividends paid by the Fund from investment income and distributions of
short-term capital gains will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Distributions of long-term capital gain will be taxable to
shareholders as long-term capital gain, whether paid in cash or reinvested in
additional shares, and regardless of the length of time the investor has held
his or her shares of the Fund.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other foreign taxes. The payment of these taxes will
reduce the amount of dividends and distributions paid to the Fund's
shareholders. Each shareholder of the Fund will receive a statement annually
from the Trust, which will set forth separately the aggregate dollar amount of
dividends and capital gains distributed to the shareholder by the Fund with
respect to the prior calendar year.
Shareholders should consult their plan document or tax advisors about
the tax consequences associated with participating in a Qualified Plan or
Smith Barney UIT.
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Smith Barney UIT. Purchases are effected at the net
asset value next determined after a purchase order is received by Smith Barney
(the "trade date"). Currently, payment is due to Smith Barney on the fifth
business day (the "settlement date") after the trade date. The Fund anticipates
that, in accordance with regulatory changes, beginning on or about June 1, 1995,
the settlement date will be the third business day after the trade date.
Investors who make payment prior to the settlement date may designate a
temporary investment (such as a money market fund of the Smith Barney Mutual
Funds) for such payment until settlement date. The Fund reserves the right to
reject any purchase order and to suspend the offering of shares for a period of
time. There are no minimum investment requirements for Class Z shares; however,
the Fund reserves the right to vary this policy at any time.
Purchase orders received by Smith Barney prior to the close of regular
trading on the NYSE, currently 4:00 p.m., New York time, on any day that the
23
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES (CONTINUED)
Fund's calculates its net asset value, are priced according to the net asset
value determined on that day. See "Valuation of Shares." Certificates for Fund
shares are issued upon request to the Trust's transfer agent.
Shareholders may redeem their shares on any day the Fund calculates its net
asset value. See "Valuation of Shares." Redemption requests received in proper
form prior to the close of regular trading on the NYSE are priced at the net
asset value per share determined on that day. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value as
next determined. Shareholders acquiring Class Z shares through a Smith Barney
Qualified Plan or a Smith Barney UIT should consult the terms of their
respective plans for redemption provisions.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Holders of Class Z shares in the Fund may exchange their shares at the net
asset value next determined for shares of the same Class in the following funds
of the Smith Barney Mutual Funds to the extent shares are offered for sale in
the shareholder's state of residence. Exchanges of shares may be made at any
time without payment of any exchange fee.
- SMITH BARNEY AGGRESSIVE GROWTH FUND INC.
- SMITH BARNEY APPRECIATION FUND INC.
- SMITH BARNEY FUNDS, INC.--INCOME AND GROWTH PORTFOLIO
- SMITH BARNEY FUNDS, INC.--INCOME RETURN ACCOUNT PORTFOLIO
- SMITH BARNEY FUNDS, INC.--U.S. GOVERNMENT SECURITIES PORTFOLIO
- SMITH BARNEY GLOBAL OPPORTUNITIES FUND
- SMITH BARNEY HIGH INCOME FUND
- SMITH BARNEY MONEY FUNDS, INC.--CASH PORTFOLIO
- SMITH BARNEY MONEY FUNDS, INC.--GOVERNMENT PORTFOLIO
- SMITH BARNEY UTILITIES FUND
- SMITH BARNEY WORLD FUNDS, INC.--INTERNATIONAL EQUITY PORTFOLIO
The exchange of shares of one fund for shares of another fund is generally
treated for Federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize a
taxable
24
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
gain or loss in connection with the exchange. Shareholders should consult
their plan prospectus and/or other governing documents regarding exchanges.
Generally, exchanges within such a plan are not treated as a taxable event.
Shareholders exercising the exchange privilege with any of the other funds
of the Smith Barney Mutual Funds should review the prospectus of that fund
carefully prior to making an exchange. Smith Barney reserves the right to reject
any exchange request.
Although the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the Fund's performance and its shareholders.
SBMFM 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,
SBMFM will notify Smith Barney, and Smith Barney may, at its discretion, decide
to limit additional purchases and/or exchanges by the shareholder. Upon such a
determination, Smith Barney 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 listed above, 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. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30 day "yield" of its Class Z
shares. The Fund's yield refers to the income generated by an investment in the
Fund over the 30 day period identified in the advertisement, and is computed by
dividing the net investment income per share earned by the Fund with respect to
the Class during the period by the maximum public offering price per share on
the last day of the period. This income is "annualized" by assuming that the
amount of income is generated each month over a one-year period and is
compounded semi-annually. The annualized income is then shown as a percentage of
the net asset value.
25
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
PERFORMANCE (CONTINUED)
The yield for the Class Z shares for the 30 day period ended July 31, 1994
was 8.73%.
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements
and/or in other types of sales literature. 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 this 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 calculates current dividend return for Class Z shares by
annualizing the most recent monthly distribution and dividing by the net asset
value on the last day of the period for which current dividend return is
presented. The current dividend return may vary from time to time depending on
market conditions, the composition of its investment portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating current dividend return should be considered when comparing the
Fund's current return to yields published for other investment companies and
other investment vehicles. The Fund may also include comparative performance
information in advertising or marketing the Class Z shares. Such performance
information may include data from Lipper Analytical Services, Inc. and other
financial publications.
26
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
PERFORMANCE (CONTINUED)
Class Z's average annual total return was as follows for the periods
indicated:
1.43% for the one-year period beginning August 1, 1993 through
July 31, 1994.
6.23% per annum during the period from commencement of
operations (November 6, 1992) through July 31, 1994.
Class Z's aggregate total return was as follows for the periods indicated:
1.43% for the one-year period beginning on August 1, 1994 through
July 31, 1994.
11.04% for the period from commencement of operations
(November 6, 1992) through July 31, 1994.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and companies that furnish services to the Trust and the Fund,
including agreements with the Fund's distributor, investment adviser, sub-
investment adviser, administrator, sub-administrator, custodian and transfer
agent. The day-to-day operations of the Fund are delegated to the Fund's
investment adviser, sub-investment adviser, administrator and sub-administrator.
The Statement of Additional Information contains background information
regarding each Trustee and executive officer of the Trust.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment adviser pursuant to a transfer of the advisory agreement,
effective November 7, 1994, from its affiliate Mutual Management Corp. (Mutual
Management Corp. and SBMFM are both wholly owned subsidiaries of Smith Barney
Holdings Inc. ("Holdings")). Investment advisory services continue to be
provided to the Fund by the same portfolio managers who had provided services
under the agreement with Mutual Management Corp. Holdings is a wholly owned
subsidiary of The Travelers Inc. ("Travelers") a diversified financial services
holding company engaged, through its subsidiaries,
27
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
principally in four business segments: Investment Services, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
SBMFM (through predecessor entities) has been in the investment counseling
business since 1934 and is a registered investment adviser. SBMFM renders
investment advice to investment companies that had aggregate assets under
management as of September 30, 1994 in excess of $52.4 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's 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 service to the Fund. For investment
advisory services rendered to the Fund, the Fund pays SBMFM a fee at the annual
rate of 0.35% of the value of the Fund's average daily net assets.
SUB-INVESTMENT ADVISER--GLOBAL CAPITAL MANAGEMENT
Global Capital Management, located at 10 Piccadilly, London W1V 9LA, United
Kingdom, serves as the Fund's sub-investment adviser pursuant to a sub-
investment advisory agreement dated March 22, 1994. Global Capital Management
has agreed to waive 50% of its investment advisory fee until such time as the
Fund's Board of Trustees and Global Capital Management mutually agree otherwise.
Global Capital Management has been in the investment counseling business since
1988 and renders advice to client companies with total assets under management,
as of September 30, 1994 in excess of $1.11 billion.
The Fund pays Global Capital Management a fee at the annual rate of 0.10% of
the value of the Fund's average daily net assets. For the fiscal year ended July
31, 1994, Global Capital Management was paid a fee equal to 0.08% of the Fund's
average daily net assets.
In its capacity as a sub-investment adviser, Global Capital Management is
responsible for and selects the Fund's investments in foreign securities and
selects the brokers and dealers that execute the Fund's investments in foreign
securities.
PORTFOLIO MANAGEMENT
John C. Bianchi and James E. Conroy, both Investment Officers of SBMFM, have
served as Vice Presidents and Investment Officers of the Fund since it commenced
operations, along with, Victor S Filatov, an Investment Officer of the Fund
since March 21, 1994 and President of Global Capital Management,
28
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
manage the day-to-day operations of the Fund, including making all domestic
investment decisions.
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1994 are included in
the Annual Report dated July 31, 1994. A copy of the Annual Report may be
obtained upon request and without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
Victor S. Filatov, International Strategist and President of Global Capital
Management, was elected by the Board of Trustees on January 20, 1994 to serve as
an Investment Officer of the Fund. Mr. Filatov is responsible for managing the
day-to-day operations of the Fund's investments in foreign securities. Prior to
1993, Mr. Filatov was Business Coordinator and head of European Fixed Income
Research for J.P. Morgan Securities Inc.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of .20% of the value of the Fund's
average daily net assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to
investment companies that had aggregate assets under management as of
September 30, 1994 in excess of $48.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated May 4, 1994, Boston
Advisors is paid a portion of the fee paid by the Fund to SBMFM at a rate agreed
upon from time to time between Boston Advisors and SBMFM. Prior
to May 4, 1994, Boston Advisors served as the Fund's administrator.
29
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
DISTRIBUTOR--SMITH BARNEY
Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Travelers.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust," registered with the SEC as a diversified, open-end management
investment company.
The Trust offers shares of beneficial interest of separate series having a
$.001 per share par value. Shares of beneficial interest of the Fund are
currently classified into five Classes -- A, B, C, Y and Z. Each Class
represents an identical pro rata interest in the Fund's investment portfolio. As
a result, the Classes have the same rights, privileges and preferences, except
with respect to: (a) the designation of each Class; (b) the effect of the
respective sales charges, if any, for each Class; (c) the distribution and/or
service fees, if any, borne by each Class pursuant to a Plan adopted by the Fund
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended; (d)
the expenses allocable exclusively to each Class; (e) voting rights on matters
exclusively affecting a single Class; (f) the exchange privilege of each Class;
and (g) the conversion feature of the Class B shares. The Trust's Board of
Trustees does not anticipate that there will be any conflicts among the
interests of the holders of different Classes of shares of the Fund. The
Trustees, on an ongoing basis, will consider whether any such conflict exists
and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
of each Fund 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 Trust vote by individual fund on all matters except (a) matters affecting
only the interests of one or more of the funds, in which case only shares of the
affected fund or funds would be entitled to vote or (b) when the 1940 Act
requires that shares of the funds be voted in the aggregate. Similarly, shares
of the Fund will be voted generally on a Fund-wide basis except matters
affecting the interests of one Class of shares.
30
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund --
Class Z Shares
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
Normally there will be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. Shareholders of
record of no less than two-thirds of the outstanding shares of the Trust may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. The Trustees 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.
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.
Boston Safe, an indirect wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Trust's investments.
The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data
Corporation, is located at Exchange Place, Boston, Massachusetts 02109, and
serves as the Trust's transfer agent.
Shareholders may seek information regarding the Fund from their
Smith Barney Financial Consultants.
31
<PAGE>
________________________________________________________________________________
<LOGO>
A Member of Travelers Group
SMITH BARNEY
DIVERSIFIED STRATEGIC
INCOME FUND
388 Greenwich Street
New York, New York 10013
Recycled Fund 128
Recyclable FD0240 K4
________________________________________________________________________________
<PAGE>
P R O S P E C T U S
S M I T H B A R N E Y
High
Income
Fund
CLASS Z SHARES
N O V E M B E R 7 , 1 9 9 4
PROSPECTUS BEGINS ON PAGE ONE
[LOGO]
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- ---------------------------------------------------------------------------
PROSPECTUS NOVEMBER 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney High Income Fund (the "Fund") is a diversified fund that seeks to
provide shareholders with high current income by investing in high-yielding
corporate bonds, debentures and notes. The Fund also purchases put and call
options and writes covered put and call options on securities it holds and on
stock indexes primarily as a hedge to reduce investment risk.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up the Smith Barney Income Funds (the "Trust").
The Trust is an open-end management investment company commonly referred to as a
mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including expenses, that prospective investors will find helpful in
making an investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.
The Class Z shares described in this Prospectus (previously designated as
Class C shares) are currently offered exclusively for sale to tax-exempt
employee benefit and retirement plans of Smith Barney Inc. ("Smith Barney") or
any of its affiliates ("Qualified Plans") and to certain unit investment trusts
sponsored by Smith Barney or any of its affiliates ("Smith Barney UITs").
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
----------------------------------------------------------------
FINANCIAL HIGHLIGHTS 4
----------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
----------------------------------------------------------------
VALUATION OF SHARES 18
----------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 19
----------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES 21
----------------------------------------------------------------
EXCHANGE PRIVILEGE 21
----------------------------------------------------------------
PERFORMANCE 23
----------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 25
----------------------------------------------------------------
ADDITIONAL INFORMATION 27
----------------------------------------------------------------
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
TRUST
OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE
TRUST
OR THE DISTRIBUTOR TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION.
2
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- ---------------------------------------------------------------------------
THE FUND'S EXPENSES
EXCEPT WHERE OTHERWISE NOTED, THE FOLLOWING EXPENSE TABLE LISTS THE COSTS
AND
EXPENSES THAT AN INVESTOR WILL INCUR EITHER DIRECTLY OR INDIRECTLY AS A
SHAREHOLDER OF CLASS Z SHARES OF THE FUND, BASED UPON THE FUND'S OPERATING
EXPENSES FOR ITS MOST RECENT FISCAL YEAR:
<TABLE>
<CAPTION>
AS A % OF
AVERAGE NET
ASSETS
<S> <C>
-----------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
Management fees 0.70%
Other expenses 0.07%
-----------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.77%
-----------------------------------------------------------------------------------
</TABLE>
The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and the Fund." "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
EXAMPLE THE FOLLOWING EXAMPLE IS INTENDED TO ASSIST AN INVESTOR IN
UNDERSTANDING
THE VARIOUS COSTS THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR
INDIRECTLY.
THE EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT THE
LEVELS SET
FORTH IN THE TABLE ABOVE. SEE "PURCHASE AND REDEMPTION OF SHARES" AND
"MANAGEMENT OF THE TRUST AND THE FUND."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------
An investor would pay the following
expenses on a $1,000 investment in
Class Z shares of the Fund,
assuming (1) 5.00% annual return
and (2) redemption at the end of
each time period: $8 $25 $43 $95
-----------------------------------------------------------------------------------
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
3
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
EXCEPT WHERE OTHERWISE NOTED, THE FOLLOWING INFORMATION HAS BEEN AUDITED
BY
COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS, WHOSE REPORT THEREON,
FOR THE
YEAR ENDED JULY 31, 1994, APPEARS IN THE FUND'S ANNUAL REPORT DATED JULY 31,
1994. THE INFORMATION SET FORTH BELOW SHOULD BE READ IN CONJUNCTION WITH
THE
FINANCIAL STATEMENTS AND RELATED NOTES THAT ALSO APPEAR IN THE FUND'S 1994
ANNUAL REPORT, WHICH IS INCORPORATED BY REFERENCE INTO THE STATEMENT OF
ADDITIONAL INFORMATION.
FOR A CLASS Z SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94 7/31/93*#
<S> <C> <C>
Net Asset Value, beginning of period $ 12.01 $ 11.03
- -----------------------------------------------------------------------------------
Income from investment operations:
Net investment income 1.10 0.79
Net realized and unrealized gain/(loss) on investments (0.80) 1.06
- -----------------------------------------------------------------------------------
Total from investment operations 0.30 1.85
Less distributions:
Dividends from net investment income (1.09) (0.84)
Distributions in excess of net investment income (0.06) (0.04)
- -----------------------------------------------------------------------------------
Total distributions (1.15) (0.88)
- -----------------------------------------------------------------------------------
Net Asset Value, end of period $ 11.16 $ 12.01
- -----------------------------------------------------------------------------------
Total return++ 2.37% 17.47%
- -----------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $11,370 $26,112
Ratio of operating expenses to average net assets 0.77% 0.81%+
Ratio of net investment income to average net assets 9.61% 9.88%+
Portfolio turnover rate 98% 95%
- -----------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class Z shares (previously designated as Class C
shares) on November 6, 1992.
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
# Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations.
</TABLE>
4
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is high current income. The Fund's investment
objective may be changed only with the approval of the holders of a majority of
the Fund's outstanding shares. There can be no assurance that the Fund will
achieve its investment objective. Although growth of capital is not an
investment objective of the Fund, Smith Barney Mutual Funds Management Inc.
("SBMFM") may consider potential for growth as one factor, among others, in
selecting investments for the Fund. The Fund will seek high current income by
investing, under normal circumstances, at least 65% of its assets in
high-yielding corporate bonds, debentures and notes denominated in U.S. dollars
or foreign currencies. Up to 40% of the Fund's assets may be invested in
fixed-income obligations of foreign issuers, and up to 20% of its assets may be
invested in common stock or other equity or equity-related securities, including
convertible securities, preferred stock, warrants and rights. Securities
purchased by the Fund generally will be rated in the lower rating categories of
recognized rating agencies, as low as Caa by Moody's Investors Service, Inc.
("Moody's") or D by Standard & Poor's Corporation ("S&P"), or unrated securities
that Greenwich Street Advisors deems of comparable quality. The Fund may invest
up to 10% of its assets in low-rated securities or unrated securities of
comparable quality. Low-rated securites are securities rated less than
investment grade by Moody's or S&P. See "Special Considerations--Medium-, Low-
and Unrated Securities" below. The Fund may hold securities with higher ratings
when the yield differential between low-rated and higher-rated securities
narrows and the risk of loss may be reduced substantially with only a relatively
small reduction in yield. The Fund also may invest in higher-rated securities
when SBMFM believes that a more defensive investment strategy is appropriate in
light of market or economic conditions. The Fund also may lend its portfolio
securities, purchase or sell securities on a when-issued or delayed-delivery
basis and write covered call options on securities. In order to mitigate the
effects of uncertainty in future exchange rates, the Fund may engage in currency
exchange transactions and purchase options on foreign currencies. The Fund also
may hedge against the effects of changes in the value of its investments by
purchasing put and call options on interest rate futures contracts. Special
considerations associated with the Fund's investments are described below.
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SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ, among
others, one or more of the strategies set forth below. More detailed information
concerning these strategies and their related risks is contained in the
Statement of Additional Information.
COVERED OPTION WRITING. The Fund may write call options on securities. The
Fund realizes fees (referred to as "premiums") for granting the rights evidenced
by the options. A call option embodies the right of its purchaser to compel the
writer of the option to sell to the option holder an underlying security at a
specified price at any time during the option period. Thus, the purchaser of a
call option written by the Fund 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 call option written by the Fund, 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 will write only covered options. Accordingly, whenever the Fund
writes a call option, it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated as the
writer of the option.
The Fund may engage in a closing purchase transaction to realize a profit or
to unfreeze an underlying security (thereby permitting its sale or the writing
of a new option on the security prior to the outstanding option's expiration).
To effect a closing purchase transaction, the Fund would purchase, prior to the
holder's exercise of an option the Fund has written, an option of the same
series as that on which the Fund desires to terminate its obligation. The
obligation of the Fund under an option it has written would be terminated by a
closing purchase transaction, but the Fund would not be deemed to own an option
as the result of the transaction. There can be no assurance the Fund will be
able to effect closing purchase transactions at a time when it wishes to do so.
To facilitate closing purchase transactions, however, the Fund ordinarily will
write options only if a secondary market for the options exists on a domestic
securities exchange or in the over-the-counter market.
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SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
CONVERTIBLE SECURITIES AND SYNTHETIC CONVERTIBLE SECURITIES. Convertible
securities are fixed-income securities that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, also will react to variations in
the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
prices of the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than
investments in common stock of the same issuer.
As fixed-income securities, convertible securities generally provide a steady
dividend which is higher than dividends paid by common stocks but at lower
interest rates or dividend yields than non-convertible fixed-income securities.
Like all fixed-income securities, there can be no assurance of current income
because issuers may default on their obligations. Similarly, although the
conversion feature of a convertible security enables the holder to benefit from
increases in the market price of the underlying common stock (to a lesser extent
than a direct holder of the common stock) there can be no assurance of capital
appreciation because of market fluctuations.
Convertible securities generally are subordinated to other similar but non-
convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
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HIGH INCOME FUND -- CLASS Z SHARES
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Unlike a convertible security which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotation System. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Fund at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risk normally involved in holding the
securities comprising the synthetic convertible security.
ADDITIONAL INVESTMENTS
MONEY MARKET INSTRUMENTS. When SBMFM believes that market conditions warrant,
the Fund may adopt a temporary defensive posture and may invest in short-term
instruments without limitation. Short-term instruments in which the Fund may
invest include: United States government securities; certain bank obligations
(including certificates of deposit, time deposits and bankers' acceptances of
domestic or foreign banks, domestic savings and loan associations and similar
institutions); commercial paper rated no lower than A-2 by S&P or Prime-2 by
Moody's or the equivalent from another major rating service or, if unrated, of
an issuer having an outstanding unsecured debt issue then rated within the three
highest rating categories; and repurchase agreements as described below.
UNITED STATES GOVERNMENT SECURITIES. United States government securities are
obligations of, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities"). The U.S. government securities
in which the Fund may invest include: direct obligations of the United States
Treasury (such as Treasury Bills, Treasury Notes and Treasury Bonds) and
obligations issued by U.S. government agencies and instrumentalities, including
securities that are supported by the full faith and credit of the United States
(such as Government National
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SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Mortgage Association ("GNMA") certificates); 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 securities that are supported by the
credit of the instrumentality (such as Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") bonds). Treasury
Bills have maturities of less than 1 year, Treasury Notes have maturities of 1
to 10 years and Treasury Bonds generally have maturities of greater than 10
years at the date of issuance. Certain U.S. government securities, such as those
issued or guaranteed by GNMA, FNMA and FHLMC, are mortgage-related securities.
U.S. government securities generally do not involve the credit risks associated
with other types of interest-bearing securities, although, as a result, the
yields available from U.S. government securities are generally lower than the
yields available from interest-bearing corporate securities.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the Fund 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.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities will be at least equal at all times to the total amount of the
repurchase obligation, including interest. Repurchase agreements could involve
certain risks in the event of default or insolvency of the other party,
including possible delays in 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.
SBMFM or the the sub-administrator, The Boston Company Advisors, Inc. ("Boston
Advisors"), acting under the supervision of the Trust's Board of Trustees,
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.
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SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. When deemed advisable by
SBMFM, the Fund may enter into futures contracts or related options that are
traded on a domestic exchange or board of trade. Such investments, if any, by
the Fund will be made solely for the purpose of hedging against the effects of
changes in the value of the portfolio securities due to anticipated changes in
interest rates, currency values and market conditions and when the transactions
are economically appropriate to the reduction of risks inherent in the
management of the Fund. The Fund may not enter into futures and options
contracts for which aggregate initial margin deposits and premium paid for
unexpired options to establish such positions that are not bona fide hedging
positions (as defined by the Commodity Futures Trading Commission), exceed 5% of
the fair market value of the Fund's assets after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
With respect to each long position in a futures contract or option thereon, the
underlying commodity value of such contract always will be covered by cash and
cash equivalents set aside plus accrued profits held in a segregated account.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities on the one
hand, and price movements in the securities which are the subject of the hedge,
on the other hand. Positions in futures contracts and options on futures
contracts may be closed out only on the exchange or board of trade on which they
were entered into, and there can be no assurance that an active market will
exist for a particular contract or option at any particular time. Losses
incurred in hedging transactions and the costs of these transactions will affect
the Fund's performance.
FOREIGN SECURITIES. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The yield of the Fund may
be adversely affected by
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SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
fluctuations in value of one or more foreign currencies relative to the U.S.
dollar. Moreover, securities of many foreign companies and their markets may be
less liquid and their prices more volatile than those of securities of
comparable domestic companies. In addition, with respect to certain foreign
countries, there is the possibility of expropriation, nationalization,
confiscatory taxation and limitations on the use or removal of funds or other
assets of the Fund, including the withholding of dividends. Foreign securities
may be subject to foreign government taxes that could reduce the yield on such
securities. Because the Fund will invest in securities denominated or quoted in
currencies other than the U.S. dollar, changes in foreign currency exchange
rates may adversely affect the value of portfolio securities and the
appreciation or depreciation of investments. Investments in foreign securities
also may result in higher expenses due to the cost of converting foreign
currency to U.S. dollars, the payment of fixed brokerage commissions on foreign
exchanges, which generally are higher than commissions on domestic exchanges,
and the expense of maintaining securities with foreign custodians, and the
imposition of transfer taxes or transaction charges associated with foreign
exchanges.
Corporate securities in which the Fund may invest include corporate
fixed-income securities of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
and preferred stock.
Certain of the corporate fixed-income securities in which the Fund may invest
may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or in
corporate fixed-income securities that have conversion or exchange rights
permitting the holder to convert or exchange the securities at a stated price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
CURRENCY EXCHANGE TRANSACTIONS AND OPTIONS ON FOREIGN CURRENCIES. In order
to
protect against uncertainty in the level of future exchange rates, the Fund may
engage in currency exchange transactions and purchase exchange-traded put and
call options on foreign currencies. The Fund will conduct its currency exchange
transactions either on a spot (i.e., cash) basis at the rate
11
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SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
prevailing in the currency exchange market or through entering into forward
contracts to purchase or sell currencies. The Fund's dealings in forward
currency exchange and options on foreign currencies are limited to hedging
involving either specific transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of the currency
increase.
The Fund may purchase put options on a foreign currency in which securities
held by the Fund are denominated to protect against a decline in the value of
the currency in relation to the currency in which the exercise price is
denominated. The Fund may purchase a call option on a foreign currency to hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the
purchaser, in return for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying currency at a specified price during
the term of the option. Although the purchase of an option on a foreign currency
may constitute an effective hedge by the Fund against fluctuations in the
exchange rates, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies purchased by the Fund may be traded on
domestic and foreign exchanges or traded over-the-counter.
Although the foreign currency market may not necessarily be more volatile than
the market in other commodities, the foreign currency market offers less
protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Because a forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits or force the Fund
to cover its commitments for purchase or resale, if any, at the current market
price.
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HIGH INCOME FUND -- CLASS Z SHARES
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or sell
any portfolio securities on a when-issued or delayed-delivery basis. The Fund
will enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. In such transactions delivery of
the securities occurs beyond the normal settlement periods, but no payment or
delivery is made by the Fund prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the investments are actually delivered to the
buyers. The Fund will establish a segregated account consisting of cash, U.S.
government securities or other high grade debt obligations in an amount equal to
the amount of its when-issued and delayed-delivery commitments. Placing
securities rather than cash in the segregated account may have a leveraging
effect on the Fund's net assets. The Fund will not accrue income with respect to
a when-issued security prior to its stated delivery date.
LENDING OF PORTFOLIO SECURITIES. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets taken at value. Loans
of portfolio securities will be collateralized by cash, letters of credit or
U.S. government securities that are maintained at all times in an amount at
least equal to the current market value of the loaned securities.
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when SBMFM believes it desirable to
do so. The Fund's investments in illiquid securities are subject to the risk
that should the Fund desire to sell any of these securities when a ready buyer
is not available at a price that the Fund deems representative of its value, the
value of the Fund's net assets could be adversely affected.
SECURITIES OF DEVELOPING COUNTRIES. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can be expected to have
13
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SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile than
the markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
CERTAIN INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities greater
than seven days, (b) time deposits maturing from two business days through seven
calendar days, and (c) to the extent that a liquid secondary market does not
exist for the instruments, futures contracts and options thereon.
Notwithstanding the foregoing, the Fund shall not invest more than 10% of its
net assets in securities (excluding those subject to Rule 144A under the
Securities Act of 1933, as amended) that are restricted. In addition, the Fund
may invest up to 5% of its assets in the securities of issuers which have been
in continuous operation for less than three years. The Fund also may borrow from
banks for temporary or emergency purposes, but not for investment purposes, in
an amount up to 10% of its total assets, and may pledge its assets to the same
extent in connection with such borrowings. Whenever these borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not make any additional
investments. Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Trust's Board of Trustees. A complete list of investment
restrictions that identifies additional restrictions that cannot be changed
without the approval of the majority of the Fund's outstanding shares is
contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
OPTIONS. The Fund may enter into options transactions primarily as hedges to
reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset by a loss on the hedge
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HIGH INCOME FUND -- CLASS Z SHARES
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
position. The Fund bears the risk that the prices of the securities being hedged
will not move in the same amount as the hedge. The Fund will engage in hedging
transactions only when deemed advisable by SBMFM. Successful use by the Fund of
options will depend on SBMFM's ability to correctly predict movements in the
direction of the stock underlying the option used as a hedge. Losses incurred in
hedging transactions and the costs of these transactions will affect the Fund's
performance.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase options only if there appears to be a liquid secondary
market for the options purchased or sold, for some options no such secondary
market may exist or the market may cease to exist.
MEDIUM-, LOW- AND UNRATED SECURITIES. The Fund may invest up to 10% of its
assets in medium- or low-rated securities and unrated securities of comparable
quality. Generally, these securities offer a higher return potential than
higher-rated securities but involve greater volatility of price and risk of loss
of income and principal Generally, these securities offer a higher current yield
than the yield offered by higher-rated securities, but involve greater
volatility of price and risk of loss of income and principal, including the
probability of future default or bankruptcy of the issuers of such securities.
Medium- and low-rated and comparable unrated securities will likely have large
uncertainties or major risk exposures to adverse conditions and are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held by the Fund, with a commensurate effect on the
value of the Fund's shares.
The markets in which medium- and low-rated or comparable unrated securities
are traded generally are more limited than those in which higher-rated
securities are traded. The existence of limited markets for these securities may
restrict the availability of securities for the Fund to purchase and also may
have the effect of limiting the ability of the Fund to (a) obtain accurate
market quotations for purposes of valuing securities and calculating net asset
value and (b) sell securities at their fair value either to meet redemption
requests or to respond to changes in the economy or the financial markets. The
market for certain medium- and low-rated and
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SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
comparable unrated securities has not fully weathered a major economic
recession. Any such economic downturn could adversely affect the value of such
securities and the ability of the issuers of these securities to repay principal
and pay interest thereon.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium- and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional expenses
to the extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities which are rated B generally lack characteristics of the desirable
investment and assurance of interest and principal payments over any long period
of time may be small. Securities which are rated Caa or CCC or below are of poor
standing. Those issues may be in default or present elements of danger with
respect to principal or interest. Securities rated C by Moody's and D by S&P are
in the lowest rating class and indicate that payments are in default or that a
bankruptcy petition has been filed with
16
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HIGH INCOME FUND -- CLASS Z SHARES
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
respect to the issuer or that the issuer is regarded as having extremely poor
prospects. See the Appendix in the Trust's Statement of Additional Information
on bond ratings by Moody's and S&P.
In light of these risks, SBMFM, in evaluating the creditworthiness of an
issue, whether rated or unrated, will take various factors into consideration,
which may include, as applicable, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
The Fund's holdings in fixed-income securities (as rated by Moody's) for the
fiscal year ended July 31, 1994 were composed as follows: 16.9% rated Ba; 65.19%
rated B; 2.98% rated Caa; and 3.8% in non-rated securities. The percentages were
calculated on a dollar weighted average basis by determining monthly the
percentage of the Fund's net assets invested in each rating category and do not
necessarily indicate what the composition of the Fund's holdings will be in
subsequent years.
SECURITIES OF UNSEASONED ISSUERS. Securities in which the Fund may invest may
have limited marketability and, therefore, may be subject to wide fluctuations
in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an
established market share.
PORTFOLIO TRANSACTIONS
All orders for transactions in securities and options on behalf of the Fund
are placed by SBMFM with broker-dealers that SBMFM selects, including Smith
Barney. The Fund may utilize Smith Barney or a Smith Barney-affiliated broker in
connection with a purchase or sale of securities when SBMFM believes that the
broker's charge for the transactions does not exceed usual and customary levels.
The same standard applies to the use of Smith Barney as a commodities broker in
connection with entering into options and futures contracts.
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HIGH INCOME FUND -- CLASS Z SHARES
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VALUATION OF SHARES
The net asset value per share of Class Z shares is determined as of the close
of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), on each
day that the NYSE is open by dividing the value of the Fund's net assets
attributable to Class Z by the number of shares of the Class outstanding. The
per share net asset value of the Class Z shares may be higher than those of
other Classes because of the lower expenses attributable to Class Z shares.
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 Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other factors by or
under the direction of the Trust's Board of Trustees or delegates. A security
that is traded primarily on an exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trust's
Board of Trustees determines that amortized cost reflects fair value of those
investments. An option generally is valued at the last sale price or, in the
absence of the last sale price, the last offer price. Further information
regarding the Fund's valuation policies is contained in the Statement of
Additional Information.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders.
18
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
If a shareholder does not otherwise instruct, dividends and distributions will
be reinvested automatically in additional shares of the same Class at net asset
value, subject to no sales charge or CDSC. Dividends from net investment income,
if any, of the Fund will be declared monthly and paid on the last day of the
Smith Barney statement month. The Fund's final distribution for each calendar
year will include any remaining net investment income and net realized long- and
short-term capital gains realized during the year and deemed undistributed
during the year for Federal income tax purposes. In order to avoid the
application of a 4% nondeductible excise tax measured with respect to certain
undistributed amounts of ordinary income and capital gains, the Fund may make
any additional distributions shortly before December 31 in each year as may be
necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a "regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended. To meet those requirements, the Fund
may need to restrict the degree to which it engages in short-term trading and
transactions in options. If the Fund qualifies as a regulated investment company
and meets certain distribution
19
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
requirements, the Fund will not be subject to Federal income tax on its net
investment income and net capital gains that it distributes to its shareholders.
Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Furthermore, as a general rule, distributions of long-term
capital gain will be taxable to shareholders as long-term capital gain, whether
paid in cash or reinvested in additional shares, and regardless of the length of
time that the investor has held his or her shares of the Fund.
Distributions of capital gains or dividends received from foreign corporations
will not qualify for the Federal dividends-received deduction for corporate
shareholders (the "Corporate Deduction"). The Fund anticipates that most of its
dividends will not qualify for the Corporate Deduction. Each shareholder will
receive a statement annually from the Trust, which will set forth separately the
aggregate dollar amount of dividends and capital gains distributed to the
shareholder by the Fund with respect to the prior calendar year.
Dividends and interest received by the Fund may give rise to withholding and
other taxes imposed by foreign countries. Tax conventions between certain
countries and the United States may reduce or eliminate such taxes.
Shareholders are urged to consult their tax advisors regarding the application
of Federal, state and local tax laws to their specific situation before
investing in the Fund.
- --------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Smith Barney UIT. Purchases are effected at the net
asset value next determined after a purchase order is received by Smith Barney
(the "trade date"). Currently, payment is due to Smith Barney on the fifth
business day (the "settlement date") after the trade date. The Fund anticipates
that, in accordance with regulatory changes, beginning on or about June 1, 1995,
the settlement date will be the third business day
20
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES (CONTINUED)
after the trade date. Investors who make payment prior to the settlement date
may designate a temporary investment (such as a money market fund of the Smith
Barney Mutual Funds) for such payment until settlement date. The Fund reserves
the right to reject any purchase order and to suspend the offering of shares for
a period of time. There are no minimum investment requirements for Class Z
shares; however, the Fund reserves the right to vary this policy at any time.
Purchase orders received by Smith Barney prior to the close of regular trading
on the NYSE, currently 4:00 p.m., New York time, on any day that the Fund's net
asset value is calculated, are priced according to the net asset value
determined on that day. See "Valuation of Shares." Certificates for Fund shares
are issued upon request to the Trust's transfer agent.
Shareholders may redeem their shares on any day the Fund calculates its net
asset value. See "Valuation of Shares." Redemption requests received in proper
form prior to the close of regular trading on the NYSE are priced at the net
asset value per share determined on that day. Redemption requests received after
the close of regular trading on the NYSE are priced at the net asset value as
next determined. Shareholders acquiring Class Z shares through a Qualified Plan
or a Smith Barney UIT should consult the terms of their respective plans for
redemption provisions.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Holders of Class Z shares in the Fund may exchange their shares at the net
asset value next determined for shares of the same Class in the following funds
of the Smith Barney Mutual Funds to the extent shares are offered for sale in
the shareholder's state of residence. Exchanges of shares may be made at any
time without payment of any exchange fee.
- - SMITH BARNEY AGGRESSIVE GROWTH FUND INC.
- - SMITH BARNEY APPRECIATION FUND INC.
- - SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND
- - SMITH BARNEY FUNDS, INC. -- INCOME AND GROWTH PORTFOLIO
21
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
- - SMITH BARNEY FUNDS, INC. -- INCOME RETURN ACCOUNT PORTFOLIO
- - SMITH BARNEY FUNDS, INC. -- U.S. GOVERNMENT SECURITIES PORTFOLIO
- - SMITH BARNEY GLOBAL OPPORTUNITIES FUND
- - SMITH BARNEY HIGH INCOME FUND
- - SMITH BARNEY MONEY FUNDS, INC. -- CASH PORTFOLIO
- - SMITH BARNEY MONEY FUNDS, INC. -- GOVERNMENT PORTFOLIO
- - SMITH BARNEY UTILITIES FUND
- - SMITH BARNEY WORLD FUNDS, INC. -- INTERNATIONAL EQUITY PORTFOLIO
The exchange of shares of one fund for shares of another fund is generally
treated for Federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize a
taxable gain or loss in connection with the exchange. Shareholders should
consult their plan prospectus and/or other governing documents regarding
exchanges. Generally, exchanges within such a plan are NOT treated as a taxable
event.
Shareholders exercising the exchange privilege with any of the other funds of
the Smith Barney Mutual Funds should review the prospectus of that fund
carefully prior to making an exchange. 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.
Although the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the Fund's performance and its shareholders.
SBMFM 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,
SBMFM will notify Smith Barney, and Smith Barney may, at its discretion, decide
to limit additional purchases and/or exchanges by the shareholder. Upon such a
determination, Smith Barney 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
22
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
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. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30-day "yield" of its Class Z
shares. The yield refers to the income generated by an investment in Class Z
shares over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the Class Z shares during
the period by the maximum public offering price per share on the last day of the
period. This income is "annualized" by assuming the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
The Fund's yield for the 30-day period ended July 31, 1994 was 10.52% with
respect to its Class Z shares.
TOTAL RETURN
From time to time the Fund may include its total return, average annual total
return and current dividend return for Class Z shares in advertisements. 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 this 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
23
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
PERFORMANCE (CONTINUED)
charges into account. The Fund calculates current dividend return by annualizing
the most recent monthly distribution and dividing by the net asset value on the
last day of the period for which current dividend return is presented. The
current dividend return for Class Z shares may vary from time to time depending
on market conditions, the composition of its investment portfolio and operating
expenses. These factors and possible differences in the methods used in
calculating current dividend return should be considered when comparing the
Class Z share's current return to yields published for other investment
companies and other investment vehicles. The Fund may also include comparative
performance information in advertising or marketing the Class Z shares. Such
performance information may include data from Lipper Analytical Services, Inc.
and other financial publications.
Class Z's average annual total return was as follows for the periods
indicated:
2.37% for the one-year period beginning August 1, 1993 through July 31,
1994.
11.23% per annum for the period from commencement of operations (November
6, 1992) through July 31, 1994.
Class Z's aggregate total return was as follows for the periods indicated:
2.37% for the one-year period beginning August 1, 1993 through July 31,
1994.
20.26% for the period from commencement of operations (November 6, 1992)
through July 31, 1994.
- --------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and the persons and companies that furnish services to the
Trust and the Fund, including agreements with its distributor, investment
adviser and administrator, sub-administrator, custodian and transfer agent. The
day-to-day operations of the Fund are delegated to the
24
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Fund's investment adviser, administrator and sub-administrator. The Statement of
Additional Information contains background information regarding the Trustees
and executive officers of the Trust.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013, and serves
as the Fund's investment adviser pursuant to a transfer of the advisory
agreement, effective November 7, 1994, from its affiliate, Mutual Management
Corp. (Mutual Management Corp. and SBMFM are both wholly owned subsidiaries of
Smith Barney Holdings Inc. ("Holdings")). Investment advisory services continue
to be provided to the Fund by the same portfolio managers who had provided
services under the agreement with Mutual Management Corp. Holdings is a wholly
owned subsidiary of The Travelers Inc. ("Travelers"), a diversified financial
services holding company engaged, through its subsidiaries, principally in four
business segments: Investment Services, Consumer Finance Services, Life
Insurance Services and Property & Casualty Insurance Services. SBMFM (through
its predecessor entities) has been in the investment counseling business since
1934 and is a registered investment adviser. SBMFM renders investment advice to
investment companies that had aggregate assets under management as of September
30, 1994 in excess of $52.4 billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's 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. For investment
advisory services rendered to the Fund, the Fund pays SBMFM a fee at the annual
rate of .50% of the value of the Fund's average daily net assets.
PORTFOLIO MANAGEMENT
John C. Bianchi, an Investment Officer of SBMFM, has served as Vice President
and Investment Officer of the Fund since 1988 and is responsible for managing
its day-to-day operations, including the making of investment decisions.
25
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Management's discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1994, is included in
the Annual Report dated July 31, 1994. A copy of the Annual Report may be
obtained upon request without charge from a Smith Barney Financial Consultant or
by writing or calling the Fund at the address or phone number listed on page one
of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of the
Fund's administration. Pursuant to an administration agreement with the Fund,
SBMFM is paid a fee at the annual rate of .20% of the value of the Fund's
average daily net assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors is a wholly owned
subsidiary of The Boston Company, Inc. ("TBC"), a financial services holding
company, which is in turn a wholly owned subsidiary of Mellon Bank Corporation.
Boston Advisors provides investment management, investment advisory and/or
administrative services to investment companies with total assets under
management, as of September 30, 1994, in excess of $48.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated May 4, 1994, Boston
Advisors is paid a portion of the administration fee paid by the Fund to SBMFM
at a rate agreed upon from time to time between Boston Advisors and SBMFM. Prior
to May 4, 1994, Boston Advisors served as the Fund's administrator. For the
fiscal year ended July 31, 1994, the Fund paid administration fees to Boston
Advisors and SBMFM in an amount equal to 0.20% of the value of the Fund's
average daily net assets.
DISTRIBUTOR--SMITH BARNEY
Smith Barney is located at 388 Greenwich Street, New York, New York 10013, and
serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary of
Travelers.
26
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, in the Commonwealth of
Massachusetts and is an entity commonly known as a "Massachusetts business
trust."
The Trust offers shares of beneficial interest of separate series having a
$.001 per share par value. Shares of beneficial interest of the Fund are
currently classified into five Classes: A, B, C, Y and Z. When matters are
submitted for shareholder vote, shareholders of each Class of the Fund 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 Trust vote by
individual fund on all matters except (a) matters affecting only the interest of
one or more of the funds, in which case only shares of the affected fund or
funds would be entitled to vote, or (b) when the 1940 Act requires that shares
of the funds be voted in the aggregate. Similarly, shares of the Fund will be
voted generally on a Fund-wide basis except on matters affecting the interests
of one Class of shares. Each Class of Fund shares represents an identical PRO
RATA interest in the Fund's investment portfolio. As such, they have the same
rights, privileges and preferences, except with respect to: (a) the designation
of each Class; (b) the effect of the respective sales charges, if any, for each
Class; (c) the distribution and/or service fees, if any, borne by each Class;
(d) the expenses allocable exclusively to each Class; (e) voting rights on
matters exclusively affecting a single Class; (f) the exchange privileges of
each Class; and (g) the conversion feature of a Class of shares. The Trust's
Board of Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes of shares of the Fund. The
Trustees, on an ongoing basis, will consider whether any such conflict exists
and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will be no
meeting of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose upon
the written request of shareholders holding at least 10% of the Fund's
outstanding shares.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, is located at One Boston Place, Boston, Massachusetts 02108, and
services as custodian of the Trust's investments.
27
<PAGE>
SMITH BARNEY
HIGH INCOME FUND -- CLASS Z SHARES
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
The Shareholder Services Group, Inc. is located at Exchange Place, Boston,
Massachusetts 02109, and serves as the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a listing of the investment securities held by
the Fund at the end of the reporting period. Shareholders may seek information
regarding the Fund from their Smith Barney Financial Consultant.
28
<PAGE>
[LOGO]
SMITH BARNEY
HIGH
INCOME
FUND
CLASS Z SHARES
388 Greenwich Street
New York, New York 10013
Fund 186
FD 0220 J4
[LOGO]
<PAGE>
_______________________________________________________________________________
PROSPECTUS
Smith Barney
UTILITIES
FUND
Class Z Shares
NOVEMBER 7, 1994
Prospectus begins on page one
<LOGO>
Investing for your future.
Every day.
_______________________________________________________________________________
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
PROSPECTUS November 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Utilities Fund (the "Fund") is a diversified fund that seeks
current income by investing in equity and debt securities of utility companies
selected by the Fund's investment adviser. Long-term capital appreciation is a
secondary objective of the Fund.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up the Smith Barney Income Funds (the "Trust").
The Trust is an open-end, management investment company commonly referred to as
a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including expenses, that prospective investors will find helpful in
making an investment decision. Investors are encouraged to read this Prospectus
carefully and retain it for future reference.
The Class Z shares described in this Prospectus (previously designated as
Class C shares) are currently offered exclusively for sale to tax-exempt
employee benefit and retirement plans of Smith Barney Inc. ("Smith Barney") or
any of its affiliates ("Qualified Plans") and to certain unit investment trusts
sponsored by Smith Barney or any of its affiliates ("Smith Barney UITs").
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus in
its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 4
---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
---------------------------------------------------------------------------
VALUATION OF SHARES 18
---------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 19
---------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES 21
---------------------------------------------------------------------------
EXCHANGE PRIVILEGE 22
---------------------------------------------------------------------------
PERFORMANCE 23
---------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 24
---------------------------------------------------------------------------
ADDITIONAL INFORMATION 26
---------------------------------------------------------------------------
</TABLE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Trust or the
distributor. This Prospectus does not constitute an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such an offer or solicitation in such jurisdiction.
2
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
<TABLE>
- --------------------------------------------------------------------------------
THE FUND'S EXPENSES
The following expense table lists the costs and expenses an investor will incur
either directly or indirectly as a shareholder of Class Z shares of the Fund,
based on the Fund's operating expenses for its most recent fiscal year:
<CAPTION>
AS A % OF
AVERAGE NET ASSETS
<S> <C>
- -------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
Management fees 0.65%
Other expenses 0.04%
- -------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 0.69%
- -------------------------------------------------------------------------------------
<FN>
The nature of the services for which the Fund pays management fees is
described under "Management of the Trust and the Fund." "Other expenses" in the
above table include fees for shareholder services, custodial fees, legal and
accounting fees, printing costs and registration fees.
</TABLE>
<TABLE>
EXAMPLE The following example is intended to assist an investor in
understanding the various costs that an investor in the Fund will bear directly
or indirectly. The example assumes payment by the Fund of operating expenses at
the levels set forth in the table above. See "Purchase and Redemption of Shares"
and "Management of the Trust and the Fund."
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------
You would pay the following expenses on a
$1,000 investment in Class Z shares of the
Fund, assuming (1) 5% annual return and (2)
redemption at the end of each time period: $7 $22 $38 $86
- --------------------------------------------------------------------------------------------
<FN>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR
LESS THAN THOSE SHOWN.
</TABLE>
3
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following information is for the Fund's Class Z shares and has been audited
by Coopers & Lybrand L.L.P., independent accountants, whose report thereon for
the fiscal year ended July 31, 1994 appears in the Fund's Annual Report dated
July 31, 1994. The information set out below should be read in conjunction with
the financial statements and related notes that also appear in the Fund's 1994
Annual Report, which is incorporated by reference into the Statement of
Additional Information.
<TABLE>
FOR A CLASS Z SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94 7/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 15.97 $ 14.36
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.89 0.69
Net realized and unrealized gain/(loss) on investments (2.21) 1.72
- -------------------------------------------------------------------------------------
Total from investment operations (1.32) 2.41
- -------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.84) (0.65)
Distributions in excess of net investment income (0.03) (0.01)
Distributions from net realized capital gains (0.50) (0.14)
- -------------------------------------------------------------------------------------
Total distributions (1.37) (0.80)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 13.28 $ 15.97
- -------------------------------------------------------------------------------------
Total return++ (8.78)% 17.21%
- -------------------------------------------------------------------------------------
Ratio to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $11,372 $22,251
Ratio of expenses to average net assets 0.69% 0.68%+
Ratio of net income to average net assets 5.92% 6.06%+
Portfolio turnover rate 28% 37%
- -------------------------------------------------------------------------------------
<FN>
* The Fund began offering Class Z shares (previously designated as Class C
shares) on November 6, 1992.
+ Annualized.
++ Total return represents aggregate total return for the period indicated.
</TABLE>
4
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
INVESTMENT OBJECTIVE
The primary investment objective of the Fund is to provide current income.
Long-term capital appreciation is a secondary objective. The Fund's investment
objectives may be changed only with the approval of the holders of a majority of
the Fund's outstanding shares. There can be no assurance that the Fund's
investment objectives will be achieved.
INVESTMENT POLICIES
The Fund seeks to achieve its objectives by investing in equity and debt
securities of companies in the utility industries. For purposes of this
Prospectus, the utility industries are deemed to be comprised of companies
principally engaged (that is, at least 50% of a company's assets, gross income
or net profits results from utility operations or the company is regulated as a
utility by a government agency or authority) in the manufacture, production,
generation, transmission and sale of electric and gas energy and companies
principally engaged in the communications field, including entities such as
telephone, telegraph, satellite, microwave and other companies regulated by
governmental agencies as utilities that provide communication facilities for the
public benefit, but not including those in public broadcasting. The Fund will
invest primarily in utility equity and debt securities that have a high expected
rate of return, as determined by the Fund's investment adviser, Smith Barney
Mutual Funds Management Inc. ("SBMFM"). Under normal market conditions, the Fund
will invest at least 65% of its assets in such securities. The Fund may invest
up to 35% of its assets in equity and debt securities of non-utility companies
believed to afford a reasonable opportunity for achieving the Fund's investment
objectives. When SBMFM believes that market conditions warrant, the Fund may
adopt a temporary defensive posture and may invest without limit in: debt
securities (whether or not they are utility securities) such as rated or unrated
bonds, debentures and commercial paper, United States government securities and
money market instruments. The Fund may invest up to 10% of its assets in
securities rated BB or B by Standard & Poor's Corporation ("S&P") or Ba or B by
Moody's Investors Service, Inc. ("Moody's") whenever SBMFM believes that the
incremental yield on such securities is advantageous to the Fund in comparison
to the additional risk involved. Securities rated BBB/Baa are considered medium
grade obligations, neither highly protected nor poorly secured. Interest
payments and principal security of BBB/Baa rated securities appear adequate for
the present but certain protective elements may be lacking or may be unreliable
over any great length of time. Such securities lack outstanding
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
investment characteristics and may in fact have speculative characteristics. The
yields on lower-rated fixed-income securities generally are higher than the
yields available on higher-rated securities. See "Risk Factors and Special
Considerations" below. In addition, the Fund may enter into repurchase
agreements.
INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
The Fund has the ability to engage in a number of specialized investment
strategies and techniques designed to enable the Fund to achieve its investment
objectives. Included among these strategies are lending its portfolio
securities, selling securities "short against the box," writing covered call and
secured put options as well as purchasing options on securities, purchasing and
selling interest rate futures contracts, options on futures contracts, stock
index put and call options and stock index futures contracts, each of which is
discussed below.
United States Government Securities. United States government securities
are obligations of, or guaranteed by, the United States government, its agencies
or instrumentalities ("U.S. government securities"). These include bills,
certificates of indebtedness, notes and bonds issued by the United States
Treasury or by agencies or instrumentalities of the United States government.
Some U.S. government securities, such as Treasury bills and bonds, are supported
by the full faith and credit of the United States; others, such as those of
Federal Home Loan Banks, are supported by the right of the issuer to borrow from
the United States Treasury; others, such as those of the Federal National
Mortgage Association, are supported by the discretionary authority of the United
States government to purchase the agency's obligations; still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. U.S. government securities generally do not
involve the credit risks associated with other types of interest-bearing
securities, although, as a result, the yields available from U.S. government
securities are generally lower than the yields available from interest-bearing
corporate securities.
Repurchase Agreements. The Fund may engage in repurchase agreements 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. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
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period. The value of the underlying securities will be at least equal at all
times to the total amount of the repurchase obligation, including interest.
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 right 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. SBMFM or the Fund's sub-administrator, The Boston
Company Advisors, Inc. ("Boston Advisors"), acting under the supervision of the
Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and creditworthiness of those banks and dealers with which the Fund
enters into repurchase agreements to evaluate potential risks.
Lending Portfolio Securities. The Fund is authorized to lend its portfolio
securities to brokers, dealers and other financial organizations. The Fund's
loans of securities will be collateralized by cash, letters of credit or U.S.
government securities that are maintained at all times in an amount at least
equal to the current market value of the loaned securities. By lending its
securities, the Fund seeks to generate income by continuing to receive interest
on the loaned securities, by 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.
Short Sales Against the Box. The Fund may make short sales (except to the
extent of 5% of the Fund's net assets) if at all times when a position is open,
the Fund owns the stock or owns preferred stock or debt securities convertible
or exchangeable without payment of further consideration for, securities of the
same issue as the securities sold short. Short sales of this kind are referred
to as "against the box." Short sales against the box are used to defer
recognition of capital gains or losses.
Options Activities. The Fund may write (that is, sell) call options
("calls") if the calls are covered throughout the life of the option. A call is
covered if the Fund (a) owns the optioned securities, (b) maintains in a
segregated account with the Trust's custodian, Boston Safe Deposit and Trust
Company ("Boston Safe"), cash, cash equivalents or U.S. government securities
with a value sufficient to meet the Fund's obligations under the call, or (c)
owns an offsetting call option. The aggregate value of the obligations
underlying calls on securities which are written by the Fund and covered with
cash, cash equivalents or U.S. government securities, together with the
aggregate value of
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the obligations underlying put options written by the Fund, will not exceed 50%
of the Fund's net assets. When the Fund writes a call, it receives a premium and
gives the purchaser the right to buy the underlying security at any time during
the call period (usually not more than nine months in the case of common stock
or fifteen months in the case of U.S. government securities) at a fixed exercise
price regardless of market price changes during the call period. If the call is
exercised, the Fund forgoes any gain from an increase in the market price of the
underlying security over the exercise price. The Fund may purchase calls on
securities. The Fund also may purchase and sell stock index calls which differ
from calls on individual securities in that they are settled in cash based on
the values of the securities in the underlying index, rather than by delivery of
the underlying securities. In writing a call on a stock index, the Fund receives
a premium and agrees that during the call period purchasers of a call, upon
exercise of the call, will receive an amount of cash if the closing level of the
stock index upon which the call is based is greater than the exercise price of
the call. When the Fund buys a call on a stock index, it pays a premium and
during the call period the Fund, upon exercise of the call, receives an amount
of cash if the closing level of the stock index upon which the call is based is
greater than the exercise price of the call.
The Fund may write and purchase put options ("puts"). When the Fund writes
a put, it receives a premium and gives the purchaser of the put the right to
sell the underlying security to the Fund at the exercise price at any time
during the option period. When the Fund purchases a put, it pays a premium in
return for the right to sell the underlying security at the exercise price at
any time during the option period. For the purchase of a put to be profitable,
the market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs, unless the put is
sold in a closing sale transaction; otherwise, the purchase of the put
effectively increases the cost of the security and thus reduces its yield. The
Fund also may purchase and sell stock index puts, which differ from puts on
individual securities in that they are settled in cash based on the values of
the securities in the underlying index, rather than by delivery of the
underlying securities. Purchase of a stock index put is designed to protect
against a decline in the value of the Fund's portfolio generally, rather than an
individual security in the portfolio. Stock index puts are sold primarily to
realize income from the premiums received on the sale of such options. If any
put is not exercised or sold, it will become worthless on its expiration date.
The Fund will not purchase puts or calls on securities if more than 5% of its
assets would be invested in premiums on puts and calls, not
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
including that portion of the premium which reflects the value of the securities
owned by the Fund and underlying a put at the time of purchase.
The Fund may write puts on securities only if they are "secured." A put is
"secured" if the Fund maintains cash, cash equivalents or U.S. government
securities with a value equal to the exercise price in a segregated account or
holds a put on the same underlying security at an equal or greater exercise
price. The aggregate value of the obligations underlying puts written by the
Fund, together with the aggregate value of the obligations underlying calls on
securities which are written by the Fund and covered with cash, cash equivalents
or U.S. government securities, will not exceed 50% of the Fund's net assets. The
Fund also may write "straddles," which are combinations of secured puts and
covered calls on the same underlying security.
The Fund will realize a gain (or loss) on a closing purchase transaction
with respect to a call or put previously written by the Fund if the premium,
plus commission costs, paid to purchase the call or put is less (or greater)
than the premium, less commission costs, received on the sale of the call or
put. A gain also will be realized if a call or put which the Fund has written
lapses unexercised, because the Fund would retain the premium. See "Dividends,
Distributions and Taxes" below. The Fund will purchase and sell only options
which are listed on a national securities exchange and will write options only
through a national options clearing organization.
There can be no assurance that a liquid secondary market will exist at a
given time for any particular option. In this regard, trading in options on U.S.
government securities is relatively new, so that it is impossible to predict to
what extent liquid markets will develop or continue. See the Statement of
Additional Information for a further discussion of risks involved in options
trading, and particular risks applicable to options trading on U.S. government
securities, including risks involved in options trading on Government National
Mortgage Association ("GNMA") certificates and the characteristics and risks of
stock index options transactions.
Futures Contracts -- General. The Fund may not purchase futures contracts
or related options if, immediately thereafter, more than 30% of the Fund's total
assets would be so invested. In purchasing and selling futures contracts and
related options, the Fund will comply with rules and interpretations of the
Commodity Futures Trading Commission ("CFTC"), under which the Fund is excluded
from regulation as a "commodity pool." CFTC regulations require, among other
things, that (a) futures and related options be used solely for bona
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
fide hedging purposes (or that the underlying commodity value of the Fund's long
positions not exceed the sum of certain identified liquid investments) and (b)
the Fund not enter into futures and related options for which the aggregate
initial margin and premiums exceed 5% of the fair market value of the Fund's
assets. In order to prevent leverage in connection with the purchase of futures
contracts by the Fund, an amount of cash and cash equivalents equal to the
market value of futures contracts purchased will be maintained in a segregated
account with Boston Safe. The Fund will engage only in futures contracts and
related options which are listed on a national commodities exchange.
Interest Rate Futures Contracts. The Fund may purchase and sell interest
rate futures contracts as a hedge against changes in interest rates. An interest
rate futures contract is an agreement between two parties to buy and sell a
security for a set price on a future date. Interest rate futures contracts are
traded on designated "contracts markets" which, through their clearing
corporations, guarantee performance of the contracts. Currently, there are
interest rate futures contracts based on securities such as long-term Treasury
bonds, Treasury notes, GNMA certificates and three-month Treasury bills.
Generally, if market interest rates increase, the value of outstanding debt
securities declines (and vice versa). Entering into an interest rate futures
contract for the sale of securities has an effect similar to the actual sale of
securities, although sale of the interest rate futures contract might be
accomplished more easily and quickly. For example, if the Fund holds long-term
U.S. government securities and SBMFM anticipates a rise in long-term interest
rates, the Fund could, in lieu of disposing of its portfolio securities, enter
into interest rate futures contracts for the sale of similar long-term
securities. If interest rates increased and the value of the Fund's securities
declined, the value of the Fund's interest rate futures contracts would
increase, thereby protecting the Fund by preventing the net asset value from
declining as much as it otherwise would have declined. Similarly, entering into
interest rate futures contracts for the purchase of securities has an effect
similar to the actual purchase of the underlying securities, but permits the
continued holding of securities other than the underlying securities. For
example, if SBMFM expects long-term interest rates to decline, the Fund might
enter into interest rate futures contracts for the purchase of long-term
securities, so that it could gain rapid market exposure that may offset
anticipated increases in the cost of securities that it intends to purchase,
while continuing to hold higher-yielding short-term securities or waiting for
the long-term market to stabilize.
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may purchase and sell listed put and call options on interest rate
futures contracts. 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 (a long position if the option is a call and a
short position if the option is a put), at a specified exercise price at any
time during the option period. When an option on a futures contract is
exercised, delivery of the interest rate futures position is accompanied by cash
representing the difference between the current market price of the interest
rate futures contract and the exercise price of the option. The Fund may
purchase put options on interest rate futures contracts in lieu of, and for the
same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying interest rate
futures contract in the same manner as it purchases "protective puts" on
securities. The purchase of call options on interest rate futures contracts is
intended to serve the same purpose as the actual purchase of the futures
contract, and the Fund will set aside cash and cash equivalents sufficient to
purchase the amount of portfolio securities represented by the underlying
futures contracts. See "Options Activities" and "Dividends, Distributions and
Taxes."
Stock Index Futures Contracts. The Fund may purchase and sell stock index
futures contracts. These transactions, if any, by the Fund will be made solely
for the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in market conditions and will be
made when the transactions are economically appropriate to the reduction of
risks inherent in the management of the Fund. A stock index futures contract is
an agreement under which two parties agree to take or make delivery of the
amount of cash based on the difference between the value of a stock index at the
beginning and at the end of the contract period. When the Fund enters into a
stock index futures contract, it must make an initial deposit, known as "initial
margin," as a partial guarantee of its performance under the contract. As the
value of the stock index fluctuates, either party to the contract is required to
make additional margin deposits, known as "variation margin," to cover any
additional obligation that it may have under the contract. The Fund may not at
any time commit more than 5% of its total assets to initial margin deposits on
futures contracts.
Successful use of stock index futures contracts by the Fund is subject to
certain special risk considerations. A liquid stock index futures market may not
be available when the Fund seeks to offset adverse market movements. In
addition, there may be an imperfect correlation between movements in the
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
securities included in the index and movements in the securities in the Fund.
Successful use of stock index futures contracts is further dependent on SBMFM's
ability to predict correctly movements in the direction of the stock markets and
no assurance can be given that its judgment in this respect will be correct.
Risks in the purchase and sale of stock index futures are further referred to in
the Statement of Additional Information.
Foreign Securities and American Depositary Receipts. The Fund may purchase
foreign securities or American Depositary Receipts ("ADRs"). ADRs are U.S.
dollar-denominated receipts issued generally by domestic banks and representing
the deposit with the bank of a security of a foreign issuer. ADRs are publicly
traded on exchanges or over-the-counter in the United States.
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
risks include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations, political instability which could
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. Additionally, dividends payable on foreign
securities may be subject to foreign taxes withheld prior to distribution.
Foreign securities often trade with less frequency and volume than domestic
securities and therefore may exhibit greater price volatility. Changes in
foreign exchange rates will affect the value of those securities which are
denominated or quoted in currencies other than the U.S. dollar. Many of the
foreign securities held by the Fund will not be registered with, nor will the
issuers thereof be subject to the reporting requirements of, the SEC.
Accordingly, there may be less publicly available information about the
securities and the foreign company or government issuing them than is available
about a domestic company or government entity. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payment positions.
Non-Publicly Traded and Illiquid Securities. The sale of securities that
are not publicly traded is typically restricted under the Federal securities
laws. As a result, the Fund may be forced to sell these securities at less than
fair market value or may not be able to sell them when SBMFM believes it
desirable to do so. The Fund's investments in illiquid securities are subject to
the risk that
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Utilities Fund -- Class Z Shares
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price that the Fund deems representative of their value, the
value of the Fund's net assets could be adversely affected.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with
respect to the Fund that may not be changed without approval of a majority of
the Fund's outstanding shares. The fundamental investment restrictions adopted
by the Trust prohibit the Fund from:
1. Purchasing the securities of any issuer (other than U.S. government
securities) if as a result more than 5% of the value of the Fund's total
assets would be invested in the securities of the issuer, except that up to
25% of the value of the Fund's total assets may be invested without regard
to this 5% limitation.
2. Purchasing more than 10% of the voting securities of any one issuer,
provided that this limitation shall not apply to investments in U.S.
government securities.
3. Purchasing securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin by the
Fund.
4. Making short sales of securities or maintaining a short position,
except to the extent of 5% of the Fund's net assets and except that the
Fund may engage in such activities without limit if, at all times when a
short position is open, the Fund owns an equal amount of the securities or
securities convertible into or exchangeable, without payment of any further
consideration, for securities of the same issuer as, and at least equal in
amount to, the securities sold short.
5. Borrowing money, including reverse repurchase agreements, except that
the Fund may borrow from banks for temporary or emergency (not leveraging)
purposes including the meeting of redemption requests that might otherwise
require the untimely disposition of securities, in an amount not exceeding
20% of the value of the Fund's total assets (including the amount borrowed)
valued at market less liabilities (not including the amount borrowed) at
the time the borrowing is made. Whenever
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
borrowings exceed 5% of the value of the Fund's total assets, the Fund will
not make any additional investments.
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than
10% of the value of the Fund's total assets as security for any
indebtedness. For purposes of this restriction (a) the deposit of assets in
escrow in connection with the writing of covered put or call options and
the purchase of securities on a when-issued or delayed-delivery basis and
(b) collateral arrangements with respect to (i) the purchase and sale of
stock options, options on foreign currencies and options on stock indexes
and (ii) initial or variation margin for futures contracts will not be
deemed to be pledges of the Fund's assets.
7. Investing in commodities, except that the Fund may purchase or write
futures contracts and options on futures contracts as described in this
Prospectus.
8. Making loans to others, except through the purchase of qualified debt
obligations, loans of portfolio securities and the entry into repurchase
agreements.
9. Concentrating in any industry, except that the Fund will concentrate in
excess of 25% of its assets in the securities of companies within the
utility industries.
In addition, the Fund will not purchase restricted securities, illiquid
securities (such as repurchase agreements with maturities in excess of seven
days) or other securities that are not readily marketable if more than 10% of
the total assets of the Fund would be invested in such securities.
Certain other investment restrictions, including fundamental restrictions
as well as restrictions that may be changed without a shareholder vote, adopted
by the Trust are described in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the Fund will be
executed by a number of brokers and dealers, including Smith Barney. The Fund
may use Smith Barney in connection with a purchase or sale of securities when
SBMFM believes that the charge for the transaction does not exceed usual and
customary levels. The Fund also may use Smith Barney as a commodities broker in
connection with entering into futures contracts and commodity options.
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Smith Barney has agreed to charge the Fund commodity commissions at rates
comparable to those charged by Smith Barney to its most favored clients for
comparable trades in comparable accounts.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves special considerations, such as those
described below:
General. Investment in the Fund may involve above-average risk of loss
because of, among other things, the Fund's use of strategies and techniques that
may be considered to be speculative. The strategy followed by the Fund and
certain of the strategies and techniques used by the Fund depend on forecasts
made by SBMFM that may or may not prove to be correct.
Low-Rated Securities. Low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment of
the rating organization, are outweighed by large uncertainties or major risk
exposures to adverse conditions and (b) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the securities.
While the market values of low-rated and comparable unrated securities tend
to react less to fluctuations in interest rate levels than the market values of
higher-rated securities, the market values of certain low-rated and comparable
unrated securities also tend to be more sensitive to individual corporate
development and changes in economic conditions than higher-rated securities. In
addition, low-rated securities and comparable unrated securities generally
present a higher degree of credit risk. Issuers of low-rated and comparable
unrated securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because low-rated and comparable unrated
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. The Fund may incur additional expenses to the
extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings. The existence of limited
markets for low-rated and comparable unrated securities may diminish the Fund's
ability to (a) obtain accurate market quotations for purposes of valuing such
securities and calculating its net asset value and (b) sell the securities at
fair value either to
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
meet redemption requests or to respond to changes in the economy or in the
financial markets.
Fixed-income securities, including low-rated securities and comparable
unrated securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding security,
thus resulting in a decreased return to the Fund.
The market for certain low-rated and comparable unrated securities is
relatively new and has not fully weathered a major economic recession. Any such
economic downturn could adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
Investment in Utility Securities. Because the Fund concentrates its
investments in one sector, its portfolio may be subject to greater risk and
market fluctuations than a portfolio of securities representing a broader range
of investment alternatives. The Fund is particularly subject to risks that are
inherent to the utility industries that make up this sector, including
difficulty in obtaining an adequate return on invested capital, difficulty in
financing large construction programs during an inflationary period,
restrictions on operations and increased cost and delays attributable to
environmental considerations and regulation, difficulty in raising capital in
adequate amounts on reasonable terms in periods of high inflation and unsettled
capital markets, increased costs and reduced availability of certain types of
fuel, occasional reduced availability and high costs of natural gas for resales,
the effects of energy conservation, the effects of a national energy policy and
lengthy delays and greatly increased costs and other problems associated with
the design, construction, licensing, regulation and operation of nuclear
facilities for electric generation, including, among other considerations, the
problems associated with the use of radioactive materials and the disposal of
radioactive wastes. There are substantial differences between the regulatory
practices and policies of various jurisdictions, and any given regulatory agency
may make major shifts in policy from time to time. There is no assurance that
regulatory authorities will grant rate increases in the future or that such
increases will be adequate to permit the payment of dividends on common stocks.
Additionally, existing and possible future regulatory legislation may make it
even more difficult for these utilities to obtain adequate relief. Certain of
the issuers of securities held by the Fund may own or operate nuclear generating
facilities. Governmental authorities may from time to time review existing
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
policies, and impose additional requirements governing the licensing,
construction and operation of nuclear power plants.
Each of the risks referred to above could adversely affect the ability and
inclination of public utilities to declare or pay dividends and the ability of
holders of common stock to realize any value from the assets of the issuer upon
liquidation or bankruptcy. All of the utilities which are issuers of the
securities held by the Fund have been experiencing one or more of these problems
in varying degrees. Moreover, price disparities within selected utility groups
and discrepancies in relation to averages and indices have occurred frequently
for reasons not directly related to the general movements or price trends of
utility common stocks. Causes of these discrepancies include changes in the
overall demand for and supply of various securities (including the potentially
depressing effect of new stock offerings), and changes in investment objectives,
market expectations or cash requirements of other purchasers and sellers of
securities.
Interest Rate Risk. The Fund will be affected by general changes in
interest rates which will result in increases or decreases in the market value
of the debt securities held by the Fund. The market value of the debt securities
held by the Fund can be expected to vary inversely to changes in prevailing
interest rates.
Options on Securities. Because option premiums paid by the Fund are small
in relation to the market value of the investments underlying the options,
buying put options can result in large amounts of leverage. The leverage offered
by trading in options could cause the Fund's net asset value to be subject to
more frequent and wider fluctuation than would be the case if the Fund did not
invest in options.
No assurance can be given that the Fund will be able to effect closing
transactions at a time when it wishes to do so. If the Fund cannot enter into a
closing transaction, the Fund will continue to be subject to the risk that a put
option it has purchased will decline in value or become worthless as a result of
any increase in the value of the underlying security. The Fund also could face
higher transaction costs, including brokerage commissions.
Lending of Portfolio Securities. The risk associated with lending
portfolio securities, as with other extensions of credit, consists of possible
loss of rights in the collateral should the borrower fail financially.
Short Sales. Possible losses from short sales differ from losses that
could be incurred from a purchase of a security, because losses from short sales
may
17
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
be unlimited, whereas losses from purchases can equal only the total amount
invested.
Futures Transactions. The use of futures contracts as a hedging device
involves several risks. No assurance can be given that a correlation will exist
between price movements in the stock index and price movements in the securities
that are the subject of the hedge; the risk of imperfect correlation increases
as the composition of the securities held by the Fund diverges from the
securities included in the applicable stock index. Positions in futures
contracts may be closed out only on the exchange on which they were entered into
(or through a linked exchange) and no secondary market exists for those
contracts. In addition, although the Fund intends to enter into futures
contracts only if an active market exists for the contracts, no assurance can be
given that an active market will exist for the contracts at any particular time.
Certain exchanges do not permit trading in particular contracts at prices that
represent a fluctuation in price during a single day's trading beyond a certain
set limit. If prices fluctuate during a single day's trading beyond those
limits, the Fund could be prevented from promptly liquidating unfavorable
positions and thus be subjected to losses. Losses incurred in hedging
transactions and the costs of these transactions will affect the Fund's
performance. Successful use of stock index futures by the Fund for hedging
purposes is subject to the ability of SBMFM to correctly predict movements in
the direction of the stock market.
- --------------------------------------------------------------------------------
VALUATION OF SHARES
The net asset value per share of Class Z shares is determined as of the
close of regular trading on the New York Stock Exchange, Inc. (the "NYSE"), on
each day that the NYSE is open, by dividing the value of the Fund's net assets
attributable to Class Z by the total number of shares of the Class outstanding.
The per share net asset value of the Class Z shares may be higher than those of
other Classes because of the lower expenses attributable to Class Z shares.
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 Trust's Board of Trustees. Portfolio
securities which are traded primarily on foreign exchanges are generally valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair market value of
those securities will be
18
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. A security that is traded primarily on an
exchange is valued at the last sale price on that exchange or, if there were no
sales during the day, at the current quoted bid price. Over-the-counter
securities are valued on the basis of the bid price at the close of business on
each day. Investments in U.S. government securities (other than short-term
securities) are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short-term investments that mature in 60 days or less
are valued at amortized cost whenever the Trustees determine that amortized cost
reflects fair value of those investments. An option generally is valued at the
last sale price or, in the absence of the last sale price, the last offer price.
The value of a futures contract equals the unrealized gain or loss on the
contract, which is determined by marking the contract to the current settlement
price for a like contract acquired on the day on which the stock index futures
contract is being valued. A settlement price may not be used if the market makes
a limited move with respect to a particular commodity or if the underlying
securities market experiences significant price fluctuations after the
determination of the settlement price. In such event, the futures contract will
be valued at a fair market price to be determined by or under the direction of
the Board of Trustees. Further information regarding the Trust's valuation
policies with respect to the Fund is contained in the Statement of Additional
Information.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions of
capital gains payable to shareholders. Dividends and capital gain distributions
will be reinvested automatically for each shareholder's account at net asset
value in additional Class Z shares of the Fund, unless the shareholder is
eligible for qualified distributions and instructs the Fund to pay all dividends
and capital gain distributions in cash. Dividends from net investment income, if
any, of the Fund will be declared each day that the Fund is open for business
and will be paid on the last day of the Smith Barney statement month.
Distributions of any net long-term capital gains earned by the Fund will be made
annually after the close of the fiscal year in which they are earned.
Distributions of short-term capital gains may be paid more frequently with
dividends from net investment
19
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
income. In addition, in order to avoid the application of a 4% nondeductible
excise tax measured with respect to certain undistributed amounts of ordinary
income and capital gains, the Fund may make an additional distribution shortly
before December 31 in each year of any undistributed ordinary income on capital
gains and expects to pay any other dividends and distributions necessary to
avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his or
her shares. Pursuant to the requirements of the Investment Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a notice will accompany
any distribution paid from sources other than net investment income. In the
event the Fund distributes amounts in excess of its net investment income and
net realized capital gains, such distributions may have the effect of decreasing
the Fund's total assets, which may increase the Fund's expense ratio.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Fund has qualified and intends to continue to
qualify each year as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended. To meet those requirements, the Fund
may need to restrict the degree to which it engages in short-term trading, short
sales of securities and transactions in options. If the Fund qualifies as a
regulated investment company and meets certain distribution requirements, the
Fund will not be subject to Federal income tax on its net investment income and
net capital gains that it distributes to its shareholders.
Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Distributions of long-term capital gain will be taxable to
shareholders as long-term capital gain, whether paid in cash or reinvested in
additional shares, and regardless of the length of time the investor has held
his or her shares of the Fund. Generally, dividends of investment income (to the
extent derived from most types of dividends from domestic corporations) from
20
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
the Fund will qualify for the Federal dividends-received deduction for corporate
shareholders. Each shareholder of the Fund will receive a statement annually
from the Trust, which will set forth separately the aggregate dollar amount of
dividends and capital gains distributed to the shareholder by the Fund with
respect to the prior calendar year and the amount of the distributions that
qualifies for the dividends-received deduction.
Shareholders should consult their plan document or tax advisors about the
consequences associated with participating in a Qualified Plan or Smith Barney
UIT.
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES
Purchases of the Fund's Class Z shares must be made in accordance with the
terms of a Qualified Plan or Smith Barney UIT. Purchases are effected at net
asset value next determined after a purchase order is received by Smith Barney
(the "trade date"). Currently, payment is due to Smith Barney on the fifth
business day (the "settlement date") after the trade date. The Fund anticipates
that in accordance with regulatory changes, beginning on or about June 1, 1995,
the settlement date will be the third business day after the trade date.
Investors who make payment prior to the settlement date may designate a
temporary investment (such as a money market fund of the Smith Barney Mutual
Funds) for such payment until settlement date. The Fund reserves the right to
reject any purchase order and to suspend the offering of shares for a period of
time. There are no minimum investment requirements for Class Z shares; however,
the Fund reserves the right to vary this policy at any time.
Purchase orders received by Smith Barney prior to the close of regular
trading on the NYSE, currently 4:00 p.m., New York time, on any day that the
Fund calculates its net asset value, are priced according to the net asset value
determined on that day. See "Valuation of Shares." Certificates for Fund shares
are issued upon request to the Trust's transfer agent.
Shareholders may redeem their shares on any day on which the Fund
calculates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form prior to the close of regular trading on the NYSE are
priced at the net asset value per share determined on that day. Redemption
requests received after the close of regular trading on the NYSE are priced at
the net asset value as next determined. Shareholders acquiring Class Z shares
21
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES (CONTINUED)
through a Qualified Plan or a Smith Barney UIT should consult the terms of their
respective plans for redemption provisions.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE
Holders of Class Z shares in the Fund may exchange their shares at the net
asset value next determined for shares of the same Class in the following funds
of the Smith Barney Mutual Funds to the extent shares are offered for sale in
the shareholder's state of residence. Exchanges of shares may be made at any
time without payment of any exchange fee.
- SMITH BARNEY AGGRESSIVE GROWTH FUND INC.
- SMITH BARNEY APPRECIATION FUND INC.
- SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND
- SMITH BARNEY FUNDS, INC. -- INCOME AND GROWTH PORTFOLIO
- SMITH BARNEY FUNDS, INC. -- INCOME RETURN ACCOUNT PORTFOLIO
- SMITH BARNEY FUNDS, INC. -- U.S. GOVERNMENT SECURITIES PORTFOLIO
- SMITH BARNEY GLOBAL OPPORTUNITIES FUND
- SMITH BARNEY HIGH INCOME FUND
- SMITH BARNEY MONEY FUNDS, INC. -- CASH PORTFOLIO
- SMITH BARNEY MONEY FUNDS, INC. -- GOVERNMENT PORTFOLIO
- SMITH BARNEY WORLD FUNDS, INC. -- INTERNATIONAL EQUITY PORTFOLIO
The exchange of shares of one fund for shares of another fund is generally
treated for Federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize a
taxable gain or loss in connection with the exchange. Shareholders should
consult their plan prospectus and/or other governing documents regarding
exchanges. Generally, exchanges within such a plan are not treated as a taxable
event.
Shareholders exercising the exchange privilege with any of the other funds
of the Smith Barney Mutual Funds should review the prospectus of that fund
carefully prior to making an exchange. Smith Barney reserves the right to reject
any exchange request.
Although the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the Fund's performance and its shareholders.
SBMFM may determine that a pattern of frequent exchanges is excessive and
22
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE(CONTINUED)
contrary to the best interests of the Fund's other shareholders. In this event,
SBMFM will notify Smith Barney, and Smith Barney may, at its discretion, decide
to limit additional purchases and/or exchanges by the shareholder. Upon such a
determination, Smith Barney 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 listed above, 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. The Fund reserves the right to modify or discontinue
exchange privileges upon 60 days' prior notice to shareholders.
- --------------------------------------------------------------------------------
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30-day "yield" of its Class Z
shares. The yield refers to the income generated by an investment in the Fund
over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the Fund with respect to
a Class during the period by the maximum public offering price per share on the
last day of the period. This income is "annualized" by assuming the amount of
income is generated each month over a one-year period and is compounded
semi-annually. The annualized income is then shown as a percentage of the net
asset value.
The Fund's yield for the 30-day period ended July 31, 1994 was 6.98% with
respect to its Class Z shares.
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total return and current dividend return for Class Z shares in advertisements
and/or other types of sales literature. 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 gains distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount
23
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
PERFORMANCE (CONTINUED)
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 calculates current dividend return by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge)on the last
day of the period for which current dividend return is presented. The Fund's
current dividend return may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing the Fund's current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc. and other financial
publications.
Class Z's average annual total return was as follows for the periods
indicated:
(8.78)% for the one-year period beginning August 1, 1993 through July
31, 1994.
3.93% per annum during the period from commencement of operations
(November 6, 1992) through July 31, 1994.
Class Z's aggregate total return was as follows for the periods indicated:
(8.78)% for the one-year period beginning on August 1, 1993 through July
31, 1994.
6.91% for the period from commencement of operations (November 6, 1992)
through July 31, 1994.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and companies that furnish services to the Trust
and the Fund, including agreements with the Fund's distributor, investment
adviser,
24
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
administrator, custodian and transfer agent. The day-to-day operations of the
Fund are delegated to the Fund's investment adviser, administrator and sub-
administrator. The Statement of Additional Information contains background
information regarding each Trustees and executive officer of the Trust.
INVESTMENT ADVISER -- SBMFM
SBMFM (formerly known as Smith, Barney Advisers, Inc.) is a registered
investment adviser whose principal executive offices are located at 388
Greenwich Street, New York, New York 10013, serves as the Fund's investment
adviser pursuant to a transfer of the advisory agreement, effective November 7,
1994, from its affiliate, Mutual Management Corp. Mutual Management Corp. and
SBMFM are both wholly owned subsidiaries of Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
("Travelers"), a diversified financial services holding company engaged, through
its subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Service. Investment advisory services continue to be provided to the
Fund by the same portfolio managers who had provided services under the
agreement with Mutual Management Corp. SBMFM (through its predecessor entities)
has been in the investment counseling business since 1934 and is a registered
investment adviser. SBMFM renders investment advice to investment companies that
had aggregate assets under management as of September 30, 1994 in excess of
$52.4 billion.
Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the Fund's investment
objectives 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. For investment
advisory services rendered the Fund pays SBMFM a fee at the annual rate of 0.45%
of the value of the Fund's daily net assets.
PORTFOLIO MANAGEMENT
Jack S. Levande, an investment officer of SBMFM, has served as Vice
President and Investment Officer of the Fund since it commenced operations and
manages the day to day operations of the Fund, including making all investment
decisions.
Management's discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1994 is
included in
25
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
the Annual Report dated July 31, 1994. A copy of the Annual Report may be
obtained upon request and without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
ADMINISTRATOR
SBMFM also serves as the Fund's administrator and oversees all aspects of
the Fund's administration. For administration services rendered, the Fund pays
SBMFM a fee at the annual rate of .20% of the value of the Fund's average daily
net assets.
SUB-ADMINISTRATOR -- BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to investment
companies that had aggregate assets under management as of September 30, 1994,
in excess of $48.6 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBMFM in all aspects of the Fund's administration and
operation. Under a sub-administration agreement dated May 4, 1994, Boston
Advisors is paid a portion of the fee paid by the Fund to SBMFM at a rate agreed
upon from time to time between Boston Advisors and SBMFM. Prior to May 4, 1994,
Boston Advisors served as the Fund's administrator.
DISTRIBUTOR -- SMITH BARNEY
Smith Barney is located at 388 Greenwich Street, New York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a wholly owned subsidiary
of Holdings.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 in the Commonwealth of
Massachusetts and is a business entity commonly known as a "Massachusetts
business trust."
The Trust offers shares of beneficial interest of separate series having a
$.001 per share par value. Shares of beneficial interest of the Fund are
currently classified into five Classes: A, B, C, Y and Z.
26
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
Each Class of shares represents identical pro rata interests in the Fund's
investment portfolio. As a result, the Classes have the same rights, privileges
and preferences, except with respect to: (a) the designation of each Class; (b)
the effect of the respective sales charges, if any, for each Class; (c) the
distribution and/or service fees, if any, borne by each Class pursuant to a plan
adopted under Rule 12b-1 under the 1940 Act; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters exclusively affecting a
single Class; (f) the exchange privilege of each Class; and (g) the conversion
feature of a Class. The Trust's Board of Trustees does not anticipate that there
will be any conflicts among the interests of the holders of the different
Classes of shares of the Fund. The Trustees, on an ongoing basis, will consider
whether any such conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There normally will be
no meeting of shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office have been
elected by shareholders. The Trustees will call a meeting for any purpose upon
the written request of shareholders holding at least 10% of the Fund's
outstanding shares. When matters are submitted for shareholder vote,
shareholders of each Class of the Fund 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 Trust vote by individual fund on all matters
except (a) matters affecting only the interests of one or more of the funds, in
which case only shares of the affected fund or funds would be entitled to vote
or (b) when the 1940 Act requires that shares of the funds be voted in the
aggregate. Similarly, shares of the Fund will be voted generally on a Fund-wide
basis except on matters affecting only the interests of one or more of the
Classes of shares.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include a listing of the investment securities held by the Fund at
the end of the reporting period.
Boston Safe, an indirect wholly owned subsidiary of Mellon Bank
Corporation, is located at One Boston Place, Boston, Massachusetts 02108, and
serves as custodian of the Fund's investments.
The Shareholder Services Group, Inc., a subsidiary of First Data
Corporation is located at Exchange Place, Boston, Massachusetts 02109, and
serves as the Trust's transfer agent.
27
<PAGE>
________________________________________________________________________________
<LOGO>
A Member of Travelers Group
SMITH BARNEY
UTILITIES FUND
388 Greenwich Street
New York, New York 10015
Recycled Fund 174
Recyclable FD0230 K3
________________________________________________________________________________
Smith Barney
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 7, 1994
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectuses of Smith Barney Income
Funds (the "Trust"), relating to eight investment funds offered by the
Trust (the "Funds"), each dated November 7, 1994, as amended or supple-
mented from time to time, and should be read in conjunction with the Pro-
spectuses. The Prospectuses may be obtained from any Smith Barney Finan-
cial Consultant or by writing or calling the Trust at the address or tele-
phone number set forth above. This Statement of Additional Information,
although not in itself a prospectus, is incorporated by reference into the
Prospectuses in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the Pro-
spectuses and this Statement of Additional Information, except where shown
below:
<TABLE>
<CAPTION>
<S> <C>
Management of the Trust and the Funds 2
Investment Objectives and Management Policies 7
Purchase of Shares 27
Redemption of Shares 28
Distributor 29
Valuation of Shares 32
Exchange Privilege 33
Performance Data (See in the Prospectuses "Performance") 34
Taxes (See in the Prospectuses "Dividends, Distributions and Taxes") 39
Additional Information 43
Financial Statements 43
Appendix A-1
</TABLE>
MANAGEMENT OF THE TRUST AND THE FUND
The executive officers of the Trust are employees of certain of the orga-
nizations that provide services to the Trust. These organizations are the
following:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Smith Barney Inc. Distributor
("Smith Barney")
Smith Barney Mutual Funds Management Inc. Investment adviser to Convertible,
("SBMFM") High Income, Diversified Strategic
Income, Tax- Exempt Income,
Utilities and Exchange Reserve Funds
Smith Barney Strategy Advisers Inc. Investment adviser to Premium Total
("Strategy Advisers") Return Fund
Smith Barney Global Capital Management Inc. Investment adviser to Global Bond
("Global Capital Management") Fund and sub-investment adviser to
Diversified Strategic Income Fund
SBMFM Administrator
The Boston Company Advisors, Inc. Sub-Administrator
("Boston Advisors")
Boston Safe Deposit and Trust Company Custodian
("Boston Safe")
The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data
Corporation Transfer Agent
</TABLE>
These organizations and the functions they perform for the Trust are dis-
cussed in the Prospectuses and in this Statement of Additional Informa-
tion.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The Trustees and executive officers of the Trust, together with informa-
tion as to their principal business occupations during the past five
years, are shown below. The executive officers of the Trust are employees
of organizations that provide services to the Funds. Each Trustee who is
an "interested person" of the Trust, as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"), is indicated by an asterisk.
Lee Abraham, Trustee. Retired; formerly Chairman and Chief Executive Of-
ficer of Associated Merchandising Corporation, a major retail merchandis-
ing and sourcing organization. His address is 1440 Broadway, Suite 1001,
New York, New York 10018.
Antoinette C. Bentley, Trustee. Retired; formerly Senior Vice President
and Associate General Counsel of Crum and Forster, Inc., an insurance
holding company. Her address is 24 Fowler Road, Far Hills, New Jersey
07931.
Allan J. Bloostein, Trustee. Consultant; formerly Vice Chairman of the
Board of and Consultant to The May Department Stores Company; Director of
Crystal Brands, Inc., Melville Corp. and R.G. Barry Corp. His address is
Anderson Road, Sherman, Connecticut 06784.
Richard E. Hanson, Jr., Trustee. Headmaster, The Peck School, Morristown,
NJ; prior to July 1, 1994, Headmaster, Lawrence Country Day School-
Woodmere Academy, Woodmere, New York; prior to July 1, 1990, Headmaster of
Woodmere Academy. His address is 247 South Street, Morristown, New Jersey
07960.
*Heath B. McLendon, Chairman of the Board and Investment Officer. Execu-
tive Vice President of Smith Barney and Chairman of the Board of Smith
Barney Strategy Advisers Inc.; prior to July 1993, Senior Executive Vice
President of Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"),
Vice Chairman of Shearson Asset Management; a Director of PanAgora Asset
Management, Inc. and PanAgora Asset Management Limited. His address is 388
Greenwich Street, New York, New York 10013.
Madelon DeVoe Talley, Trustee. Author; Governor at Large of the National
Association of Securities Dealers, Inc. Her address is 876 Park Avenue,
New York, New York 10021.
Stephen J. Treadway, President. Executive Vice President and Director of
Smith Barney; Director and President of SBMFM and Trustee of Corporate Re-
alty Income Trust I. His address is 388 Greenwich Street, New York, New
York 10013.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney; President of Smith Barney Strategy Advisers Inc.; prior to July
1993, Senior Vice President of Shearson Lehman Brothers and Vice President
of Shearson Lehman Investment Strategy Advisors Inc., an investment advi-
sory affiliate of Shearson Lehman Brothers. His address is 388 Greenwich
Street, New York, New York 10013.
John C. Bianchi, Vice President and Investment Officer. Managing Director
of SBMFM; prior to July 1993, Managing Director of Shearson Lehman Advi-
sors. His address is 388 Greenwich Street, New York, New York 10013.
James E. Conroy, Vice President and Investment Officer. Managing Director
of SBMFM; prior to July 1993, Managing Director of Shearson Lehman Advi-
sors. His address is 388 Greenwich Street, New York, New York 10013.
Victor S. Filatov, Investment Officer. International Strategist and Presi-
dent of Global Capital Management; prior to November 1993, Business Coor-
dinator and Head of European Fixed Income Research of J.P. Morgan Securi-
ties Inc. His address is 10 Piccadilly, London, W1V 9LA, England.
John B. Fullerton, Sr., Investment Administrator. Vice President of Boston
Advisors; Senior Vice President of The Boston Company Institutional Inves-
tors, Inc. His address is 100 Drake's Landing Road, Greenbrae, California
94904.
Jack S. Levande, Vice President and Investment Officer. Managing Director
of SBMFM; prior to July 1993, Managing Director of Shearson Lehman Advi-
sors. His address is 388 Greenwich Street, New York, New York 10013.
Karen Mahoney-Malcomson, Investment Officer. Vice President of SBMFM;
prior to July 1993, Vice President of Shearson Lehman Advisors. Her ad-
dress is 388 Greenwich Street, New York, New York 10013.
Lawrence T. McDermott, Vice President and Investment Officer. Managing Di-
rector of SBMFM; prior to July 1993, Managing Director of Shearson Lehman
Advisors. His address is 388 Greenwich Street, New York, New York 10013.
Evelyn R. Robertson, Investment Officer. Vice President and Portfolio Man-
ager of SBMFM; prior to July 1993, Vice President of Shearson Lehman Advi-
sors. Her address is 388 Greenwich Street, New York, New York 10013.
Harry Rosenbluth, Investment Administrator. Vice President of Boston Advi-
sors; Senior Vice President of The Boston Company Institutional Investors,
Inc. His address is 100 Drake's Landing Road, Greenbrae, California 94904.
Phyllis M. Zahorodny, Vice President and Investment Officer. Managing Di-
rector of SBMFM; prior to July 1993, Managing Director of Shearson Lehman
Advisors. Her address is 388 Greenwich Street, New York, New York 10013.
Patricia Zuch, Investment Administrator. Vice President of Boston Advi-
sors. Her address is 100 Drake's Landing Road, Greenbrae, California
94904.
Lewis E. Daidone, Treasurer. Managing Director and Chief Financial Officer
of Smith Barney; Director and Senior Vice President of SBMFM. His address
is 388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary. Managing Director of Smith Barney; General
Counsel and Secretary of SBMFM. Her address is 388 Greenwich Street, New
York, New York 10013.
Each Trustee also serves as a director, trustee and/or general partner of
certain other mutual funds for which Smith Barney serves as distributor.
Global Capital Management, SBMFM and Strategy Advisers (the "Advisers")
are "affiliated persons" of the Trust as defined in the 1940 Act by virtue
of their positions as investment advisers to the Funds. As of October 31,
1994, the Trustees and officers of the Funds, as a group, owned less than
1% of the outstanding shares of beneficial interest of each Fund.
No director, officer or employee of Smith Barney or any Smith Barney af-
filiates receives any compensation from the Trust for serving as an of-
ficer or Trustee of the Trust. The Trust pays each Trustee who is not a
director, officer or employee of Smith Barney or any of their affiliates a
fee of $10,000 per annum plus $1,500 per meeting attended and reimburses
them for travel and out-of-pocket expenses. For the fiscal year ended July
31, 1994, such fees and expenses totalled $115,411.
INVESTMENT ADVISERS, SUB-INVESTMENT ADVISER, ADMINISTRATOR, AND
SUB-ADMINISTRATOR
Each Adviser serves as investment adviser to one or more Funds pursuant to
a separate written agreement with the relevant Fund (an ''Advisory Agree-
ment''). SBMFM serves as investment adviser to its relevant Funds pursuant
to a transfer of the investment advisory agreement, effective November 7,
1994, from its affiliate, Mutual Management Corp. (Mutual Management Corp.
and SBMFM are both wholly owned subsidiaries of Smith Barney Holdings Inc.
(''Holdings'')). Strategy Advisers is a wholly owned subsidiary of Hold-
ings and Global Capital Management is an indirect wholly owned subsidiary
of Holdings. Holdings is a wholly owned subsidiary of the The Travelers
Inc. The Advisory Agreements were most recently approved by the Board of
Trustees, including a majority of the Trustees who are not ''interested
persons'' of the Trust or the Advisers (''Independent Trustees''), on Au-
gust 10, 1994, with the exception of Premium Total Return Fund and Global
Bond Fund, which were approved on April 4, 1994 and January 20,1994, re-
spectively. SBMFM also serves as administrator to each Fund pursuant to a
separate written agreement dated May 4, 1994 (the ''Administration Agree-
ment'') which was most recently approved by the Board of Trustees, includ-
ing a majority of the Independent Trustees, on August 10, 1994. Global
Capital Management also serves as sub-investment adviser to Diversified
Strategic Income Fund, pursuant to a written agreement dated March 21,
1994 which was approved by the Fund's Board of Trustees, including a ma-
jority of the Independent Trustees, on January 20, 1994 and by the Fund's
shareholders on April 29, 1994. Prior to March 21, 1994, Lehman Brothers
Global Asset Management Limited (''LBGAM'') acted in the capacity as the
Fund's sub-investment adviser.
Boston Advisors currently serves as sub-administrator to the Funds under a
written agreement (the "Sub-Administration Agreement") dated May 4, 1994,
which was most recently approved by the Trust's Board of Trustees, includ-
ing the Independent Trustees, on May 4, 1994. Prior to that date, Boston
Advisors served as administrator to the Funds, and prior to April 4, 1994,
also served as investment advisor to Premium Total Return Fund. Prior to
May 21, 1993, Boston Advisors acted in the capacity of sub-investment ad-
visor and administrator to the Funds. Boston Advisors is a wholly owned
subsidiary of The Boston Company, Inc. ("TBC"), a financial services hold-
ing company, which is in turn an indirect wholly owned subsidiary of Mel-
lon Bank Corporation ("Mellon").
Certain of the services provided to the Trust by the Advisers, Global Cap-
ital Management and Boston Advisors are described in the Prospectuses
under "Management of the Trust and the Fund." Each Adviser, SBMFM, as ad-
ministrator, and Boston Advisors, as sub-administrator, pay the salaries
of all officers and employees who are employed by both it and the Trust,
and maintain office facilities for the Trust. In addition to those ser-
vices, Boston Advisors pays the salaries of all officers and employees who
are employed by both it and the Trust, maintains office facilities for the
Trust, furnishes the Trust with statistical and research data, clerical
help and accounting, data processing, bookkeeping, internal auditing and
legal services and certain other services required by the Trust, prepares
reports to the Funds' shareholders and prepares tax returns, reports to
and filings with the Securities and Exchange Commission (the "SEC") and
state blue sky authorities. The Advisers, Global Capital Management and
Boston Advisors bear all expenses in connection with the performance of
their services.
For the fiscal years ended July 31, 1992, 1993 and 1994, the Funds paid
investment advisory fees to their respective Advisers as follows:
<TABLE>
<CAPTION>
FUND 1992 1993 1994
<S> <C> <C> <C>
Premium Total Return Fund $ 2,776,638 $4,803,717 $8,506,930
Tax-Exempt Income Fund 2,884,333 3,978,637 4,561,779
Convertible Fund 305,154 329,323 425,505
Global Bond Fund 301,528 356,324 466,389
High Income Fund 1,313,890 2,659,448 3,771,643
Diversified Strategic Income Fund 3,346,434 6,226,342 8,761,857
Utilities Fund 4,272,080 10,317,792 10,896,883
Exchange Reserve Fund 970,662 612,812 622,203
</TABLE>
For the fiscal years ended July 31, 1992, 1993 and 1994, the Funds paid
administrative fees to Boston Advisors or SBMFM as follows:
<TABLE>
<CAPTION>
BOSTON ADVISORS SBMFM
FOR THE FISCAL FOR THE FISCAL
PERIOD FROM PERIOD FROM
8/1/93 THROUGH 5/4/94 THROUGH
FUND 1992 1993 5/3/94 7/31/94
<S> <C> <C> <C> <C>
Premium Total Return Fund $ 1,009,687 $1,746,806 $2,639,140 $454,284
Tax-Exempt Income Fund 1,442,166 1,989,319 1,971,064 309,826
Convertible Fund 122,062 131,729 145,717 24,485
Global Bond Fund 100,509 118,434 134,269 21,556
High Income Fund 525,556 1,063,779 1,297,678 210,979
Diversified Strategic
Income Fund 1,912,279 3,557,910 4,289,630 717,145
Utilities Fund 1,898,703 4,584,796 4,256,098 586,961
Exchange Reserve Fund 647,081 408,842 341,472 73,330
</TABLE>
For the fiscal years ended July 31, 1992, 1993 and the period ended March
20, 1994, Diversified Strategic Income Fund paid LBGAM $956,195,
$1,778,955 and $1,562,892, respectively, in sub- investment advisory fees.
For the period from March 21, 1994 through July 31, 1994, Diversified
Strategic Income Fund paid Global Capital Management $940,496 in sub-
investment advisory fees.
Each Adviser and SBMFM, as administrator, have agreed that if in any fis-
cal year the aggregate expenses of the Fund that it serves (including fees
payable pursuant to its Advisory Agreement and Administration Agreement,
but excluding interest, taxes, brokerage, distribution and service fees
and, if permitted by the relevant state securities commission, extraordi-
nary expenses) exceed the expense limitation of any state having jurisdic-
tion over the Fund, the Adviser and SBMFM will, to the extent required by
state law, reduce their fees by the amount of such excess expenses, such
amount to be allocated between them in the proportion that their respec-
tive fees bear to the aggregate of the fees paid by the Fund. Such fee re-
duction, if any, will be estimated and reconciled on a monthly basis. The
most restrictive state expense limitation applicable to any Fund is 2.5%
of the first $30 million of the Fund's average daily net assets, 2% of the
next $70 million of the average daily net assets and 1.5% of the remaining
average daily net assets of each Fund. No such fee reduction was required
for the fiscal years ended July 31, 1992, 1993 and 1994.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Trust. The Trust-
ees who are not "interested persons" of the Fund have selected Stroock &
Stroock & Lavan as their counsel.
KPMG Peat Marwick LLP, independent accountants, 345 Park Avenue, New York,
New York 10154. serve as auditors of the Trust and will render an opinion
on the Trust's financial statements annually. Prior to October 20, 1994,
Coopers & Lybrand L.L.P., independent accountants, served as auditors of
the Trust and rendered an opinion on the Trust's financial statements for
the fiscal year ended July 31, 1994.
In the interest of economy and convenience, certificates representing
shares in the Trust are not physically issued except upon specific request
made by a shareholder to TSSG. TSSG maintains a record of each sharehold-
er's ownership of Trust shares. Shares do not have cumulative voting
rights, which means that holders of more than 50% of the shares voting for
the election of Trustees can elect all of the Trustees. Shares are trans-
ferable but have no preemptive or subscription rights. Shareholders gener-
ally vote by Fund, except with respect to the election of Trustees and the
selection of independent public accountants.
Massachusetts law provides that, under certain circumstances, shareholders
could be held personally liable for the obligations of the Trust. However,
the Trust Agreement disclaims shareholder liability for acts or obliga-
tions of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the
Trust or a Trustee. The Trust Agreement provides for indemnification from
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability
is limited to circumstances in which the Trust would be unable to meet its
obligations, a possibility that the Trust's management believes is remote.
Upon payment of any liability incurred by the Trust, the shareholder pay-
ing the liability will be entitled to reimbursement from the general as-
sets of the Trust. The Trustees intend to conduct the operations of the
Trust in such a way so as to avoid, as far as possible, ultimate liability
of the shareholders for liabilities of the Trust.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectuses discuss the investment objectives of the Funds and the
policies to be employed to achieve those objectives. This section contains
supplemental information concerning the types of securities and other in-
struments in which the Funds may invest, the investment policies and port-
folio strategies that the Funds may utilize and certain risks attendant to
such investments, policies and strategies.
U.S. Government Securities (All Funds). United States government securi-
ties include debt obligations of varying maturities issued or guaranteed
by the United States government or its agencies or instrumentalities
("U.S. government securities"). U.S. government securities include not
only direct obligations of the United States Treasury, but also securities
issued or guaranteed by the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), General
Services Administration, Central Bank for Cooperatives, Federal Intermedi-
ate Credit Banks, Federal Land Banks, Federal National Mortgage Associa-
tion ("FNMA"), Maritime Administration, Tennessee Valley Authority, Dis-
trict of Columbia Armory Board, Student Loan Marketing Association, Inter-
national Bank for Reconstruction and Development and Resolution Trust
Corporation. Certain U.S. government securities, such as those issued or
guaranteed by GNMA, FNMA and Federal Home Loan Mortgage Corporation
("FHLMC"), are mortgage-related securities. Because the United States gov-
ernment is not obligated by law to provide support to an instrumentality
that it sponsors, a Fund will invest in obligations issued by such an in-
strumentality only if its Adviser determines that the credit risk with re-
spect to the instrumentality does not make its securities unsuitable for
investment by the Fund.
Bank Obligations (All Funds). Domestic commercial banks organized under
Federal law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to be in-
sured by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic
banks organized under state law are supervised and examined by state bank-
ing authorities but are members of the Federal Reserve System only if they
elect to join. Most state banks are insured by the FDIC (although such in-
surance may not be of material benefit to a Fund, depending upon the prin-
cipal amount of certificates of deposit ("CDs") of each held by the Fund)
and are subject to Federal examination and to a substantial body of Fed-
eral law and regulation. As a result of Federal and state laws and regula-
tions, domestic branches of domestic banks are, among other things, gener-
ally required to maintain specified levels of reserves, and are subject to
other supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of U.S. banks, such as CDs and time depos-
its ("TDs"), may be general obligations of the parent bank in addition to
the issuing branch, or may be limited by the terms of a specific obliga-
tion and governmental regulation. Obligations of foreign branches of U.S.
banks and foreign banks are subject to different risks than are those of
U.S. banks or U.S. branches of foreign banks. These risks include foreign
economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obliga-
tions, foreign exchange controls and foreign withholding and other taxes
on interest income. Foreign branches of U.S. banks are not necessarily
subject to the same or similar regulatory requirements that apply to U.S.
banks, such as mandatory reserve requirements, loan limitations and ac-
counting, auditing and financial recordkeeping requirements. In addition,
less information may be publicly available about a foreign branch of a
U.S. bank than about a U.S. bank. CDs issued by wholly owned Canadian sub-
sidiaries of U.S. banks are guaranteed as to repayment of principal and
interest, but not as to sovereign risk, by the U.S. parent bank.
Obligations of U.S. branches of foreign banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by
the terms of a specific obligation and by Federal and state regulation as
well as governmental action in the country in which the foreign bank has
its head office. A U.S. branch of a foreign bank with assets in excess of
$1 billion may or may not be subject to reserve requirements imposed by
the Federal Reserve System or by the state in which the branch is located
if the branch is licensed in that state. In addition, branches licensed by
the Comptroller of the Currency and branches licensed by certain states
("State Branches") may or may not be required to: (a) pledge to the regu-
lator by depositing assets with a designated bank within the state, an
amount of its assets equal to 5% of its total liabilities; and (b) main-
tain assets within the state in an amount equal to a specified percentage
of the aggregate amount of liabilities of the foreign bank payable at or
through all of its agencies or branches within the state. The deposits of
State Branches may not necessarily be insured by the FDIC. In addition,
there may be less publicly available information about a U.S. branch of a
foreign bank than about a U.S. bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign banks and foreign branches of U.S. banks, a Fund's
Adviser will carefully evaluate such investments on a case-by-case basis.
Exchange Reserve Fund may purchase a CD issued by a bank, savings and loan
association or other banking institution with less than $1 billion in as-
sets (a "Small Issuer CD") so long as the issuer is a member of the FDIC
or Office of Thrift Supervision and is insured by the Savings Association
Insurance Fund ("SAIF") and so long as the principal amount of the Small
Issuer CD is fully insured and is no more than $100,000. Exchange Reserve
Fund will at any one time hold only one Small Issuer CD from any one
issuer.
Savings and loan associations whose CDs may be purchased by the Funds are
members of the Federal Home Loan Bank and are insured by the SAIF. As a
result, such savings and loan associations are subject to regulation and
examination.
When-Issued Securities and Delayed-Delivery Transactions (Global Bond,
High Income, Premium Total Return, Diversified Strategic Income and Tax-
Exempt Income Funds). To secure an advantageous price or yield, these
Funds may purchase certain securities on a when-issued basis or purchase
or sell securities for delayed delivery. A Fund will enter into such
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 a 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, a Fund will rely on the other party to consummate the trans-
action and may be disadvantaged if the other party fails to do so.
U.S. government securities and Municipal Securities (as defined below)
normally are subject to changes in value based upon changes, real or an-
ticipated, in the level of interest rates and, although to a lesser extent
in the case of U.S. government securities, the public's perception of the
creditworthiness of the issuers. In general, U.S. government securities
and Municipal Securities tend to appreciate when interest rates decline
and depreciate when interest rates rise. Purchasing these securities on a
when-issued 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. Simi-
larly, the sale of U.S. government securities for delayed delivery can in-
volve the risk that the prices available in the market when the delivery
is made may actually be higher than those obtained in the transaction it-
self.
In the case of the purchase by a Fund of securities on a when-issued or
delayed-delivery basis, a segregated account in the name of the Fund con-
sisting of cash or liquid debt securities equal to the amount of the when-
issued or delayed-delivery commitments will be established at Boston Safe.
For the purpose of determining the adequacy of the securities in the ac-
counts, the deposited securities will be valued at market or fair value.
If the market or fair value of the securities declines, additional cash or
securities will be placed in the account daily so that the value of the
account will equal the amount of such commitments by the Fund involved. On
the settlement date, a Fund will meet its obligations from then-available
cash flow, the sale of securities held in the segregated account, the sale
of other securities or, although it would not normally expect to do so,
from the sale of the securities purchased on a when-issued or delayed-
delivery basis (which may have a value greater or less than the Fund's
payment obligations).
Lending of Portfolio Securities (Premium Total Return, Utilities, Convert-
ible, Global Bond, High Income and Diversified Strategic Income Fund-
s). These Funds have the ability to lend portfolio securities to brokers,
dealers and other financial organizations. Such loans, if and when made,
may not exceed 20% (33 1/3 % in the case of Diversified Strategic Income
Fund) of a Fund's total assets taken at value. A Fund will not lend port-
folio securities to Smith Barney unless it has applied for and received
specific authority to do so from the SEC. Loans of portfolio securities
will be collateralized by cash, letters of credit or U.S. government secu-
rities which are maintained at all times in an amount at least equal to
the current market value of the loaned securities. From time to time, a
Fund may pay a part of the interest earned from the investment of collat-
eral received for securities loaned to the borrower and/or a third party
which is unaffiliated with the Fund and is acting as a "finder."
By lending its securities, a Fund can increase its income by continuing to
receive interest on the loaned securities as well as by either investing
the cash collateral in short-term instruments or obtaining yield in the
form of interest paid by the borrower when U.S. government securities are
used as collateral. A Fund will comply with the following conditions when-
ever its 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 loaned rises above the level of such collateral; (c) the
Fund must be able to terminate the loan at any time; (d) the Fund must re-
ceive reasonable interest on the loan, as well as any dividends, interest
or other distributions on the loaned securities, and any increase in mar-
ket value; (e) the Fund may pay only reasonable custodian fees in connec-
tion with the loan; and (f) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event ad-
versely affecting the investment in the loaned securities occurs, the
Trust's Board of Trustees 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 a possible delay in receiv-
ing 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 each Fund's Adviser to be of good
standing and will not be made unless, in the judgment of the Adviser, the
consideration to be earned from such loans would justify the risk.
Options on Securities (Premium Total Return, Convertible, Global Bond, Di-
versified Strategic Income and High Income Funds). These Funds may engage
in transactions in options on securities, which, depending on the Fund,
may include the writing of covered put options and covered call options,
the purchase of put and call options and the entry into closing transac-
tions.
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. Diversified Strategic Income
Fund, however, may engage in option transactions only to hedge against ad-
verse price movements in the securities that it holds or may wish to pur-
chase and the currencies in which certain portfolio securities may be de-
nominated. In return for a premium, the writer of a covered call option
forfeits the right to any appreciation in the value of the underlying se-
curity above the strike price for the life of the option (or until a clos-
ing 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 re-
alize 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 premiums that a 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 a 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 market values of the underlying secu-
rities 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. A Fund with option-writing authority
may write (a) in-the-money call options when its Adviser expects that the
price of the underlying security will remain flat or decline moderately
during the option period, (b) at-the-money call options when its Adviser
expects that the price of the underlying security will remain flat or ad-
vance moderately during the option period and (c) out-of-the-money call
options when its Adviser expects that the price of the underlying 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 de-
clines and the security is sold at this lower price, the amount of any re-
alized loss will be offset wholly or in part by the premium received. Out-
of-the-money, at-the-money and in-the-money put options (the reverse of
call options as to the relation 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 a 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 the Fund 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. A Fund
can no longer effect a closing purchase transaction with respect to an op-
tion once it has been assigned an exercise notice. To secure its obliga-
tion to deliver the underlying security when it writes a call option, or
to pay for the underlying security when it writes a put option, a Fund
will be required to deposit in escrow the underlying security or other as-
sets in accordance with the rules of the Options Clearing Corporation (the
"Clearing Corporation") or similar foreign clearing corporation and of the
securities exchange on which the option is written.
The Global Bond and Diversified Strategic Income Funds may purchase and
sell put, call and other types of option securities that are traded on do-
mestic or foreign exchanges or the over-the-counter market including, but
not limited to, "spread" options, "knock-out" options, "knock-in" options
and "average rate" or "look-back" options.
"Spread" options are dependent upon the difference between the price of
two securities or futures contracts, "Knock-out" options are cancelled if
the price of the underlying asset reaches a trigger level prior to expira-
tion, "Knock-in" options only have value if the price of the underlying
asset reaches a trigger level and, "average rate" or "look-back" options
are options where at expiration, the option's strike price is set based on
either the average, maximum or minimum price of the asset over the period
of the option.
The Global Bond and Diversified Strategic Income Funds may utilize up to
15% of their assets to purchase options and may do so at or about the same
time that they purchase the underlying security or at a later time. In
purchasing options on securities, the Funds will trade only with counter-
parties of high status in terms of credit quality and commitment to the
market.
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 ex-
change or in the over-the-counter market. In light of this fact and cur-
rent trading conditions, the Funds expect to purchase only call or put op-
tions issued by the Clearing Corporation. The Funds with option-writing
authority expect to write options only on U.S. securities exchanges, ex-
cept that the Global Bond and Diversified Strategic Income Funds also may
write options on foreign exchanges and in the over-the-counter market.
A Fund may realize a profit or loss upon entering into a closing transac-
tion. In cases in which a 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. Similarly, when a Fund has purchased an
option and engages in a closing sale transaction, whether the Fund real-
izes a profit or loss will depend upon whether the amount received in the
closing sale transaction is more or less than the premium that the Fund
initially paid for the original option plus the related transaction costs.
Although a Fund generally will purchase or write only those options for
which its Adviser believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient
trading interest to create a liquid secondary market on a securities ex-
change will exist for any particular option 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 inadequate certain of
the facilities of the Clearing Corporation and U.S. and foreign securities
exchanges 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 that 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 op-
tions. If as a covered call option writer a Fund is unable to effect clos-
ing 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 writ-
ten, or exercised within certain time 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 ex-
ercised in one or more accounts or through one or more brokers). It is
possible that the Funds with authority to engage in options transactions
and other clients of their respective Advisers and certain of their affil-
iates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these lim-
its and it may impose certain other sanctions.
In the case of options written by a Fund that are deemed covered by virtue
of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stocks with respect to which the Fund
has written options may exceed the time within which the Fund must make
delivery in accordance with an exercise notice. In these instances, a Fund
may purchase or borrow temporarily the underlying securities for purposes
of physical delivery. By so doing, the Fund will not bear any market risk
because the Fund will have the absolute right to receive from the issuer
of the underlying security an equal number of shares to replace the bor-
rowed stock, but the Fund may incur additional transaction costs or inter-
est expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the U.S. government se-
curities for which a Fund may write covered call options. If a Fund writes
covered call options on mortgage-backed securities, the securities that it
holds as cover may, because of scheduled amortization or unscheduled pre-
payments, 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.
Stock Index Options (Premium Total Return and Utilities Funds). The Pre-
mium Total Return and Utilities Funds may purchase and write put and call
options on U.S. stock indexes listed on U.S. exchanges for the purpose of
hedging its portfolio. A stock index fluctuates with changes in the market
values of the stocks included in the index. Some stock index options are
based on a broad market index such as the NYSE Composite Index or a nar-
rower market index such as the Standard & Poor's 100. Indexes also are
based on an industry or market segment such as the AMEX Oil and Gas Index
or the Computer and Business Equipment Index.
Options on stock indexes are similar to options on stock except that (a)
the expiration cycles of stock index options are monthly, while those of
stock options currently are quarterly, and (b) the delivery requirements
are different. Instead of giving the right to take or make delivery of
stock at a specified price, an option on a stock index gives the holder
the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a put) or is less than (in the case of a call) the closing
value of the underlying index on the date of exercise, multiplied by (b) a
fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. The amount of cash received will be
equal to such difference between the closing price of the index and the
exercise price of the option expressed in dollars times a specified multi-
ple. The writer of the option is obligated, in return for the premium re-
ceived, to make delivery of this amount. The writer may offset its posi-
tion in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index options as a hedg-
ing technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price move-
ments of the stock index selected. Because the value of an index option
depends upon movements in the level of the index rather than the price of
a particular stock, whether the Premium Total Return and Utilities Funds
will realize a gain or loss from the purchase or writing of options on an
index depends upon movements in the level of stock prices in the stock
market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by a Fund of options on stock indexes will be
subject to its Adviser's ability to predict correctly movements in the di-
rection of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the
prices of individual stocks.
The Premium Total Return and Utilities Funds will engage in stock index
options transactions only when determined by their respective Advisers to
be consistent with the Funds' efforts to control risk. There can be no as-
surance that such judgment will be accurate or that the use of these port-
folio strategies will be successful. When a Fund writes an option on a
stock index, the Fund will establish a segregated account with Boston Safe
in an amount equal to the market value of the option and will maintain the
account while the option is open.
Mortgage-Related Securities (Diversified Strategic Income Fund). The av-
erage maturity of pass- through pools of mortgage-related securities var-
ies with the maturities of the underlying mortgage instruments. In addi-
tion, a pool's stated maturity 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 age of the mortgage. Because pre-
payment rates of individual pools vary widely, it is not possible to accu-
rately predict the average life of a particular pool. Common practice is
to assume that prepayments will result in an average life ranging from 2
to 10 years for pools of fixed-rate 30-year mortgages. Pools of mortgages
with other maturities or different characteristics will have varying aver-
age life assumptions.
Mortgage-related securities may be classified as private, governmental or
government-related, depending on the issuer or guarantor. Private
mortgage-related securities represent pass-through pools consisting prin-
cipally of conventional residential mortgage loans created by non-
governmental issuers, such as commercial banks, savings and loan associa-
tions and private mortgage insurance companies. Governmental mortgage- re-
lated securities are backed by the full faith and credit of the United
States. GNMA, the principal guarantor of such securities, is a wholly
owned United States government corporation within the Department of Hous-
ing and Urban Development. Government-related mortgage-related securities
are not backed by the full faith and credit of the United States govern-
ment. Issuers of such securities include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders,
which is subject to general regulation by the Secretary of Housing and
Urban Development. Pass-through securities issued by FNMA are guaranteed
as to timely payment of principal and interest by FNMA. FHLMC is a corpo-
rate instrumentality of the United States, the stock of which is owned by
the Federal Home Loan Banks. Participation certificates representing in-
terests in mortgages from FHLMC's national portfolio are guaranteed as to
the timely payment of interest and ultimate collection of principal by
FHLMC.
Private, U.S. governmental or government-related entities create mortgage
loan pools offering pass- through investments in addition to those de-
scribed above. The mortgages underlying these securities may be alterna-
tive mortgage instruments, that is, mortgage instruments whose principal
or interest payments may vary or whose terms to maturity may be shorter
than previously customary. As new types of mortgage-related securities are
developed and offered to investors, Diversified Strategic Income Fund,
consistent with its investment objective and policies, will consider mak-
ing investments in such new types of securities.
Currency Transactions (Global Bond, Diversified Strategic Income and High
Income Funds). The Funds' dealings in forward currency exchange transac-
tions will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is the purchase or sale of for-
ward currency contracts with respect to specific receivables or payables
of the Fund generally arising in connection with the purchase or sale of
its securities. Position hedging, generally, is the sale of forward cur-
rency contracts with respect to portfolio security positions denominated
or quoted in the currency. A Fund may not position hedge with respect to a
particular currency to an extent greater than the aggregate market value
at any time of the security or securities held in its portfolio denomi-
nated or quoted in or currently convertible (such as through exercise of
an option or consummation of a forward currency contract) into that par-
ticular currency, except that Global Bond Fund may utilize forward cur-
rency contracts denominated in the European Currency Unit to hedge portfo-
lio security positions when a security or securities are denominated in
currencies of member countries in the European Monetary System. If a Fund
enters into a transaction hedging or position hedging transaction, it will
cover the transaction through one or more of the following methods: (a)
ownership of the underlying currency or an option to purchase such cur-
rency; (b) ownership of an option to enter into an offsetting forward cur-
rency contract; (c) entering into a forward contract to purchase currency
being sold or to sell currency being purchased, provided that such cover-
ing contract is itself covered by any one of these methods unless the cov-
ering contract closes out the first contract; or (d) depositing into a
segregated account with the custodian or a sub-custodian of the Fund cash
or readily marketable securities in an amount equal to the value of the
Fund's total assets committed to the consummation of the forward currency
contract and not otherwise covered. In the case of transaction hedging,
any securities placed in the account must be liquid debt securities. In
any case, if the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account so
that the value of the account will equal the above amount. Hedging trans-
actions may be made from any foreign currency into dollars or into other
appropriate currencies.
At or before the maturity of a forward contract, a Fund either may sell a
portfolio security and make delivery of the currency, or retain the secu-
rity and offset its contractual obligation to deliver the currency by pur-
chasing a second contract pursuant to which the relevant Fund will obtain,
on the same maturity date, the same amount of the currency which it is ob-
ligated to deliver. If a Fund retains the portfolio security and engages
in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or loss to the extent movement
has occurred in forward contract prices. Should forward prices decline
during the period between a Fund's entering into a forward contract for
the sale of a currency and the date that it enters into an offsetting con-
tract for the purchase of the currency, the Fund will realize a gain to
the extent that the price of the currency it has agreed to sell exceeds
the price of the currency it has agreed to purchase. Should forward prices
increase, the Fund will suffer a loss to the extent the price of the cur-
rency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The cost to a Fund of engaging in currency transactions varies with fac-
tors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commis-
sions are involved. The use of forward currency contracts does not elimi-
nate fluctuations in the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the future. In addi-
tion, although forward currency contracts limit the risk of loss due to a
decline in the value of the hedged currency, at the same time, they limit
any potential gain that might result should the value of the currency in-
crease.
If a devaluation is generally anticipated, the Global Bond, Diversified
Strategic Income and High Income Funds may not be able to contract to sell
the currency at a price above the devaluation level they anticipate.
Foreign Currency Options (Global Bond, Diversified Strategic Income and
High Income Funds) With the exception of High Income Fund which may only
purchase put and call options on foreign currencies, these Funds may pur-
chase or write put and call options on foreign currencies for the purpose
of hedging against changes in future currency exchange rates. Foreign cur-
rency options generally have three, six and nine month expiration cycles.
Put options convey the right to sell the underlying currency at a price
which is anticipated to be higher than the spot price of the currency at
the time the option expires. Call options convey the right to buy the un-
derlying currency at a price which is expected to be lower than the spot
price of the currency at the time that the option expires.
The Fund may use foreign currency options under the same circumstances
that it could use forward currency exchange transactions. A decline in the
dollar value of a foreign currency in which a Fund's securities are denom-
inated, for example, will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. In order to pro-
tect against such diminutions in the value of securities that it holds,
the Fund may purchase put options on the foreign currency. If the value of
the currency does decline, the Fund will have the right to sell the cur-
rency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its securities that otherwise would have
resulted. Conversely, if a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby poten-
tially increasing the cost of the securities, the Fund may purchase call
options on the particular currency. The purchase of these options could
offset, at least partially, the effects of the adverse movements in ex-
change rates. The benefit to the Fund derived from purchases of foreign
currency options, like the benefit derived from other types of options,
will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direc-
tion or to the extent anticipated, the Fund could sustain losses on trans-
actions in foreign currency options that would require it to forego a por-
tion or all of the benefits of advantageous changes in the rates.
Foreign Government Securities (Diversified Strategic Income and Global
Bond Funds). Among the foreign government securities in which these Funds
may invest are those issued by countries with developing economies, which
are countries in the initial stages of their industrialization cycles. In-
vesting in securities of countries with developing economies involves ex-
posure to economic structures that are generally less diverse and less ma-
ture, and to political systems that can be expected to have less stabil-
ity, than those of developed countries. The markets of countries with
developing economies historically have been more volatile than markets of
the more mature economies of developed countries, but often have provided
higher rates of return to investors.
Municipal Securities (Tax-Exempt Income Fund). Municipal securities gen-
erally are understood to include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities, refunding of outstanding obligations, payment of gen-
eral operating expenses and extensions of loans to public institutions and
facilities ("Municipal Securities"). Private activity bonds that are is-
sued by or on behalf of public authorities to finance privately operated
facilities are considered to be Municipal Securities if the interest paid
thereon qualifies as excluded from gross income (but not necessarily from
alternative minimum taxable income) for Federal income tax purposes in the
opinion of bond counsel to the issuer.
Municipal bonds may be issued to finance life care facilities. Life care
facilities are an alternative form of long-term housing for the elderly
which offer residents the independence of condominium life style and, if
needed, the comprehensive care of nursing home services. Bonds to finance
these facilities have been issued by various state industrial development
authorities. Because the bonds are secured only by the revenues of each
facility and not by state or local government tax payments, they are sub-
ject to a wide variety of risks, including a drop in occupancy levels, the
difficulty of maintaining adequate financial reserves to secure estimated
actuarial liabilities, the possibility of regulatory cost restrictions ap-
plied to health care delivery and competition from alternative health care
or conventional housing facilities.
Municipal leases are Municipal Securities that may take the form of a
lease or an installment purchase contract issued by state and local gov-
ernmental authorities to obtain funds to acquire a wide variety of equip-
ment and facilities such as fire and sanitation vehicles, computer equip-
ment and other capital assets. These obligations have evolved to make it
possible for state and local government authorities to acquire property
and equipment without meeting constitutional and statutory requirements
for the issuance of debt. Thus, municipal leases have special risks not
normally associated with municipal bonds. These obligations frequently
contain "non-appropriation" clauses providing that the governmental issuer
of the obligation has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
legislative body on a yearly or other periodic basis. In addition to the
"non-appropriation" risk, municipal leases represent a type of financing
that has not yet developed the depth of marketability associated with mu-
nicipal bonds; moreover, although the obligations will be secured by the
leased equipment, the disposition of the equipment in the event of fore-
closure might prove to be difficult. In order to limit the risks, Tax-
Exempt Income Fund proposes to purchase either (a) municipal leases rated
in the four highest categories by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") or (b) unrated munic-
ipal leases purchased principally from domestic banks or other responsible
third parties which enter into an agreement with the Fund providing the
seller will either remarket or repurchase the municipal lease within a
short period after demand by the Fund.
Temporary Investments (Tax-Exempt Income Fund). When the Tax-Exempt In-
come Fund is maintaining a defensive position, the Fund may invest in
short-term investments ("Temporary Investments") consisting of: (a) the
following tax-exempt securities: (i) tax-exempt notes of municipal issuers
having, at the time of purchase, a rating of MIG 1 through MIG 4 by
Moody's or rated SP-1 or SP-2 by S&P or, if not rated, of issuers having
an issue of outstanding Municipal Securities rated within the four highest
grades by Moody's or S&P; (ii) tax-exempt commercial paper having, at the
time of purchase, a rating not lower than A-2 by S&P or Prime-2 by
Moody's; and (iii) variable rate demand notes rated at the time of pur-
chase within the two highest ratings by any major rating service or deter-
mined to be of comparable quality to instruments with such rating; and (b)
the following taxable securities: (i) U.S. government securities, includ-
ing repurchase agreements with respect to such securities; (ii) other debt
securities rated within the four highest grades by Moody's or S&P; (iii)
commercial paper rated in the highest grade by either of these rating ser-
vices; and (iv) certificates of deposit of domestic banks with assets of
$1 billion or more. Among the tax-exempt notes in which the Fund may in-
vest are Tax Anticipation Notes, Bond Anticipation Notes and Revenue An-
ticipation Notes which are issued in anticipation of receipt of tax funds,
proceeds of bond placements or other revenues, respectively. At no time
will more than 20% of the Fund's total assets be invested in Temporary In-
vestments unless the Fund has adopted a defensive investment policy in an-
ticipation of a market decline. The Fund intends, however, to purchase
tax-exempt Temporary Investments pending the investment of the proceeds of
the sale of shares of the Fund and of its portfolio securities, or in
order to have highly liquid securities available to meet anticipated re-
demptions.
Investing in Utilities (Utilities Fund). Each of the risks referred to in
Utilities Fund's Prospectus could adversely affect the ability and incli-
nation of public utilities to declare or pay dividends and the ability of
holders of common stock to realize any value from the assets of the issuer
upon liquidation or bankruptcy. Moreover, price disparities within se-
lected utility groups and discrepancies in relation to averages and indi-
ces have occurred frequently for reasons not directly related to the gen-
eral movements or price trends of utility common stocks. Causes of these
discrepancies include changes in the overall demand for and supply of var-
ious securities (including the potentially depressing effect of new stock
offerings), and changes in investment objectives, market expectations or
cash requirements of other purchasers and sellers of securities.
Ratings as Investment Criteria (All Funds). In general, the ratings of
nationally recognized statistical rating organizations ("NRSROs") repre-
sent the opinions of these agencies as to the quality of securities that
they rate. Such ratings, however, are relative and subjective, and are not
absolute standards of quality and do not evaluate the market value risk of
the securities. These ratings will be used by the Funds as initial crite-
ria for the selection of portfolio securities, but the Funds also will
rely upon the independent advice of their respective Advisers to evaluate
potential investments. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and general
economic trends. The Appendix to this Statement of Additional Information
contains further information concerning the rating categories of NRSROs
and their significance.
Subsequent to its purchase by a Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for pur-
chase by the Fund. In addition, it is possible that an NRSRO might not
change its rating of a particular issue to reflect subsequent events. None
of these events will require sale of such securities by a Fund, but the
Fund's Adviser will consider such events in its determination of whether
the Fund should continue to hold the securities. In addition, to the ex-
tent that the ratings change as a result of changes in such organizations
or their rating systems, or due to a corporate reorganization, a Fund will
attempt to use comparable ratings as standards for its investments in ac-
cordance with its investment objective and policies.
Futures Activities (High Income, Utilities and Tax-Exempt Income Fund-
s). These Funds may enter into futures contracts and/or options on fu-
tures contracts that are traded on a United States exchange or board of
trade. These investments may be made by a Fund solely for the purpose of
hedging against the effects of changes in the value of its portfolio secu-
rities due to anticipated changes in interest rates, currency values
and/or market conditions, and not for purposes of speculation. In the case
of Tax-Exempt Income Fund, investments in futures contracts will be made
only in unusual circumstances, such as when the Fund's Adviser anticipates
an extreme change in interest rates or market conditions. See "Taxes"
below.
Futures Contracts. The purpose of the acquisition or sale of a futures
contract by a Fund is to mitigate the effects of fluctuations in interest
rates or currency or market values, depending on the type of contract, on
securities or their values without actually buying or selling the securi-
ties. For example, if Tax-Exempt Income Fund owns long-term bonds and tax-
exempt rates are expected to increase, the Fund might enter into a short
position in municipal bond index futures contracts. Such a sale would have
much the same effect as the Fund's selling some of the long-term bonds in
its portfolio. If tax-exempt rates increase as anticipated, the value of
certain long-term Municipal Securities in the Fund 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 otherwise would have. Of course, because the value of port-
folio securities will far exceed the value of the futures contracts sold
by a Fund, an increase in the value of the futures contracts could only
mitigate -- but not totally offset -- the decline in the value of the
Fund.
The Global Bond and Diversified Strategic Income Funds may enter into fu-
tures contracts or related options on futures contracts that are traded on
a domestic or foreign exchange or in the over-the-counter market. These
investments may be made solely for the purpose of hedging against changes
in the value of its portfolio securities due to anticipated changes in in-
terest rates, currency values and/or market conditions when the transac-
tions are economically appropriate to the reduction of risks inherent in
the management of the Fund and not for purposes of speculation. The abil-
ity of the Funds to trade in futures contracts may be limited by the re-
quirements of the Internal Revenue Code of 1986 as amended (the "Code"),
applicable to a regulated investment company.
No consideration is paid or received by a Fund upon entering into a fu-
tures contract. Initially, a Fund will be required to deposit with its
custodian 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, known as initial mar-
gin, is in the nature of a performance bond or good faith deposit on the
contract and is returned to a Fund upon termination of the futures con-
tract, assuming that all contactual obligations have been satisfied. Sub-
sequent payments, known as variation margin, to and from the broker, will
be made daily as the price of the securities, currency or index 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." At any time prior to expiration of a futures contract, a 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.
Several risks are associated with the use of futures contracts as a hedg-
ing device. Successful use of futures contracts by a Fund is subject to
the ability of its Adviser to predict correctly movements in interest
rates, stock or bond indices or foreign currency values. These predictions
involve skills and techniques that may be different from those involved in
the management of the portfolio being hedged. In addition, there can be no
assurance that there will be a correlation between movements in the price
of the underlying securities, currency or index and movements in the price
of the securities which are the subject of the hedge. A decision of
whether, when and how to hedge involves the exercise of skill and judg-
ment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected trends in interest rates or cur-
rency values.
Although the Funds with authority to engage in futures activity intend to
enter into futures contracts only if there is an active market for such
contracts, there is no assurance that an active market will exist for the
contracts at any particular time. Most 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, a Fund would be required to make daily
cash payments of variation margin, and 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. As described above, however, there
is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus
provide an offset to losses on the futures contract.
If a Fund has hedged against the possibility of a change in interest rates
or currency or market values adversely affecting the value of securities
held in its portfolio and rates or currency or market values move in a di-
rection opposite to that which the Fund has anticipated, 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 posi-
tions. In addition, in such situations, if the Fund had 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 securi-
ties may, but will not necessarily, be at increased prices which reflect
the change in interest rates or currency values, as the case may be.
Options on Futures Contracts. An option on an interest rate futures con-
tract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a posi-
tion in the underlying interest rate futures contract at a specified exer-
cise price at any time prior to the expiration date of the option. An op-
tion on a foreign currency futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, but not the
obligation, to assume a long or short position in the relevant underlying
future currency at a predetermined exercise price at a time in the future.
Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin ac-
count, which represents the amount by which the market price of the fu-
tures contract exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.
The potential for loss related to the purchase of an option on futures
contracts is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of sale,
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 would be reflected in the net asset value of a Fund in-
vesting in the options.
Several risks are associated with options on futures contracts. The abil-
ity to establish and close out positions on such options will be subject
to the existence of a liquid market. In addition, the purchase of put or
call options on interest rate and foreign currency futures will be based
upon predictions by a Fund's Adviser as to anticipated trends in interest
rates and currency values, as the case may be, which could prove to be in-
correct. Even if the expectations of an Adviser are correct, there may be
an imperfect correlation between the change in the value of the options
and of the portfolio securities or the currencies being hedged.
Foreign Investments. Investors should recognize that investing in foreign
companies involves certain considerations which are not typically associ-
ated with investing in U.S. issuers. Since the Fund will be investing in
securities denominated in currencies other than the U.S. dollar, and since
the Fund may temporarily hold funds in bank deposits or other money market
investments denominated in foreign currencies, the Fund may be affected
favorably or unfavorably by exchange control regulations or changes in the
exchange rate between such currencies and the dollar. A change in the
value of a foreign currency relative to the U.S. dollar will result in a
corresponding change in the dollar value of the Fund's assets denominated
in that foreign currency. Changes in foreign currency exchange rates may
also affect the value of dividends and interest earned, gains and losses
realized on the sale of securities and net investment income and gain, if
any, to be distributed to shareholders by the Fund.
The rate of exchange between the U.S. dollar and other currencies is de-
termined by the forces of supply and demand in the foreign exchange mar-
kets. Changes in the exchange rate may result over time from the interac-
tion of many factors directly or indirectly affecting economic conditions
and political developments in other countries. Of particular importance
are rates of inflation, interest rate levels, the balance of payments and
the extent of government surpluses or deficits in the Unites States and
the particular foreign country, all of which are in turn sensitive to the
monetary, fiscal and trade policies pursued by the governments of the
United States and other foreign countries important to international trade
and finance. Governmental intervention may also play a significant role.
National governments rarely voluntarily allow their currencies to float
freely in response to economic forces. Sovereign governments use a variety
of techniques, such as intervention by a country's central bank or imposi-
tion of regulatory controls or taxes, to affect the exchange rates of
their currencies.
Many of the securities held by the Fund will not be registered with, nor
the issuers thereof be subject to reporting requirements of, the SEC. Ac-
cordingly, there may be less publicly available information about the se-
curities and about the foreign company or government issuing them than is
available about a domestic company or government entity. Foreign issuers
are generally not subject to uniform financial reporting standards, prac-
tices and requirements comparable to those applicable to U.S. issuers. In
addition, with respect to some foreign countries, there is the possibility
of expropriation or confiscatory taxation, limitations on the removal of
funds or other assets of the Fund, political or social instability, or do-
mestic developments which could affect U.S. investments in those coun-
tries. Moreover, individual foreign economies may differ favorably or un-
favorably from the U.S. economy in such respects as growth of gross na-
tional product, rate of inflation, capital reinvestment, resource self-
sufficiency and balance of payments positions. The Fund may invest in
securities of foreign governments (or agencies or instrumentalities
thereof), and many, if not all, of the foregoing considerations apply to
such investments as well.
Securities of some foreign companies are less liquid and their prices are
more volatile than securities of comparable domestic companies. Certain
foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold. Due to the increased
exposure to the Fund of market and foreign exchange fluctuations brought
about by such delays, and due to the corresponding negative impact on Fund
liquidity, the Fund will avoid investing in countries which are known to
experience settlement delays which may expose the Fund to unreasonable
risk of loss.
The interest payable on the Fund's foreign securities may be subject to
foreign withholding taxes, and while investors may be able to claim some
credit or deductions for such taxes with respect to their allocated shares
of such foreign tax payments, the general effect of these taxes will be to
reduce the Fund's income. Additionally, the operating expenses of the Fund
can be expected to be higher than that of an investment company investing
exclusively in U.S. securities, since the expenses of the Fund, such as
custodial costs, valuation costs and communication costs, as well as the
rate of the investment advisory fees, though similar to such expenses of
some other international funds, are higher than those costs incurred by
other investment companies.
Short Sales (Utilities Fund). Utilities Fund may from time to time sell
securities short, but the value of securities sold short will not exceed
5% of the value of the Fund's assets. In addition, the Fund may not (a)
sell short the securities of a single issuer to the extent of more than 2%
of the value of the Fund's net assets and (b) sell short the securities of
any class of an issuer to the extent of more than 2% of the outstanding
securities of the class at the time of the transaction. A short sale is a
transaction in which the Fund sells securities that it does not own (but
has borrowed) in anticipation of a decline in the market price of the se-
curities.
When the Fund makes a short sale, the proceeds it receives from the sale
are retained by a broker until the Fund replaces the borrowed securities.
To deliver the securities to the buyer, the Fund must arrange through a
broker to borrow the securities and, in so doing, the Fund becomes obli-
gated to replace the securities borrowed at their market price at the time
of replacement, whatever that price may be. The Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker
that consists of cash or U.S. government securities. In addition, the Fund
will place in a segregated account with its custodian an amount of cash or
U.S. government securities equal to the difference, if any, between (a)
the market value of the securities sold at the time they were sold short
and (b) any cash or U.S. government securities deposited as collateral
with the broker in connection with the short sale (not including the pro-
ceeds of the short sale). Until it replaces the borrowed securities, the
Fund will maintain the segregated account daily at a level so that the
amount deposited in the account plus the amount deposited with the broker
(not including the proceeds from the short sale) (a) will equal the cur-
rent market value of the securities sold short and (b) will not be less
than the market value of the securities at the time they were sold short.
Short Sales Against the Box (Premium Total Return, Convertible and Utili-
ties Funds). These Funds may enter into a short sale of common stock such
that when the short position is open the Fund involved owns an equal
amount of preferred stocks or debt securities, convertible or exchange-
able, without payment of further consideration, into an equal number of
shares of the common stock sold short. This kind of short sale, which is
described as "against the box," will be entered into by a Fund for the
purpose of receiving a portion of the interest earned by the executing
broker from the proceeds of the sale. The proceeds of the sale will be
held by the broker until the settlement date when the Fund delivers the
convertible securities to close out its short position. Although prior to
delivery a Fund will have to pay an amount equal to any dividends paid on
the common stock sold short, the Fund will receive the dividends from the
preferred stock or interest from the debt securities convertible into the
stock sold short, plus a portion of the interest earned from the proceeds
of the short sale. The Funds will deposit, in a segregated account with
their custodian, convertible preferred stock or convertible debt securi-
ties in connection with short sales against the box.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 14 below (other than re-
striction number 10 as applied to Utilities Fund) have been adopted by the
Trust with respect to the Funds as fundamental policies. Under the 1940
Act, a fundamental policy may not be changed without the vote of a major-
ity of the outstanding voting securities of a Fund, as defined in the 1940
Act. Majority is defined in the 1940 Act as the lesser of (a) 67% or more
of the shares present at a shareholder meeting, if the holders of more
than 50% of the outstanding shares of the Trust are present or represented
by proxy, or (b) more than 50% of the outstanding shares. Investment re-
strictions 15 through 20, and number 10 as applied to Utilities Fund, may
be changed by vote of a majority of the Board of Trustees at any time.
The investment policies adopted by the Trust prohibit a Fund from:
1. Purchasing the securities of any issuer (other than U.S. government
securities) if as a result more than 5% of the value of the Fund's total
assets would be invested in the securities of the issuer, except that up
to 25% of the value of the Fund's total assets may be invested without re-
gard to this 5% limitation.
2. Purchasing (a) more than 10% of the voting securities of any one is-
suer, (b) more than 10% of the securities of any class of any one issuer
or (c) more than 10% of the outstanding debt securities of any one issuer,
except that limitation (c) does not apply to the Exchange Reserve and Di-
versified Strategic Income Funds and limitations (b) and (c) do not apply
to the Utilities Fund; provided that this limitation shall not apply to
investment in U.S. government securities.
3. Purchasing securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or re-
lated options will not be deemed to be a purchase of securities on margin
by any Fund permitted to engage in transactions in futures contracts or
related options.
4. Making short sales of securities or maintaining a short position ex-
cept that (a) the Premium Total Return, Utilities and Convertible Funds
may engage in such activities if, at all times when a short position is
open, the relevant Fund owns an equal amount of the securities convertible
into or exchangeable, without payment of any further consideration, for
securities of the same issuer as, and at least equal in amount to, the se-
curities sold short, and if, with respect to the Premium Total Return and
Convertible Funds, not more than 10% of the relevant Fund's net assets
(taken at current value) is held as collateral for such sales at any one
time and (b) Utilities Fund may make short sales or maintain a short posi-
tion to the extent of 5% of its net assets.
5. Borrowing money, except that (a) the Fund may borrow from banks for
temporary or emergency (not leveraging) purposes, including the meeting of
redemption requests that might otherwise require the untimely disposition
of securities, in an amount not exceeding 10% (20% for Utilities Fund) of
the value of the Fund's total assets (including the amount borrowed) val-
ued at market less liabilities (not including the amount borrowed) at the
time the borrowing is made, (b) Diversified Strategic Income Fund may
enter into reverse repurchase agreements and forward roll transactions and
(c) one or more Funds may enter into futures contracts. Except for Diver-
sified Strategic Income Fund, whenever borrowings described in (a) exceed
5% of the value of a Fund's total assets, the Fund will not make any addi-
tional investments. Immediately after any borrowing (including reverse re-
purchase agreements and forward roll transactions), Diversified Strategic
Income Fund will maintain an asset coverage of at least 300% with respect
to all its borrowings.
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than
10% of the value of the Fund's total assets. For purposes of this restric-
tion, (a) the deposit of assets in escrow in connection with the writing
of covered put or call options and the purchase of securities on a when-
issued or delayed-delivery basis and (b) collateral arrangements with re-
spect to (i) the purchase and sale of stock options, options on foreign
currencies and options on stock indexes and (ii) initial or variation mar-
gin for futures contracts, will not be deemed to be pledges of a Fund's
assets.
7. Underwriting the securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, by virtue of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate, except
that the Fund may purchase and sell securities that are secured by real
estate and may purchase securities issued by companies that invest or deal
in real estate.
9. Investing in commodities, except that (a) the Global Bond, High In-
come, Diversified Strategic Income, Utilities and Tax-Exempt Income Funds
may invest in futures contracts and options on futures contracts as de-
scribed in their Prospectuses and (b) upon 60 days' notice given to its
shareholders, the Premium Total Return and Convertible Funds may engage in
hedging transactions involving futures contracts and related options, in-
cluding stock index futures contracts and financial futures contracts.
10. Investing in oil, gas or other mineral exploration or development
programs, except that the Premium Total Return, Convertible, Diversified
Strategic Income, Global Bond, Utilities and High Income Funds may invest
in the securities of companies that invest in or sponsor those programs.
11. Making loans to others, except through the purchase of qualified debt
obligations, the entry into repurchase agreements and, with respect to
Funds other than the Exchange Reserve Fund, loans of portfolio securities
consistent with the Fund's investment objective.
12. Investing in securities of other investment companies registered or
required to be registered under the 1940 Act, except as they may be ac-
quired as part of a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange.
13. Purchasing any securities which would cause more than 25% of the
value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities
in the same industry, except that Exchange Reserve Fund and Utilities Fund
will invest in excess of 25% of their respective assets in the securities
of companies within the banking industry and utility industry, respec-
tively; provided that there shall be no limit on the purchase of (a) U.S.
government securities or (b) for Funds other than the Exchange Reserve and
Utilities Funds, Municipal Securities issued by governments or political
subdivisions of governments.
14. Writing or selling puts, calls, straddles, spreads or combinations
thereof, except, with respect to Funds other than Exchange Reserve Fund,
as permitted under the Fund's investment objective and policies.
15. Purchasing restricted securities, illiquid securities (such as repur-
chase agreements with maturities in excess of seven days and, in the case
of Exchange Reserve Fund, time deposits maturing from two business days
through seven calendar days) or other securities that are not readily mar-
ketable if more than 10% or, in the case of the High Income, Global Bond
and Diversified Strategic Income Funds, 15% of the total assets of the
Fund would be invested in such securities.
16. Purchasing any security if as a result the Fund would then have more
than 5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for fewer than three
years; provided that in the case of private activity bonds purchased for
Tax-Exempt Income Fund, this restriction shall apply to the entity supply-
ing the revenues from which the issue is to be paid.
17. Making investments for the purpose of exercising control or manage-
ment.
18. Purchasing or retaining securities of any company if, to the knowl-
edge of the Trust, any of the Trust's officers or Trustees or any officer
or director of an Adviser individually owns more than 1/2 of 1% of the
outstanding securities of such company and together they own beneficially
more than 5% of the securities.
19. Investing in warrants (except as permitted under a Fund's investment
objective and policies or other than warrants acquired by the Fund as part
of a unit or attached to securities at the time of purchase) if, as a re-
sult, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Fund's net assets of which not more than 2% of the
Fund's net assets may be invested in warrants not listed on a recognized
United States or foreign stock exchange to the extent permitted by appli-
cable state securities laws.
20. With respect to Utilities Fund only, purchasing in excess of 5% of
the voting securities of a public utility or public utility holding com-
pany, so as to become a public utility holding company as defined in the
Public Utility Holding Company Act of 1935, as amended.
The Trust has adopted two additional investment restrictions applicable to
Exchange Reserve Fund, the first of which is a fundamental policy, which
prohibit Exchange Reserve Fund from:
1. Investing in common stocks, preferred stocks, warrants, other equity
securities, corporate bonds or debentures, state bonds, municipal bonds or
industrial revenue bonds.
2. Investing more than 10% of its assets in variable rate master demand
notes providing for settlement upon more than seven days' notice by the
Fund.
For purposes of the investment restrictions described above, the issuer of
a Municipal Security is deemed to be the entity (public or private) ulti-
mately responsible for the payment of the principal of and interest on the
security. For purposes of investment restriction number 13, private activ-
ity bonds (other than those issued for charitable, educational and certain
other purposes), the payment of principal and interest on which is the ul-
timate responsibility of companies within the same industry, are grouped
together as an industry. The Trust may make commitments more restrictive
than the restrictions listed above with respect to a Fund so as to permit
the sale of shares of the Fund in certain states. Should the Trust deter-
mine that any such commitment is no longer in the best interests of the
Fund and its shareholders, the Trust will revoke the commitment by termi-
nating the sale of shares of the Fund in the state involved. The percent-
age limitations contained in the restrictions listed above apply at the
time of purchases of securities.
PORTFOLIO TURNOVER
The Funds do not intend to seek profits through short-term trading. Never-
theless, the Funds will not consider portfolio turnover rate a limiting
factor in making investment decisions.
Under certain market conditions, a Fund authorized to engage in transac-
tions in options may experience increased portfolio turnover as a result
of its investment strategies. For instance, the exercise of a substantial
number of options written by a Fund (due to appreciation of the underlying
security in the case of call options on securities or depreciation of the
underlying security in the case of put options on securities) could result
in a turnover rate in excess of 100%. A portfolio turnover rate of 100%
also would occur, for example, if all of a Fund's securities that are in-
cluded in the computation of turnover were replaced once during a period
of one year. A Fund's turnover rate is calculated by dividing the lesser
of purchases or sales of its portfolio securities for the year by the
monthly average value of the portfolio securities. Securities or options
with remaining maturities of one year or less on the date of acquisition
are excluded from the calculation.
Certain other practices which may be employed by a Fund also could result
in high portfolio turnover. For example, portfolio securities may be sold
in anticipation of a rise in interest rates (market decline) or purchased
in anticipation of a decline in interest rates (market rise) and later
sold. In addition, a security may be sold and another of comparable qual-
ity purchased at approximately the same time to take advantage of what a
Fund's Adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur
for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes in the
overall demand for, or supply of, various types of securities.
For the fiscal years ended July 31, 1993 and 1994, the portfolio turnover
rates were as follows:
<TABLE>
<CAPTION>
FUND 1993 1994
<S> <C> <C>
Premium Total Return Fund 55% 34%
Tax-Exempt Income Fund 34% 39%
Convertible Fund 95% 54%
High Income Fund 95% 98%
Global Bond Fund 216% 257%
Diversified Strategic Income Fund 116% 93%
Utilities Fund 37% 28%
</TABLE>
For regulatory purposes the turnover rate of Exchange Reserve Fund is
zero.
PORTFOLIO TRANSACTIONS
Most of the purchases and sales of securities for a Fund, whether trans-
acted on a securities exchange or over-the-counter, will be effected in
the primary trading market for the securities, except for Eurobonds which
are principally traded over-the-counter. The primary trading market for a
given security is generally located in the country in which the issuer has
its principal office. Decisions to buy and sell securities for a Fund are
made by its Adviser, which also is responsible for placing these transac-
tions, subject to the overall review of the Trust's Trustees. With respect
to Diversified Strategic Income Fund, decisions to buy and sell domestic
securities for the Fund are made by SBMFM, which is also responsible for
placing these transactions; the responsibility to make investment deci-
sions with respect to foreign securities and to place these transactions
rests with Global Capital Management. Although investment decisions for
each Fund are made independently from those of the other accounts managed
by its Adviser, investments of the type that the Fund may make also may be
made by those other accounts. When a Fund and one or more other accounts
managed by its Adviser 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 Adviser to be equitable to each.
In some cases, this procedure may adversely affect the price paid or re-
ceived by a Fund or the size of the position obtained or disposed of by
the Fund.
Transactions on domestic stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on
which commissions are negotiated, the cost of transactions may vary among
different brokers. Commissions generally are fixed on most foreign ex-
changes. There is generally no stated commission in the case of securities
traded in U.S. or foreign over-the-counter markets, but the prices of
those securities include undisclosed commissions or mark-ups. The cost of
securities purchased from underwriters includes an underwriting commission
or concession, and the prices at which securities are purchased from and
sold to dealers include a dealer's mark-up or mark-down. U.S. government
securities generally are purchased from underwriters or dealers, although
certain newly issued U.S. government securities may be purchased directly
from the United States Treasury or from the issuing agency or instrumen-
tality. The following table sets forth certain information regarding each
Fund's payment of brokerage commissions:
<TABLE>
<CAPTION>
PREMIUM DIVERSIFIED
TOTAL CONVERT- HIGH STRATEGIC
FISCAL RETURN IBLE INCOME UTILITIES INCOME
YEAR FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C>
Total Brokerage
Commissions 1992 $ 762,101 $51,993 $11,296 $ 562,710 --
1992* -- -- -- $ 774,306 --
1993 $1,933,587 $75,836 $17,225 $1,810,481 $ 19,446
1994 $1,767,577 $60,818 $96,670 $2,006,028 $106,421
Commissions paid to
Shearson Lehman
Brothers or Smith
Barney 1992 $ 283,190 $ 2,700 $ 22,419 $ 28,848 --
1992* -- -- -- $ 51,828 --
1993 $ 355,027 -- -- $ 97,740 --
1994 $ 280,686 -- -- $ 174,858 --
% of Total Brokerage
Commissions paid to
Smith Barney 1994 15.88% -- -- 8.70% --
% of Total Transac-
tions involving
Commissions paid to
Smith Barney 1994 14.92% -- -- 8.10% --
* Periods disclosed for Utilities Fund are for fiscal year ended February
29, 1992 and the period from March 1, 1992 through July 31, 1992.
</TABLE>
In selecting brokers or dealers to execute securities transactions on be-
half of a Fund, the Fund's Adviser seeks the best overall terms available.
In assessing the best overall terms available for any transaction, each
Adviser will consider the factors that it deems relevant, including the
breadth of the market in the security, the price of the security, the fi-
nancial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and
on a continuing basis. In addition, each Advisory Agreement between the
Trust and an Adviser authorizes the Adviser, in selecting brokers or deal-
ers to execute a particular transaction and in evaluating the best overall
terms available, to consider the brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934)
provided to the Trust, the other Funds and/or other accounts over which
the Adviser or its affiliates exercise investment discretion. The fees
under the Advisory Agreements and the Sub-Advisory and/or Administration
Agreements are not reduced by reason of their receiving such brokerage and
research services. Further, Smith Barney will not participate in commis-
sions brokerage given by the Fund to other brokers or dealers and will not
receive any reciprocal brokerage business resulting therefrom. The Trust's
Board of Trustees periodically will review the commissions paid by the
Funds to determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits inuring to the Trust.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the SEC thereunder, the Trust's Board
of Trustees has determined that transactions for a Fund may be executed
through Smith Barney and other affiliated broker-dealers if, in the judg-
ment of the Fund's Adviser, the use of such broker-dealer is likely to re-
sult in price and execution at least as favorable as those of other quali-
fied broker-dealers, and if, in the transaction, such broker-dealer
charges the Fund a rate consistent with that charged to comparable unaf-
filiated customers in similar transactions. In addition, under rules re-
cently adopted by the SEC, Smith Barney may directly execute such transac-
tions for the Funds on the floor of any national securities exchange, pro-
vided (a) the Trust's Board of Trustees has expressly authorized Smith
Barney to effect such transactions, and (b) Smith Barney annually advises
the Trust of the aggregate compensation it earned on such transactions.
Over-the-counter purchases and sales are transacted directly with princi-
pal market makers except in those cases in which better prices and execu-
tions may be obtained elsewhere.
The Funds will not purchase any security, including U.S. government secu-
rities or Municipal Securities, during the existence of any underwriting
or selling group relating thereto of which Smith Barney is a member, ex-
cept to the extent permitted by the SEC.
The Funds may use Smith Barney as a commodities broker in connection with
entering into futures contracts and options on futures contracts. Smith
Barney has agreed to charge the Funds commodity commissions at rates com-
parable to those charged by Smith Barney to its most favored clients for
comparable trades in comparable accounts.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedules of sales charges on Class A shares described in the Prospec-
tuses apply to purchases made by any "purchaser," which is defined to in-
clude the following: (a) an individual; (b) an individual's spouse and his
or her children purchasing shares for his or her own account; (c) a
trustee or other fiduciary purchasing shares for a single trust estate or
single fiduciary account; (d) a pension, profit-sharing or other employee
benefit plan qualified under Section 401(a) of the Code and qualified em-
ployee benefit plans of employers who are "affiliated persons" of each
other within the meaning of the 1940 Act; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Code; (f) any other orga-
nized group of persons, provided that the organization has been in exist-
ence for at least six months and was organized for a purpose other than
the purchase of investment company securities at a discount; or (g) a
trustee or other professional fiduciary (including a bank, or an invest-
ment adviser registered with the SEC under the Investment Advisers Act of
1940) purchasing shares of the Fund for one or more trust estates or fidu-
ciary accounts. Purchasers who wish to combine purchase orders to take ad-
vantage of volume discounts on Class A shares should contact their Smith
Barney Financial Consultants.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedules in the Prospec-
tuses, apply to any purchase of Class A shares if the aggregate investment
in Class A shares of the relevant Fund and in Class A shares of other
funds of the Smith Barney Mutual Funds that are offered with an initial
sales charge, including the purchase being made, of any "purchaser" (as
defined above) is $25,000 or more. The reduced sales charge is subject to
confirmation of the shareholder's holdings through a check of appropriate
records. The Trust reserves the right to terminate or amend the combined
right of accumulation at any time after notice to shareholders. For fur-
ther information regarding the rights of accumulation, shareholders should
contact a Smith Barney Financial Consultant.
DETERMINATION OF PUBLIC OFFERING PRICES
The Trust offers shares of the Funds to the public on a continuous basis.
The public offering price for Class A, Class Y and Class Z shares 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 Class B and Class
C shares (and Class A share purchases, including applicable rights of ac-
cumulation, 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 contingent deferred sales charge ("CDSC"), how-
ever, is imposed on certain redemptions of Class B and Class C shares, and
Class A shares when purchased in amounts exceeding $500,000. The method of
computation of the public offering price is shown in the Funds' financial
statements incorporated by reference in their entirety into this Statement
of Additional Information.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of a Fund is included in its
Prospectus. The right of redemption of shares of a Fund may be suspended
or the date of payment postponed (a) for any periods during which the New
York Stock Exchange, Inc. (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 such other
periods as the SEC by order may permit for the protection of the Fund's
shareholders.
Distributions in Kind. If the Trust's Board of Trustees determines that
it would be detrimental to the best interests of the remaining sharehold-
ers of a Fund to make a redemption payment wholly in cash, the Trust may
pay, in accordance with SEC rules, any portion of a redemption in excess
of the lesser of $250,000 or 1% of the Fund's net assets by distribution
in kind of portfolio securities in lieu of cash. Portfolio securities is-
sued in a distribution in kind will be readily marketable, although share-
holders receiving distributions in kind may incur brokerage commissions
when subsequently disposing of those securities.
Automatic Cash Withdrawal Plan. An automatic cash withdrawal plan (the
"Withdrawal Plan") is available to shareholders who own shares of a Fund
with a value of at least $10,000 ($5,000 for retirement plan accounts) and
who wish to receive specific amounts of cash monthly or quarterly. With-
drawals of at least $100 may be made under the Withdrawal Plan by redeem-
ing as many shares of the Fund as may be necessary to cover the stipulated
withdrawal payment. Any applicable CDSC 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 re-
spect to Withdrawal Plans in effect prior to November 7, 1994, any appli-
cable CDSC 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 With-
drawal Plan commences). To the extent that withdrawals exceed dividends,
distributions and appreciation of a shareholder's investment in the Fund,
there will be a reduction in the value of the shareholder's investment and
continued withdrawal payments may reduce the shareholder's investment and
ultimately exhaust it. Withdrawal payments should not be considered as in-
come from investment in a Fund. Furthermore, as it generally would not be
advantageous to a shareholder to make additional investments in a Fund at
the same time that he or she is participating in the Withdrawal Plan with
respect to that Fund, purchases by such shareholders of additional shares
in the Fund in amounts less than $5,000 will not ordinarily be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates of
the Fund from which withdrawals will be made with TSSG, as agent for With-
drawal Plan members. All dividends and distributions on shares in the
Withdrawal Plan are reinvested automatically at net asset value in addi-
tional shares of the Fund involved. Effective November 7, 1994, Withdrawal
Plans should be set up with any Smith Barney Financial Consultant. All ap-
plications for participation in the Withdrawal Plan must be received by
TSSG as Plan Agent no later than the eighth day of each month to be eligi-
ble for participation beginning with that month's withdrawal. For addi-
tional information regarding the Withdrawal Plan, contact your Smith Bar-
ney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Trust's distributor on a best efforts basis
pursuant to a distribution agreement (the "Distribution Agreement").
When payment is made by the investor before the settlement date, unless
otherwise directed by the investor, the funds will be held as a free
credit balance in the investor's brokerage account, and Smith Barney may
benefit from the temporary use of the funds. The investor may designate
another use for the funds prior to settlement date, such as an investment
in a money market fund (other than Smith Barney Exchange Reserve Fund) of
the Smith Barney Mutual Funds. If the investor instructs Smith Barney to
invest the funds in a money market fund, the amount of the investment will
be included as part of the average daily net assets of both the relevant
Fund and the money market fund, and affiliates of Smith Barney which serve
the funds in an investment advisory capacity will benefit from the fact
that they are receiving fees from both such investment companies for man-
aging these assets computed on the basis of their average daily net as-
sets. The Trust's Board of Trustees has been advised of the benefits to
Smith Barney resulting from these settlement procedures and will take such
benefits into consideration when reviewing the Advisory, Administration
and Distribution Agreements for continuance.
DISTRIBUTION ARRANGEMENTS
Shares of the Trust are distributed on a best efforts basis by Smith Bar-
ney as exclusive sales agent of the Trust pursuant to the Distribution
Agreement. To compensate Smith Barney for the services it provides and for
the expense it bears under the Distribution Agreement, the Trust has
adopted a services and distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, each Fund pays Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual rate
of .25% (.15% in the case of Tax-Exempt Income Fund) of the value of the
Fund's average daily net assets attributable to the Class A, Class B and
Class C shares. In addition, Class B and Class C shares pay a distribution
fee primarily intended to compensate Smith Barney for its initial expense
of paying Financial Consultants a commission upon sales of the respective
shares. The Class B and Class C distribution fees, accrued daily and paid
monthly, are calculated at the annual rate of .50% of the value of a
Fund's average daily net assets attributable to the shares of the respec-
tive Class.
During the fiscal years ended July 31, 1992 and 1993, Shearson Lehman
Brothers, the Funds' distributor prior to Smith Barney, received
$35,428,596 and $48,427,224, respectively, in the aggregate from the Trust
under the Plan. For the fiscal year ended July 31, 1994, Smith Barney re-
ceived $61,280,961, in the aggregate from the Trust under the Plan. For
the same period, Smith Barney incurred distribution expenses totaling ap-
proximately $105,372,000, consisting of approximately $732,000 for adver-
tising, $814,000 for printing and mailing of Prospectuses, $44,025,000 for
support services, $45,777,000 to Smith Barney Financial Consultants, and
$14,024,000 in accruals for interest on the excess of Smith Barney ex-
penses incurred in distributing the Trust's shares over the sum of the
distribution fees and CDSC received by Smith Barney from the Trust.
The following expenses were incurred during the periods indicated:
SALES CHARGES (paid to Smith Barney or Shearson Lehman Brothers, its pre-
decessor).
<TABLE>
<CAPTION>
CLASS A
FOR PERIOD
FROM 11/6/92 FISCAL YEAR
NAME OF FUND THROUGH 7/31/93 ENDED 7/31/94
<S> <C> <C>
Premium Total Return $399,065 $546,635
Tax-Exempt Income 103,757 176,786
Convertible 13,105 14,561
High Income 324,552 507,890
Global Bond 12,570 13,847
Diversified Strategic Income 629,705 818,088
Utilities 572,895 364,556
</TABLE>
CDSC (paid to Smith Barney or Shearson Lehman Brothers, its predecessor).
<TABLE>
<CAPTION>
CLASS B
FISCAL YEAR FISCAL YEAR FISCAL YEAR
NAME OF FUND ENDED 7/31/92 ENDED 7/31/93 ENDED 7/31/94
<S> <C> <C> <C>
Premium Total Return $330,726 $492,148 $2,133,023
Tax-Exempt Income 883,630 713,191 1,570,424
Convertible 126,725 107,519 87,160
High Income 560,013 562,214 743,718
Global Bond 79,361 48,463 109,733
Diversified Strategic Income 2,485,544 4,531,241 5,301,256
Utilities 2,001,692 2,489,562 8,429,876
</TABLE>
SERVICE FEES
<TABLE>
<CAPTION>
CLASS A
FOR PERIOD
FROM 11/6/92 FISCAL YEAR
NAME OF FUND THROUGH 7/31/93 ENDED 7/31/94
<S> <C> <C>
Premium Total Return $32,902 $138,713
Tax-Exempt Income 5,963 26,737
Convertible 1,212 5,556
High Income 401,688 593,011
Global Bond 2,302 10,579
Diversified Strategic Income 38,096 169,673
Utilities 46,507 125,227
</TABLE>
<TABLE>
<CAPTION>
CLASS B
FISCAL YEAR FISCAL YEAR
NAME OF FUND ENDED 7/31/93 ENDED 7/31/94
<S> <C> <C>
Premium Total Return $1,760,462 $3,725,474
Tax-Exempt Income 1,125,371 1,683,930
Convertible 124,907 207,197
High Income 673,903 1,238,239
Global Bond 108,768 183,065
Diversified Strategic Income 2,303,022 6,054,604
Utilities 4,480,226 5,877,824
</TABLE>
<TABLE>
<CAPTION>
CLASS C
(FORMERLY DESIGNATED AS CLASS D)
FOR PERIOD
FROM 11/6/92 FISCAL YEAR
NAME OF FUND THROUGH 7/31/93 ENDED 7/31/94
<S> <C> <C>
Premium Total Return $137 $2,600
Tax-Exempt Income -- --
Convertible -- --
High Income -- --
Global Bond 12 48
Diversified Strategic Income 4 980
Utilities 112 2,828
</TABLE>
DISTRIBUTION FEES
<TABLE>
<CAPTION>
CLASS B
FISCAL YEAR FISCAL YEAR FISCAL YEAR
NAME OF FUND ENDED 7/31/92 ENDED 7/31/93 ENDED 7/31/94
<S> <C> <C> <C>
Premium Total Return $3,786,350 $4,691,152 $7,450,948
Tax-Exempt Income 5,408,124 5,554,513 5,613,101
Convertible 457,731 365,443 414,394
High Income 1,970,780 1,998,175 2,476,479
Global Bond 376,910 330,220 365,230
Diversified Strategic Income 7,171,314 10,875,236 12,109,208
Utilities 4,556,871 12,484,195 11,755,647
</TABLE>
<TABLE>
<CAPTION>
CLASS C
(FORMERLY DESIGNATED AS CLASS D)
FOR PERIOD
FROM 11/6/92 FISCAL YEAR
NAME OF FUND THROUGH 7/31/93 ENDED 7/31/94
<S> <C> <C>
Premium Total Return $274 $5,199
Tax-Exempt Income -- --
Convertible -- --
High Income -- --
Global Bond 24 96
Diversified Strategic Income 8 1,960
Utilities 225 5,656
</TABLE>
Under its terms, the Plan continues from year to year, provided such con-
tinuance is approved annually by vote of the Trust's Board of Trustees,
including a majority of the Independent Trustees who have no direct or in-
direct financial interest in the operation of the Plan. The Plan may not
be amended to increase the amount to be spent for the services provided by
Smith Barney without shareholder approval, and all amendments of the Plan
also must be approved by the Trustees in the manner described above. The
Plan may be terminated with respect to a Class at any time, without pen-
alty, by vote of a majority of the Independent Trustees or, with respect
to any Fund, by vote of a majority of the outstanding voting securities of
the Class (as defined in the 1940 Act). Pursuant to the Plan, Smith Barney
will provide the Trust's Board of Trustees with periodic reports of
amounts expended under the Plan and the purpose for which such expendi-
tures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE cur-
rently is scheduled to be closed on New Year's Day, President's 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 de-
scription of procedures used by a Fund in valuing its assets.
Because of the need to obtain prices as of the close of trading on various
exchanges throughout the world, the calculation of the net asset value of
Funds investing in foreign securities may not take place contemporaneously
with the determination of the prices of many of their respective portfolio
securities used in such calculation. A security which is listed or traded
on more than one exchange is valued at the quotation on the exchange de-
termined to be the primary market for such security. All assets and lia-
bilities initially expressed in foreign currency values will be converted
into U.S. dollar values at the mean between the bid and offered quotations
of such currencies against U.S. dollars as last quoted by any recognized
dealer. If such quotations are not available, the rate of exchange will be
determined in good faith by the Trust's Board of Trustees. In carrying out
the Board's valuation policies, SBMFM, as administrator, may consult with
an independent pricing service (the "Pricing Service") retained by the
Trust.
Debt securities of United States issuers (other than U.S. government secu-
rities and short-term investments), including Municipal Securities held by
Tax-Exempt Income Fund, are valued by SBMFM, as administrator, after con-
sultation with the Pricing Service approved by the Trust's Board of Trust-
ees. When, in the judgment of the Pricing Service, quoted bid prices for
investments are readily available and are representative of the bid side
of the market, these investments are valued at the mean between the quoted
bid prices and asked prices. Investments for which, in the judgment of the
Pricing Service, there are no readily obtainable market quotations are
carried at fair value as determined by the Pricing Service. The procedures
of the Pricing Service are reviewed periodically by the officers of the
Trust under the general supervision and responsibility of the Board of
Trustees.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund of the Smith Barney Mutual
Funds may exchange all or part of their shares for shares of the same
Class of other funds of the Smith Barney Mutual Funds, to the extent such
shares are offered for sale in the shareholder's state of residence, on
the basis of relative net asset value per share at the time of exchange as
follows:
A. Class A shares of any fund purchased with a sales charge may be ex-
changed for Class A shares of any of the other funds, and the sales charge
differential, if any, will be applied. Class A shares of any fund may be
exchanged without a sales charge for shares of the funds that are offered
without a sales charge. Class A shares of any fund purchased without a
sales charge may be exchanged for shares sold with a sales charge, and the
appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of shares
purchased with a sales charge may be exchanged for Class A shares of any
of the other funds, and the sales charge differential, if any, will be ap-
plied.
C. Class B shares of any fund may be exchanged without a sales charge.
Class B shares of a Fund exchanged for Class B shares of another fund will
be subject to the higher applicable CDSC of the two funds and, for pur-
poses of calculating CDSC rates and conversion periods, will be deemed to
have been held since the date the shares being exchanged were deemed to be
purchased.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the ac-
count number in order to accomplish an exchange of shares of Smith Barney
High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same
Class in a fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision. This
privilege is available to shareholders resident 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 Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting docu-
ments, shares submitted for exchange are redeemed at the then-current net
asset value and, subject to any applicable CDSC, the proceeds immediately
invested, at a price as described above, in shares of the fund being ac-
quired. 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.
PERFORMANCE DATA
From time to time, the Trust may quote yield or total return of the Funds
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, Insti-
tutional 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 Trust describes the expenses
or performance of Class A, Class B, Class C or Class Y, it will also dis-
close such information for the other Classes.
YIELD
Exchange Reserve Fund. The current yield for the Fund is computed by (a)
determining the net change in the value of a hypothetical pre-existing ac-
count in the Fund having a balance of one share at the beginning of a
seven-calendar-day period for which yield is to be quoted, (b) dividing
the net change by the value of the account at the beginning of period to
obtain the base period return and (c) annualizing the results (i.e., mul-
tiplying the base period return by 365/7). The net change in the value of
the account reflects the value of additional shares purchased with divi-
dends declared on the original share and any such additional shares, but
does not include realized gains and losses or unrealized appreciation and
depreciation. In addition, the Fund may calculate a compound effective an-
nualized yield by adding 1 to the base period return (calculated as de-
scribed above), raising the sum to a power equal to 365/7 and subtracting
1.
For the seven-day period ended July 31, 1994, the annualized yield was
3.09%, and the compound effective yield was 3.13%. As of July 31, 1994,
the Fund's average portfolio maturity was 32 days.
Other Funds. The 30-day yield figure of a Fund other than Exchange Re-
serve Fund is calculated according to a formula prescribed by the SEC. The
formula can be expressed as follows:
YIELD =2 [ ( a-bcd +1)6--1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of waiver and reimburse-
ment).
c = the average daily number of shares outstanding during the pe-
riod that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount
or premium, the formula generally calls for amortization of the discount
or premium; the amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
The Class A yields for the 30-day period ended July 31, 1994 for the High
Income, Diversified Strategic Income, Global Bond and Utilities Funds were
9.70%, 8.02%, 4.73% and 6.26%, respectively.
The Class B yields for the 30-day period ended July 31, 1994 for the High
Income, Diversified Strategic Income, Global Bond and Utilities Funds were
9.66%, 7.91%, 4.53% and 6.13%, respectively.
The Class C yields for the 30-day period ended July 31, 1994 for the High
Income, Diversified Strategic Income, Global Bond and Utilities Funds were
11.32%, 7.85%, 4.63% and 6.21%, respectively.
The Class A and Class B yield for Tax-Exempt Income Fund for the 30-day
period ended July 31, 1994, was 5.32% and 5.07%, respectively, and the
equivalent taxable yield for that period was 7.39%, and 7.04%, respec-
tively, assuming payment of Federal income taxes at a rate of 28%.
Investors should recognize that, in periods of declining interest rates, a
Fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates the Fund's yield will tend to be
somewhat lower. In addition, when interest rates are falling, the inflow
of net new money to the Fund from the continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than
the balance of such Fund's investments, thereby reducing the current yield
of the Fund. In periods of rising interest rates, the opposite can be ex-
pected to occur.
AVERAGE ANNUAL TOTAL RETURN
The "average annual total return" figures for each Fund, other than Ex-
change Reserve Fund, are 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 the 1-, 5- or 10-year period at
the end of the 1-, 5- or 10-year period (or fractional por-
tion thereof), assuming reinvestment of all dividends and
distributions.
The average annual total returns (with fees waived and without sales
charge) of the Fund's Class A shares were as follows for the periods indi-
cated:
Class A Shares:
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD FROM
ONE YEAR COMMENCEMENT OF
PERIOD ENDED OPERATIONS* THROUGH
NAME OF FUND 7/31/94 7/31/94
<S> <C> <C>
Premium Total Return 8.65% 11.01%
Tax-Exempt Income 1.14 6.48
Convertible 1.99 8.37
High Income 2.11 10.97
Global Bond (0.67) 3.97
Diversified Strategic Income 1.16 5.97
Utilities (8.99) 3.69
* The Fund commenced selling Class A shares on November 6, 1992.
</TABLE>
The average annual total returns (with fees waived and without CDSC) of
the Fund's Class B shares were as follows for the periods indicated:
Class B Shares:
<TABLE>
<CAPTION>
PER ANNUM PER ANNUM FOR
FOR THE THE PERIOD FROM
ONE YEAR FIVE YEAR COMMENCEMENT OF
PERIOD ENDED PERIOD ENDED OPERATIONS THROUGH
NAME OF FUND 7/31/94 7/31/94 7/31/94
<S> <C> <C> <C>
Premium Total Return<F1> 8.12% 11.42% 12.49%
Tax-Exempt Income<F1><F6> 0.60 6.86 8.76
Convertible<F2> 1.50 6.82 7.76
High Income<F2><F6> 1.60 8.20 8.49
Global Bond<F3><F6> (1.19) 7.47 8.39
Diversified Strategic Income<F4><F6> 0.66 -- 8.92
Utilities<F5> (9.52) 7.63 9.36
<F1> Fund commenced operations on September 16, 1985.
<F2> Fund commenced operations on September 2, 1986.
<F3> Fund commenced operations on October 27, 1986.
<F4> Fund commenced operations on December 28, 1989.
<F5> Fund commenced operations on March 28, 1988.
<F6> Prior to November 6, 1992 the maximum CDSC imposed on redemptions was
5.00%.
</TABLE>
The average annual total returns (with fees waived) of the Fund's Class C
shares were as follows for the periods indicated:
Class C Shares:
<TABLE>
<CAPTION>
PER ANNUM FOR
THE PERIOD FROM
ONE YEAR COMMENCEMENT OF
PERIOD ENDED OPERATIONS THROUGH
NAME OF FUND 7/31/94 7/31/94
<S> <C> <C>
Premium Total Return* 8.12% 9.33%
Tax-Exempt Income -- --
Convertible -- --
High Income -- --
Global Bond* (1.19) 3.29
Diversified Strategic Income** 0.66 2.98
Utilities*** (9.52) (1.49)
* The Fund commenced selling Class C shares (previously designated as
Class D shares) on November 6, 1992.
** The Fund commenced selling Class C shares (previously designated as
Class D shares) on March 19, 1993.
*** The Fund commenced selling Class C shares (previously designated as
Class D shares) on February 4, 1993.
</TABLE>
A Class' total return figures calculated in accordance with the above for-
mula assume that the maximum sales charge or maximum applicable CDSC, as
the case may be, has been deducted for the hypothetical $1,000 initial in-
vestment at the time of purchase.
AGGREGATE TOTAL RETURN
The aggregate total return figures for each Fund, other than Exchange Re-
serve Fund, represent the cumulative change in the value of an investment
in the Class for the specified period and are 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 invest-
ment 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 aggregate total returns (with fees waived) of the Class B shares of
the Funds indicated were as follows for the periods indicated:
<TABLE>
<CAPTION>
NO LOAD LOAD
ONE YEAR FIVE YEAR PERIOD FROM ONE YEAR FIVE YEAR PERIOD
FROM
PERIOD PERIOD COMMENCEMENT PERIOD PERIOD
COMMENCEMENT
ENDED ENDED OF OPERATIONS ENDED ENDED OF
OPERATIONS
JULY 31, JULY 31, THROUGH JULY 31, JULY 31, THROUGH
NAME OF FUND 1994* 1994* JULY 31, 1994* 1994** 1994** JULY 31, 1994**
<S> <C> <C> <C> <C> <C> <C>
Premium Total
Return<F1> 8.12% 71.75% 184.18% 3.12% 70.75% 184.18%
Tax-Exempt
Income<F1><F6> 0.60 39.36 110.72 (3.66) 38.36 110.72
Convertible<F2> 1.50 39.07 80.61 (3.35) 38.07 80.61
High Income<F2><F6> 1.60 48.28 90.58 (2.59) 47.45 90.58
Global Bond<F3><F6> (1.19) 43.34 86.85 (5.32) 42.43 86.85
Diversified Strategic
Income<F4><F6> 0.66 -- 48.02 (3.49) -- 47.05
Utilities<F5> (9.52) 44.46 76.38 (13.68) 43.47 76.38
* Figures do not include the effect of the maximum sales charge or maxi-
mum applicable CDSC. If they had been included, it would have the ef-
fect of lowering the returns shown.
** Figures include the effect of the maximum sales charge or maximum ap-
plicable CDSC.
<F1> Fund commenced operations on September 16, 1985.
<F2> Fund commenced operations on September 2, 1986.
<F3> Fund commenced operations on October 27, 1986.
<F4> Fund commenced operations on December 28, 1989.
<F5> Fund commenced operations on March 28, 1988.
<F6> Prior to November 6, 1992 the maximum CDSC imposed on redemptions was
5%.
</TABLE>
The aggregate total returns (with fees waived) of the Class A and Class C
shares of the Funds indicated were as follows for the periods indicated:
<TABLE>
<CAPTION>
NO LOAD LOAD NO LOAD LOAD
PERIOD FROM PERIOD FROM
ONE YEAR ONE YEAR NOVEMBER 6, 1992 NOVEMBER 6, 1992
PERIOD ENDED PERIOD ENDED THROUGH THROUGH
NAME OF FUND JULY 31, 1994* JULY 31, 1994** JULY 31, 1994* JULY 31, 1994**
<S> <C> <C> <C> <C>
Premium Total Return
Class A 8.65% 3.22% 19.85% 13.86%
Class C 8.12 7.12 10.94 10.94
Tax-Exempt Income
Class A 1.14 (2.91) 11.49 7.03
Class C -- -- -- --
Convertible
Class A 1.99 (3.11) 14.87 9.13
Class C -- -- -- --
High Income
Class A 2.11 (2.48) 19.77 14.38
Class C -- -- -- --
Global Bond
Class A (0.67) (5.14) 6.98% 2.17%
Class C (1.19) (2.10) 4.93 4.93
Diversified Strategic
Income
Class A 1.16 (3.39) 10.57 5.60
Class C+ 0.66 (0.27) 4.09 4.09
Utilities
Class A 8.99 (13.54) 6.48 1.16
Class C++ (9.52) (10.35) (2.21) (2.21)
* Figures do not include the effect of the maximum sales charge or maxi-
mum applicable CDSC.
** Figures include the effect of the maximum sales charge or maximum ap-
plicable CDSC.
+ The Fund commenced selling Class C shares (previously designated as
Class D shares) on March 19, 1993.
++ The Fund commenced selling Class C shares (previously designated as
Class D shares) on February 4, 1993.
</TABLE>
It is important to note that the yield and total return figures set forth
above are based on historical earnings and are not intended to indicate
future performance.
A Class' performance will vary from time to time depending upon market
conditions, the composition of the relevant Fund's portfolio and operating
expenses and the expenses exclusively attributable to that Class. Conse-
quently, any given performance quotation should not be considered repre-
sentative of the Class' performance for any specified period in the fu-
ture. Because performance will vary, it may not provide a basis for com-
paring 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' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
company's portfolio securities.
TAXES
Set forth below is a summary of certain Federal income tax considerations
generally affecting the Trust and its shareholders. The summary is not in-
tended as a substitute for individual tax advice, and investors are urged
to consult their tax advisors with specific reference to their own Fed-
eral, state or local tax situations.
TAX STATUS OF THE FUNDS
Each Fund will be treated as a separate taxable entity for Federal income
tax purposes.
Each Fund has qualified and the Trust intends that each Fund continue to
qualify separately each year as a "regulated investment company" under the
Code. A qualified Fund will not be liable for Federal income taxes to the
extent its taxable net investment income and net realized capital gains
are distributed to its shareholders, provided that each Fund distributes
at least 90% of its net investment income. One of the several requirements
for qualification is that a Fund receive at least 90% of its gross income
each year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of equity or debt secu-
rities or foreign currencies, or other income (including but not limited
to gains from options, futures, or forward contracts) derived with respect
to the Fund's investment in such stock, securities, or currencies. The
Trust does not expect any Fund to have difficulty meeting this test.
To qualify as a regulated investment company, a Fund also must earn less
than 30% of its gross income from the disposition of securities held for
less than three months. The 30% test will limit the extent to which a Fund
may sell securities held for less than three months; effect short sales of
securities held for less than three months; write options which expire in
less than three months; and effect closing transactions with respect to
call or put options that have been written or purchased within the preced-
ing three months. (If a Fund purchases a put option for the purpose of
hedging an underlying portfolio security, the acquisition of the option is
treated as a short sale of the underlying security unless the option and
the security are acquired on the same date.) Finally, as discussed below,
this requirement also may limit investments by certain Funds in options on
stock indexes, options on nonconvertible debt securities, futures con-
tracts and options on futures contracts, and foreign currencies (or op-
tions, futures or forward contracts on foreign currencies) but only to the
extent that such foreign currencies are not directly related to the
Trust's principal business of investing in securities.
TAXATION OF INVESTMENT BY THE FUNDS
Gains or losses on sales of securities by a Fund generally will be long-
term capital gains or losses if the Fund has held the securities for more
than one year. Gains or losses on sales of securities held for not more
than one year generally will be short-term. If a Fund acquires a debt se-
curity at a substantial discount, a portion of any gain upon sale or re-
demption will be taxed as ordinary income, rather than capital gain, to
the extent that it reflects accrued market discount.
Options and Futures Transactions. The tax consequences of options trans-
actions entered into by a Fund will vary depending on the nature of the
underlying security, whether the option is written or purchased, and
whether the "straddle" rules, discussed separately below, apply to the
transaction. When a Fund writes a call or put option on an equity or con-
vertible debt security, it will receive a premium that will, subject to
the straddle rules, be treated as follows for tax purposes. If the option
expires unexercised, or if the Fund enters into a closing purchase trans-
action, the Fund will realize a gain (or loss if the cost of the closing
purchase transaction exceeds the amount of the premium) without regard to
any unrealized gain or loss on the underlying security. Any such gain or
loss will be a short-term capital gain or loss, except that any loss on a
"qualified" covered call stock option that is not treated as a part of a
straddle may be treated as long-term capital loss. If a call option writ-
ten by a Fund is exercised, the Fund will recognize a capital gain or loss
from the sale of the underlying security, and will treat the premium as
additional sales proceeds. Whether the gain or loss will be long-term or
short-term will depend on the holding period of the underlying security.
If a put option written by a Fund is exercised, the amount of the premium
will reduce the tax basis of the security that the Fund then purchases.
If a put or call option that a Fund has purchased on an equity or convert-
ible debt security expires unexercised, the Fund will realize capital loss
equal to the cost of the option. If the Fund enters into a closing sale
transaction with respect to the option, it will realize a capital gain or
loss (depending on whether the proceeds from the closing transaction are
greater or less than the cost of the option). The gain or loss will be
short-term or long-term, depending on the Fund's holding period in the op-
tion. If the Fund exercises such a put option, it will realize a short-
term capital gain or loss (long-term if the Fund holds the underlying se-
curity for more than one year before it purchases the put) from the sale
of the underlying security measured by the sales proceeds decreased by the
premium paid. If the Fund exercises such a call option, the premium paid
for the option will be added to the tax basis of the security purchased.
One or more Funds may invest in section 1256 contracts, and the Code im-
poses a special "mark-to-market" system for taxing these contracts. These
contracts generally include options on nonconvertible debt securities (in-
cluding United States government securities), options on stock indexes,
futures contracts, options on futures contracts and certain foreign cur-
rency contracts. Options on foreign currency, futures contracts on foreign
currency and options on foreign currency futures will qualify as "section
1256" contracts if the options or futures are traded on or subject to the
rules of a qualified board or exchange. Generally, most of the foreign
currency options and foreign currency futures and related options in which
certain Funds may invest will qualify as section 1256 contracts. In gen-
eral, gain or loss on section 1256 contracts will be taken into account
for tax purposes when actually realized (by a closing transaction, by ex-
ercise, by taking delivery or by other termination). In addition, any sec-
tion 1256 contracts held at the end of a taxable year will be treated as
sold at their year-end fair market value (that is, marked to the market),
and the resulting gain or loss will be recognized for tax purposes. Pro-
vided that section 1256 contracts are held as capital assets and are not
part of a straddle, both the realized and the unrealized year-end gain or
loss from these investment positions (including premiums on options that
expire unexercised) will be treated as 60% long-term and 40% short-term
capital gain or loss, regardless of the period of time particular posi-
tions actually are held by a Fund.
A portion of the mark-to-market gain on instruments held for less than
three months at the close of a Fund's taxable year may represent a gain on
securities held for less than three months for purposes of the 30% test
discussed above. Accordingly, a Fund may have to restrict its fourth-
quarter transactions in section 1256 contracts.
Straddles. While the mark-to-market system is limited to section 1256
contracts, the Code contains other rules applicable to transactions which
create positions which offset positions in section 1256 or other invest-
ment contracts. Those rules, applicable to "straddle" transactions, are
intended to eliminate any special tax advantages for such transactions.
"Straddles" are defined to include "offsetting positions" in actively-
traded personal property. Under current law, it is not clear under what
circumstances one investment made by a Fund, such as an option or futures
contract, would be treated as "offsetting" another investment also held by
the Fund, such as the underlying security (or vice versa) and, therefore,
whether the Fund would be treated as having entered into a straddle. In
general, investment positions may be "offsetting" if there is a substan-
tial diminution in the risk of loss from holding one position by reason of
holding one or more other positions (although certain "qualified" covered
call stock options written by a Fund may be treated as not creating a
straddle). Also, the forward currency contracts entered into by a Fund may
result in the creation of "straddles" for Federal income tax purposes.
If two (or more) positions constitute a straddle, a realized loss from one
position (including a mark-to-market loss) must be deferred to the extent
of unrecognized gain in an offsetting position. Also, the holding period
rules described above may be modified to recharacterize long-term gain as
short-term gain, or to recharacterize short-term loss as long-term loss,
in connection with certain straddle transactions. Furthermore, interest
and other carrying charges allocable to personal property that is part of
a straddle must be capitalized. In addition, "wash sale" rules apply to
straddle transactions to prevent the recognition of loss from the sale of
a position at a loss where a new offsetting position is or has been ac-
quired within a prescribed period. To the extent that the straddle rules
apply to positions established by a Fund, losses realized by the Fund may
be either deferred or recharacterized as long-term losses, and long-term
gains realized by the Fund may be converted to short-term gains.
If a Fund chooses to identify particular offsetting positions as being
components of a straddle, a realized loss will be recognized, but only
upon the liquidation of all of the components of the identified straddle.
Special rules apply to the treatment of "mixed" straddles (that is, strad-
dles consisting of a section 1256 contract and an offsetting position that
is not a section 1256 contract). If a Fund makes certain elections, the
section 1256 contract components of such straddles will not be subject to
the "60%/40%" mark-to-market rules. If any such election is made, the
amount, the nature (as long-or short-term) and the timing of the recogni-
tion of the Fund's gains or losses from the affected straddle positions
will be determined under rules that will vary according to the type of
election made.
Section 988. Foreign currency gain or loss from transactions in (a) bank
forward contracts not traded in the interbank market and (b) futures con-
tracts traded on a foreign exchange may be treated as ordinary income or
loss under Code section 988. A Fund may elect to have section 988 apply to
section 1256 contracts. Pursuant to that election, foreign currency gain
or loss from these transactions would be treated entirely as ordinary in-
come or loss when realized. A Fund will make the election necessary to
gain such treatment if the election is otherwise in the best interests of
the Fund.
TAXATION OF THE TRUST'S SHAREHOLDERS
Dividends paid by a Fund from investment income and distributions of
short-term capital gains will be taxable to shareholders as ordinary in-
come for Federal income tax purposes, whether received in cash or rein-
vested in additional shares. Distributions of long-term capital gains will
be taxable to shareholders as long-term capital gain, whether paid in cash
or reinvested in additional shares, and regardless of the length of time
that the shareholder has held his or her shares of the Fund.
Dividends of investment income (but not capital gains) from any Fund gen-
erally will qualify for the Federal dividends-received deduction for do-
mestic corporate shareholders to the extent that such dividends do not ex-
ceed the aggregate amount of dividends received by the Fund from domestic
corporations. If securities held by a Fund are considered to be "debt-
financed" (generally, acquired with borrowed funds), are held by the Fund
for less than 46 days (91 days in the case of certain preferred stock), or
are subject to certain forms of hedges or short sales, the portion of the
dividends paid by the Fund which corresponds to the dividends paid with
respect to such securities will not be eligible for the corporate
dividends-received deduction.
If a shareholder (a) incurs a sales charge in acquiring or redeeming Fund
shares and (b) disposes of those shares and acquires within 90 days after
the original acquisition, or (c) acquires within 90 days of the redemp-
tion, shares in a mutual fund for which the otherwise applicable sales
charge is reduced by reason of a reinvestment right (i.e., exchange privi-
lege), the original sales charge increases the shareholder's tax basis in
the original shares only to the extent the otherwise applicable sales
charge for the second acquisition is not reduced. The portion of the orig-
inal sales charge that does not increase the shareholder's tax basis in
the original shares would be treated as incurred with respect to the sec-
ond acquisition and, as a general rule, would increase the shareholder's
tax basis in the newly acquired shares. Furthermore, the same rule also
applies to a disposition of the newly acquired or redeemed shares made
within 90 days of the second acquisition. This provision prevents a share-
holder from immediately deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Capital Gains Distribution. As a general rule, a shareholder who redeems
or exchanges his or her shares will recognize long-term capital gain or
loss if the shares have been held for more than one year, and will recog-
nize short-term capital gain or loss if the shares have been held for one
year or less. However, if a shareholder receives a distribution taxable as
long-term capital gain with respect to shares of a Fund and redeems or ex-
changes the shares before he or she has held them for more than six
months, any loss on such redemption or exchange that is less than or equal
to the amount of the distribution will be treated as a long-term capital
loss.
Backup Withholding. If a shareholder fails to furnish a correct taxpayer
identification number, fails to fully report dividend or interest income,
or fails to certify that he or she has provided a correct taxpayer identi-
fication number and that he or she is not subject to such withholding,
then the shareholder may be subject to a 31% "backup withholding tax" with
respect to (a) any taxable dividends and distributions and (b) any pro-
ceeds of any redemption of Trust shares. An individual's taxpayer identi-
fication number is his or her social security number. The backup withhold-
ing tax is not an additional tax and may be credited against a sharehold-
er's regular Federal income tax liability.
Tax-Exempt Income Fund Because Tax-Exempt Income Fund will distribute
exempt-interest dividends, interest on indebtedness incurred by sharehold-
ers, directly or indirectly, to purchase or carry shares of the Fund will
not be deductible for Federal income tax purposes. If a shareholder re-
deems or exchanges shares of the Fund with respect to which he receives an
exempt-interest dividend before holding the shares for more than six
months, no loss will be allowed on the redemption or exchange to the ex-
tent of the dividend received. Also, that portion of any dividend from the
Fund which represents income from private activity bonds other than those
issued for charitable, educational and certain other purposes held by the
Fund may not retain its tax-exempt status in the hands of a shareholder
who is a "substantial user" of a facility financed by such bonds or a per-
son "related" to a substantial user. Investors should consult their own
tax advisors to see whether they may be substantial users or related per-
sons with respect to a facility financed by bonds in which the Fund may
invest. Moreover, investors receiving social security or certain other re-
tirement benefits should be aware that tax-exempt interest received from
the Fund may under certain circumstances cause up to one-half of such re-
tirement benefits to be subject to tax. If the Fund receives taxable in-
vestment income, it will designate as taxable the same percentage of each
dividend as the actual taxable income bears to the total investment income
earned during the period for which the dividend is paid. The percentage of
each dividend designated as taxable, if any, may, therefore, vary. Divi-
dends derived from interest from Municipal Securities which are exempt
from Federal tax also may be exempt from personal income taxes in the
state where the issuer is located, but in most cases will not be exempt
under the tax laws of other states or local authorities. Annual statements
will set forth the amount of interest from Municipal Securities earned by
the Fund in each state or possession in which issuers of portfolio securi-
ties are located.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated business trust under the laws
of the Commonwealth of Massachusetts pursuant to a Master Trust Agreement
dated March 12, 1985, as amended from time to time, and on November 5,
1992 the Trust filed an Amended and Restated Master Trust Agreement (the
"Trust Agreement"). The Trust commenced business as an investment company
on September 16, 1985, under the name Shearson Lehman Special Portfolios.
On February 21, 1986, December 6, 1988, August 27, 1990, November 5, 1992,
July 30, 1993 and October 14, 1994, the Trust changed its name to Shearson
Lehman Special Income Portfolios, SLH Income Portfolios, Shearson Lehman
Brothers Income Portfolios, Shearson Lehman Brothers Income Funds, Smith
Barney Shearson Income Funds and Smith Barney Income Funds, respectively.
Boston Safe, an indirect, wholly owned subsidiary of Mellon, is located at
One Boston Place, Boston, Massachusetts 02108, and serves as the custodian
of the Trust. Under its custodian agreement with the Trust, Boston Safe is
authorized to establish separate accounts for foreign securities owned by
the Trust to be held with foreign branches of other U.S. banks as well as
with certain foreign banks and securities depositaries. For its custody
services to the Trust, Boston Safe receives monthly fees based upon the
month-end aggregate net asset value of the Trust, plus certain charges for
securities transactions including out-of-pocket expenses, and costs of any
foreign and domestic sub-custodians. The assets of the Trust are held
under bank custodianship in compliance with the 1940 Act.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent. Under the transfer agency agreement, TSSG
maintains the shareholder account records for the Trust, handles certain
communications between shareholders and the Trust and distributes divi-
dends and distributions payable by each Fund. For these services TSSG re-
ceives from each Fund a monthly fee computed on the basis of the number of
shareholder accounts maintained during the year for each Fund and is reim-
bursed for certain out-of-pocket expenses.
FINANCIAL STATEMENTS
The Funds' Annual Reports for the fiscal year ended July 31, 1994, accom-
pany this Statement of Additional Information and are incorporated herein
by reference in their entirety.
APPENDIX
Description of Ratings
DESCRIPTION OF S&P CORPORATE BOND RATINGS
AAA
Bonds rated AAA have the highest rating assigned by S&P to a debt obliga-
tion. Capacity to pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay prin-
cipal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay inter-
est and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
BB, B AND CCC
Bonds rated BB and B are regarded, on balance, as predominantly specula-
tive with respect to capacity to pay interest and repay principal in ac-
cordance with the terms of the obligation. BB represents a lower degree of
speculation than B and CCC, the highest degrees 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.
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be 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 exceptionally
stable margin and principal is secure. While the various protective ele-
ments are likely to change, such changes as can be visualized are most un-
likely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because mar-
gins of protection may not be as large as in Aaa securities, or fluctua-
tion 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 which are rated A possess 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 fu-
ture.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest pay-
ments 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 which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of in-
terest 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 which are rated B generally lack characteristics of desirable in-
vestments. 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 de-
fault or present elements of danger may exist with respect to principal or
interest.
Moody's applies the numerical modifier 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the secu-
rity ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P MUNICIPAL BOND RATINGS
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. Qual-
ity of management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to re-
main, 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 cov-
enant, earnings test for issuance of additional bonds, debt service re-
serve requirements) are rigorous. There is evidence of superior manage-
ment.
AA
High Grade -- The investment characteristics of 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 although the bonds are somewhat more susceptible to
the adverse affects of changes in circumstances and economic conditions
than bonds in higher rated categories. This rating describes the third
strongest capacity for payment of debt service. Regarding municipal bonds,
the ratings differ 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 expen-
ditures, 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. Sta-
bility of the pledged revenues could show some variations because of in-
creased 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. Bonds
in this group are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection pa-
rameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
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 funda-
mental weakness, whereas the former shows only one deficiency among the
factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged rev-
enues 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 includes the lowest de-
gree 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 cat-
egories, except in the AAA-Prime Grade category.
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) 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 de-
termined to possess overwhelming safety characteristics are given the des-
ignation of SP-1+. Notes rated SP-2 have satisfactory capacity to pay
principal and interest.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be 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 excep-
tionally stable margin and principal is secure. While the various protec-
tive 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 which are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because mar-
gins of protection may not be as large as in Aaa securities, or fluctua-
tion 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 which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving se-
curity to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest pay-
ments 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 which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of in-
terest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterize bonds in this class.
B
Bonds which 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 which are rated Caa are of poor standing. Such issues may be in de-
fault or there may be present elements of danger with respect to principal
or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked short-
comings.
C
Bonds which 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 applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the secu-
rity ranks in the higher end of its generic ratings category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic ratings category.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS
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 recognizes the differences between short- and long-term credit
risk. Loans bearing the designation MIG 1/VMIG 1 are the best quality, en-
joying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for re-
financing, or both. Loans bearing the designation MIG 2/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/VMIG 3 are of favor-
able quality, with all security elements accounted for but lacking the un-
deniable strength of the preceding grades. Market access for refinancing,
in particular, is likely to be less well established. Loans bearing the
designation MIG 4/VMIG 4 are of adequate quality. Protection commonly re-
garded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
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 strength combined with strong liquidity char-
acteristics (typically, such issuers or guarantors would display credit
quality characteristics which would warrant a senior bond rating of A- or
higher) or the direct credit support of an issuer or guarantor that pos-
sesses above average long-term fundamental operating and financing capa-
bilities combined with ongoing excellent liquidity characteristics. Paper
rated A-1 must have 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 bor-
rowing; 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.
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: (a) evaluation of the management of the issuer; (b) eco-
nomic evaluation of the issuer's industry or industries and an appraisal
of speculative-type risks which may be inherent in certain areas; (c)
evaluation of the issuer's products in relation to competition and cus-
tomer acceptance; (d) liquidity; (e) amount and quality of long-term debt;
(f) trend of earnings over a period of ten years; (g) financial strength
of parent company and the relationships which exist with the issue; and
(h) 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.
Short-term obligations, including commercial paper, rated A-1+ by IBCA
Limited or its affiliate IBCA Inc. are obligations supported by the high-
est capacity for timely repayment. Obligations rated A-1 have a very
strong capacity for timely repayment. Obligations rated A-2 have a strong
capacity for timely repayment, although such capacity may be susceptible
to adverse changes in business, economic and financial conditions.
Thomson BankWatch employs the rating "TBW-1" as its highest category,
which indicates that the degree of safety regarding timely repayment of
principal and interest is very strong. "TBW-2" is its second highest rat-
ing category. While the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not as
high as for issues rated "TBW-1."
Fitch Investors Services, Inc. employs the rating F-1+ to indicate issues
regarded as having the strongest degree of assurance of timely payment.
The rating F-1 reflects an assurance of timely payment only slightly less
in degree than issues rated F-1+, while the rating F-2 indicated a satis-
factory degree of assurance of timely payment although the margin of
safety is not as great as indicated by the F-1+ and F-1 categories.
Duff & Phelps Inc. employs the designation of Duff 1 with respect to top
grade commercial paper and bank money instruments. Duff 1+ indicated the
highest certainty of timely payment: short-term liquidity is clearly out-
standing and safety is just below risk-free U.S. Treasury short-term obli-
gations. Duff 1- indicates high certainty of timely payment. Duff 2 indi-
cates good certainty of timely payment: liquidity factors and company fun-
damentals are sound.
Various NRSROs utilize rankings within ratings categories indicated by a +
or -. The Funds, in accordance with industry practice, recognize such rat-
ings within categories as gradations, viewing for example S&P's rating of
A-1+ and A-1 as being in S&P's highest rating category.
SMITH BARNEY
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
Smith Barney
INCOME FUNDS
PREMIUM TOTAL RETURN FUND
CONVERTIBLE FUND
GLOBAL BOND FUND
HIGH INCOME FUND
DIVERSIFIED STRATEGIC INCOME FUND
TAX-EXEMPT INCOME FUND
UTILITIES FUND
EXCHANGE RESERVE FUND
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 7, 1994
SMITH BARNEY INCOME FUNDS
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Reports for the fiscal year
ended July 31, 1994 and the Reports of Independent
Accountants are incorporated by reference to the
definitive 30b2-1 filed on October 20, 1994 as Accession # 0000053798-94-
000495
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
All references are to the Registrant's Registration Statement on form
N-1A as filed with the Securities and Exchange Commission (the "SEC") on
March 13, 1985. (File Nos. 2-96408 and 811-4254) (the "Registration
Statement").
(1)(a) Registrant's First Amended and Restated Master Trust
Agreement dated November 5, 1993 and Amendment No. 1 to the First Amended
and Restated Master Trust Agreement dated July 30, 1993 are incorporated by
reference to Post-Effective Amendment No. 36.
(b) Amendment No. 2 to the First Amended and Restated
Master Trust Agreement, dated October 14, 1994, is filed herein.
(c) Amendment No. 3 to the First Amended and Restated Master
Trust Agreement, dated October 14, 1994, is filed herein.
(2)(a) Registrant's By-Laws are incorporated by reference to the
Registration Statement.
(3) Not Applicable.
(4) Registrant's form of share certificates for Class A, B, C and Y
shares are incorporated by reference to Post-Effective Amendment No.36
(5)(a) Investment Advisory Agreements between the Registrant and
Greenwich Street Advisors Division of Mutual Management Corp. with respect
to Utilities, Convertible, High Income, Tax-Exempt Income, Money Market and
Premium Total Return Funds are incorporated by reference to Post-Effective
Amendment No. 36.
(b) Investment Advisory Agreement between the Registrant
and Greenwich Street Advisors Division of Mutual Management Corp. with
respect to Diversified Strategic Income Fund, dated March 21, 1994, is
filed herein.
(c) Investment Advisory Agreement between the Registrant and
Smith Barney Shearson Strategy Advisers Inc. with respect to Premium Total
Return Fund, dated July 15, 1994, is filed herein.
(d) Investment Advisory Agreement between the Registrant and
Smith Barney Global Capital Management, Inc. with respect to Global Bond
Fund, dated March 21, 1994, is filed herein.
(e) Sub-Investment Advisory Agreement between the Registrant and
Smith Barney Global Capital Management, Inc. with respect to Diversified
Strategic Income Fund, dated March 21, 1994, is filed herein.
(f) Sub-Investment Advisory Agreement between the Registrant and
The Boston Company Advisors, Inc. with respect to Premium Total Return
Fund, dated July 16, 1994, is filed herein.
(6) Distribution Agreement dated July 30, 1993 between the The
Registrant and Smith Barney Shearson Inc. is incorporated by reference to
Post-Effective Amendment No. 38.
(7) Not Applicable.
(8)(a) Custodian Agreement between the Registrant and Boston
Safe Deposit and Trust Company ("Boston Safe") is incorporated by reference
to Pre-Effective Amendment No. 1.
(b) Supplement to the Registrant's Custodian Agreement with
respect to SLH Diversified Strategic Income Portfolio is incorporated by
reference to Post-Effective Amendment No. 16.
(c) Sub-Custodian Agreement between the Registrant and Boston
Safe is incorporated by reference to Pre-Effective Amendment No. 3.
(9)(a) Administration Agreements between the Registrant and
Smith, Barney Advisers, Inc. with respect to Convertible Fund, Diversified
Strategic Income Fund, Global Bond Fund, High Income Fund, Money Market
Fund, Premium Total Return Fund, Tax-Exempt Fund and Utilities Fund (the
"Funds"), dated May 4, 1994, are filed herein.
(b) Sub-Administration Agreements between the Registrant
and The Boston Company Advisors, Inc. with respect to the Funds, dated May
4, 1994, are filed herein.
(c) Transfer Agency and Registrar Agreement dated August 4,
1993 between the Registrant and The Shareholder Services Group, Inc. is
incorporated by reference to Post-Effective Amendment No. 16.
(10) Not Applicable.
(11) Consent of Independent Accountants is filed herein..
(12) Not Applicable.
(13)(a) Purchase Agreements between the Registrant and Shearson
Lehman Hutton are incorporated by reference to Post-Effective Amendment No.
3. to the Registration Statement, filed on August 30, 1985 and Post-
Effective Amendment No. 2.
(b) Purchase Agreement between the Registrant and Shearson
Lehman Hutton relating to Money Market Portfolio is incorporated by
reference to Post-Effective Amendment No. 6.
(c) Purchase Agreement between the Registrant and Shearson
Lehman Hutton relating to Global Bond, Mortgage Securities, Convertible
Securities and High Income Bond Portfolios is incorporated by reference to
Post-Effective Amendment No. 7.
(d) Purchase Agreement between the Registrant and Shearson
Lehman Hutton with respect to SLH Diversified Strategic Income Portfolio is
incorporated by reference to Post-Effective Amendment No. 16.
(14) Not Applicable.
(15) Amended Services and Distribution Plans pursuant to Rule
12b-1 between the Registrant and Smith Barney Inc. with respect to the
Funds, dated November 7, 1994, are filed herein.
(16) Performance Data for Registrant is incorporated by reference to
Post-Effective Amendments Nos. 14, 15 and 30 to the Registration Statement
filed on September 30, 1988, December 30, 1988 and January 29, 1992,
respectively.
25. Persons Controlled by or Under Common Control with
Registrant
None.
26. Number of Holders of Securities
(1) (2)
Number of Record
Title of Class Holders by Class as of August 12,
1994
Beneficial
Interest, par value $.001
# per share
Class A Class B Class C
Class Y Class Z
Tax-Exempt Income 546 26,429 * * *
Convertible 258 8,977 1 * *
High Income 16,759 32,340 2 * 5
Premium Total Return 6,679 125,753 26 *
*
Global Bond 4,459 8,162 3 * *
Utilities 4,384 150,729 37 *
11
Diversified Strategic Income 5,076 126,871 37 *
6
Money Market * 16,423 * *
*
* The Fund does not presently offer this class of shares.
27. Indemnification
The response to this item is incorporated by reference to
Registrant's Post-Effective
Amendment No. 2.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Mutual Funds Management Inc., formerly
known as Smith, Barney
Advisers, Inc. ("SBMFM")
SBMFM was incorporated in December 1968 under the laws of the State of
Delaware. SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.) ("Holdings"), which
is in turn a wholly owned subsidiary of The Travelers Inc. (formerly known
as Primerica Corporation) ("Travelers"). SBMFM is registered as an
investment adviser under the Investment Advisers Act of 1940 (the "Advisers
Act").
The list required by this Item 28 of officers and directors of SBMFM,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and
directors during the past two fiscal years, is incorporated by reference to
Schedules A and D of FORM ADV filed by SBMFM pursuant to the Advisers Act
(SEC File No. 801-8314).
Prior to the close of business on November 7, 1994, Greenwich Street
Advisors served as investment adviser. Greenwich Street Advisors, through
its predecessors, has been in the investment counseling business since 1934
and is a division of Mutual Management Corp. ("MMC"). MMC was incorporated
in 1978 and is a wholly owned subsidiary of Holdings, which is in turn a
wholly owned subsidiary of Travelers. The list required by this Item 28 of
officers and directors of MMC and Greenwich Street Advisors, together with
information as to any other business, profession, vocation or employment of
a substantial nature engaged in by such officers and directors during the
past two fiscal years, is incorporated by reference to Schedules A and D of
FORM ADV filed by MMC on behalf of Greenwich Street Advisors pursuant to
the Advisers Act (SEC File No. 801-14437).
Prior to the close of business on July 30, 1993 (the "Closing"), Shearson
Lehman Advisors, a member of the Asset Management Group of Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers"), served as the Registrant's
investment adviser. On the Closing, Travelers and Smith Barney Inc.
(formerly known as Smith Barney Shearson Inc.) acquired the domestic retail
brokerage and asset management business of Shearson Lehman Brothers, which
included the business of the Registrant's prior investment adviser.
Shearson Lehman Brothers was a wholly owned subsidiary of Shearson Lehman
Brothers Holdings Inc. ("Shearson Holdings"). All of the issued and
outstanding common stock of Shearson Holdings (representing 92% of the
voting stock) was held by American Express Company. Information as to any
past business vocation or employment of a substantial nature engaged in by
officers and directors of Shearson Lehman Advisors can be located in
Schedules A and D of FORM ADV filed by Shearson Lehman Brothers on behalf
of Shearson Lehman Advisors prior to July 30, 1993. (SEC FILE NO. 801-
3701)
11/01/94
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Global Capital Management, Inc.
Investment Adviser - - Smith Barney Global Capital Management, Inc.
("SBGCM") was incorporated on January 22, 1988 under the laws of the State
of Delaware. SBGCM is an indirect wholly owned subsidiary of Smith Barney
Holdings Inc. (formerly known as Smith Barney Shearson Holdings Inc.),
which in turn is a wholly owned subsidiary of The Travelers Inc. (formerly
known as Primerica Corporation) ("Travelers"). SBGCM is an investment
adviser registered with the Securities and Exchange Commission in the
United States and with the Investment Management Regulatory Organization
Limited in the United Kingdom. SBGCM conducts its operations primarily in
the United Kingdom.
The list required by this Item 28 of officers and directors of SBGCM,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to
Schedules A and D of FORM ADV filed by SBGCM pursuant to the Advisers Act
(SEC File No. 801-31824).
11/01/94
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Strategy Advisers Inc.
Smith Barney Strategy Advisers Inc. ("Strategy Advisers") was incorporated
on October 22, 1986 under the laws of the State of Delaware. On June 1,
1994, Strategy Advisers changed its name from Smith Barney Strategy
Advisers Inc. to its current name. Strategy Advisers is a wholly owned
subsidiary of Smith Barney Mutual Funds Management Inc. (formerly known as
Smith, Barney Advisers, Inc.) ("SBMFM"), which was incorporated under the
laws of the state of Delaware in 1968. SBMFM is a wholly owned subsidiary
of Smith Barney Holdings Inc. (formerly known as Smith Barney Shearson
Holdings Inc.), which in turn is a wholly owned subsidiary of The Travelers
Inc. (formerly know as Primerica Corporation) ("Travelers"). Strategy
Advisers is registered as an investment adviser under the Investment
Adviser Act of 1940 (the "Advisers Act"). Strategy Advisers is also
registered with the Commodity Futures Trading Commission (the "CFTC") as a
commodity pool operator under the Commodity Exchange Act (the "CEA"), and
is a member of the National Futures Association (the "NFA").
The list required by this Item 28 of officers and directors of SBMFM and
Strategy Advisers, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by
such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of FORM ADV filed by SBMFM on behalf of
Strategy Advisers pursuant to the Advisers Act (SEC File No. 801-8314).
Prior to the close of business on July 30, 1993 (the "Closing"), Shearson
Lehman Investment Strategy Advisors Inc. ("Shearson Lehman Strategy
Advisors"), was a wholly owned subsidiary of Shearson Lehman Brothers Inc.
("Shearson Lehman Brothers"), and served as the Registrant's investment
adviser. On the Closing, Travelers and Smith Barney Inc. (formerly known
as Smith Barney Shearson Inc.) acquired the domestic retail brokerage and
asset management business of Shearson Lehman Brothers which included the
business of the Registrant's prior investment adviser. Shearson Lehman
Brothers was a wholly owned subsidiary of Shearson Lehman Brothers Holdings
Inc. ("Shearson Holdings"). All of the issued and outstanding common stock
of Shearson Holdings (representing 92% of the voting stock) was held by
American Express Company. Information as to any past business vocation or
employment of a substantial nature engaged in by officers and directors of
Shearson Lehman Investment Strategy Advisors can be located in Schedules A
and D of FORM ADV filed by Shearson Lehman Investment Strategy Advisors
prior to July 30, 1993. (SEC FILE NO. 801-28715)
11/01/94
Item 28(b). Business and Other Connections of Sub-Investment Adviser
Investment Adviser -- The Boston Company Advisors, Inc.
The Boston Company Advisors, Inc. ("Boston Advisors") is a wholly owned
subsidiary of The Boston Company, Inc., which is in turn a wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Mellon is a publicly
owned multibank holding company registered under the Federal Bank Holding
Company Act of 1956 and through its subsidiaries Mellon provides a
comprehensive range of financial products and services in domestic and
selected international markets. Boston Advisors is an investment adviser
registered under the Investment Advisers Act of 1940 (the "Advisers Act")
and serves as investment counsel for individuals with substantial capital,
executors, trustees and institutions. It also serves as investment
adviser, sub-investment adviser, administrator or sub-administrator to
numerous investment companies.
The list required by this Item 28 of officers and directors of Boston
Advisors, together with information as to any other business profession,
vocation or employment of a substantial nature engaged in by such officers
and directors during the past two years, is incorporated by reference to
Schedules A and D of FORM ADV filed by Boston Advisors pursuant to the
Advisers Act (SEC File No. 801-14158).
11/01/94
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as distributor for Smith
Barney Managed Municipals Fund Inc., Smith Barney New York Municipals Fund
Inc., Smith Barney California Municipals Fund Inc., Smith Barney
Massachusetts Municipals Fund, Smith Barney Global Opportunities Fund,
Smith Barney Aggressive Growth Fund Inc., Smith Barney Appreciation Fund
Inc., Smith Barney Principal Return Fund, Smith Barney Shearson Municipal
Money Market Fund Inc., Smith Barney Daily Dividend Fund Inc., Smith Barney
Government and Agencies Fund Inc., Smith Barney Managed Governments Fund
Inc., Smith Barney New York Municipal Money Market Fund, Smith Barney
California Municipal Money Market Fund, Smith Barney Income Funds, Smith
Barney Equity Funds, Smith Barney Investment Funds Inc., Smith Barney
Precious Metals and Minerals Fund Inc., Smith Barney Telecommunications
Trust, Smith Barney Arizona Municipals Fund Inc., Smith Barney New Jersey
Municipals Fund Inc., The USA High Yield Fund N.V., Garzarelli Sector
Analysis Portfolio N.V., The Advisors Fund L.P., Smith Barney Fundamental
Value Fund Inc., Smith Barney Series Fund, Consulting Group Capital Markets
Funds, Smith Barney Income Trust, Smith Barney Adjustable Rate Government
Income Fund, Smith Barney Florida Municipals Fund, Smith Barney Oregon
Municipals Fund, Smith Barney Funds, Inc., Smith Barney Muni Funds, Smith
Barney World Funds, Inc., Smith Barney Money Funds, Inc., Smith Barney Tax
Free Money Fund, Inc., Smith Barney Variable Account Funds, Smith Barney
U.S. Dollar Reserve Fund (Cayman), Worldwide Special Fund, N.V., Worldwide
Securities Limited, (Bermuda), Smith Barney International Fund (Luxembourg)
and various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Smith Barney Holdings
Inc. (formerly known as Smith Barney Holdings Inc.), which in turn is a
wholly owned subsidiary of The Travelers Inc. (formerly known as Primerica
Corporation) ("Travelers"). On June 1, 1994, Smith Barney changed its
name from Smith Barney Inc. to its current name. The information required
by this Item 29 with respect to each director, officer and partner of Smith
Barney is incorporated by reference to Schedule A of FORM BD filed by Smith
Barney pursuant to the Securities Exchange Act of 1934 (SEC File No. 812-
8510).
11/4/94
Location of Accounts and Records
(1) Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Income Funds
388 Greenwich Street
New York, New York 10013
(3) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(4) Smith Barney Global Capital Management, Inc.
10 Piccadilly
London W1V 9LA
United Kingdom
(5) Smith Barney Strategy Advisers Inc.
388 Greenwich Street
New York, New York 10013
(6) The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
(7) Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
(8) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Ma 02109
Management Services
Not Applicable.
Undertakings
(a) Registrant hereby undertakes to call a meeting of its shareholders
for the purpose of voting upon the question of removal of a trustee or
trustees of Registrant when requested to do so by the holders of at least
10% of Registrant's outstanding shares. Registrant undertakes further, in
connection with the meeting, to comply with the provisions of Section 16(c)
of the 1940 Act relating to communications with the shareholders of certain
common-law trusts.
485 (b) Certification
The Registrant hereby certifies that it meets all requirements for
effectiveness pursuant to Rule 485(b) under the Securities Act of 1933, as
amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant, SMITH
BARNEY INCOME FUNDS has duly caused this amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, State of New York on the 3rd day
of November, 1994.
SMITH BARNEY
INCOME FUNDS
By:/s/ Heath B. McLendon*
Heath B. McLendon, Chairman of the Board
Pursuant to the requirement of the Securities Act of 1933 Act, as
amended, this Amendment to the Registration statement and the above Power
of Attorney has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Heath B. McLendon* Chairman of the Board
11/3/94
Heath B. McLendon
/s/ Lewis E. Daidone** Treasurer (Chief Financial
11/3/94
Lewis E. Daidone and Accounting Officer)
Trustee
Lee Abraham
Trustee
Antoinette C. Bentley
/s/ Allan J. Bloostein* Trustee
11/3/94
Allan J. Bloostein
/s/ Richard E. Hanson* Trustee
11/3/94
Richard E. Hanson
/s/ Madelon DeVoe Talley* Trustee
11/3/94
Madelon DeVoe Talley
*Signed by Francis J. McNamara, III, their
duly authorized attorney-in-fact, pursuant
to power of attorney dated August 14, 1992.
/s/ Francis J. McNamara, III
Francis J. McNamara, III
** I, the undersigned, hereby constitute and appoint Heath B. McLendon,
Francis J. McNamara, III, Lee D. Augsburger and Ellen E. Crane and each of
them singly, my true and lawful attorneys, with full power to them and each
of them, to sign for me, and in my hand and in the capacities indicated
below, any and all Post-Effective Amendments to this Registration Statement
and to file the same, with all exhibits thereto, and other documents
therewith, with the Securities and Exchange Commission, granting unto said
attorneys, and each of them, acting alone, full authority and power to do
and perform each and every act and thing requisite or necessary to be done
in the premises, as fully to all intents and purposes as I might or could
do in person, hereby ratifying and confirming all that said attorneys or
any of them may lawfully do or cause to be done by virtue thereof.
WITNESS my hand on date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement and the above Power of Attorney has
been signed below by the following person in the capacity and on the date
indicated.
Signature Title Date
/s/Lewis E. Daidone Treasurer (Chief
Financial 9/8/94
Lewis E. Daidone and Accounting Officer)
shared/domestic/clients/shearson/funds/slip/pea40.doc
EXHIBIT 1(b)
SMITH BARNEY SHEARSON INCOME FUNDS
AMENDMENT NO. 2 TO THE FIRST AMENDED AND RESTATED MASTER TRUST AGREEMENT
(Change of Name of the Trust, Change of Names of Existing Sub-Trusts and
Change of Emeritus Policy )
The undersigned, Assistant Secretary of Smith Barney Shearson Income
Funds (the "Trust"), does hereby certify that pursuant to Article I,
Section 1.1 and Article VII, Section 7.3 of the First Amended and Restated
Master Trust Agreement dated November 5, 1992 ("Master Trust Agreement"),
which amended and restated the Master Trust Agreement dated March 12, 1985,
the following votes were duly adopted by the Board of Trustees at a Regular
Meeting of the Board held on August 10, 1994:
(Change of Name of the Trust)
VOTED: That the name of the Trust previously established and
designated pursuant to the Trust's Master Trust Agreement be modified and
amended as set forth below:
Current Name: Name as Amended:
Smith Barney Shearson Smith Barney
Income Funds ` Income Funds
; and further
(Change of Names of the Existing Sub-Trusts)
VOTED: That the names of the Sub-Trusts previously established and
designated pursuant to Section 4.2 be modified and amended as set forth
below:
Current Name: Name as Amended:
Smith Barney Shearson Smith Barney
Convertible Fund Convertible Fund
Smith Barney Shearson Smith Barney
Diversified Strategic Income Fund Diversified Strategic Income Fund
Smith Barney Shearson Smith Barney
Global Bond Fund Global Bond Fund
Smith Barney Shearson Smith Barney
High Income Fund High Income Fund
Smith Barney Shearson Smith Barney
Money Market Fund Exchange Reserve Fund
Smith Barney Shearson Smith Barney
Tax-Exempt Income Fund Tax-Exempt Income Fund
Smith Barney Shearson Smith Barney
Utilities Fund Utilities Fund
Smith Barney Shearson Smith Barney
Premium Total Return Premium Total Return
; and further
(Change of Emeritus Policy)
VOTED: That Article III, Section 3.1(c) of the Trust's Master Trust
Agreement be and is hereby amended by adding the following new provision:
Section 3.1(c)
A Trustee who has reached the age of seventy two (72) years may elect
the status of Trustee Emeritus provided that the Trustee has served for ten
(10) years as a member of the Board of the Trust or of the Board of
Trustees of another investment company distributed, advised or administered
by an entity under common control with the Trust's distributor, investment
adviser or administrator. Upon reaching eighty (80) years of age, a
Trustee must elect status as a Trustee Emeritus. (The foregoing provisions
shall not be deemed to restrict a Trustee's ability to resign.)
A Board Member designated as a Trustee Emeritus may attend meetings
of the Board of Trustees, however, he or she shall have no voting rights
and shall not be under a duty to manage or direct the business and affairs
of the Trust. A Trustee Emeritus shall not be deemed to stand in a
fiduciary relation to the Trust and shall not be responsible to discharge
the duties of a Trustee or to exercise that diligence, care or skill which
a Trustee would ordinarily be required to exercise under applicable laws.
In addition, a Trustee Emeritus shall be indemnified to the full extent
that an officer or Trustee of the Trustee may be indemnified under the
Trust's governing documents and applicable state and federal laws.
As long as a Board Member is a Trustee Emeritus, but in no event for
more than a period of ten (10) years, provided the Trust has net assets in
excess of $100 million, a Trustee Emeritus will receive 50% of the annual
retainer and annual meeting fees paid to active Board Members. In any
event, a Trustee Emeritus shall be entitled to reasonable out-of-pocket
expenses for each meeting attended; and further
VOTED: That the appropriate officers of the Fund be, and each hereby
is, authorized to execute and file any notices required to be filed
reflecting the foregoing changes; to execute amendments to the Fund's
Master Trust Agreement and By-Laws reflecting the foregoing change; and to
execute and file all requisite certificates, documents and instruments and
to take such other actions required to cause said amendment to become
effective and to pay all requisite fees and expenses incident thereto.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand
this 14th day of October, 1994.
/s/ Lee D. Augsburger
Lee D. Augsburger
Assistant Secretary
s:\shared\domestic\clients\shearson\funds\slip\namech2.doc
EXHIBIT 1(c)
SMITH BARNEY INCOME FUNDS
AMENDMENT NO. 3 TO THE FIRST AMENDED AND RESTATED
MASTER TRUST AGREEMENT
WHEREAS, Section 4.1 of the First Amended And Restated Master Trust
Agreement
of Smith Barney Income Funds (the "Trust") dated November 5, 1992, as
amended,
authorizes the Trustees of the Trust to issue classes of shares of any Sub-
Trust or divide the
Shares of any Sub-Trust into classes, having different dividend,
liquidation, voting and other
rights as the Trustees may determine;
WHEREAS, the Trustees have previously established and designated four
classes of
shares, Classes A, B, C and D for each of the eight Sub-Trusts of the
Trust: Smith Barney
Convertible Fund, Smith Barney Diversified Strategic Income Fund, Smith
Barney Global
Bond Fund, Smith Barney High Income Fund, Smith Barney Exchange Reserve
Fund, Smith
Barney Premium Total Return Fund, Smith Barney Tax-Exempt Income Fund, and
Smith
Barney Utilities Fund;
WHEREAS, the Trustees unanimously voted on August 10, 1994 to
redesignate the
existing Class C shares of each Sub-Trust as Class Z shares, such change to
be effective
concurrently with the effectiveness of the Trust's registration statement
describing said Class
Z shares;
WHEREAS, the Trustees unanimously voted on August 10, 1994 to
redesignate the
existing Class D shares of each Sub-Trust as Class C shares, such change to
be effective
concurrently with the effectiveness of the Trust's registration statement
describing said Class
C shares; and
WHEREAS, the Trustees unanimously voted on August 10, 1994 to
establish and
designate a new class of shares of each Sub-Trust as Class Y shares.
NOW, THEREFORE, the undersigned Assistant Secretary of the Trust
hereby states
as follows:
1. That, pursuant to the vote of the Trustees, (i) the existing
class of shares of
the aforementioned Sub-Trusts heretofore designated as Class C shares be
redesignated as
Class Z shares; and (ii) the existing class of shares of the
aforementioned Sub-Trusts
heretofore designated as Class D shares be redesignated as Class C shares;
such changes to
become effective concurrently with the effectiveness of the Trust's
registration statement
describing the redesignated Class Z and Class C shares. Each such class of
shares shall have
the rights and preferences as set forth in the Prospectus of each Sub-Trust
dated November
7, 1994, as such Prospectus may be further amended from time to time.
2. That, pursuant to the vote of the Trustees, each of the
aforementioned Sub-
Trusts be divided into an additional class of shares established and
designated as Class Y
shares. Such class of shares shall have the rights and preferences as set
forth in the
Prospectus of each Sub-Trust dated November 7, 1994, as such Prospectus may
be further
amended from time to time.
IN WITNESS WHEREOF, the undersigned hereby sets his hand this ___ day
of
November, 1994.
SMITH BARNEY INCOME FUNDS
/s/ Lee D. Augsburger
By: Lee D. Augsburger
Title: Assistant Secretary
123777.c1
s:\domestic\clients\shearson\funds\slip\amend3.doc
EXHIBIT 5(b)
ADVISORY AGREEMENT
SMITH BARNEY SHEARSON INCOME FUNDS
(Smith Barney Shearson Diversified Strategic Income Fund)
March 21, 1994
The Greenwich Street Advisors Division of
Mutual Management Corp.
Two World Trade Center
New York, New York 10048
Dear Sirs:
Smith Barney Shearson Income Funds (the "Company"), a trust organized
under the laws of the Commonwealth of Massachusetts, confirms its agreement
with the Greenwich Street Advisors Division of Mutual Management Corp. (the
"Adviser"), as follows:
1. Investment Description; Appointment
The Company desires to employ its capital relating to its Smith
Barney Shearson Diversified Strategic Income Fund (the "Fund") by investing
and reinvesting in investments of the kind and in accordance with the
investment objective(s), policies and limitations specified in its Master
Trust Agreement, as amended from time to time (the "Master Trust
Agreement"), in the prospectus (the "Prospectus") and the statement of
additional information (the "Statement") filed with the Securities and
Exchange Commission as part of the Company's Registration Statement on Form
N-1A, as amended from time to time, and in the manner and to the extent as
may from time to time be approved by the Board of Trustees of the Company
(the "Board"). Copies of the Prospectus, the Statement and the Master
Trust Agreement have been or will be submitted to the Adviser. The Company
agrees to provide copies of all amendments to the Prospectus, the Statement
and the Master Trust Agreement to the Adviser on an on-going basis. The
Company desires to employ and hereby appoints the Adviser to act as the
Fund's investment adviser with respect to all assets other than foreign
securities ("domestic assets"), for which Smith Barney Global Capital
Management, Inc. ("Global Captial Management") acts as sub-investment
adviser. The Adviser accepts the appointment and agrees to furnish the
services for the compensation set forth below.
2. Services as Investment Adviser
Subject to the supervision, direction and approval of the Board of
the Company, the Adviser will (a) manage the Fund's holdings of domestic
assets in accordance with the Fund's investment objective(s) and policies
as stated in the Master Trust Agreement, the Prospectus and the Statement;
(b) make investment decisions concerning domestic assets for the Fund; (c)
place purchase and sale orders for portfolio transactions for domestic
assets on behalf of the Fund; and (d) employ professional portfolio
managers and securities analysts who provide research services to the Fund.
In providing those services, the Adviser will conduct a continual program
of investment, evaluation and, if appropriate, sale and reinvestment of the
Fund's domestic assets.
3. Brokerage
In selecting brokers or dealers to execute transactions on behalf of
the Fund, the Adviser will seek the best overall terms available. In
assessing the best overall terms available for any transaction, the Adviser
will consider factors it deems relevant, including, but not limited to, the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and
the reasonableness of the commission, if any, for the specific transaction
and on a continuing basis. In selecting brokers or dealers to execute a
particular transaction, and in evaluating the best overall terms available,
the Adviser is authorized to consider the brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act
of 1934), provided to the Fund and/or other accounts over which the Adviser
or its affiliates exercise investment discretion.
4. Information Provided to the Company
The Adviser will keep the Company informed of developments materially
affecting the Fund's domestic holdings, and will, on its own initiative,
furnish the Company from time to time with whatever information the Adviser
believes is appropriate for this purpose.
5. Standard of Care
The Adviser shall exercise its best judgment in rendering the
services listed in paragraphs 2 and 3 above. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Company in connection with the matters to which this Agreement
relates, provided that nothing in this Agreement shall be deemed to protect
or purport to protect the Adviser against any liability to the Company or
to its shareholders of the Fund to which the Adviser would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence on
its part in the performance of its duties or by reason of the Adviser's
reckless disregard of its obligations and duties under this Agreement.
6. Compensation
In consideration of the services rendered pursuant to this Agreement,
the Fund will pay the Adviser on the first business day of each month a fee
for the previous month at the annual rate of .45 of 1.00% of the Fund's
average daily net assets. The fee for the period from the Effective Date
(defined below) of the Agreement to the end of the month during which the
Effective Date occurs shall be prorated according to the proportion that
such period bears to the full monthly period. Upon any termination of this
Agreement before the end of a month, the fee for such part of that month
shall be prorated according to the proportion that such period bears to the
full monthly period and shall be payable upon the date of termination of
this Agreement. For the purpose of determining fees payable to the
Adviser, the value of the Fund's net assets shall be computed at the times
and in the manner specified in the Prospectus and/or the Statement.
7. Expenses
The Adviser will bear all expenses in connection with the performance
of its services under this Agreement and will pay (a) to Global Capital
Management, as sub-investment adviser to the Fund under the Sub-Investment
Advisory Agreement dated of even date herewith among the Company, the
Adviser and Global Capital Management, as amended from time to time, and
(b) to any additional or substitute sub-investment adviser or advisers
retained by the Adviser to provide advisory services to the Fund with
respect to non-U.S. investments (together with Global Capital Management,
each a "Sub-Adviser"), the fees required to be paid to each Sub-Adviser.
The Fund will bear certain other expenses to be incurred in its operation,
including, but not limited to, investment advisory, sub-advisory and
administration fees, other than those payable to a Sub-Adviser or any
additional or substitute investment adviser; fees for necessary
professional and brokerage services; fees for any pricing service; the
costs of regulatory compliance; and costs associated with maintaining the
Company's legal existence and shareholder relations.
8. Reduction of Fee
If in any fiscal year the aggregate expenses of the Fund (including
fees pursuant to this Agreement and the Fund's administration agreements,
but excluding interest, taxes, brokerage and extraordinary expenses) exceed
the expense limitation of any state having jurisdiction over the Fund, the
Adviser will reduce its fee to the Fund by the proportion of such excess
expense equal to the proportion that its fee thereunder bears to the
aggregate of fees paid by the Fund for investment advice and administration
in that year, to the extent required by state law. A fee reduction
pursuant to this paragraph 8, if any, will be estimated, reconciled and
paid on a monthly basis.
9. Services to Other Companies or Accounts
The Company understands that the Adviser now acts, will continue to
act and may act in the future as investment adviser to fiduciary and other
managed accounts, and as investment adviser to other investment companies,
and the Company has no objection to the Adviser's so acting, provided that
whenever the Fund and one or more other investment companies advised by the
Adviser have available funds for investment, investments suitable and
appropriate for each will be allocated in accordance with a formula
believed to be equitable to each company. The Fund recognizes that in some
cases this procedure may adversely affect the size of the position
obtainable for the Fund. In addition, the Fund understands that the
persons employed by the Adviser to assist in the performance of the
Adviser's duties under this Agreement will not devote their full time to
such service and nothing contained in this Agreement shall be deemed to
limit or restrict the right of the Adviser or any affiliate of the Adviser
to engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
10. Term of Agreement
This Agreement shall become effective March 21, 1994 (the "Effective
Date") and shall continue for an initial two-year term and shall continue
thereafter so long as such continuance is specifically approved at least
annually by (i) the Board of the Company or (ii) a vote of a "majority" (as
that term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Fund's outstanding voting securities, provided that in
either event the continuance is also approved by a majority of the Board
who are not "interested persons" (as defined in the 1940 Act) of any party
to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable, without
penalty, on 60 days' written notice, by the Board of the Company or by vote
of holders of a majority of the Fund's shares, or upon 90 days' written
notice, by the Adviser. This Agreement will also terminate automatically
in the event of its assignment (as defined in the 1940 Act and the rules
thereunder).
11. Representation by the Company
The Company represents that a copy of the Master Trust Agreement is
on file with the Secretary of The Commonwealth of Massachusetts.
12. Limitation of Liability
The Company and the Adviser agree that the obligations of the Company
under this Agreement shall not be binding upon any of the members of the
Board, shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Company, individually, but are binding only upon
the assets and property of the Company, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement have been
authorized by the Board and a majority of the holders of the Fund's
outstanding voting securities, and signed by an authorized officer of the
Company, acting as such, and neither such authorization by such members of
the Board and shareholders nor such execution and delivery by such officer
shall be deemed to have been made by any of them individually or to impose
any liability on any of them personally, but shall bind only the assets and
property of the Company as provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
SMITH BARNEY SHEARSON
INCOME FUNDS
By:_/s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman of the Board
Accepted:
THE GREENWICH STREET ADVISORS
DIVISION OF MUTUAL MANAGEMENT CORP.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
4
shared domesic clients shearson funds slip dsip advis2ds. doc
EXHIBIT 5(c)
ADVISORY AGREEMENT
SMITH BARNEY SHEARSON INCOME FUNDS
(Smith Barney Shearson Premium Total Return Fund)
July 16, 1994
Smith Barney Shearson Strategy Advisers Inc.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
Smith Barney Shearson Income Funds (the "Company"), a trust organized
under the laws of the Commonwealth of Massachusetts, confirms its agreement
with Smith Barney Shearson Strategy Advisers Inc. (the "Adviser"), as
follows:
1. Investment Description; Appointment
The Company desires to employ its capital relating to its Smith
Barney Shearson Premium Total Return Fund (the "Fund") by investing and
reinvesting in investments of the kind and in accordance with the
investment objective(s), policies and limitations specified in its Master
Trust Agreement, as amended from time to time (the "Master Trust
Agreement"), in the prospectus (the "Prospectus") and the statement of
additional information (the "Statement") filed with the Securities and
Exchange Commission as part of the Company's Registration Statement on Form
N-1A, as amended from time to time, and in the manner and to the extent as
may from time to time be approved by the Board of Trustees of the Company
(the "Board"). Copies of the Prospectus, the Statement and the Master
Trust Agreement have been or will be submitted to the Adviser. The Company
agrees to provide copies of all amendments to the Prospectus, the Statement
and the Master Trust Agreement to the Adviser on an on-going basis. The
Company desires to employ and hereby appoints the Adviser to act as the
Fund's investment adviser. The Adviser accepts the appointment and agrees
to furnish the services for the compensation set forth below.
2. Services as Investment Adviser
Subject to the supervision, direction and approval of the Board of
the Company, the Adviser will: (a) manage the Fund's portfolio in
accordance with the Fund's investment objective(s) and policies as stated
in the Master Trust Agreement, the Prospectus and the Statement; (b) make
investment decisions for the Fund; (c) place purchase and sale orders for
portfolio transactions for the Fund; and (d) employ professional portfolio
managers and securities analysts who provide research services to the Fund.
In providing those services, the Adviser will conduct a continual program
of investment, evaluation and, if appropriate, sale and reinvestment of the
Fund's assets. The Adviser may, with the approval of the Board and the
shareholders of the Fund (to the extent required by applicable law), from
time to time, sub-contract with one or more sub-investment advisers to
provide some or all of the services required under this agreement.
3. Brokerage
In selecting brokers or dealers to execute transactions on behalf of
the Fund, the Adviser will seek the best overall terms available. In
assessing the best overall terms available for any transaction, the Adviser
will consider factors it deems relevant, including, but not limited to, the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and
the reasonableness of the commission, if any, for the specific transaction
and on a continuing basis. In selecting brokers or dealers to execute a
particular transaction, and in evaluating the best overall terms available,
the Adviser is authorized to consider the brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act
of 1934), provided to the Fund and/or other accounts over which the Adviser
or its affiliates exercise investment discretion.
4. Information Provided to the Company
The Adviser will keep the Company informed of developments materially
affecting the Fund's portfolio, and will, on its own initiative, furnish
the Company from time to time with whatever information the Adviser
believes is appropriate for this purpose.
5. Standard of Care
The Adviser shall exercise its best judgment in rendering the
services listed in paragraphs 2 and 3 above. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Company in connection with the matters to which this Agreement
relates, provided that nothing in this Agreement shall be deemed to protect
or purport to protect the Adviser against any liability to the Company or
its shareholders of the Fund to which the Adviser would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence on
its part in the performance of its duties or by reason of the Adviser's
reckless disregard of its obligations and duties under this Agreement.
6. Compensation
In consideration of the services rendered pursuant to this Agreement,
the Fund will pay the Adviser on the first business day of each month a fee
for the previous month at the annual rate of .55 of 1.00% of the Fund's
average daily net assets. The fee for the period from the Effective Date
(defined below) of the Agreement to the end of the month during which the
Effective Date occurs shall be prorated according to the proportion that
such period bears to the full monthly period. Upon any termination of this
Agreement before the end of a month, the fee for such part of that month
shall be prorated according to the proportion that such period bears to the
full monthly period and shall be payable upon the date of termination of
this Agreement. For the purpose of determining fees payable to the
Adviser, the value of the Fund's net assets shall be computed at the times
and in the manner specified in the Prospectus and/or the Statement.
7. Expenses
The Adviser will bear all expenses in connection with the performance
of its services under this Agreement and will pay (a) to The Boston Company
Advisors, Inc. ("Boston Advisors"), as sub-investment adviser to the Fund
under the Sub-Investment Advisory Agreement dated of even date herewith
among the Company, the Adviser and Boston Advisors, as amended from time to
time, and (b) to any additional or substitute sub-investment adviser or
advisers retained by the Adviser to provide advisory services to the Fund
(together with Boston Advisors, each a "Sub-Adviser"), the fees required to
be paid to each Sub-Adviser. The Fund will bear certain other expenses to
be incurred in its operation, including, but not limited to, investment
advisory and administration fees, other than those payable to a Sub-Adviser
or any additional or substitute investment adviser; fees for necessary
professional and brokerage services; fees for any pricing service; the
costs of regulatory compliance; and costs associated with maintaining the
Company's legal existence and shareholder relations.
8. Reduction of Fee
If in any fiscal year the aggregate expenses of the Fund (including
fees pursuant to this Agreement and the Fund's sub-investment advisory and
administration agreements, but excluding interest, taxes, brokerage and
extraordinary expenses) exceed the expense limitation of any state having
jurisdiction over the Fund, the Adviser will reduce its fee to the Fund by
the proportion of such excess expense equal to the proportion that its fee
thereunder bears to the aggregate of fees paid by the Fund for investment
advice and administration in that year, to the extent required by state
law. A fee reduction pursuant to this paragraph 8, if any, will be
estimated, reconciled and paid on a monthly basis.
9. Services to Other Companies or Accounts
The Company understands that the Adviser now acts, will continue to
act and may act in the future as investment adviser to fiduciary and other
managed accounts, and as investment adviser to other investment companies,
and the Company has no objection to the Adviser's so acting, provided that
whenever the Fund and one or more other investment companies advised by the
Adviser have available funds for investment, investments suitable and
appropriate for each will be allocated in accordance with a formula
believed to be equitable to each company. The Fund recognizes that in some
cases this procedure may adversely affect the size of the position
obtainable for the Fund. In addition, the Fund understands that the
persons employed by the Adviser to assist in the performance of the
Adviser's duties under this Agreement will not devote their full time to
such service and nothing contained in this Agreement shall be deemed to
limit or restrict the right of the Adviser or any affiliate of the Adviser
to engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
10. Term of Agreement
This Agreement shall become effective July 16, 1994 (the "Effective
Date") and shall continue for an initial two-year term and shall continue
thereafter so long as such continuance is specifically approved at least
annually by (i) the Board of the Company or (ii) a vote of a "majority" (as
that term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) of the Fund's outstanding voting securities, provided that in
either event the continuance is also approved by a majority of the Board
who are not "interested persons" (as defined in the 1940 Act) of any party
to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable, without
penalty, on 60 days' written notice, by the Board of the Company or by vote
of holders of a majority of the Fund's shares, or upon 90 days' written
notice, by the Adviser. This Agreement will also terminate automatically
in the event of its assignment (as defined in the 1940 Act and the rules
thereunder).
11. Representation by the Company
The Company represents that a copy of the Master Trust Agreement is
on file with the Secretary of The Commonwealth of Massachusetts.
12. Limitation of Liability
The Company and the Adviser agree that the obligations of the Company
under this Agreement shall not be binding upon any of the members of the
Board, shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Company, individually, but are binding only upon
the assets and property of the Company, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement have been
authorized by the Board and a majority of the holders of the Fund's
outstanding voting securities, and signed by an authorized officer of the
Company, acting as such, and neither such authorization by such members of
the Board and shareholders nor such execution and delivery by such officer
shall be deemed to have been made by any of them individually or to impose
any liability on any of them personally, but shall bind only the assets and
property of the Company as provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
SMITH BARNEY SHEARSON
INCOME FUNDS
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman of the Board
Accepted:
SMITH BARNEY SHEARSON STRATEGY ADVISERS INC.
By: /s/ Christina T. Sydor
Name:Christina T. Sydor
Title: Secretary
shearson2\inccequit\slip\prtn\advis2ds.doc
F-5
EXHIBIT 5(d)
ADVISORY AGREEMENT
SMITH BARNEY SHEARSON INCOME FUNDS
(Smith Barney Shearson Global Bond Fund)
March 21, 1994
Smith Barney Global Capital Management, Inc.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
Smith Barney Shearson Income Funds (the "Fund"), a trust organized
under the laws of the Commonwealth of Massachusetts, confirms its agreement
between Smith Barney Shearson Global Bond Fund and Smith Barney Global
Capital Management, Inc. (the "Adviser"), as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital, relating to its Smith Barney
Shearson Global Bond Fund, by investing and reinvesting in investments of
the kind and in accordance with the investment objective(s), policies and
limitations specified in its Master Trust Agreement, as amended from time
to time (the "Master Trust Agreement"), in the prospectus (the
"Prospectus") and the statement of additional information (the "Statement")
filed with the Securities and Exchange Commission as part of the Fund's
Registration Statement on Form N-1A, as amended from time to time, and in
the manner and to the extent as may from time to time be approved by the
Board of Trustees of the Fund (the "Board"). Copies of the Prospectus, the
Statement and the Master Trust Agreement have been or will be submitted to
the Adviser. The Fund agrees to provide copies of all amendments to the
Prospectus, the Statement and the Master Trust Agreement to the Adviser on
an on-going basis. The Fund desires to employ and hereby appoints the
Adviser to act as the investment adviser to the Fund. The Adviser accepts
the appointment and agrees to furnish the services for the compensation set
forth below.
2. Services as Investment Adviser
Subject to the supervision, direction and approval of the Board of
the Fund, the Adviser will: (a) manage the Fund's holdings in accordance
with the
Fund's investment objective(s) and policies as stated in the Master Trust
Agreement, the Prospectus and the Statement; (b) make investment decisions
for the Fund; (c) place purchase and sale orders for portfolio transactions
for the Fund; and (d) employ professional portfolio managers and securities
analysts who provide research services to the Fund. In providing those
services, the Adviser will conduct a continual program of investment,
evaluation and, if appropriate, sale and reinvestment of the Fund's assets.
3. Brokerage
In selecting brokers or dealers to execute transactions on behalf of
the Fund, the Adviser will seek the best overall terms available. In
assessing the best overall terms available for any transaction, the Adviser
will consider factors it deems relevant, including, but not limited to, the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and
the reasonableness of the commission, if any, for the specific transaction
and on a continuing basis. In selecting brokers or dealers to execute a
particular transaction, and in evaluating the best overall terms available,
the Adviser is authorized to consider the brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange Act
of 1934), provided to the Fund and/or other accounts over which the Adviser
or its affiliates exercise investment discretion.
4. Information Provided to the Fund
The Adviser will keep the Fund informed of developments materially
affecting the Fund's holdings, and will, on its own initiative, furnish the
Fund from time to time with whatever information the Adviser believes is
appropriate for this purpose.
5. Standard of Care
The Adviser shall exercise its best judgment in rendering the
services listed in paragraphs 2 and 3 above. The Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the matters to which this Agreement relates,
provided that nothing in this Agreement shall be deemed to protect or
purport to protect the Adviser against any liability to the Fund or to its
shareholders to which the
Adviser would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or
by reason of the Adviser's reckless disregard of its obligations and duties
under this Agreement.
6. Compensation
In consideration of the services rendered pursuant to this Agreement,
the Fund will pay the Adviser on the first business day of each month a fee
for the previous month at the annual rate of .60 of 1.00% of the Fund's
average daily net assets. The fee for the period from the Effective Date
(defined below) of the Agreement to the end of the month during which the
Effective Date occurs shall be prorated according to the proportion that
such period bears to the full monthly period. Upon any termination of this
Agreement before the end of a month, the fee for such part of that month
shall be prorated according to the proportion that such period bears to the
full monthly period and shall be payable upon the date of termination of
this Agreement. For the purpose of determining fees payable to the
Adviser, the value of the Fund's net assets shall be computed at the times
and in the manner specified in the Prospectus and/or the Statement.
7. Expenses
The Adviser will bear all expenses in connection with the performance
of its services under this Agreement. The Fund will bear certain other
expenses to be incurred in its operation, including, but not limited to,
investment advisory and administration fees; fees for necessary
professional and brokerage services; fees for any pricing service; the
costs of regulatory compliance; and costs associated with maintaining the
Fund's legal existence and shareholder relations.
8. Reduction of Fee
If in any fiscal year the aggregate expenses of the Fund (including
fees pursuant to this Agreement and the Fund's administration agreements,
but excluding interest, taxes, brokerage and extraordinary expenses) exceed
the expense limitation of any state having jurisdiction over the Fund, the
Adviser will reduce its fee to the Fund by the proportion of such excess
expense equal to the proportion that its fee thereunder bears to the
aggregate of fees paid by the Fund for investment advice and administration
in that year, to the extent required by state law. A fee reduction
pursuant to this paragraph 8, if any, will be estimated, reconciled and
paid on a monthly basis.
9. Services to Other Companies or Accounts
The Fund understands that the Adviser now acts, will continue to act
and may act in the future as investment adviser to fiduciary and other
managed
accounts, and as investment adviser to other investment companies, and the
Fund has no objection to the Adviser's so acting, provided that whenever
the Fund and one or more other investment companies advised by the Adviser
have available funds for investment, investments suitable and appropriate
for each will be allocated in accordance with a formula believed to be
equitable to each company. The Fund recognizes that in some cases this
procedure may adversely affect the size of the position obtainable for the
Fund. In addition, the Fund understands that the persons employed by the
Adviser to assist in the performance of the Adviser's duties under this
Agreement will not devote their full time to such service and nothing
contained in this Agreement shall be deemed to limit or restrict the right
of the Adviser or any affiliate of the Adviser to engage in and devote time
and attention to other businesses or to render services of whatever kind or
nature.
10. Term of Agreement
This Agreement shall become effective as of March 21, 1994, (the
"Effective Date") and shall continue for an initial two-year term and shall
continue thereafter so long as such continuance is specifically approved at
least annually by (i) the Board of the Fund or (ii) a vote of a "majority"
(as that term is defined in the Investment Fund Act of 1940, as amended
(the "1940 Act")) of the Fund's outstanding voting securities, provided
that in either event the continuance is also approved by a majority of the
Board who are not "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable, without
penalty, on 60 days' written notice, by the Board of the Fund or by vote of
holders of a majority of the Fund's shares, or upon 90 days' written
notice, by the Adviser. This Agreement will also terminate automatically
in the event of its assignment (as defined in the 1940 Act and the rules
thereunder).
11. Representation by the Fund
The Fund represents that a copy of the Master Trust Agreement is on
file with the Secretary of The Commonwealth of Massachusetts.
12. Limitation of Liability
The Fund and the Adviser agree that the obligations of the Fund under
this Agreement shall not be binding upon any of the members of the Board,
shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund, individually, but are binding only upon the
assets and property of the Fund, as provided in the Master Trust Agreement.
The execution and delivery of this Agreement have been authorized by the
Board and a majority of the holders of the Fund's outstanding voting
securities, and signed by an authorized officer of the Fund, acting as
such, and neither such authorization by such members of the Board and
shareholders nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the assets and
property of the Fund as provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
SMITH BARNEY SHEARSON
INCOME FUNDS
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman of the Board
Accepted:
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT, INC.
By: /s/ Bruce D. Sargent
Name: Bruce D. Sargent
Title: President
shared domestic clients shearson funds slip glos advis3
EXHIBIT 5(e)
SUB-INVESTMENT ADVISORY AGREEMENT
SMITH BARNEY SHEARSON INCOME FUNDS
(Smith Barney Shearson Diversified Strategic Income Fund)
March 21, 1994
Smith Barney Global Capital Management, Inc.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
Smith Barney Shearson Income Funds (the "Company"), a trust organized
under the laws of the Commonwealth of Massachusetts and the Greenwich
Street Advisors Division of Mutual Management Corp. (the "Adviser"), each
confirms its agreement with Smith Barney Global Capital Management, Inc.
(the "Sub-Adviser"), as follows:
1. Investment Description; Appointment
The Company desires to employ its capital relating to its Smith
Barney Shearson Diversified Strategic Income Fund (the "Fund") by investing
and reinvesting in investments of the kind and in accordance with the
investment objective(s), policies and limitations specified in its Master
Trust Agreement, as amended from time to time (the "Master Trust
Agreement"), in the prospectus (the "Prospectus") and the statement of
additional information (the "Statement") filed with the Securities and
Exchange Commission as part of the Company's Registration Statement on Form
N-1A, as amended from time to time, and in the manner and to the extent as
may from time to time be approved by the Board of Trustees of the Company
(the "Board"). Copies of the Prospectus, the Statement and the Master
Trust Agreement have been or will be submitted to the Sub-Adviser. The
Company agrees to provide copies of all amendments to the Prospectus, the
Statement and the Master Trust Agreement to the Sub-Adviser on an on-going
basis. The Company employs the Adviser as the investment adviser to the
Fund, and the Company and the Adviser desire to employ and hereby appoint
the Sub-Adviser to act as the sub-investment adviser to the Fund. The
adviser accepts the appointment and agrees to furnish the services for the
compensation set forth below.
2. Services as Sub-Investment Adviser
Subject to the supervision, direction and approval of the Board of
the Company and the Adviser, the Sub-Adviser will: (a) manage the Fund's
holdings in accordance with the Fund's investment objective(s) and policies
as stated in the Master Trust Agreement, the Prospectus and the Statement;
(b) make investment decisions concerning foreign assets for the Fund; (c)
place purchase and sale orders for portfolio transactions for foreign
assets on behalf of the Fund; and (d) employ professional portfolio
managers and securities analysts who provide research services to the Fund.
In providing those services, the Sub-Adviser will conduct a continual
program of investment, evaluation and, if appropriate, sale and
reinvestment of the Fund's foreign assets.
3. Brokerage
In selecting brokers or dealers to execute transactions on behalf of
the Fund, the Sub-Adviser will seek the best overall terms available. In
assessing the best overall terms available for any transaction, the Sub-
Adviser will consider factors it deems relevant, including, but not limited
to, the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer
and the reasonableness of the commission, if any, for the specific
transaction and on a continuing basis. In selecting brokers or dealers to
execute a particular transaction, and in evaluating the best overall terms
available, the Sub-Adviser is authorized to consider the brokerage and
research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934), provided to the Fund and/or other
accounts over which the Sub-Adviser or its affiliates exercise investment
discretion.
4. Information Provided to the Company
The Sub-Adviser will keep the Company informed of developments
materially affecting the Fund, and will, on its own initiative, furnish the
Company from time to time with whatever information the Sub-Adviser
believes is appropriate for this purpose.
5. Compensation
In consideration of the services rendered pursuant to this Agreement,
the Adviser will pay the Sub-Adviser on the first business day of each
month a fee for the previous month at the annual rate of .10 of 1.00% of
the Fund's average daily net assets. The Sub-Adviser shall have no right
to obtain compensation directly from the Company for services provided
hereunder and agrees to look solely to the Adviser for payment of fees due.
The fee for the period from the Effective Date (defined below) of the
Agreement to the end of the month during which the Effective Date occurs
shall be prorated according to the proportion that such period bears to the
full monthly period. Upon any termination of this Agreement before the end
of a month, the fee for such part of that month shall be prorated according
to the proportion that such period bears to the full monthly period and
shall be payable upon the date of termination of this Agreement. For the
purpose of determining fees payable to the Sub-Adviser, the value of the
Fund's net assets shall be computed at the times and in the manner
specified in the Prospectus and/or the Statement.
6. Expenses
The Sub-Adviser will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including, but not
limited to, investment advisory, sub-advisory and administration fees; fees
for necessary professional and brokerage services; fees for any pricing
service; the costs of regulatory compliance; and costs associated with
maintaining the Company's legal existence and shareholder relations.
7. Reduction of Fee
If in any fiscal year the aggregate expenses of the Fund (including
fees pursuant to this Agreement and the Fund's investment advisory
agreement, but excluding interest, taxes, brokerage and extraordinary
expenses) exceed the expense limitation of any state having jurisdiction
over the Fund, the Sub-Adviser will reduce its fee by the proportion of
such excess expense equal to the proportion that its fee thereunder bears
to the aggregate of fees paid by the Fund for investment advice and
administration in that year, to the extent required by state law. A fee
reduction pursuant to this paragraph 7, if any, will be estimated,
reconciled and paid on a monthly basis.
8. Standard of Care
The Sub-Adviser shall exercise its best judgment in rendering the
services listed in paragraphs 2 and 3 above. The Sub-Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Fund and the Adviser in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed
to protect or purport to protect the Sub-Adviser against any liability to
the Adviser, the Company or to the shareholders of the Fund to which the
Sub-Adviser would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties
or by reason of the Sub-Adviser's reckless disregard of its obligations and
duties under this Agreement.
9. Term of Agreement
This Agreement shall become effective as of March 21, 1994 (the
"Effective Date") and shall continue for an initial two-year term and shall
continue thereafter so long as such continuance is specifically approved at
least annually by (i) the Board of the Company or (ii) a vote of a
"majority" (as that term is defined in the Investment Company Act of 1940,
as amended (the "1940 Act")) of the Fund's outstanding voting securities,
provided that in either event the continuance is also approved by a
majority of the Board who are not "interested persons" (as defined in the
1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. This Agreement
is terminable, without penalty, on 60 days' written notice, by the Board of
the Company or by vote of holders of a majority of the Fund's shares, or
upon 90 days' written notice, by the Sub-Adviser. This Agreement will also
terminate automatically in the event of its assignment (as defined in the
1940 Act and the rules thereunder).
10. Services to Other Companies or Accounts
The Company understands that the Sub-Adviser now acts, will continue
to act and may act in the future as investment adviser to fiduciary and
other managed accounts, and as investment adviser to other investment
companies, and the Company has no objection to the Sub-Adviser's so acting,
provided that whenever the Fund and one or more other investment companies
advised by the Sub-Adviser have available funds for investment, investments
suitable and appropriate for each will be allocated in accordance with a
formula believed to be equitable to each company. The Company recognizes
that in some cases this procedure may adversely affect the size of the
position obtainable for the Fund. In addition, the Company understands
that the persons employed by the Sub-Adviser to assist in the performance
of the Sub-Adviser's duties under this Agreement will not devote their full
time to such service and nothing contained in this Agreement shall be
deemed to limit or restrict the right of the Sub-Adviser or any affiliate
of the Sub-Adviser to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
11. Representation by the Company
The Company represents that a copy of the Master Trust Agreement is
on file with the Secretary of The Commonwealth of Massachusetts and with
the Boston City Clerk.
12. Limitation of Liability
The Company, the Adviser and the Sub-Adviser agree that the
obligations of the Company under this Agreement shall not be binding upon
any of the members of the Board, shareholders, nominees, officers,
employees or agents, whether past, present or future, of the Company,
individually, but are binding only upon the assets and property of the Fund
and not upon the assets and property of any other portfolio of the Company.
The execution and delivery of this Agreement have been authorized by the
Board and a majority of the holders of the Fund's outstanding voting
securities, and signed by an authorized officer of the Company, acting as
such, and neither such authorization by such members of the Board and
shareholders nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the assets and
property of the Fund as provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
SMITH BARNEY SHEARSON INCOME
FUNDS
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman of the Board
THE GREENWICH STREET
ADVISORS DIVISION OF MUTUAL
MANAGEMENT CORP.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
Accepted:
SMITH BARNEY GLOBAL CAPITAL
MANAGEMENT, INC.
By: /s/ Bruce D. Sargent
Name: Bruce D. Sargent
Title: President
g:\shared\domestic\clients\shearson\funds\slip\dsip\subadv3.dod
EXHIBIT 5(f)
SUB-INVESTMENT ADVISORY AGREEMENT
SMITH BARNEY SHEARSON INCOME FUNDS
(Smith Barney Shearson Premium Total Return Fund)
July 16, 1994
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
Dear Sirs:
Smith Barney Shearson Income Funds (the "Company"), a trust organized
under the laws of the Commonwealth of Massachusetts and Smith Barney
Shearson Strategy Advisers Inc. (the "Adviser"), each confirms its
agreement with The Boston Company Advisors, Inc. (the "Sub-Adviser"), as
follows:
1. Investment Description; Appointment
The Company desires to employ its capital relating to Smith Barney
Shearson Premium Total Return Fund (the "Fund") by investing and
reinvesting in investments of the kind and in accordance with the
investment objective(s), policies and limitations specified in its Master
Trust Agreement, as amended from time to time (the "Master Trust
Agreement"), in the prospectus (the "Prospectus") and the statement of
additional information (the "Statement") filed with the Securities and
Exchange Commission as part of the Company's Registration Statement on Form
N-1A, as amended from time to time, and in the manner and to the extent as
may from time to time be approved by the Board of Trustees of the Company
(the "Board"). Copies of the Prospectus, the Statement and the Master
Trust Agreement have been or will be submitted to the Sub-Adviser. The
Company agrees to provide copies of all amendments to the Prospectus, the
Statement and the Master Trust Agreement to the Sub-Adviser on an on-going
basis. The Company employs the Adviser as the investment adviser to the
Fund, and the Company and the Adviser desire to employ and hereby appoint
the Sub-Adviser to act as the sub-investment adviser to the Fund. The Sub-
Adviser accepts the appointment and agrees to furnish the services for the
compensation set forth below.
2. Services as Sub-Investment Adviser
Subject to the supervision, direction and approval of the Board of
the Company and the Adviser, the Sub-Adviser will: (a) manage the Fund's
portfolio in accordance with the Fund's investment objective(s) and
policies as stated in the Master Trust Agreement, the Prospectus and the
Statement; (b) make investment decisions for the Fund; (c) place purchase
and sale orders for portfolio transactions for the Fund; and (d) employ
professional portfolio managers and securities analysts who provide
research services to the Fund. In providing those services, the Sub-
Adviser will conduct a continual program of investment, evaluation and, if
appropriate, sale and reinvestment of the Fund's assets.
3. Brokerage
In selecting brokers or dealers to execute transactions on behalf of
the Fund, the Sub-Adviser will seek the best overall terms available. In
assessing the best overall terms available for any transaction, the Sub-
Adviser will consider factors it deems relevant, including, but not limited
to, the breadth of the market in the security, the price of the security,
the financial condition and execution capability of the broker or dealer
and the reasonableness of the commission, if any, for the specific
transaction and on a continuing basis. In selecting brokers or dealers to
execute a particular transaction, and in evaluating the best overall terms
available, the Sub-Adviser is authorized to consider the brokerage and
research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934), provided to the Fund and/or other
accounts over which the Sub-Adviser or its affiliates exercise investment
discretion.
4. Information Provided to the Company
The Sub-Adviser will keep the Adviser and the Company informed of
developments materially affecting the Fund, and will, on its own
initiative, furnish the Adviser and the Company from time to time with
whatever information the Sub-Adviser believes is appropriate for this
purpose.
5. Standard of Care
The Sub-Adviser shall exercise its best judgment in rendering the
services listed in paragraphs 2 and 3 above. The Sub-Adviser shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Fund and the Adviser in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed
to protect or purport to protect the Sub-Adviser against any liability to
the Adviser, the Company or the shareholders of the Fund to which the Sub-
Adviser would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence on its part in the performance of its duties or
by reason of the Sub-Adviser's reckless disregard of its obligations and
duties under this Agreement.
6. Compensation
In consideration of the services rendered pursuant to this Agreement,
the Adviser will pay the Sub-Adviser on the first business day of each
month a fee for the previous month at the annual rate of .275 of 1.00% of
the Fund's average daily net assets. The fee for the period from the
Effective Date (defined below) of the Agreement to the end of the month
during which the Effective Date occurs shall be prorated according to the
proportion that such period bears to the full monthly period. Upon any
termination of this Agreement before the end of a month, the fee for such
part of that month shall be prorated according to the proportion that such
period bears to the full monthly period and shall be payable upon the date
of termination of this Agreement. For the purpose of determining fees
payable to the Sub-Adviser, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Prospectus and/or
the Statement.
7. Expenses
The Sub-Adviser will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including, but not
limited to, investment advisory and administration fees; fees for necessary
professional and brokerage services; fees for any pricing service; the
costs of regulatory compliance; and costs associated with maintaining the
Company's legal existence and shareholder relations.
8. Reduction of Fee
If in any fiscal year the aggregate expenses of the Fund (including
fees pursuant to this Agreement and the Fund's investment advisory
agreement, but excluding interest, taxes, brokerage and extraordinary
expenses) exceed the expense limitation of any state having jurisdiction
over the Fund, the Sub-Adviser will reduce its fee by the proportion of
such excess expense equal to the proportion that its fee thereunder bears
to the aggregate of fees paid by the Fund for investment advice and
administration in that year, to the extent required by state law. A fee
reduction pursuant to this paragraph 8, if any, will be estimated,
reconciled and paid on a monthly basis.
9. Services to Other Companies or Accounts
The Company understands that the Sub-Adviser now acts, will continue
to act and may act in the future as investment adviser to fiduciary and
other managed accounts, and as investment adviser to other investment
companies, and the Company has no objection to the Sub-Adviser's so acting,
provided that whenever the Fund and one or more other investment companies
advised by the Sub-Adviser have available funds for investment, investments
suitable and appropriate for each will be allocated in accordance with a
formula believed to be equitable to each company. The Company recognizes
that in some cases this procedure may adversely affect the size of the
position obtainable for the Fund. In addition, the Company understands
that the persons employed by the Sub-Adviser to assist in the performance
of the Sub-Adviser's duties under this Agreement will not devote their full
time to such service and nothing contained in this Agreement shall be
deemed to limit or restrict the right of the Sub-Adviser or any affiliate
of the Sub-Adviser to engage in and devote time and attention to other
businesses or to render services of whatever kind or nature.
10. Term of Agreement
This Agreement shall become effective as of July 16, 1994 (the
"Effective Date") and shall continue for an initial two-year term and shall
continue thereafter so long as such continuance is specifically approved at
least annually by (i) the Board of the Company or (ii) a vote of a
"majority" (as that term is defined in the Investment Company Act of 1940,
as amended (the "1940 Act")) of the Fund's outstanding voting securities,
provided that in either event the continuance is also approved by a
majority of the Board who are not "interested persons" (as defined in the
1940 Act) of any party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such approval. This Agreement
is terminable, without penalty, on 60 days' written notice, by the Board of
the Company or by vote of holders of a majority of the Fund's shares, or
upon 90 days' written notice, by the Sub-Adviser. This Agreement will also
terminate automatically in the event of its assignment (as defined in the
1940 Act and the rules thereunder).
11. Representation by the Company
The Company represents that a copy of the Master Trust Agreement is
on file with the Secretary of The Commonwealth of Massachusetts and with
the Boston City Clerk.
12. Limitation of Liability
The Company, the Adviser and the Sub-Adviser agree that the
obligations of the Company under this Agreement shall not be binding upon
any of the members of the Board, shareholders, nominees, officers,
employees or agents, whether past, present or future, of the Company,
individually, but are binding only upon the assets and property of the Fund
and not upon the assets and property of any other portfolio of the Company.
The execution and delivery of this Agreement have been authorized by the
Board and a majority of the holders of the Fund's outstanding voting
securities, and signed by an authorized officer of the Company, acting as
such, and neither such authorization by such members of the Board and
shareholders nor such execution and delivery by such officer shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the assets and
property of the Fund as provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance of this Agreement by signing and returning the
enclosed copy of this Agreement.
Very truly yours,
SMITH BARNEY SHEARSON
INCOME FUNDS
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
SMITH BARNEY SHEARSON STRATEGY
ADVISERS INC.
By: /s/ Christina T. Sydor
Christina T. Sydor
Secretary
Accepted:
THE BOSTON COMPANY ADVISORS, INC.
By:______________________________
shared/domestic/clients/shearson/funds/slip/prtn/subadv2.doc
E-5
EXHIBIT 9(a)
SMITH BARNEY SHEARSON INCOME FUNDS
CONVERTIBLE FUND
ADMINISTRATION AGREEMENT
May 4, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business trust
organized under the laws of the Commonwealth of Massachusetts, on behalf of
its sub-trust Convertible Fund (the "Fund"), confirms its agreement with
Smith, Barney Advisers, Inc. ("SBA") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in the Trust's Amended and Restated Master Trust
Agreement dated November 5, 1992 as amended from time to time (the "Master
Trust Agreement"), in its Prospectus and Statement of Additional
Information as from time to time in effect and in such manner and to such
extent as may from time to time be approved by the Board of Trustees of the
Trust (the "Board"). Copies of the Fund's Prospectus, Statement of
Additional Information and Master Trust Agreement have been or will be
submitted to SBA. Greenwich Street Advisors ("Greenwich Street"), a
division of Mutual Management Corp., serves as the Fund's investment
adviser; and the Fund desires to employ and hereby appoints SBA to act as
its administrator. SBA accepts this appointment and agrees to furnish the
services to the Fund for the compensation set forth below. SBA is hereby
authorized to retain third parties and is hereby authorized to delegate
some or all of its duties and obligations hereunder to such persons
provided that such persons shall remain under the general supervision of
SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations except
those performed by the Fund's investment adviser under its investment
advisory agreement; (b) supply the Fund with office facilities (which may
be in SBA'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 contingent 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 Securities and Exchange
Commission (the "SEC") and state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month a
fee for the previous month at an annual rate of .20% of the Fund's average
daily net assets. The fee for the period from the date the Fund's initial
registration statement is declared effective by the SEC to the end of the
month during which the initial registration statement is declared effective
shall be prorated according to the proportion that such period bears to the
full monthly period. Upon any termination of this Agreement before the end
of any month, the fee for such part of a month shall be prorated according
to the proportion which such period bears to the full monthly period and
shall be payable upon the date of termination of this Agreement. For the
purpose of determining fees payable to SBA, the value of the Fund's net
assets shall be computed at the times and in the manner specified in the
Fund's Prospectus and Statement of Additional Information as from time to
time in effect.
4. Expenses
SBA will bear all expenses in connection with the performance
of its services under this Agreement. The Fund will bear certain other
expenses to be incurred in its operation, including: taxes, interest,
brokerage fees and commissions, if any; fees of the members of the Board of
the Fund who are not officers, directors or employees of Smith Barney
Shearson Inc. or its affiliates or any person who is an affiliate of any
person to whom duties may be delegated hereunder; SEC fees and state blue
sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; the Fund's and Board members' proportionate share of
insurance premiums, professional association dues and/or assessments;
outside auditing and legal expenses; costs of maintaining the Fund's
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders; costs of
shareholders' reports and meetings of the officers or Board and any
extraordinary expenses. In addition, the Fund will pay all distribution
fees pursuant to a Distribution Plan adopted under Rule 12b-1 of the
Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest, taxes,
brokerage and, if permitted by state securities commissions, extraordinary
expenses) exceed the expense limitations of any state having jurisdiction
over the Fund, SBA will reimburse the Fund for that excess expense to the
extent required by state law in the same proportion as its respective fees
bear to the combined fees for investment advice and administration. The
expense reimbursement obligation of SBA will be limited to the amount of
its fees hereunder. Such expense reimbursement, if any, will be estimated,
reconciled and paid on a monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the services
listed in paragraph 2 above, and SBA shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates, provided that
nothing herein shall be deemed to protect or purport to protect SBA against
liability to the Fund or to its shareholders to which SBA would otherwise
be subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of SBA's reckless
disregard of its obligations and duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at least
annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other investment
companies, and the Fund has no objection to SBA so acting. In addition,
the Fund understands that the persons employed by SBA or its affiliates to
assist in the performance of its duties hereunder will not devote their
full time to such service and nothing contained herein shall be deemed to
limit or restrict the right of SBA or its affiliates to engage in and
devote time and attention to other businesses or to render services of
whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers, directors,
employees, affiliates, controlling persons, agents (including persons to
whom responsibilities are delegated hereunder) ("indemnitees") against any
loss, claim, expense or cost of any kind (including reasonable attorney's
fees) resulting or arising in connection with this Agreement or from the
performance or failure to perform any act hereunder, provided that no such
indemnification shall be available if the indemnitee violated the standard
of care in paragraph 6 above. This indemnification shall be limited by the
1940 Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the 1940
Act and the rules, regulations and interpretations thereof as in effect
from time to time.
10. Limitation of Liability
The Fund and SBA agree that the obligations of the Fund under
this Agreement shall not be binding upon any of the Board members,
shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon the
assets and property of the Fund, as provided in the Master Trust Agreement.
The execution and delivery of this Agreement has been duly authorized by
the Fund and SBA, and signed by an authorized officer of each, acting as
such. Neither the authorization by the Board members of the Fund, nor the
execution and delivery by the officer of the Fund shall be deemed to have
been made by any of them individually or to impose any liability on any of
them personally, but shall bind only the assets and property of the Fund as
provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by singing and returning to us the enclosed
copy hereof.
Very truly yours,
Smith Barney Shearson Income
Funds -
Convertible Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Accepted:
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Masater Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
SMITH BARNEY SHEARSON INCOME FUNDS
DIVERSIFIED STRATEGIC INCOME FUND
ADMINISTRATION AGREEMENT
May 4, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business trust
organized under the laws of the Commonwealth of Massachusetts, on behalf
of its sub-trust Diversified Strategic Income Fund (the "Fund"),
confirms its agreement with Smith, Barney Advisers, Inc. ("SBA") as
follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in the Trust's Amended and Restated Master Trust
Agreement dated November 5, 1992 as amended from time to time (the
"Master Trust Agreement"), in its Prospectus and Statement of Additional
Information as from time to time in effect and in such manner and to
such extent as may from time to time be approved by the Board of
Trustees of the Trust (the "Board"). Copies of the Fund's Prospectus,
Statement of Additional Information and Master Trust Agreement have been
or will be submitted to SBA. Greenwich Street Advisors ("Greenwich
Street"), a wholly owned subsidiary of Mutual Management Corp., serves
as the Fund's investment adviser; and the Fund desires to employ and
hereby appoints SBA to act as its administrator. SBA accepts this
appointment and agrees to furnish the services to the Fund for the
compensation set forth below. SBA is hereby authorized to retain third
parties and is hereby authorized to delegate some or all of its duties
and obligations hereunder to such persons provided that such persons
shall remain under the general supervision of SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations
except those performed by the Fund's investment adviser under its
investment advisory agreement; (b) supply the Fund with office
facilities (which may be in SBA'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 contingent 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 Securities and Exchange Commission (the "SEC") and
state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month
a fee for the previous month at an annual rate of .20 of 1.00% of the
Fund's average daily net assets. The fee for the period from the date
the Fund's initial registration statement is declared effective by the
SEC to the end of the month during which the initial registration
statement is declared effective shall be prorated according to the
proportion that such period bears to the full monthly period. Upon any
termination of this Agreement before the end of any month, the fee for
such part of a month shall be prorated according to the proportion which
such period bears to the full monthly period and shall be payable upon
the date of termination of this Agreement. For the purpose of
determining fees payable to SBA, the value of the Fund's net assets
shall be computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
SBA will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
members of the Board of the Fund who are not officers, directors or
employees of Smith Barney Shearson Inc. or its affiliates or any person
who is an affiliate of any person to whom duties may be delegated
hereunder; SEC fees and state blue sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; the Fund's and
Board members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest,
taxes, brokerage and, if permitted by state securities commissions,
extraordinary expenses) exceed the expense limitations of any state
having jurisdiction over the Fund, SBA will reimburse the Fund for that
excess expense to the extent required by state law in the same
proportion as its respective fees bear to the combined fees for
investment advice and administration. The expense reimbursement
obligation of SBA will be limited to the amount of its fees hereunder.
Such expense reimbursement, if any, will be estimated, reconciled and
paid on a monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the
services listed in paragraph 2 above, and SBA shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the matters to which this Agreement relates,
provided that nothing herein shall be deemed to protect or purport to
protect SBA against liability to the Fund or to its shareholders to
which SBA would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its
duties or by reason of SBA's reckless disregard of its obligations and
duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at
least annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other
investment companies, and the Fund has no objection to SBA so acting.
In addition, the Fund understands that the persons employed by SBA or
its affiliates to assist in the performance of its duties hereunder will
not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of SBA or its affiliates
to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers,
directors, employees, affiliates, controlling persons, agents (including
persons to whom responsibilities are delegated hereunder)
("indemnitees") against any loss, claim, expense or cost of any kind
(including reasonable attorney's fees) resulting or arising in
connection with this Agreement or from the performance or failure to
perform any act hereunder, provided that no such indemnification shall
be available if the indemnitee violated the standard of care in
paragraph 6 above. This indemnification shall be limited by the 1940
Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the
1940 Act and the rules, regulations and interpretations thereof as in
effect from time to time.
10. Limitation of Liability
The Fund and SBA agree that the obligations of the Fund
under this Agreement shall not be binding upon any of the Board members,
shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon
the assets and property of the Fund, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement has been duly
authorized by the Fund and SBA, and signed by an authorized officer of
each, acting as such. Neither the authorization by the Board members of
the Fund, nor the execution and delivery by the officer of the Fund
shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the
assets and property of the Fund as provided in the Master Trust
Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by singing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income
Funds -
Diversified Strategic Income
Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Accepted:
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Masater Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
SMITH BARNEY SHEARSON INCOME FUNDS
GLOBAL BOND FUND
ADMINISTRATION AGREEMENT
May 4, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business trust
organized under the laws of the Commonwealth of Massachusetts, on behalf
of its sub-trust Global Bond Fund (the "Fund"), confirms its agreement
with Smith, Barney Advisers, Inc. ("SBA") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in the Trust's Amended and Restated Master Trust
Agreement dated November 5, 1992 as amended from time to time (the
"Master Trust Agreement"), in its Prospectus and Statement of Additional
Information as from time to time in effect and in such manner and to
such extent as may from time to time be approved by the Board of
Trustees of the Trust (the "Board"). Copies of the Fund's Prospectus,
Statement of Additional Information and Master Trust Agreement have been
or will be submitted to SBA. Smith Barney Global Capital Management,
Inc., serves as the Fund's investment adviser; and the Fund desires to
employ and hereby appoints SBA to act as its administrator. SBA accepts
this appointment and agrees to furnish the services to the Fund for the
compensation set forth below. SBA is hereby authorized to retain third
parties and is hereby authorized to delegate some or all of its duties
and obligations hereunder to such persons provided that such persons
shall remain under the general supervision of SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations
except those performed by the Fund's investment adviser under its
investment advisory agreement; (b) supply the Fund with office
facilities (which may be in SBA'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 contingent 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 Securities and Exchange Commission (the "SEC") and
state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month
a fee for the previous month at an annual rate of .20 of 1.00% of the
Fund's average daily net assets. The fee for the period from the date
the Fund's initial registration statement is declared effective by the
SEC to the end of the month during which the initial registration
statement is declared effective shall be prorated according to the
proportion that such period bears to the full monthly period. Upon any
termination of this Agreement before the end of any month, the fee for
such part of a month shall be prorated according to the proportion which
such period bears to the full monthly period and shall be payable upon
the date of termination of this Agreement. For the purpose of
determining fees payable to SBA, the value of the Fund's net assets
shall be computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
SBA will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
members of the Board of the Fund who are not officers, directors or
employees of Smith Barney Shearson Inc. or its affiliates or any person
who is an affiliate of any person to whom duties may be delegated
hereunder; SEC fees and state blue sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; the Fund's and
Board members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest,
taxes, brokerage and, if permitted by state securities commissions,
extraordinary expenses) exceed the expense limitations of any state
having jurisdiction over the Fund, SBA will reimburse the Fund for that
excess expense to the extent required by state law in the same
proportion as its respective fees bear to the combined fees for
investment advice and administration. The expense reimbursement
obligation of SBA will be limited to the amount of its fees hereunder.
Such expense reimbursement, if any, will be estimated, reconciled and
paid on a monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the
services listed in paragraph 2 above, and SBA shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the matters to which this Agreement relates,
provided that nothing herein shall be deemed to protect or purport to
protect SBA against liability to the Fund or to its shareholders to
which SBA would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its
duties or by reason of SBA's reckless disregard of its obligations and
duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at
least annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other
investment companies, and the Fund has no objection to SBA so acting.
In addition, the Fund understands that the persons employed by SBA or
its affiliates to assist in the performance of its duties hereunder will
not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of SBA or its affiliates
to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers,
directors, employees, affiliates, controlling persons, agents (including
persons to whom responsibilities are delegated hereunder)
("indemnitees") against any loss, claim, expense or cost of any kind
(including reasonable attorney's fees) resulting or arising in
connection with this Agreement or from the performance or failure to
perform any act hereunder, provided that no such indemnification shall
be available if the indemnitee violated the standard of care in
paragraph 6 above. This indemnification shall be limited by the 1940
Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the
1940 Act and the rules, regulations and interpretations thereof as in
effect from time to time.
10. Limitation of Liability
The Fund and SBA agree that the obligations of the Fund
under this Agreement shall not be binding upon any of the Board members,
shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon
the assets and property of the Fund, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement has been duly
authorized by the Fund and SBA, and signed by an authorized officer of
each, acting as such. Neither the authorization by the Board members of
the Fund, nor the execution and delivery by the officer of the Fund
shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the
assets and property of the Fund as provided in the Master Trust
Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by singing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income
Funds -
Global Bond Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Accepted:
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Masater Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
SMITH BARNEY SHEARSON INCOME FUNDS
HIGH INCOME FUND
ADMINISTRATION AGREEMENT
May 4, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business trust
organized under the laws of the Commonwealth of Massachusetts, on behalf
of its sub-trust High Income Fund (the "Fund"), confirms its agreement
with Smith, Barney Advisers, Inc. ("SBA") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in the Trust's Amended and Restated Master Trust
Agreement dated November 5, 1992 as amended from time to time (the
"Master Trust Agreement"), in its Prospectus and Statement of Additional
Information as from time to time in effect and in such manner and to
such extent as may from time to time be approved by the Board of
Trustees of the Trust (the "Board"). Copies of the Fund's Prospectus,
Statement of Additional Information and Master Trust Agreement have been
or will be submitted to SBA. Greenwich Street Advisors ("Greenwich
Street"), a division of Mutual Management Corp., serves as the Fund's
investment adviser; and the Fund desires to employ and hereby appoints
SBA to act as its administrator. SBA accepts this appointment and
agrees to furnish the services to the Fund for the compensation set
forth below. SBA is hereby authorized to retain third parties and is
hereby authorized to delegate some or all of its duties and obligations
hereunder to such persons provided that such persons shall remain under
the general supervision of SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations
except those performed by the Fund's investment adviser under its
investment advisory agreement; (b) supply the Fund with office
facilities (which may be in SBA'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 contingent 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 Securities and Exchange Commission (the "SEC") and
state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month
a fee for the previous month at an annual rate of .20 of 1.00% of the
Fund's average daily net assets. The fee for the period from the date
the Fund's initial registration statement is declared effective by the
SEC to the end of the month during which the initial registration
statement is declared effective shall be prorated according to the
proportion that such period bears to the full monthly period. Upon any
termination of this Agreement before the end of any month, the fee for
such part of a month shall be prorated according to the proportion which
such period bears to the full monthly period and shall be payable upon
the date of termination of this Agreement. For the purpose of
determining fees payable to SBA, the value of the Fund's net assets
shall be computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
SBA will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
members of the Board of the Fund who are not officers, directors or
employees of Smith Barney Shearson Inc. or its affiliates or any person
who is an affiliate of any person to whom duties may be delegated
hereunder; SEC fees and state blue sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; the Fund's and
Board members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest,
taxes, brokerage and, if permitted by state securities commissions,
extraordinary expenses) exceed the expense limitations of any state
having jurisdiction over the Fund, SBA will reimburse the Fund for that
excess expense to the extent required by state law in the same
proportion as its respective fees bear to the combined fees for
investment advice and administration. The expense reimbursement
obligation of SBA will be limited to the amount of its fees hereunder.
Such expense reimbursement, if any, will be estimated, reconciled and
paid on a monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the
services listed in paragraph 2 above, and SBA shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the matters to which this Agreement relates,
provided that nothing herein shall be deemed to protect or purport to
protect SBA against liability to the Fund or to its shareholders to
which SBA would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its
duties or by reason of SBA's reckless disregard of its obligations and
duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at
least annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other
investment companies, and the Fund has no objection to SBA so acting.
In addition, the Fund understands that the persons employed by SBA or
its affiliates to assist in the performance of its duties hereunder will
not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of SBA or its affiliates
to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers,
directors, employees, affiliates, controlling persons, agents (including
persons to whom responsibilities are delegated hereunder)
("indemnitees") against any loss, claim, expense or cost of any kind
(including reasonable attorney's fees) resulting or arising in
connection with this Agreement or from the performance or failure to
perform any act hereunder, provided that no such indemnification shall
be available if the indemnitee violated the standard of care in
paragraph 6 above. This indemnification shall be limited by the 1940
Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the
1940 Act and the rules, regulations and interpretations thereof as in
effect from time to time.
10. Limitation of Liability
The Fund and SBA agree that the obligations of the Fund
under this Agreement shall not be binding upon any of the Board members,
shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon
the assets and property of the Fund, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement has been duly
authorized by the Fund and SBA, and signed by an authorized officer of
each, acting as such. Neither the authorization by the Board members of
the Fund, nor the execution and delivery by the officer of the Fund
shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the
assets and property of the Fund as provided in the Master Trust
Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by singing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income
Funds -
High Income Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Accepted:
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Masater Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
SMITH BARNEY SHEARSON INCOME FUNDS
MONEY MARKET FUND
ADMINISTRATION AGREEMENT
May 4, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business trust
organized under the laws of the Commonwealth of Massachusetts, on behalf
of its sub-trust Money Market Fund (the "Fund"), confirms its agreement
with Smith, Barney Advisers, Inc. ("SBA") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in the Trust's Amended and Restated Master Trust
Agreement dated November 5, 1992 as amended from time to time (the
"Master Trust Agreement"), in its Prospectus and Statement of Additional
Information as from time to time in effect and in such manner and to
such extent as may from time to time be approved by the Board of
Trustees of the Trust (the "Board"). Copies of the Fund's Prospectus,
Statement of Additional Information and Master Trust Agreement have been
or will be submitted to SBA. Greenwich Street Advisors ("Greenwich
Street"), a division of Mutual Management Corp., serves as the Fund's
investment adviser; and the Fund desires to employ and hereby appoints
SBA to act as its administrator. SBA accepts this appointment and
agrees to furnish the services to the Fund for the compensation set
forth below. SBA is hereby authorized to retain third parties and is
hereby authorized to delegate some or all of its duties and obligations
hereunder to such persons provided that such persons shall remain under
the general supervision of SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations
except those performed by the Fund's investment adviser under its
investment advisory agreement; (b) supply the Fund with office
facilities (which may be in SBA'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 contingent 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 Securities and Exchange Commission (the "SEC") and
state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month
a fee for the previous month at an annual rate of .20 of 1.00% of the
Fund's average daily net assets. The fee for the period from the date
the Fund's initial registration statement is declared effective by the
SEC to the end of the month during which the initial registration
statement is declared effective shall be prorated according to the
proportion that such period bears to the full monthly period. Upon any
termination of this Agreement before the end of any month, the fee for
such part of a month shall be prorated according to the proportion which
such period bears to the full monthly period and shall be payable upon
the date of termination of this Agreement. For the purpose of
determining fees payable to SBA, the value of the Fund's net assets
shall be computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
SBA will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
members of the Board of the Fund who are not officers, directors or
employees of Smith Barney Shearson Inc. or its affiliates or any person
who is an affiliate of any person to whom duties may be delegated
hereunder; SEC fees and state blue sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; the Fund's and
Board members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest,
taxes, brokerage and, if permitted by state securities commissions,
extraordinary expenses) exceed the expense limitations of any state
having jurisdiction over the Fund, SBA will reimburse the Fund for that
excess expense to the extent required by state law in the same
proportion as its respective fees bear to the combined fees for
investment advice and administration. The expense reimbursement
obligation of SBA will be limited to the amount of its fees hereunder.
Such expense reimbursement, if any, will be estimated, reconciled and
paid on a monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the
services listed in paragraph 2 above, and SBA shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the matters to which this Agreement relates,
provided that nothing herein shall be deemed to protect or purport to
protect SBA against liability to the Fund or to its shareholders to
which SBA would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its
duties or by reason of SBA's reckless disregard of its obligations and
duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at
least annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other
investment companies, and the Fund has no objection to SBA so acting.
In addition, the Fund understands that the persons employed by SBA or
its affiliates to assist in the performance of its duties hereunder will
not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of SBA or its affiliates
to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers,
directors, employees, affiliates, controlling persons, agents (including
persons to whom responsibilities are delegated hereunder)
("indemnitees") against any loss, claim, expense or cost of any kind
(including reasonable attorney's fees) resulting or arising in
connection with this Agreement or from the performance or failure to
perform any act hereunder, provided that no such indemnification shall
be available if the indemnitee violated the standard of care in
paragraph 6 above. This indemnification shall be limited by the 1940
Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the
1940 Act and the rules, regulations and interpretations thereof as in
effect from time to time.
10. Limitation of Liability
The Fund and SBA agree that the obligations of the Fund
under this Agreement shall not be binding upon any of the Board members,
shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon
the assets and property of the Fund, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement has been duly
authorized by the Fund and SBA, and signed by an authorized officer of
each, acting as such. Neither the authorization by the Board members of
the Fund, nor the execution and delivery by the officer of the Fund
shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the
assets and property of the Fund as provided in the Master Trust
Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by singing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income
Funds -
Money Market Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Accepted:
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Masater Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
SMITH BARNEY SHEARSON INCOME FUNDS
PREMIUM TOTAL RETURN FUND
ADMINISTRATION AGREEMENT
May 4, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business trust
organized under the laws of the Commonwealth of Massachusetts, on behalf
of its sub-trust Premium Total Return Fund (the "Fund"), confirms its
agreement with Smith, Barney Advisers, Inc. ("SBA") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in the Trust's Amended and Restated Master Trust
Agreement dated November 5, 1992 as amended from time to time (the
"Master Trust Agreement"), in its Prospectus and Statement of Additional
Information as from time to time in effect and in such manner and to
such extent as may from time to time be approved by the Board of
Trustees of the Trust (the "Board"). Copies of the Fund's Prospectus,
Statement of Additional Information and Master Trust Agreement have been
or will be submitted to SBA. The Boston Company Advisors, Inc., serves
as the Fund's investment adviser; and the Fund desires to employ and
hereby appoints SBA to act as its administrator. SBA accepts this
appointment and agrees to furnish the services to the Fund for the
compensation set forth below. SBA is hereby authorized to retain third
parties and is hereby authorized to delegate some or all of its duties
and obligations hereunder to such persons provided that such persons
shall remain under the general supervision of SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations
except those performed by the Fund's investment adviser under its
investment advisory agreement; (b) supply the Fund with office
facilities (which may be in SBA'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 contingent 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 Securities and Exchange Commission (the "SEC") and
state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month
a fee for the previous month at an annual rate of .20 of 1.00% of the
Fund's average daily net assets. The fee for the period from the date
the Fund's initial registration statement is declared effective by the
SEC to the end of the month during which the initial registration
statement is declared effective shall be prorated according to the
proportion that such period bears to the full monthly period. Upon any
termination of this Agreement before the end of any month, the fee for
such part of a month shall be prorated according to the proportion which
such period bears to the full monthly period and shall be payable upon
the date of termination of this Agreement. For the purpose of
determining fees payable to SBA, the value of the Fund's net assets
shall be computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
SBA will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
members of the Board of the Fund who are not officers, directors or
employees of Smith Barney Shearson Inc. or its affiliates or any person
who is an affiliate of any person to whom duties may be delegated
hereunder; SEC fees and state blue sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; the Fund's and
Board members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest,
taxes, brokerage and, if permitted by state securities commissions,
extraordinary expenses) exceed the expense limitations of any state
having jurisdiction over the Fund, SBA will reimburse the Fund for that
excess expense to the extent required by state law in the same
proportion as its respective fees bear to the combined fees for
investment advice and administration. The expense reimbursement
obligation of SBA will be limited to the amount of its fees hereunder.
Such expense reimbursement, if any, will be estimated, reconciled and
paid on a monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the
services listed in paragraph 2 above, and SBA shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the matters to which this Agreement relates,
provided that nothing herein shall be deemed to protect or purport to
protect SBA against liability to the Fund or to its shareholders to
which SBA would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its
duties or by reason of SBA's reckless disregard of its obligations and
duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at
least annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other
investment companies, and the Fund has no objection to SBA so acting.
In addition, the Fund understands that the persons employed by SBA or
its affiliates to assist in the performance of its duties hereunder will
not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of SBA or its affiliates
to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers,
directors, employees, affiliates, controlling persons, agents (including
persons to whom responsibilities are delegated hereunder)
("indemnitees") against any loss, claim, expense or cost of any kind
(including reasonable attorney's fees) resulting or arising in
connection with this Agreement or from the performance or failure to
perform any act hereunder, provided that no such indemnification shall
be available if the indemnitee violated the standard of care in
paragraph 6 above. This indemnification shall be limited by the 1940
Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the
1940 Act and the rules, regulations and interpretations thereof as in
effect from time to time.
10. Limitation of Liability
The Fund and SBA agree that the obligations of the Fund
under this Agreement shall not be binding upon any of the Board members,
shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon
the assets and property of the Fund, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement has been duly
authorized by the Fund and SBA, and signed by an authorized officer of
each, acting as such. Neither the authorization by the Board members of
the Fund, nor the execution and delivery by the officer of the Fund
shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the
assets and property of the Fund as provided in the Master Trust
Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by singing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income
Funds -
Premium Total Return Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Accepted:
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Masater Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
SMITH BARNEY SHEARSON INCOME FUNDS
TAX-EXEMPT INCOME FUND
ADMINISTRATION AGREEMENT
May 4, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business trust
organized under the laws of the Commonwealth of Massachusetts, on behalf
of its sub-trust Tax-Exempt Income Fund (the "Fund"), confirms its
agreement with Smith, Barney Advisers, Inc. ("SBA") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in the Trust's Amended and Restated Master Trust
Agreement dated November 5, 1992 as amended from time to time (the
"Master Trust Agreement"), in its Prospectus and Statement of Additional
Information as from time to time in effect and in such manner and to
such extent as may from time to time be approved by the Board of
Trustees of the Trust (the "Board"). Copies of the Fund's Prospectus,
Statement of Additional Information and Master Trust Agreement have been
or will be submitted to SBA. Greenwich Street Advisors ("Greenwich
Street"), a division of Mutual Management Corp., serves as the Fund's
investment adviser; and the Fund desires to employ and hereby appoints
SBA to act as its administrator. SBA accepts this appointment and
agrees to furnish the services to the Fund for the compensation set
forth below. SBA is hereby authorized to retain third parties and is
hereby authorized to delegate some or all of its duties and obligations
hereunder to such persons provided that such persons shall remain under
the general supervision of SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations
except those performed by the Fund's investment adviser under its
investment advisory agreement; (b) supply the Fund with office
facilities (which may be in SBA'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 contingent 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 Securities and Exchange Commission (the "SEC") and
state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month
a fee for the previous month at an annual rate of .20 of 1.00% of the
Fund's average daily net assets. The fee for the period from the date
the Fund's initial registration statement is declared effective by the
SEC to the end of the month during which the initial registration
statement is declared effective shall be prorated according to the
proportion that such period bears to the full monthly period. Upon any
termination of this Agreement before the end of any month, the fee for
such part of a month shall be prorated according to the proportion which
such period bears to the full monthly period and shall be payable upon
the date of termination of this Agreement. For the purpose of
determining fees payable to SBA, the value of the Fund's net assets
shall be computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
SBA will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
members of the Board of the Fund who are not officers, directors or
employees of Smith Barney Shearson Inc. or its affiliates or any person
who is an affiliate of any person to whom duties may be delegated
hereunder; SEC fees and state blue sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; the Fund's and
Board members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest,
taxes, brokerage and, if permitted by state securities commissions,
extraordinary expenses) exceed the expense limitations of any state
having jurisdiction over the Fund, SBA will reimburse the Fund for that
excess expense to the extent required by state law in the same
proportion as its respective fees bear to the combined fees for
investment advice and administration. The expense reimbursement
obligation of SBA will be limited to the amount of its fees hereunder.
Such expense reimbursement, if any, will be estimated, reconciled and
paid on a monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the
services listed in paragraph 2 above, and SBA shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the matters to which this Agreement relates,
provided that nothing herein shall be deemed to protect or purport to
protect SBA against liability to the Fund or to its shareholders to
which SBA would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its
duties or by reason of SBA's reckless disregard of its obligations and
duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at
least annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other
investment companies, and the Fund has no objection to SBA so acting.
In addition, the Fund understands that the persons employed by SBA or
its affiliates to assist in the performance of its duties hereunder will
not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of SBA or its affiliates
to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers,
directors, employees, affiliates, controlling persons, agents (including
persons to whom responsibilities are delegated hereunder)
("indemnitees") against any loss, claim, expense or cost of any kind
(including reasonable attorney's fees) resulting or arising in
connection with this Agreement or from the performance or failure to
perform any act hereunder, provided that no such indemnification shall
be available if the indemnitee violated the standard of care in
paragraph 6 above. This indemnification shall be limited by the 1940
Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the
1940 Act and the rules, regulations and interpretations thereof as in
effect from time to time.
10. Limitation of Liability
The Fund and SBA agree that the obligations of the Fund
under this Agreement shall not be binding upon any of the Board members,
shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon
the assets and property of the Fund, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement has been duly
authorized by the Fund and SBA, and signed by an authorized officer of
each, acting as such. Neither the authorization by the Board members of
the Fund, nor the execution and delivery by the officer of the Fund
shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the
assets and property of the Fund as provided in the Master Trust
Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by singing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income
Funds -
Tax-Exempt Income Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Accepted:
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Masater Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
SMITH BARNEY SHEARSON INCOME FUNDS
UTILITIES FUND
ADMINISTRATION AGREEMENT
May 4, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business trust
organized under the laws of the Commonwealth of Massachusetts, on behalf
of its sub-trust Utilities Fund (the "Fund"), confirms its agreement
with Smith, Barney Advisers, Inc. ("SBA") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in the Trust's Amended and Restated Master Trust
Agreement dated November 5, 1992 as amended from time to time (the
"Master Trust Agreement"), in its Prospectus and Statement of Additional
Information as from time to time in effect and in such manner and to
such extent as may from time to time be approved by the Board of
Trustees of the Trust (the "Board"). Copies of the Fund's Prospectus,
Statement of Additional Information and Master Trust Agreement have been
or will be submitted to SBA. Greenwich Street Advisors ("Greenwich
Street"), a division of Mutual Management Corp., serves as the Fund's
investment adviser; and the Fund desires to employ and hereby appoints
SBA to act as its administrator. SBA accepts this appointment and
agrees to furnish the services to the Fund for the compensation set
forth below. SBA is hereby authorized to retain third parties and is
hereby authorized to delegate some or all of its duties and obligations
hereunder to such persons provided that such persons shall remain under
the general supervision of SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA
will: (a) assist in supervising all aspects of the Fund's operations
except those performed by the Fund's investment adviser under its
investment advisory agreement; (b) supply the Fund with office
facilities (which may be in SBA'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 contingent 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 Securities and Exchange Commission (the "SEC") and
state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, the Fund will pay SBA on the first business day of each month
a fee for the previous month at an annual rate of .20 of 1.00% of the
Fund's average daily net assets. The fee for the period from the date
the Fund's initial registration statement is declared effective by the
SEC to the end of the month during which the initial registration
statement is declared effective shall be prorated according to the
proportion that such period bears to the full monthly period. Upon any
termination of this Agreement before the end of any month, the fee for
such part of a month shall be prorated according to the proportion which
such period bears to the full monthly period and shall be payable upon
the date of termination of this Agreement. For the purpose of
determining fees payable to SBA, the value of the Fund's net assets
shall be computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
SBA will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
members of the Board of the Fund who are not officers, directors or
employees of Smith Barney Shearson Inc. or its affiliates or any person
who is an affiliate of any person to whom duties may be delegated
hereunder; SEC fees and state blue sky qualification fees; charges of
custodians and transfer and dividend disbursing agents; the Fund's and
Board members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement (s), but excluding distribution fees, interest,
taxes, brokerage and, if permitted by state securities commissions,
extraordinary expenses) exceed the expense limitations of any state
having jurisdiction over the Fund, SBA will reimburse the Fund for that
excess expense to the extent required by state law in the same
proportion as its respective fees bear to the combined fees for
investment advice and administration. The expense reimbursement
obligation of SBA will be limited to the amount of its fees hereunder.
Such expense reimbursement, if any, will be estimated, reconciled and
paid on a monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the
services listed in paragraph 2 above, and SBA shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Fund in connection with the matters to which this Agreement relates,
provided that nothing herein shall be deemed to protect or purport to
protect SBA against liability to the Fund or to its shareholders to
which SBA would otherwise be subject by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its
duties or by reason of SBA's reckless disregard of its obligations and
duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive
annual periods, provided such continuance is specifically approved at
least annually by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act
and may act in the future as administrator to one or more other
investment companies, and the Fund has no objection to SBA so acting.
In addition, the Fund understands that the persons employed by SBA or
its affiliates to assist in the performance of its duties hereunder will
not devote their full time to such service and nothing contained herein
shall be deemed to limit or restrict the right of SBA or its affiliates
to engage in and devote time and attention to other businesses or to
render services of whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers,
directors, employees, affiliates, controlling persons, agents (including
persons to whom responsibilities are delegated hereunder)
("indemnitees") against any loss, claim, expense or cost of any kind
(including reasonable attorney's fees) resulting or arising in
connection with this Agreement or from the performance or failure to
perform any act hereunder, provided that no such indemnification shall
be available if the indemnitee violated the standard of care in
paragraph 6 above. This indemnification shall be limited by the 1940
Act, and relevant state law. Each indemnitee shall be entitled to
advancement of its expenses in accordance with the requirements of the
1940 Act and the rules, regulations and interpretations thereof as in
effect from time to time.
10. Limitation of Liability
The Fund and SBA agree that the obligations of the Fund
under this Agreement shall not be binding upon any of the Board members,
shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon
the assets and property of the Fund, as provided in the Master Trust
Agreement. The execution and delivery of this Agreement has been duly
authorized by the Fund and SBA, and signed by an authorized officer of
each, acting as such. Neither the authorization by the Board members of
the Fund, nor the execution and delivery by the officer of the Fund
shall be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but shall bind only the
assets and property of the Fund as provided in the Master Trust
Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by singing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income
Funds -
Utilities Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Accepted:
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
Provide a Treasurer and Assistant Treasurer for the
Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market
funds;
Recommend valuation to be used for securities which
are not readily saleable;
Function as a liaison with the Fund's outside auditors
and arrange for audits;
Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
Prepare and file forms with the Internal Revenue
Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the
Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder
meetings;
Maintain Masater Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Smith, Barney Advisers, Inc.
October 10, 1994
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EXHIBIT 9(b)
SMITH BARNEY SHEARSON INCOME FUNDS
CONVERTIBLE FUND
SUB-ADMINISTRATION AGREEMENT
May 4, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02210
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business
trust organized under the laws of the Commonwealth of Massachusetts, on
behalf of its sub-trust Convertible Fund (the "Fund"), and Smith, Barney
Advisers, Inc. ("SBA") confirm their agreement with The Boston Company
Advisors, Inc. ("Boston Advisors") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 5, 1992 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information as
from time to time in effect, and in such manner and to such extent as may
from time to time be approved by the Board of Trustees of the Trust (the
"Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
you. The Fund employs SBA as its administrator, and the Fund and SBA
desire to employ and hereby appoint Boston Advisors as the Fund's sub-
administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and SBA,
Boston Advisors will: (a) assist in supervising all aspects of the Fund's
operations except those performed by the Fund's investment adviser under
the Fund's investment advisory agreement; (b) supply the Fund with office
facilities (which may be in Boston Advisor'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 contingent
deferred sales charges and similar fees and changes and (iii) distribution
fees, internal auditing and legal services, internal executive and
administrative services, and stationery and office supplies; and (c)
prepare reports to shareholders of the Fund, tax returns and reports to and
filings with the Securities and Exchange Commission (the "SEC") and state
blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of each
month a fee for the previous month calculated in accordance with the terms
set forth in Appendix B, and as agreed to from time to time by the Fund,
SBA and Boston Advisors. Upon any termination of this Agreement before the
end of any month, the fee for such part of a month shall be prorated
according to the proportion which such period bears to the full monthly
period and shall be payable upon the date of termination of this Agreement.
For the purpose of determining fees payable to Boston Advisors, the value
of the Fund's net assets shall be computed at the times and in the manner
specified in the Fund's Prospectus and Statement of Additional Information
as from time to time in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear
certain other expenses to be incurred in its operation, including: taxes,
interest, brokerage fees and commissions, if any; fees of the Board members
of the Fund who are not officers, directors or employees of Smith Barney
Shearson Inc., Boston Advisors of their affiliates; SEC fees and state blue
sky qualification fees; charges of custodians and transfer and dividend
disbursing agents; the Fund's and its Board members' proportionate share of
insurance premiums, professional association dues and/or assessments;
outside auditing and legal expenses; costs of maintaining the Fund's
existence; costs attributable to investor services, including, without
limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for
regulatory purposes and for distribution to existing shareholders; costs of
shareholders' reports and meetings of the officers or Board and any
extraordinary expenses. In addition, the Fund will pay all distribution
fees pursuant to a Distribution Plan adopted under Rule 12b-1 of the
Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston Advisors
will reimburse the Fund for that excess expense to the extent required by
state law in the same proportion as its respective fees bear to the
combined fees for investment advice and administration. The expense
reimbursement obligation of Boston Advisors will be limited to the amount
of its fees hereunder. Such expense reimbursement, if any, will be
estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in rendering
the services listed in paragraph 2 above. Boston Advisors shall not be
liable for any error of judgment or mistake of law or for any loss suffered
by the Fund in connection with the matters to which this Agreement relates,
provided that nothing herein shall be deemed to protect or purport to
protect Boston Advisors against liability to the Fund or to its
shareholders to which Boston Advisors would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of Boston Advisors' reckless
disregard of its obligations and duties under this Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without the
written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or more
other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and nothing
contained herein shall be deemed to limit or restrict the right of Boston
Advisors or its affiliates to engage in and devote time and attention to
other businesses or to render services of whatever kind of nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including reasonable
attorney's fees) resulting or arising in connection with this Agreement or
from the performance or failure to perform any act hereunder, provided that
not such indemnification shall be available if the indemnitee violated the
standard of care in paragraph 6 above. This indemnification shall be
limited by the 1940 Act, and relevant state law. Each indemnitee shall be
entitled to advancement of its expenses in accordance with the requirements
of the 1940 Act and the rules, regulations and interpretations thereof as
in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations of
the Fund under this Agreement shall not be binding upon any of the Board
members, shareholders, nominees, officers, employees or agents, whether
past, present or future, of the Fund individually, but are binding only
upon the assets and property of the Fund, as provided in the Master Trust
Agreement and Bylaws. The execution and delivery of this Agreement has
been duly authorized by the Fund, SBA and Boston Advisors, and signed by an
authorized officer of each, acting as such. Neither the authorization by
the Board Members of the Trust, nor the execution and delivery by the
officer of the Trust shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but
shall bind only the assets and property of the Fund as provided in the
Mastser Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us the
enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income Funds -
Convertible Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: _____________________________
Name:
Title:
Appendix A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
- Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
- Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
- Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
- Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
- Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
- Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
- Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
- Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
- Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
- Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
- Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
- System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
- Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
- Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
- Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
- Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
- Total return reporting;
- SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
- Prepare dividend summary;
- Prepare quarter-end reports;
- Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
- Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
- Provide an Assistant Treasurer for the Fund;
- Authorize payment of bills for expenses of the Fund;
- Establish and monitor the rate of expense accruals;
- Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
- Monitor mark-to-market comparisons for money market funds;
- Recommend valuations to be used for securities which are not
readily saleable;
- Function as a liaison with the Fund's outside auditors and
arrange for audits;
- Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
- Prepare and file forms with the Internal Revenue Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
- File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
- File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
- Prepare and file proxy statements;
- Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
- Provide an Assistant Secretary for the Fund;
- Maintain general corporate calendar;
- Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
- Organize, attend and keep minutes of shareholder meetings;
- Maintain Articles of Incorporation or Master Trust
Agreements and By-Laws of the Fund.
Legal Consultation and Business Planning
- Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
- Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
- Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
- Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Schedule B
Fee
To be paid at an annual rate of:
6 bps of Administration Fee, plus 3/4 of amount between 15 bps and 6,
plus 1/2 of amount over 15 bps
SMITH BARNEY SHEARSON INCOME FUNDS
DIVERSIFIED STRATEGIC INCOME FUND
SUB-ADMINISTRATION AGREEMENT
May 4, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02210
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business
trust organized under the laws of the Commonwealth of Massachusetts, on
behalf of its sub-trust Diversified Strategic Income Fund (the "Fund"),
and Smith, Barney Advisers, Inc. ("SBA") confirm their agreement with
The Boston Company Advisors, Inc. ("Boston Advisors") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 5, 1992 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information
as from time to time in effect, and in such manner and to such extent as
may from time to time be approved by the Board of Trustees of the Trust
(the "Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
you. The Fund employs SBA as its administrator, and the Fund and SBA
desire to employ and hereby appoint Boston Advisors as the Fund's sub-
administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and
SBA, Boston Advisors will: (a) assist in supervising all aspects of the
Fund's operations except those performed by the Fund's investment
adviser under the Fund's investment advisory agreement; (b) supply the
Fund with office facilities (which may be in Boston Advisor'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 contingent deferred sales charges and similar fees
and changes and (iii) distribution fees, internal auditing and legal
services, internal executive and administrative services, and stationery
and office supplies; and (c) prepare reports to shareholders of the
Fund, tax returns and reports to and filings with the Securities and
Exchange Commission (the "SEC") and state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of
each month a fee for the previous month calculated in accordance with
the terms set forth in Appendix B, and as agreed to from time to time
by the Fund, SBA and Boston Advisors. Upon any termination of this
Agreement before the end of any month, the fee for such part of a month
shall be prorated according to the proportion which such period bears to
the full monthly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees
payable to Boston Advisors, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with
the performance of its services under this Agreement. The Fund will
bear certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
Board members of the Fund who are not officers, directors or employees
of Smith Barney Shearson Inc., Boston Advisors of their affiliates; SEC
fees and state blue sky qualification fees; charges of custodians and
transfer and dividend disbursing agents; the Fund's and its Board
members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston
Advisors will reimburse the Fund for that excess expense to the extent
required by state law in the same proportion as its respective fees bear
to the combined fees for investment advice and administration. The
expense reimbursement obligation of Boston Advisors will be limited to
the amount of its fees hereunder. Such expense reimbursement, if any,
will be estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in
rendering the services listed in paragraph 2 above. Boston Advisors
shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the matters to which
this Agreement relates, provided that nothing herein shall be deemed to
protect or purport to protect Boston Advisors against liability to the
Fund or to its shareholders to which Boston Advisors would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of Boston
Advisors' reckless disregard of its obligations and duties under this
Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without
the written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or
more other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and
nothing contained herein shall be deemed to limit or restrict the right
of Boston Advisors or its affiliates to engage in and devote time and
attention to other businesses or to render services of whatever kind of
nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including
reasonable attorney's fees) resulting or arising in connection with this
Agreement or from the performance or failure to perform any act
hereunder, provided that not such indemnification shall be available if
the indemnitee violated the standard of care in paragraph 6 above. This
indemnification shall be limited by the 1940 Act, and relevant state
law. Each indemnitee shall be entitled to advancement of its expenses
in accordance with the requirements of the 1940 Act and the rules,
regulations and interpretations thereof as in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations
of the Fund under this Agreement shall not be binding upon any of the
Board members, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Fund individually, but are
binding only upon the assets and property of the Fund, as provided in
the Master Trust Agreement and Bylaws. The execution and delivery of
this Agreement has been duly authorized by the Fund, SBA and Boston
Advisors, and signed by an authorized officer of each, acting as such.
Neither the authorization by the Board Members of the Trust, nor the
execution and delivery by the officer of the Trust shall be deemed to
have been made by any of them individually or to impose any liability on
any of them personally, but shall bind only the assets and property of
the Fund as provided in the Mastser Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us
the enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income Funds -
Diversified Strategic Income Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: _____________________________
Name:
Title:
Appendix A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
- Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
- Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
- Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
- Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
- Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
- Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
- Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
- Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
- Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
- Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
- Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
- System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
- Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
- Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
- Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
- Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
- Total return reporting;
- SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
- Prepare dividend summary;
- Prepare quarter-end reports;
- Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
- Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
- Provide an Assistant Treasurer for the Fund;
- Authorize payment of bills for expenses of the Fund;
- Establish and monitor the rate of expense accruals;
- Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
- Monitor mark-to-market comparisons for money market funds;
- Recommend valuations to be used for securities which are not
readily saleable;
- Function as a liaison with the Fund's outside auditors and
arrange for audits;
- Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
- Prepare and file forms with the Internal Revenue Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
- File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
- File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
- Prepare and file proxy statements;
- Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
- Provide an Assistant Secretary for the Fund;
- Maintain general corporate calendar;
- Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
- Organize, attend and keep minutes of shareholder meetings;
- Maintain Articles of Incorporation or Master Trust
Agreements and By-Laws of the Fund.
Legal Consultation and Business Planning
- Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
- Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
- Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
- Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Schedule B
Fee
SMITH BARNEY SHEARSON INCOME FUNDS
GLOBAL BOND FUND
SUB-ADMINISTRATION AGREEMENT
May 4, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02210
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business
trust organized under the laws of the Commonwealth of Massachusetts, on
behalf of its sub-trust Global Bond Fund (the "Fund"), and Smith, Barney
Advisers, Inc. ("SBA") confirm their agreement with The Boston Company
Advisors, Inc. ("Boston Advisors") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 5, 1992 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information
as from time to time in effect, and in such manner and to such extent as
may from time to time be approved by the Board of Trustees of the Trust
(the "Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
you. The Fund employs SBA as its administrator, and the Fund and SBA
desire to employ and hereby appoint Boston Advisors as the Fund's sub-
administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and
SBA, Boston Advisors will: (a) assist in supervising all aspects of the
Fund's operations except those performed by the Fund's investment
adviser under the Fund's investment advisory agreement; (b) supply the
Fund with office facilities (which may be in Boston Advisor'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 contingent deferred sales charges and similar fees
and changes and (iii) distribution fees, internal auditing and legal
services, internal executive and administrative services, and stationery
and office supplies; and (c) prepare reports to shareholders of the
Fund, tax returns and reports to and filings with the Securities and
Exchange Commission (the "SEC") and state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of
each month a fee for the previous month calculated in accordance with
the terms set forth in Appendix B, and as agreed to from time to time
by the Fund, SBA and Boston Advisors. Upon any termination of this
Agreement before the end of any month, the fee for such part of a month
shall be prorated according to the proportion which such period bears to
the full monthly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees
payable to Boston Advisors, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with
the performance of its services under this Agreement. The Fund will
bear certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
Board members of the Fund who are not officers, directors or employees
of Smith Barney Shearson Inc., Boston Advisors of their affiliates; SEC
fees and state blue sky qualification fees; charges of custodians and
transfer and dividend disbursing agents; the Fund's and its Board
members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston
Advisors will reimburse the Fund for that excess expense to the extent
required by state law in the same proportion as its respective fees bear
to the combined fees for investment advice and administration. The
expense reimbursement obligation of Boston Advisors will be limited to
the amount of its fees hereunder. Such expense reimbursement, if any,
will be estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in
rendering the services listed in paragraph 2 above. Boston Advisors
shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the matters to which
this Agreement relates, provided that nothing herein shall be deemed to
protect or purport to protect Boston Advisors against liability to the
Fund or to its shareholders to which Boston Advisors would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of Boston
Advisors' reckless disregard of its obligations and duties under this
Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without
the written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or
more other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and
nothing contained herein shall be deemed to limit or restrict the right
of Boston Advisors or its affiliates to engage in and devote time and
attention to other businesses or to render services of whatever kind of
nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including
reasonable attorney's fees) resulting or arising in connection with this
Agreement or from the performance or failure to perform any act
hereunder, provided that not such indemnification shall be available if
the indemnitee violated the standard of care in paragraph 6 above. This
indemnification shall be limited by the 1940 Act, and relevant state
law. Each indemnitee shall be entitled to advancement of its expenses
in accordance with the requirements of the 1940 Act and the rules,
regulations and interpretations thereof as in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations
of the Fund under this Agreement shall not be binding upon any of the
Board members, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Fund individually, but are
binding only upon the assets and property of the Fund, as provided in
the Master Trust Agreement and Bylaws. The execution and delivery of
this Agreement has been duly authorized by the Fund, SBA and Boston
Advisors, and signed by an authorized officer of each, acting as such.
Neither the authorization by the Board Members of the Trust, nor the
execution and delivery by the officer of the Trust shall be deemed to
have been made by any of them individually or to impose any liability on
any of them personally, but shall bind only the assets and property of
the Fund as provided in the Mastser Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us
the enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income Funds -
Global Bond Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: _____________________________
Name:
Title:
Appendix A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
- Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
- Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
- Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
- Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
- Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
- Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
- Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
- Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
- Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
- Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
- Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
- System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
- Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
- Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
- Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
- Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
- Total return reporting;
- SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
- Prepare dividend summary;
- Prepare quarter-end reports;
- Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
- Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
- Provide an Assistant Treasurer for the Fund;
- Authorize payment of bills for expenses of the Fund;
- Establish and monitor the rate of expense accruals;
- Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
- Monitor mark-to-market comparisons for money market funds;
- Recommend valuations to be used for securities which are not
readily saleable;
- Function as a liaison with the Fund's outside auditors and
arrange for audits;
- Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
- Prepare and file forms with the Internal Revenue Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
- File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
- File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
- Prepare and file proxy statements;
- Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
- Provide an Assistant Secretary for the Fund;
- Maintain general corporate calendar;
- Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
- Organize, attend and keep minutes of shareholder meetings;
- Maintain Articles of Incorporation or Master Trust
Agreements and By-Laws of the Fund.
Legal Consultation and Business Planning
- Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
- Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
- Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
- Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Schedule B
Fee
SMITH BARNEY SHEARSON INCOME FUNDS
HIGH INCOME FUND
SUB-ADMINISTRATION AGREEMENT
May 4, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02210
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business
trust organized under the laws of the Commonwealth of Massachusetts, on
behalf of its sub-trust High Income Fund (the "Fund"), and Smith, Barney
Advisers, Inc. ("SBA") confirm their agreement with The Boston Company
Advisors, Inc. ("Boston Advisors") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 5, 1992 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information
as from time to time in effect, and in such manner and to such extent as
may from time to time be approved by the Board of Trustees of the Trust
(the "Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
you. The Fund employs SBA as its administrator, and the Fund and SBA
desire to employ and hereby appoint Boston Advisors as the Fund's sub-
administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and
SBA, Boston Advisors will: (a) assist in supervising all aspects of the
Fund's operations except those performed by the Fund's investment
adviser under the Fund's investment advisory agreement; (b) supply the
Fund with office facilities (which may be in Boston Advisor'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 contingent deferred sales charges and similar fees
and changes and (iii) distribution fees, internal auditing and legal
services, internal executive and administrative services, and stationery
and office supplies; and (c) prepare reports to shareholders of the
Fund, tax returns and reports to and filings with the Securities and
Exchange Commission (the "SEC") and state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of
each month a fee for the previous month calculated in accordance with
the terms set forth in Appendix B, and as agreed to from time to time
by the Fund, SBA and Boston Advisors. Upon any termination of this
Agreement before the end of any month, the fee for such part of a month
shall be prorated according to the proportion which such period bears to
the full monthly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees
payable to Boston Advisors, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with
the performance of its services under this Agreement. The Fund will
bear certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
Board members of the Fund who are not officers, directors or employees
of Smith Barney Shearson Inc., Boston Advisors of their affiliates; SEC
fees and state blue sky qualification fees; charges of custodians and
transfer and dividend disbursing agents; the Fund's and its Board
members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston
Advisors will reimburse the Fund for that excess expense to the extent
required by state law in the same proportion as its respective fees bear
to the combined fees for investment advice and administration. The
expense reimbursement obligation of Boston Advisors will be limited to
the amount of its fees hereunder. Such expense reimbursement, if any,
will be estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in
rendering the services listed in paragraph 2 above. Boston Advisors
shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the matters to which
this Agreement relates, provided that nothing herein shall be deemed to
protect or purport to protect Boston Advisors against liability to the
Fund or to its shareholders to which Boston Advisors would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of Boston
Advisors' reckless disregard of its obligations and duties under this
Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without
the written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or
more other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and
nothing contained herein shall be deemed to limit or restrict the right
of Boston Advisors or its affiliates to engage in and devote time and
attention to other businesses or to render services of whatever kind of
nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including
reasonable attorney's fees) resulting or arising in connection with this
Agreement or from the performance or failure to perform any act
hereunder, provided that not such indemnification shall be available if
the indemnitee violated the standard of care in paragraph 6 above. This
indemnification shall be limited by the 1940 Act, and relevant state
law. Each indemnitee shall be entitled to advancement of its expenses
in accordance with the requirements of the 1940 Act and the rules,
regulations and interpretations thereof as in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations
of the Fund under this Agreement shall not be binding upon any of the
Board members, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Fund individually, but are
binding only upon the assets and property of the Fund, as provided in
the Master Trust Agreement and Bylaws. The execution and delivery of
this Agreement has been duly authorized by the Fund, SBA and Boston
Advisors, and signed by an authorized officer of each, acting as such.
Neither the authorization by the Board Members of the Trust, nor the
execution and delivery by the officer of the Trust shall be deemed to
have been made by any of them individually or to impose any liability on
any of them personally, but shall bind only the assets and property of
the Fund as provided in the Mastser Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us
the enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income Funds -
High Income Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: _____________________________
Name:
Title:
Appendix A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
- Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
- Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
- Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
- Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
- Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
- Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
- Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
- Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
- Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
- Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
- Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
- System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
- Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
- Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
- Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
- Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
- Total return reporting;
- SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
- Prepare dividend summary;
- Prepare quarter-end reports;
- Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
- Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
- Provide an Assistant Treasurer for the Fund;
- Authorize payment of bills for expenses of the Fund;
- Establish and monitor the rate of expense accruals;
- Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
- Monitor mark-to-market comparisons for money market funds;
- Recommend valuations to be used for securities which are not
readily saleable;
- Function as a liaison with the Fund's outside auditors and
arrange for audits;
- Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
- Prepare and file forms with the Internal Revenue Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
- File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
- File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
- Prepare and file proxy statements;
- Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
- Provide an Assistant Secretary for the Fund;
- Maintain general corporate calendar;
- Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
- Organize, attend and keep minutes of shareholder meetings;
- Maintain Articles of Incorporation or Master Trust
Agreements and By-Laws of the Fund.
Legal Consultation and Business Planning
- Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
- Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
- Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
- Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Schedule B
Fee
SMITH BARNEY SHEARSON INCOME FUNDS
MONEY MARKET FUND
SUB-ADMINISTRATION AGREEMENT
May 4, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02210
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business
trust organized under the laws of the Commonwealth of Massachusetts, on
behalf of its sub-trust Money Market Fund (the "Fund"), and Smith,
Barney Advisers, Inc. ("SBA") confirm their agreement with The Boston
Company Advisors, Inc. ("Boston Advisors") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 5, 1992 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information
as from time to time in effect, and in such manner and to such extent as
may from time to time be approved by the Board of Trustees of the Trust
(the "Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
you. The Fund employs SBA as its administrator, and the Fund and SBA
desire to employ and hereby appoint Boston Advisors as the Fund's sub-
administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and
SBA, Boston Advisors will: (a) assist in supervising all aspects of the
Fund's operations except those performed by the Fund's investment
adviser under the Fund's investment advisory agreement; (b) supply the
Fund with office facilities (which may be in Boston Advisor'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 contingent deferred sales charges and similar fees
and changes and (iii) distribution fees, internal auditing and legal
services, internal executive and administrative services, and stationery
and office supplies; and (c) prepare reports to shareholders of the
Fund, tax returns and reports to and filings with the Securities and
Exchange Commission (the "SEC") and state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of
each month a fee for the previous month calculated in accordance with
the terms set forth in Appendix B, and as agreed to from time to time
by the Fund, SBA and Boston Advisors. Upon any termination of this
Agreement before the end of any month, the fee for such part of a month
shall be prorated according to the proportion which such period bears to
the full monthly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees
payable to Boston Advisors, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with
the performance of its services under this Agreement. The Fund will
bear certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
Board members of the Fund who are not officers, directors or employees
of Smith Barney Shearson Inc., Boston Advisors of their affiliates; SEC
fees and state blue sky qualification fees; charges of custodians and
transfer and dividend disbursing agents; the Fund's and its Board
members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston
Advisors will reimburse the Fund for that excess expense to the extent
required by state law in the same proportion as its respective fees bear
to the combined fees for investment advice and administration. The
expense reimbursement obligation of Boston Advisors will be limited to
the amount of its fees hereunder. Such expense reimbursement, if any,
will be estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in
rendering the services listed in paragraph 2 above. Boston Advisors
shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the matters to which
this Agreement relates, provided that nothing herein shall be deemed to
protect or purport to protect Boston Advisors against liability to the
Fund or to its shareholders to which Boston Advisors would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of Boston
Advisors' reckless disregard of its obligations and duties under this
Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without
the written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or
more other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and
nothing contained herein shall be deemed to limit or restrict the right
of Boston Advisors or its affiliates to engage in and devote time and
attention to other businesses or to render services of whatever kind of
nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including
reasonable attorney's fees) resulting or arising in connection with this
Agreement or from the performance or failure to perform any act
hereunder, provided that not such indemnification shall be available if
the indemnitee violated the standard of care in paragraph 6 above. This
indemnification shall be limited by the 1940 Act, and relevant state
law. Each indemnitee shall be entitled to advancement of its expenses
in accordance with the requirements of the 1940 Act and the rules,
regulations and interpretations thereof as in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations
of the Fund under this Agreement shall not be binding upon any of the
Board members, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Fund individually, but are
binding only upon the assets and property of the Fund, as provided in
the Master Trust Agreement and Bylaws. The execution and delivery of
this Agreement has been duly authorized by the Fund, SBA and Boston
Advisors, and signed by an authorized officer of each, acting as such.
Neither the authorization by the Board Members of the Trust, nor the
execution and delivery by the officer of the Trust shall be deemed to
have been made by any of them individually or to impose any liability on
any of them personally, but shall bind only the assets and property of
the Fund as provided in the Mastser Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us
the enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income Funds -
Money Market Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: _____________________________
Name:
Title:
Appendix A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
- Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
- Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
- Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
- Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
- Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
- Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
- Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
- Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
- Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
- Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
- Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
- System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
- Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
- Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
- Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
- Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
- Total return reporting;
- SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
- Prepare dividend summary;
- Prepare quarter-end reports;
- Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
- Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
- Provide an Assistant Treasurer for the Fund;
- Authorize payment of bills for expenses of the Fund;
- Establish and monitor the rate of expense accruals;
- Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
- Monitor mark-to-market comparisons for money market funds;
- Recommend valuations to be used for securities which are not
readily saleable;
- Function as a liaison with the Fund's outside auditors and
arrange for audits;
- Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
- Prepare and file forms with the Internal Revenue Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
- File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
- File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
- Prepare and file proxy statements;
- Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
- Provide an Assistant Secretary for the Fund;
- Maintain general corporate calendar;
- Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
- Organize, attend and keep minutes of shareholder meetings;
- Maintain Articles of Incorporation or Master Trust
Agreements and By-Laws of the Fund.
Legal Consultation and Business Planning
- Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
- Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
- Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
- Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Schedule B
Fee
SMITH BARNEY SHEARSON INCOME FUNDS
PREMIUM TOTAL RETURN FUND
SUB-ADMINISTRATION AGREEMENT
May 4, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02210
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business
trust organized under the laws of the Commonwealth of Massachusetts, on
behalf of its sub-trust Premium Total Return Fund (the "Fund"), and
Smith, Barney Advisers, Inc. ("SBA") confirm their agreement with The
Boston Company Advisors, Inc. ("Boston Advisors") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 5, 1992 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information
as from time to time in effect, and in such manner and to such extent as
may from time to time be approved by the Board of Trustees of the Trust
(the "Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
you. The Fund employs SBA as its administrator, and the Fund and SBA
desire to employ and hereby appoint Boston Advisors as the Fund's sub-
administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and
SBA, Boston Advisors will: (a) assist in supervising all aspects of the
Fund's operations except those performed by the Fund's investment
adviser under the Fund's investment advisory agreement; (b) supply the
Fund with office facilities (which may be in Boston Advisor'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 contingent deferred sales charges and similar fees
and changes and (iii) distribution fees, internal auditing and legal
services, internal executive and administrative services, and stationery
and office supplies; and (c) prepare reports to shareholders of the
Fund, tax returns and reports to and filings with the Securities and
Exchange Commission (the "SEC") and state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of
each month a fee for the previous month calculated in accordance with
the terms set forth in Appendix B, and as agreed to from time to time
by the Fund, SBA and Boston Advisors. Upon any termination of this
Agreement before the end of any month, the fee for such part of a month
shall be prorated according to the proportion which such period bears to
the full monthly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees
payable to Boston Advisors, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with
the performance of its services under this Agreement. The Fund will
bear certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
Board members of the Fund who are not officers, directors or employees
of Smith Barney Shearson Inc., Boston Advisors of their affiliates; SEC
fees and state blue sky qualification fees; charges of custodians and
transfer and dividend disbursing agents; the Fund's and its Board
members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston
Advisors will reimburse the Fund for that excess expense to the extent
required by state law in the same proportion as its respective fees bear
to the combined fees for investment advice and administration. The
expense reimbursement obligation of Boston Advisors will be limited to
the amount of its fees hereunder. Such expense reimbursement, if any,
will be estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in
rendering the services listed in paragraph 2 above. Boston Advisors
shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the matters to which
this Agreement relates, provided that nothing herein shall be deemed to
protect or purport to protect Boston Advisors against liability to the
Fund or to its shareholders to which Boston Advisors would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of Boston
Advisors' reckless disregard of its obligations and duties under this
Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without
the written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or
more other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and
nothing contained herein shall be deemed to limit or restrict the right
of Boston Advisors or its affiliates to engage in and devote time and
attention to other businesses or to render services of whatever kind of
nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including
reasonable attorney's fees) resulting or arising in connection with this
Agreement or from the performance or failure to perform any act
hereunder, provided that not such indemnification shall be available if
the indemnitee violated the standard of care in paragraph 6 above. This
indemnification shall be limited by the 1940 Act, and relevant state
law. Each indemnitee shall be entitled to advancement of its expenses
in accordance with the requirements of the 1940 Act and the rules,
regulations and interpretations thereof as in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations
of the Fund under this Agreement shall not be binding upon any of the
Board members, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Fund individually, but are
binding only upon the assets and property of the Fund, as provided in
the Master Trust Agreement and Bylaws. The execution and delivery of
this Agreement has been duly authorized by the Fund, SBA and Boston
Advisors, and signed by an authorized officer of each, acting as such.
Neither the authorization by the Board Members of the Trust, nor the
execution and delivery by the officer of the Trust shall be deemed to
have been made by any of them individually or to impose any liability on
any of them personally, but shall bind only the assets and property of
the Fund as provided in the Mastser Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us
the enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income Funds -
Premium Total Return Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: _____________________________
Name:
Title:
Appendix A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
- Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
- Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
- Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
- Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
- Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
- Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
- Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
- Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
- Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
- Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
- Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
- System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
- Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
- Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
- Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
- Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
- Total return reporting;
- SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
- Prepare dividend summary;
- Prepare quarter-end reports;
- Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
- Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
- Provide an Assistant Treasurer for the Fund;
- Authorize payment of bills for expenses of the Fund;
- Establish and monitor the rate of expense accruals;
- Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
- Monitor mark-to-market comparisons for money market funds;
- Recommend valuations to be used for securities which are not
readily saleable;
- Function as a liaison with the Fund's outside auditors and
arrange for audits;
- Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
- Prepare and file forms with the Internal Revenue Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
- File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
- File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
- Prepare and file proxy statements;
- Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
- Provide an Assistant Secretary for the Fund;
- Maintain general corporate calendar;
- Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
- Organize, attend and keep minutes of shareholder meetings;
- Maintain Articles of Incorporation or Master Trust
Agreements and By-Laws of the Fund.
Legal Consultation and Business Planning
- Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
- Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
- Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
- Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Schedule B
Fee
SMITH BARNEY SHEARSON INCOME FUNDS
TAX-EXEMPT INCOME FUND
SUB-ADMINISTRATION AGREEMENT
May 4, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02210
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business
trust organized under the laws of the Commonwealth of Massachusetts, on
behalf of its sub-trust Tax-Exempt Income Fund (the "Fund"), and Smith,
Barney Advisers, Inc. ("SBA") confirm their agreement with The Boston
Company Advisors, Inc. ("Boston Advisors") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 5, 1992 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information
as from time to time in effect, and in such manner and to such extent as
may from time to time be approved by the Board of Trustees of the Trust
(the "Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
you. The Fund employs SBA as its administrator, and the Fund and SBA
desire to employ and hereby appoint Boston Advisors as the Fund's sub-
administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and
SBA, Boston Advisors will: (a) assist in supervising all aspects of the
Fund's operations except those performed by the Fund's investment
adviser under the Fund's investment advisory agreement; (b) supply the
Fund with office facilities (which may be in Boston Advisor'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 contingent deferred sales charges and similar fees
and changes and (iii) distribution fees, internal auditing and legal
services, internal executive and administrative services, and stationery
and office supplies; and (c) prepare reports to shareholders of the
Fund, tax returns and reports to and filings with the Securities and
Exchange Commission (the "SEC") and state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of
each month a fee for the previous month calculated in accordance with
the terms set forth in Appendix B, and as agreed to from time to time
by the Fund, SBA and Boston Advisors. Upon any termination of this
Agreement before the end of any month, the fee for such part of a month
shall be prorated according to the proportion which such period bears to
the full monthly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees
payable to Boston Advisors, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with
the performance of its services under this Agreement. The Fund will
bear certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
Board members of the Fund who are not officers, directors or employees
of Smith Barney Shearson Inc., Boston Advisors of their affiliates; SEC
fees and state blue sky qualification fees; charges of custodians and
transfer and dividend disbursing agents; the Fund's and its Board
members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston
Advisors will reimburse the Fund for that excess expense to the extent
required by state law in the same proportion as its respective fees bear
to the combined fees for investment advice and administration. The
expense reimbursement obligation of Boston Advisors will be limited to
the amount of its fees hereunder. Such expense reimbursement, if any,
will be estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in
rendering the services listed in paragraph 2 above. Boston Advisors
shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the matters to which
this Agreement relates, provided that nothing herein shall be deemed to
protect or purport to protect Boston Advisors against liability to the
Fund or to its shareholders to which Boston Advisors would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of Boston
Advisors' reckless disregard of its obligations and duties under this
Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without
the written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or
more other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and
nothing contained herein shall be deemed to limit or restrict the right
of Boston Advisors or its affiliates to engage in and devote time and
attention to other businesses or to render services of whatever kind of
nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including
reasonable attorney's fees) resulting or arising in connection with this
Agreement or from the performance or failure to perform any act
hereunder, provided that not such indemnification shall be available if
the indemnitee violated the standard of care in paragraph 6 above. This
indemnification shall be limited by the 1940 Act, and relevant state
law. Each indemnitee shall be entitled to advancement of its expenses
in accordance with the requirements of the 1940 Act and the rules,
regulations and interpretations thereof as in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations
of the Fund under this Agreement shall not be binding upon any of the
Board members, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Fund individually, but are
binding only upon the assets and property of the Fund, as provided in
the Master Trust Agreement and Bylaws. The execution and delivery of
this Agreement has been duly authorized by the Fund, SBA and Boston
Advisors, and signed by an authorized officer of each, acting as such.
Neither the authorization by the Board Members of the Trust, nor the
execution and delivery by the officer of the Trust shall be deemed to
have been made by any of them individually or to impose any liability on
any of them personally, but shall bind only the assets and property of
the Fund as provided in the Mastser Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us
the enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income Funds -
Tax-Exempt Income Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: _____________________________
Name:
Title:
Appendix A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
- Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
- Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
- Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
- Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
- Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
- Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
- Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
- Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
- Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
- Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
- Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
- System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
- Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
- Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
- Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
- Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
- Total return reporting;
- SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
- Prepare dividend summary;
- Prepare quarter-end reports;
- Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
- Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
- Provide an Assistant Treasurer for the Fund;
- Authorize payment of bills for expenses of the Fund;
- Establish and monitor the rate of expense accruals;
- Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
- Monitor mark-to-market comparisons for money market funds;
- Recommend valuations to be used for securities which are not
readily saleable;
- Function as a liaison with the Fund's outside auditors and
arrange for audits;
- Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
- Prepare and file forms with the Internal Revenue Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
- File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
- File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
- Prepare and file proxy statements;
- Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
- Provide an Assistant Secretary for the Fund;
- Maintain general corporate calendar;
- Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
- Organize, attend and keep minutes of shareholder meetings;
- Maintain Articles of Incorporation or Master Trust
Agreements and By-Laws of the Fund.
Legal Consultation and Business Planning
- Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
- Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
- Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
- Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Schedule B
Fee
SMITH BARNEY SHEARSON INCOME FUNDS
UTILITIES FUND
SUB-ADMINISTRATION AGREEMENT
May 4, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02210
Dear Sirs:
Smith Barney Shearson Income Funds (the "Trust"), a business
trust organized under the laws of the Commonwealth of Massachusetts, on
behalf of its sub-trust Utilities Fund (the "Fund"), and Smith, Barney
Advisers, Inc. ("SBA") confirm their agreement with The Boston Company
Advisors, Inc. ("Boston Advisors") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the
limitations specified in its Amended and Restated Master Trust Agreement
dated November 5, 1992 as amended from time to time (the "Master Trust
Agreement"), in its Prospectus and Statement of Additional Information
as from time to time in effect, and in such manner and to such extent as
may from time to time be approved by the Board of Trustees of the Trust
(the "Board"). Copies of the Fund's Prospectus, Statement of Additional
Information and Master Trust Agreement have been or will be submitted to
you. The Fund employs SBA as its administrator, and the Fund and SBA
desire to employ and hereby appoint Boston Advisors as the Fund's sub-
administrator. Boston Advisors accepts this appointment and agrees to
furnish the services to the Fund, for the compensation set forth below,
under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and
SBA, Boston Advisors will: (a) assist in supervising all aspects of the
Fund's operations except those performed by the Fund's investment
adviser under the Fund's investment advisory agreement; (b) supply the
Fund with office facilities (which may be in Boston Advisor'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 contingent deferred sales charges and similar fees
and changes and (iii) distribution fees, internal auditing and legal
services, internal executive and administrative services, and stationery
and office supplies; and (c) prepare reports to shareholders of the
Fund, tax returns and reports to and filings with the Securities and
Exchange Commission (the "SEC") and state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this
Agreement, SBA will pay Boston Advisors on the first business day of
each month a fee for the previous month calculated in accordance with
the terms set forth in Appendix B, and as agreed to from time to time
by the Fund, SBA and Boston Advisors. Upon any termination of this
Agreement before the end of any month, the fee for such part of a month
shall be prorated according to the proportion which such period bears to
the full monthly period and shall be payable upon the date of
termination of this Agreement. For the purpose of determining fees
payable to Boston Advisors, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's
Prospectus and Statement of Additional Information as from time to time
in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with
the performance of its services under this Agreement. The Fund will
bear certain other expenses to be incurred in its operation, including:
taxes, interest, brokerage fees and commissions, if any; fees of the
Board members of the Fund who are not officers, directors or employees
of Smith Barney Shearson Inc., Boston Advisors of their affiliates; SEC
fees and state blue sky qualification fees; charges of custodians and
transfer and dividend disbursing agents; the Fund's and its Board
members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable
to investor services, including, without limitation, telephone and
personnel expenses; costs of preparing and printing prospectuses and
statements of additional information for regulatory purposes and for
distribution to existing shareholders; costs of shareholders' reports
and meetings of the officers or Board and any extraordinary expenses.
In addition, the Fund will pay all distribution fees pursuant to a
Distribution Plan adopted under Rule 12b-1 of the Investment Company Act
of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment
advisory agreement(s) and administration agreement, but excluding
distribution fees, interest, taxes, brokerage and, if permitted by state
securities commissions, extraordinary expenses) exceed the expense
limitations of any state having jurisdiction over the Fund, Boston
Advisors will reimburse the Fund for that excess expense to the extent
required by state law in the same proportion as its respective fees bear
to the combined fees for investment advice and administration. The
expense reimbursement obligation of Boston Advisors will be limited to
the amount of its fees hereunder. Such expense reimbursement, if any,
will be estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in
rendering the services listed in paragraph 2 above. Boston Advisors
shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the Fund in connection with the matters to which
this Agreement relates, provided that nothing herein shall be deemed to
protect or purport to protect Boston Advisors against liability to the
Fund or to its shareholders to which Boston Advisors would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of Boston
Advisors' reckless disregard of its obligations and duties under this
Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive
annual periods, provided that it may be terminated by 90 days' written
notice to the other parties by any of the Fund, SBA or Boston Advisors.
This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns, provided, however,
that this agreement may not be assigned, transferred or amended without
the written consent of all the parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will
continue to act and may act in the future as administrator to one or
more other investment companies, and the Fund has no objection to Boston
Advisors so acting. In addition, the Fund understands that the persons
employed by Boston Advisors to assist in the performance of its duties
hereunder may or may not devote their full time to such service and
nothing contained herein shall be deemed to limit or restrict the right
of Boston Advisors or its affiliates to engage in and devote time and
attention to other businesses or to render services of whatever kind of
nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the
Fund, and Boston Advisors agrees to indemnify SBA and its indemnitees,
against any loss, claim, expenses or cost of any kind (including
reasonable attorney's fees) resulting or arising in connection with this
Agreement or from the performance or failure to perform any act
hereunder, provided that not such indemnification shall be available if
the indemnitee violated the standard of care in paragraph 6 above. This
indemnification shall be limited by the 1940 Act, and relevant state
law. Each indemnitee shall be entitled to advancement of its expenses
in accordance with the requirements of the 1940 Act and the rules,
regulations and interpretations thereof as in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations
of the Fund under this Agreement shall not be binding upon any of the
Board members, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Fund individually, but are
binding only upon the assets and property of the Fund, as provided in
the Master Trust Agreement and Bylaws. The execution and delivery of
this Agreement has been duly authorized by the Fund, SBA and Boston
Advisors, and signed by an authorized officer of each, acting as such.
Neither the authorization by the Board Members of the Trust, nor the
execution and delivery by the officer of the Trust shall be deemed to
have been made by any of them individually or to impose any liability on
any of them personally, but shall bind only the assets and property of
the Fund as provided in the Mastser Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance hereof by signing and returning to us
the enclosed copy hereof.
Very truly yours,
Smith Barney Shearson Income Funds -
Utilities Fund
By: /s/ Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman
Smith, Barney Advisers, Inc.
By: /s/ Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: _____________________________
Name:
Title:
Appendix A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
- Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
- Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
- Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
- Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
- Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
- Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
- Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
- Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
- Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
- Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
- Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
- System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
- Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
- Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
- Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
- Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
- Total return reporting;
- SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
- Prepare dividend summary;
- Prepare quarter-end reports;
- Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
- Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
- Provide an Assistant Treasurer for the Fund;
- Authorize payment of bills for expenses of the Fund;
- Establish and monitor the rate of expense accruals;
- Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
- Monitor mark-to-market comparisons for money market funds;
- Recommend valuations to be used for securities which are not
readily saleable;
- Function as a liaison with the Fund's outside auditors and
arrange for audits;
- Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
- Prepare and file forms with the Internal Revenue Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
- File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
- File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
- Prepare and file proxy statements;
- Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
- Provide an Assistant Secretary for the Fund;
- Maintain general corporate calendar;
- Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
- Organize, attend and keep minutes of shareholder meetings;
- Maintain Articles of Incorporation or Master Trust
Agreements and By-Laws of the Fund.
Legal Consultation and Business Planning
- Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
- Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
- Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
- Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
Schedule B
Fee
The Boston Company Advisors, Inc.
October 10, 1994
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May 4, 1994
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May 4, 1994
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May 4, 1994
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May 4, 1994
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May 4, 1994
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May 4, 1994
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May 4, 1994
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EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Smith Barney Income Funds:
We hereby consent to the following with respect to
Post-Effective Amendment No. 40 to the Registration Statement on
Form N-1A (File No. 2-96408) under the Securities Act of 1933,
as amended, of Smith Barney Income Funds (formerly Smith Barney
Shearson Income Funds) (consisting of Global Bond Fund, High
Income Fund, Exchange Reserve Fund (formerly Money Market
Fund), Premium Total Return Fund, Tax-Exempt Fund, Utilities
Fund, Convertible Fund, and Diversified Strategic Income Fund):
1. The incorporation by reference of our reports dated
September 9, 1994, accompanying the Annual Reports dated July
31, 1994 of Money Market Fund and Utilities Fund, in the
Statement of Additional Information.
2. The incorporation by reference of our reports dated
September 19, 1994, accompanying the Annual Reports dated July
31, 1994 of High Income Fund and Convertible Securities Fund, in
the Statement of Additional Information.
3. The incorporation by reference of our report dated September
23, 1994, accompanying the Annual Report dated July 31, 1994 of
Premium Total Return Fund, in the Statement of Additional
Information.
4. The incorporation by reference of our reports dated
September 30, 1994, accompanying the Annual Reports dated July
31, 1994 of Global Bond Fund and Diversified Strategic Income
Fund, in the Statement of Additional Information.
5. The incorporation by reference of our report dated September
16, 1994, accompanying the Annual Report dated July 31, 1994 of
Tax-Exempt Fund, in the Statement of Additional Information.
6. The reference to our firm under the heading "Financial
Highlights" in the Prospectuses.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
November 3, 1994
s:\domestic\clients\shearson\funds\slip\ex11.doc
EXHIBIT 15
AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY CONVERTIBLE FUND
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney Convertible Fund, a
business trust organized under the laws of the Commonwealth of
Massachusetts (the "Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .25% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class B shares
(the "Class B Service Fee").
(c) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class C shares
(the "Class C Service Fee," and collectively with the Class A Service Fee
and the Class B Service Fee, the "Service Fees").
(d) Distribution Fee for Class B shares. In addition to the Class B
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the fund
attributable to the Class B Distribution Fee, the "Distribution Fees").
(e) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .45% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(f) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone
facilities, answering routine inquires regarding the Fund, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Fund's Transfer agent; and (e) accruals for
interest on the amount of the foregoing expenses that exceed the
Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by
a majority of the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Trustees and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule, which sets out
the amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder
shall not be binding upon of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the
Fund, individually, but are binding only upon the assets and property of
the Fund, as provided, as provided in the Master Trust Agreement of the
Fund. The execution and delivery of this Plan has been authorized by the
Trustees and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
CONVERTIBLE FUND
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY DIVERSIFIED STRATEGIC INCOME FUND
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney Diversified Strategic
Income Fund, a business trust organized under the laws of the Commonwealth
of Massachusetts (the "Fund"), subject to the following terms and
conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .25% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class B shares
(the "Class B Service Fee").
(c) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class C shares
(the "Class C Service Fee," and collectively with the Class A Service Fee
and the Class B Service Fee, the "Service Fees").
(d) Distribution Fee for Class B shares. In addition to the Class B
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the fund
attributable to the Class B Distribution Fee, the "Distribution Fees").
(e) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .45% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(f) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone
facilities, answering routine inquires regarding the Fund, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Fund's Transfer agent; and (e) accruals for
interest on the amount of the foregoing expenses that exceed the
Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by
a majority of the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Trustees and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule, which sets out
the amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder
shall not be binding upon of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the
Fund, individually, but are binding only upon the assets and property of
the Fund, as provided, as provided in the Master Trust Agreement of the
Fund. The execution and delivery of this Plan has been authorized by the
Trustees and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
DIVERSIFIED STRATEGIC INCOME FUND
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY GLOBAL BOND FUND
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney Global Bond, a business
trust organized under the laws of the Commonwealth of Massachusetts (the
"Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .25% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class B shares
(the "Class B Service Fee").
(c) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class C shares
(the "Class C Service Fee," and collectively with the Class A Service Fee
and the Class B Service Fee, the "Service Fees").
(d) Distribution Fee for Class B shares. In addition to the Class B
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the fund
attributable to the Class B Distribution Fee, the "Distribution Fees").
(e) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .45% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(f) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone
facilities, answering routine inquires regarding the Fund, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Fund's Transfer agent; and (e) accruals for
interest on the amount of the foregoing expenses that exceed the
Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by
a majority of the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Trustees and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule, which sets out
the amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder
shall not be binding upon of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the
Fund, individually, but are binding only upon the assets and property of
the Fund, as provided, as provided in the Master Trust Agreement of the
Fund. The execution and delivery of this Plan has been authorized by the
Trustees and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
GLOBAL BOND FUND
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY HIGH INCOME FUND
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney High Income Fund, a
business trust organized under the laws of the Commonwealth of
Massachusetts (the "Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .25% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class B shares
(the "Class B Service Fee").
(c) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class C shares
(the "Class C Service Fee," and collectively with the Class A Service Fee
and the Class B Service Fee, the "Service Fees").
(d) Distribution Fee for Class B shares. In addition to the Class B
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the fund
attributable to the Class B Distribution Fee, the "Distribution Fees").
(e) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .45% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(f) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone
facilities, answering routine inquires regarding the Fund, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Fund's Transfer agent; and (e) accruals for
interest on the amount of the foregoing expenses that exceed the
Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by
a majority of the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Trustees and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule, which sets out
the amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder
shall not be binding upon of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the
Fund, individually, but are binding only upon the assets and property of
the Fund, as provided, as provided in the Master Trust Agreement of the
Fund. The execution and delivery of this Plan has been authorized by the
Trustees and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
HIGH INCOME FUND
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY MONEY MARKET FUND
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney Money Market Fund, a
business trust organized under the laws of the Commonwealth of
Massachusetts (the "Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Service Fee for Class B shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .50% of the
average daily net assets of the Fund attributable to the Class B shares
(the "Class B Service Fee").
(b) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of
of the average daily net assets of the Fund attributable to the Class C
shares (the "Class C Service Fee," and collectively with the Class A
Service Fee and the Class B Service Fee, the "Service Fees").
(c) Distribution Fee for Class B shares. In addition to the Class B
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the fund
attributable to the Class B Distribution Fee, the "Distribution Fees").
(d) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of of the average daily net assets of
the Fund attributable to the Class C shares (the "Class C Distribution
Fee," and collectively with the Class B Distribution Fee, the "Distribution
Fees").
(e) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone facilities, answering routine inquires regarding the Fund,
processing shareholder transactions and providing any other shareholder
services not otherwise provided by the Fund's Transfer agent; and (e)
accruals for interest on the amount of the foregoing expenses that exceed
the Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by
a majority of the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Trustees and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule, which sets out
the amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder
shall not be binding upon of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the
Fund, individually, but are binding only upon the assets and property of
the Fund, as provided, as provided in the Master Trust Agreement of the
Fund. The execution and delivery of this Plan has been authorized by the
Trustees and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
MONEY MARKET FUND
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY PREMIUM TOTAL RETURN FUND
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney Premium Total Return
Fund, a business trust organized under the laws of the Commonwealth of
Massachusetts (the "Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .25% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class B shares
(the "Class B Service Fee").
(c) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class C shares
(the "Class C Service Fee," and collectively with the Class A Service Fee
and the Class B Service Fee, the "Service Fees").
(d) Distribution Fee for Class B shares. In addition to the Class B
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the fund
attributable to the Class B Distribution Fee, the "Distribution Fees").
(e) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .45% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(f) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone
facilities, answering routine inquires regarding the Fund, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Fund's Transfer agent; and (e) accruals for
interest on the amount of the foregoing expenses that exceed the
Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by
a majority of the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Trustees and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule, which sets out
the amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder
shall not be binding upon of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the
Fund, individually, but are binding only upon the assets and property of
the Fund, as provided, as provided in the Master Trust Agreement of the
Fund. The execution and delivery of this Plan has been authorized by the
Trustees and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY TAX-EXEMPT INCOME FUND
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney Tax-Exempt Income Fund,
a business trust organized under the laws of the Commonwealth of
Massachusetts (the "Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .15% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .15% of the
average daily net assets of the Fund attributable to the Class B shares
(the "Class B Service Fee").
(c) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .15% of the
average daily net assets of the Fund attributable to the Class C shares
(the "Class C Service Fee," and collectively with the Class A Service Fee
and the Class B Service Fee, the "Service Fees").
(d) Distribution Fee for Class B shares. In addition to the Class B
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the fund
attributable to the Class B Distribution Fee, the "Distribution Fees").
(e) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .55% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(f) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone
facilities, answering routine inquires regarding the Fund, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Fund's Transfer agent; and (e) accruals for
interest on the amount of the foregoing expenses that exceed the
Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by
a majority of the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Trustees and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule, which sets out
the amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder
shall not be binding upon of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the
Fund, individually, but are binding only upon the assets and property of
the Fund, as provided, as provided in the Master Trust Agreement of the
Fund. The execution and delivery of this Plan has been authorized by the
Trustees and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
TAX-EXEMPT INCOME FUND
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY UTILITIES FUND
This Services and Distribution Plan (the "Plan") is adopted in
accordance with rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by Smith Barney Utilities Fund, a
business trust organized under the laws of the Commonwealth of
Massachusetts (the "Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .25% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class B shares
(the "Class B Service Fee").
(c) Service Fee for Class C shares. The Fund will pay to the
Distributor a service fee under the Plan at the annual rate of .25% of the
average daily net assets of the Fund attributable to the Class C shares
(the "Class C Service Fee," and collectively with the Class A Service Fee
and the Class B Service Fee, the "Service Fees").
(d) Distribution Fee for Class B shares. In addition to the Class B
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the fund
attributable to the Class B Distribution Fee, the "Distribution Fees").
(e) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .45% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(f) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective
Service Fees and/or Distribution Fees may be used for; (a) costs of
printing and distributing the Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs
involved in preparing, printing and distributing sales literature
pertaining o the Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments made
to, and expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution of the
Fund's shares, including but not limited to, office space and equipment,
telephone
facilities, answering routine inquires regarding the Fund, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Fund's Transfer agent; and (e) accruals for
interest on the amount of the foregoing expenses that exceed the
Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in
accordance with Section 1 of the Plan, with respect to a Class until the
Plan has been approved by a vote of a least a majority of the outstanding
voting securities of the Class. The Plan will be deemed to have been
approved with respect to a class so longer as a majority of the outstanding
voting securities of the Class votes for the approval of the Plan,
notwithstanding that: (a) the Plan has not been approved by a major of the
outstanding voting securities of any other Class, or (b) the Plan has not
been approved by a majority of the outstanding voting securities of the
Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until
approved by a majority of both (a) the full Board of Trustees of the Fund
and (b) those Trustees who are not interested persons of the Fund and who
have not direct or indirect financial interest in the operation of the Plan
or in any agreements related to it (the "Qualified Trustees"), cast in
person at a meeting called for the purpose of voting on the Plan and the
related agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until
November 7, 1995, and thereafter for successive twelve-month periods with
respect to each Class; provided, however, that such continuance is
specifically approved at least annually by the Trustees of the Fund and by
a majority of the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by
the Fund without the payment of any penalty, by the vote of a majority of
the outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to
increase materially the amounts of the Fees described in Section 1 above,
unless the amendment is approved by a vote of the holders of at least a
majority of the outstanding voting securities of that class. No material
amendment to the Plan may be made unless approved by the Fund's Board of
Trustees in the manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the
Fund's Trustees who are not interested persons of the Fund will be
committed to the discretion of the Trustees then in office who are not
interested persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to the Plan or any related agreement will prepare and furnish to
the Fund's Board of Trustees and the Board will review, at least quarterly,
written reports complying with the requirements of the Rule, which sets out
the amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to
the Plan and any report made pursuant to Section 9 above, for a period of
not less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of
the outstanding voting securities" will be deemed to have the same meaning
that those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder
shall not be binding upon of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of the
Fund, individually, but are binding only upon the assets and property of
the Fund, as provided, as provided in the Master Trust Agreement of the
Fund. The execution and delivery of this Plan has been authorized by the
Trustees and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
UTILITIES FUND
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
g\shared\domestic\clients\shearson\funds\slip\cnvs\12b1plna.doc3:56 PM
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 1
<NAME> SBS INC FUNDS - PREMIUM TOTAL RETURN FUND - CLASS
<S> <C>
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> SBS INC FUNDS - PREMIUM TOTAL RETURN FUND - CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
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<SERIES>
<NUMBER> 1
<NAME> SBS INC FUNDS - PREMIUM TOTAL RETURN FUND - CLASS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> SBS INC FUNDS - TAX EXEMPT - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> SBS INC FUNDS - TAX EXEMPT - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> SBS INC FUNDS - MONEY MARKET
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 260,776,063
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> SBS INC FUNDS- CONVERTIBLE SECURITIES CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> SBS INC FUNDS- CONVERTIBLE SECURITIES CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> SBS INC FUNDS- GLOBAL BOND CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 107,120,807
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<RECEIVABLES> 71,063,858
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<ACCUMULATED-NII-PRIOR> 313,723
<ACCUMULATED-GAINS-PRIOR> 889,907
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<PER-SHARE-NAV-END> 15.16
<EXPENSE-RATIO> 1.58
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> SBS INC FUNDS- GLOBAL BOND CLASS B
<S> <C>
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<PERIOD-END> JUL-31-1994
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<OTHER-ITEMS-LIABILITIES> 89,407,320
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<PAID-IN-CAPITAL-COMMON> 129,028,297
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<DIVIDEND-INCOME> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> 1,573,047
<NET-INVESTMENT-INCOME> 3,692,373
<REALIZED-GAINS-CURRENT> (4,444,865)
<APPREC-INCREASE-CURRENT> (656,997)
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<DISTRIBUTIONS-OF-INCOME> 4,070,938
<DISTRIBUTIONS-OF-GAINS> 1,361,030
<DISTRIBUTIONS-OTHER> 109,471
<NUMBER-OF-SHARES-SOLD> 2,935,790
<NUMBER-OF-SHARES-REDEEMED> 1,766,032
<SHARES-REINVESTED> 285,115
<NET-CHANGE-IN-ASSETS> 53,679,311
<ACCUMULATED-NII-PRIOR> 313,723
<ACCUMULATED-GAINS-PRIOR> 889,907
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<GROSS-EXPENSE> 1,658,493
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<PER-SHARE-NAV-END> 15.16
<EXPENSE-RATIO> 2.06
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> SBS INC FUNDS- GLOBAL BOND CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 107,120,807
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<RECEIVABLES> 71,063,858
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<PAID-IN-CAPITAL-COMMON> 129,028,297
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<OVERDISTRIBUTION-GAINS> (3,052,163)
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<NET-ASSETS> 122,508,857
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<EXPENSES-NET> 1,573,047
<NET-INVESTMENT-INCOME> 3,692,373
<REALIZED-GAINS-CURRENT> (4,444,865)
<APPREC-INCREASE-CURRENT> (656,997)
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<NUMBER-OF-SHARES-SOLD> 536
<NUMBER-OF-SHARES-REDEEMED> 182
<SHARES-REINVESTED> 110
<NET-CHANGE-IN-ASSETS> 53,679,311
<ACCUMULATED-NII-PRIOR> 313,723
<ACCUMULATED-GAINS-PRIOR> 889,907
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,658,493
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<PER-SHARE-GAIN-APPREC> (0.45)
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<PER-SHARE-NAV-END> 15.16
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> SBS INC FUNDS- HIGH INC CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
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<TOTAL-LIABILITIES> 13,754,914
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<PAID-IN-CAPITAL-COMMON> 985,128,754
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<NET-INVESTMENT-INCOME> 67,533,971
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<APPREC-INCREASE-CURRENT> (78,041,218)
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<NUMBER-OF-SHARES-REDEEMED> 5,572,672
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<OVERDIST-NET-GAINS-PRIOR> (282,979,438)
<GROSS-ADVISORY-FEES> 3,771,643
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<GROSS-EXPENSE> 10,720,928
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<PER-SHARE-NII> 1.08
<PER-SHARE-GAIN-APPREC> (0.81)
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<PER-SHARE-NAV-END> 11.16
<EXPENSE-RATIO> 1.11
<AVG-DEBT-OUTSTANDING> 55342
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> SBS INC FUNDS- HIGH INC CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
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<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 55342
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> SBS INC FUNDS- HIGH INC CLASS C
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-END> JUL-31-1994
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> SBS INC FUNDS- HIGH INC CLASS D
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
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<AVG-DEBT-OUTSTANDING> 55342
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> SBS INC FUNDS - UTILITY - CLASS A
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
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<ACCUM-APPREC-OR-DEPREC> (81,900,040)
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<NUMBER-OF-SHARES-SOLD> 1,190,478
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<NET-CHANGE-IN-ASSETS> (964,947,784)
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<PER-SHARE-NII> 0.56
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<PER-SHARE-NAV-END> 13.28
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> SBS INC FUNDS - UTILITY - CLASS B
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1994
<PERIOD-END> JUL-31-1994
<INVESTMENTS-AT-COST> 1,921,630,260
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<EXPENSE-RATIO> 1.54
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> SBS INC FUNDS - UTILITY - CLASS C
<S> <C>
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<GROSS-EXPENSE> 36,848,586
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<PER-SHARE-NAV-END> 13.28
<EXPENSE-RATIO> 0.69
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</TABLE>
<TABLE> <S> <C>
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<SERIES>
<NUMBER> 9
<NAME> SBS INC FUNDS - UTILITY - CLASS D
<S> <C>
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<FISCAL-YEAR-END> JUL-31-1994
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> SBS INC FUNDS - DIV STRATEGIC INC - CLASS A
<S> <C>
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<FISCAL-YEAR-END> JUL-31-1994
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> SBS INC FUNDS - DIV STRATEGIC INC - CLASS B
<S> <C>
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<AVG-DEBT-OUTSTANDING> 4384
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</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> SBS INC FUNDS - DIV STRATEGIC INC - CLASS C
<S> <C>
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<FISCAL-YEAR-END> JUL-31-1994
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> SBS INC FUNDS - DIV STRATEGIC INC - CLASS D
<S> <C>
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</TABLE>
