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REGISTRATION NO. 33-53253
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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/X/ PRE-EFFECTIVE AMENDMENT NO. 1 / / POST-EFFECTIVE AMENDMENT NO.
SMITH BARNEY SHEARSON INCOME FUNDS
(Exact Name of Registrant as Specified in Charter)
Area Code and Telephone Number: (212) 720-9218
TWO WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(Address of Principal Executive Offices) (Zip code)
BURTON M. LEIBERT, ESQ.
WILLKIE FARR & GALLAGHER
ONE CITICORP CENTER
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022
(Name and Address of Agent for Service)
Approximate date of proposed public offering: As soon as possible after the
effective date of this Registration Statement.
Registrant has registered an indefinite amount of securities pursuant to
Rule 24f-2 under the Investment Company Act of 1940, as amended; accordingly, no
fee is payable herewith. Registrant's Rule 24f-2 Notice for the fiscal period
ended July 31, 1993 was filed with the Securities and Exchange Commission on
October 4, 1993.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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SMITH BARNEY SHEARSON INCOME FUNDS
CONTENTS OF
REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
Cross-Reference Sheet
Letter to Shareholders
Notice of Special Meeting
Part A -- Prospectus/Proxy Statement
Part B -- Statement of Additional Information
Part C -- Other Information
Signature Page
Exhibits
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SMITH BARNEY SHEARSON INCOME FUNDS
FORM N-14 CROSS REFERENCE SHEET
PURSUANT TO RULE 481(A) UNDER THE SECURITIES ACT OF 1933
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PART A ITEM NO. AND CAPTION PROSPECTUS/PROXY STATEMENT CAPTION
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Item 1. Beginning of Registration
Statement and Outside Front
Cover Page of Prospectus........ Cover Page; Cross Reference Sheet
Item 2. Beginning and Outside Back Cover
Page of Prospectus.............. Table of Contents
Item 3. Synopsis Information and Risk
Factors......................... Summary; Comparison of Investment Objectives and Policies
Item 4. Information About the
Transaction..................... Summary; Reasons for the Reorganization; Information About the
Reorganization; Comparative Information on Shareholder Rights;
Exhibit A (Agreement and Plan of Reorganization)
Item 5. Information About the
Registrant...................... Cover Page; Summary; Information About the Reorganization;
Comparison of Investment Objectives and Policies; Information on
Shareholder Rights; Additional Information About Smith Barney
Shearson Global Bond Fund and Smith Barney Shearson Short-Term
World Income Fund; Prospectus of Smith Barney Shearson Global Bond
Fund dated December 1, 1993
Item 6. Information About the Company
Being Acquired.................. Summary; Information About the Reorganization; Comparison of
Investment Objectives and Policies; Information on Shareholder
Rights; Additional Information About Smith Barney Shearson Global
Bond Fund and Smith Barney Shearson Short-Term World Income Fund
Item 7. Voting Information............... Summary; Information About the Reorganization; Information on
Shareholder Rights; Voting Information
Item 8. Interest of Certain Persons and
Experts......................... Financial Statements and Experts; Legal Matters
Item 9. Additional Information Required
for Reoffering By Persons Deemed
to be Underwriters.............. Not Applicable
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PART B ITEM NO. AND CAPTION STATEMENT OF ADDITIONAL INFORMATION CAPTION
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Item 10. Cover Page....................... Cover Page
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Item 11. Table of Contents................ Cover Page
Item 12. Additional Information About the
Registrant...................... Cover Page; Statement of Additional Information of Smith Barney
Shearson Income Funds dated December 1, 1993
Item 13. Additional Information About the
Company Being Acquired.......... Not Applicable
Item 14. Financial Statements............. Annual Report of Smith Barney Shearson Global Bond Fund; Annual
Report of Smith Barney Shearson Short-Term World Income Fund;
Pro-Forma Financial Statements
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PART C ITEM NO. AND CAPTION OTHER INFORMATION CAPTION
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Item 15. Indemnification.................. Incorporated by reference to Part A caption "Comparative
Information on Shareholder Rights -- Liability of Trustees "
Item 16. Exhibits......................... Exhibits
Item 17. Undertakings..................... Undertakings
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A SPECIAL NOTICE TO SHAREHOLDERS OF
SMITH BARNEY SHEARSON SHORT-TERM WORLD INCOME FUND
YOUR VOTE IS IMPORTANT
Dear Shareholder:
The Board of Trustees of Smith Barney Shearson Short-Term World Income Fund
(the "Company") has recently reviewed and endorsed a proposal for a
reorganization of the Company which it judges to be in the best interests of the
Company's shareholders.
UNDER THE TERMS OF THE PROPOSAL, SMITH BARNEY SHEARSON GLOBAL BOND FUND
("GLOBAL BOND FUND"), A SEPARATE INVESTMENT PORTFOLIO OF SMITH BARNEY SHEARSON
INCOME FUNDS ("INCOME FUNDS"), WOULD ACQUIRE SUBSTANTIALLY ALL OF THE ASSETS AND
LIABILITIES OF THE COMPANY. After the transaction, the Company would be
dissolved and you would become a shareholder of Global Bond Fund, having
received the same class of shares with an aggregate value equivalent to the
aggregate net asset value of your investment in the Company at the time of the
transaction. The transaction would, in the opinion of counsel, be free from
federal income taxes to you, Global Bond Fund and Income Funds.
SPECIAL MEETING OF SHAREHOLDERS: YOUR VOTE IS IMPORTANT
The Board of Trustees of the Company has determined that the proposed
reorganization should provide benefits to shareholders due, in part, to savings
in expenses borne by shareholders. We have therefore called a Special Meeting of
Shareholders to be held July 5, 1994 to consider this transaction. WE STRONGLY
INVITE YOUR PARTICIPATION BY ASKING YOU TO REVIEW, COMPLETE AND RETURN YOUR
PROXY NO LATER THAN JULY 5, 1994.
Detailed information about the proposed transaction is described in the
enclosed proxy statement. On behalf of the board, I thank you for your
participation as a shareholder and urge you to please exercise your right to
vote by completing, dating and signing the enclosed proxy card. A
self-addressed, postage-paid envelope has been enclosed for your convenience.
If you have any questions regarding the proposed transaction, please feel
free to call your financial consultant.
IT IS VERY IMPORTANT THAT YOUR VOTING INSTRUCTIONS BE RECEIVED PROMPTLY.
Sincerely,
HEATH B. McLENDON
Chairman of the Board
June 2, 1994
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SMITH BARNEY SHEARSON SHORT-TERM WORLD INCOME FUND
Two World Trade Center
New York, New York 10048
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on July 5, 1994
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To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of Smith Barney Shearson Short-Term World Income Fund (the "Company")
will be held at Two World Trade Center, 100th Floor, New York, New York on July
5, 1994, commencing at 10:00 A.M. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization (the
"Plan") dated as of June 1, 1994 providing for (i) the acquisition of
substantially all of the assets of the Company by Smith Barney Shearson Global
Bond Fund ("Global Bond Fund"), a separate investment series of Smith Barney
Shearson Income Funds ("Income Funds"), in exchange for shares of Global Bond
Fund and the assumption by Global Bond Fund of certain liabilities of the
Company, (ii) the distribution of such shares of Global Bond Fund to
shareholders of the Company in liquidation of the Company and (iii) the
subsequent dissolution and termination of the Company.
2. To transact such other business as may properly come before the Meeting
or any adjournment or adjournments thereof.
The Trustees of the Company have fixed the close of business on May 16, 1994
as the record date for the determination of shareholders entitled to notice of
and to vote at the Meeting and any adjournment or adjournments thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE SPECIAL MEETING ARE URGED TO SIGN AND RETURN WITHOUT DELAY
THE ENCLOSED PROXY CARD IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE SO
THAT THEIR SHARES MAY BE REPRESENTED AT THE MEETING. INSTRUCTIONS FOR THE PROPER
EXECUTION OF PROXY CARDS ARE SET FORTH ON THE FOLLOWING PAGE.
By Order of the Board of Trustees
CHRISTINA T. SYDOR
Secretary
June 2, 1994
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE
OF FURTHER SOLICITATION.
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INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance to
you and avoid the time and expense involved in validating your vote if you fail
to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party signing
should conform exactly to the name shown in the registration on the proxy card.
3. All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration. For
example:
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REGISTRATION VALID SIGNATURES
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CORPORATE ACCOUNTS
(1) ABC Corp....................................... ABC Corp.
(2) ABC Corp....................................... John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer....................... John Doe
(4) ABC Corp. Profit Sharing Plan.................. John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust...................................... Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78................................ Jane B. Doe
CUSTODIAL OR ESTATE ACCOUNTS
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr. UGMA................. John B. Smith
(2) John B. Smith.................................. John B. Smith, Jr., Executor
</TABLE>
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PROSPECTUS/PROXY STATEMENT DATED JUNE 2, 1994
ACQUISITION OF THE ASSETS OF
SMITH BARNEY SHEARSON SHORT-TERM WORLD INCOME FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 720-9218
BY AND IN EXCHANGE FOR CLASS A AND CLASS B SHARES OF
SMITH BARNEY SHEARSON GLOBAL BOND FUND
A SEPARATE INVESTMENT SERIES OF
SMITH BARNEY SHEARSON INCOME FUNDS
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 720-9218
This Prospectus/Proxy Statement is being furnished to shareholders of Smith
Barney Shearson Short-Term World Income Fund (the "Acquired Fund") in connection
with a proposed plan of reorganization to be submitted to shareholders of the
Acquired Fund for consideration at a Special Meeting of Shareholders to be held
on July 5, 1994 at 10:00 A.M. (the "Meeting"), at Two World Trade Center, 100th
Floor, New York, New York or any adjournment or adjournments thereof.
The plan provides for all or substantially all of the assets of the Acquired
Fund to be acquired by Smith Barney Shearson Global Bond Fund (the "Acquiring
Fund"), a separate series of Smith Barney Shearson Income Funds ("Income
Funds"), in exchange for Class A and Class B shares of the Acquiring Fund and
the assumption by the Acquiring Fund of certain liabilities of the Acquired Fund
(hereinafter referred to as the "Reorganization"; the Acquiring Fund and the
Acquired Fund are sometimes referred to hereinafter as the "Funds" and
individually as a "Fund"). The Class A and Class B shares of the Acquiring Fund
would be distributed to shareholders of the Acquired Fund in liquidation of the
Acquired Fund and the Acquired Fund would be dissolved and terminated. As a
result of the proposed Reorganization, each shareholder of the Acquired Fund
will receive that number of shares of the Acquiring Fund having an aggregate net
asset value equal to the aggregate net asset value of such shareholder's shares
of the Acquired Fund. Holders of Class A shares in the Acquired Fund will
receive Class A shares of the Acquiring Fund, and no sales charge will be
imposed on the Class A shares of the Acquiring Fund received by the Acquired
Fund's Class A shareholders. Holders of Class B shares in the Acquired Fund will
receive Class B shares of
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the Acquiring Fund; any contingent deferred sales charge ("CDSC") which is
applicable to an Acquired Fund shareholder's investment will continue to apply
as it did and at the same rate prior to the Reorganization and, in calculating
the applicable CDSC payable upon the subsequent redemption of Class B shares of
the Acquiring Fund, the period during which an Acquired Fund shareholder held
Class B shares of the Acquired Fund will be counted. This transaction is
structured to be tax-free for federal income tax purposes to shareholders and to
both the Acquiring Fund and the Acquired Fund.
The Acquiring Fund is a diversified fund and is a separate series of Income
Funds, an open-end management, investment company. Smith Barney Global Capital
Management Inc. ("SBGCM") serves as investment adviser to the Acquiring Fund.
SBGCM is a wholly owned subsidiary of Smith Barney Shearson Holdings Inc., which
is itself a wholly owned subsidiary of The Travelers Inc. PanAgora Asset
Management Limited ("PanAgora") serves as investment adviser to the Acquired
Fund. Fifty percent of the outstanding voting stock of PanAgora is owned by
Nippon Life Insurance Company and fifty percent is owned by Lehman Brothers Inc.
Lehman Brothers Inc. is a wholly owned subsidiary of Lehman Brothers Holdings
Inc. ("LBHI"), which until 12:00 midnight on May 31, 1994 was a wholly owned
subsidiary of American Express Company. As of such date, the common stock of
LBHI was distributed to the holders of common stock of American Express Company.
The investment objectives of the Acquiring Fund are generally similar to
those of the Acquired Fund. The Acquiring Fund's investment objective is current
income and capital appreciation. The Acquired Fund's investment objective is the
maximization of current income consistent with the protection of principal and
relative stability of net asset value. Notwithstanding the similarities of the
investment objectives, the Acquiring Fund generally invests in securities with
longer term maturities than those of the Acquired Fund. Certain differences in
the investment policies of the Acquiring Fund and the Acquired Fund, however,
are described under "Comparison of Investment Objectives and Policies" in this
Prospectus/Proxy Statement.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Acquiring Fund that a
prospective investor should know before investing. Certain relevant documents
listed below, which have been filed with the Securities and Exchange Commission
("SEC"), are incorporated in whole or in part by reference. A Statement of
Additional Information dated June 2, 1994, relating to this Prospectus/Proxy
Statement and the Reorganization, has been filed with the SEC and is
incorporated by reference into this Prospectus/Proxy Statement. A copy of such
Statement of Additional Information is available upon request
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and without charge by writing to the Acquired Fund at the address listed on the
cover page of this Prospectus/Proxy Statement or by calling toll-free
1-800-221-8806.
1. The Prospectus of Smith Barney Shearson Global Bond Fund dated December
1, 1993, as supplemented by Prospectus Supplements dated December 20, 1993,
January 21, 1994 and April 5, 1994, is incorporated in its entirety by reference
and a copy is included herein.
2. The Prospectus of Smith Barney Shearson Short-Term World Income Fund
dated September 1, 1993, as supplemented by Prospectus Supplements dated January
3, 1994, February 1, 1994 and April 1, 1994, is incorporated in its entirety by
reference.
Also accompanying this Prospectus/Proxy Statement as Exhibit A is a copy of
the Agreement and Plan of Reorganization (the "Plan") for the proposed
transaction.
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/PROXY STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
3
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TABLE OF CONTENTS
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PAGE
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Summary...................................................................... 5
Reasons for the Reorganization............................................... 10
Information About the Reorganization......................................... 10
Comparison of Investment Objectives and Policies............................. 15
Information on Shareholders' Rights.......................................... 17
Additional Information About Smith Barney Shearson Short-Term World Income
Fund and Smith Barney Shearson Global Bond Fund............................. 19
Other Business............................................................... 19
Voting Information........................................................... 20
Financial Statements and Experts............................................. 21
Legal Matters................................................................ 22
Exhibit A: Agreement and Plan of Reorganization.............................. A-1
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ADDITIONAL MATERIALS
Prospectus of Smith Barney Shearson
Global Bond Fund,
dated December 1, 1993, as supplemented by Prospectus Supplements dated
April 5, 1994 and January 21, 1994.
4
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SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ADDITIONAL
INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS/PROXY STATEMENT, THE
AGREEMENT AND PLAN OF REORGANIZATION, A COPY OF WHICH IS ATTACHED TO THIS
PROSPECTUS/ PROXY STATEMENT AS EXHIBIT A, THE ACCOMPANYING PROSPECTUS OF THE
ACQUIRING FUND DATED DECEMBER 1, 1993, AS SUPPLEMENTED BY PROSPECTUS SUPPLEMENTS
DATED DECEMBER 20, 1993, JANUARY 21, 1994 AND APRIL 5, 1994, AND THE PROSPECTUS
OF THE ACQUIRED FUND DATED SEPTEMBER 1, 1993, AS SUPPLEMENTED BY PROSPECTUS
SUPPLEMENTS DATED JANUARY 3, 1994, FEBRUARY 1, 1994 AND APRIL 1, 1994.
PROPOSED REORGANIZATION. The Plan provides for the transfer of all of the
assets of the Acquired Fund to the Acquiring Fund in exchange for Class A and
Class B shares of the Acquiring Fund and the assumption by the Acquiring Fund of
certain liabilities of the Acquired Fund. The Plan also calls for the
distribution of shares of the Acquiring Fund to the Acquired Fund's shareholders
in liquidation of the Acquired Fund. As a result of the Reorganization, each
shareholder of the Acquired Fund will become the owner of that number of full
and fractional shares of the Acquiring Fund having an aggregate net asset value
equal to the aggregate net asset value of the shareholder's shares of the
Acquired Fund as of the close of business on the date that the Acquired Fund's
assets are exchanged for shares of the Acquiring Fund. See "Information About
the Reorganization -- Plan of Reorganization."
For the reasons set forth below under "Reasons for the Reorganization," the
Board of Trustees of the Acquired Fund, including the Trustees of the Acquired
Fund who are not "interested persons" (the "Independent Trustees"), as that term
is defined in the Investment Company Act of 1940, as amended (the "1940 Act"),
has concluded that the Reorganization would be in the best interests of the
shareholders of the Acquired Fund and that the interests of the Acquired Fund's
existing shareholders will not be diluted as a result of the transaction
contemplated by the Reorganization and therefore has submitted the Plan for
approval by the Acquired Fund's shareholders. The Board of Trustees of Income
Funds has reached similar conclusions with respect to the Acquiring Fund also
approved the Reorganization.
Approval of the Reorganization will require the affirmative vote of a
majority, as defined in the 1940 Act, of the outstanding shares of the Acquired
Fund, which is the lesser of: (i) 67% of the voting securities of the Acquired
Fund present at the Meeting, if the holders of more than 50% of the outstanding
voting securities of the Acquired Fund are present or represented by proxy; or
(ii) more than 50% of the outstanding voting securities of the Acquired Fund.
See "Voting Information."
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TAX CONSEQUENCES. Prior to completion of the Reorganization, the Acquired
Fund will have received an opinion of counsel that, upon the Reorganization and
the transfer of the assets of the Acquired Fund, no gain or loss will be
recognized by the Acquired Fund or its shareholders for federal income tax
purposes. The holding period and aggregate tax basis of the Acquiring Fund Class
A and Class B shares that are received by each Acquired Fund shareholder will be
the same as the holding period and aggregate tax basis of the shares of the
Acquired Fund previously held by such shareholder. In addition, the holding
period and tax basis of the assets of the Acquired Fund in the hands of the
Acquiring Fund as a result of the Reorganization will be the same as in the
hands of the Acquired Fund immediately prior to the Reorganization.
INVESTMENT OBJECTIVES AND POLICIES. The Acquired Fund and the Acquiring
Fund have generally similar investment objectives, policies and restrictions.
The Acquiring Fund's investment objective is current income and capitalization.
The Acquired Fund's investment objective is the maximization of current income
consistent with the protection of principal and relative stability of net asset
value. To achieve their objectives, both Funds invest in high-quality debt
securities denominated in U.S. dollars as well as other major currencies.
Notwithstanding the similarities of the investment objectives, the Acquiring
Fund generally invests in securities with longer term maturities than those of
the Acquired Fund. Nevertheless, there are certain differences between the
investment policies of the Acquiring Fund and the Acquired Fund, which are
described under "Comparison of Investment Objectives and Policies."
FEES AND EXPENSES. Total management fees payable by the Acquired Fund are
0.75% of the Acquired Fund's average daily net assets, consisting of a monthly
fee computed at an annual rate of 0.55% which is paid to PanAgora as investment
adviser and a monthly fee computed at an annual rate of 0.20% which is paid to
Smith, Barney Advisors, Inc. ("Smith Barney Advisors") as Administrator (from
which The Boston Company Advisors, Inc. ("Boston Advisors") is compensated for
its services as sub-administrator). As a result of a voluntary agreement by
PanAgora and Boston Advisors to waive certain management fees, the cumulative
management fees paid by the Acquired Fund to PanAgora and Boston Advisors was
0.49% of the Acquired Fund's average daily net assets for the fiscal year ended
April 30, 1993. Total management fees payable by the Acquiring Fund are 0.80% of
the Acquiring Fund's average daily net assets, consisting of a monthly fee
computed at an annual rate of 0.60% which is paid to SBGCM as investment adviser
and a monthly fee computed at an annual rate of 0.20% which is paid to Smith
Barney Advisors as administrator (from which Boston Advisors is compensated for
its services as sub-administrator).
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The expense ratio of the Acquiring Fund subsequent to the Reorganization is
expected to be lower than that payable by the Acquired Fund. See "Reasons for
the Reorganization." Total operating expenses for the Acquiring Fund stated as a
percentage of average net assets for the fiscal year ended July 31, 1993 for
Class A shares and Class B shares were 1.71% and 2.22%, respectively. Total
operating expenses for the Acquired Fund stated as a percentage of average net
assets for the fiscal year ended April 30, 1993 for Class A shares and Class B
shares were 1.40% and 1.75%, respectively, which includes the voluntary
agreements of PanAgora and Boston Advisors to waive a portion of their fees. If
these voluntary agreements had not been in place, total operating expenses for
the fiscal year ended April 30, 1993 would have been 1.67% for Class A shares
and 2.02% for Class B shares of the Acquired Fund. In effecting the
Reorganization, it is estimated that, although the investment advisory fee
payable by the Acquiring Fund shareholders, as a percentage of its average daily
net assets, would be higher than that payable by the Acquired Fund, the expense
ratios for the Class A shares and Class B shares of the combined fund would be
reduced to 1.44% and 1.94%, respectively.
Shares of the Acquiring Fund and the Acquired Fund are both sold subject to
distribution plans adopted pursuant to Rule 12b-1 under the 1940 Act. Under
their respective plans, Smith Barney Shearson Inc. ("Smith Barney Shearson") is
paid a service fee calculated at the annual rate of 0.25% of the value of each
Fund's average daily net assets attributable to the respective Fund's Class A
and Class B shares. In addition, each Fund's Class B shares pays a distribution
fee primarily intended to compensate Smith Barney Shearson for its initial
expense of paying financial consultants a commission upon sales of the
respective shares. The distribution fees for both Funds' Class B shares are
calculated at the annual rate of 0.50% of the value of the respective Fund's
average net assets attributable to the shares of the respective Class. Class B
shares of the Acquiring Fund will convert automatically to Class A shares eight
years after the date of purchase based on the relative net asset values of
shares of each Class and, after such conversion, will not be subject to a
distribution fee. Class B shares of the Acquired Fund, however, convert
automatically to Class A shares four years after the date of purchase based on
the relative net asset values of shares of each Class and, after such
conversion, will not be subject to a distribution fee. All Class B shares of the
Acquired Fund that are exchanged for Class B shares of the Acquiring Fund in the
Reorganization will retain the four year conversion feature and will
automatically convert to Class A shares of the Acquiring Fund four years after
the date that such shares were initially purchased (unless such shares were
acquired through an exchange, in which case such shares will retain the
conversion feature of the fund from which the exchange was made).
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EXCHANGE PRIVILEGES. Shareholders of both the Acquired Fund and the
Acquiring Fund are entitled to exchange shares of each Class for shares of the
same Class in certain funds in the Smith Barney Shearson Group of Funds ("Group
of Funds") to the extent shares are offered for sale in the shareholder's state
of residence. After the Reorganization, each shareholder of Class A and Class B
shares of the Acquired Fund who becomes the owner of the respective Class of
shares of the Acquiring Fund will be entitled to the exchange privileges offered
by that Class of shares. Any exchange will be a taxable event for which a
shareholder may have to recognize a gain or loss under federal income tax
provisions. For the purposes of any exchange of shares acquired through the
Reorganization, the Acquired Fund Class A shareholders will be deemed to have
paid the maximum sales charge currently applicable for Class A shares of the
Acquiring Fund. A "sales charge differential" will be imposed on any Acquiring
Fund shareholder who chooses to exchange shares of the Acquiring Fund for shares
of another fund in the Group of Funds which imposes a higher sales charge than
that imposed on the Acquiring Fund shares. The Acquiring Fund reserves the right
to amend or terminate the exchange privilege after providing notice to
shareholders. See "Exchange Privilege" in the accompanying Prospectus of the
Acquiring Fund.
DIVIDENDS. The policies of each Fund with regard to dividends and
distributions are generally the same. It is the policy of the Acquired Fund to
declare daily and distribute monthly its net investment income (that is, its
taxable income other than its net realized capital gains). Dividends from the
net investment income, if any, of the Acquiring Fund are declared and paid
monthly. Each Fund's policy is to distribute its net realized capital gains, if
any, once a year. Unless a shareholder instructs that dividends and capital
gains distributions be paid in cash and credited to the shareholder's account at
Smith Barney Shearson, dividends and capital gains distributions will be
reinvested automatically in additional shares of the Acquiring Fund at net asset
value, without a sales charge or CDSC. The Acquired Fund shareholders that have
elected to receive dividends and distributions in cash will continue to receive
distributions in such manner from the Acquiring Fund. Subsequent to the
Reorganization, the Acquired Fund shareholders may elect at any time to have
their dividends and distributions reinvested automatically in additional shares
of the Acquiring Fund by contacting their Smith Barney Shearson Financial
Consultant. See "Dividends, Distributions and Taxes" in the accompanying
Prospectus of the Acquiring Fund.
PURCHASE AND REDEMPTION PROCEDURES. Purchase of shares of the Acquiring
Fund and the Acquired Fund must be made through a brokerage account maintained
with Smith Barney Shearson or with a broker that clears securities transactions
through Smith Barney Shearson on a fully disclosed basis (an "Introducing
Broker"). Class A shares of the Acquiring Fund and the
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Acquired Fund are sold subject to a maximum initial sales charge of up to 4.50%
and 3.00% of the public offering price, respectively. Class B shares of the
Acquiring Fund and the Acquired Fund are sold without an initial sales charge
but are subject to a CDSC and certain higher expenses. See "Purchase of Shares"
in the accompanying Prospectus of the Acquiring Fund.
Class A shares of the Acquiring Fund and the Acquired Fund may be redeemed
at their net asset value per share without charge; Class B shares of the
Acquiring Fund and the Acquired Fund may be redeemed at their net asset value
per share subject to a maximum CDSC of 4.50% and 3.00%, respectively.
Redemptions may be made by submitting a redemption request through Smith Barney
Shearson or an Introducing Broker or the respective Fund's transfer agent. See
"Redemption of Shares" in the accompanying Prospectus of the Acquiring Fund.
The Acquiring Fund also offers Class D shares. Class D shares are available
to participants in the Smith Barney Shearson 401(k) Program and are sold at net
asset value per share. Class D shares of the Acquiring Fund are not subject to
an initial sales charge or CDSC. Class D shares are subject to an annual service
fee of 0.25% and an annual distribution fee of 0.50% of the value of average
daily net assets attributable to such Class. No Class D shares of the Acquiring
Fund will be issued to any shareholder of the Acquired Fund as part of the
Reorganization. See "Purchase of Shares" in the accompanying Prospectus of the
Acquiring Fund.
SHAREHOLDERS' RIGHTS. Shareholders of the Acquiring Fund and the Acquired
Fund have similar voting rights. For example, neither the Acquired Fund nor
Income Funds, on behalf of the Acquiring Fund, holds an annual meeting of
shareholders and there is normally 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. In addition, under
the laws of The Commonwealth of Massachusetts and the Master Trust Agreement of
the Acquired Fund, shareholders of the Acquired Fund do not have appraisal
rights in connection with a combination or acquisition of the assets of the
Acquired Fund by another entity. Shareholders of the Acquired Fund may, however,
redeem their shares at net asset value (subject to any applicable CDSC) prior to
the date of the Reorganization. See "Information on Shareholder Rights."
RISK FACTORS. Due to the similarities of investment objectives and policies
of the Acquiring Fund and the Acquired Fund, an investment in the Acquiring Fund
involves investment risks that are substantially similar to those of the
Acquired Fund. Such risks are those generally associated with investing in a
managed portfolio consisting primarily of high-quality, debt securities
denominated in U.S. dollars as well as other currencies. In addition, both Funds
have policies, such as those relating to investing in foreign securities,
9
<PAGE>
and investment techniques, such as entering into futures contracts and options
on futures contracts, entering into options on foreign currencies, entering into
forward currency contracts, lending portfolio securities and entering into
repurchase agreements, that involve certain risks and special considerations.
For a full description of the risk factors involved in investing in the
Acquiring Fund, refer to "Risk Factors and Special Considerations" in the
accompanying Prospectus of the Acquiring Fund.
REASONS FOR THE REORGANIZATION
The Board of Trustees of the Acquired Fund has determined that it is
advantageous to combine the Acquired Fund with the Acquiring Fund. The Funds
have generally similar investment objectives and policies and the Funds have the
same administrator, sub-administrator, custodian and transfer agent.
The Board of Trustees of the Acquired Fund has determined that the
Reorganization should provide certain benefits to shareholders. In making such
determination, the Board of Trustees considered, among other things, the savings
in expenses borne by shareholders expected to be realized by the Reorganization
and the comparative investment performance of the Funds.
In light of the foregoing, the Board of Trustees of the Acquired Fund,
including the Independent Trustees, has decided that it is in the best interests
of the Acquired Fund and its shareholders to combine with the Acquiring Fund.
The Board of Trustees of the Acquired Fund has also determined that a
combination of the Acquired Fund and the Acquiring Fund would not result in a
dilution of the interests of the Acquired Fund's shareholders.
The Board of Trustees of Income Funds considered various factors in
approving the Reorganization and it has determined that it is advantageous to
acquire the assets of the Acquired Fund. Among other factors, the Board of
Trustees of Income Funds considered pro forma financial information provided by
Smith Barney Shearson which indicated that the Reorganization is likely to
slightly reduce the expense ratios on both Class A and Class B shares of the
Acquiring Fund. In addition, the Board of Trustees concluded that the
Reorganization will be effected as a tax-free reorganization. Accordingly, the
Board of Trustees of Income Funds, including a majority of the non-interested
Trustees, has determined that the Reorganization is in the best interests of the
Acquiring Fund's shareholders and that the interests of the Acquiring Fund's
shareholders will not be diluted as a result of the Reorganization.
INFORMATION ABOUT THE REORGANIZATION
PLAN OF REORGANIZATION. The following summary of the Plan is qualified in
its entirety by reference to the Plan (Exhibit A hereto). The Plan provides that
10
<PAGE>
the Acquiring Fund will acquire all or substantially all of the assets of the
Acquired Fund in exchange for shares of the Acquiring Fund and the assumption by
the Acquiring Fund of certain liabilities of the Acquired Fund on July 15, 1994
or such later date as may be agreed upon by the parties (the "Closing Date").
Prior to the Closing Date, the Acquired Fund will endeavor to discharge all
of its known liabilities and obligations. The Acquiring Fund will not assume any
liabilities or obligations other than those reflected on an unaudited statement
of assets and liabilities of the Acquired Fund prepared as of the close of
regular trading on the New York Stock Exchange, Inc. (the "NYSE"), currently
4:00 p.m. New York time, on the Closing Date. The number of full and fractional
Class A and Class B shares of the Acquiring Fund to be issued to the Acquired
Fund shareholders will be determined on the basis of the Acquiring Fund's and
the Acquired Fund's relative net asset values per Class A and Class B shares,
respectively, computed as of the close of regular trading on the NYSE on the
Closing Date. The net asset value per share of each Class will be determined by
dividing assets, less liabilities, by the total number of outstanding shares.
Both the Acquired Fund and the Acquiring Fund will utilize Boston Advisors
as agent to determine the value of their respective portfolio securities. The
Acquired Fund and the Acquiring Fund also will use the same independent pricing
service to determine the value of each security so that Boston Advisors, as
agent, can determine the aggregate value of each Fund's portfolio. The method of
valuation employed will be consistent with the requirements set forth in the
Prospectus of each Fund, Rule 22c-1 under the 1940 Act and the interpretation of
such rule by the SEC's Division of Investment Management.
At or prior to the Closing Date, each of the Acquired Fund and Acquiring
Fund shall have declared a dividend or dividends which, together with all
previous such dividends, shall have the effect of distributing to their
respective shareholders all taxable income for the taxable year ending on or
prior to the Closing Date (computed without regard to any deduction for
dividends paid) and all of the respective Funds' net capital gains realized in
the taxable year ending on or prior to the Closing Date (after reductions for
any capital loss carryforward).
As soon after the Closing Date as conveniently practicable, the Acquired
Fund will liquidate and distribute pro rata to shareholders of record as of the
close of business on the Closing Date the full and fractional shares of the
Acquiring Fund received by the Acquired Fund. Such liquidation and distribution
will be accomplished by the establishment of accounts in the names of the
Acquired Fund's shareholders on the share records of the Acquiring Fund's
transfer agent. Each account will represent the respective pro rata
11
<PAGE>
number of full and fractional shares of the Acquiring Fund due to each of the
Acquired Fund's shareholders. After such distribution and the winding up of its
affairs, the Acquired Fund and its registration under the 1940 Act will be
terminated.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan. Notwithstanding approval of the Acquired Fund's shareholders,
the Plan may be terminated at any time at or prior to the Closing Date (1) by
mutual agreement of the Acquired Fund and the Acquiring Fund or (2) by either
party to the Plan upon a material breach by the other party of any
representation, warranty or agreement contained therein.
Approval of the Plan will require the affirmative vote of a majority, as
defined in the 1940 Act, of the outstanding voting securities of the Acquired
Fund. The 1940 Act defines "majority" as the lesser of: (i) 67% of the voting
securities of the Acquired Fund present at the Meeting, if the holders of more
than 50% of the outstanding voting securities of the Acquired Fund are present
or represented by proxy; or (ii) more than 50% of the outstanding voting
securities of the Acquired Fund. If the Reorganization is not approved by
shareholders of the Acquired Fund, the Board of Trustees of the Acquired Fund
will consider other possible courses of action, including liquidation of the
Acquired Fund.
DESCRIPTION OF THE ACQUIRING FUND'S SHARES. Full and fractional shares of
beneficial interest of the respective Class of the Acquiring Fund will be issued
to the Acquired Fund in accordance with the procedures detailed in the Plan and
as described in the Acquiring Fund's Prospectus. Generally, the Acquiring Fund
does not issue share certificates to shareholders unless a specific request is
submitted to the Acquiring Fund's transfer agent. The shares of the Acquiring
Fund to be issued to the Acquired Fund shareholders and registered on the
shareholder records of the transfer agent will have no pre-emptive or conversion
rights. Class B shares of the Acquiring Fund will convert automatically to Class
A shares of such Fund eight years after the date of purchase, based on the
relative net asset values of shares of each Class and will, after such
conversion, not be subject to a distribution fee. Class B shares of the Acquired
Fund, however, convert automatically to Class A shares four years after the date
of purchase based on the relative net asset values of shares of each Class and,
after such conversion, will not be subject to a distribution fee. All Class B
shares of the Acquired Fund that are exchanged for Class B shares of the
Acquiring Fund in the Reorganization will retain the four years conversion
feature and will automatically convert to Class A shares of the Acquiring Fund
four years after the date that such shares were initially
12
<PAGE>
purchased (unless such shares were acquired through an exchange, in which case
such shares will retain the conversion feature of the fund from which the
exchange was made).
FEDERAL INCOME TAX CONSEQUENCES. The exchange of assets for shares of the
Acquiring Fund is intended to qualify for federal income tax purposes as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended (the "Code"). As a condition to the closing of the
Reorganization, the Acquired Fund will receive an opinion from Willkie Farr &
Gallagher, counsel to both the Acquired Fund and the Acquiring Fund, to the
effect that, on the basis of the existing provisions of the Code, U.S. Treasury
regulations issued thereunder, current administrative rules, pronouncements and
court decisions, for federal income tax purposes, upon consummation of the
Reorganization:
(1) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for the Acquiring Fund's shares and the assumption by the
Acquiring Fund of certain identified liabilities of the Acquired Fund will
constitute a "reorganization" within the meaning of Section 368(a)(1)(C) of
the Code, and the Acquiring Fund and the Acquired Fund are each a "party to
a reorganization" within the meaning of Section 368(b) of the Code;
(2) no gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund in exchange for the Acquiring
Fund's shares and the assumption of certain identified liabilities of the
Acquired Fund;
(3) no gain or loss will be recognized by the Acquired Fund upon the
transfer of the Acquired Fund's assets to the Acquiring Fund in exchange for
the Acquiring Fund's shares and the assumption of certain identified
liabilities of the Acquired Fund or upon the distribution (whether actual or
constructive) of the Acquiring Fund's shares to the Acquired Fund's
shareholders;
(4) no gain or loss will be recognized by shareholders of the Acquired
Fund upon the exchange of their shares of the Acquired Fund for shares of
the Acquiring Fund and the assumption by the Acquiring Fund of certain
identified liabilities of the Acquired Fund;
(5) the aggregate tax basis for shares of the Acquiring Fund received by
each shareholder of the Acquired Fund pursuant to the Reorganization will be
the same as the aggregate tax basis of shares of the Acquired Fund held by
that shareholder immediately prior to the Reorganization, and the holding
period of shares of the Acquiring Fund to be received by each shareholder of
the Acquired Fund will include the
13
<PAGE>
period during which shares of the Acquired Fund exchanged therefor were held
by such shareholder (provided shares of the Acquired Fund were held as
capital assets on the date of the Reorganization); and
(6) the tax basis of the Acquired Fund's assets acquired by the
Acquiring Fund will be the same as the tax basis of such assets to the
Acquired Fund immediately prior to the Reorganization, and the holding
period of the assets of the Acquired Fund in the hands of the Acquiring Fund
will include the period during which those assets were held by the Acquired
Fund.
Shareholders of the Acquired Fund should consult their tax advisors
regarding the effect, if any, of the proposed Reorganization in light of their
individual circumstances. Since the foregoing discussion only relates to the
federal income tax consequences of the Reorganization, shareholders of the
Acquired Fund should also consult their tax advisors as to state and local tax
consequences, if any, of the Reorganization.
CAPITALIZATION. The following table shows the capitalization of the
Acquiring Fund and the Acquired Fund as of March 31, 1994, and on a pro forma
basis as of that date, giving effect to the proposed acquisition of assets at
net asset value.
<TABLE>
<CAPTION>
SMITH BARNEY
SHEARSON SMITH BARNEY
SHORT-TERM SHEARSON
WORLD INCOME GLOBAL BOND PRO FORMA FOR
FUND FUND REORGANIZATION
(UNAUDITED) (UNAUDITED) (UNAUDITED)
-------------- -------------- ---------------
<S> <C> <C> <C>
CLASS A SHARES
Net Assets............................ $ 43,717,219 $ 2,579,400 $ 46,296,619
Net asset value per share............. $ 6.40 $ 15.65 $ 15.65
Shares outstanding.................... 6,833,489 164,822 2,958,324
CLASS B SHARES
Net Assets............................ $ 22,151,207 $ 71,956,870 $ 94,108,077
Net asset value per share............. $ 6.40 $ 15.65 $ 15.65
Shares outstanding.................... 3,461,846 4,598,460 6,014,050
</TABLE>
As of the Record Date, May 16, 1994, there were 6,434,819 outstanding Class
A shares and 3,036,912 outstanding Class B shares of the Acquired Fund and
168,303 outstanding Class A shares, 4,512,221 outstanding Class B shares and
1,523 outstanding Class D shares of the Acquiring Fund. As of the Record Date,
the officers and Trustees of the Acquired Fund beneficially owned as a group
less than 1% of the outstanding shares of the Acquired Fund. To the best
knowledge of the Trustees of the Acquired Fund, as of the Record Date, no
shareholder or "group" (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act")) beneficially owned more
than 5% of the Acquired Fund. As
14
<PAGE>
of the Record Date, the officers and Trustees of Income Funds beneficially owned
as a group less than 1% of the outstanding shares of the Acquiring Fund. To the
best knowledge of the Trustees of Income Funds, as of the Record Date, no other
shareholder or "group" (as that term is used in Section 13(d) of the Exchange
Act) beneficially owned more than 5% of the Acquiring Fund.
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES
The following discussion comparing investment objectives, policies and
restrictions of the Acquiring Fund and the Acquired Fund is based upon and
qualified in its entirety by the respective investment objectives, policies and
restrictions sections of the Prospectuses of the Acquiring Fund and the Acquired
Fund. For a full discussion of the investment objectives, policies and
restrictions of the Acquiring Fund, refer to the Acquiring Fund's Prospectus,
which accompanies this Prospectus/Proxy Statement, under the caption "Investment
Objective and Management Policies," and for a discussion of these issues as they
apply to the Acquired Fund, refer to the Acquired Fund's Prospectus under the
caption "Investment Objective and Management Policies."
INVESTMENT OBJECTIVE. The investment objective of the Acquiring Fund is
current income and capital appreciation. The investment objective of the
Acquired Fund is the maximization of current income consistent with protection
of principal and relative stability of net asset value per share. Both the
Acquiring Fund's and the Acquired Fund's investment objectives are considered
fundamental policies which cannot be changed without shareholder approval.
PRIMARY INVESTMENTS. The Acquiring Fund invests primarily in high-quality
bonds, debentures and notes of foreign and domestic issuers. At least 85% of the
obligations of issuers in which the Acquiring 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 Ratings Group ("S&P") or comparable
unrated securities.
The Acquired Fund invests primarily in high-quality foreign and/or domestic
debt securities. The Acquired Fund will invest only in debt issues rated no
lower than Aa by Moody's or AA by S&P, or if unrated, deemed to be of comparable
quality by its investment adviser
The Acquiring Fund and the Acquired Fund may both invest a substantial
portion of their net assets in the securities of foreign issuers and in
securities denominated in currencies other than the U.S. dollar. For a
discussion of the risks involved in investing in foreign securities and in
securities denominated
15
<PAGE>
in currencies other than the U.S. dollar, refer to "Investment Objective and
Management Policies -- Investment Policies and Strategies" in the accompanying
Prospectus of the Acquiring Fund.
The Acquired Fund is a non-diversified investment company which concentrates
its investments in the banking industry. The Acquiring Fund is a diversified
fund and does not have an industry concentration policy. Correspondingly,
shareholders of the Acquired Fund will, after the Reorganization, have a reduced
exposure to the risks associated with such restrictive investment policies as
non-diversification and industry concentration. As of April 30, 1994, the
Acquired Fund's investments had an average weighted maturity of 1.90 years
denominated in U.S. dollars and the Acquiring Fund's investments had an average
weighted maturity of 6.39 years denominated in U.S. dollars.
INVESTMENT TECHNIQUES. From time to time, each Fund may lend its portfolio
securities to brokers, dealers and other financial organizations. These loans
will not exceed 20% of each Fund's total assets taken at value. Loans of
portfolio securities by each Fund must be collateralized by cash, letters of
credit or obligations of the United States government and its agencies and
instrumentalities ("U.S. government securities") which are maintained at all
times in an amount equal to at least 100% of the current market value of the
loaned securities.
The Acquired Fund may invest in money market instruments, including U.S.
government securities and certain bank obligations. The Acquiring Fund may hold
up to 20% of its assets in such instruments and may invest in the same without
limitation for defensive purposes. Each Fund may also enter into 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.
Both the Acquiring Fund and the Acquired Fund may enter into futures
contracts and options on futures contracts and may engage in currency exchange
transactions and purchase exchange traded put and call options on foreign
currencies. The Acquiring Fund may write covered call options on its portfolio
securities and enter into closing transactions with respect to such options,
purchase or sell portfolio securities on a when issued or delayed-delivery basis
and may purchase and sell put, call and other types of option securities that
are traded on domestic or foreign exchanges or over-the-counter. A detailed
discussion of the foregoing investment practices of the Acquiring Fund and their
associated risks can be found under the caption "Investment Objective and
Management Policies" in the Acquiring Fund's Prospectus, which accompanies this
Prospectus/Proxy Statement.
16
<PAGE>
INFORMATION ON SHAREHOLDERS' RIGHTS
GENERAL. Income Funds and the Acquired Fund are open-end management
investment companies registered under the 1940 Act which continuously offer to
sell shares at their current net asset value. The Acquiring Fund is a separate
series of Income Funds, which is organized as a business trust under the laws of
The Commonwealth of Massachusetts and is governed by a Master Trust Agreement,
By-laws and Board of Trustees. The Acquired Fund is also organized as a business
trust under the laws of The Commonwealth of Massachusetts and is also governed
by a Master Trust Agreement, By-laws and Board of Trustees. Both Funds are also
governed by applicable state and federal law.
TRUSTEES. Under the Master Trust Agreement of each of Income Funds and the
Acquired Fund, persons serving as Trustees will continue as Trustees for the
duration of each of the Fund's existence until they resign, die or are removed
by a written instrument, signed by at least two-thirds of the Trustees or by
vote of the shareholders holding not less than two-thirds of the shares then
outstanding, cast in person or by proxy at any meeting called for that purpose
or by a written declaration signed by the shareholders holding not less than
two-thirds of the shares then outstanding and filed with the Fund's custodian.
Vacancies on the Boards of either Income Funds or the Acquired Fund may be
filled by a majority of the Trustees remaining in office. A meeting of
shareholders will be required for the purpose of electing additional Trustees
whenever fewer than a majority of the Trustees then in office were elected by
shareholders.
SHAREHOLDER LIABILITY. Under Massachusetts law, shareholders of Income
Funds and the Acquired Fund may, under certain circumstances, be held personally
liable for the obligations of either Income Funds or the Acquired Fund,
respectively. The Acquired Fund's and Income Funds' Master Trust Agreements,
however, both disclaim shareholder liability for acts or obligations of the
Acquiring Fund or the Acquired Fund, as the case may be, and require that notice
of such disclaimer be given in each agreement, obligation or instrument entered
into or executed by Income Funds or the Acquired Fund, as the case may be. The
Master Trust Agreement for each of the Acquired Fund and Income Funds provides
for indemnification out of the Acquired Fund's or a series of Income Funds'
property, as the case may be, for all losses and expenses of any shareholder
held personally liable for the obligations of either the Acquired Fund or the
series of Income Funds, as the case may be. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is considered
remote since it is limited to circumstances in which a disclaimer is inoperative
and the Acquired Fund or the series of Income Funds itself, as the case may be,
would be unable to meet its obligations. A substantial number of mutual funds in
the United States are organized as Massachusetts business trusts.
17
<PAGE>
VOTING RIGHTS. Neither Income Funds nor the Acquired Fund holds annual
meetings of shareholders. However, special meetings of shareholders of each of
the Funds must be called upon the written request of holders of not less than
10% of the then outstanding voting securities of the respective Fund. On each
matter submitted to a vote of the shareholders of either the Acquired Fund or
Income Funds, each shareholder is entitled to one vote for each whole share
owned and a proportionate fractional vote for any fractional share outstanding
in the shareholder's name on the Fund's books. Shares of each series of Income
Funds votes as a separate class except as to the election of Trustees and as
otherwise required by the 1940 Act. As to any matter which does not affect the
interest of a particular series, only the holders of shares of the one or more
series are entitled to vote.
LIQUIDATION OR DISSOLUTION. In the event of the liquidation or dissolution
of the Acquiring Fund or the Acquired Fund, the shareholders of either Fund are
entitled to receive, when, and as declared by the Trustees, the excess of the
assets belonging to the Fund over the liabilities belonging to the Fund. In
either case, the assets so distributed to shareholders of the Fund will be
distributed among the shareholders in proportion to the number of shares of the
Fund held by them and recorded on the books of the Fund.
LIABILITY OF TRUSTEES. Under the Master Trust Agreement of each of Income
Funds and the Acquired Fund, a Trustee will be personally liable only for his or
her own willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of the office of Trustee. The Master Trust
Agreements of each Fund further provide that Trustees and officers will be
indemnified for the expenses of litigation against them unless it is determined
that the person did not act in good faith in the reasonable belief that the
person's actions were in or not opposed to the best interests of the Fund or the
person's conduct is determined to constitute willful misfeasance, bad faith,
gross negligence or reckless disregard of the person's duties.
RIGHTS OF INSPECTION. Shareholders of the Acquiring Fund and the Acquired
Fund have the same inspection rights as are permitted shareholders of a
Massachusetts corporation under Massachusetts corporate law. Currently, each
shareholder of a Massachusetts corporation is permitted to inspect the records,
accounts and books of a corporation for any legitimate business purpose.
The foregoing is only a summary of certain characteristics of the operations
of the Acquired Fund and the Acquiring Fund, the Master Trust Agreements of the
Acquired Fund and Income Funds, their respective By-laws and Massachusetts law.
The foregoing is not a complete description of the documents cited. Shareholders
should refer to the provisions of the corporate documents and state laws
governing each of the Funds for a more thorough description.
18
<PAGE>
ADDITIONAL INFORMATION ABOUT
SMITH BARNEY SHEARSON SHORT-TERM WORLD INCOME FUND
AND
SMITH BARNEY SHEARSON GLOBAL BOND FUND
SMITH BARNEY SHORT-TERM WORLD INCOME FUND. Information about the Acquired
Fund is included in its current Prospectus dated September 1, 1993, as
supplemented by Prospectus Supplements dated January 3, 1994, February 1, 1994
and April 1, 1994, and in the statement of additional information that has been
filed with the SEC, both of which are incorporated herein by reference. A copy
of the Prospectus and the statement of additional information is available upon
request and without charge by writing the Acquired Fund at the address listed on
the cover page of this Prospectus/Proxy Statement or by calling toll-free
1-800-221-8806.
SMITH BARNEY SHEARSON GLOBAL BOND FUND. Information concerning the
operation and management of the Acquiring Fund is incorporated herein by
reference from the Prospectus dated December 1, 1993, as supplemented by
Prospectus Supplements dated December 20, 1993, January 21, 1994 and April 5,
1994, and statement of additional information dated December 1, 1993. A copy of
such statement of additional information is available upon request and without
charge by writing the Acquiring Fund at the address listed on the cover page of
this Prospectus/Proxy Statement or by calling toll-free 1-800-221-8806.
Both the Acquiring Fund and the Acquired Fund are subject to the
informational requirements of the Exchange Act and in accordance therewith file
reports and other information including proxy material, reports and charter
documents with the SEC. These materials can be inspected and copies obtained at
the Public Reference Facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the New York Regional Office of the SEC at 75 Park
Place, New York, New York 10007. Copies of such material can also be obtained
from the Public Reference Branch, Office of Consumer Affairs and Information
Services, SEC, Washington, D.C. 20549 at prescribed rates.
OTHER BUSINESS
The Trustees of the Acquired Fund do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
19
<PAGE>
VOTING INFORMATION
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Trustees of the Acquired Fund to be used
at the Special Meeting of Shareholders to be held at 10:00 a.m. on July 5, 1994,
at Two World Trade Center, New York, New York 10048-0002 and at any adjournment
thereof. This Prospectus/Proxy Statement, along with a Notice of the Meeting and
a proxy card, is first being mailed to shareholders of the Acquired Fund on or
about June 2, 1994. Only shareholders of record as of the close of business on
the Record Date will be entitled to notice of, and to vote at the Meeting or any
adjournment thereof. The holders of a majority of the shares of the Acquired
Fund outstanding at the close of business on the Record Date present in person
or represented by proxy will constitute a quorum for the Meeting. For purposes
of determining the presence of a quorum for transacting business at the Meeting,
abstention and broker "non-votes" (that is, proxies from brokers or nominees
indicating that such persons have not received instructions from the beneficial
owner or other persons entitled to vote the shares with respect to which the
brokers or nominees do not have discretionary power) will be treated as shares
that are present but which have not been voted. For this reason, abstentions and
broker non-votes will have the effect of a "no" vote for purposes of obtaining
the requisite approval of the Plan. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Meeting, the proxies named
therein will vote the shares represented by the proxy in accordance with the
instructions marked thereon. Unmarked proxies will be voted FOR the proposed
Reorganization and FOR any other matters deemed appropriate. A proxy may be
revoked at any time on or before the Meeting by written notice to the Secretary
of the Acquired Fund, Christina T. Sydor, 1345 Avenue of the Americas, New York,
New York 10105. Unless revoked, all valid proxies will be voted in accordance
with the specifications thereon or, in the absence of such specifications, for
approval of the Plan and the Reorganization contemplated thereby.
Approval of the Plan will require the affirmative vote of a majority, as
defined in the 1940 Act, of the outstanding voting securities of the Acquired
Fund, which is the lesser of: (i) 67% of the voting securities of the Acquired
Fund present at the Meeting, if the holders of more than 50% of the outstanding
voting securities of the Acquired Fund are present or represented by proxy; or
(ii) more than 50% of the outstanding voting securities of the Acquired Fund.
Shareholders of the Acquired Fund are entitled to one vote for each share.
Fractional shares are entitled to proportional voting rights.
Proxy solicitations will be made primarily by mail, but proxy solicitations
also may be made by telephone, telegraph or personal interviews conducted by
officers and employees of the Acquired Fund, Smith Barney Shearson,
20
<PAGE>
SBGCM, Smith Barney Advisors, Boston Advisors and/or The Shareholer Services
Group, Inc., a subsidiary of First Data Corporation. The aggregate cost of
solicitation of the shareholders of the Acquired Fund is expected to be
approximately $15,000. Expenses incurred in connection with the Reorganization,
including the costs of the proxy solicitation and the preparation of the
enclosures to the Prospectus/Proxy Statement (including reimbursement of
expenses of forwarding solicitation material to beneficial owners of shares of
the Acquired Fund), and expenses incurred in connection with the preparation of
this Prospectus/Proxy Statement, will be borne by the Acquiring Fund and the
Acquired Fund in proportion to their assets.
In the event that sufficient votes to approve the Reorganization are not
received by July 5, 1994, the persons named as proxies may propose one or more
adjournments of the Meeting to permit further solicitation of proxies. In
determining whether to adjourn the Meeting, the following factors may be
considered: the percentage of votes actually cast, the percentage of negative
votes actually cast, the nature of any further solicitation and the information
to be provided to shareholders with respect to the reasons for the solicitation.
Any such adjournment will require an affirmative vote by the holders of a
majority of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon a decision to adjourn the
Meeting.
The votes of the shareholders of the Acquiring Fund are not being solicited
by this Prospectus/Proxy Statement.
FINANCIAL STATEMENTS AND EXPERTS
The statement of assets and liabilities of the Acquired Fund, including the
schedule of portfolio investments, as of April 30, 1993 the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the condensed financial
information for each of the two years in the period ended April 30, 1993 and for
the period from May 22, 1990 (commencement of operations) to April 30, 1991, and
the statement of assets and liabilities of the Acquiring Fund, including the
schedule of portfolio investments, as of July 31, 1993, the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the six years in the period then ended and for the period October 27,
1986 (commencement of operations) to July 31, 1987 have been incorporated by
reference into this Prospectus/Proxy Statement in reliance on the reports of
Coopers & Lybrand, independent accountants, given on the authority of such firm
as experts in accounting and auditing. In addition, the unaudited financial
statements for the Acquired Fund for the semi-annual period ended October 31,
1993 are incorporated by reference.
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LEGAL MATTERS
Certain legal matters concerning the issuance of shares of the Acquiring
Fund will be passed upon by Willkie Farr & Gallagher, One Citicorp Center, 153
East 53rd Street, New York, New York 10022.
THE BOARD OF TRUSTEES OF THE ACQUIRED FUND, INCLUDING THE INDEPENDENT
TRUSTEES, RECOMMEND APPROVAL OF THE PLAN, AND ANY UNMARKED PROXIES WITHOUT
INSTRUCTIONS TO THE CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN.
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EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this 1st day of June, 1994, by and between SMITH BARNEY SHEARSON SHORT-TERM
WORLD INCOME FUND (the "Acquired Fund"), a business trust organized under the
laws of The Commonwealth of Massachusetts, with its principal place of business
at Two World Trade Center, New York, New York 10048, and SMITH BARNEY SHEARSON
INCOME FUNDS ("Income Funds"), a business trust organized under the laws of The
Commonwealth of Massachusetts, with its principal place of business at Two World
Trade Center, New York, New York 10048, on behalf of SMITH BARNEY SHEARSON
GLOBAL BOND FUND (the "Acquiring Fund"), a series of Income Funds.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1)(C) of the United States
Internal Revenue Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all or substantially all of
the assets of the Acquired Fund in exchange solely for Class A and Class B
shares of beneficial interest of the Acquiring Fund (the "Acquiring Fund
Shares") and the assumption by the Acquiring Fund of certain liabilities of the
Acquired Fund and the distribution, after the Closing Date herein referred to,
of Acquiring Fund Shares to the shareholders of the Acquired Fund in liquidation
of the Acquired Fund and the dissolution and termination of the Acquired Fund,
all upon the terms and conditions hereinafter set forth in this Agreement.
WHEREAS, Income Funds and the Acquired Fund are registered investment
companies of the management type and both Income Funds and the Acquired Fund are
authorized to issue shares of beneficial interest;
WHEREAS, the Board of Trustees of the Acquired Fund has determined that the
exchange of all or substantially all of the assets and certain of the
liabilities of the Acquired Fund for Acquiring Fund Shares and the assumption of
such liabilities by the Acquiring Fund is in the best interests of the Acquired
Fund shareholders and that the interests of the existing shareholders of the
Acquired Fund would not be diluted as a result of this transaction;
WHEREAS, the Board of Trustees of Income Funds has determined that the
exchange of all or substantially all of the assets and certain of the
liabilities of the Acquired Fund for Acquiring Fund Shares and the assumption of
such liabilities by the Acquiring Fund is in the best interests of the Acquiring
Fund shareholders and that the interests of the existing shareholders of the
Acquiring Fund would not be diluted as a result of this transaction;
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NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE
FOR ACQUIRING FUND SHARES AND ASSUMPTION OF THE ACQUIRED FUND'S STATED
LIABILITIES AND LIQUIDATION, DISSOLUTION AND TERMINATION OF THE ACQUIRED
FUND
1.1. Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, the Acquired Fund agrees
to transfer the Acquired Fund's assets as set forth in paragraph 1.2 to the
Acquiring Fund, and the Acquiring Fund agrees in exchange therefor: (i) to
deliver to the Acquired Fund the number of Class A Acquiring Fund Shares,
including fractional Class A Acquiring Fund Shares, determined by dividing the
value of the Acquired Fund's net assets attributable to its Class A shares,
computed in the manner and as of the time and date set forth in paragraph 2.1,
by the net asset value of one Acquiring Fund Class A Share, computed in the
manner and as of the time and date set forth in paragraph 2.2; (ii) to deliver
to the Acquired Fund the number of Class B Acquiring Fund Shares, including
fractional Class B Acquiring Fund Shares, determined by dividing the value of
the Acquired Fund's net assets attributable to its Class B shares, computed in
the manner and as of the time and date set forth in paragraph 2.1, by the net
asset value of one Acquiring Fund Class B Share, computed in the manner and as
of the time and date set forth in paragraph 2.2; and (iii) to assume certain
liabilities of the Acquired Fund, as set forth in paragraph 1.3. Such
transactions shall take place at the closing provided for in paragraph 3.1 (the
"Closing").
1.2. (a) The assets of the Acquired Fund to be acquired by the Acquiring
Fund shall consist of all property, including without limitation, all cash,
securities and dividends or interest receivables which are owned by the Acquired
Fund and any deferred or prepaid expenses shown as an asset on the books of the
Acquired Fund on the closing date provided in paragraph 3.1 (the "Closing
Date").
(b) The Acquired Fund has provided the Acquiring Fund with a list of
all of the Acquired Fund's assets as of the date of execution of this Agreement.
The Acquired Fund reserves the right to sell any of the securities consisting a
part of such assets, but will not, without the prior approval of the Acquiring
Fund, acquire any additional securities other than securities of the type in
which the Acquiring Fund is permitted to invest. The Acquiring Fund will, within
a reasonable time prior to the Closing Date, furnish the Acquired Fund with a
statement of the Acquiring Fund's investment objectives, policies and
restrictions and a list of the securities, if any, on the Acquired Fund's list
referred to in the first sentence of this paragraph which do not conform to the
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Acquiring Fund's investment objectives, policies and restrictions. In the event
that the Acquired Fund holds any investments which the Acquiring Fund may not
hold, the Acquired Fund will dispose of such securities prior to the Closing
Date. In addition, if it is determined that the portfolios of the Acquired Fund
and the Acquiring Fund, when aggregated, would contain investments exceeding
certain percentage limitations imposed upon the Acquiring Fund with respect to
such investments, the Acquired Fund if requested by the Acquiring Fund will
dispose of and/or reinvest a sufficient amount of such investments as may be
necessary to avoid violating such limitations as of the Closing Date.
1.3. The Acquired Fund will endeavor to discharge all the Acquired Fund's
known liabilities and obligations prior to the Closing Date. The Acquiring Fund
shall assume all liabilities, expenses, costs, charges and reserves reflected on
an unaudited Statement of Assets and Liabilities of the Acquired Fund prepared
by The Boston Company Advisors, Inc. ("Boston Advisors"), as sub-administrator
of the Acquiring Fund and the Acquired Fund, as of the Valuation Date (as
defined in paragraph 2.1), in accordance with generally accepted accounting
principles consistently applied from the prior audited period. The Acquiring
Fund shall assume only those liabilities of the Acquired Fund reflected in and
quantified on the face of that unaudited Statement of Assets and Liabilities and
shall not assume any other liabilities, whether absolute or contingent, not
reflected thereon.
1.4. As soon after the Closing Date as is conveniently practicable (the
"Liquidation Date"), the Acquired Fund will liquidate and distribute pro rata to
the Acquired Fund's shareholders of record determined as of the close of
business on the Closing Date (the "Acquired Fund Shareholders"), the Acquiring
Fund Shares it receives pursuant to paragraph 1.1. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Acquired Fund on the books of the Acquiring
Fund to open accounts on the share records of the Acquiring Fund in the name of
the Acquired Fund's shareholders and representing the respective pro rata number
of the Acquiring Fund Shares due such shareholders. All issued and outstanding
shares of the Acquired Fund will simultaneously be cancelled on the books of the
Acquired Fund, although share certificates representing interests in the
Acquired Fund will represent a number of Acquiring Fund Shares after the Closing
Date as determined in accordance with paragraph 1.1. The Acquiring Fund shall
not issue certificates representing the Acquiring Fund Shares in connection with
such exchange.
1.5. Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund's transfer agent. Acquiring Fund Shares will be issued in the
manner described in the Acquiring Fund's current prospectus and statement of
additional information.
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1.6. Any transfer taxes payable upon issuance of the Acquiring Fund Shares
in a name other than the registered holder of the Acquired Fund shares on the
books of the Acquired Fund as of that time shall, as a condition of such
issuance and transfer, be paid by the person to whom such Acquiring Fund Shares
are to be issued and transferred.
1.7. Any reporting responsibility of the Acquired Fund is and shall remain
the responsibility of the Acquired Fund up to and including the Closing Date and
such later dates on which the Acquired Fund is dissolved and deregistered.
1.8. The Acquired Fund shall be dissolved and terminated under the relevant
laws of its state of organization and in accordance with its governing
documents, promptly following the Closing Date and the making of all
distributions pursuant to paragraph 1.4.
2. VALUATION
2.1. The value of the Acquired Fund's assets to be acquired by the
Acquiring Fund hereunder shall be the value of such assets computed as of the
close of regular trading on the New York Stock Exchange, Inc. (the "NYSE") on
the Closing Date (such time and date being hereinafter called the "Valuation
Date"), using the valuation procedures set forth in Income Funds' Master Trust
Agreement and the Acquiring Fund's then current prospectus or statement of
additional information.
2.2. The net asset value of Acquiring Fund Shares shall be the net asset
value per share computed as of the close of regular trading on the NYSE on the
Valuation Date, using the valuation procedures set forth in Income Funds' Master
Trust Agreement and the Acquiring Fund's then current prospectus or statement of
additional information.
2.3. All computations of value shall be made by Boston Advisors in
accordance with its regular practice as pricing agent for the Acquiring Fund.
2.4. In carrying out the valuations and calculations required in this
section, Acquiring Fund Class A Shares shall be issued only to the extent of the
value of the assets of the Acquired Fund representing the pro rata interest of
Class A shares of the Acquired Fund. Acquiring Fund Class B Shares shall be
issued only to the extent of the value of the assets of the Acquired Fund
representing the pro rata interest of Class B shares of the Acquired Fund.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be July 15, 1994, or such later date as the
parties may agree to in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be held as of
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5:00 p.m. at the offices of Boston Advisors, One Boston Place, Boston,
Massachusetts 02108, or at such other time and/or place as the parties may
agree.
3.2. Boston Safe Deposit and Trust Company, as custodian for the Acquiring
Fund (the "Custodian"), shall deliver at the Closing a certificate of an
authorized officer stating that: (a) the Acquired Fund's portfolio securities,
cash and any other assets shall have been delivered in proper form to the
Acquiring Fund within two business days prior to or on the Closing Date and (b)
all necessary transfer taxes including all applicable federal and state stock
transfer stamps, if any, shall have been paid, or provision for payment shall
have been made, in conjunction with the delivery of portfolio securities.
3.3. In the event that on the Valuation Date (a) the NYSE or another
primary trading market for portfolio securities of the Acquiring Fund or the
Acquired Fund shall be closed to trading or trading thereon shall be restricted
or (b) trading or the reporting of trading on the NYSE or elsewhere shall be
disrupted so that accurate appraisal of the value of the net assets of the
Acquiring Fund or the Acquired Fund is impracticable, the Closing Date shall be
postponed until the first business day after the day when trading shall have
been fully resumed and reporting shall have been restored.
3.4. The Acquired Fund shall deliver at the Closing a list of the names and
addresses of the Acquired Fund's shareholders and the number, class and
percentage ownership of outstanding shares owned by each such shareholder
immediately prior to the Closing, certified on behalf of the Acquired Fund by
its President. The Acquiring Fund shall issue and deliver a confirmation
evidencing the Acquiring Fund Shares to be credited on the Closing Date to the
Secretary of the Acquired Fund, or provide evidence satisfactory to the Acquired
Fund that such Acquiring Fund Shares have been credited to the Acquired Fund's
account on the books of the Acquiring Fund. At the Closing, each party shall
deliver to the other such bills of sale, checks, assignments, share
certificates, if any, receipts or other documents as such other party or its
counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1. The Acquired Fund represents and warrants to Income Funds and the
Acquiring Fund as follows:
(a) The Acquired Fund is a business trust, duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts;
(b) The Acquired Fund is a registered investment company classified as a
management company of the open-end type, and its registration
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with the Securities and Exchange Commission (the "Commission") as an
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act") is in full force and effect;
(c) The Acquired Fund is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation of
its Master Trust Agreement or By-laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the Acquired Fund
is a party or by which it is bound;
(d) The Acquired Fund has no material contracts or other commitments
(other than this Agreement) which will be terminated with liability to it
prior to the Closing Date;
(e) Except as otherwise disclosed in writing to and accepted by the
Acquiring Fund, no litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against the Acquired Fund or any of its properties or
assets (other than that previously disclosed to the other party to the
Agreement) which, if adversely determined, would materially and adversely
affect its financial condition or the conduct of its business. The Acquired
Fund knows of no facts which might form the basis for the institution of
such proceedings and is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which materially
and adversely affects its business or its ability to consummate the
transactions herein contemplated;
(f) The Statements of Assets and Liabilities of the Acquired Fund for
the fiscal period from May 22, 1990 (commencement of operations) through
April 30, 1991 and for the fiscal years ended April 30, 1992 through April
30, 1993 have been audited by Coopers & Lybrand, certified public
accountants, and are in accordance with generally accepted accounting
principles consistently applied, and such statements (copies of which have
been furnished to the Acquiring Fund) fairly reflect the financial condition
of the Acquired Fund as of such dates, and there are no known contingent
liabilities of the Acquired Fund as of such dates not disclosed therein;
(g) Since April 30, 1993, there has not been any material adverse change
in the Acquired Fund's financial condition, assets, liabilities or business
other than changes occurring in the ordinary course of business, or any
incurrence by the Acquired Fund of indebtedness maturing more than one year
from the date that such indebtedness was incurred, except as otherwise
disclosed to and accepted by the Acquiring Fund.
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For the purposes of this subparagraph (g), a decline in net asset value per
share of the Acquired Fund shall not constitute a material adverse change;
(h) At the Closing Date, all material federal and other tax returns and
reports of the Acquired Fund required by law then to have been filed by such
dates shall have been filed, and all federal and other taxes shown as due on
such returns shall have been paid so far as due, or provision shall have
been made for the payment thereof and, to the best of the Acquired Fund's
knowledge, no such return is currently under audit and no assessment has
been asserted with respect to such returns;
(i) For the most recent fiscal year and for the current year of its
operation, the Acquired Fund has met the requirements of Subchapter M of the
Code for qualification and treatment as a regulated investment company;
(j) All issued and outstanding shares of the Acquired Fund are, and at
the Closing Date will be, duly and validly issued and outstanding, fully
paid and non-assessable. All of the issued and outstanding shares of the
Acquired Fund will, at the time of Closing, be held by the persons and in
the amounts set forth in the records of the transfer agent as provided in
paragraph 3.4. The Acquired Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of the Acquired
Fund's shares, nor is there outstanding any security convertible into any of
the Acquired Fund's shares;
(k) At the Closing Date, the Acquired Fund will have good and marketable
title to its assets to be transferred to the Acquiring Fund pursuant to
paragraph 1.2 and full right, power and authority to sell, assign, transfer
and deliver such assets hereunder and, upon delivery and payment for such
assets, the Acquiring Fund will acquire good and marketable title thereto,
subject to no restrictions on the full transfer thereof, including such
restrictions as might arise under the Securities Act of 1933, as amended
(the "1933 Act"), other than as disclosed to the Acquiring Fund;
(l) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary action on the part of the Acquired Fund's
Board of Trustees, and subject to the approval of the Acquired Fund's
shareholders, this Agreement will constitute a valid and binding obligation
of the Acquired Fund, enforceable in accordance with its terms, subject as
to enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights and to general equity
principles;
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(m) The information to be furnished by the Acquired Fund for use in
no-action letters, applications for exemptive orders, registration
statements, proxy materials and other documents which may be necessary in
connection with the transactions contemplated hereby shall be accurate and
complete in all material respects and shall comply in all material respects
with federal securities and other laws and regulations thereunder applicable
thereto; and
(n) The proxy statement of the Acquired Fund (the "Proxy Statement") to
be included in the Registration Statement referred to in paragraph 5.7
(other than information therein that relates to the Acquiring Fund) will, on
the effective date of the Registration Statement and on the Closing Date,
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which such
statements were made, not materially misleading.
4.2. Income Funds and the Acquiring Fund represent and warrant to the
Acquired Fund as follows:
(a) The Acquiring Fund is a series of Income Funds which is a business
trust, duly organized, validly existing and in good standing under the laws
of The Commonwealth of Massachusetts;
(b) Income Funds is a registered investment company classified as a
management company of the open-end type and its registration with the
Commission as an investment company under the 1940 Act is in full force and
effect;
(c) The current prospectus of the Acquiring Fund and statement of
additional information of Income Funds conform in all material respects to
the applicable requirements of the 1933 Act and the 1940 Act and the rules
and regulations of the Commission thereunder and do not include any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not materially misleading;
(d) At the Closing Date, Income Funds will have good and marketable
title to the Acquiring Fund's assets;
(e) Income Funds is not, and the execution, delivery and performance of
this Agreement will not result, in a material violation of its Master Trust
Agreement or By-laws or of any agreement, indenture, instrument, contract,
lease or other undertaking with respect to the Acquiring Fund to which
Income Funds is a party or by which it is bound;
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(f) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or threatened against Income Funds with respect to the Acquiring
Fund or any of the Acquiring Fund's properties or assets, except as
previously disclosed in writing to the Acquired Fund. Income Funds and the
Acquiring Fund know of no facts which might form the basis for the
institution of such proceedings and neither Income Funds nor the Acquiring
Fund is a party to or subject to the provisions of any order, decree or
judgment of any court or governmental body which materially and adversely
affects the Acquiring Fund's business or Income Funds' ability on behalf of
the Acquiring Fund to consummate the transactions contemplated herein;
(g) The Statement of Assets and Liabilities of the Acquiring Fund for
the fiscal period from October 27, 1986 (commencement of operations) through
July 31, 1987 and for the fiscal years ended July 31, 1988 through July 31,
1993 have been audited by Coopers & Lybrand, certified public accountants,
and are in accordance with generally accepted accounting principles
consistently applied, and such statements (copies of which have been
furnished to the Acquired Fund) fairly reflect the financial condition of
the Acquiring Fund as of such dates, and there are no known contingent
liabilities of the Acquiring Fund as of such dates not disclosed therein;
(h) Since July 31, 1993, there has not been any material adverse change
in the Acquiring Fund's financial condition, assets, liabilities or business
other than changes occurring in the ordinary course of business, or any
incurrence by the Acquiring Fund of indebtedness maturing more than one year
from the date that such indebtedness was incurred. For the purposes of this
subparagraph (h), a decline in net asset value per share of the Acquiring
Fund shall not constitute a material adverse change;
(i) At the Closing Date, all material federal and other tax returns and
reports of the Acquiring Fund required by law then to have been filed by
such dates shall have been filed, and all federal and other taxes shown as
due on said returns shall have been paid so far as due, or provision shall
have been made for the payment thereof and, to the best of the Acquiring
Fund's knowledge, no such return is currently under audit and no assessment
has been asserted with respect to such returns;
(j) For the most recent fiscal year and for the current year of its
operation, the Acquiring Fund has met the requirements of Subchapter M of
the Code for qualification and treatment as a regulated investment company
and the Acquiring Fund intends to do so in the future;
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(k) At the date hereof, all issued and outstanding Acquiring Fund Shares
are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable, with no personal liability
attaching to the ownership thereof. The Acquiring Fund does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any shares of the Acquiring Fund, nor is there outstanding any
security convertible into any shares of the Acquiring Fund;
(l) The execution, delivery and performance of this Agreement has been
duly authorized by all necessary action, on the part of Income Funds' Board
of Trustees and, assuming due authorization, execution and delivery by the
Acquired Fund, this Agreement constitutes a valid and binding obligation of
Income Funds on behalf of the Acquiring Fund, enforceable in accordance with
its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors' rights and to general equity principles;
(m) The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund, for the account of the Acquired Fund's Shareholders, pursuant to the
terms of this Agreement, will at the Closing Date have been duly authorized
and, when so issued and delivered, will be duly and validly issued Acquiring
Fund Shares, and will be fully paid and non-assessable with no personal
liability attaching to the ownership thereof;
(n) The information to be furnished by the Acquiring Fund for use in
no-action letters, applications for exemptive orders, registration
statements, proxy materials and other documents which may be necessary in
connection with the transactions contemplated hereby shall be accurate and
complete in all material respects and shall comply in all material respects
with federal securities and other laws and regulations applicable thereto;
(o) The Proxy Statement to be included in the Registration Statement
(only insofar as it relates to in formation provided by the Acquiring Fund
and Income Funds specifically for inclusion therein) will, on the effective
date of the Registration Statement and on the Closing Date, not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
materially misleading; and
(p) Income Funds, on behalf of the Acquiring Fund, agrees to use all
reasonable efforts to obtain the approvals and authorizations required by
the 1933 Act, the 1940 Act and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue the Acquiring Fund's
operations after the Closing Date.
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5. COVENANTS OF THE ACQUIRED FUND, INCOME FUNDS AND
THE ACQUIRING FUND
5.1. The Acquired Fund and Income Funds on behalf of the Acquiring Fund
each will operate its business in the ordinary course between the date hereof
and the Closing Date, it being understood that such ordinary course of business
will include the declaration and payment of customary dividends and
distributions and any other dividends and distributions deemed advisable.
5.2. The Acquired Fund will call a meeting of its shareholders to consider
and act upon this Agreement and to take all other action necessary to obtain
approval of the transactions contemplated herein.
5.3. The Acquired Fund covenants that the Acquiring Fund Shares to be
issued hereunder are not being acquired for the purpose of making any
distribution thereof other than in accordance with the terms of this Agreement.
5.4. The Acquired Fund will assist Income Funds and the Acquiring Fund in
obtaining such information as the Acquiring Fund reasonably requests concerning
the beneficial ownership of the Acquired Fund's shares.
5.5. Subject to the provisions of this Agreement, the Acquired Fund and
Income Funds on behalf of the Acquiring Fund each will take, or cause to be
taken, all action, and do or cause to be done, all things reasonably necessary,
proper or advisable to consummate and make effective the transactions
contemplated by this Agreement.
5.6. As promptly as practicable, but in any case within sixty days after
the Closing Date, the Acquired Fund shall furnish the Acquiring Fund, in such
form as is reasonably satisfactory to the Acquiring Fund, a statement of the
earnings and profits of the Acquired Fund for federal income tax purposes which
will be carried over to the Acquiring Fund as a result of Section 381 of the
Code, and which will be certified by the Acquired Fund's President and its
Treasurer.
5.7. The Acquired Fund will provide the Acquiring Fund with information
reasonably necessary for the preparation of a prospectus (the "Prospectus")
which will include the Proxy Statement, referred to in paragraph 4.1(n), all to
be included in a Registration Statement on Form N-14 of the Acquiring Fund (the
"Registration Statement"), in compliance with the 1933 Act, the Securities
Exchange Act of 1934 (the "1934 Act") and the 1940 Act in connection with the
meeting of the Acquired Fund's shareholders to consider approval of this
Agreement and the transactions contemplated herein.
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6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED
FUND
The obligations of the Acquired Fund to consummate the transactions provided
for herein shall be subject, at its election, to the performance by Income Funds
and the Acquiring Fund of all of the obligations to be performed by them
hereunder on or before the Closing Date and, in addition thereto, the following
further conditions:
6.1. All representations and warranties of Income Funds and the Acquiring
Fund contained in this Agreement shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date with the
same force and effect as if made on and as of the Closing Date;
6.2. Income Funds on behalf of the Acquiring Fund shall have delivered to
the Acquired Fund a certificate executed in its name by its President or Vice
President and its Treasurer or Assistant Treasurer, in a form reasonably
satisfactory to the Acquired Fund and dated as of the Closing Date, to the
effect that the representations and warranties of Income Funds and the Acquiring
Fund made in this Agreement are true and correct at and as of the Closing Date,
except as they may be affected by the transactions contemplated by this
Agreement and as to such other matters as the Acquired Fund shall reasonably
request; and
6.3. The Acquired Fund shall have received on the Closing Date a favorable
opinion from Willkie Farr & Gallagher, counsel to the Acquiring Fund, dated as
of the Closing Date, in a form reasonably satisfactory to Christina T. Syder,
Esq., Secretary of the Acquired Fund, covering the following points:
That (a) the Acquiring Fund is a series of Income Funds which is a
business trust duly organized, validly existing and in good standing under
the laws of The Commonwealth of Massachusetts and has the power, under its
Master Trust Agreement, to own all of its properties and assets and to carry
on its business as presently conducted; (b) this Agreement has been duly
authorized, executed and delivered by Income Funds on behalf of the
Acquiring Fund and, assuming that the Prospectus, Registration Statement and
Proxy Statement comply with the 1933 Act, the 1934 Act and the 1940 Act and
the rules and regulations thereunder and, assuming due authorization,
execution and delivery of the Agreement by the Acquired Fund, is a valid and
binding obligation of Income Funds on behalf of the Acquiring Fund
enforceable against Income Funds in accordance with its terms, subject as to
enforcement, to
A-12
<PAGE>
bankruptcy, insolvency, reorganization, moratorium and other laws relating
to or affecting creditors' rights generally and to general equity
principles; (c) the Acquiring Fund Shares to be issued to the Acquired
Fund's shareholders as provided by this Agreement are duly authorized and
upon such delivery will be validly issued and outstanding and are fully paid
and non-assessable with no personal liability attaching to ownership
thereof, and no shareholder of the Acquiring Fund has any preemptive rights
to subscription or purchase in respect thereof; (d) the execution and
delivery of this Agreement did not, and the consummation of the transactions
contemplated hereby will not, result in a material violation of Income
Funds' Master Trust Agreement or By-laws or any provision of any agreement
(known to such counsel) to which Income Funds is a party with respect to the
Acquiring Fund or by which it is bound or, to the knowledge of such counsel,
result in the acceleration of any obligation or the imposition of any
penalty, under any agreement, judgment, or decree to which Income Funds is a
party with respect to the Acquiring Fund or by which it is bound; (e) to the
knowledge of such counsel, no consent, approval, authorization or order of
any court or governmental authority of the United States, the State of New
York or The Commonwealth of Massachusetts is required for the consummation
by Income Funds of the transactions contemplated herein, except such as have
been obtained under the 1933 Act, the 1934 Act and the 1940 Act, and such as
may be required under state securities law; (f) only insofar as they relate
to Income Funds and the Acquiring Fund, the descriptions in the Proxy
Statement of statutes, legal and governmental proceedings and contracts and
other documents, if any, are accurate and fairly present the information
required to be shown; (g) such counsel does not know of any legal or
governmental proceedings, only insofar as they relate to the Acquiring Fund,
existing on or before the effective date of the Registration Statement or
the Closing Date required to be described in the Registration Statement or
to be filed as exhibits to the Registration Statement which are not
described as required; (h) Income Funds is registered as an investment
company under the 1940 Act and its registration with the Commission as an
investment company under the 1940 Act is in full force and effect; and (i)
to the best knowledge of such counsel, no litigation or administrative
proceeding or investigation of or before any court or governmental body is
presently pending or threatened as to Income Funds with respect to the
Acquiring Fund or any of the properties or assets of the Acquiring Fund and
Income Funds is not a party to or subject to the provisions of any order,
decree or judgment of any court or governmental body, which materially and
adversely affects the business of the Acquiring Fund, other than as
previously disclosed in the Registration Statement. In addition, such
counsel also shall state that they have participated in conferences with
officers and other representatives of
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<PAGE>
Income Funds at which the contents of the Proxy Statement and related
matters were discussed and, although they are not passing upon and do not
assume any responsibility for the accuracy, completeness or fairness of the
statements contained in the Proxy Statement (except to the extent indicated
in paragraph (f) of their above opinion), on the basis of the foregoing
(relying as to materiality to a large extent upon the opinions of officers
and other representatives of Income Funds), no facts have come to their
attention that lead them to believe that the Proxy Statement as of its date,
as of the date of the Acquired Fund shareholders' meeting, and as of the
Closing Date, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein regarding Income Funds
or the Acquiring Fund or necessary to make the statements therein regarding
Income Funds or the Acquiring Fund, in the light of the circumstances under
which they were made, not misleading. Such opinion may state that such
counsel does not express any opinion or belief as to the financial
statements or other financial data or as to the information relating to
Income Funds or the Acquired Fund contained in the Proxy Statement or
Registration Statement, and that such opinion is solely for the benefit of
the Acquired Fund, its trustees and its officers. Such counsel may rely, as
to matters governed by the laws of The Commonwealth of Massachusetts, on an
opinion of Massachusetts counsel. Such opinion also shall include such other
matters incident to the transaction contemplated hereby as the Acquired Fund
may reasonably request.
In this paragraph 6.3, references to the Proxy Statement include and relate
only to the text of such Proxy Statement and not to any exhibits or attachments
thereto or to any documents incorporated by reference therein.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF INCOME FUNDS
AND THE ACQUIRING FUND
The obligations of Income Funds and the Acquiring Fund to complete the
transactions provided for herein shall be subject, at its election, to the
performance by the Acquired Fund of all the obligations to be performed by it
hereunder on or before the Closing Date and, in addition thereto, the following
conditions:
7.1. All representations and warranties of the Acquired Fund contained in
this Agreement shall be true and correct in all material respects as of the date
hereof and, except as they may be affected by the transactions contemplated by
this Agreement, as of the Closing Date with the same force and effect as if made
on and as of the Closing Date;
7.2. The Acquired Fund shall have delivered to the Acquiring Fund a
statement of the Acquired Fund's assets and liabilities, together with a list of
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<PAGE>
the Acquired Fund's portfolio securities showing the tax costs of such
securities by lot and the holding periods of such securities, as of the Closing
Date, certified by the Treasurer or Assistant Treasurer of the Acquired Fund;
7.3. The Acquired Fund shall have delivered to the Acquiring Fund on the
Closing Date a certificate executed in its name by its President or Vice
President and its Treasurer or Assistant Treasurer, in form and substance
satisfactory to the Acquiring Fund and dated as of the Closing Date, to the
effect that the representations and warranties of the Acquired Fund made in this
Agreement are true and correct at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement, and as to such
other matters as the Acquiring Fund shall reasonably request; and
7.4. The Acquiring Fund shall have received on the Closing Date a favorable
opinion of Willkie Farr & Gallagher, counsel to the Acquired Fund, in a form
satisfactory to Christina T. Syder, Esq., Secretary of the Acquiring Fund,
covering the following points:
That (a) the Acquired Fund is a business trust duly organized, validly
existing and in good standing under the laws of The Commonwealth of
Massachusetts and has the power, under its Master Trust Agreement, to own
all of its properties and assets and to carry on its business as presently
conducted; (b) this Agreement has been duly authorized, executed and
delivered by the Acquired Fund and, assuming that the Prospectus, the
Registration Statement and the Proxy Statement comply with the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations thereunder and,
assuming due authorization, execution and delivery of the Agreement by
Income Funds on behalf of the Acquiring Fund, is a valid and binding
obligation of the Acquired Fund enforceable against the Acquired Fund in
accordance with its terms, subject as to enforcement to bankruptcy,
insolvency, reorganization, moratorium and other laws relating to or
affecting creditors' rights generally and to general equity principles; (c)
the execution and delivery of this Agreement did not, and the consummation
of the transactions contemplated hereby will not, result in a material
violation of the Acquired Fund's Master Trust Agreement or By-laws or any
provision of any agreement (known to such counsel) to which the Acquired
Fund is a party or by which it is bound or, to the knowledge of such
counsel, result in the acceleration of any obligation or the imposition of
any penalty, under any agreement, judgment or decree to which the Acquired
Fund is a party or by which it is bound; (d) to the knowledge of such
counsel, no consent, approval, authorization or order of any court or
governmental authority of the United States, the State of New York or The
Commonwealth of Massachusetts is required for the consummation by the
Acquired Fund of the transactions
A-15
<PAGE>
contemplated herein, except such as have been obtained under the 1933 Act,
the 1934 Act and the 1940 Act, and such as may be required under state
securities laws and except for an order of the Commission under Section 8(f)
of the 1940 Act declaring that the Acquired Fund has ceased to be an
investment company; (e) only insofar as they relate to the Acquired Fund,
the descriptions in the Proxy Statement of statutes, legal and governmental
proceedings and contracts and other documents, if any, are accurate and
fairly present the information required to be shown; (f) such counsel does
not know of any legal or governmental proceedings, only insofar as they
relate to the Acquired Fund existing on or before the effective date of the
Registration Statement or the Closing Date, required to be described in the
Proxy Statement or to be filed as exhibits to the Registration Statement
which are not described and filed as required; (g) the Acquired Fund is
registered as an investment company under the 1940 Act and its registration
with the Commission as an investment company under the 1940 Act is in full
force and effect; and (h) to the best knowledge of such counsel, no
litigation or administrative proceeding or investigation of or before any
court or governmental body is presently pending or threatened as to the
Acquired Fund or any of its properties or assets and the Acquired Fund is
neither a party to nor subject to the provisions of any order, decree or
judgment of any court or governmental body, which materially and adversely
affects its business other than as previously disclosed in the Proxy
Statement. Such counsel also shall state that they have participated in
conferences with officers and other representatives of the Acquired Fund at
which the contents of the Proxy Statement and related matters were discussed
and, although they are not passing upon and do not assume any responsibility
for the accuracy, completeness or fairness of the statements contained in
the Proxy Statement (except to the extent indicated in paragraph (e) of
their above opinion), on the basis of the foregoing (relying as to
materiality to a large extent upon the opinions of officers and other
representatives of the Acquired Fund), no facts have come to their attention
that lead them to believe that the Proxy Statement as of its date, as of the
date of the Acquired Fund shareholders' meeting, and as of the Closing Date,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein regarding the Acquired Fund or
necessary in the light of the circumstances under which they were made, to
make the statements therein regarding the Acquired Fund not misleading. Such
opinion may state that such counsel does not express any opinion or belief
as to the financial statements or other financial data, or as to the
information relating to the Acquiring Fund, contained in the Proxy Statement
or Registration Statement, and that such opinion is solely for the benefit
of Income Funds, its trustees and its officers. Such
A-16
<PAGE>
counsel may rely, as to matters governed by the laws of the Commonwealth of
Massachusetts, on an opinion of Massachusetts counsel. Such opinion also
shall include such other matters incident to the transaction contemplated
hereby as Income Funds on the behalf of the Acquiring Fund may reasonably
request.
In this paragraph 7.4, references to the Proxy Statement include and relate
to only the text of such Proxy Statement and not to any exhibits or attachments
thereto or to any documents incorporated by reference therein.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
ACQUIRED FUND, INCOME FUNDS AND THE ACQUIRING FUND
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to Income Funds on behalf of the Acquiring Fund or the
Acquired Fund, the other party to this Agreement shall, at its option, not be
required to consummate the transactions contemplated by this Agreement:
8.1. The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with the provisions of its Master Trust Agreement
and By-laws and certified copies of the votes evidencing such approval shall
have been delivered to the Acquiring Fund. Notwithstanding anything herein to
the contrary, neither the Acquired Fund nor Income Funds on behalf of the
Acquiring Fund may waive the conditions set forth in this paragraph 8.1;
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein;
8.3. All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including "no-
action" positions of and exemptive orders from such federal and state
authorities) deemed necessary by the Acquiring Fund or the Acquired Fund to
permit consummation, in all material respects, of the transactions contemplated
hereby shall have been obtained, except where failure to obtain any such
consent, order or permit would not involve a risk of a material adverse effect
on the assets or properties of the Acquiring Fund or the Acquired Fund, provided
that either party hereto may for itself waive any of such conditions;
8.4. The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have
A-17
<PAGE>
been issued and, to the best knowledge of the parties hereto, no investigation
or proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act;
8.5. The Acquired Fund and Income Funds on behalf of the Acquiring Fund,
shall have declared and paid a dividend or dividends on the outstanding shares
of the Acquired Fund and the Acquiring Fund, respectively, which, together with
all previous such dividends, shall have the effect of distributing to the
shareholders of the Acquired Fund and the Acquiring Fund all of the investment
company taxable income of the Acquired Fund and the Acquiring Fund for all
taxable years ending on or prior to the Closing Date (computed without regard to
any deduction for dividends paid) and all of each fund's net capital gain
realized in all taxable years ending on or prior to the Closing Date (after
reduction for any capital loss carry forward);
8.6. The parties shall have received a favorable opinion of Willkie Farr &
Gallagher, addressed to the Acquired Fund and Income Funds and satisfactory to
Christina T. Syder, Esq., Secretary of the Acquiring Fund and the Acquired Fund,
substantially to the effect that for federal income tax purposes:
(a) the transfer of all or substantially all of the Acquired Fund's
assets in exchange for the Acquiring Fund Shares and the assumption by the
Acquiring Fund of certain identified liabilities of the Acquired Fund will
constitute a "reorganization" within the meaning of Section 368(a)(1)(C) of
the Code, and the Acquiring Fund and the Acquired Fund are each a "party to
a reorganization" within the meaning of Section 368(b) of the Code; (b) no
gain or loss will be recognized by the Acquiring Fund upon the receipt of
the assets of the Acquired Fund in exchange for the Acquiring Fund Shares
and the assumption by the Acquiring Fund of certain identified liabilities
of the Acquired Fund; (c) no gain or loss will be recognized by the Acquired
Fund upon the transfer of the Acquired Fund's assets to the Acquiring Fund
in exchange for the Acquiring Fund Shares and the assumption by the
Acquiring Fund of certain identified liabilities of the Acquired Fund or
upon the distribution (whether actual or constructive) of the Acquiring Fund
Shares to the Acquired Fund's shareholders; (d) no gain or loss will be
recognized by shareholders of the Acquired Fund upon the exchange of their
Acquired Fund shares for the Acquiring Fund Shares and the assumption by the
Acquiring Fund of certain identified liabilities of the Acquired Fund; (e)
the aggregate tax basis for the Acquiring Fund Shares received by each of
the Acquired Fund's shareholders pursuant to the Reorganization will be the
same as the aggregate tax basis of the Acquired Fund shares held by such
shareholder immediately prior to the Reorganization, and the holding period
of
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<PAGE>
the Acquiring Fund Shares to be received by each Acquired Fund shareholder
will include the period during which the Acquired Fund shares exchanged
therefor were held by such shareholder (provided that the Acquired Fund
shares were held as capital assets on the date of the Reorganization); and
(f) the tax basis of the Acquired Fund's assets acquired by the Acquiring
Fund will be the same as the tax basis of such assets to the Acquired Fund
immediately prior to the Reorganization, and the holding period of the
assets of the Acquired Fund in the hands of the Acquiring Fund will include
the period during which those assets were held by the Acquired Fund.
Notwithstanding anything herein to the contrary, neither the Acquired Fund
nor Income Funds may waive the conditions set forth in this paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1. The Acquired Fund and Income Funds on behalf of the Acquiring Fund
each represents and warrants to the other that there are no brokers or finders
entitled to receive any payments in connection with the transactions provided
for herein.
9.2. (a) Except as may be otherwise provided herein, the Acquiring Fund and
the Acquired Fund shall each be liable, in proportion to their assets, for the
expenses incurred in connection with entering into and carrying out the
provisions of this Agreement, including the expenses of: (i) its counsel and
independent accountants associated with the Reorganization; (ii) printing and
mailing the Prospectus/Proxy Statement and soliciting proxies in connection with
the meeting of shareholders of the Acquired Fund referred to in paragraph 5.2
hereof; (iii) any special pricing fees associated with the valuation of the
Acquired Fund's or the Acquiring Fund's portfolio on the Closing Date; (iv)
expenses associated with preparing this Agreement and preparing and filing the
Registration Statement under the 1933 Act covering the Acquiring Fund Shares to
be issued in the Reorganization; and (v) registration or qualification fees and
expenses of preparing and filing such forms, if any, necessary under applicable
state securities laws to qualify the Acquiring Fund Shares to be issued in
connection with the Reorganization. The Acquired Fund shall be liable for (i)
all fees and expenses related to the liquidation and termination of the Acquired
Fund; and (ii) fees and expenses of the Acquired Fund's custodian and transfer
agent incurred in connection with the Reorganization. The Acquiring Fund shall
be liable for any fees and expenses of the Acquiring Fund's custodian and
transfer agent incurred in connection with the Reorganization.
(b) Consistent with the provisions of paragraph 1.3, the Acquired Fund,
prior to the Closing, shall pay for or include in the unaudited Statement of
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<PAGE>
Assets and Liabilities prepared pursuant to paragraph 1.3 all of its known and
reasonably estimated expenses associated with the transactions contemplated by
this Agreement.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The Acquired Fund and Income Fund on behalf of the Acquiring Fund
agree that neither party has made any representation, warranty or covenant not
set forth herein and that this Agreement constitutes the entire agreement
between the parties.
10.2. The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
11.1. This Agreement may be terminated at any time prior to the Closing
Date by: (1) the mutual agreement of the Acquired Fund and Income Funds; (2) the
Acquired Fund in the event Income Funds or the Acquiring Fund shall, or Income
Funds in the event the Acquired Fund shall, materially breach any
representation, warranty or agreement contained herein to be performed at or
prior to the Closing Date; or (3) a condition herein expressed to be precedent
to the obligations of the terminating party has not been met and it reasonably
appears that it will not or cannot be met.
11.2. In the event of any such termination, there shall be no liability for
damages on the part of either the Acquired Fund or Income Funds, or their
respective trustees or officers, to the other party, but each shall bear the
expenses incurred by it incidental to the preparation and carrying out of this
Agreement as provided in paragraph 9.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of Income
Funds and the Acquired Fund; provided, however, that following the meeting of
the Acquired Fund shareholders called by the Acquired Fund pursuant to paragraph
5.2 of this Agreement, no such amendment may have the effect of changing the
provisions for determining the number of the Acquiring Fund Shares to be issued
to the Acquired Fund's shareholders under this Agreement to the detriment of
such shareholders without their further approval.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
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<PAGE>
telegraph, telecopy or certified mail addressed to the Acquired Fund, Two World
Trade Center, 100th Floor, New York, New York 10048, Attention: Heath B.
McLendon; or to Income Funds on behalf of the Acquiring Fund, Two World Trade
Center, 100th Floor, New York, New York 10048, Attention: Heath B. McLendon.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT;
LIMITATION OF LIABILITY
14.1. The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
14.4. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm, corporation or other entity, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason of
this Agreement.
14.5. (a) It is expressly agreed that the obligations of the Acquired Fund
hereunder shall not be binding upon any of the trustees, shareholders, nominees,
officers, agents or employees of the Acquired Fund personally, but bind only the
trust property of the Acquired Fund, as provided in its Master Trust Agreement.
The execution and delivery of this Agreement have been authorized by the
trustees of the Acquired Fund and this Agreement has been executed by authorized
officers of the Acquired Fund, acting as such, and neither such authorization by
such trustees nor such execution and delivery by such officers 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 trust property of the Acquired Fund
as provided in its Master Agreement.
(b) It is expressly agreed that the obligations of Income Funds
hereunder shall not be binding upon any of the trustees, shareholders, nominees,
officers, agents or employees of Income Funds personally, but bind only the
trust property of Income Funds and the Acquiring Fund, as provided in the Master
Trust Agreement of Income Funds. The execution and delivery of this Agreement
have been authorized by the trustees of Income Funds and this Agreement has been
executed by authorized officers of Income Funds on
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<PAGE>
behalf of the Acquiring Fund, acting as such, and neither such authorization by
such trustees nor such execution and delivery by such officers 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 trust property of the Acquiring Fund
as provided in the Master Trust Agreement of Income Funds.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its Chairman of the Board, President or Vice President and its
seal to be affixed thereto and attested by its Secretary or Assistant Secretary.
<TABLE>
<S> <C>
Attest: SMITH BARNEY SHEARSON SHORT-TERM
WORLD INCOME FUND
/s/CHRISTINA T. SYDER By: /s/HEATH B. MCLENDON
Name: Christina T. Syder Name: Heath B. McLendon
Title: Secretary Title: Chairman of the Board
Attest: SMITH BARNEY SHEARSON INCOME
FUNDS, on behalf of SMITH BARNEY
SHEARSON GLOBAL BOND FUND
/s/CHRISTINA T. SYDER By: /s/HEATH B. MCLENDON
Name: Christina T. Syder Name: Heath B. McLendon
Title: Secretary Title: Chairman of the Board
</TABLE>
A-22
<PAGE>
SMITH BARNEY SHEARSON GLOBAL BOND FUND
(THE "FUND")
SUPPLEMENT TO PROSPECTUS DATED DECEMBER 1, 1993
The following information replaces the disclosure found in the Fund's
Prospectus under the headings "Prospectus Summary -- Management of the Fund" and
"Management of the Fund -- Investment Adviser and -- Portfolio Management:"
Smith Barney Global Capital Management, Inc. ("SBGCM") serves as the Fund's
investment adviser pursuant to an investment advisory agreement dated March 22,
1994. SBGCM has agreed to waive 50% of its investment advisory fee until such
time as the Fund's Board of Trustees and SBGCM mutually agree otherwise. SBGCM
is located at 10 Piccadilly, London WIV 9LA England and has been in the
investment counseling business since 1988. SBGCM is a wholly owned subsidiary of
Smith Barney Shearson Holdings Inc., which is in turn a wholly owned subsidiary
of The Travelers Inc. ("Travelers"). Travelers is a financial services holding
company engaged through its subsidiaries principally in the businesses of
consumer financial, investment and insurance services.
Mr. Victor S. Filatov, International Strategist and President of SBGCM, 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.
Supplement dated, April 5, 1994
1
<PAGE>
SMITH BARNEY SHEARSON GLOBAL BOND FUND
(THE "FUND")
SUPPLEMENT TO PROSPECTUS
DATED DECEMBER 1, 1993
On January 20, 1994, the Board of Trustees of the Fund terminated the
investment advisory agreement with Lehman Brothers Global Asset Management
Limited. In addition, the Board proposed that the Fund enter into a new
investment advisory agreement with Smith Barney Global Capital Management, Inc.
("SBGCM"). This agreement would contain substantially the same terms, conditions
and fees as the Fund's previous agreement, however, SBGCM has agreed to waive
50% of its investment advisory fees until such time as the Fund's Board of
Trustees and SBGCM mutually agree otherwise. Pending shareholder approval, the
new advisory agreement would become effective on March 22, 1994. The Board of
Trustees has called a shareholder meeting for the purpose of considering the new
agreement.
SBGCM is located at 10 Piccadilly, London, W1V 9LA England and has been in the
investment counseling business since 1988. SBGCM is a wholly owned subsidiary of
Smith Barney Shearson Holdings Inc. ("Holdings"). Holdings is a wholly owned
subsidiary of The Travelers Inc., a financial services holding company engaged
through its subsidiaries principally in the businesses of consumer financial
services, investment services and insurance services.
January 21, 1994
2
<PAGE>
SMITH BARNEY SHEARSON
<TABLE>
<S> <C>
Limited Maturity Municipals Investment Grade Bond Fund
Fund
Managed Municipals Fund Inc. High Income Fund
Tax-Exempt Income Fund Global Bond Fund
Arizona Municipals Fund Inc. European Fund
Intermediate Maturity Convertible Fund
California Municipals Fund
California Municipals Fund Inc. Utilities Fund
Florida Municipals Fund Strategic Investors Fund
Massachusetts Municipals Fund Premium Total Return Fund
New Jersey Municipals Fund Inc. Growth and Income Fund
Intermediate Maturity New York Appreciation Fund Inc.
Municipals Fund
New York Municipals Fund Inc. Fundamental Value Fund Inc.
Adjustable Rate Government Directions Value Fund
Income Fund
Worldwide Prime Assets Fund Sector Analysis Fund
Short-Term World Income Fund Telecommunications Growth Fund
Limited Maturity Treasury Fund Aggressive Growth Fund Inc.
Diversified Strategic Income Special Equities Fund
Fund
Managed Governments Fund Inc. Global Opportunities Fund
Government Securities Fund Premiums Metals and Minerals
Fund Inc.
</TABLE>
SUPPLEMENT DATED DECEMBER 20, 1993
TO THE PROSPECTUSES*
Effective February 21, 1994, the following information supplements the
disclosure found in the prospectus of each of the funds listed above (each a
"Fund") under "Exchange Privilege:"
Although the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the Fund's performance and its shareholders.
The Fund's investment adviser may determine that a pattern of frequent exchanges
is excessive and contrary to the best interests of the Fund's other
shareholders.
3
<PAGE>
In this event, the Fund's investment adviser will notify Smith Barney
Shearson, and Smith Barney Shearson may, at its discretion, decide to limit
additional purchase and/or exchanges by the shareholder. Upon such a
determination, Smith Barney Shearson 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 Smith Barney Shearson funds ordinarily available, which
position the shareholder would expect to maintain for a significant period of
time. All relevant factors will be considered in determining what constitutes an
abusive pattern of exchanges.
- ------------------
*Prospectuses dated:
<TABLE>
<S> <C>
Limited Maturity 4/1/93
Municipals Fund
Managed Municipals Fund Inc. 7/1/91
Tax-Exempt Income Fund 12/1/93
Arizona Municipals Fund Inc. 10/1/93
Intermediate Maturity 4/1/93
California Municipals Fund
California Municipals Fund Inc. 7/1/93
Florida Municipals Fund 10/19/92
Massachusetts Municipals Fund 4/1/93
New Jersey Municipals Fund Inc. 8/1/93
Intermediate Maturity New York Municipals Fund 4/1/93
New York Municipals Fund Inc. 5/1/93
Adjustable Rate Government Income Fund 10/1/93
Worldwide Prime Assets Fund 4/1/93
Short-Term World Income Fund 9/1/93
Limited Maturity Treasury Fund 4/1/93
Diversified Strategic Income Fund 12/1/93
Managed Governments Fund Inc. 12/1/93
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Government Securities Fund 5/1/93
Investment Grade Bond Fund 5/1/93
High Income Fund 12/1/93
Global Bond Fund 12/1/93
European Fund 5/1/93
Convertible Fund 12/1/93
Utilities Fund 12/1/93
Strategic Investors Fund 6/1/93
Premium Total Return Fund 12/1/93
Growth and Income Fund 6/1/93
Appreciation Fund 5/1/93
Fundamental Value Fund Inc. 11/22/93
Directions Value Fund 5/1/93
Sector Analysis Fund 6/1/93
Telecommunications 5/1/93
Growth Fund
Aggressive Growth Fund Inc. 3/1/93
Special Equities Fund 5/1/93
Global Opportunities Fund 9/1/93
Precious Metals and Minerals Fund Inc. 3/1/93
</TABLE>
5
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
PROSPECTUS December 1, 1993
Two World Trade Center
New York, New York 10048
(212) 720-9218
The Smith Barney Shearson 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 Shearson 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 your Smith Barney Shearson
Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated December 1, 1993, as amended or
supplemented from time to time, which 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 Shearson 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 SHEARSON INC.
Distributor
LEHMAN BROTHERS GLOBAL ASSET MANAGEMENT LIMITED
Investment Adviser
THE BOSTON COMPANY ADVISORS, 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.
6
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
---------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 9
---------------------------------------------------------------------
VARIABLE PRICING SYSTEM 12
---------------------------------------------------------------------
THE FUND'S PERFORMANCE 13
---------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 15
---------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 16
---------------------------------------------------------------------
PURCHASE OF SHARES 31
---------------------------------------------------------------------
REDEMPTION OF SHARES 38
---------------------------------------------------------------------
VALUATION OF SHARES 43
---------------------------------------------------------------------
EXCHANGE PRIVILEGE 44
---------------------------------------------------------------------
DISTRIBUTOR 50
---------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 52
---------------------------------------------------------------------
ADDITIONAL INFORMATION 54
---------------------------------------------------------------------
</TABLE>
7
<PAGE>
SMITH BARNEY SHEARSON
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."
BENEFITS TO INVESTORS THE FUND OFFERS INVESTORS SEVERAL IMPORTANT BENEFITS:
- A professionally managed portfolio of bonds, debentures and notes of United
States and foreign issuers.
- Ownership of a diversified portfolio of debt securities.
- Investment liquidity through convenient purchase and redemption procedures.
- A convenient way to invest without the administrative and recordkeeping
burdens normally associated with the direct ownership of securities.
- Different methods for purchasing shares that allow investment flexibility
and a wider range of investment alternatives.
- Automatic dividend reinvestment feature, plus exchange privilege within the
same class of shares of most other funds in the Smith Barney Shearson Group
of Funds.
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."
VARIABLE PRICING SYSTEM The Fund offers three 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 two classes
of shares: Class A shares and Class B shares which differ principally in terms
of the sales charges and rate of expenses to which they are subject. A third
class -- Class D shares -- is offered only to plans
8
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
participating in the Smith Barney Shearson 401(k) Program (the "401(k)
Program"). See "Variable Pricing System" and "Purchase of Shares -- Smith Barney
Shearson 401(k) Program."
CLASS A SHARES These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.50%. The Fund pays an annual service fee of
.25% of the value of average daily net assets of this Class. See "Purchase of
Shares."
CLASS B SHARES These shares are offered at net asset value per share subject to
a maximum contingent deferred sales charge ("CDSC") of 4.50% of redemption
proceeds, declining by .50% after the first year after purchase and by 1% each
year thereafter to zero. The Fund pays an annual service fee of .25% and an
annual distribution fee of .50% of the value of average daily net assets of this
Class. See "Purchase of Shares."
CLASS B CONVERSION FEATURE Class B shares will convert automatically to Class A
shares, based on relative net asset value, eight years after the date of
original purchase. Upon conversion, these shares will no longer be subject to an
annual distribution fee. The first of these conversions will commence on or
about September 30, 1994. See "Variable Pricing System--Class B Shares."
SMITH BARNEY SHEARSON 401(K) PROGRAM Investors may be eligible to participate in
the 401(k) Program, which is generally designed to assist employers or 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 and Class D shares are
available as investment alternatives for Participating Plans. Class A and Class
B shares acquired through the 401(k) Program are subject to the same service
and/or distribution fee as, but different sales charge and CDSC schedules than,
the Class A and Class B shares acquired by other investors. Class D shares
acquired by Participating Plans are offered at net asset value per share without
any sales charge or CDSC. The Fund pays annual service and distribution fees
based on the value of the average daily net assets attributable to this Class.
See "Purchase of Shares -- Smith Barney Shearson 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the Trust's distributor,
Smith Barney Shearson Inc. ("Smith Barney Shearson"), or a
9
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
broker that clears securities transactions through Smith Barney Shearson on a
fully disclosed basis (an "Introducing Broker"). Direct purchases of certain
retirement plans may be made through the Trust's transfer agent, The Shareholder
Services Group, Inc. ("TSSG"), a subsidiary of First Data Corporation. Smith
Barney Shearson recommends that, in most cases, single investments of $250,000
or more should be made in Class A. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors are subject to a minimum initial investment
requirement of $1,000 and a minimum subsequent investment requirement of $200.
However, for Individual Retirement Accounts ("IRAs") and Self-Employed
Retirement Plans, the minimum initial investment requirement is $250 and the
minimum subsequent investment requirement is $100 and for certain qualified
retirement plans, the minimum initial and subsequent investment requirement is
$25. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Trust also 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 not less than
$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. Class A and Class D shares are
redeemable at net asset value and Class B shares are redeemable at net asset
value less any applicable CDSC. See "Redemption of Shares."
MANAGEMENT OF THE FUND Lehman Brothers Global Asset Management Limited ("Global
Asset Management") serves as the Fund's investment adviser. Global Asset
Management is a wholly owned subsidiary of Lehman Brothers Holdings Inc.
("Lehman Holdings"), which is in turn a a wholly owned subsidiary of American
Express Company ("American Express"). American Express owns 100% of Lehman
Holdings' issued and outstanding common stock, which represents approximately
92% of Lehman Holdings' voting stock. The remainder of Holdings' voting stock is
owned by Nippon Life Insurance Company. American Express is principally engaged
in the business of providing travel-related services, information services,
investment services, international banking services and investors' diversified
financial services.
10
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
The Boston Company Advisors, Inc. ("Boston Advisors") serves as the Fund's
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 ("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 in the Smith Barney Shearson Group of Funds.
Certain exchanges may be subject to a sales charge differential. See "Exchange
Privilege."
VALUATION OF SHARES Net asset value of each Class is quoted daily in the
financial section of most newspapers and is also available from any Smith Barney
Shearson Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly 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" and "Variable Pricing
System."
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."
11
<PAGE>
SMITH BARNEY SHEARSON
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 the Fund's current operating expenses:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS D
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% -- --
Maximum CDSC (as a percentage of redemption proceeds) -- 4.50% --
- -------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees .80 .80 .80
12b-1 fees* .25 .75 .75
Other expenses** .66 .67 .63
- -------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.71% 2.22% 2.18%
- -------------------------------------------------------------------------------------
<FN>
* Upon conversion, Class B shares will no longer be subject to a distribution
fee. Class D shares do not have a conversion feature and, therefore, are
subject to an ongoing distribution fee.
** All expenses are based on data for the Fund's fiscal year ended July 31,
1993 and with the exception of Class B shares, are annualized.
</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 pay actual
charges of less than 4.50%, depending on the amount purchased and, in the case
of Class B shares, the length of time the shares are held and whether the shares
are held through the 401(k) Program. See "Purchase of Shares" and "Redemption of
Shares." Management fees paid by the Fund include investment advisory fees paid
to Global Asset Management at the annual rate of .60% of the value of the Fund's
average daily net assets and administration fees paid to Boston Advisors at the
annual rate of .20% of the value of the Fund's average daily net assets. The
nature of the services for which the Fund pays management fees is described
under "Management of the Trust and the Fund." Smith Barney Shearson receives an
annual 12b-1 service fee of .25% of the value of average daily net assets of
Class A shares. Smith Barney Shearson also receives, with respect to Class
12
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
B and Class D shares, an annual 12b-1 fee of .75% of the value of average daily
net assets of Class B and Class D shares, consisting of a .50% distribution fee
and a .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 demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in the Fund assuming a 5% total return. THE
EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT THE LEVELS SET
FORTH IN THE ABOVE TABLE. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN. MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE FUND'S ACTUAL
PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN
5%.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS*
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------
Class A shares** $62 $97 $134 $238
Class B shares:
Assumes complete redemption at end
of each time
period*** 68 99 129 243
Assumes no redemption 23 69 119 243
Class D shares: 22 68 117 251
-------------------------------------------------------------------------------------
<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.
** Assumes deduction at the time of purchase of the maximum 4.50% sales
charge.
*** Assumes deduction at the time of redemption of the maximum CDSC applicable
for that time period.
</TABLE>
13
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE FOLLOWING INFORMATION HAS BEEN AUDITED BY COOPERS & LYBRAND, INDEPENDENT
ACCOUNTANTS, WHOSE REPORT THEREON APPEARS IN THE FUND'S ANNUAL REPORT DATED JULY
31, 1993. 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, 1993, WHICH IS INCORPORATED BY REFERENCE INTO THE
STATEMENT OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT THE PERIOD:
<TABLE>
<CAPTION>
PERIOD
ENDED
7/31/93*++
<S> <C>
Net asset value, beginning of period $16.32
---------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.61
Net realized and unrealized gain on investments 0.60
---------------------------------------------------------------------------------
Total from investment operations 1.21
Distributions to shareholders:
Distributions from net investment income: (0.88)
Distributions in excess of net investment income (0.12)
---------------------------------------------------------------------------------
Total distributions (1.00)
---------------------------------------------------------------------------------
Net asset value, end of period $16.53
---------------------------------------------------------------------------------
Total return+ 7.70%
---------------------------------------------------------------------------------
Ratios to average net assets/ supplemental data:
Net assets, end of period (in 000's) $2,389
Ratio of operating expenses to average net assets 1.71%**
Ratio of net investment income to average net assets 5.37%**
Portfolio turnover rate 216%
---------------------------------------------------------------------------------
<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 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>
14
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
7/31/93+++ 7/31/92 7/31/91 7/31/90 7/31/89 7/31/88 7/31/87*
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 16.32 $ 15.24 $ 16.79 $ 16.60 $ 16.70 $ 16.35 $ 15.00
-------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.79 0.94 1.12 1.04 1.05 0.94 0.24#
Net realized and unrealized
gain/(loss) on investments 0.57 1.43 (0.17) 0.29 0.02 0.73 1.35
-------------------------------------------------------------------------------------------------
Total from investment
operations 1.36 2.37 0.95 1.33 1.07 1.67 1.59
Distributions to shareholders:
Distributions from net
investment income (1.01) (0.94) (1.39) (1.14) (0.94) (0.85) (0.24)
Distributions in excess of
net investment income (0.14) -- -- -- -- -- --
Distributions from net
realized capital gains -- (0.26) -- -- (0.23) (0.47) --
Distributions from capital -- (0.09) (1.11) -- -- -- --
-------------------------------------------------------------------------------------------------
Total distributions (1.15) (1.29) (2.50) (1.14) (1.17) (1.32) (0.24)
-------------------------------------------------------------------------------------------------
Net asset value, end of year $ 16.53 $ 16.32 $ 15.24 $ 16.79 $ 16.60 $ 16.70 $ 16.35
-------------------------------------------------------------------------------------------------
Total return+ 8.67% 16.11% 6.02% 8.43% 6.66% 10.53% 10.57%
-------------------------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of year
(in 000's) $ 66,418 $51,627 $48,951 $61,732 $101,273 $154,362 $162,757
Ratio of operating expenses
to average net assets 2.22% 2.02% 1.99% 2.04% 1.96% 2.00% 1.84%**++
Ratio of net investment
income to average net assets 4.85% 5.87% 6.65% 5.95% 5.82% 5.55% 4.61%**
Portfolio turnover rate 216% 230% 397% 309% 374% 241% 112%
-------------------------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on October 27, 1986. Those shares in
existence prior to November 6, 1992 were designated as Class B shares.
** Annualized.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable CDSC.
++ Annualized expense ratio before waiver of fees by investment adviser,
sub-investment adviser and administrator and distributor was 2.00%.
+++ 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.
# Net investment income before waiver of fees by investment adviser,
sub-investment adviser and administrator and distributor was $0.23.
</TABLE>
15
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
7/31/93*++
<S> <C>
Net asset value, beginning of period $15.98
--------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.38
Net realized and unrealized gain on investments 0.61
--------------------------------------------------------------------------------
Total from investment operations 0.99
Distributions to shareholders:
Distributions from net investment income (0.39)
Distributions in excess of net investment income (0.05)
--------------------------------------------------------------------------------
Total distributions (0.44)
--------------------------------------------------------------------------------
Net asset value, end of period $16.53
--------------------------------------------------------------------------------
Total return+ 6.19%
--------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 23
Ratio of operating expenses to average net assets 2.18%**
Ratio of net investment income to average net assets 4.89%**
Portfolio turnover rate 216%
--------------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class D shares on February 4, 1993.
** Annualized.
+ 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.
</TABLE>
16
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
VARIABLE PRICING SYSTEM
The Fund offers individual investors two methods of purchasing shares, thus
enabling investors to choose the Class that best suits their needs, given the
amount of purchase and intended length of investment. A third class -- Class D
- -- is offered only to Participating Plans.
CLASS A SHARES. Class A shares are sold at net asset value per share plus a
maximum initial sales charge of 4.50% imposed at the time of purchase. The
initial sales charge may be reduced or waived for certain purchases. Class A
shares are subject to an annual service fee of .25% of the value of the Fund's
average daily net assets attributable to the Class. The annual service fee is
used by Smith Barney Shearson to compensate its Financial Consultants for
ongoing services provided to shareholders. The sales charge is used to
compensate Smith Barney Shearson for expenses incurred in selling Class A
shares. See "Purchase of Shares."
CLASS B SHARES. Class B shares are sold at net asset value per share subject
to a maximum 4.50% CDSC, which is assessed only if the shareholder redeems
shares within the first five years of investment. This results in 100% of the
investor's assets being used to acquire shares of the Fund. After the first year
after the purchase of shares, the CDSC declines to 4%. For each year of
investment thereafter within this five-year time frame, the applicable CDSC
declines by 1%; in year six, the applicable CDSC is reduced to 0%. See "Purchase
of Shares" and "Redemption of Shares."
Class B shares are subject to an annual service fee of .25% and an annual
distribution fee of .50% of the value of the Fund's average daily net assets
attributable to the Class. Like the service fee applicable to Class A shares,
the Class B service fee is used to compensate Smith Barney Shearson Financial
Consultants for ongoing services provided to shareholders. Additionally, the
distribution fee paid with respect to Class B shares compensates Smith Barney
Shearson for expenses incurred in selling those shares, including expenses such
as sales commissions, Smith Barney Shearson's branch office overhead expenses
and marketing costs associated with Class B shares, such as preparation of sales
literature, advertising and printing and distributing prospectuses, statements
of additional information and other materials to prospective investors in Class
B shares. A Financial Consultant may receive different levels of compensation
for selling different Classes.
17
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
VARIABLE PRICING SYSTEM (CONTINUED)
Class B shares are subject to a distribution fee and higher transfer agency fees
than Class A shares which, in turn, will cause Class B shares to have a higher
expense ratio and pay lower dividends than Class A shares.
Eight years after the date of purchase, Class B shares will convert
automatically to Class A shares, based on the relative net asset values of
shares of each Class, and will no longer be subject to a 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. That portion will be a percentage of the total number
of outstanding Class B Dividend Shares, which percentage will be determined by
the ratio of the total number of Class B shares converting at the time to the
total number of outstanding Class B shares (other than Class B Dividend Shares).
The first of these conversions will commence on or about September 30, 1994. The
conversion of Class B shares into Class A shares is subject to the continuing
availability of an opinion of counsel to the effect that such conversions will
not constitute taxable events for Federal tax purposes.
CLASS D SHARES. Class D shares of the Fund are sold to Participating Plans at
net asset value per share and are not subject to an initial sales charge or
CDSC. This Class of shares is subject to an annual service fee of .25% and an
annual distribution fee of .50% of the value of the Fund's average daily net
assets attributable to Class D shares. The distribution fee is used by Smith
Barney Shearson for expenses incurred in selling Class D shares, and the service
fee is used to compensate Smith Barney Shearson Financial Consultants for
ongoing services provided to Class D shareholders. Class D shares are subject to
a distribution fee which will cause Class D shareholders to have a higher
expense ratio and to pay lower dividends than Class A shares.
- --------------------------------------------------------------------
THE FUND'S PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30-day "yield" of each Class of
shares. The yield refers to the income generated in these shares over the 30-day
period identified in the advertisement and is computed by
18
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
THE FUND'S PERFORMANCE (CONTINUED)
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 advertise the "average annual total return"
over various periods of time for each Class. Total return figures show the
average percentage change in value of an investment in the Class from the
beginning date of the measuring period to the end of the measuring period. These
figures reflect changes in the price of the shares and assume that any income
dividends and/or capital gains distributions made by the Fund during the period
were reinvested in shares of the same Class. Class A total return figures
include the maximum initial 4.50% sales charge and Class B total return figures
include any applicable CDSC. These figures also take into account the service
and distribution fees, if any, payable with respect to the Classes.
Total return figures will be given for the recent one-, five-and ten-year
periods, or the life of a Class to the extent it has not been in existence for
any such periods, and may be given for other periods as well, such as on a
year-by-year basis. When considering average annual total return figures for
periods longer than one year, it is important to note that the total return for
any one year in the period might have been greater or less than the average for
the entire period. "Aggregate" total return figures may be used for various
periods, representing the cumulative change in value of an investment in a Class
for the specific period (again reflecting changes in share prices and assuming
reinvestment of dividends and distributions). Aggregate total return may be
calculated either with or without the effect of the maximum 4.50% sales charge
for the Class A shares or any applicable CDSC for Class B shares and may be
shown by means of schedules, charts, or graphs, and may indicate subtotals of
the various components of total return (i.e., change in the value of initial
investment, income dividends, and capital gains distributions). Because of the
differences in sales charges and distribution fees, the performance of each of
the Classes will differ.
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
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THE FUND'S PERFORMANCE (CONTINUED)
In reports or other communications to shareholders or in advertising material,
performance of the Classes may be compared with that of other mutual funds or
classes of shares of other funds, as listed in the rankings prepared by Lipper
Analytical Services, Inc. or similar independent services that monitor the
performance of mutual funds, or other industry or financial publications, such
as BARRON'S, BUSINESS WEEK, CHANGING TIMES, FORBES, FORTUNE, INSTITUTIONAL
INVESTOR, MONEY, MORNINGSTAR MUTUAL FUND VALUES, THE NEW YORK TIMES, USA TODAY
and THE WALL STREET JOURNAL. Performance figures are based on historical
earnings and are not intended to indicate future performance. To the extent any
advertisement or sales literature of the Fund describes the expenses or
performance of a Class, it will also disclose such information for the other
Classes. The Statement of Additional Information further contains a description
of the methods used to determine performance. Performance figures may be
obtained from your Smith Barney Shearson Financial Consultant.
- --------------------------------------------------------------------
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,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to Global Asset Management and Boston Advisors. The Statement of
Additional Information contains background information regarding the Trustees
and executive officers of the Trust.
INVESTMENT ADVISER--GLOBAL ASSET MANAGEMENT
Global Asset Management, located at Two Broadgate, London EC2M 7HA, United
Kingdom, serves as the Fund's investment adviser. Global Asset Management
renders investment advice to institutional clients and investment companies with
total assets under management, as of October 31, 1993, in excess of $7.1
billion.
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
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MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
Subject to the supervision and direction of the Trust's Board of Trustees,
Global Asset 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.
PORTFOLIO MANAGEMENT
Pauline A.M. Barrett, Vice President and Investment Officer of the Fund, is
primarily responsible for management of the Fund's assets. Ms. Barrett has
served the Fund in these capacities since October 27, 1986, and manages the
day-to-day operations of the Fund, including making all investment decisions.
Ms. Barrett's management discussion and analysis, and additional performance
information regarding the Fund during the fiscal year ended July 31, 1993 is
included in its Annual Report dated July 31, 1993. A copy of the Annual Report
may be obtained upon request without charge from your Smith Barney Shearson
Financial Consultant or by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors is located at One Boston Place, Boston, Massachusetts 02108
and serves as the Fund's administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to investment
companies which had aggregate assets under management, as of October 31, 1993,
in excess of $90 billion. Boston Advisors calculates the net asset value of the
Fund's shares and generally assists in all aspects of the Fund's administration
and operation.
- --------------------------------------------------------------------
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
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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") and 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 Asset
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, 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
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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.
LENDING OF PORTFOLIO SECURITIES. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 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
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 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
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 Asset
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 Asset Management anticipates
purchasing the underlying debt securities or currency 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 or currency, an amount of cash,
26
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SMITH BARNEY SHEARSON
GLOBAL BOND 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 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, 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
27
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 Asset 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
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 1
year, Treasury Notes have
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and the
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.
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 Asset Management 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.
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
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 Asset Management. Successful
use by the Fund of options will depend on Global Asset Management's 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.
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 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
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 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
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- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 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.
33
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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.
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
34
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SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 Asset 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.
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transactions in securities and options on behalf of the Fund
are placed by Global Asset Management with broker-dealers that Global Asset
Management selects, including Smith Barney Shearson and other
35
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
affiliated brokers. The Fund may utilize Smith Barney Shearson or a Smith Barney
Shearson-affiliated-broker in connection with a purchase or sale of securities
when Global Asset 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 Shearson 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.
- --------------------------------------------------------------------
PURCHASE OF SHARES
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney Shearson or with an Introducing Broker, except that investors
purchasing shares of the Fund through a qualified retirement plan may do so
directly through the Trust's transfer agent. When purchasing shares of the Fund,
investors must specify whether the purchase is for Class A or Class B shares or,
in the case of Participating Plans, Class D shares. No maintenance fee will be
charged in connection with a brokerage account through which an investor
purchases or holds shares. Purchases are effected at the public offering price
next determined after a purchase order is received by Smith Barney Shearson or
an Introducing Broker (the "trade date"). Payment is generally due to Smith
Barney Shearson or the Introducing Broker on the fifth business day (the
"settlement date") after the trade date. Investors who make payment prior to the
settlement date may permit the payment to be held in their brokerage accounts or
may designate a temporary investment (such as a money market
36
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
fund in the Smith Barney Shearson Group of Funds) for the payment until the
settlement date. The Trust reserves the right to reject any purchase order for
shares and to suspend the offering of shares for any period of time.
Purchase orders received by Smith Barney Shearson or an Introducing Broker
prior to the close of regular trading on the NYSE, currently 4:00 p.m., New York
time, on any day the Fund's net asset value is calculated are priced according
to the net asset value determined on that day. Purchase orders received after
the close of regular trading on the NYSE are priced as of the time the net asset
value per share is next determined. See "Valuation of Shares" below.
SYSTEMATIC INVESTMENT PLAN. The Trust offers shareholders a Systematic
Investment Plan under which shareholders may authorize Smith Barney Shearson or
an Introducing Broker to place a purchase order each month or quarter for Fund
shares in an amount not less than $100. The purchase price is paid automatically
from cash held in the shareholder's Smith Barney Shearson brokerage account or
through the automatic redemption of the shareholder's shares of a Smith Barney
Shearson money market fund. For further information regarding the Systematic
Investment Plan, shareholders should contact their Smith Barney Shearson
Financial Consultants.
MINIMUM INVESTMENTS. The minimum initial investment in the Fund is $1,000 and
the minimum subsequent investment is $200, except that for purchases through (a)
IRAs and Self-Employed Retirement Plans, the minimum initial and subsequent
investments are both $250 and $100, respectively, (b) retirement plans qualified
under Sections 401(a) and 403(b)(7) of the Code, the minimum initial and
subsequent investment is $25 and (c) the Systematic Investment Plan, the minimum
initial and subsequent investment are both $100. There are no minimum investment
requirements for employees of Primerica Corporation ("Primerica") and its
subsidiaries, including Smith Barney Shearson. The Trust reserves the right at
any time to vary the initial and subsequent investment minimums. Certificates
for Fund shares are issued upon request to the Trust's transfer agent.
37
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
CLASS A SHARES
The public offering price for Class A shares is the per share net asset value
of that Class plus a sales charge, which is imposed in accordance with the
following schedule:
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS %
AMOUNT OF INVESTMENT* OF OFFERING PRICE OF NET ASSET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Less than $25,000 4.50% 4.71%
$25,000 but under $50,000 4.00% 4.17%
$50,000 but under $100,000 3.50% 3.63%
$100,000 but under $250,000 3.00% 3.09%
$250,000 but under $500,000 2.50% 2.56%
$500,000 but under $1,000,000 1.50% 1.52%
$1,000,000 or more** .00% .00%
- -------------------------------------------------------------------------------------
<FN>
* Smith Barney Shearson has adopted guidelines directing its Financial
Consultants and Introducing Brokers that single investments of $250,000 or
more should be made in Class A shares.
** No sales charge is imposed on purchases of $1 million or more; however, a
CDSC of .75% is imposed for the first year after purchase. The CDSC on
Class A shares is payable to Smith Barney Shearson, which, with Boston
Advisors, compensates Smith Barney Shearson Financial Consultants upon the
sale of these shares. The CDSC is waived in the same circumstances in which
the CDSC applicable to Class B shares is waived. See "Redemption of
Shares--Contingent Deferred Sales Charge--Class B Shares--Waivers of CDSC."
</TABLE>
REDUCED SALES CHARGES--CLASS A SHARES
Reduced sales charges are available to investors who are eligible to combine
their purchases of Class A shares to receive volume discounts. Investors
eligible to receive volume discounts include individuals and their immediate
families, tax-qualified employee benefit plans and a trustee or other
professional fiduciary (including a bank, or an investment adviser registered
with the SEC under the Investment Advisers Act of 1940, as amended) purchasing
shares for one or more trust estates or fiduciary accounts even though more than
one beneficiary is involved. The initial sales charge is also reduced to 1% for
Smith Barney Shearson Personal Living Trust program participants for whom Smith
Barney Shearson acts as trustee. Reduced sales charges on Class A shares are
also available under a combined right of accumulation, under which an investor
may combine the
38
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
value of Class A shares already held in the Fund and in any of the funds in the
Smith Barney Shearson Group of Funds listed below (except those sold without a
sales charge), along with the value of the Class A shares being purchased, to
qualify for a reduced sales charge. For example, if an investor owns Class A
shares of the Fund and other funds in the Smith Barney Shearson Group of Funds
that have an aggregate value of $22,000, and makes an additional investment in
Class A shares of the Fund of $4,000, the sales charge applicable to the
additional investment would be 4.0%, rather than the 4.50% normally charged on a
$4,000 purchase. Investors interested in further information regarding reduced
sales charges should contact their Smith Barney Shearson Financial Consultants.
Class A shares may be offered without any applicable sales charges to: (a)
employees of Primerica and its subsidiaries, including Smith Barney Shearson,
employee benefit plans for such employees and the spouses and minor children of
such employees when orders on their behalf are placed by such employees; (b)
accounts managed by registered investment advisory subsidiaries of Primerica;
(c) directors, trustees or general partners of any investment company for which
Smith Barney Shearson serves as distributor; (d) any other investment company in
connection with the combination of such company with the Fund by merger,
acquisition of assets or otherwise; (e) shareholders who have redeemed Class A
shares in the Fund (or Class A shares of another fund in the Smith Barney
Shearson Group of Funds that are sold with a maximum 4.50% sales charge) and who
wish to reinvest their redemption proceeds in the Fund, provided the
reinvestment is made within 30 days of the redemption; (f) any client of a
newly-employed Smith Barney Shearson Financial Consultant (for a period up to 90
days from the commencement of the Financial Consultant's employment with Smith
Barney Shearson), on the condition that the purchase is made with the proceeds
of the redemption of shares of a mutual fund that (i) was sponsored by the
Financial Consultant's prior employer, (ii) was sold to a client by the
Financial Consultant, and (iii) when purchased, such shares were sold with a
sales charge.
CLASS B SHARES
The public offering price for Class B shares is the per share net asset value
of that Class. No initial sales charge is imposed at the time of
39
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
purchase. A CDSC is imposed, however, on certain redemptions of Class B shares.
See "Redemption of Shares" which describes the CDSC in greater detail.
Smith Barney Shearson has adopted guidelines, in view of the relative sales
charges and distribution fees applicable to the Classes, directing Smith Barney
Shearson Financial Consultants and Introducing Brokers that all purchases of
shares of $250,000 or more should be for Class A rather than Class B. Smith
Barney Shearson reserves the right to vary these guidelines at any time.
SMITH BARNEY SHEARSON 401(K) PROGRAM
Shareholders investing in the Fund may be eligible to participate in the
401(k) Program, which is generally designed to assist employers or 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 401(k) Program, which include both 401(k) plans and
other types of participant directed, tax-qualified employee benefit plans. For
further information regarding the 401(k) Program, investors should contact their
Smith Barney Shearson Financial Consultants.
The Fund offers to Participating Plans three classes of shares, Class A, Class
B and a third class, Class D shares, as investment alternatives under the 401(k)
Program. Class A shares are available to all Participating Plans, and are the
only investment alternative for Participating Plans that are eligible to
purchase Class A shares at net asset value without a sales charge. In addition,
Class B shares are offered only to Participating Plans satisfying certain
criteria with respect to the amount of the initial investment and number of
employees eligible to participate in the Plan at that time. Alternatively, Class
D shares are offered only to Participating Plans that meet other criteria
relating to the amount of initial investment and number of employees eligible to
participate in the Plan at that time, as described below.
The Class A and Class B shares acquired through the 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 and Class B shares acquired by other investors.
Class D shares acquired by Participating Plans are offered
40
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
at net asset value per share without any sales charges or CDSC. The Fund pays
annual service and distribution fees based on the value of the average daily net
assets attributable to this Class.
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. The sales charges for Class A shares acquired by Participating
Plans are as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS % SALES CHARGE AS %
AMOUNT OF INVESTMENT OF OFFERING PRICE OF NET ASSET VALUE
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Less than $25,000 4.50% 4.71%
$25,000 up to $50,000 4.00% 4.17%
$50,000 up to $100,000 3.50% 3.63%
$100,000 up to $250,000 3.00% 3.09%
$250,000 up to $500,000 2.50% 2.56%
$500,000 up to $750,000 1.50% 1.52%
$750,000 and over .00% .00%
<CAPTION>
- -------------------------------------------------------------------------------------
</TABLE>
A Participating Plan will have a combined right of accumulation under which,
to qualify for a reduced sales charge, it may combine the value of Class A
shares being purchased with the value of Class A shares already held in the Fund
and in any of the funds listed below under "Exchange Privilege" that are sold
with a sales charge.
Class A shares of the Fund may be offered without any sales charge to any
Participating Plan that: (a) purchases $750,000 or more of Class A shares of one
or more funds in the Smith Barney Shearson Group of Funds under the combined
right of accumulation described above; (b) has 250 or more employees eligible to
participate in the Participating Plan at the time of initial investment in the
fund; or (c) currently holds Class A shares in the Fund that were received as a
result of an exchange of Class B or Class D shares of the fund as described
below.
Class A shares acquired through the 401(k) Program will not be subject to a
CDSC.
41
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
CLASS B SHARES. Under the 401(k) Program, Class B shares are offered to
Participating Plans that: (a) purchase less that $250,000 of Class B shares of
one or more funds in the Smith Barney Shearson Group of Funds that are sold
subject to a CDSC; and (b) that have less than 100 employees eligible to
participate in the Participating Plan at the time of initial investment in the
Fund. Class B shares acquired by such Plans will be subject to a CDSC of 3% of
redemption proceeds, if redeemed within eight years of the date the
Participating Plan first purchases Class B shares. No CDSC is imposed to the
extent that the net asset value of the Class B shares redeemed does not exceed
(a) the current net asset value of Class B shares purchased through reinvestment
of dividends or capital gains distributions, plus (b) the current net asset
value of Class B shares purchased more than eight years prior to the redemption,
plus (c) increases in the net asset value of the shareholder's Class B shares
above the purchase payments made during the preceding eight years. The CDSC
applicable to a Participating Plan depends on the number of years since the
Participating Plan first became a holder of Class B shares, unlike the CDSC
applicable to other Class B 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 Class B 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 Class B shares in connection with a loan made the by
Participating Plan to an employee.
Eight years after the date a Participating Plan acquired its first Class B
share, 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
purchase 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
42
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
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 "Variable Pricing System -- Class B Shares."
CLASS D SHARES. Class D shares are offered to Participating Plans that: (a)
purchase less than $750,000 but more than $250,000 of Class D shares of one or
more funds in the Smith Barney Shearson Group of Funds that offer one or more
Classes of shares subject to a sales charge and/or CDSC; or (b) have at least
100 but no more than 250 employees eligible to participate in the Participating
Plan at the time of initial investment in the Fund.
Class D shares acquired by Participating Plans are offered at net asset value
per share without any sales charge or CDSC. The Fund pays annual service and
distribution fees based on the value of the average daily net assets
attributable to this Class. Class D shares are not subject to an automatic
conversion feature as are the Class B shares. Participating Plans which hold
Class D shares valued at $750,000 or more in any fund or funds in the Smith
Barney Shearson Group of Funds that offer one or more Classes of shares subject
to a sales charge and/or CDSC will be offered the opportunity to exchange all of
their Class D shares for Class A shares. Such Plans will be notified of the
pending exchange 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 March in the following
calendar year. Once the exchange has occurred, a Participating Plan will not be
eligible to acquire Class D shares of the Fund but instead may acquire Class A
shares of the Fund. Any Class D shares not converted will continue to be subject
to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the 401(k)
Program must purchase shares directly from the transfer agent. For further
information regarding the 401(k) Program, investors should contact their Smith
Barney Shearson Financial Consultants.
43
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
REDEMPTION OF SHARES
Shareholders may redeem their shares on any day the Fund's net asset value is
calculated. 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 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 Trust's transfer
agent receives further instructions from Smith Barney Shearson, or if the
shareholder's account is not with Smith Barney Shearson, from the shareholder
directly.
The Fund normally transmits redemption proceeds for credit to the
shareholder's account at Smith Barney Shearson or the Introducing Broker at no
charge (other than any applicable CDSC) within seven days after receipt of a
redemption request. Generally, these funds will not be invested for the
shareholder's benefit without specific instruction, and Smith Barney Shearson
will benefit from the use of temporarily uninvested funds. A shareholder who
pays for Fund shares by personal check will be credited with the proceeds of a
redemption of those shares only after the purchase check has been collected,
which may take up to 10 days or more. A shareholder who anticipates the need for
more immediate access to his or her investment should purchase shares with
Federal funds, by bank wire or by certified or cashier's check.
A Fund account that is reduced by a shareholder to a value of $500 or less may
be subject to redemption by the Fund but only after the shareholder has been
given at least 30 days in which to increase the account balance to more than
$500.
Fund shares may be redeemed in either of the following two ways:
REDEMPTION THROUGH SMITH BARNEY SHEARSON
Redemption requests may be made through Smith Barney Shearson or an
Introducing Broker. A shareholder desiring to redeem shares represented by share
certificates must present the certificates to Smith Barney Shearson or the
Introducing Broker endorsed for transfer (or accompanied by an endorsed stock
power), signed exactly as the shares are registered.
44
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
Redemption requests involving shares represented by certificates will not be
deemed received until the certificates are received by the Trust's transfer
agent in proper form.
REDEMPTION BY MAIL
Shares held by Smith Barney Shearson as custodian must be redeemed by
submitting a written request to your Smith Barney Shearson Financial Consultant.
All other shares may be redeemed by submitting a written request for redemption
to:
Smith Barney Shearson Global Bond Fund
Class A, B or D (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request to TSSG or a Smith Barney Shearson Financial
Consultant 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 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 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 of the Fund with a value of at least $10,000 may
elect to receive periodic cash payments of at least $50 monthly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified
45
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
distributions and has an account value of at least $5,000. Any applicable CDSC
will not be waived on amounts withdrawn by a shareholder that exceeds 2% per
month of the value of a shareholder's shares subject to the CDSC at the time the
withdrawal plan commences. For further information regarding the automatic cash
withdrawal plan, shareholders should contact their Smith Barney Shearson
Financial Consultants.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
A CDSC payable to Smith Barney Shearson is imposed on any redemption of Class
B shares, however effected, that caused the current value of a shareholder's
account to fall below the dollar amount of all payments by the shareholder for
the purchase of Class B shares ("purchase payments") during the preceding five
years, except in the case of purchases by Participating Plans, as described
above. See "Purchase of Shares -- Smith Barney Shearson 401(k) Program." No
charge is imposed to the extent that the net asset value of the Class B shares
redeemed does not exceed (a) the current net asset value of Class B shares
purchased through reinvestment of dividends or capital gains distributions, plus
(b) the current net asset value of Class B shares purchased more than five years
prior to the redemption, plus (c) increases in the net asset value of the
shareholder's Class B shares above the purchase payments made during the
preceding five years.
In circumstances in which the CDSC is imposed, 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, except in the case of purchases through
Participating Plans which are subject to a different CDSC. See "Purchase of
Shares -- Smith Barney Shearson 401(k) Program." Solely for purposes of
determining the number of years since a purchase payment, all purchase payments
during a month will be aggregated and deemed to have been made on the last day
of the preceding Smith Barney Shearson statement month. The following table sets
forth the rates of the charges for redemptions of Class B shares by investors
other than Participating Plans in the 401(k) Program:
46
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
<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%
<CAPTION>
----------------------------------------------------------------------------------
</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 fee. The first of these conversions will commence on or
about September 30, 1994. See "Variable Pricing System--Class B Shares."
The purchase payment from which a redemption of Class B shares is made is
assumed to be the earliest purchase payment from which a full redemption has not
already been effected. In the case of redemptions of Class B shares of other
funds in the Smith Barney Shearson Group of Funds issued in exchange for Class B
shares of the Fund, the term "purchase payments" refers to the purchase payments
for the shares given in exchange. In the event of an exchange of Class B shares
of funds with differing CDSC schedules, the shares will be, in all cases,
subject to the higher CDSC schedule. See "Exchange Privilege."
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 2%
per month of the value of the shareholder's Class B shares at the time the
withdrawal plan commences (see above); (c) redemptions of shares following the
death or disability of the shareholder; (d) redemption of shares in connection
with certain post-retirement distributions and withdrawals from retirement plans
or IRAs; (e) involuntary redemptions; (f) redemption proceeds from other funds
in the Smith Barney Shearson Group of Funds that are reinvested within 30 days
of the redemption; (g) redemptions of shares in connection with a combination of
any investment company with the Fund by merger, acquisition of assets or
47
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
otherwise; and (h) certain redemptions of shares of the Fund in connection with
lump-sum or other distributions made by a Participating Plan. See "Purchase of
Shares -- Smith Barney Shearson 401(k) Program."
- --------------------------------------------------------------------
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except on days on which the NYSE is closed. The NYSE currently
is scheduled to be closed on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on a
Saturday or Sunday, respectively.
The net asset value per share of a given Class 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 that 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. 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.
48
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class in the
following funds in the Smith Barney Shearson Group of Funds, to the extent
shares are offered for sale in the shareholder's state of residence:
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
<S> <C>
---------------------------------------------------------------------------
MUNICIPAL BOND FUNDS
A SMITH BARNEY SHEARSON LIMITED MATURITY MUNICIPALS FUND, an
intermediate-term municipal bond fund investing in
investment-grade obligations.
A, B SMITH BARNEY SHEARSON MANAGED MUNICIPALS FUND INC., an
intermediate-and long-term municipal bond fund.
A, B SMITH BARNEY SHEARSON TAX-EXEMPT INCOME FUND, an intermediate-and
long-term municipal bond fund investing in medium-and lower-rated
securities.
A SMITH BARNEY SHEARSON INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS
FUND, an intermediate-term municipal bond fund designed for
California investors.
A, B SMITH BARNEY SHEARSON ARIZONA MUNICIPALS FUND INC., an
intermediate-and long-term municipal bond fund designed for
Arizona investors.
A, B SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC., an
intermediate-and long-term municipal bond fund designed for
California investors.
A, B SMITH BARNEY SHEARSON FLORIDA MUNICIPALS FUND, an intermediate-
and long-term municipal bond fund designed for Florida investors.
A, B SMITH BARNEY SHEARSON MASSACHUSETTS MUNICIPALS FUND, an
intermediate-and long-term municipal bond fund designed for
Massachusetts investors.
</TABLE>
49
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
---------------------------------------------------------------------------
<S> <C>
A, B SMITH BARNEY SHEARSON NEW JERSEY MUNICIPALS FUND INC., an
intermediate-and long-term municipal bond fund designed for New
Jersey investors.
A SMITH BARNEY SHEARSON INTERMEDIATE MATURITY NEW YORK MUNICIPALS
FUND, an intermediate-term municipal bond fund designed for New
York investors.
A, B SMITH BARNEY SHEARSON NEW YORK MUNICIPALS FUND INC., an
intermediate-and long-term municipal bond fund designed for New
York investors.
INCOME FUNDS
A, B, D+ SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND,
seeks high current income while limiting the degree of
fluctuation in net asset value resulting from movement in
interest rates.
A, B SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND, invests in a
portfolio of high quality debt securities that may be denominated
in U.S. dollars or selected foreign currencies and that have
remaining maturities of not more than one year.
A, B SMITH BARNEY SHEARSON SHORT-TERM WORLD INCOME FUND, invests in
high quality, short-term debt securities denominated in U.S.
dollars as well as a range of foreign currencies.
A SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND, invests
exclusively in securities issued by the United States Treasury
and other U.S. government securities.
A, B, D+ SMITH BARNEY SHEARSON DIVERSIFIED STRATEGIC INCOME FUND, seeks
high current income primarily by allocating and reallocating its
assets among various types of fixed-income securities.
</TABLE>
50
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
---------------------------------------------------------------------------
<S> <C>
A, B, D+ SMITH BARNEY SHEARSON MANAGED GOVERNMENTS FUND INC., invests in
obligations issued or guaranteed by the United States government
and its agencies and instrumentalities with emphasis on
mortgage-backed government securities.
A, B, D+ SMITH BARNEY SHEARSON GOVERNMENT SECURITIES FUND, seeks a high
current return by investing in U.S. government securities.
A, B, D+ SMITH BARNEY SHEARSON INVESTMENT GRADE BOND FUND, seeks maximum
current income consistent with prudent investment management and
preservation of capital by investing in corporate bonds.
A, B, D+ SMITH BARNEY SHEARSON HIGH INCOME FUND, seeks high current income
by investing in high-yielding corporate bonds, debentures and
notes.
GROWTH AND INCOME FUNDS
A*, B*, D+ SMITH BARNEY SHEARSON CONVERTIBLE FUND, seeks current income and
capital appreciation by investing in convertible securities.
A*, B*, D+ SMITH BARNEY SHEARSON UTILITIES FUND, seeks total return by
investing in equity and debt securities of utilities companies.
A*, B*, D+ SMITH BARNEY SHEARSON STRATEGIC INVESTORS FUND, seeks high total
return consisting of current income and capital appreciation by
investing in a combination of equity, fixed-income and money
market securities.
A*, B*, D+ SMITH BARNEY SHEARSON PREMIUM TOTAL RETURN FUND, seeks total
return by investing in dividend-paying common stocks.
</TABLE>
51
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
---------------------------------------------------------------------------
<S> <C>
A*, B*, D+ SMITH BARNEY SHEARSON GROWTH AND INCOME FUND, seeks income and
long-term capital growth by investing in income-producing equity
securities.
GROWTH FUNDS
A*, B*, D+ SMITH BARNEY SHEARSON APPRECIATION FUND INC., seeks long-term
appreciation of capital.
A*, B*, D+ SMITH BARNEY SHEARSON FUNDAMENTAL VALUE FUND INC., seeks
long-term capital growth with current income as a secondary
objective.
A*, B*, D+ SMITH BARNEY SHEARSON DIRECTIONS VALUE FUND, seeks long-term
capital appreciation by investing in equity securities believed
to be undervalued.
A*, B*, D+ SMITH BARNEY SHEARSON SECTOR ANALYSIS FUND, seeks capital
appreciation by following a sector strategy.
A*, B* SMITH BARNEY SHEARSON TELECOMMUNICATIONS GROWTH FUND, seeks
capital appreciation, with income as a secondary consideration.
A*, B*, D+ SMITH BARNEY SHEARSON AGGRESSIVE GROWTH FUND INC., seeks
above-average capital growth.
A*, B*, D+ SMITH BARNEY SHEARSON SPECIAL EQUITIES FUND, seeks long-term
capital appreciation by investing in equity securities primarily
of emerging growth companies.
A*, B*, D+ SMITH BARNEY SHEARSON GLOBAL OPPORTUNITIES FUND, seeks long-term
capital growth by investing principally in the common stock of
foreign and domestic issuers.
A*, B*, D+ SMITH BARNEY SHEARSON EUROPEAN FUND, seeks long-term capital
appreciation by investing primarily in securities of issuers
based in European countries.
</TABLE>
52
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
---------------------------------------------------------------------------
<S> <C>
A*, B*, D+ SMITH BARNEY SHEARSON PRECIOUS METALS AND MINERALS FUND INC.,
seeks long-term capital appreciation by investing primarily in
precious metal-and mineral-related companies and gold bullion.
MONEY MARKET FUNDS
** SMITH BARNEY SHEARSON MONEY MARKET FUND, invests in a diversified
portfolio of high quality money market instruments.
*** SMITH BARNEY SHEARSON DAILY DIVIDEND FUND INC., invests in a
diversified portfolio of high quality money market instruments.
*** SMITH BARNEY SHEARSON GOVERNMENT AND AGENCIES FUND INC., invests
in United States government and agency securities.
++ SMITH BARNEY SHEARSON MUNICIPAL MONEY MARKET FUND INC., invests
in short-term high quality municipal obligations.
++ SMITH BARNEY SHEARSON CALIFORNIA MUNICIPAL MONEY MARKET FUND,
invests in short-term, high quality California municipal
obligations.
++ SMITH BARNEY SHEARSON NEW YORK MUNICIPAL MONEY MARKET FUND,
invests in short-term, high quality New York municipal
obligations.
---------------------------------------------------------------------------
<FN>
* Shares of this fund are subject to a higher sales charge or CDSC than that
applicable to the Fund's shares.
** Shares of this money market fund may be exchanged for Class B shares of the
Fund.
*** Shares of this money market fund may be exchanged for Class A and Class D
shares of the Fund.
+ Class D shares of this fund may be acquired only by Participating Plans in
the 401(k) Program.
++ Shares of this money market fund may be exchanged for Class A shares of the
Fund.
</TABLE>
53
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
TAX EFFECT. The exchange of shares of one fund for shares of another fund is
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 an exchange.
CLASS A EXCHANGES. Class A shareholders of the funds in the Smith Barney
Shearson Group of Funds sold without a sales charge or with a maximum sales
charge of less than 4.50% will be subject to the appropriate "sales charge
differential" upon the exchange of their 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 purchases of shares of the mutual fund being acquired in the
exchange over the sum of the rates of all sales charges previously 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, as described below, are treated as having
paid the same sales charges applicable to the shares on which the dividends were
paid. However, except in the case of the 401(k) Program, if no sales charge were
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. Class B shareholders of the Fund who wish to exchange all
or a portion of their Class B shares for Class B shares of any of the funds
identified above may do so without the imposition of an exchange fee. In the
event a Class B shareholder wishes to exchange all or a portion of his or her
shares for 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 which have
been exchanged.
CLASS D EXCHANGES. Class D shares of the Fund will be exchangeable for Class D
shares of the funds listed above. Class D shareholders who wish to exchange all
or part of their Class D shares in any of these funds may do so without charge.
Class D shares may be acquired only by Participating Plans.
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Shareholders
exercising the exchange privilege with any of the other funds in the Smith
54
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
Barney Shearson Group of Funds should review the prospectus of that fund
carefully prior to making an exchange. Smith Barney Shearson reserves the right
to reject any exchange request. The exchange privilege may be modified or
terminated at any time after written notice to shareholders. For further
information regarding the exchange privilege or to obtain the current
prospectuses for members of the Smith Barney Shearson Group of Funds, investors
should contact their Smith Barney Shearson Financial Consultants.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney Shearson is located at 388 Greenwich Street, New York, New York
10013 and serves as distributor of the Trust's shares. Smith Barney Shearson is
a wholly owned subsidiary of Smith Barney Shearson Holdings Inc. ("Holdings"),
which is in turn a wholly owned subsidiary of Primerica, a diversified financial
services holding company principally engaged in the business of providing
investment, consumer finance and insurance services. Smith Barney Shearson is
paid an annual service fee with respect to Class A, Class B and Class D shares
of the Fund at the rate of .25% of the value of average daily net assets of the
respective Class. Smith Barney Shearson is also paid an annual distribution fee
with respect to Class B and Class D shares at the rate of .50% of the value of
average daily net assets attributable to that Class. The fees are authorized
pursuant to a services and distribution plan (the "Plan") adopted by the Trust
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"1940 Act"), and are used by Smith Barney Shearson to pay its Financial
Consultants for servicing shareholder accounts, and in the case of Class B and
Class D shares, also to cover expenses primarily intended to result in the sale
of those shares. These expenses include: costs of printing and distributing
prospectuses, statements of additional information and sales literature to
prospective investors; an allocation of overhead and other Smith Barney Shearson
branch office distribution-related expenses; payments to and expenses of Smith
Barney Shearson Financial Consultants and other persons who provide support
services in connection with the distribution of the shares; and accruals for
interest on the amount of the foregoing expenses that exceed distribution fees
and, in the case of Class B shares, the CDSC received by Smith Barney Shearson.
The payments to Smith Barney Shearson Financial Consultants for selling shares
of a Class include a commission paid
55
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
at the time of sale and a continuing fee for servicing shareholder accounts for
as long as a shareholder remains a holder of that Class. The service fee is
credited at the rate of .25% of the value of average daily net assets of the
Class that remain invested in the Fund. Smith Barney Shearson Financial
Consultants may receive different levels of compensation for selling different
Classes.
Although it is anticipated that some promotional activities will be conducted
on a Trust-wide basis, payments made by a fund of the Trust under the Plan
generally will be used to finance the distribution of shares of that fund.
Expenses incurred in connection with Trust-wide activities may be allocated
pro-rata among all funds of the Trust on the basis of their relative net assets.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney Shearson, and the
payments may exceed distribution and shareholder service expenses actually
incurred. 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 Shearson and amounts received
under the Plan and the proceeds of the CDSC. During the period from the Trust's
commencement of operations (September 16, 1985) through July 31, 1993, Shearson
Lehman Brothers Inc. ("Shearson Lehman Brothers"), the Trust's distributor prior
to Smith Barney Shearson, incurred, with respect to Class B shares, total
distribution expenses of approximately $432,117,000, while receiving
approximately $220,353,000 pursuant to the Plan and approximately $104,390,000
from CDSC. The excess of such distribution expenses incurred by Shearson Lehman
Brothers over such distribution fees and CDSC, or approximately $107,374,000,
was equivalent to approximately 1.27% of the Trust's aggregate net assets on
July 31, 1993.
56
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND 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. Dividends and distributions will be
reinvested automatically for each shareholder's account at net asset value in
additional shares of the relevant Class of the Fund unless the shareholder
instructs the Fund to pay all dividends and distributions in cash and to credit
the amounts to his or her Smith Barney Shearson brokerage account. Dividends
from the net investment income, if any, of the Fund will be declared monthly and
paid after the close of the fiscal quarter in which they are earned.
Distributions of any net long-term capital gains earned by the Fund will be paid
annually after the close of the fiscal year in which they are earned.
Distributions of any net short-term capital gains from the Fund generally will
be made annually after the close of the fiscal year in which they are earned,
although they may be made more frequently at the discretion of the Trust's Board
of Trustees. The Fund is subject to a 4% nondeductible excise tax measured with
respect to certain undistributed amounts of net investment income and capital
gains. The Fund expects to make any additional distributions as may be necessary
to avoid the application of this tax.
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 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
57
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
additional shares. The per share dividends and distributions on Class A shares
will be higher than those on Class B and Class D shares as a result of lower
distribution and transfer agency fees applicable to the Class A 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.
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.
58
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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.
- --------------------------------------------------------------------
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 commenced operations on September 16, 1985, under the name
Shearson Lehman Special Portfolios. On February 21, 1986, December 6, 1988,
August 27, 1990, November 5, 1992, and July 30, 1993 the Trust changed its name
to Shearson Lehman Special Income Portfolios, SLH Income Portfolios, Shearson
Lehman Brothers Income Portfolios, Shearson Lehman Brothers Income Funds and
Smith Barney Shearson Income Funds, respectively. On November 5, 1992, the Fund
changed its name from Global Bond Portfolio to Global Bond Fund and on July 30,
1993, the Fund changed its name to Smith Barney Shearson Global Bond Fund. 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 on matters affecting the interests of one Class of shares.
The Fund offers shares of beneficial interest currently classified into three
classes -- A, B and D. 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 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
59
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
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.
The Trust does not hold annual shareholder meetings. Normally, no meetings of
shareholders will be held 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. A meeting will be called for the purpose of voting on the removal of a
Trustee at the written request of holders of 10% of the Trust's outstanding
shares. Shareholders who satisfy certain criteria will be assisted in
communicating with other shareholders in seeking the holding of the meeting.
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston Place,
Boston, Massachusetts 02108, and services as custodian of the Fund's
investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves as
the Trust's transfer agent. The common stock of FDC is publicly traded, however,
American Express currently owns 23% of the outstanding common stock.
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. Any shareholder who does
not want this consolidation to apply to his or her account should contact his or
her Financial Consultant or the
60
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
Trust's transfer agent. Shareholders may seek information regarding the Trust,
including the current performance of the Fund, from their Smith Barney Shearson
Financial Consultants.
---------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT OF
ADDITIONAL INFORMATION AND/OR THE TRUST'S OFFICIAL SALES LITERATURE IN
CONNECTION WITH THE OFFERING OF THE TRUST'S SHARES, AND, IF GIVEN OR MADE, SUCH
OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
STATE IN WHICH, OR TO ANY PERSON TO WHOM, SUCH AN OFFER MAY NOT LAWFULLY BE
MADE.
61
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND
FUND
Two World Trade Center
New York, New York 10048
Fund 30, 202, 244
FD0223 K3
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
DATED JUNE 2, 1994
ACQUISITION OF THE ASSETS OF
SMITH BARNEY SHEARSON SHORT-TERM WORLD INCOME FUND
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 720-9218
BY AND IN EXCHANGE FOR CLASS A AND CLASS B SHARES OF
SMITH BARNEY SHEARSON GLOBAL BOND FUND
A PORTFOLIO OF SMITH BARNEY SHEARSON INCOME FUNDS
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 720-9218
This Statement of Additional Information, relating specifically to the
proposed transfer of all or substantially all of the assets of Smith Barney
Shearson Short-Term World Income Fund (the "Acquired Fund") to Smith Barney
Shearson Global Bond Fund (the "Acquiring Fund"), a series of Smith Barney
Shearson Income Funds ("Income Funds"), in exchange for Class A and Class B
shares of the Acquiring Fund and the assumption by the Acquiring Fund of certain
liabilities of the Acquired Fund, consists of this cover page and the following
described documents, each of which accompanies this Statement of Additional
Information (except as noted below) and is incorporated herein by reference.
1. Statement of Additional Information of Income Funds dated
December 1, 1993.
2. Annual Report of the Acquiring Fund for the fiscal year ended
July 31, 1993.
3. Semi-Annual Report (unaudited) of the Acquiring Fund dated as
of January 31, 1994.
4. Annual Report of the Acquired Fund for the fiscal period ended
April 30, 1993.
5. Semi-Annual Report (unaudited) of the Acquired Fund dated
October 31, 1993.
6. Pro Forma Financial Statements.
This Statement of Additional Information is not a prospectus. A
Prospectus/Proxy Statement, dated June 2, 1994, relating to the above referenced
matter may be obtained without charge by calling or writing either the Acquiring
Fund or the Acquired Fund at the telephone numbers or addresses set forth above
or by contacting any Smith Barney Shearson Financial Consultant or by calling
toll-free 1-800-221-8806.
The date of this Statement of Additional Information
is June 2, 1994.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
OF
SMITH BARNEY SHEARSON
INCOME FUNDS
DATED DECEMBER 1, 1993
<PAGE>
Smith Barney Shearson
INCOME FUNDS
Two World Trade Center
New York, New York 10048
(212) 720-9218
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 1, 1993
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectuses of Smith Barney Shearson
Income Funds (the "Trust"), relating to eight investment funds offered by the
Trust (the "Funds"), each dated December 1, 1993, as amended or supplemented
from time to time, and should be read in conjunction with the Prospectuses. The
Prospectuses may be obtained from your Smith Barney Shearson Financial
Consultant or by writing or calling the Trust at the address or telephone 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
Prospectuses and this Statement of Additional Information, except where shown
below:
Management of the Trust and the Fund 2
Investment Objectives and Management Policies 7
Purchase of Shares 28
Redemption of Shares 29
Distributor 30
Valuation of Shares 31
Exchange Privilege 32
Performance Data (See in the Prospectuses "The Fund's Performance") 33
Taxes (See in the Prospectuses "Dividends, Distributions and Taxes") 37
Custodian and Transfer Agent (See in the Prospectuses
"Additional Information") 42
Financial Statements 42
Appendix A-1
MANAGEMENT OF THE TRUST AND THE FUND
The executive officers of the Trust are employees of certain of the
organizations that provide services to the Trust. These organizations are the
following:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Smith Barney Shearson Inc.
("Smith Barney Shearson") Distributor
Greenwich Street Advisors (a division of Investment adviser to Smith Barney
Mutual Management Corp.) Shearson Convertible, High Income,
Diversified Strategic Income,
Tax-Exempt Income, Utilities and
Money Market Funds
The Boston Company Advisors, Inc.
("Boston Advisors") Investment adviser to Smith Barney
Shearson Premium Total Return Fund
and administrator to each Fund
Lehman Brothers Global Asset Management
Limited ("Global Asset Management") Investment adviser to Smith Barney
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Shearson Global Bond Fund and
sub-investment adviser to the
Diversified Strategic Income Fund
Boston Safe Deposit and Trust Company
("Boston Safe") Custodian
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 discussed
in the Prospectuses and in this Statement of Additional Information.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The names of the Trustees and executive officers of the Trust, together with
information as to their principal business occupations, are set forth 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. As of November 1, 1993, Trustees and officers of
the Trust as a group owned less than 1% of the outstanding shares of the Trust.
Lee Abraham, Trustee. Retired; formerly Chairman and Chief Executive Officer of
Associated Merchandising Corporation, a major retail merchandising 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, Lawrence Country Day School-
Woodmere Academy, Woodmere, New York; prior to July 1, 1990, Headmaster of
Woodmere Academy. His address is 336 Woodmere Boulevard, Woodmere, New York
11598.
*Heath B. McLendon, Chairman of the Board and Investment Officer. Executive Vice
President of Smith Barney Shearson 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 Two
World Trade Center, New York, New York 10048.
Madelon DeVoe Talley, Trustee. Author; Governor at Large of the National
Association of Securities Dealers, Inc.; prior to 1985, Chairman of Rothschild
Asset Management Inc., a money management firm. Her address is 876 Park Avenue,
New York, New York 10021.
Stephen J. Treadway, President. Executive Vice President and Director of Smith
Barney Shearson; Director and President of Mutual Management Corp., Smith Barney
Advisers, Inc.; and Director and Chairman of Corporate Realty Advisers, Inc. and
Trustee of Corporate Realty Income Trust I. His address is 1345 Avenue of the
Americas, New York, New York 10105.
Richard P. Roelofs, Executive Vice President of the Trust, and Investment
Officer, Secretary and Treasurer of Smith Barney Shearson Premium Total Return
Fund. Managing Director of Smith Barney Shearson; President of Smith Barney
Shearson Strategy Advisers Inc.; prior to July 1993, Senior Vice President of
Shearson Lehman Brothers, Vice President of Shearson Lehman Investment Strategy
Advisors Inc., an investmemt advisory affiliate of Shearson Lehman Brothers. His
address is Two World Trade Center, New York, New York 10048.
<PAGE>
Pauline A.M. Barrett, Chief Investment Officer. Managing Director -- Fixed
Income, Global Asset Management. Her address is Two Broadgate, London EC2M 7HA,
United Kingdom.
John C. Bianchi, Vice President and Investment Officer. Managing Director of
Greenwich Street Advisors; prior to July 1993, Managing Director of Shearson
Lehman Advisors. His address is Two World Trade Center, New York, New York
10048.
James E. Conroy, Vice President and Investment Officer. Managing Director of
Greenwich Street Advisors; prior to July 1993, Managing Director of Shearson
Lehman Advisors. His address is Two World Trade Center, New York, New York
10048.
John B. Fullerton, Sr., Investment Administrator. Vice President of Boston
Advisors; Senior Vice President of The Boston Company Institutional Investors,
Inc. His address is 100 Drake's Landing Road, Greenbrae, California 94904.
Jack S. Levande, Vice President and Investment Officer. Managing Director of
Greenwich Street Advisors; prior to July 1993, Managing Director of Shearson
Lehman Advisors; prior to April 1989, First Vice President of E.F. Hutton &
Company Inc. His address is Two World Trade Center, New York, New York 10048.
Karen Mahoney-Malcomson, Investment Officer. Vice President of Greenwich Street
Advisors; prior to July 1993, Vice President of Shearson Lehman Advisors. Her
address is Two World Trade Center, New York, New York 10048.
Lawrence T. McDermott, Vice President and Investment Officer. Managing Director
of Greenwich Street Advisors; prior to July 1993, Managing Director of Shearson
Lehman Advisors. His address is Two World Trade Center, New York, New York
10048.
Evelyn R. Robertson, Investment Officer. Vice President and Portfolio Manager of
Greenwich Street Advisors; prior to July 1993, Vice President of Shearson Lehman
Advisors. Her address is Two World Trade Center, New York, New York 10048.
Harry Rosenbluth, Investment Administrator. Vice President of Boston Advisors;
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 Director
of Greenwich Street Advisors; prior to July 1993, Managing Director of Shearson
Lehman Advisors. Her address is Two World Trade Center, New York, New York
10048.
Michael Zelouf, Investment Officer. Director -- Fixed Income, Global Asset
Management; prior to 1989, Portfolio Manager, Fuji International Finance. His
address is Two Broadgate, London EC2M 7HA, United Kingdom.
Patricia Zuch, Investment Administrator. Vice President of Boston Advisors. Her
address is 100 Drake's Landing Road, Greenbrae, California 94904.
Vincent Nave, Treasurer of the Trust, Financial Administrator Officer of Smith
Barney Shearson Premium Total Return Fund. Senior Vice President of Boston
Advisors and Boston Safe. His address is One Boston Place, Boston,
Massachusetts 02108.
Francis J. McNamara, III, Secretary of the Trust, Legal Administrator Officer of
Smith Barney Shearson Premium Total Return Fund. Senior Vice President and
General Counsel of Boston Advisors; prior to June 1989, Vice President and
Associate Counsel of Boston Advisors. His address is One Boston Place, Boston,
Massachusetts 02108.
Each Trustee also serves as a director, trustee and/or general partner of
certain other mutual funds for which Smith Barney Shearson serves as
distributor. Global Asset Management, Greenwich Street Advisors and Boston
Advisors (the "Advisers") are "affiliated persons" of the Trust as defined
<PAGE>
in the 1940 Act by virtue of their positions as investment advisers to the
Funds.
No director, officer or employee of Smith Barney Shearson, the Advisers or any
affiliate of Smith Barney Shearson or the Advisers will receive any compensation
from the Trust for serving as an officer or Trustee of the Trust. The Trust pays
each Trustee who is not a director, officer or employee of Shearson Lehman
Brothers or the Advisers 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, 1993, such fees and
expenses totalled $74,849.
INVESTMENT ADVISERS, SUB-INVESTMENT ADVISER AND ADMINISTRATOR
Each Adviser serves as investment adviser to one or more Funds pursuant to a
separate written agreement with the relevant Fund (an "Advisory Agreement").
Boston Advisors serves as administrator to each Fund pursuant to a separate
written agreement dated May 21, 1993 (the "Administration Agreement") and as
investment adviser to the Premium Total Return Fund pursuant to a separate
written agreement dated May 21, 1993. Global Asset Management also serves as
sub-investment adviser to the Diversified Strategic Income Fund. The Advisory,
Sub-Advisory and Administration 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, on August 4, 1993, and by shareholders of
the Funds on June 1, 1993 with the exception of Premium Total Return Fund and
Global Bond Fund which were approved on December 29, 1992 and August 11, 1987,
respectively.
Greenwich Street Advisors, a division of Mutual Management Corp. provides
investment advisory and management services to investment companies affiliated
with Smith Barney Shearson. Smith Barney Shearson is a wholly owned subsidiary
of Smith Barney Shearson Holdings Inc., which is in turn a wholly owned
subsidiary of Primerica Corporation ("Primerica").
Prior to the close of business on May 21, 1993, Boston Advisors acted in the
capacity as the Funds' sub-investment adviser and 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 ("Mellon").
Prior to the close of business on May 21, 1993 (the "Closing"), TBC was an
affiliate of Shearson Lehman Brothers and, in connection with its sale to
Mellon, Shearson Lehman Brothers conditionally agreed (with certain exceptions)
that neither it nor its subsidiaries would provide custody services (other than
to investment companies) or master trust services for a period of three years,
and that neither it nor its subsidiaries would provide custody or administration
services to certain investment companies and/or clients of TBC and its
subsidiaries for a period of one to seven years. In addition, Shearson Lehman
Brothers conditionally agreed (with certain exceptions) that, for a period of
seven years (a) with respect to each investment company for which both (i) TBC
or its subsidiary provided custody services, administration services or
investment advisory services (not sub-advisory services) on September 14, 1992
and (ii) Shearson Lehman Brothers or its subsidiaries serve as investment
adviser or principal underwriter, Shearson Lehman Brothers would to the extent
consistent with its fiduciary duties and other applicable law recommend TBC or
its subsidiary as a provider of such services, and (b) it would recommend TBC or
its subsidiary as the provider of custody services and administration services
for any investment company for which Shearson Lehman Brothers or its
subsidiaries become an investment adviser or principal underwriter.
On July 30, 1993, Smith Barney Shearson purchased certain assets and as-
sumed certain liabilities of Shearson Lehman Brothers. Under the asset
purchase agreement between Smith Barney Shearson and Shearson Lehman
Brothers, as regards the above-described provisions, Smith Barney Shearson
agreed with American Express Company that Smith Barney Shearson and its
pertinent affiliates would be bound by those provisions to the extent that
Shearson Lehman Brothers, and its pertinent affiliates would have been
bound if the sale to Smith Barney Shearson had not occurred.
Certain of the services provided to the Trust by the Advisers, Global Asset
Management and Boston Advisors are described in the Prospectus under
<PAGE>
"Management of the Trust and the Fund." Each Adviser and Boston Advisors, as
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 services, 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 Fund's 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 Asset Management and Boston Advisors
bear all expenses in connection with the performance of their services.
For the 1991, 1992 and 1993 fiscal years, the Funds paid investment advisory
fees to their respective Advisers as follows:
<TABLE>
<CAPTION>
FUND 1991 1992 1993
<S> <C> <C> <C>
Premium Total Return Fund $ 2,497,944 $ 2,776,638 $4,803,717
Tax-Exempt Income Fund 2,365,885 2,884,333 3,978,637
Convertible Fund 371,014 305,154 329,323
Global Bond Fund 329,593 301,528 356,324
High Income Fund 1,176,103 1,313,890 2,659,448
Diversified Strategic Income Fund 1,015,382 3,346,434 6,226,342
Utilities Fund 2,824,608 4,272,080 10,317,792
Money Market Fund 1,782,558 970,662 612,812
</TABLE>
For the 1991, 1992 and 1993 fiscal years, the Funds paid Boston Advisors
the following fees:
<TABLE>
<CAPTION>
FUND 1991 1992 1993
<S> <C> <C> <C>
Premium Total Return Fund $ 908,343 $ 1,009,687 $1,746,806
Tax-Exempt Income Fund 1,182,942 1,442,166 1,989,319
Convertible Fund 148,406 122,062 131,729
Global Bond Fund 109,864 100,509 118,434
High Income Fund 470,441 525,556 1,063,779
Diversified Strategic Income Fund 869,907 1,912,279 3,557,910
Utilities Fund 1,255,381 1,898,703 4,584,796
Money Market Fund 1,188,372 647,081 408,842
</TABLE>
For the fiscal years ended July 31, 1991, 1992 and 1993, Diversified Strategic
Income Fund paid Global Asset Management $289,969, $956,195 and $1,778,955 in
sub-investment advisory fees, respectively.
Each Adviser and Boston Advisors, as administrator, have agreed that if in any
fiscal 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, extraordinary expenses)
exceed the expense limitation of any state having jurisdiction over the Fund,
the Adviser and Boston Advisors 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 respective fees bear to the
aggregate of the fees paid by the Fund. Such fee reduction, 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, 1991, 1992 and
1993.
COUNSEL AND AUDITORS
<PAGE>
Willkie Farr & Gallagher serves as legal counsel to the Trust. The Trustees who
are not "interested persons" of the Fund have selected Stroock & Stroock & Lavan
as their counsel.
Coopers & Lybrand, independent accountants, One Post Office Square, Boston,
Massachusetts 02109, serve as auditors of the Trust and render an opinion on the
Trust's financial statements annually.
ORGANIZATION OF THE TRUST
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, 1993 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 and July 30, 1993, the Trust
changed its name to Shearson Lehman Special Income Portfolios, SLH Income
Portfolios, Shearson Lehman Brothers Income Portfolios, Shearson Lehman Brothers
Income Funds and Smith Barney Shearson Income Funds, respectively.
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 shareholder'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 transferable but have no preemptive or
subscription rights. Shareholders generally 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 obligations 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 paying the liability will be entitled to
reimbursement from the general assets 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 instruments in which
the Funds may invest, the investment policies and portfolio 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 securities
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 Intermediate Credit Banks, Federal Land Banks, Federal
National Mortgage Association ("FNMA"), Maritime Administration, Tennessee
Valley Authority, District of Columbia Armory Board, Student Loan Marketing
Association, International Bank for Reconstruction and Development and
Resolution Trust Corporation. Certain U.S. government securities, such as those
issued or
<PAGE>
guaranteed by GNMA, FNMA and FHLMC, are mortgage-related securities. Because the
United States government is not obligated by law to provide support to an
instrumentality that it sponsors, a Fund will invest in obligations issued by
such an instrumentality only if its Adviser determines that the credit risk with
respect 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 insured by the
Federal Deposit Insurance Corporation (the "FDIC"). Domestic banks organized
under state law are supervised and examined by state banking 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 insurance may not be of material
benefit to a Fund, depending upon the principal amount of certificates of
deposit ("CDs") of each held by the Fund) and are subject to Federal examination
and to a substantial body of Federal law and regulation. As a result of Federal
and state laws and regulations, domestic branches of domestic banks are, among
other things, generally 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 deposits
("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 obligation 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 obligations, 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 accounting, 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 subsidiaries 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 regulator by depositing assets with a designated
bank within the state, an amount of its assets equal to 5% of its total
liabilities; and (b) maintain 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.
The Money Market Fund may purchase a CD issued by a bank, savings and loan
association or other banking institution with less than $1 billion in assets (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. The Money Market Fund will at any one time
hold only one Small Issuer CD from any one issuer.
<PAGE>
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 TaxExempt 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 transaction 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 anticipated, 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. Similarly, the sale of U.S. government securities for
delayed delivery can involve the risk that the prices available in the market
when the delivery is made may actually be higher than those obtained in the
transaction itself.
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 consisting
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 accounts, 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, Convertible,
Global Bond, High Income and Diversified Strategic Income Funds). 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 portfolio securities to Smith Barney
Shearson 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 securities 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 collateral 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
<PAGE>
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 receive reasonable
interest on the loan, as well as any dividends, interest or other distributions
on the loaned securities, and any increase in market value; (e) the Fund may pay
only reasonable custodian fees in connection with the loan; and (f) voting
rights on the loaned securities may pass to the borrower; provided, however,
that if a material event adversely affecting the investment in the loaned
securities occurs, the 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 receiving
additional collateral or in the recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Loans will be
made to firms deemed by 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,
Diversified 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 transactions.
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 adverse price movements
in the securities that it holds or may wish to purchase and the currencies in
which certain portfolio securities may be denominated. In return for a premium,
the writer of a covered call option forfeits the right to any appreciation in
the value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected). Nevertheless,
the call writer retains the risk of a decline in the price of the underlying
security. Similarly, the principal reason for writing covered put options is to
realize income in the form of premiums. The writer of a covered put option
accepts the risk of a decline in the price of the underlying security. The size
of the 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 securities at the
times the options are written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. 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 advance 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 declines and the security is sold at this lower price, the
amount of any realized loss will be offset wholly or in part by the premium
received. Out-of-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 option once it has been assigned
an exercise notice. To secure its obligation to deliver the underlying security
when it writes a call option, or
<PAGE>
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 assets 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 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.
"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 expiration, "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
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 options on
securities, the Funds will trade only with counterparties 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 exchange or in the
over-the-counter market. In light of this fact and current trading conditions,
the Funds expect to purchase only call or put options issued by the Clearing
Corporation. The Funds with option-writing authority expect to write options
only on U.S. securities exchanges, except 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 transaction. 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 realizes 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 exchange 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 options. If as a
covered call option writer a Fund is unable to effect closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise.
Securities exchanges generally have established limitations governing the
maximum number of calls and puts of each class which may be held or written, or
exercised within certain time periods, by an investor or group of
<PAGE>
investors acting in concert (regardless of whether the options are written on
the same or different securities exchanges or are held, written or exercised in
one or more accounts or through one or more brokers). It is possible that the
Funds with authority to engage in options transactions and other clients of
their respective Advisers and certain of their affiliates may be considered to
be such a group. A securities exchange may order the liquidation of positions
found to be in violation of these limits 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 borrowed stock, but the Fund may incur
additional transaction costs or interest expenses in connection with any such
purchase or borrowing.
Additional risks exist with respect to certain of the U.S. government securities
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 prepayments, cease to be
sufficient cover. The Fund will compensate for the decline in the value of the
cover by purchasing an appropriate additional amount of those securities.
Stock Index Options (Premium Total Return and Utilities Funds). The Premium
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 narrower 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
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may offset its position 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 hedging
technique will depend upon the extent to which price movements in the portion of
a securities portfolio being hedged correlate with price movements 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-
<PAGE>
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 assurance that such
judgment will be accurate or that the use of these portfolio 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 average
maturity of pass- through pools of mortgage-related securities varies with the
maturities of the underlying mortgage instruments. In addition, 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 prepayment rates of individual pools vary
widely, its is not possible to accurately 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 average 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 principally
of conventional residential mortgage loans created by nongovernmental issuers,
such as commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage-related 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 Housing and Urban Development. Government-related
mortgage-related securities are not backed by the full faith and credit of the
United States government. 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 corporate
instrumentality of the United States, the stock of which is owned by the Federal
Home Loan Banks. Participation certificates representing interests 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 described above.
The mortgages underlying these securities may be alternative 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,
the Diversified Strategic Income Fund, consistent with its investment objective
and policies, will consider making 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 transactions will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward 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 currency 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 denominated or quoted in or currently convertible (such as
through exercise of an option or consummation of a forward currency contract)
into that par-
<PAGE>
ticular currency, except that the Global Bond Fund may utilize forward currency
contracts denominated in the European Currency Unit to hedge portfolio 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 currency; (b) ownership of an option to enter into
an offsetting forward currency contract; (c) entering into a forward contract to
purchase currency being sold or to sell currency being purchased, provided that
such covering contract is itself covered by any one of these methods unless the
covering 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 transactions 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 security and
offset its contractual obligation to deliver the currency by purchasing 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 obligated 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 contract 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 currency 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 factors 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 commissions are involved. The
use of forward currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. In addition, 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 increase.
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 the High Income Fund which may only purchase
put and call options on foreign currencies, these Funds may purchase or write
put and call options on foreign currencies for the purpose of hedging against
changes in future currency exchange rates. Foreign currency 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 underlying 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-
<PAGE>
inated, for example, will reduce the dollar value of the securities, even if
their value in the foreign currency remains constant. In order to protect
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 currency 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 potentially 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 exchange 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 direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options that would require it to forego a portion 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. Investing in securities of
countries with developing economies involves exposure to economic structures
that are generally less diverse and less mature, and to political systems that
can be expected to have less stability, 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 generally
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 general operating
expenses and extensions of loans to public institutions and facilities
("Municipal Securities"). Private activity bonds that are issued 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 subject 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 applied 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 governmental
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. 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-
<PAGE>
nicipal bonds; moreover, although the obligations will be secured by the leased
equipment, the disposition of the equipment in the event of foreclosure might
prove to be difficult. In order to limit the risks, the Tax-Exempt Income Fund
proposes to purchase either (a) municipal leases rated in the four highest
categories by Moody's Investors Services, Inc. ("Moody's") or Standard & Poor's
Corporation ("S&P") or (b) unrated municipal leases purchased principally from
domestic banks or other responsible third parties which entered 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.
From time to time, proposals to restrict or eliminate the Federal income tax
exemption for interest on Municipal Securities have been introduced before
Congress. Similar proposals may be introduced in the future. In addition, the
Code currently provides that small issue private activity bonds will not be
tax-exempt if the bonds are issued after December 31, 1986, and the proceeds are
used to finance projects other than manufacturing facilities. Interest on
certain small issue private activity bonds used to finance manufacturing
facilities will not be tax-exempt if such bonds are issued after December 31,
1991. If the latter deadline is not extended, or, if a proposal to restrict or
eliminate the Federal tax exemption for interest on Municipal Securities were
enacted, the availability of Municipal Securities for investment by the
Tax-Exempt Income Fund would be adversely affected. In such event, the Fund
would reevaluate its investment objective and policies and submit possible
changes in the structure of the Fund for the consideration of shareholders.
Temporary Investments (Tax-Exempt Income Fund). When the Tax-Exempt Income 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 purchase within the two highest ratings by any major
rating service or determined to be of comparable quality to instruments with
such rating; and (b) the following taxable securities: (i) U.S. government
securities, including 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
services; 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 invest are Tax
Anticipation Notes, Bond Anticipation Notes and Revenue Anticipation Notes which
are issued in anticipation of receipt of tax funds, proceeds of bond placements
or other revenues. At no time will more than 20% of the Fund's total assets be
invested in Temporary Investments unless the Fund has adopted a defensive
investment policy in anticipation 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
redemptions.
Investing in Utilities (Utilities Fund). Each of the risks referred to in the
Utilities Fund's Prospectus 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. 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.
Ratings as Investment Criteria (All Funds). In general, the ratings of
nationally recognized statistical rating organizations ("NRSROs") represent the
opinions of these agencies as to the quality of securities that they rate. Such
ratings, however, are relative and subjective, and are not
<PAGE>
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 criteria 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 purchase 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 whether the Fund should continue to hold the
securities. In addition, to the extent 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 accordance with its investment objective and policies.
Futures Activities, High Income, Utilities and Tax-Exempt Income Funds. These
Funds may enter into futures contracts and/or options on futures 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 securities due to anticipated changes in
interest rates, currency values and/or market conditions, and not for purposes
of speculation. In the case of the 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 securities. For example, if
the 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 portfolio 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 futures
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 interest rates, currency
values and/or market conditions when the transactions are economically
appropriate to the reduction of risks inherent in the management of the Fund and
not for purposes of speculation. The ability of the Funds to trade in futures
contracts may be limited by the requirements 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 futures
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 margin, 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 contract, assuming that all contactual obligations
have been satisfied. Sub-
<PAGE>
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 hedging
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 judgment, and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected trends in
interest rates or currency 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 direction
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 positions. 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 securities 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 contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying interest rate futures contract at a specified exercise price at any
time prior to the expiration date of the option. An option 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 account, which represents the amount by which the market price of the
futures 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
<PAGE>
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 investing in the
options.
Several risks are associated with options on futures contracts. The ability 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 incorrect. 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 associated
with investing in U.S. issuers. Since the Fund will be investing in securities
dominated 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 determined
by the forces of supply and demand in the foreign exchange markets. Changes in
the exchange rate may result over time from the interaction 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
imposition 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 Securities and
Exchange Commission. Accordingly, there may be less publicly available
information about the securities 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, practices 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 domestic developments which could affect U.S. investments in those countries.
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
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
<PAGE>
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). The 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 securities.
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 obligated 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 proceeds 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 current 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 Utilities
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 exchangeable, 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 securities in connection with
short sales against the box.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 14 below (other than re-
<PAGE>
striction number 10 as applied to the 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 majority 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 restrictions 15 through 20, and number 10 as
applied to the 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 regard to this 5%
limitation.
2. Purchasing (a) more than 10% of the voting securities of any one issuer,
(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 Money Market and Diversified 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 related 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 except 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 securities 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) the Utilities Fund may make short sales or
maintain a short position 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 the Utilities Fund) 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, (b) the 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 the Diversified 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 additional investments. Immediately
after any borrowing (including reverse repurchase agreements and forward roll
transactions), the 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 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 a Fund's
<PAGE>
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 Income,
Diversified Strategic Income, Utilities and Tax-Exempt Income Funds may invest
in futures contracts and options on futures contracts as described 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, including 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 Money Market 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 acquired 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 the Money Market Fund and the Utility Fund will invest in excess of
25% of its respective assets in the securities of companies within the banking
industry and utility industry, respectively; provided that there shall be no
limit on the purchase of (a) U.S. government securities or (b) for Funds other
than the Money Market and Utility 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 the Money Market Fund, as permitted
under the Fund's investment objective and policies.
15. Purchasing restricted securities, illiquid securities (such as repurchase
agreements with maturities in excess of seven days and, in the case of the Money
Market Fund, time deposits maturing from two business days through seven
calendar days) or other securities that are not readily marketable if more than
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 the Tax-Exempt Income Fund,
this restriction shall apply to the entity supplying the revenues from which the
issue is to be paid.
17. Making investments for the purpose of exercising control or management.
18. Purchasing or retaining securities of any company if, to the knowledge 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.
<PAGE>
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 result, 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 applicable state securities laws.
20. With respect to the Utilities Fund only, purchasing in excess of 5% of the
voting securities of a public utility or public utility holding company, 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 the
Money Market Fund, the first of which is a fundamental policy, which prohibit
the Money Market 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) ultimately
responsible for the payment of the principal of and interest on the security.
For purposes of investment restriction number 13, private activity bonds (other
than those issued for charitable, educational and certain other purposes) the
payment of principal and interest on which is the ultimate 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 determine that any such commitment is no longer in the
best interests of the Fund and its shareholders, the Trust will revoke the
commitment by terminating the sale of shares of the Fund in the state involved.
The percentage 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.
Nevertheless, 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 transactions 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 included 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 quality 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
<PAGE>
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 1992 and 1993 fiscal years, the portfolio turnover rates were as
follows:
<TABLE>
<CAPTION>
FUND 1992 1993
<S> <C> <C>
Premium Total Return Fund 57% 55%
Tax-Exempt Income Fund 61% 34%
Convertible Fund 77% 95%
High Income Fund 137% 95%
Global Bond Fund 230% 216%
Diversified Strategic Income Fund 125% 116%
Utilities Fund 10%* 34%
<FN>
* In 1992, Utilities Fund changed its fiscal year end from February, 1992 to
July, 1992. This figure represents the period from March 1, 1992 through July
31, 1992.
</TABLE>
For regulatory purposes the turnover rate of the Money Market Fund is zero.
PORTFOLIO TRANSACTIONS
Most of the purchases and sales of securities for a Fund, whether transacted 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 transactions, 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
Greenwich Street Advisors, which is also responsible for placing these
transactions; the responsibility to make investment decisions with respect to
foreign securities and to place these transactions rests with Global Asset
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
received 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 exchanges. 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 instrumentality. The following table sets forth certain
information regarding each Fund's payment of brokerage commissions:
<PAGE>
<TABLE>
<CAPTION>
PREMIUM DIVERSIFIED
TOTAL HIGH STRATEGIC
FISCAL RETURN CONVERTIBLE INCOME UTILITIES INCOME
YEAR FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C>
Total Brokerage Commissions 1991 $ 629,631 $21,850 $32,207 $ 572,086 --
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
Commissions paid to 1991 $ 323,209 -- -- $ 81,906 --
Shearson Lehman Brothers 1992 $ 283,190 $ 2,700 $22,419 $ 28,848 --
1992* -- -- -- $ 51,828 --
1993 $ 355,027 -- -- $ 97,740 --
% of Total Brokerage 1993 18% 0% 0% 5% --
Commissions paid to
Shearson Lehman Brothers
% of Total Transactions 1993 18% 0% 0% 4% --
involving Commissions paid
to Shearson Lehman Brothers
<FN>
* Periods disclosed for Utilities Fund are for fiscal years ended February 28,
1991, 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 behalf 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 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 addition, each
Advisory Agreement between the Trust and an Adviser authorizes the Adviser, in
selecting brokers or dealers 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 Shearson will not
participate in commissions brokerage given by the Fund to other brokers or
dealers and will not receive any reciprocal brokerage business resulting
therefrom. The 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 Board of Trustees has
determined that transactions for a Fund may be executed through Smith Barney
Shearson and other affiliated broker-dealers if, in the judgment of the Fund's
Adviser, the use of such broker-dealer is likely to result in price and
execution at least as favorable as those of other qualified broker-dealers, and
if, in the transaction, such broker-dealer charges the Fund a rate consistent
with that charged to comparable unaffiliated customers in similar transactions.
In addition, under rules recently adopted by the SEC, Smith Barney Shearson may
directly execute such transactions for the Funds on the floor of any national
securities exchange, provided (a) the Board of Trustees has expressly authorized
Smith Barney Shearson to effect such transactions, and (b) Smith Barney Shearson
annually advises the Trust of the aggregate compensation it earned on such
transactions. Over-the-counter purchases and sales are transacted directly with
principal market makers except in those cases in which better prices and
executions may be obtained elsewhere.
<PAGE>
The Funds will not purchase any security, including U.S. government securities
or Municipal Securities, during the existence of any underwriting or selling
group relating thereto of which Smith Barney Shearson is a member, except to the
extent permitted by the SEC.
The Funds may use Smith Barney Shearson as a commodities broker in connection
with entering into futures contracts and options on futures contracts. Smith
Barney Shearson has agreed to charge the Funds commodity commissions at rates
comparable to those charged by Smith Barney Shearson 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 Prospectuses
apply to purchases made by any "purchaser," which is defined to include the
following: (a) an individual; (b) an individual, his or her immediate family
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 employee 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 organized group of persons, provided that the organization has
been in existence 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 investment
adviser registered with the SEC under the Investment Advisers Act of 1940)
purchasing shares of the Fund for one or more trust estates or fiduciary
accounts. Purchasers who wish to combine purchase orders to take advantage of
volume discounts on Class A shares should contact their Smith Barney Shearson
Financial Consultants.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedules in the Prospectuses,
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 in the Smith
Barney Shearson Group of Funds that are sold with a 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 further information regarding the rights of accumulation,
shareholders should contact their Smith Barney Shearson Financial Consultants.
DETERMINATION OF PUBLIC OFFERING PRICES
The Trust offers shares of the Funds to the public on a continuous basis. The
public offering price per Class A share of a Fund is equal to the net asset
value per share at the time of purchase plus a sales charge based on the
aggregate amount of the investment. The public offering price per Class B share,
Class C share and Class D share (and Class A share purchases, including
applicable rights of accumulation, equalling or exceeding $1 million or, in the
case of investors purchasing through the Smith Barney Shearson 401(k) Program,
equalling or exceeding $750,000), is equal to the net asset value per share of
the relevant Fund at the time of purchase and no sales charge is imposed at the
time of purchase. A contingent deferred sales charge ("CDSC"), however, is
imposed on certain redemptions of Class B shares and Class A shares of a Fund
when purchased in amounts equalling or exceeding $1 million. The method of
computation of the public offering prices of the Funds is shown in the Trust's
financial statements accompanying 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
<PAGE>
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 Board of Trustees determines that it would be
detrimental to the best interests of the remaining shareholders 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 issued in a distribution in kind will be readily
marketable, although shareholders 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 periodically. Withdrawals of at least $50
monthly may be made under the Withdrawal Plan by redeeming as many shares of the
Fund as may be necessary to cover the stipulated withdrawal payment. Any
applicable CDSC will not be waived on amounts withdrawn by shareholders that
exceed 2% per month of the value of a shareholder's shares at the time the
Withdrawal 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 income 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 Withdrawal Plan
members. All dividends and distributions on shares in the Withdrawal Plan are
reinvested automatically at net asset value in additional shares of the Fund
involved. All applications 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
eligible for participation beginning with that month's withdrawal. The
Withdrawal Plan will not be carried over on exchanges between Funds or classes
("Classes"). A new Withdrawal Plan application is required to establish the Plan
in the new Fund. For additional information regarding the Withdrawal Plan,
contact your Smith Barney Shearson Financial Consultant.
DISTRIBUTOR
Smith Barney Shearson serves as the Trust's distributor on a best efforts basis
pursuant to a distribution agreement (the "Distribution Agreement").
Smith Barney Shearson forwards investors' funds for the purchase of shares five
business days after placement of purchase orders (i.e., the "settlement date").
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 Shearson 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 Shearson Money Market Fund) in the Smith
Barney Shearson Group of Funds. If the investor instructs Smith Barney Shearson
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 Shearson 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 managing these assets
<PAGE>
computed on the basis of their average daily net assets. The Trust's Board of
Trustees has been advised of the benefits to Smith Barney Shearson resulting
from five-day settlement procedures and will take such benefits into
consideration when reviewing the Advisory and Distribution Agreements for
continuance.
DISTRIBUTION ARRANGEMENTS
Shares of the Trust are distributed on a best efforts basis by Smith Barney
Shearson as exclusive sales agent of the Trust pursuant to the Distribution
Agreement. To compensate Smith Barney Shearson 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 Shearson a service fee,
accrued daily and paid monthly, calculated at the annual rate of .25% (.15% in
the case of the Tax-Exempt Income Fund) of the value of the Fund's average daily
net assets attributable to the Class A, Class B and Class D shares. In addition,
Class B and Class D pay a distribution fee primarily intended to compensate
Smith Barney Shearson for its initial expense of paying Financial Consultants a
commission upon sales of the respective shares. The Class B and Class D
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 respective Class.
During the twelve-month periods ended July 31, 1991, 1992 and 1993, Shearson
Lehman Brothers, the Fund's distributor prior to Smith Barney Shearson, received
$25,625,753, $35,428,596 and $48,427,224, respectively, in the aggregate from
the Trust under the Plan. For the same periods, Shearson Lehman Brothers also
received $10,998,283, $8,915,876 and $9,494,822, respectively, representing CDSC
on redemptions of Class B shares of the Trust. For the same period, Shearson
Lehman Brothers incurred distribution expenses totalling approximately
$108,875,000, consisting of approximately $601,000 for advertising, $775,000 for
printing and mailing of Prospectuses, $13,215,000 for support services,
$74,851,000 to Shearson Lehman Brothers Financial Consultants and $19,433,000 in
accruals for interest on the excess of Shearson Lehman Brothers expenses
incurred in distributing the Trust's shares over the sum of the distribution
fees and CDSC received by Shearson Lehman Brothers from the Trust.
Under its terms, the Plan continues from year to year, provided such continuance
is approved annually by vote of the Board of Trustees, including a majority of
the Trustees who are not interested persons of the Trust and who have no direct
or indirect financial interest in the operation of the Plan (the "Independent
Trustees"). The Plan may not be amended to increase the amount to be spent for
the services provided by Smith Barney Shearson 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 penalty, 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
Shearson will provide the Board of Trustees with periodic reports of amounts
expended under the Plan and the purpose for which such expenditures were made.
VALUATION OF SHARES
The Prospectuses discuss the times at which the net asset value of shares of
each Class is determined for purposes of sales and redemptions. Because of the
differences in distribution fees and Class-specific expenses, the per share net
asset value of each Class will differ. The following is a description 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 determined to be the primary
market for such security. All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values at the mean
between the bid and offered quotations
<PAGE>
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 Board of Trustees. In carrying out the Board's valuation
policies, Boston Advisors, 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 securities
and short-term investments), including Municipal Securities held by the
Tax-Exempt Income Fund, are valued by Boston Advisors, as administrator, after
consultation with the Pricing Service approved by the Board of Trustees. 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
Shares of a Fund may be exchanged for shares of the same Class of many of the
funds in the Smith Barney Shearson Group of Funds, as indicated in the
Prospectuses, to the extent such shares are offered for sale in the
shareholder's state of residence.
Except as noted below, shareholders of any fund in the Smith Barney Shearson
Group of Funds may exchange all or part of their shares for shares of the same
class of other funds in the Smith Barney Shearson Group of Funds, as listed in
the Prospectuses, 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 exchanged 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 applied.
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 purposes of calculating
CDSC rates and conversion periods, will be deemed to have been held since the
date the shares being exchanged were purchased.
Dealers other than Smith Barney Shearson must notify TSSG of the investor's
prior ownership of Class A shares of Smith Barney Shearson High Income Fund and
the account number in order to accomplish an exchange of shares of Smith Barney
Shearson 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 your Smith Barney Shearson
Financial Consultant.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and, subject to any applicable CDSC, the proceeds immediately invested, at a
price as described above, in shares of the fund being acquired. Smith Barney
Shearson reserves the right to reject any exchange
<PAGE>
request. The exchange privilege may be modified or terminated at any time after
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. To the
extent any advertisement or sales literature of the Trust describes the expenses
or performance of a Class, it will also disclose such information for the other
Classes.
YIELD
Money Market Fund. The current yield for the Fund is computed by (a) determining
the net change in the value of a hypothetical pre-existing account 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., multiplying the base period return by 365/7). The
net change in the value of the account reflects the value of additional shares
purchased with dividends 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 annualized yield by adding 1 to the base period return (calculated as
described above), raising the sum to a power equal to 365/7 and subtracting 1.
For the seven-day period ended July 31, 1993, the annualized yield was 1.54%,
and the compound effective yield was 2.12%. For the same seven-day period, the
Fund's average portfolio maturity was 25.2 days.
Other Funds. The 30-day yield figure of a Fund other than the Money Market 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 reimbursement).
c =the average daily number of shares outstanding during the period
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 B yields for the 30-day period ended July 31, 1993 for the High
Income, Diversified Strategic Income Global Bond and Utilities Funds were 7.93%,
7.16%, 4.48% and 4.80%, respectively.
Class A's yields for the Tax-Exempt Income Fund for the 30-day period ended July
31, 1993, was 4.87% and the equivalent taxable yield for Class A for that period
was 6.76% 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-
<PAGE>
pected to occur.
AVERAGE ANNUAL TOTAL RETURN
The "average annual total return" figures for Class B of a Fund, other than the
Money Market 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 portion thereof, assuming
reinvestment of all dividends and distributions).
The ERV assumes complete redemption of the hypothetical investment at the end of
the measuring period, and reflects deduction upon redemption of the Fund's CDSC
at the percentage level corresponding to the length of the measuring period. A
Fund's net investment income changes in response to fluctuations in interest
rates and the expenses of the Fund.
From time to time, the Trust may quote the performance of a Fund in terms of
total return in reports or other communications to shareholders or in
advertising material. A Fund's total return combines principal changes and
income dividends and capital gains distributions reinvested for the periods
shown. Principal changes are based on the difference between the beginning and
closing net asset values for the period. The period selected will depend upon
the purpose of reporting the performance.
The average annual total returns of the Class B shares of the Funds indicated
were as follows for the period indicated:
Class B Shares:
<TABLE>
<CAPTION>
PER ANNUM PER ANNUM
FOR THE FOR THE
ONE FIVE YEAR PERIOD FROM
YEAR PERIOD PERIOD COMMENCEMENT OF
ENDED ENDED OPERATIONS THROUGH
NAME OF FUND JULY 31, 1993 JULY 31, 1993 JULY 31, 1993
<S> <C> <C> <C>
Premium Total Return(1) 6.68% 13.93% 13.06%
Tax-Exempt Income(1)(6) 3.78 9.17 9.85
Convertible(2) 8.40 9.01 8.70
High Income(2)(6) 14.05 9.12 9.53
Global Bond(3)(6) 4.17 8.98 9.88
Diversified Strategic Income(4)(6) 2.85 -- 10.91
Utilities(5) 9.69 13.70 13.31
<FN>
(1) Fund commenced operations on September 16, 1985.
(2) Fund commenced operations on September 2, 1986.
(3) Fund commenced operations on October 27, 1986.
(4) Fund commenced operations on December 28, 1989.
(5) Fund commenced operations on March 28, 1988.
(6) Prior to November 6, 1992 the maximum CDSC imposed on redemptions was 5%.
</TABLE>
<PAGE>
A Class' total return figures calculated in accordance with the above formula
assume that the maximum sales charge or maximum applicable CDSC, as the case may
be, has been deducted for the hypothetical $1,000 initial investment at the time
of purchase.
AGGREGATE TOTAL RETURN
A Class' aggregate total return figures 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 investment made
at the beginning of the 1-, 5- or 10-year period at the end of the
1-, 5- or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The aggregate total returns of the Class B shares of the Funds indicated were as
follows for the periods indicated:
<TABLE>
<CAPTION>
FIVE YEAR PERIOD FROM ONE YEAR FIVE YEAR PERIOD FROM
ONE YEAR PERIOD COMMENCEMENT PERIOD PERIOD COMMENCEMENT
PERIOD ENDED OF OPERATIONS ENDED ENDED OF OPERATIONS
ENDED JULY 31, THROUGH JULY 31, JULY 31, THROUGH
NAME OF FUND JULY 31, 1993* 1993* JULY 31, 1993* 1993** 1993** JULY 31, 1993**
<S> <C> <C> <C> <C> <C> <C>
Premium Total Return(1) 11.68% 92.98% 162.83% 6.68% 91.98% 162.83%
Tax-Exempt Income(1)(6) 8.28 56.09 109.46 3.78 55.09 109.46
Convertible(2) 13.40 54.95 77.93 8.40 53.95 77.93
High Income(2)(6) 18.55 55.58 87.58 14.05 54.72 87.58
Global Bond(3)(6) 8.67 54.73 89.10 4.17 53.74 89.10
Diversified Strategic Income(4)(6) 7.28 -- 47.05 2.85 -- 45.05
Utilities(5) 14.69 13.81 94.94 9.69 13.70 94.94
<FN>
* Figures do not include the effect of the maximum sales charge or maximum
applicable CDSC or the annual service fee of .25% (.15% for the Tax-Exempt
Income Fund) or Class B distribution fee of .50% of the average net assets
of the Class. If they had been included, it would have the effect of
lowering the returns shown.
** Figures include the effect of the maximum sales charge or maximum applicable
CDSC and the annual service fee of .25% (.15% for the Tax-Exempt Income
Fund) and Class B distribution fee of .50% of the average net assets of the
Class.
(1) Fund commenced operations on September 16, 1985.
(2) Fund commenced operations on September 2, 1986.
(3) Fund commenced operations on October 27, 1986.
(4) Fund commenced operations on December 28, 1989.
(5) Fund commenced operations on March 28, 1988.
(6) Prior to November 6, 1992 the maximum CDSC imposed on redemptions was
5%.
</TABLE>
The aggregate total returns of the Class A and Class D shares of the Funds
indicated were as follows for the periods indicated:
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
NOVEMBER 6, 1992 NOVEMBER 6, 1992
THROUGH THROUGH
NAME OF FUND JULY 31, 1993* JULY 31, 1993**
<S> <C> <C>
Premium Total Return
Class A 10.31% 4.79%
Class D 2.60 2.60
Tax-Exempt Income
Class A 10.24 5.28
Convertible***
Class A 12.63 7.00
High Income***
Class A 17.29 12.01
Global Bond
Class A 7.70 2.85
Class D 6.19 6.19
Diversified Strategic Income
Class A 9.30 4.38
Class D 3.86 3.86
Utilities
Class A 17.01 11.16
Class D 8.08 8.08
<FN>
* Figures do not include the effect of the maximum sales charge or maximum
applicable CDSC.
** Figures include the effect of the maximum sales charge or maximum applicable
CDSC.
*** No performance information was available for Class D shares as of July 31,
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. Consequently,
any given performance quotation should not be considered representative of the
Class' performance for any specified period in the future. Because performance
will vary, it may not provide a basis for comparing an investment in the Class
with certain bank deposits or other investments that pay a fixed yield for a
stated period of time. Investors comparing a Class' 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 intended
as a substitute for individual tax planning, and investors are urged to consult
their tax advisors with specific reference to their own Federal, 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
<PAGE>
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 securities 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 preceding 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 contracts and options on futures contracts, and foreign
currencies (or options, 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 security at a
substantial discount, a portion of any gain upon sale or redemption 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 transactions
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 convertible 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 transaction, 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 written 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 convertible
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 option. 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 security 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
<PAGE>
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 imposes a
special "mark-to-market" system for taxing these contracts. These contracts
generally include options on nonconvertible debt securities (including United
States government securities), options on stock indexes, futures contracts,
options on futures contracts and certain foreign currency 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 general, gain or loss on section 1256 contracts will be taken into
account for tax purposes when actually realized (by a closing transaction, by
exercise, by taking delivery or by other termination). In addition, any section
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. Provided 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 positions 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 investment 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
substantial 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 acquired 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, straddles consisting of a
section 1256 contract and an offsetting position that is not a section 1256
contract). If a Fund makes certain elections, the
<PAGE>
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 recognition 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 contracts 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 income 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 income for Federal
income tax purposes, whether received in cash or reinvested 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 generally
will qualify for the Federal dividends-received deduction for domestic corporate
shareholders to the extent that such dividends do not exceed 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 redemption, shares in a
mutual fund for which the otherwise applicable sales charge is reduced by reason
of a reinvestment right (i.e., exchange privilege), 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 original sales charge that does not increase the
shareholder's tax basis in the original shares would be treated as incurred with
respect to the second 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 shareholder
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 recognize 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 exchanges 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 identification
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
<PAGE>
respect to (a) any taxable dividends and distributions and (b) any proceeds of
any redemption of Trust shares. An individual's taxpayer identification number
is his or her social security number. The backup withholding tax is not an
additional tax and may be credited against a shareholder's regular Federal
income tax liability.
Tax-Exempt Income Fund Because the Tax-Exempt Income Fund will distribute
exempt-interest dividends, interest on indebtedness incurred by shareholders,
directly or indirectly, to purchase or carry shares of the Fund will not be
deductible for Federal income tax purposes. If a shareholder redeems 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 extent 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 person "related" to a substantial user.
Investors should consult their own tax advisors to see whether they may be
substantial users or related persons with respect to a facility financed by
bonds in which the Fund may invest. Moreover, investors receiving social
security or certain other retirement benefits should be aware that tax-exempt
interest received from the Fund may under certain circumstances cause up to
one-half of such retirement benefits to be subject to tax. If the Fund receives
taxable investment 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. Dividends 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 securities are located.
CUSTODIAN AND TRANSFER AGENT
Boston Safe, a wholly owned subsidiary of TBC, 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 dividends and distributions
payable by each Fund. For these services TSSG receives 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 reimbursed for certain out-of-pocket
expenses.
FINANCIAL STATEMENTS
The Funds' Annual Reports for the fiscal year ended July 31, 1993, accompany
this Statement of Additional Information and are incorporated herein by
reference in their entirety. In addition, the Report of Independent Accountants
dated September 10, 1993 on the Financial Highlights tables appearing in the
Prospectus is also incorporated by reference into this Statement of Additional
Information in its entirety.
APPENDIX
Description of Ratings
<PAGE>
DESCRIPTION OF S&P CORPORATE BOND RATINGS
AAA
Bonds rated AAA have the highest rating assigned by S&P to a debt obligation.
Capacity to pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay principal
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 interest 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 speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB represents a lower degree of speculation than B and
CCC 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.
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 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 standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds 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 future.
BAA
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain
<PAGE>
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 interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B
Bonds which are rated B generally lack characteristics of desirable investments.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA
Bonds that are rated Caa are of poor standing. These issues may be in default or
present elements of danger may exist with respect to principal or interest.
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 security
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. Quality of
management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to remain,
substantial. Stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the nature of the
revenues. Basic security provisions (including rate covenant, earnings test for
issuance of additional bonds, debt service reserve requirements) are rigorous.
There is evidence of superior management.
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 expenditures, or in
quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at some
future date.
<PAGE>
Revenue Bonds -- Debt service coverage is good, but not exceptional. Stability
of the pledged revenues could show some variations because of increased
competition or economic influences on revenues. Basic security provisions, while
satisfactory, are less stringent. Management performance appears adequate.
BBB
Medium Grade -- Of the investment grade ratings, this is the lowest. Bonds in
this group are regarded as having an adequate capacity to pay interest 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.
General Obligation Bonds -- Under certain adverse conditions, several of the
above factors could contribute to a lesser capacity for payment of debt service.
The difference between A and BBB ratings is that the latter shows more than one
fundamental weakness, or one very substantial fundamental weakness, whereas the
former shows only one deficiency among the factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged revenues
could show substantial variations, with the revenue flow possibly being subject
to erosion over time. Basic security provisions are no more than adequate.
Management performance could be stronger.
BB, B, CCC AND CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB includes the lowest degree of
speculation and CC the highest degree of speculation. While such bonds will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
C
The rating C is reserved for income bonds on which no interest is being paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus sign,
which is used to show relative standing within the major rating categories,
except in the AAA-Prime Grade category.
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 determined to
possess overwhelming safety characteristics are given the designation 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 exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
<PAGE>
AA
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities, or fluctuation of protective elements
may be of greater amplitude, or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
BAA
Bonds which are rated Baa are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
BA
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position 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 default 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 security
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-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are the best
<PAGE>
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, 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 favorable
quality, with all security elements accounted for but lacking the undeniable
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 regarded 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 characteristics
(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 possesses above average
long-term fundamental operating and financing capabilities 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 borrowing; basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances; typically, the
issuer's industry is well established and the issuer has a strong position
within the industry; and the reliability and quality of management are
unquestioned.
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) economic 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 customer 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 highest 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 rating 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 satisfactory 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 outstanding and
safety is just below risk-free U.S. Treasury short-term obligations. Duff 1-
indicates high certainty of timely payment. Duff 2 indicates good certainty of
timely payment: liquidity factors and company fun-
<PAGE>
damentals are sound.
Various NRSROs utilize rankings within ratings categories indicated by a + or -.
The Funds, in accordance with industry practice, recognize such ratings 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 SHEARSON
INCOME FUNDS
Two World Trade Center
New York, New York 10048
Smith Barney Shearson
INCOME FUNDS
PREMIUM TOTAL RETURN FUND
CONVERTIBLE FUND
GLOBAL BOND FUND
HIGH INCOME FUND
DIVERSIFIED STRATEGIC INCOME FUND
TAX-EXEMPT INCOME FUND
UTILITIES FUND
MONEY MARKET FUND
STATEMENT OF
ADDITIONAL INFORMATION
DECEMBER 1, 1993
<PAGE>
ANNUAL REPORT OF
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
DATED JULY 31, 1993
<PAGE>
ANNUAL REPORT JULY 31, 1993
[GRAPHIC]
SMALL BOX ABOVE FUND NAME
SHOWING THE WORLD MAP STRETCHING
FROM THE UNITED STATES TO JAPAN.
SMITH BARNEY SHEARSON
GLOBAL
BOND
FUND
[LOGO]
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL
BOND
FUND
A PROFESSIONALLY
MANAGED FUND
DESIGNED FOR INVESTORS
WHO SEEK CURRENT INCOME
AND CAPITAL APPRECIATION
THROUGH INVESTMENT
PRIMARILY IN BONDS,
DEBENTURES AND NOTES OF
FOREIGN AND DOMESTIC
ISSUERS IN THE U.S. DOLLAR
AND FOREIGN CURRENCY
BOND AND MONEY MARKETS.
<PAGE>
HISTORICAL PERFORMANCE (UNAUDITED)
<TABLE>
<CAPTION>
YEAR NET ASSET VALUE CAPITAL GAINS DIVIDENDS TOTAL
ENDED CLASS A CLASS B CLASS D DISTRIBUTED+ PAID+ RETURN**
DECEMBER 31, BEGIN END BEGIN END BEGIN END CLASS A CLASS B CLASS D CLASS A CLASS B CLASS D CLASS A CLASS B CLASS D
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
10/27/86* -
12/31/86 -- -- $ 15.00 $ 15.52 -- -- -- -- -- -- -- -- -- 3.47% --
- ------------------------------------------------------------------------------------------
1987 -- -- 15.52 17.48 -- -- -- $ 0.29 -- -- $ 0.79 -- -- 20.22 --
- ------------------------------------------------------------------------------------------
1988 -- -- 17.48 16.37 -- -- -- 0.41 -- -- 0.95 -- -- 1.49 --
- ------------------------------------------------------------------------------------------
1989 -- -- 16.37 16.11 -- -- -- -- -- -- 1.31 -- -- 6.64 --
- ------------------------------------------------------------------------------------------
1990 -- -- 16.11 15.17 -- -- -- -- -- -- 2.38 -- -- 9.09 --
- ------------------------------------------------------------------------------------------
1991 -- -- 15.17 16.40 -- -- -- 0.26 -- -- 0.83 -- -- 15.85 --
- ------------------------------------------------------------------------------------------
1992* $ 16.32 $ 15.87 16.40 15.87 -- -- -- -- -- $ 0.44 1.08 -- (0.06)% 3.45 --
- ------------------------------------------------------------------------------------------
1/1/93 -
7/31/93* 15.87 16.53 15.87 16.53 $ 15.98 $ 16.53 -- -- -- 0.56 0.51 $ 0.44 7.76 7.44 6.19%
- ------------------------------------------------------------------------------------------
TOTAL $0.00 $0.96 $0.00 $1.00 $7.85 $0.44
- ------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN - CLASS A SHARES (11/6/92 THROUGH 7/31/93) 7.70%
- ------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN - CLASS B SHARES (10/27/86 THROUGH 7/31/93) 89.10%
- ------------------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN - CLASS D SHARES (2/4/93 THROUGH 7/31/93) 6.19%
- ------------------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on October 27, 1986 and on November 6, 1992 its existing shares were designated Class B shares. On
November 6, 1992 and February 4, 1993, the Fund commenced selling Class A and Class D shares, respectively.
**Figures assume reinvestment of all dividends and capital gains distributions at net asset value and do not
reflect deduction of the applicable sales charges.
+The above distributions may differ from those cited in the Financial Highlights contained elsewhere in this report. These
differences result from accounting rules requiring the redesignation of distributions to the tax characterization of such
distributions.
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN*** -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
WITHOUT CONTINGENT WITH CONTINGENT
DEFERRED SALES CHARGE DEFERRED SALES CHARGE
<S> <C> <C>
--------------------------------------------------------------------------------------
Year Ended 7/31/93 8.67% 4.17%
--------------------------------------------------------------------------------------
Five Years Ended 7/31/93 9.12 8.98
--------------------------------------------------------------------------------------
Inception (10/27/86) through 7/31/93 9.88 9.88
--------------------------------------------------------------------------------------
<FN>
***The Fund's average annual total returns for Class B shares since inception (October
27, 1986) and for the five-and one-year periods ended June 30, 1993 were 9.94%,
8.89%, and 5.60%, respectively. All average annual total return figures shown
reflect the reinvestment of dividends and capital gains at net asset value. Average
annual total return figures shown assume the deduction of the maximum 4.5%
contingent deferred sales charge (CDSC).
NOTE: All figures cited here and on the following pages represent past performance and
do not guarantee future results. Investment return and principal value of an investment
will fluctuate so that an investor's shares upon redemption may be worth more or less
than original cost.
</TABLE>
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Income Funds - Global
Bond Fund Class B shares on October 27, 1986 through July 30, 1993 as compared
with the growth of a $10,000 investment in the Salomon Brothers World Government
Bond Index. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF
$10,000
INVESTMENT IN
GROWTH OF $10,000 THE
INVESTED IN CLASS B SALOMON BROTHERS
SHARES WORLD GOVERNMENT
MONTH ENDED OF THE FUND BOND INDEX
<S> <C> <C>
10/27/86 $ 10,000 -
10/86 10,000 $ 10,000
11/86 10,067 10,184
12/86 10,347 10,368
03/87 11,307 11,097
06/87 11,118 11,025
09/87 10,916 10,660
12/87 12,438 12,278
03/88 12,446 12,538
06/88 12,221 12,090
09/88 12,377 12,188
12/88 12,624 12,814
03/89 12,462 12,460
06/89 12,666 12,607
09/89 12,931 12,980
12/89 13,462 13,369
03/90 13,152 12,861
06/90 13,680 13,489
09/90 14,119 13,957
12/90 14,685 14,967
03/91 14,830 14,789
06/91 14,908 14,839
09/91 15,732 16,055
12/91 17,013 17,334
03/92 16,187 16,750
06/92 17,101 17,876
09/92 17,940 18,993
12/92 17,600 18,291
03/93 18,277 19,268
06/93 18,827 19,830
07/93 18,910 19,886
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class B shares at inception
on October 27, 1986, assuming reinvestment of dividends and capital gains at
net asset value through July 31, 1993. As a performance benchmark, the Fund
may be compared to the Salomon Brothers World Government Bond Index, which is
a weighted index of the world's major bond markets. The performance of the
Fund's other classes will be greater or less than the line shown based on the
differences in loads and fees paid by shareholders investing in the different
classes.
This period was one in which bond prices fluctuated and the results should not
be considered as a representation of the dividend income or capital gain or
loss which may be realized from an investment in the Fund today. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
NOTE: Class B shares are subject to a maximum 4.5% CDSC. Class A shares are
subject to a maximum 4.5% front-end sales charge. The Fund's cumulative total
returns for Class A shares without the deduction of the front-end sales charge
from inception (November 6, 1992) through June 30, 1993 and July 31, 1993 were
7.18% and 7.70%, respectively. Assuming the deduction of the maximum 4.5%
front-end sales charge these figures were 2.36% and 2.85%, respectively. On
January 29, 1993 the Fund began offering Class D shares for purchase by
participants in the Smith Barney Shearson 401(k) program and these shares were
purchased by the public on February 4, 1993. Class D shares are sold at net
asset value per share and are not subject to an initial sales charge or CDSC.
The Fund's cumulative total return for Class D shares from commencement of
operations (February 4, 1993) through June 30, 1993 and July 31, 1993 were
5.73% and 6.19%, respectively. Please consult the Notes to Financial
Statements for complete information on fees and expenses.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS REPORT.
<PAGE>
DEAR SHAREHOLDER:
THE INVESTMENT OBJECTIVE
The Smith Barney Shearson Global Bond Fund seeks current income and capital
appreciation by investing in the major government bond markets throughout the
world to capitalize on currency and interest rate opportunities. It is a
portfolio of the highest quality, since at least 85% of the portfolio must be
invested in securities rated no lower than Aa or AA. Currently, 75% is being
invested in AAA-rated government and supranational debt.
THE PERFORMANCE
The Fund's Class B aggregate total return without the effect of the sales
load for for the twelve months ended July 31, 1993 was 8.67% versus 8.70% in the
Salomon Brothers World Government Bond Index (a weighted index of the world's
major bond markets). The Fund's Class A aggregate total return without the
effect of the sales load for the period from November 6, 1992 through July 31,
1993 was 7.70%. During the twelve month period, the Fund's Class B shares paid
dividends of $1.15 per share, made up of monthly dividends of $0.0725 per share
and an annual dividend from currency appreciation of $0.28 per share. The Class
A shares paid dividends of $1.00 per share for the period from November 6, 1992
through July 31, 1993, made up of monthly dividends of $0.0795 per share and an
annual dividend from currency appreciation of $0.28 per share. The Class D
shares paid dividends of $0.44 per share for the period from February 4, 1993
through July 31, 1993, made up of monthly dividends of $0.0725 per share.
Since the Global Bond Fund is a total return fund, and not an income fund,
there is no requirement to meet a stated level of income for distribution each
month. However, from the portfolio of global bonds selected by the investment
manager the fund provides for a monthly dividend from income as well as an
annual payment at the year end of currency appreciation and capital gains. With
global interest rates in decline, we would anticipate during the next twelve
months a marginal decrease in the level of the monthly dividends paid. This
results from the reduced coupon income available from bonds in general. The
corollary to this is that, as interest rates decline further, there is the
potential for capital gain, as well as the potential for currency gains in
periods of a weak U.S. dollar.
PERFORMANCE DISCUSSION AND ANALYSIS
To capitalize on currency and interest rate opportunities around the globe,
it is necessary to employ an active, disciplined approach to managing
CONTINUED
1
<PAGE>
the assets, whereby the decisions on the currency and the bond exposure are two
separate investment decisions. For example, it is sometimes more optimal to own
a bond for its interest rate exposure and to hedge the currency exposure of that
bond into a more favored currency.
In analyzing the contribution to return from the components of currency and
capital, the portfolio performance benefitted throughout most of the year from
an overweighting in European bonds relative to the weighting of European bonds
in the Salomon Brothers World Government Bond Index, as interest rates in Europe
sharply declined. Performance and was marginally impacted by an overweighted
position in the U.S. dollar during the first quarter of 1993. This overweighted
position to the U.S. dollar, to which we were biased for most of the year, was
to benefit the portfolio in both the fourth quarter of 1992 and the second
quarter of 1993.
THE INVESTMENT ENVIRONMENT
Sluggish world economic growth, rising unemployment and declining inflation
have provided the backdrop for attractive returns in local currency terms from a
large number of global bond markets over the past year. The performance of most
international bonds firmly outstripped that of U.S. bonds as recessionary
conditions shifted away from the United States, Canada and Australia towards
Europe and Japan. Long-term interest rates declined steadily and yield curves
sharply inverted in anticipation of a relaxation in monetary policies to
stimulate global economic activity. During the course of 1993, investors in
Europe and Japan have witnessed the beginnings of a series of interest rate cuts
by the central banks. The best performing bond markets in local currency terms
proved to be the Italian and the Spanish markets which returned 26.45% and
23.64%, respectively, both markets benefitting from a sharp reduction in
interest rates over the period. In contrast, the U.S. and Canadian bond markets
returned 10.91%, and 9.96%, respectively, with both economies beginning to show
signs of recovery.
U.S. dollar strength, particularly against the European currencies, however,
provided a respectable return from U.S. bonds when compared to the universe of
global bonds. U.S. bonds returned 10.91% while the Salomon Brothers World
Government Bond Index returned 8.70%. Analyzing the individual market returns,
Japanese bonds performed best at 32.40%, as the sizeable and still growing trade
surplus with the United States propelled the yen to record highs against the
dollar. The peripheral European markets of Spain and Sweden performed worst at
- -19.92% and
CONTINUED
2
<PAGE>
- -21.11%, given their respective currency devaluations following the prolonged
turmoil in the Exchange Rate Mechanism (ERM). This turmoil had resulted from the
Danish rejection of the Maastricht Treaty in June 1992 and the subsequent
uncertainty over the future of European Monetary Union. During the course of the
past year, Italy and the UK were forced to leave the ERM and devalue their
currencies against the Deutsche-
mark, while the currencies of Portugal, Ireland, Finland, Denmark and Sweden
also met with significant devaluations.
PORTFOLIO ACTIVITY
During the course of the fiscal year, given the heightened volatility in both
global currencies and global interest rates, the portfolio has been broadly
diversified across a large range of markets to insulate it from the risks of any
one market, while capitalizing on the global opportunities. For most of the
fiscal year, we have maintained a range of 30-40% in U.S. and Canadian bonds
where sluggish economic conditions have favored further cuts in interest rates.
More recently, however, as these economies have shown signs of recovery, and
thus a bias towards a tightening of monetary policy longer term, we have reduced
the weighting in U.S. bonds to around 20%. The balance of the portfolio has been
invested in a broad range of European markets, where the real returns have been
most favorable, and in Japan. Cash has been kept to a minimum and the average
life of the portfolio has ranged between 7 and 8 years, thus ensuring that a
substantial portion of the portfolio has been participating in capital growth as
interest rates steadily declined.
During the latter part of 1992 and into the first quarter of 1993, despite
the large interest rate differential with Europe, we favored an overweighted
exposure to the U.S. dollar which was underpinned by improving economic
fundamentals and the currency turbulence in Europe. This policy translated into
a majority of the European bond exposure being hedged into U.S. dollars to
protect the base currency of the portfolio. More recently, with the lackluster
performance of the U.S. economy, where modest growth at best can be expected
through the rest of 1993, we have maintained an exposure to the U.S. dollar of
around 50%.
INVESTMENT STRATEGY
However modest the U.S. recovery may appear, the bias towards U.S. short-term
interest rates rising while European short-term interest rates decline to stoke
recovery remains firmly in place. We therefore expect the U.S. dollar to trend
higher as the interest rate gap between the United States
CONTINUED
3
<PAGE>
and Europe narrows. The progress made in the U.S. towards recovery at a time
when Europe and Japan are firmly in recession has already been reflected to some
extent in the rise of the dollar. However, the trends in place are likely to
persist and the portfolio is gradually being positioned for further dollar
strength. We also believe that the yen, supported by the sizeable trade surplus,
will broadly strengthen in line with the U.S. dollar against European
currencies. Within Europe, there remains the possibility of a further currency
turbulence, particularly in the light of the most recent suspension of the ERM.
Economic growth prospects amongst the major economies for the balance of 1993
remain on a divergent path. In the United States, bond yields are nearing their
cyclical lows. The yield curve may flatten further on benign inflation data but
additional official interest rate cuts will only materialize if the economy
assumes a much slower growth path than at present.
In Japan and Europe, however, the path in the direction of interest rates is
most certainly downwards. In Japan, we anticipate further cuts in the discount
rate, given the fragility of the economy, and an inflation rate of zero will
ensure that rates remain low over the course of the next year. In Europe, all of
the European bond markets are expected to rally further as economies continue to
soften in a most protracted recession. Rising unemployment is increasing budget
deficits as tax revenues decline and social spending rises. This in turn is
increasing the risk of social unrest. We expect the peripheral European markets,
such as Spain, Italy, Sweden and Finland, to continue to outperform Germany, as
interest rates, now free from the confines of the ERM, are more willingly cut to
encourage a recovery. In the case of Germany, the Bundesbank is expected to
continue to place more emphasis on inflation than growth.
With little let-up in the worldwide recession, save for the modest recovery
in the dollar bloc bond markets of Australia, New Zealand, the United States and
Canada, and the United Kingdom, we continue to expect attractive rates of return
from global bonds well into 1994. This recession is proving particularly
far-reaching, deep and lengthy. While the extent to which short-term interest
rates will eventually decline will ensure the sighting of green shoots of
recovery sometime in the next year, the global recovery is expected to be modest
at best with little inflationary pressures. Accordingly, we will maintain our
policy of broadly diversifying the portfolio across a wide range of markets,
with the emphasis towards European bond markets, and fully investing the
portfolio to take advantage of the attractive opportunities in global bond
markets.
CONTINUED
4
<PAGE>
ADMINISTRATIVE UPDATE
As many of you are aware, our fund family became known as the Smith Barney
Shearson Group of Funds. This name change has occurred in connection with the
completion of the merger between Smith Barney Inc., a subsidiary of Primerica
Corporation and substantially all of the domestic retail and brokerage asset
management businesses of Shearson Lehman Brothers Inc., an American Express
subsidiary. You can see your fund listed under its new name Smith Barney
Shearson Global Bond Fund of Smith Barney Shearson Income Funds under the
heading Smith Barney Shearson in daily newspapers.
Last month, Robert B. Clark retired as a Trustee of the Fund. Bob, who had
formerly been the Chief Executive Officer of Hoffman-La Roche, Inc., served on
the Board of Trustees with distinction since August 1985, and we will miss his
sound judgement.
We would also like to welcome Lee Abraham and Antoinette C. Bentley, who were
recently elected to the Board of Trustees of the Fund. Lee recently retired as
the Chairman and Chief Executive Officer of Associated Merchandising
Corporation, the world's largest retail merchandising and sourcing organization
which serves many of the most prestigious department and specialty stores and
mass merchants around the globe. Lee also served on the Board of Directors of
Liz Claiborne and has been recognized as a leader in charitable activities.
Ann is an attorney who recently retired as the Senior Vice President and
Associate General Counsel of Crum and Forster, Inc., a property and casualty
insurance holding company, with over $11 billion in assets, wholly-owned by
Xerox Corporation. Ann has served on the Board of Directors of several insurance
companies and a bank and has been active in a number of New Jersey-based
community activities.
We very much appreciate your continued interest in the Fund.
Sincerely,
Heath B. McLendon Pauline A.M. Barrett
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
INVESTMENT OFFICER
September 27, 1993
5
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS July 31, 1993 (unaudited)
COUNTRY BREAKDOWN
Pie chart depicting the allocation of the Income Funds - Global Bond Fund's
investment securities held at July 31, 1993 by country classificatin. The pie is
broken in pieces representing countries in the following percentages:
<TABLE>
<CAPTION>
COUNTRY PERCENTAGE
<S> <C>
Japanese Yen Bonds 14.2%
Finnish Marrka Bonds 3.8
German Deutschemark Bonds 4.3
Great Britain Pound Sterling Bonds 4.5
Spanish Peseta Bonds 6.2
French Franc Bonds 13.3
Repurchase Agreement, Put Options Purchased and Net
Other Assets 11.2
Other Bonds 12.5
Italian Lira Bonds 10.0
United States Dollar Bonds 20.0
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Bond Net Assets
<S> <C> <C>
- -------------------------------------------------------------------------------------
UNITED STATES TREASURY NOTES 12.1%
INTELSAT 4.6
KINGDOM OF SPAIN 4.1
CREDIT LOCAL DE FRANCE 4.1
REPUBLIC OF FINLAND 3.8
REPUBLIC OF ITALY 3.8
OEST KONTROLBANK 3.8
KINGDOM OF DENMARK 3.8
NORDISKA INVESTERIN 3.8
GOVERNMENT OF FRANCE 3.6
</TABLE>
6
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------
PORTFOLIO OF INVESTMENTS July 31, 1993
<TABLE>
<S> <C> <C> <C> <C> <C>
KEY TO CURRENCY ABBREVIATIONS
CAD -- Canadian Dollar FRF -- French Franc
Great Britain Pound
DEM -- German Deutschemark GBP -- Sterling
DKR -- Danish Kroner ITL -- Italian Lira
European Currency
ECU -- Unit JPY -- Japanese Yen
ESP -- Spanish Peseta NLG -- Netherland Guilder
FIM -- Finnish Marrka SEK -- Swedish Krona
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
-------------------------------------------------------------------------------
UNITED STATES DOLLAR BONDS -- 20.0%
$ 2,000,000 British Telecom,
8.750% due 8/11/99 $ 2,277,600
3,000,000 Intelsat,
7.375% due 8/6/02 3,198,900
United States Treasury Notes:
2,000,000 6.375% due 1/15/00 2,100,938
6,200,000 5.500% due 4/15/00 6,215,500
-------------------------------------------------------------------------------
TOTAL UNITED STATES DOLLAR BONDS
(Cost $13,502,521) 13,792,938
-------------------------------------------------------------------------------
JAPANESE YEN BONDS -- 14.2%
JPY 200,000,000 Asian Development Bank,
5.000% due 2/5/03 1,948,596
210,000,000 Autobahn Schnell AG,
6.000% due 3/11/00 2,143,979
International Bank for Reconstruction &
Development:
175,000,000 6.750% due 3/15/00 1,868,277
125,000,000 4.500% due 3/20/03+ 1,188,482
250,000,000 Oest Kontrolbank,
6.500% due 9/19/98 2,607,092
-------------------------------------------------------------------------------
TOTAL JAPANESE YEN BONDS
(Cost $8,824,383) 9,756,426
-------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) July 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
-------------------------------------------------------------------------------
<C> <S> <C>
FRENCH FRANC BONDS -- 13.3%
FRF 10,000,000 Caisse National de Autoroute,
9.000% due 7/9/01 $ 1,902,603
15,000,000 Credit Local de France,
8.875% due 6/10/02 2,831,234
10,000,000 Deutsche Bank Finance N.V.,
9.250% due 5/9/01 1,902,317
Government of France:
6,500,000 8.500% due 11/25/02 1,231,234
7,500,000 6.750% due 10/25/03 1,259,446
-------------------------------------------------------------------------------
TOTAL FRENCH FRANC BONDS
(Cost $9,514,546) 9,126,834
-------------------------------------------------------------------------------
ITALIAN LIRA BONDS -- 10.0%
ITL 2,500,000,000 LKB Baden Wurtenburg,
10.750% due 4/14/03 1,631,778
4,000,000,000 Nordiska Investerin,
10.800% due 5/24/03 2,599,682
4,000,000,000 Republic of Italy,
12.000% due 1/1/98 2,619,527
-------------------------------------------------------------------------------
TOTAL ITALIAN LIRA BONDS
(Cost $7,136,088) 6,850,987
-------------------------------------------------------------------------------
SPANISH PESETA BONDS -- 6.2%
ESP 200,000,000 Eurofima,
11.350% due 7/22/97 1,440,000
382,000,000 Kingdom of Spain,
11.450% due 8/30/98 2,839,676
-------------------------------------------------------------------------------
TOTAL SPANISH PESETA BONDS
(Cost $4,635,066) 4,279,676
-------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) July 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
-------------------------------------------------------------------------------
<C> <S> <C>
GREAT BRITAIN POUND STERLING BONDS -- 4.5%
GBP 1,500,000 European Investment Bank,
8.000% due 6/10/03 $ 2,313,202
450,000 United Kingdom Treasury,
9.750% due 8/27/02 770,834
-------------------------------------------------------------------------------
TOTAL GREAT BRITAIN POUND STERLING BONDS
(Cost $3,085,029) 3,084,036
-------------------------------------------------------------------------------
GERMAN DEUTSCHEMARK BONDS -- 4.3%
DEM 1,500,000 Federal Republic of Germany,
8.250% due 9/20/01 951,379
2,250,000 Germany Unity Fund,
8.000% due 1/21/02 1,408,060
1,100,000 Government of Germany,
6.500% due 4/23/03 628,036
-------------------------------------------------------------------------------
TOTAL GERMAN DEUTSCHEMARK BONDS
(Cost $3,157,661) 2,987,475
-------------------------------------------------------------------------------
FINNISH MARRKA BONDS -- 3.8%
Republic of Finland:
FIM 9,000,000 11.000% due 1/15/99 1,727,614
5,000,000 9.500% due 3/15/04 902,264
-------------------------------------------------------------------------------
TOTAL FINNISH MARRKA BONDS
(Cost $2,643,882) 2,629,878
-------------------------------------------------------------------------------
DANISH KRONER BONDS -- 3.8%
Kingdom of Denmark:
DKR 5,000,000 9.000% due 11/15/98 812,849
4,200,000 9.000% due 11/15/00 687,761
7,000,000 8.000% due 5/15/03 1,101,246
-------------------------------------------------------------------------------
TOTAL DANISH KRONER BONDS
(Cost $2,643,083) 2,601,856
-------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) July 31, 1993
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
-------------------------------------------------------------------------------
<C> <S> <C>
NETHERLAND GUILDER BOND -- 3.2% (Cost $2,369,387)
NLG 3,750,000 Dutch Government,
9.000% due 5/15/00 $ 2,198,177
-------------------------------------------------------------------------------
EUROPEAN CURRENCY UNIT BOND -- 2.0% (Cost $1,513,348)
ECU 1,150,000 United Kingdom Bond,
9.125% due 2/21/01 1,380,420
-------------------------------------------------------------------------------
SWEDISH KRONA BOND -- 1.9% (Cost $1,325,932)
SEK 9,500,000 Government of Sweden,
10.250% due 5/5/03 1,316,813
-------------------------------------------------------------------------------
CANADIAN DOLLAR BOND -- 1.6% (Cost $1,076,937)
CAD 1,400,000 Government of Canada,
7.250% due 6/1/03 1,102,753
-------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 3.5% (Cost $2,420,000)
$ 2,420,000 Agreement with Morgan Stanley & Company,
3.000% dated 7/30/93, to be repurchased
at $2,420,605 on 8/2/93, collateralized
by $1,665,000 U.S. Treasury Bonds,
11.875% due 11/15/03 2,420,000
-------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION STRIKE
CONTRACTS DATE PRICE
<C> <S> <C> <C> <C>
------------------------------------------------------------------------------------
PUT OPTIONS PURCHASED -- 1.0%
720 United States Dollar Put 10/20/93 $ 105.00 185,400
1,580 German Deutschemark Put 10/20/93 1.73 470,840
------------------------------------------------------------------------------------
656,240
TOTAL PUT OPTIONS PURCHASED (COST $480,865)
------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $64,328,728*) 93.3% 64,184,509
OTHER ASSETS AND LIABILITIES (NET) 6.7 4,645,037
------------------------------------------------------------------------------------
NET ASSETS 100.0% $68,829,546
------------------------------------------------------------------------------------
<FN>
*Aggregate cost for Federal tax purposes.
+Security loaned at 7/31/93 has a market value of $1,188,482 (Note 7).
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS
JULY 31, 1993
<TABLE>
<CAPTION>
CONTRACT MARKET VALUE
VALUE DATE (NOTE 1)
<S> <C> <C>
----------------------------------------------------------------------------------
FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
4,220,810 German Deutschemarks 8/6/93 $ 2,424,982
1,495,159 Australian Dollars 8/19/93 1,027,597
19,276,159 German Deutschemarks 8/19/93 11,054,726
375,735,600 Japanese Yen 8/19/93 3,576,529
637,554 Great Britain Pounds Sterling 10/20/93 941,462
211,230,000 Japanese Yen 10/20/93 2,010,900
----------------------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
(Contract Amount $21,295,222) $ 21,036,196
----------------------------------------------------------------------------------
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
7,000,000 Belgian Francs 8/3/93 $ (191,697)
89,000,000 Belgian Francs 8/6/93 (2,435,823)
1,495,159 Australian Dollars 8/19/93 (1,027,597)
13,771,455 German Deutschemarks 8/19/93 (7,897,821)
341,291,648 Japanese Yen 8/19/93 (3,248,666)
15,819,432 Finnish Marrka 9/21/93 (2,642,557)
6,706,999,339 Italian Lire 9/21/93 (4,120,546)
3,223,500 Netherland Guilders 9/21/93 (1,635,636)
91,862,500 Belgian Francs 10/20/93 (2,484,925)
851,788 European Currency Units 10/20/93 (918,455)
25,930,185 French Francs 10/20/93 (4,287,015)
561,713,285 Spanish Pesetas 10/20/93 (3,806,474)
9,128,358 Swedish Krones 10/20/93 (1,096,539)
----------------------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(Contract Amount $36,954,856) $(35,793,751)
----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES July 31, 1993
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $64,328,728) (Note 1)
See accompanying schedule $ 64,184,509
Cash and foreign currency (Cost $390,060) 386,811
Receivable for forward foreign exchange contracts
to sell 36,954,856
Forward foreign exchange contracts to buy, at value
(Contract cost $21,295,222) (Note 1)
See accompanying schedule 21,036,196
Receivable for investment securities sold 5,043,044
Interest receivable 1,672,225
Receivable for Fund shares sold 701,954
- ----------------------------------------------------------------------------------
TOTAL ASSETS 129,979,595
- ----------------------------------------------------------------------------------
LIABILITIES:
Forward foreign exchange contracts to sell, at
value
(Contract cost $36,954,856) (Note 1)
See accompanying schedule $35,793,751
Payable for forward foreign exchange contracts to
buy 21,295,222
Payable for investment securities purchased 2,340,931
Collateral for securities loaned (Note 7) 1,237,500
Dividends payable 298,831
Investment advisory fee payable (Note 2) 34,278
Distribution fee payable (Note 3) 27,597
Custodian fees payable (Note 2) 16,000
Service fees payable (Note 3) 14,290
Administration fee payable (Note 2) 11,426
Transfer agent fees payable (Notes 2 and 4) 7,202
Accrued Trustees' fees and expenses (Note 2) 1,987
Accrued expenses and other payables (Note 4) 71,034
- ----------------------------------------------------------------------------------
TOTAL LIABILITIES 61,150,049
- ----------------------------------------------------------------------------------
NET ASSETS $ 68,829,546
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
- ---------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
JULY 31, 1993
<TABLE>
<S> <C> <C>
NET ASSETS consist of (Note 1):
Undistributed net investment income $ 313,723
Accumulated net realized gain on securities sold,
forward foreign
exchange contracts and foreign currency
transactions 889,907
Net unrealized appreciation of securities, forward
foreign exchange
contracts, currencies and net other assets 706,544
Par value 4,165
Paid-in capital in excess of par value 66,915,207
- -------------------------------------------------------------------------------
TOTAL NET ASSETS $68,829,546
- -------------------------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($2,389,160 DIVIDED BY 144,552 shares of beneficial
interest outstanding) $16.53
- -------------------------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($16.53 DIVIDED BY .955)
(based on sales charge
of 4.5% of the offering price on July 31, 1993) $17.31
- -------------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($66,417,562 DIVIDED BY 4,019,102 shares of beneficial
interest outstanding) $16.53
- -------------------------------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE, offering price and redemption price per
share
($22,824 DIVIDED BY 1,381 shares of beneficial interest
outstanding) $16.53
- -------------------------------------------------------------------------------
<FN>
+Redemption price per share is equal to Net Asset Value less any applicable
contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1993
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of $28,384) $ 4,199,589
- -------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) $356,324
Distribution fee (Note 3) 330,244
Sub-investment advisory and administration fee (Note 2) 118,434
Service fees (Note 3) 111,082
Custodian fees (Note 2) 88,610
Legal and audit fees 81,672
Transfer agent fees (Notes 2 and 4) 79,117
Shareholder reports expense (Note 4) 65,988
Trustees' fees and expenses (Note 2) 10,668
Other (Note 4) 73,264
- -------------------------------------------------------------------------------------
TOTAL EXPENSES 1,315,403
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,884,186
- -------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities transactions 1,667,616
Forward foreign exchange contracts 1,334,049
Foreign currency transactions (42,590)
- -------------------------------------------------------------------------------------
Net realized gain on investments during the year 2,959,075
- -------------------------------------------------------------------------------------
Net change in unrealized appreciation/(depreciation) of:
Securities (1,951,900)
Forward foreign exchange contracts 1,141,680
Foreign currencies and net other assets (85,649)
- -------------------------------------------------------------------------------------
Net unrealized depreciation of investments during the
year (895,869)
- -------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 2,063,206
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,947,392
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
7/31/93 7/31/92
<S> <C> <C>
Net investment income $ 2,884,186 $ 2,951,999
Net realized gain on investments, forward foreign exchange
contracts
and foreign currency transactions during the year 2,959,075 1,958,367
Net unrealized appreciation/(depreciation) on securities, forward
foreign exchange contracts, foreign currencies and net other
assets
during the year (895,869) 2,586,269
- -------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 4,947,392 7,496,635
Distributions to shareholders (Note 1):
Distributions from net investment income:
Class A (55,127) --
Class B (3,602,906) (2,951,999)
Class D (438) --
Distributions in excess of net investment income:
Class A (7,615) --
Class B (497,707) --
Class D (61) --
Distributions to Class B shareholders from net realized
gain on investments -- (820,804)
Distributions to Class B shareholders from capital
(book basis) -- (294,292)
Net increase/(decrease) in net assets from share
transactions (Note 6):
Class A 2,341,075 --
Class B 14,054,689 (753,083)
Class D 22,824 --
- -------------------------------------------------------------------------------------
Net increase in net assets 17,202,126 2,676,457
NET ASSETS:
Beginning of year 51,627,420 48,950,963
- -------------------------------------------------------------------------------------
End of year (including undistributed net investment income
of $313,723 at July 31, 1993) $68,829,546 $51,627,420
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
7/31/93*++
<S> <C>
Net Asset Value, beginning of period $ 16.32
- ------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.61
Net realized and unrealized gain on investments 0.60
- ------------------------------------------------------------------------------
Total from investment operations 1.21
Distributions to shareholders:
Distributions from net investment income (0.88)
Distributions in excess of net investment income (0.12)
- ------------------------------------------------------------------------------
Total distributions (1.00)
- ------------------------------------------------------------------------------
Net Asset Value, end of period $ 16.53
- ------------------------------------------------------------------------------
Total return+ 7.70%
- ------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 2,389
Ratio of operating expenses to average net assets 1.71%**
Ratio of net investment income to average net assets 5.37%**
Portfolio turnover rate 216%
- ------------------------------------------------------------------------------
<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 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>
See Notes to Financial Statements.
16
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT THE YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
7/31/93+++ 7/31/92 7/31/91 7/31/90 7/31/89 7/31/88 7/31/87*
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning
of year $ 16.32 $ 15.24 $ 16.79 $ 16.60 $ 16.70 $ 16.35 $ 15.00
- -------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.79 0.94 1.12 1.04 1.05 0.94 0.24#
Net realized and unrealized
gain/(loss) on investments 0.57 1.43 (0.17) 0.29 0.02 0.73 1.35
- -------------------------------------------------------------------------------------------------
Total from investment
operations 1.36 2.37 0.95 1.33 1.07 1.67 1.59
Distributions to
shareholders:
Distributions from net
investment income (1.01) (0.94) (1.39) (1.14) (0.94) (0.85) (0.24)
Distributions in excess of
net investment income (0.14) -- -- -- -- -- --
Distributions from net
realized capital gains -- (0.26) -- -- (0.23) (0.47) --
Distributions from capital -- (0.09) (1.11) -- -- -- --
- -------------------------------------------------------------------------------------------------
Total distributions (1.15) (1.29) (2.50) (1.14) (1.17) (1.32) (0.24)
- -------------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 16.53 $ 16.32 $ 15.24 $ 16.79 $ 16.60 $ 16.70 $ 16.35
- -------------------------------------------------------------------------------------------------
Total return+ 8.67% 16.11% 6.02% 8.43% 6.66% 10.53% 10.57%
- -------------------------------------------------------------------------------------------------
Ratios to average net
assets/supplemental data:
Net assets, end of year
(in 000's) $ 66,418 $ 51,627 $ 48,951 $ 61,732 $ 101,273 $ 154,362 $ 162,757
Ratio of operating expenses
to average net assets 2.22% 2.02% 1.99% 2.04% 1.96% 2.00% 1.84%**++
Ratio of net investment
income to average net
assets 4.85% 5.87% 6.65% 5.95% 5.82% 5.55% 4.61%**
Portfolio turnover rate 216% 230% 397% 309% 374% 241% 112%
- -------------------------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on October 27, 1986. Those shares in existence prior to November 6, 1992 were designated
as Class B shares.
**Annualized.
+Total return represents aggregate total return for the period indicated and does not reflect any applicable sales
charges.
++Annualized expense ratio before waiver of fees by investment adviser, sub-investment adviser and administrator and
distributor was 2.00%.
+++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.
#Net investment income before waiver of fees by investment adviser, sub-investment adviser and administrator and
distributor was $0.23.
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
7/31/93*++
<S> <C>
Net Asset Value, beginning of period $ 15.98
- ---------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.38
Net realized and unrealized gain on investments 0.61
- ---------------------------------------------------------------------------------
Total from investment operations 0.99
Distributions to shareholders:
Distributions from net investment income (0.39)
Distributions in excess of net investment income (0.05)
- ---------------------------------------------------------------------------------
Total distributions (0.44)
- ---------------------------------------------------------------------------------
Net Asset Value, end of period $ 16.53
- ---------------------------------------------------------------------------------
Total return+ 6.19%
- ---------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 23
Ratio of operating expenses to average net assets 2.18%**
Ratio of net investment income to average net assets 4.89%**
Portfolio turnover rate 216%
- ---------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class D shares on February 4, 1993.
**Annualized.
+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.
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Funds (the "Trust") was organized as a
"Massachusetts business trust" under the laws of the Commonwealth of
Massachusetts on March 12, 1985. The Trust is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended (the
"1940 Act"), as an open-end management investment company. In July 1993, the
Trust changed its name to Smith Barney Shearson Income Funds. As of the date of
this report, the Trust offered eight managed investment funds: Premium Total
Return Fund, Convertible Fund, Global Bond Fund (the "Fund"), High Income Fund,
Tax-Exempt Income Fund, Money Market Fund, Diversified Strategic Income Fund and
Utilities Fund. As of November 6, 1992, the Fund offered two classes of shares
to the general public: Class A shares and Class B shares. Class A shares are
sold with a front-end sales charge. Class B shares may be subject to a
contingent deferred sales charge. Class B shares will convert automatically to
Class A shares eight years after the date of original purchase. On January 29,
1993, the Fund began offering Class D shares to investors that are eligible to
participate in the Smith Barney Shearson 401(k) Program. Class D shares are
offered without a front-end sales load or contingent deferred sales charge. Each
class of shares has identical rights and privileges except with respect to the
effect of the respective sales charges, the distribution and/or service fees
borne by each class, expenses allocable exclusively to each class, voting rights
on matters affecting a single class, the exchange privilege of each class and
the conversion feature of Class B shares. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
PORTFOLIO VALUATION: Generally, the Fund's investments are valued at market
value or, in the absence of market value with respect to any portfolio
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 a domestic
or foreign exchange are 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 and securities listed or traded on certain foreign
exchanges whose operations are similar to the United States over-the-counter
market are valued on the basis of the bid price at the close of business each
day. Portfolio securities that are traded primarily on foreign exchanges
generally are valued at the preceding closing values of such 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 such value, then the fair
value of those securities will be
19
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
determined by consideration of other factors by or under the direction of the
Trust's Board of Trustees or its delegates. Debt securities are valued by The
Boston Company Advisors, Inc. ("Boston Advisors"), after consultation with an
independent pricing service (the "Pricing Service") approved by the Trust's
Board of Trustees. 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 Trust's Board of Trustees.
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.
REPURCHASE AGREEMENTS: The Fund engages in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation 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 collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is potential loss to the
Fund in the event the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a possible decline
in the value of the underlying securities during the period while the Fund seeks
to assert its rights. The Fund's investment adviser or administrator, acting
under the supervision of the Trust's Board of Trustees, reviews 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.
FOREIGN CURRENCY: The books and records of the Fund are maintained in U.S.
dollars. Foreign currencies, investments and other assets and liabilities are
translated into U.S. dollars at the exchange rates prevailing at the end of the
period, and purchases and sales of investment securities, income and expenses
are translated on the respective dates of such transactions. Unrealized gains
and losses which result from changes in foreign currency exchange rates have
been included in the unrealized appreciation/(depreciation) of currencies and
net other
20
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
assets. Net realized foreign currency gains and losses resulting from changes in
exchange rates include foreign currency gains and losses between trade date and
settlement date on investment securities transactions, foreign currency
transactions and the difference between the amounts of interest and dividends
recorded on the books of the Fund and the amount actually received. The portion
of foreign currency gains and losses related to fluctuation in the exchange
rates between the initial purchase trade date and subsequent sale trade date is
included in realized gains and losses on investment securities sold.
FORWARD FOREIGN CURRENCY CONTRACTS: Forward foreign currency contracts are
valued at the forward rate and are marked-to-market daily. The change in market
value is recorded by the Fund as an unrealized gain or loss. When the contract
is closed, the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time that it was opened and the value
at the time that it was closed.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Fund's investment securities, but
it does establish a rate of exchange that can be achieved in the future.
Although forward foreign currency contracts limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any potential gain
that might result should the value of the currency increase. In addition, the
Fund could be exposed to risks if the counterparties to the contracts are unable
to meet the terms of their contracts.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities sold
are recorded on the identified cost basis. Dividend income and distributions to
shareholders are recorded on the ex-dividend date. Interest income is recorded
on the accrual basis. Investment income and realized gains and losses are
allocated based upon relative net assets of each class.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are determined on a class level and will be declared monthly and
paid on the last day of the Smith Barney Shearson Inc. ("Smith Barney Shearson")
statement month. Distributions, if any, of net short-and long-term capital gains
earned by the Fund will be made annually after the close of the fiscal year in
which they are earned. Additional distributions of net investment income and
capital gains from the Fund may be made at the discretion of the Trust's Board
of Trustees in order to avoid the application of a 4% nondeductible excise tax
on certain undistributed amounts of ordinary income
21
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
and capital gains. Income distributions and capital gain distributions on a Fund
level are determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are primarily
due to differing treatments of income and gains on various investment securities
held by the Fund and timing differences.
Permanent differences incurred during the year ended July 31, 1993 resulting
from different book and tax accounting for certain investments have been
reclassified to paid-in-capital at year end.
FEDERAL INCOME TAXES: The Trust intends that the Fund qualify as a regulated
investment company, if such qualification is in the best interest of its
shareholders, by complying with the requirements of the Internal Revenue Code of
1986, as amended, applicable to regulated investment companies and by
distributing substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
RECLASSIFICATIONS: During the current period, the Fund adopted Statement of
Position 93-2 "Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies." Accordingly, certain reclassifications have been made to the
components of capital in the Statement of Net Assets to conform with the
accounting and reporting guidelines of this statement. Distributions in excess
of book basis accumulated realized gains or undistributed net investment income
that were the result of permanent book and tax accounting differences have been
reclassified to paid-in capital. In addition, amounts distributed in excess of
accumulated net investment income as determined for financial statement purposes
but as distributions from net investment income or realized gains for tax
purposes, previously having been reported as distributions from paid-in capital
have been reclassified to reflect the tax characterization. Accordingly, amounts
as of July 31, 1992 have been restated to reflect an increase in paid-in capital
of $2,018,904, a decrease in accumulated net realized gains of $2,793,189 and an
increase in undistributed net investment income of $774,285. The Statement of
Changes in Net Assets and Financial Highlights for the prior periods have not
been restated to reflect this change in presentation. Net investment income, net
realized gains, and net assets basis were not affected by this change.
22
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Lehman Brothers Global Asset Management Limited ("Global Asset
Management") a wholly owned subsidiary of Lehman Brothers Inc. Under the
Advisory Agreement, the Fund pays a monthly fee at the annual rate of 0.60% of
the value of its average daily net assets.
The Fund has also entered into an administration agreement (the
"Administration Agreement") with Boston Advisors, an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under the Administration
Agreement, the Fund pays Boston Advisors a monthly fee at the annual rate of
0.20% of the value of its average daily net assets. Prior to the close of
business on May 21, 1993, Boston Advisors served as sub-investment adviser and
administrator to the Fund and received fees equivalent to the current rate for
its services.
For the year ended July 31, 1993, Smith Barney Shearson received $12,570
from investors representing commissions (sales charges) on sales of Class A
shares.
A contingent deferred sales charge ("CDSC") is generally payable by a
shareholder in connection with the redemption of Class B shares within five
years (eight years in the case of certain 401(k) Plans) after the date of
purchase. In circumstances in which the CDSC is imposed, the amount of the
charge ranges between 4.5% and 1% of net asset value depending on the number of
years since the date of purchase (except in the case of purchases by certain
401(k) plans in which case a 3% CDSC is imposed for the eight year period after
the date of purchase). For the year ended July 31, 1993, Smith Barney Shearson
received from shareholders $48,463 in CDSC fees on the redemption of Class B
shares.
No officer, director or employee of Smith Barney Shearson, Global Asset
Management, Boston Advisors or of any parent or subsidiary of those corporations
receives any compensation from the Trust for serving as Trustee or officer of
the Trust. The Trust pays each Trustee who is not an officer, director or
employee of Smith Barney Shearson, Global Asset Management, Boston
23
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Advisors or any of their affiliates $6,000 per annum plus $1,500 per meeting
attended and reimburses each such Trustee for travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, serves as the Trust's custodian. The Shareholder Services Group,
Inc., a subsidiary of First Data Corporation, serves as the Trust's transfer
agent.
3. DISTRIBUTION AGREEMENT
As of the close of business on July 30, 1993, Primerica Corporation
("Primerica") and Smith Barney, Harris Upham & Co. Incorporated completed the
acquisition of substantially all of the domestic retail brokerage and asset
management businesses of Shearson Lehman Brothers Inc. ("Shearson Lehman
Brothers") and Smith Barney, Harris Upham & Co. Incorporated was renamed Smith
Barney Shearson Inc. Smith Barney Shearson is a wholly owned subsidiary of Smith
Barney Shearson Holdings Inc., which is in turn a wholly owned subsidiary of
Primerica. As a result of the acquisition, Smith Barney Shearson succeeded
Shearson Lehman Brothers as the Fund's distributor. Smith Barney Shearson acts
as distributor of the Fund's shares pursuant to a distribution agreement with
the Trust and sells shares of the Fund through Smith Barney Shearson or its
affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a Services
and Distribution Plan (the "Plan"). Effective November 6, 1992, under this Plan,
the Fund compensates Smith Barney Shearson for servicing shareholder accounts
for Class A, Class B and Class D shareholders and covers expenses incurred in
distributing Class B and Class D shares. Smith Barney Shearson is paid an annual
service fee with respect to Class A, Class B and Class D shares of the Fund at
the rate of 0.25% of the value of the average daily net assets of each
respective class of shares. Smith Barney Shearson is also paid an annual
distribution fee with respect to Class B and Class D shares at the rate of 0.50%
of the value of the average daily net assets attributable to those shares. Prior
to November 6, 1992, the Fund paid distribution fees at an annual rate of 0.75%
of the value of the average daily net assets of Class B shares. For the period
from November 6, 1992 through July 31, 1993, the Fund incurred service fees of
$2,302, $108,768 and $12 for Class A, Class B and Class D shares, respectively.
For the year ended July 31, 1993, the Fund incurred distribution
24
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
fees of $330,220 and $24 for Class B shares and Class D shares, respectively.
Prior to July 31, 1993, Shearson Lehman Brothers as distributor received fees
equivalent to the current rate for its services.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class. Operating expenses directly attributable to a class of
shares are charged to that class' operations. In addition to the above servicing
and distribution fees, class specific operating expenses for the year ended July
31, 1993 include the following:
<TABLE>
<CAPTION>
Class A Class B Class D
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Transfer agent fees $ 919 $78,189 $ 9
Shareholder reports expense 1,239 64,745 4
Registration and filing fees 450 33,229 --
- --------------------------------------------------------------------------------
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding short-
term investments and U.S. government securities, aggregated $117,530,868 and
$94,919,919, respectively, for the year ended July 31, 1993. Costs of purchases
and proceeds from sales of U.S. government securities aggregated $13,452,918 and
$23,039,186, respectively, for the year ended July 31, 1993.
At July 31, 1993, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $1,460,796,
and the aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value was $1,605,015.
25
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest of
separate series with a $.001 par value. Changes in shares of beneficial interest
of the Fund which are divided into three classes (Class A, Class B and Class D)
were as follows:
<TABLE>
<S> <C> <C> <C> <C>
PERIOD ENDED
7/31/93*
CLASS A SHARES: Shares Amount
- -------------------------------------------------------------------------------------
Sold 1,182,632 $ 19,303,134
Issued as reinvestment of
dividends 3,797 61,933
Redeemed (1,041,877) (17,023,992)
- -------------------------------------------------------------------------------------
Net increase 144,552 $ 2,341,075
- -------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED
7/31/93* 7/31/92
CLASS B SHARES: Shares Amount Shares Amount
- -------------------------------------------------------------------------------------
Sold 2,174,986 $ 35,662,222 1,073,982 $ 17,070,208
Issued as reinvestment of
dividends 214,872 3,486,967 220,410 3,486,066
Redeemed (1,534,376) (25,094,500) (1,343,738) (21,309,357)
- -------------------------------------------------------------------------------------
Net increase/(decrease) 855,482 $ 14,054,689 (49,346) $ (753,083)
- -------------------------------------------------------------------------------------
PERIOD ENDED
7/31/93**
CLASS D SHARES: Shares Amount
- -------------------------------------------------------------------------------------
Sold 1,422 $ 23,492
Issued as reinvestment of
dividends 30 498
Redeemed (71) (1,166)
- -------------------------------------------------------------------------------------
Net increase 1,381 $ 22,824
- -------------------------------------------------------------------------------------
<FN>
*The Fund began offering Class A shares on November 6, 1992. Any shares outstanding prior to
November 6, 1992 were designated as Class B shares.
**The Fund began offering Class D shares on January 29, 1993.
</TABLE>
26
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. LENDING OF PORTFOLIO SECURITIES
The Fund has the ability to lend its securities to brokers, dealers and
other financial organizations. Loans of securities by the Fund are
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.
At July 31, 1993, the Fund had an outstanding loan of one security to a
certain broker for which the Fund received $1,237,500 as collateral. At July 31,
1993, the Fund loaned a security with an aggregate market value of $1,188,482
which represents 1.7% of total net assets.
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in securities of U.S. companies and the United States government.
These risks include revaluation of currencies and future adverse political and
economic developments. Moreover, securities of many foreign companies and
foreign governments and their markets may be less liquid and their prices more
volatile than securities of comparable U.S. companies and the United States
government.
9. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Continental Bank N.A. under an Amended and Restated Line
of Credit Agreement (the "Agreement") dated April 30, 1992, primarily for
temporary or emergency purposes, including the meeting of redemption requests
that otherwise might require the untimely disposition of securities. Under this
Agreement, the Fund may borrow up to the lesser of $25 million or 10% of its net
assets. Interest is payable either at the bank's Money Market Rate or the London
Interbank Offered Rate (LIBOR) plus 0.375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less than 5
to 1. During the year ended July 31, 1993, the Fund did not borrow under the
Agreement.
27
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
GLOBAL BOND FUND OF SMITH BARNEY SHEARSON INCOME FUNDS:
We have audited the accompanying statement of assets and liabilities of the
Global Bond Fund of Smith Barney Shearson Income Funds (formerly Shearson Lehman
Brothers Income Portfolios), including the schedule of portfolio investments, as
of July 31, 1993, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the six years in the
period then ended and for the period October 27, 1986 (commencement of
operations) to July 31, 1987. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments and cash held by
the custodian as of July 31, 1993, and confirmation by correspondence with
brokers as to securities purchased but not received at that date or other
auditing procedures where confirmations from brokers were not received. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Global Bond Fund of Smith Barney Shearson Income Funds as of July 31, 1993, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the six years in the period then ended and for the period October
27, 1986 (commencement of operations) to July 31, 1987, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND
Boston, Massachusetts
September 10, 1993
28
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
CAPITAL GAIN (OR LOSS): This is the increase or decrease in the market value
(price) of a security in your fund. If a stock or bond appreciates in price,
there is a capital gain; if it depreciates there is a capital loss. A capital
gain or loss is "realized" upon the sale of a security; if net capital gains
exceed net capital losses, there may be a capital gain distribution to
shareholders.
CDSC (CONTINGENT DEFERRED SALES CHARGE): A kind of back-end load, a CDSC is
imposed if shares are redeemed during the first few years of ownership. The CDSC
may be expressed as a percentage of either the original purchase price or the
redemption proceeds. Most CDSCs decline over time, and some will not be charged
if shares are redeemed under certain conditions.
DISTRIBUTION RATE: This is the rate at which a mutual fund pays out (or
distributes) interest, dividends and realized capital gains to shareholders. A
fund's distribution rate is usually expressed as an annualized percent of the
fund's offering price.
DIVIDEND: This is income generated by securities in a portfolio and distributed
after expenses to shareholders.
FRONT-END SALES CHARGE: This is the sales charge applied to an investment at the
time of initial purchase.
NET ASSET VALUE (NAV): Net asset value is the total market value of all
securities held by a fund, minus any liabilities, divided by the number of
shares outstanding. It is the value of a single share of a mutual fund on a
given day. The total value of your investment would be the NAV multiplied by the
number of shares you own.
SEC YIELD: This standardized calculation of a mutual fund's yield is based on a
formula developed by the Securities and Exchange Commission (SEC) to allow funds
to be compared on an equal basis. It is an annualized yield based on the fund's
potential earnings from dividends, interest and yield to maturity of its
holdings, and it reflects the accrual of all portfolio expenses for the most
recent 30-day period.
TOTAL RETURN: Total return measures a fund's performance, taking into account
the combination of dividends paid and the gain or loss in the value of the
securities held in the fund. It may be expressed on an AVERAGE ANNUAL basis or
CUMULATIVE basis (total change over a given period). In addition, total return
may be expressed with or without the effects of sales charges or the
reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the average
annual total return according to the standardized calculation developed by the
SEC. This standardized calculation was introduced to insure that investors can
compare different funds on an equal basis. The SEC AVERAGE ANNUAL TOTAL RETURN
calculation includes the effects of all fees and sales charges and assumes the
reinvestment of all dividends and capital gains.
29
<PAGE>
SMITH BARNEY SHEARSON
GLOBAL BOND 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
Richard P. Roelofs
PRESIDENT
Pauline A.M. Barrett
VICE PRESIDENT AND INVESTMENT
OFFICER
Vincent Nave
TREASURER
Francis J. McNamara, III
SECRETARY
DISTRIBUTOR
Smith Barney Shearson Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Lehman Brothers
Global Asset Management Limited
Two Broadgate
London EC2M 7HA
United Kingdom
ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetss 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
30
<PAGE>
<TABLE>
<S> <C>
THE SMITH 1. PERSONAL SERVICE The Smith
BARNEY SHEARSON Barney Shearson Financial
APPROACH TO Consultant (FC) is highly
MUTUAL FUND trained and deeply committed to
INVESTING client service. Your FC works
with you to establish a
relationship based on
one-to-one communication and
the highest standards of
quality.
2. ANALYZING YOUR
NEEDS Defining your needs and
establishing specific goals is
the first step toward any
successful investment program.
The Smith Barney Shearson
Strategic Asset Allocator -- a
sophisticated financial
planning tool -- can help you
and your Financial Consultant
evaluate your resources and
objectives. This groundwork
then
becomes the basis for a
strategy designed specifically
for you. Your FC can use the
Strategic Asset Allocator on a
periodic basis to ensure that
your investment strategy is
keeping pace with your changing
needs and goals.
3. A UNIQUE MUTUAL FUND
INVESTMENT PROGRAM Your FC
offers a number of mutual fund
assessment tools that are
unmatched in the financial
services industry. Shearson
Lehman Brothers FCs have access
to a proprietary mutual fund
research database that provides
information at their fingertips
on more than 2,100 funds. In
addition, working with another
proprietary system known as the
Mutual Fund Evaluation Service,
your FC can help guide you
through the complex mutual fund
maze.
Specifically, the Evaluation
Service can provide a clear
picture of the past performance
of mutual funds you currently
own. Presented in both graphic
and numerical form, this
illustration provides a wealth
of easily understood data on
more than 2,100
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
funds. This complimentary service allows
you to judge whether your mutual fund
has helped meet your investment needs.
4. LOOKING AHEAD Selecting a mutual fund
should not be a one-event process that
ends with the purchase of shares. You
can count on the expertise of your FC as
he or she continues to monitor and
evaluate your funds, to suggest new
strategies and to listen. That, in our
opinion, is how to use mutual funds to
help achieve your financial goals.
</TABLE>
32
<PAGE>
INVESTOR BENEFITS Monthly Distributions It's your fund's
policy to distribute dividend income monthly.
Automatic Reinvestment You may reinvest your
dividends and/or capital gains automatically in
additional shares of your fund at the current net
asset value.
Unlimited Exchanges If your investment goals
change, you may exchange into another Smith Barney
Shearson mutual fund with the same sales charge
structure without incurring a sales charge.*
Systematic Investment Plan This program
allows you to invest equal dollar amounts
automatically on a regular basis, monthly or
quarterly.
Automatic Cash Withdrawal Plan With this plan,
you may withdraw money on a regular basis while
maintaining your investment.
Mutual Fund Evaluation Service Through your
Financial Consultant, you may obtain a free
personalized analysis of how your fund has
performed for you, taking into account the effect
of every transaction. The analysis is based upon
month-end data from CDA Investment Technologies,
Inc., a widely recognized mutual fund information
service. An evaluation also gives you other
important facts and figures about your investment.
FOR MORE INFORMATION ABOUT THESE BENEFITS, OR
IF YOU HAVE ANY OTHER QUESTIONS, PLEASE CALL
YOUR FINANCIAL CONSULTANT OR WRITE:
MUTUAL FUND POLICY GROUP
SMITH BARNEY SHEARSON
388 GREENWICH STREET 37TH FLOOR
NEW YORK, NY 10013
*AFTER WRITTEN NOTIFICATION, EXCHANGE
PRIVILEGE MAY BE MODIFIED OR TERMINATED
AT ANY TIME.
<PAGE>
This report is submitted for
the general information of the shareholders
of Smith Barney Shearson Global Bond Fund.
It is not authorized for distribution to
prospective investors unless accompanied or
preceded by
an effective Prospectus for the Fund, which
contains information concerning the Fund's
investment policies, applicable sales
charges, fees and expenses as well as other
pertinent information.
Performance cited is through July 31, 1993.
Please consult Smith Barney Shearson Mutual
Funds QUARTERLY PERFORMANCE UPDATE for
figures through the most recent calendar
quarter.
SMITH BARNEY SHEARSON
GLOBAL
BOND
FUND
Two World Trade Center
New York, New York 10048
Fund 30, 202, 244
FD2171 I3
<PAGE>
SMITH BARNEY SHEARSON GLOBAL BOND
APPENDIX TO GRAPHIC AND IMAGE MATERIALS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ----------------------------------------------------------------------------- ---------
<S> <C>
Cover graphics............................................................... cover
Line graph--growth of Class B Shares.........................................
Pie Chart showing portfolio breakdown........................................ 6
</TABLE>
<PAGE>
SEMI-ANNUAL REPORT (UNAUDITED) OF
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
DATED JANUARY 31, 1994
<PAGE>
SEMI-
ANNUAL
REPORT
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above fund name showing a black and white picture
of the world map stretching from the United States to Japan.
Smith Barney Shearson
GLOBAL
BOND FUND
JANUARY 31, 1994
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
THE INVESTMENT OBJECTIVE
The Smith Barney Shearson Global Bond Fund seeks current income and capi-
tal appreciation by investing in the major government bond markets
throughout the world to capitalize on currency and interest rate opportu-
nities. It is a portfolio of the highest quality, 75% being exposed to
AAA government and supranational debt.
THE PERFORMANCE
The Fund's aggregate total return (without the effect of sales charges)
for Class A, Class B, and Class D shares for the six months ended January
31, 1994 was 5.34%, 5.07% and 5.08%, respectively. This compared with a
gain of 5.02% for the Salomon Brothers World Government Bond Index (a
weighted index of the world's major bond markets). For the twelve months
to December 31, 1993 the return was 11.92% versus 13.27% in the Salomon
Brothers World Government Bond Index. During the six month period the
Class A shares paid dividends of $0.8216 per share made up of six monthly
dividends of $0.0795 per share and an annual dividend from currency appre-
ciation and capital gains of $0.3446 per share. The Class B shares paid
dividends of $0.7781 per share, made up of six monthly dividends of
$0.0725 per share and an annual dividend from currency appreciation and
capital gains of $0.3431 per share. The Class D shares paid dividends of
$0.779 per share made up of six monthly dividends of $0.0725 per share and
an annual dividend from currency appreciation and capital gains of $0.344
per share.
Since the Fund is a total return fund, and not an income fund, there is no
requirement to meet a stated level of income for distribution each month.
However, from the portfolio of global bonds selected by the investment
manager the Fund provides for a monthly dividend from income as well as an
annual payment at the year end of currency appreciation and capital gains.
With global interest rates in decline, we would anticipate during the next
twelve months a marginal decrease in the level of the monthly dividends
paid. This results from the reduced coupon income available from bonds in
general. The corollary to this is that, as interest rates decline further,
there is the potential for capital gain, as well as the potential for cur-
rency gains in periods of a weak U.S. dollar.
PERFORMANCE DISCUSSION & ANALYSIS
To capitalize on currency and interest rate opportunities around the
globe, it is necessary to employ an active, disciplined approach to manag-
ing the assets, whereby the decisions on the currency and the bond expo-
sure are two separate investment decisions. For example, it is sometimes
<PAGE>
more optimal to own a bond for its interest rate exposure and to hedge the
currency exposure of that bond into a more favoured currency.
In analyzing the contribution to return from the components of currency
and capital, the portfolio performance benefited throughout most of the
year from an overweighting to European bonds relative to the weighting of
European bonds in the Salomon Brothers World Government Bond Index, as in-
terest rates in Europe sharply declined. Performance was marginally im-
pacted by an overweight position to the U.S. dollar during the third quar-
ter of 1993. This overweight position to the U.S. dollar, to which we were
biased for most of the year, was however to benefit the portfolio in the
fourth quarter of 1993.
THE INVESTMENT ENVIRONMENT
Sluggish world growth and declining inflation have continued to provide
the backdrop for attractive returns in local currency terms from a number
of global bond markets over the past six months. The performance of inter-
national bonds easily outstripped that of U.S. bonds even after accounting
for currency movements versus the U.S. dollar. Interest rates declined
steadily across the yield curve throughout Europe as monetary policies
were relaxed in an attempt to kick start the sluggish domestic economies,
although the end of July saw the effective breakdown of the Exchange Rate
Mechanism ("ERM") with the move to wide-bands for all of the currencies
within the system barring the German Deutschemark and Netherlands Guilder.
Once more the peripheral markets of Spain (11.54%) and Italy (11.74%) were
the best performers over the six months, with the United Kingdom Gilt mar-
ket close behind, rallying strongly after a tight Budget and interest rate
cut in November. The Fund benefited from being invested in each of these
markets, together with Ireland, another strong performer which has quickly
become a respectable market amongst international investors due to its
splendid fundamentals. The Japanese bond market performed well during the
last quarter, although mounting political risks and concerns over the ex-
tent of forthcoming supply resulted in a sharp correction during January.
Overall, the Japanese market was one of the poorer performers, alongside
U.S. Treasuries which were dogged by increasing concern that the Federal
Reserve Bank would act pre-emptively and raise interest rates in the near
future.
The removal of the pent-up tension within the ERM resulted in a dramatic
weakening of the non-core currencies versus the Deutschemark, with the
French Franc and Danish Krone initially losing around 3-4% versus the
Deutschemark as their respective Central Banks were forced to purchase
Deutschemarks to repay the German Bundesbank for reserves borrowed during
the build-up to the crisis. These reserve rebuilding actions weighed
heavily on the U.S. dollar, resulting in a bout of weakness which culmi-
nated in the reduction in German interest rates in October, allowing the
U.S. dollar to recover back to the DM/$1.73 level. Towards the end of the
period, the peripheral currencies strengthened back to within sight of
their old ERM bands as interest rate cuts increased the likelihood of a
return to growth. In August, the intervention by the U.S. Federal Reserve
to curtail the incredible strength of the Yen reversed the trend, leading
to a weaker yen over the period, and further reducing the return from Jap-
anese bonds in dollar terms. Overall, the effect of currency movements was
minimal, reducing the return from the Salomon Brothers World Government
Bond Index to 5.02% in dollar terms.
PORTFOLIO ACTIVITY
During the period, and given the heightened volatility in both global
currencies and global interest rates, the portfolio was broadly diversi-
fied across a large range of markets to insulate it from the risks of any
one market, while capitalizing on the global opportunities. For most of
the year, we maintained a range of 20-25% in US$-Bloc bonds, where low in-
flationary expectations continued to indicate the prospect for positive
returns notably in Canada and Australia. The balance of the portfolio was
invested in a broad range of European markets, where the real returns were
most favourable, with a declining proportion in Japan. Cash was kept to a
minimum and the average life of the portfolio ranged between 7 and 9
years, thus ensuring that a substantial portion of the portfolio was par-
ticipating in capital growth as interest rates steadily declined.
For most of the period, despite the large but declining interest rate dif-
ferential with Europe, we favoured an overweight exposure to the U.S. dol-
lar which we felt was underpinned by improving economic fundamentals and
the currency turbulence in Europe. This policy translated into a large
part of our European bond exposure being hedged into U.S. dollars to pro-
tect the base currency of the portfolio.
<PAGE>
INVESTMENT STRATEGY
Over the coming months, we expect the U.S. dollar to trend higher as the
interest rate gap between the United States and Europe narrows, brought
about through both interest rate cuts by the Europeans and rate rises by
the U.S. Federal Reserve. The progress made in the U.S. towards recovery
at a time when Europe and Japan are sliding into recession has already
been reflected to some extent in the rise of the U.S. dollar. However, the
trends in place are likely to persist and the portfolio is positioned for
further dollar strength. Turning to the Yen, we feel that the recent
breakdown in the trade negotiations between the U.S. and Japan are signif-
icant for the path of the Yen, and unless sufficient progress is made by
the Japanese Administration to open their markets to U.S. and foreign com-
petition, we believe the Yen will strengthen into the March year-end as
the U.S. Government makes a stronger Yen a policy objective in order to
reduce the Japanese trade surplus.
Economic growth prospects amongst the major economies for 1993 remain on a
divergent path. In the United States, the strong growth witnessed in the
last half of 1993 will be sustained and the Federal Reserve will embark on
a slow and cautious policy of raising interest rates to maintain faith in
the current low inflation environment. In Europe, most economies will
emerge from recession only slowly, continuing to require the boost from
lower interest rates. The benign inflationary environment will, however,
provide scope for long term yields to continue to fall, although in most
cases they will be constrained by large budget deficits, thus leading to
steeper yield curves. Most European bond markets should outperform German
bonds, benefiting from a faster pace of monetary easing, with Denmark,
Sweden, United Kingdom, Spain and Italy providing attractive returns from
longer dated bonds.
Japanese bonds will fare reasonably well as inflation falls further en-
hancing real yield levels, but performance will be tempered by relentless
government supply and continued political risk. Furthermore, Australian,
Canadian and New Zealand bond yields look set to converge around 6.5% at
the longer end given the combination of stable inflation and a pick-up of
economic activity.
In conclusion, our overweight exposure to European bonds, a feature of our
investment stance throughout 1993, will be maintained through at least the
first half of 1994 on expectations of further easing of interest rates by
European central banks to re-ignite or sustain economic recovery.
We very much appreciate your interest in Smith Barney Shearson Global Bond
Fund.
Sincerely,
Heath B. McLendon
Pauline A. M. Barrett
Heath B. McLendon
Chairman of the Board Pauline A. M. Barrett
Vice President
and Investment Officer
March 10, 1994
PORTFOLIO HIGHLIGHTS (UNAUDITED) JANUARY 31, 1994
COUNTRY BREAKDOWN
DESCRIPTION OF PIE CHART IN SHAREHOLDER REPORT
Pie chart depicting the allocation of the Income Funds -- Global Bond
Fund's investment securities held at January 31, 1994 by country
classification. The pie is broken in pieces representing countries in
the following percentages:
<TABLE>
<CAPTION>
COUNTRY PERCENTAGE
<S> <C>
OTHER BONDS 22.9%
<PAGE>
FRENCH FRANC BONDS 18.3%
UNITED STATES DOLLAR BONDS 9.8%
JAPANESE YEN BONDS 8.8%
COMMERCIAL PAPER, CALL OPTIONS PURCHASED, CALL OPTIONS
WRITTEN AND NET OTHER ASSETS AND LIABILITIES 8.3%
SPANISH PESETA BONDS 8.0%
GREAT BRITAIN POUND STERLING BONDS 6.6%
IRISH PUNT BOND 5.5%
FINNISH MARRKA BONDS 5.0%
ITALIAN LIRA BONDS 6.8%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE OF
BOND NET ASSETS
<S> <C>
GOVERNMENT OF IRELAND 5.4%
REPUBLIC OF FINLAND 5.0
GOVERNMENT OF SWEDEN 4.7
CAISSE NATIONAL DE AUTOROUTE 4.6
KINGDOM OF DENMARK 4.5
ELECTRIC DE FRANCE 4.5
WESTERN AUSTRALIA TREASURY 4.4
DUTCH GOVERNMENT 4.4
INTELSAT 4.1
CREDIT LOCAL DE FRANCE 3.8
</TABLE>
PORTFOLIO OF INVESTMENTS (UNAUDITED) JANUARY 31, 1994
KEY TO CURRENCY ABBREVIATIONS
AUD -- Australian Dollar
CAD -- Canadian Dollar
DKK -- Danish Kroner
ECU -- European Currency Unit
ESP -- Spanish Peseta
FIM -- Finnish Marrka
FRF -- French Franc
GBP -- Great Britain Pound Sterling
IEP -- Irish Punt
ITL -- Italian Lira
JPY -- Japanese Yen
NLG -- Netherland Guilder
SEK -- Swedish Krona
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<S> <C> <C>
FRENCH FRANC BONDS -- 18.3%
FRF 18,000,000 Caisse National de Autoroute,
9.000% due 7/9/01 $ 3,638,087
15,000,000 Credit Local de France,
8.875% due 6/10/02 3,027,930
10,000,000 Deutsche Bank Finance N.V.,
9.250% due 5/9/01 2,046,707
17,500,000 Electric de France,
8.600% due 4/9/04 3,559,247
Government of France:
3,000,000 6.750% due 10/25/03 546,932
<PAGE>
11,000,000 6.000% due 10/25/25 1,797,241
TOTAL FRENCH FRANC BONDS
(Cost $14,239,818) 14,616,144
UNITED STATES DOLLAR BONDS -- 9.8%
$ 3,000,000 Intelsat,
7.375% due 8/6/02 3,253,800
2,000,000 Republic of Portugal,
5.750% due 10/8/03 1,945,600
2,600,000 United States Treasury Notes,
5.750% due 8/15/03 2,619,094
TOTAL UNITED STATES DOLLAR BONDS
(Cost $7,809,000) 7,818,494
JAPANESE YEN BONDS -- 8.8%
JPY 200,000,000 Asian Development Bank,
5.000% due 2/5/03 1,970,588
125,000,000 International Bank for Reconstruction & Development,
5.250% due 3/20/02 1,250,575
175,000,000 Japan Development Bank,
6.500% due 9/20/01 1,865,809
200,000,000 World Bank,
4.500% due 3/20/03 1,917,279
TOTAL JAPANESE YEN BONDS
(Cost $6,871,288) 7,004,251
SPANISH PESETA BONDS -- 8.0%
ESP 200,000,000 Eurofima,
11.350% due 7/22/97 1,564,134
270,000,000 European Investment Bank,
11.700% due 2/10/03 2,336,766
292,000,000 Kingdom of Spain,
10.900% due 8/30/03 2,498,078
TOTAL SPANISH PESETA BONDS
(Cost $6,254,934) 6,398,978
ITALIAN LIRA BONDS -- 6.8%
ITL 1,400,000,000 European Investment Bank,
12.200% due 2/18/03 1,022,648
2,500,000,000 LKB Baden Wurtenburg,
10.750% due 4/14/03 1,693,453
1,000,000,000 Nordiska Investerin,
10.800% due 5/24/03 679,151
3,300,000,000 Republic of Italy,
9.000% due 10/1/98 2,011,531
TOTAL ITALIAN LIRA BONDS
(Cost $5,361,711) 5,406,783
GREAT BRITAIN POUND STERLING BONDS -- 6.6%
GBP 1,500,000 Abbey National,
8.000% due 4/2/03 2,432,609
<PAGE>
1,700,000 United Kingdom Treasury,
8.000% due 6/10/03 2,871,298
TOTAL GREAT BRITAIN POUND STERLING BONDS
(Cost $5,253,676) 5,303,907
IRISH PUNT BOND -- 5.5% (Cost $4,293,092)
IEP 2,500,000 Government of Ireland,
9.250% due 7/11/03 4,350,726
FINNISH MARRKA BONDS -- 5.0%
Republic of Finland:
FIM 9,000,000 11.000% due 1/15/99 1,990,114
9,000,000 9.500% due 3/15/04 1,995,807
TOTAL FINNISH MARRKA BONDS (Cost $3,394,535) 3,985,921
SWEDISH KRONA BONDS -- 4.7%
Government of Sweden:
SEK 12,000,000 11.000% due 1/21/99 1,819,313
12,500,000 10.250% due 5/5/03 1,961,519
TOTAL SWEDISH KRONA BONDS (Cost $3,539,212) 3,780,832
DANISH KRONER BONDS -- 4.5%
Kingdom of Denmark:
DKK 4,200,000 9.000% due 11/15/00 733,110
17,000,000 8.000% due 5/15/03 2,863,847
TOTAL DANISH KRONER BONDS (Cost $3,394,441) 3,596,957
AUSTRALIAN DOLLAR BOND -- 4.4% (Cost $3,480,660)
AUD 4,500,000 Western Australia Treasury,
8.000% due 7/15/03 3,495,778
NETHERLAND GUILDER BONDS -- 4.4%
Dutch Government:
NLG 850,000 7.000% due 3/15/99 471,650
5,000,000 7.500% due 1/15/23 3,005,745
TOTAL NETHERLAND GUILDER BONDS
(Cost $3,395,939) 3,477,395
CANADIAN DOLLAR BOND -- 3.1% (Cost $2,453,924)
CAD 3,000,000 Eurobank Reconstruction and Development,
8.375% due 2/25/03 2,512,337
EUROPEAN CURRENCY UNIT BOND -- 1.8% (Cost $1,500,888)
ECU 1,150,000 Credit Foncier,
8.375% due 3/17/94 1,470,810
COMMERCIAL PAPER -- 3.9% (Cost $3,125,000)
<PAGE>
$ 3,125,000 Ford Motor Credit Corporation,
3.100% due 2/1/94 3,125,000
<CAPTION>
EXPIRATION STRIKE
DATE PRICE
<S> <C> <C> <C> <C>
CALL OPTIONS PURCHASED -- 0.2%
FRF 3,000,000 French Treasury Bond,
8.500% due 2023 3/15/94 $129.20 6,602
JPY 400,000,000 Japan Government Bond,
4.700% due 3/2017 2/16/94 105.00 74
JPY 400,000,000 Japan Government Bond,
5.500% due 3/2002 3/9/94 116.20 404
ESP 150,000,000 Spanish Government Bond,
8.000% due 2004 3/15/94 98.85 22,523
GBP 1,500,000 United Kingdom Treasury
Bond,
8.750% due 2017 2/17/94 126.00 40,694
$ 7,600,000 United States Dollar 2/10/94 112.00 4,560
7,000 United States Treasury,
6.250% due 2023 2/17/94 105.03 280
4,000,000 United States Treasury,
6.250% due 2023 4/13/94 100.69 58,280
TOTAL CALL OPTIONS PURCHASED
(Cost $463,083) 133,417
TOTAL INVESTMENTS (Cost $74,831,201*) 95.8% 76,477,730
CALL OPTIONS WRITTEN -- 0.0%
(Premiums received $12,614)
GBP 1,500,000 United Kingdom Treasury
Bond,
8.750% due 2017 2/17/94 129.00 (8,058)
OTHER ASSETS AND LIABILITIES (NET) 4.2 3,395,358
NET ASSETS 100.0% $79,865,030
<FN>
* Aggregate cost for Federal tax purposes.
</TABLE>
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS (UNAUDITED)
JANUARY 31, 1994
<TABLE>
<CAPTION>
CONTRACT VALUE MARKET VALUE
DATE (NOTE 1)
<S> <C> <C>
FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
4,765,111 European Currency Units 3/23/94 $ 5,297,699
27,204,746 German Deutschemarks 3/23/94 15,562,742
34,443,952 Japanese Yen 4/20/94 317,243
506,831,802 Japanese Yen 4/27/94 4,669,179
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
(Contract Amount $25,649,631) $ 25,846,863
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
569,055,809 Spanish Pesetas 2/24/94 $ (4,034,494)
825,488 European Currency Units 3/16/94 (918,365)
76,693,140 French Francs 3/16/94 (12,931,667)
27,135,414 Swedish Krona 3/16/94 (3,414,047)
4,776,135 Australian Dollars 3/23/94 (3,377,721)
9,837,465 Danish Kroners 3/23/94 (1,450,387)
20,438,800 Finnish Marrka 3/23/94 (3,684,641)
23,507,843 German Deutschemarks 3/23/94 (13,447,892)
3,968,466,318 Italian Lire 3/23/94 (2,323,043)
4,178,829 Netherland Guilders 3/23/94 (2,136,587)
3,368,565 Great Britain Pounds Sterling 4/27/94 (5,028,805)
<PAGE>
1,198,459 Irish Punts 4/27/94 (1,712,914)
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(Contract Amount $53,968,714) $(54,460,563)
</TABLE>
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JANUARY 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $74,831,201) (Note 1)
See accompanying schedule $ 76,477,730
Cash and foreign currency (Cost $2,568,098) 2,576,907
Receivable for forward foreign exchange contracts to sell 53,968,714
Forward foreign exchange contracts to buy, at value
(Contract cost $25,649,631) (Note 1)
See accompanying schedule 25,846,863
Receivable for investment securities sold 3,482,355
Dividends and interest receivable 3,053,790
Receivable for Fund shares sold 126,996
TOTAL ASSETS 165,533,355
LIABILITIES:
Forward foreign exchange contracts to sell, at value
(Contract cost $53,968,714) (Note 1)
See accompanying schedule $ 54,460,563
Payable for forward foreign exchange contracts to buy 25,649,631
Payable for investment securities purchased 5,343,471
Investment advisory fee payable (Note 2) 40,196
Distribution fee payable (Note 3) 32,461
Custodian fees payable (Note 2) 28,500
Service fee payable (Note 3) 17,410
Administration fee payable (Note 2) 13,399
Options written, at value (premiums received $12,614) (Note 1)
See accompanying schedule 8,058
Transfer agent fees payable (Note 2) 7,867
Accrued Trustees' fees and expenses (Note 2) 2,833
Accrued expenses and other payables 63,936
TOTAL LIABILITIES 85,668,325
NET ASSETS $ 79,865,030
NET ASSETS CONSIST OF:
Undistributed net investment income $ 61,659
Accumulated net realized gain on securities, written options,
forward foreign exchange contracts and foreign currency
transactions 520,683
Net unrealized appreciation of securities, written options, forward
foreign exchange contracts, foreign currencies and net other
assets 1,309,400
Par value 4,818
Paid-in capital in excess of par value 77,968,470
TOTAL NET ASSETS $ 79,865,030
</TABLE>
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) (continued)
JANUARY 31, 1994
<TABLE>
<CAPTION>
<S> <C>
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($2,731,798 / 164,799 shares of beneficial interest
outstanding) $16.58
Maximum offering price per share ($16.58 / 0.955)
(based on sales charge of 4.5% of the offering
price on January 31, 1994) $17.36
CLASS B SHARES:
<PAGE>
NET ASSET VALUE and offering price per share+
($77,108,283 / 4,651,492 shares of beneficial in-
terest outstanding) $16.58
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per
share ($24,949 / 1,505 shares of beneficial inter-
est outstanding) $16.58
<FN>
+ Redemption price per share for Class B shares is equal to net asset
value less any applicable contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JANUARY 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest (net of foreign withholding taxes of $12,333) $ 2,793,512
EXPENSES:
Investment advisory fee (Note 2) $ 234,293
Distribution fee (Note 3) 186,862
Service fee (Note 3) 97,622
Administration fee (Note 2) 77,678
Custodian fees (Note 2) 58,837
Transfer agent fees (Notes 2 and 4) 47,263
Legal and audit fees 29,784
Trustees' fees and expenses (Note 2) 7,843
Other 69,396
TOTAL EXPENSES 809,578
NET INVESTMENT INCOME 1,983,934
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities 1,514,106
Forward foreign exchange contracts (743,345)
Foreign currency transactions 269,176
Net realized gain on investments during the period 1,039,937
Net change in unrealized appreciation/(depreciation) of:
Securities 1,790,748
Written options 4,556
Forward foreign exchange contracts (1,196,696)
Foreign currencies and net other assets 4,248
Net unrealized appreciation of investments during the period 602,856
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 1,642,793
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,626,727
</TABLE>
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
1/31/94 7/31/93
(UNAUDITED)
<S> <C> <C>
Net investment income $ 1,983,934 $ 2,884,186
Net realized gain on securities, written options, forward foreign ex-
change contracts and foreign currency transactions during
the period 1,039,937 2,959,075
Net unrealized appreciation/(depreciation) of securities, written
options, foward foreign exchange contracts, foreign currencies
and net other assets during the period 602,856 (895,869)
Net increase in net assets resulting from operations 3,626,727 4,947,392
<PAGE>
Distributions to shareholders from net investment income:
Class A (102,505) (55,127)
Class B (2,132,827) (3,602,906)
Class D (666) (438)
Distributions in excess of net investment income:
Class A -- (7,615)
Class B -- (497,707)
Class D -- (61)
Distribution to shareholders from net realized gain on investments:
Class A (45,205) --
Class B (1,363,525) --
Class D (431) --
Net increase in net assets from share transactions (Note 6):
Class A 316,481 2,341,075
Class B 10,735,373 14,054,689
Class D 2,062 22,824
Net increase in net assets 11,035,484 17,202,126
NET ASSETS:
Beginning of period 68,829,546 51,627,420
End of period (including undistributed net investment income of $61,659
and $313,723, respectively) $ 79,865,030 $ 68,829,546
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED ENDED
1/31/94++ 7/31/93*++
(UNAUDITED)
<S> <C> <C>
Net Asset Value, beginning of period $16.53 $16.32
Income from investment operations:
Net investment income 0.50 0.61
Net realized and unrealized gain on investments 0.37 0.60
Total from investment operations 0.87 1.21
Distributions to shareholders:
Distributions from net investment income (0.52) (0.88)
Distributions in excess of net investment income -- (0.12)
Distributions from net realized gains (0.30) --
Total distributions (0.82) (1.00)
Net Asset Value, end of period $16.58 $16.53
Total return+ 5.34% 7.70%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $2,732 $2,389
Ratio of operating expenses to average net assets 1.60%** 1.71%**
Ratio of net investment income to average net assets 5.60%** 5.37%**
Portfolio turnover rate 124% 216%
<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>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
1/31/94+++ 7/31/93+++
(UNAUDITED)
<S> <C> <C>
Net Asset Value, beginning of period $ 16.53 $ 16.32
Income from investment operations:
Net investment income# 0.43 0.79
Net realized and unrealized gain/(loss) on investments 0.40 0.57
Total from investment operations 0.83 1.36
Distributions to shareholders:
Distributions from net investment income (0.48) (1.01)
Distributions in excess of net investment income -- (0.14)
Distributions from net realized gains (0.30) --
Distributions from capital -- --
Total distributions (0.78) (1.15)
Net Asset Value, end of period $ 16.58 $ 16.53
Total return+ 5.07% 8.67%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $77,108 $66,418
Ratio of operating expenses to average net assets++ 2.11%** 2.22%
Ratio of net investment income to average net assets 5.09%** 4.85%
Portfolio turnover rate 124% 216%
<FN>
* The Fund commenced operations on October 27, 1986. The Fund commenced
selling Class A shares on November 6, 1992. Those shares in existence
prior to November 6, 1992 were designated Class
B shares.
** Annualized.
+ Total return represents aggregate total return for the period indi-
cated and does not reflect any applicable sales charges.
++ Annualized expense ratio before waiver of fees by investment adviser,
sub-investment adviser and administrator and distributor for the pe-
riod ended July 31, 1987 was 2.00%.
+++ 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.
# Net investment income per share before waiver of fees by investment
adviser, sub-investment adviser and administrator and distributor for
the period ended July 31, 1987 was $0.23.
</TABLE>
See Notes to Financial Statements.
<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>
See Notes to Financial Statements.
<PAGE>
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX MONTHS PERIOD
ENDED ENDED
1/31/94++ 7/31/93*++
(UNAUDITED)
<S> <C> <C>
Net Asset Value, beginning of period $16.53 $15.98
Income from investment operations:
Net investment income 0.40 0.38
Net realized and unrealized gain on investments 0.43 0.61
Total from investment operations 0.83 0.99
Distributions to shareholders:
Distributions from net investment income (0.48) (0.39)
Distributions in excess of net investment income -- (0.05)
Distributions from net realized gains (0.30) --
Total distributions (0.78) (0.44)
Net Asset Value, end of period $16.58 $16.53
Total return+ 5.08% 6.19%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 25 $ 23
Ratio of operating expenses to average net assets 2.41%** 2.18%**
Ratio of net investment income to average net assets 4.79%** 4.89%**
Portfolio turnover rate 124% 216%
<FN>
* The Fund commenced selling Class D shares on February 4, 1993.
** Annualized.
+ Total return represents aggregate total return for the period indi-
cated.
++ 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>
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Income Funds (the "Trust") was organized as a "Mas-
sachusetts business trust" under the laws of the Commonwealth of Massachu-
setts on March 12, 1985. The Trust is registered with the Securities and
Exchange Commission under the Investment Company Act of 1940, as amended
(the "1940 Act"), as an open-end management investment company. As of the
date of this report, the Trust offered eight managed investment funds:
Smith Barney Shearson Premium Total Return Fund, Smith Barney Shearson
Convertible Fund, Smith Barney Shearson Global Bond Fund (the "Fund"),
Smith Barney Shearson High Income Fund, Smith Barney Shearson Tax-Exempt
Income Fund, Smith Barney Shearson Money Market Fund, Smith Barney Shear-
son Diversified Strategic Income Fund and Smith Barney Shearson Utilities
Fund. As of November 6, 1992, the Fund offered two classes of shares:
Class A shares and Class B shares. As of January 29, 1993, the Fund of-
fered a third class of shares, Class D shares, to investors eligible to
participate in the Smith Barney Shearson 401(k) Program. Class A shares
are sold with a front-end sales charge. Class B shares may be subject to a
contingent deferred sales charge ("CDSC"). Class B shares will convert au-
tomatically to Class A shares eight years after the date of original pur-
chase. Class D shares are offered without a front-end sales charge or
CDSC. Each class of shares has identical rights and privileges except with
respect to the effect of the respective sales charges, the distribution
and/or service fees borne by each class, expenses allocable exclusively to
each class, voting rights on matters affecting a single class, the ex-
change privilege of each class and the conversion feature of Class B
<PAGE>
shares. The following is a summary of significant accounting policies con-
sistently followed by the Fund in the preparation of its financial state-
ments.
Portfolio valuation: Generally, the Fund's investments are valued at
market value or, in the absence of market value with respect to any port-
folio 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 a domestic or foreign exchange are 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 and securities
listed or traded on certain foreign exchanges whose operations are similar
to the United States over-the-counter market are valued on the basis of
the bid price at the close of business each day. Portfolio securities that
are traded primarily on foreign exchanges generally are valued at the
preceding closing values of such 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 such value, then the fair 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 its delegates.
Debt securities are valued by The Boston Company Advisors, Inc. ("Boston
Advisors"), after consultation with an independent pricing service (the
"Pricing Service") approved by the Trust's Board of Trustees. 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 Trust's Board of
Trustees. 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.
Option accounting principles: Upon the purchase of a put option or a call
option by the Fund, the premium paid is recorded as an investment, the
value of which is marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the cost of the option. When
the Fund enters into a closing sale transaction, the Fund will realize a
gain or loss depending on whether the sales proceeds from the closing sale
transaction are greater or less than the cost of the option. When the Fund
exercises a put option, it will realize a gain or loss from the sale of
the underlying security and the proceeds from such sale will be decreased
by the premium originally paid. When the Fund exercises a call option, the
cost of the security which the Fund purchases upon exercise will be in-
creased by the premium originally paid.
When the Fund writes a call option or a put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of
which is marked-to-market daily. When a written option expires, the Fund
realizes a gain equal to the amount of the premium received. When the Fund
enters into a closing purchase transaction, the Fund realizes a gain (or
loss if the cost of the closing purchase transaction exceeds the premium
received when the option was sold) without regard to any unrealized gain
or loss on the underlying security, and the liability related to such op-
tion is eliminated. When a call option is exercised, the Fund realizes a
gain or loss from the sale of the underlying security and the proceeds
from such sale are increased by the premium originally received. When a
put option is exercised, the amount of the premium originally received
will reduce the cost of the security that the Fund purchased upon exer-
cise.
The risk associated with purchasing options is limited to the premium
originally paid. The risk in writing a call option is that the Fund may
forego the opportunity of profit if the market price of the underlying se-
curity or index increases and the option is exercised. The risk in writing
a put option is that the Fund may incur a loss if the market price of the
underlying security or index decreases and the option is exercised. In ad-
dition, there is the risk that the Fund may not be able to enter into a
closing transaction because of an illiquid secondary market.
Repurchase Agreements: The Fund engages in repurchase agreement transac-
tions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation 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
<PAGE>
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 collateral is at least equal at all times to the
total amount of the repurchase obligations, including interest. In the event
of counterparty default, the Fund has the right to use the collateral to
offset losses incurred. There is potential loss to the Fund in the event
the Fund is delayed or prevented from exercising its rights to dispose of
the collateral securities, including the risk of a possible decline in the
value of the underlying securities during the period while the Fund seeks
to assert its rights. The Fund's investment adviser or administrator,
acting under the supervision of the Trust's Board of Trustees, reviews 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.
Foreign Currency: The books and records of the Fund are maintained in
U.S. dollars. Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the exchange rates pre-
vailing at the end of the period, and purchases and sales of investment
securities, income and expenses are translated on the respective dates of
such transactions. Unrealized gains and losses which result from changes
in foreign currency exchange rates have been included in the unrealized
appreciation/ (depreciation) of currencies and net other assets. Net real-
ized foreign currency gains and losses resulting from changes in exchange
rates include foreign currency gains and losses between trade date and
settlement date on investment securities transactions, foreign currency
transactions and the difference between the amounts of interest and divi-
dends recorded on the books of the Fund and the amount actually received.
The portion of foreign currency gains and losses related to fluctuation in
the exchange rates between the initial purchase trade date and subsequent
sale trade date is included in realized gains and losses on investment se-
curities sold.
Forward Foreign Exchange Contracts: Forward foreign exchange contracts
are valued at the forward rate and are marked-to-market daily. The change
in market value is recorded by the Fund as an unrealized gain or loss.
When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time that
it was opened and the value at the time that it was closed.
The use of forward foreign exchange contracts does not eliminate fluctua-
tions in the underlying prices of the Fund's investment securities, but it
does establish a rate of exchange that can be achieved in the future. Al-
though forward foreign exchange contracts limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any potential
gain that might result should the value of the currency increase. In addi-
tion, the Fund could be exposed to risks if the counterparties to the con-
tracts are unable to meet the terms of their contracts.
Securities transactions and investment income: Securities transactions
are recorded as of the trade date. Realized gains and losses from securi-
ties sold are recorded on the identified cost basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Inter-
est income is recorded on the accrual basis. Investment income and real-
ized and unrealized gains and losses are allocated based upon the relative
net assets of each class of shares.
Dividends and distributions to shareholders: Dividends from net invest-
ment income, if any, are determined on a class level, are declared monthly
and are paid on the last day of the Smith Barney Shearson Inc. ("Smith
Barney Shearson") statement month. Distributions, if any, of net short-
and long-term capital gains earned by the Fund will be made annually after
the close of the fiscal year in which they are earned. Additional distri-
butions of net investment income and capital gains from the Fund may be
made at the discretion of the Trust's Board of Trustees in order to avoid
the application of a 4% nondeductible excise tax on certain undistributed
amounts of ordinary income and capital gains. Income distributions and
capital gain distributions on a Fund level are determined in accordance
with income tax regulations which may differ from generally accepted ac-
counting principles. These differences are primarily due to differing
treatments of income and gains on various investment securities held by
the Fund and timing differences.
Federal income taxes: The Trust intends that the Fund qualify as a
regulated investment company, if such qualification is in the best inter-
est of its shareholders, by complying with the requirements of the
Internal Revenue Code of 1986, as amended, applicable to regulated invest-
ment companies and by distributing substantially all of its taxable income
<PAGE>
to its shareholders. Therefore, no Federal income tax provision is re-
quired.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION
FEE AND OTHER TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with Lehman Brothers Global Asset Management Limited ("Global
Asset Management"), a wholly owned subsidiary of Lehman Brothers Holdings
Inc. ("Lehman Holdings"), which is in turn a wholly owned subsidiary of
American Express Company ("American Express"). American Express owns 100%
of Lehman Holdings' issued and outstanding common stock, which represents
approximately 92% of the issued and outstanding voting stock. The remain-
der of Holdings' voting stock is owned by Nippon Life Insurance Company.
Under the Advisory Agreement, the Fund pays a monthly fee at the annual
rate of 0.60% of the value of its average daily net assets.
Boston Advisors, an indirect wholly owned subsidiary of Mellon Bank
Corporation ("Mellon"), serves as the Fund's administrator pursuant to an
administration agreement (the "Administration Agreement"). Under the Ad-
ministration Agreement, the Fund pays Boston Advisors a monthly fee at the
annual rate of 0.20% of the value of the Fund's average daily net assets.
For the six months ended January 31, 1994, Smith Barney Shearson received
$9,338 from investors representing commissions (sales charges) on sales of
Class A shares.
A CDSC is generally payable by a shareholder in connection with the
redemption of Class B shares within five years (eight years in the case of
certain 401(k) plans) after the date of purchase. In circumstances in
which the CDSC is imposed, the amount of the charge ranges between 4.5%
and 1% of net asset value depending on the number of years since the date
of purchase (except in the case of purchases by certain 401(k) plans in
which case a 3% CDSC is imposed for the eight year period after the date
of purchase). For the six months ended January 31, 1994, Smith Barney
Shearson received from shareholders $47,684 in CDSCs on the redemption of
Class B shares.
No officer, director or employee of Smith Barney Shearson, Global Asset
Management, Boston Advisors or of any parent or subsidiary of those
corporations receives any compensation from the Trust for serving as
Trustee or officer of the Trust. The Trust pays each Trustee who is not an
officer, director or employee of Smith Barney Shearson, Global Asset
Management, Boston Advisors or any of their affiliates $6,000 per annum
plus $1,500 per meeting attended and reimburses each such Trustee for
travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, serves as the Trust's custodian. The Shareholder Services
Group, Inc., a subsidiary of First Data Corporation, serves as the Trust's
transfer agent.
3. DISTRIBUTION AGREEMENT
Smith Barney Shearson acts as distributor of the Fund's shares pursuant to
a distribution agreement with the Trust and sells shares of the Fund
through Smith Barney Shearson or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a Services
and Distribution Plan (the "Plan"). Under this Plan, the Fund compensates
Smith Barney Shearson for servicing shareholder accounts for Class A,
Class B and Class D shareholders and covers expenses incurred in distrib-
uting Class B and Class D shares. Smith Barney Shearson is paid an annual
service fee with respect to Class A, Class B and Class D shares of the
Fund at the annual rate of 0.25% of the value of the average daily net as-
sets of each respective class of shares. Smith Barney Shearson is also
paid an annual distribution fee with respect to Class B and Class D shares
at the annual rate of 0.50% of the value of the average daily net assets
of each respective class of shares. For the six months ended January 31,
1994, the service fee for Class A, Class B and Class D shares was $3,741,
$93,851 and $30, respectively. For the six months ended January 31, 1994,
the distribution fee for Class B and Class D shares was $186,802 and $60,
respectively.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class. Operating expenses directly attributable to a class
<PAGE>
of shares are charged to that class' operations. In addition to the above
service and distribution fees, class specific operating expenses include
transfer agent fees. For the six months ended January 31, 1994, transfer
agent fees for Class A, Class B and Class D shares were $1,658, $45,556
and $49, respectively.
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding short-
term investments and U.S. government securities, aggregated $63,204,210
and $77,456,462, respectively, for the six months ended January 31, 1994.
Costs of purchases and proceeds from sales of long-term U.S. government
securities aggregated $33,739,500 and $9,432,828, respectively, for the
six months ended January 31, 1994.
At January 31, 1994, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$2,604,647, and the aggregate gross unrealized depreciation for all secu-
rities in which there was an excess of tax cost over value was $958,118.
Option activity for the six months ended January 31, 1994 was as follows:
<TABLE>
<CAPTION>
FACE
PREMIUMS VALUE
<S> <C> <C>
Options outstanding at July 31, 1993 0 0
Options written $ 96,602 GBP 7,500,000
Options exercised (83,988) (6,000,000)
Options outstanding at January 31, 1994 $ 12,614 GBP 1,500,000
</TABLE>
6. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest
of each class in each separate series with a $.001 par value. Changes in
shares of beneficial interest of the Fund which are divided into three
classes (Class A, Class B and Class D) were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
1/31/94 7/31/93*
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 655,718 $ 11,049,713 1,182,632 $ 19,303,134
Issued as reinvestment of dividends 8,645 144,140 3,797 61,933
Redeemed (644,116) (10,877,372) (1,041,877) (17,023,992)
Net increase 20,247 $ 316,481 144,552 $ 2,341,075
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
1/31/94 7/31/93*
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 1,421,248 $ 24,151,107 2,174,986 $ 35,662,222
Issued as reinvestment of dividends 177,621 2,952,578 214,872 3,486,967
Redeemed (966,479) (16,368,312) (1,534,376) (25,094,500)
Net increase 632,390 $ 10,735,373 855,482 $ 14,054,689
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
1/31/94 7/31/93**
CLASS D SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 130 $ 2,183 1,422 $ 23,492
Issued as reinvestment of dividends 66 1,098 30 498
Redeemed (72) (1,219) (71) (1,166)
Net increase 124 $ 2,062 1,381 $ 22,824
<FN>
* The Fund commenced selling Class A shares on November 6, 1992. Any
shares outstanding prior to November 6, 1992 were designated Class B
shares.
** The Fund commenced selling Class D shares to the public on February 4,
1993.
</TABLE>
<PAGE>
7. LENDING OF PORTFOLIO SECURITIES
The Fund has the ability to lend its securities to brokers, dealers and
other financial organizations. Loans of securities by the Fund are collat-
eralized 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. At January 31, 1994, the Fund had no secu-
rities on loan.
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments in-
volves special risks and considerations not typically associated with in-
vesting in securities of U.S. companies and the United States government.
These risks include revaluation of currencies and future adverse political
and economic developments. Moreover, securities of many foreign companies
and foreign governments and their markets may be less liquid and their
prices more volatile than securities of comparable U.S. companies and the
United States government.
9. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Continental Bank N.A. under an Amended and Restated
Line of Credit Agreement (the "Agreement") dated April 30, 1992, primarily
for temporary or emergency purposes, including the meeting of redemption
requests that otherwise might require the untimely disposition of securi-
ties. Under this Agreement, the Fund may borrow up to the lesser of $25
million or 10% of its net assets. Interest is payable either at the bank's
Money Market Rate or the London Interbank Offered Rate (LIBOR) plus 0.375%
on an annualized basis. The Fund and the other affiliated entities are
charged an aggregate commitment fee of $125,000 which is allocated equally
among each of the participants. The Agreement requires, among other provi-
sions, each participating fund to maintain a ratio of net assets (not in-
cluding funds borrowed pursuant to the Agreement) to aggregate amount of
indebtedness pursuant to the Agreement of no less than 5 to 1. During the
six months ended January 31, 1994, the Fund did not borrow under the
Agreement.
10. SUBSEQUENT EVENT
On January 20, 1994, the Board of Trustees of the Fund terminated the
investment advisory agreement with Lehman Brothers Global Asset Management
Limited. In addition, the Board proposed that the Fund enter into a new
investment advisory agreement with Smith Barney Global Capital Management,
Inc. ("SBGCM"). This agreement would contain substantially the same terms,
conditions and fees as the Fund's previous agreement, however, SBGCM has
agreed to waive 50% of its investment advisory fees until such time as the
Fund's Board of Trustees and SBGCM mutually agree otherwise. Pending
shareholder approval, the new advisory agreement would become effective on
March 22, 1994. The Board of Trustees has called a shareholder meeting for
the purpose of considering the new agreement.
SBGCM is located at 10 Piccadilly, London, W1V 9LA England and has been in
the investment counseling business since 1988. SBGCM is a wholly-owned
subsidiary of Smith Barney Shearson Holdings Inc. ("Holdings"). Holdings
is a wholly owned subsidiary of The Travelers Inc., a financial services
holding company engaged through its subsidiaries principally in the busi-
nesses of consumer financial services, investment services and insurance
services.
GLOBAL BOND
FUND
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
<PAGE>
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Stephen J. Treadway
President
Richard P. Roelofs
Executive Vice President
Vincent Nave
Treasurer
Francis J. McNamara, III
Secretary
This report is submitted for
the general information of the
shareholders of Smith Barney
Shearson Global Bond Fund.
It is not authorized for distribution
to prospective investors unless
accompanied or preceded by an
effective Prospectus for the Fund,
which contains information
concerning the Fund's investment
policies, fees and expenses, as well
as other pertinent information.
SMITH BARNEY SHEARSON
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 30, 202, 244
FD2171 C4
<PAGE>
ANNUAL REPORT OF SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
DATED APRIL 30, 1993
<PAGE>
Annual Report April 30, 1993
SHEARSON LEHMAN BROTHERS
Short-Term
World Income
Fund
[LOGO]
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
DEAR SHAREHOLDER:
We are pleased to provide you with the Annual Report for Shearson Lehman
Brothers Short-Term World Income Fund for the fiscal year ended April 30, 1993.
INVESTMENT OBJECTIVE
The Fund seeks to maximize current income consistent with protection of
principal while maintaining a relatively stable net asset value. To achieve its
objective, the Fund invests in a portfolio of high-quality debt securities of
short maturity (less than three years), denominated in U.S. dollars and foreign
currencies. The Fund employs a cross-hedging strategy in an attempt to limit
foreign exchange risks.
PERFORMANCE
The past six months ending on April 30, 1993, were characterized by two very
distinct periods of behavior for the Fund. During November of 1992, European
currencies continued the turmoil of earlier in the autumn when intense selling
pressure forced Sterling and the Italian lira to leave the Exchange Rate
Mechanism (ERM). The ERM is a managed exchange rate system, linking the
currencies of certain member states of the European Community. In November,
pressure on the remaining ERM members resulted in the devaluations of the
Spanish peseta and Portuguese escudo. The Swedish krone followed the Finnish
markka's September move by abandoning its link with the above mentioned system.
The Fund's net asset value for Class A shares declined in that one month by
$0.14 to $6.88. Since then, order has been increasingly restored to the European
currency markets and the net asset value (NAV) of the Fund has moved in a
six-cent range above $6.85.
As conditions have returned to normal, the distribution rate for Class A
shares has been increased from 4.90% in early November to 5.25% on April 5,
1993, 2.50% above income from the average money market fund. The distribution
rate for Class B shares was similarly increased from 4.50% to 4.75%, 2.0% above
average money market fund rates. Of course, while the Fund's price per share
will fluctuate with market conditions, money market funds seek to maintain a
stable NAV of $1.00.
The total return over the last six months has been 0.05% and 0.00%* for
Class A and Class B shares, respectively, reflecting the difficulties of the
Fund which followed from the ERM crisis described above. Since the end of the
year, however, the return has been 1.34% and 1.13% (4.02% and 3.39% annualized)
for Class A and Class B shares, respectively.
Continued
- --------------------------------------------------------------------------------
*From inception of Class B shares on November 6, 1992.
1
<PAGE>
INVESTMENT ENVIRONMENT
The investment strategy of the Fund relies, as we have stressed in previous
letters, on there being a reasonable spread of interest rates available
worldwide and on various currencies maintaining their relative value within
historical ranges. The past year was difficult for the Fund's strategy. Interest
rate spreads narrowed dramatically and, for a period of eleven consecutive
months, higher yielding European currencies depreciated against lower yielding
European currencies. This is without precedent in the contemporary history of
world markets. This period of currency instability was punctuated by the
devaluation of several major currencies and the threat of devaluation for
several more.
For some time weak economic conditions in Europe, like those in the United
States, have called for lower interest rates. The Bundesbank's high interest
rate policy at this time of recession in Europe has been the most significant
source of ERM tensions. Since German interest rates were cut in February,
currency pressure has been subsiding. ERM members have been able to cut their
interest rates while maintaining their deutschemark parity.
One consequence of the reduction in currency pressures within Europe is that
the depreciating trend of high yielding currencies relative to the low-yielders
appears to have ended. This is one of the two necessary conditions for the
success of the Fund's strategy. The other condition, a reasonable spread of
interest rates between countries, has been met by the departure of currencies
from the ERM and the devaluation of others. There is now a greater divergence of
monetary policies in Europe. The loss in credibility suffered by the European
Monetary System and the consequent delay of monetary integration means that
currencies of weak economies will not lose all their risk premium. Therefore the
range of prevailing European rates will remain wide. Interest rate differentials
are currently higher than they have been for years.
OUTLOOK
The prospects for continued ERM stability have significantly improved. With
the forced departure or devaluation of weak currencies in the ERM since
September 1992, many pressure points have disappeared. Most of the remaining
tensions are being relieved by reductions in German interest rates. This means
that the two important conditions for the Fund's strategy -- reasonable levels
of currency stability and a reasonable spread of interest rates -- have both
materially improved from the period six months ago.
While we continue to monitor a number of potentially destabilizing events,
overall conditions are more favorable for the Fund's strategy now than at any
time for the last twelve months. This is already evident in the recent stability
of the NAV and the return to a distribution rate of 2.50% for Class A shares and
2.0% for Class B shares above money market funds.
As many of you are aware, Smith Barney, Harris Upham & Co. Incorporated has
entered into an agreement to purchase certain assets of
Continued
2
<PAGE>
Shearson Lehman Brothers Inc. As a result, it is expected that the Fund will
change its name to the Smith Barney Shearson Short-Term World Income Fund.
We are encouraged by the changes to the investment environment which have
occurred during the latter portion of the last six months and believe that these
changes present an enhanced opportunity for the Fund to achieve its objectives
and meet your expectations. We remain, as always, grateful for your continued
support.
Sincerely,
<TABLE>
<S> <C>
Heath B. McLendon Alan J. Brown
Chairman of the Board and Vice President and Investment Officer
Investment Officer
</TABLE>
June 21, 1993
3
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Portfolio Highlights April 30, 1993 (unaudited)
Industry Breakdown
Top Ten Holdings
<TABLE>
<CAPTION>
Percentage of
Security Net Assets
<S> <C> <C>
- -------------------------------------------------------------------------------------
Postipankki, 7.735% due 6/21/93 5.3 %
Government of France Treasury Bill, 7.750% due 7/15/93 4.7
Societe General De France, 7.510% due 10/18/93 4.6
Banca Nationale Lavoro, 9.563% due 5/18/93 4.5
CRS America Inc., 3.120% due 8/5/93 4.3
Nippon Telephone and Telegram, 9.500% due 5/31/95 4.0
World Bank, 8.625% due 10/1/95 4.0
Metropolis of Tokyo, 9.250% due 6/28/94 3.8
Credit Locale, 7.750% due 5/23/94 3.8
Swedish Export Credit, 7.500% due 3/20/94 3.7
</TABLE>
4
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments April 30, 1993
<TABLE>
<CAPTION>
Market
Value
Face Value (Note 1)
<C> <S> <C>
- ----------------------------------------------------------------------------
UNITED STATES DOLLAR BONDS -- 35.4%
USD 5,000,000 ANZ Bank, 3.080% due 5/4/93 $ 5,000,000
5,000,000 Credit Locale, 7.750% due 5/23/94 5,195,315
3,000,000 Credit Lyonnais, 7.750% due 8/20/93 3,037,503
6,000,000 CRS America Inc., 3.120% due 8/5/93 5,952,026
3,000,000 Massachusetts Mutual Insurance, 7.500% due 3,039,378
9/30/93
5,000,000 Metropolis of Tokyo, 9.250% due 6/28/94 5,304,690
5,000,000 Nippon Telephone and Telegram, 9.500% due 5,509,380
5/31/95
5,000,000 Nordic Investment Bank, 7.500% due 8/27/93 5,058,500
5,000,000 Swedish Export Credit, 7.500% due 3/20/94 5,157,815
5,000,000 World Bank, 8.625% due 10/1/95 5,505,945
- ----------------------------------------------------------------------------
48,760,552
TOTAL UNITED STATES DOLLAR BONDS
(Cost $48,049,136)
- ----------------------------------------------------------------------------
FRENCH FRANC BONDS -- 13.1%
FRF 7,220,000 General Electric Capital Corporation, 1,399,360
9.375% due 3/28/95
35,000,000 Government of France Treasury Bill, 6,437,990
7.750% due 7/15/93+
20,000,000 Guiness Finance B.V., 9.750% due 3/28/96 3,954,049
35,000,000 Societe Generale De France, 7.510% due 6,317,683
10/18/93
- ----------------------------------------------------------------------------
18,109,082
TOTAL FRENCH FRANC BONDS
(Cost $17,936,962)
- ----------------------------------------------------------------------------
AUSTRALIAN DOLLAR BONDS -- 6.1%
AUD 6,000,000 State Bank of South Australia, 15.250% due 4,584,484
5/4/94
5,000,000 Swiss Bank Corporation, 14.750% due 6/6/94 3,851,236
- ----------------------------------------------------------------------------
8,435,720
TOTAL AUSTRALIAN DOLLAR BONDS
(Cost $8,753,248)
- ----------------------------------------------------------------------------
FINNISH MARRKA BOND -- 5.2% (Cost $9,647,441)
FIM 40,000,000 Postipankki, 7.735% due 6/21/93 7,239,524
- ----------------------------------------------------------------------------
EUROPEAN CURRENCY UNIT -- 4.5% (Cost $5,957,562)
ECU 5,000,000 Banca Nationale Lavoro, 9.563% due 5/18/93 6,153,477
- ----------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (continued) April 30, 1993
<TABLE>
<CAPTION>
Market
Value
Face Value (Note 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
ITALIAN LIRA BONDS -- 3.9%
ITL 3,000,000,000 Export Development Corporation, $ 2,014,114
12.750% due 10/29/93
5,000,000,000 Unilever, 12.750% due 7/4/94 3,387,684
- ----------------------------------------------------------------------------
5,401,798
TOTAL ITALIAN LIRA BONDS
(Cost $6,824,943)
- ----------------------------------------------------------------------------
BELGIAN FRANC BOND -- 3.3% (Cost $4,478,440)
BEF 150,000,000 Kingdom of Belgium Treasury Bill, 4,522,768
7.550% due 7/22/93+
- ----------------------------------------------------------------------------
SWEDISH KRONA BOND -- 1.7% (Cost $2,377,021)
SEK 18,000,000 Kingdom of Sweden Treasury Bill, 2,411,496
8.650% due 7/21/93+
- ----------------------------------------------------------------------------
TIME DEPOSITS -- 25.6%
BEF 149,135,773 Barclays Bank, 4,571,211
7.750% due 5/5/93
ITL 5,939,260,250 Creditanstalt Bank, 3,980,284
10.813% due 5/7/93
Salomon Brothers:
ITL 6,744,555,691 11.250% due 5/5/93 4,519,965
BEF 149,357,433 7.500% due 5/7/93 4,578,006
ITL 6,759,309,406 11.250% due 5/7/93 4,529,852
Unibank:
FRF 18,516,219 8.875% due 5/4/93 3,458,713
SEK 7,940,121 9.750% due 5/5/93 1,083,694
FRF 18,548,172 8.313% due 5/7/93 3,464,682
SEK 7,955,174 9.250% due 5/7/93 1,085,749
ECU 3,239,495 Westpac, 3,986,198
8.563% due 5/7/93
- ----------------------------------------------------------------------------
35,258,354
TOTAL TIME DEPOSITS
(Cost $35,522,915)
- ----------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (continued) April 30, 1993
<TABLE>
<CAPTION>
Market
Value
Face Value (Note 1)
- ----------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENTS -- 11.5%
USD 7,000,000 Agreement with Goldman, Sachs & Co., 2.900% $ 7,000,000
dated 4/30/93 to be repurchased at
$7,001,692 on 5/3/93, collateralized by
$5,105,000
U.S. Treasury Bond 11.125% due 8/15/03
8,828,000 Agreement with Morgan Stanley & Company, 8,828,000
2.900% dated 4/30/93 to be repurchased at
$8,830,133 on 5/3/93, collateralized by
$7,555,000
U.S. Treasury Bond 8.875% due 2/15/99
- ----------------------------------------------------------------------------
15,828,000
TOTAL REPURCHASE AGREEMENTS
(Cost $15,828,000)
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS
(Cost $155,375,668*) 110.3% 152,120,771
OTHER ASSETS AND LIABILITIES (Net) (10.3) (14,225,714)
- ----------------------------------------------------------------------------------
NET ASSETS 100.0% $137,895,057
- ----------------------------------------------------------------------------------
</TABLE>
+Discount note; rate represents annualized yield to maturity. (unaudited)
*Aggregate cost for Federal tax purposes.
See Notes to Financial Statements.
7
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Schedule of Forward Foreign Exchange Contracts April 30, 1993
<TABLE>
<CAPTION>
Contract
Value Market Value
Date (Note 1)
<S> <C> <C>
- -------------------------------------------------------------------------------------
FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
10,000,000 Australian Dollars 6/25/93 $ 7,025,126
304,000,000 Belgian Francs 5/12/93 9,306,596
27,050,000 Canadian Dollars 7/6/93 21,215,121
131,000,000 Danish Krone 5/12/93 21,418,696
4,600,000 Great Britian Pounds 6/18/93 7,194,008
4,600,000 Irish Punts 6/21/93 6,999,849
10,500,000,000 Italian Lire 5/24/93 6,997,485
2,600,000 Netherland Guilders 5/19/93 1,454,089
20,750,000 New Zealand Dollars 6/21/93 11,177,656
4,600,000 Swiss Francs 5/12/93 3,204,840
- -------------------------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
(Contract amount $94,065,274) $ 95,993,466
- -------------------------------------------------------------------------------------
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
13,750,000 Australian Dollars 6/25/93 $ (9,659,548)
304,000,000 Belgian Francs 5/12/93 (9,306,596)
30,650,000 Canadian Dollars 7/6/93 (24,038,575)
40,000,000 Finnish Marrka 6/21/93 (7,262,829)
34,000,000 German Marks 7/20/93 (21,195,436)
12,000,000 Great Britian Pounds 6/18/93 (18,766,978)
18,947,340,000 Italian Lire 5/24/93 (12,627,021)
37,100,000 Netherland Guilders 5/19/93 (20,748,733)
1,500,000 Netherland Guilders 6/21/93 (808,023)
35,900,000 Swiss Francs 5/12/93 (25,011,687)
- -------------------------------------------------------------------------------------
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(Contract amount $143,830,216) $(149,425,426)
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities April 30, 1993
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $155,375,668) (Note 1)
See accompanying schedule:
Investments $136,292,771
Repurchase Agreements 15,828,000 $152,120,771
- ----------------------------------------------------------------------------------
Currency, at value (Cost $6,215) 6,215
Receivable for forward foreign exchange contracts to
sell 143,830,216
Forward foreign exchange contracts to buy, at value
(Contract cost $94,403,127) (Note 1)
See accompanying schedule 95,993,466
Interest receivable 3,584,069
Receivable for Fund shares sold 427,161
Unamortized organization costs (Note 7) 91,313
Prepaid expense 96,151
Accounts receivable from affiliate 79,435
- ----------------------------------------------------------------------------------
Total Assets 396,228,797
- ----------------------------------------------------------------------------------
LIABILITIES:
Forward foreign exchange contracts to sell, at value
(Contract cost $144,622,012) (Note 1)
See accompanying schedule 149,425,426
Payable for forward foreign exchange contracts to
buy 94,065,274
Payable for investment securities purchased 13,658,288
Dividends payable 636,859
Payable for Fund shares redeemed 250,960
Custodian fees payable (Note 2) 119,041
Service fees payable (Note 3) 28,560
Investment advisory fee payable (Note 2) 31,416
Distribution fee payable (Note 3) 20,808
Transfer agent fees payable (Notes 2 and 4) 15,000
Sub-investment advisory and administration fee
payable (Note 2) 11,424
Accrued Trustees' fees and expenses (Note 2) 5,750
Accrued expenses and other payables (Note 4) 64,934
- ----------------------------------------------------------------------------------
Total Liabilities 258,333,740
- ----------------------------------------------------------------------------------
NET ASSETS $137,895,057
- ----------------------------------------------------------------------------------
NET ASSETS consist of:
Accumulated net realized loss on security
transactions, forward
foreign exchange contracts, and currency
transactions $(38,936,805)
Net unrealized depreciation of securities, forward
foreign
exchange contracts, foreign currencies and net
other assets (6,505,041)
Par value 20,139
Paid-in capital in excess of par value 183,316,764
- ----------------------------------------------------------------------------------
TOTAL NET ASSETS $137,895,057
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (continued) April 30, 1993
<TABLE>
<S> <C> <C>
NET ASSETS:
CLASS A SHARES:
Net Asset Value and redemption price per share
($88,033,637 DIVIDED BY 12,855,806 shares of beneficial interest
outstanding) $6.85
- -------------------------------------------------------------------------------------
Maximum offering price per share ($6.85 DIVIDED BY 0.97) (based on a
sales charge
of 3.0% of the offering price on April 30, 1993) $7.06
- -------------------------------------------------------------------------------------
CLASS B SHARES:
Net Asset Value and offering price per share+
($49,861,420 DIVIDED BY 7,283,635 shares of beneficial interest
outstanding) $6.85
- -------------------------------------------------------------------------------------
</TABLE>
+Redemption price per share is equal to Net Asset Value less any applicable
contingent deferred sales charge.
See Notes to Financial Statements.
10
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended April 30, 1993
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest income $12,370,522
EXPENSES:
Investment advisory fee (Note 2) $1,042,266
Distribution fee (Note 3) 398,884
Sub-investment advisory and administration fee (Note
2) 412,223
Registration and filing fees (Note 4) 360,072
Custodian fees (Note 2) 391,114
Transfer agent fees (Notes 2 and 4) 248,909
Service fees (Note 3) 201,032
Legal and audit fees 109,407
Amortization of organization costs (Note 7) 36,000
Trustees' fees and expenses (Note 2) 35,458
Other (Note 4) 185,697
Fees waived by investment adviser, sub-investment
adviser and
administrator, custodian and distributor (Notes 2
and 3) (546,786)
- ----------------------------------------------------------------------------------
Total Expenses 2,874,276
- ----------------------------------------------------------------------------------
NET INVESTMENT INCOME 9,496,246
- ----------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (Notes 1 and 5):
Net realized gain/(loss) on:
Securities transactions (7,485,327)
Forward foreign exchange contracts 4,859,977
Foreign currency transactions (1,389,208)
- ----------------------------------------------------------------------------------
Net realized loss on investments during the year (4,014,558)
- ----------------------------------------------------------------------------------
Net change in unrealized appreciation/(depreciation)
of:
Securities (3,487,371)
Forward foreign exchange contracts (7,410,903)
Foreign currencies and net other assets 12,620
- ----------------------------------------------------------------------------------
Net unrealized depreciation of investments during the
year (10,885,654)
- ----------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (14,900,212)
- ----------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(5,403,966)
- ----------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
4/30/93 4/30/92
<S> <C> <C>
Net investment income $ 9,496,246 $ 34,346,502
Net realized loss on securities transactions, forward
foreign exchange
contracts and foreign currency transactions during the
year (4,014,558) (13,527,438)
Net unrealized appreciation/(depreciation) of
securities, forward foreign
exchange contracts, foreign currencies and net other
assets during the year (10,885,654) 1,524,824
- ------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
operations (5,403,966) 22,343,888
Distributions to shareholders from net investment
income:
Class A (9,393,559) (33,267,036)
Class B (1,182,153) --
Distributions to shareholders from Capital (Note 1):
Class A (223,984) --
Class B (28,188) --
Net increase/(decrease) in net assets from Fund share
transactions:
Class A share transactions (Note 6) (181,264,369) (231,990,374)
Class B share transactions (Note 6) 50,472,473 --
- ------------------------------------------------------------------------------------
Net decrease in net assets (147,023,746) (242,913,522)
NET ASSETS:
Beginning of year 284,918,803 527,832,325
- ------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of
$1,079,466, at April 30, 1992) $137,895,057 $284,918,803
- ------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Condensed Financial Information
For a Class A share outstanding throughout each year.
<TABLE>
<CAPTION>
Year Year Period
Ended Ended Ended
4/30/93 4/30/92 4/30/91*
<S> <C> <C> <C>
Investment income $ 0.44 $ 0.72 $ 0.86
Expenses (0.12) (0.10) (0.10)
Fees waived by investment adviser,
sub-investment
adviser and administrator, custodian,
distributor
and/or transfer agent 0.02 0.01 0.01
- -------------------------------------------------------------------------------------
Net investment income 0.34 0.63 0.77
Dividends from net investment income (0.38) (0.60) (0.77)
Distributions from Capital (Note 1) (0.01)
Net realized and unrealized loss on
investments (0.54) (0.21) (0.14)
- -------------------------------------------------------------------------------------
Net decrease in net asset value (0.59 ) (0.18 ) (0.14 )
Net Asset Value:
Beginning of year 7.44 7.62 7.76
- -------------------------------------------------------------------------------------
End of year $ 6.85 $ 7.44 $ 7.62
- -------------------------------------------------------------------------------------
Ratios to average net assets:
Net investment income 4.83 % 8.33 % 10.23 %**
Operating expenses+ 1.40 % 1.26 % 1.22 %**
Portfolio turnover rate 57 % 63 % 267 %
Number of shares outstanding at end of year
(000's) 12,856 38,300 69,255
- -------------------------------------------------------------------------------------
</TABLE>
*The Fund commenced operations on May 22, 1990. On November 6, 1992 the Fund
commenced selling Class B shares. Those shares in existence prior to November
6, 1992 were designated as Class A shares.
**Annualized.
+Annualized expense ratio before waiver of fees by investment adviser,
sub-investment adviser and administrator, custodian, distributor and/or
transfer agent for the years ended April 30, 1993 and 1992 and for the period
ended April 30, 1991 were 1.67%, 1.31% and 1.28%, respectively.
See Notes to Financial Statements.
13
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Condensed Financial Information
For a Class B share outstanding throughout the period.
<TABLE>
<CAPTION>
Period
Ended
4/30/93*
<S> <C>
Investment income $ 0.21
Expenses (0.07)
Fees waived by investment adviser, sub-investment adviser and
administrator,
and custodian 0.01
- -------------------------------------------------------------------------------------
Net investment income 0.15
Dividends from net investment income (0.14)
Distributions from Capital (Note 1) 0.00**
Net realized and unrealized loss on investments (0.07)
- -------------------------------------------------------------------------------------
Net decrease in net asset value (0.06 )
Net Asset Value:
Beginning of period 6.91
- -------------------------------------------------------------------------------------
End of period $ 6.85
- -------------------------------------------------------------------------------------
Ratios to average net assets (annualized):
Net investment income 4.48 %
Operating expenses+ 1.75 %
Portfolio turnover rate 57 %
Number of shares outstanding at end of period (000's) 7,284
- -------------------------------------------------------------------------------------
</TABLE>
*The Fund commenced selling Class B shares on November 6, 1992.
**Represents a number less than one cent.
+Annualized expense ratio before waiver of fees by investment adviser,
sub-investment adviser and administrator, and custodian for the period ended
April 30, 1993 was 2.02%.
See Notes to Financial Statements.
14
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Shearson Lehman Brothers Short-Term World Income Fund (the "Fund") was
organized under the laws of the Commonwealth of Massachusetts on March 13, 1990
as an entity commonly known as a "Massachusetts business trust." The Fund is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a non-diversified, open-end
management investment company. The Fund commenced operations on May 22, 1990. As
of November 6, 1992, the Fund began offering two classes of shares to the
general public: Class A shares and Class B shares. Class A shares are sold with
a front-end sales charge. Class B shares may be subject to a contingent deferred
sales charge. Beginning on or about September 30, 1994, Class B shares will
automatically convert to Class A shares four years after the original purchase
date. Each class of shares has identical rights and privileges except with
respect to the effect of the respective sales charges, the distribution and/or
service fees borne by each class, expenses allocable exclusively to each class,
voting rights on matters affecting a single class, the exchange privilege of
each class and the conversion feature of Class B shares. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements.
Portfolio valuation: Generally, the Fund's investments are valued at market
value or, in the absence of a market value, at fair value as determined by or
under the direction of the Fund's Board of Trustees. A security which is traded
primarily on a United States 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. Portfolio securities which are traded primarily on
foreign securities 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 that a value was so established is likely to
have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Fund's Board of Trustees or its delegates. Debt securities (other than
government securities and short-term obligations) are valued by The Boston
Company Advisors, Inc. ("Boston Advisors") after consultation with independent
pricing services approved by the Fund's Board of Trustees. Investments in
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.
15
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
Repurchase agreements: The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation 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 collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is potential loss to the
Fund in the event the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a possible decline
in the value of the underlying securities during the period while the Fund seeks
to assert its rights. The Fund's investment adviser or administrator, acting
under the supervision of the Board of Trustees, reviews 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.
Foreign currency: The books and records of the Fund are maintained in United
States (U.S.) dollars. Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the exchange rates prevailing at
the end of the period, and purchases and sales of investment securities, income
and expenses are translated on the respective dates of such transactions.
Unrealized gains and losses which result from changes in foreign currency
exchange rates have been included in the unrealized appreciation/(depreciation)
of investments and net other assets. Net unrealized foreign currency gains and
losses resulting from changes in exchange rates include foreign currency gains
and losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interest and dividends recorded on the books of the Fund and the
amount actually received. The portion of foreign currency gains and losses
related to fluctuation in exchange rates between the initial purchase trade date
and subsequent sale trade date is included in realized gains and losses on
investment securities sold.
Forward foreign currency contracts: Forward foreign currency contracts are
valued at the forward rate, and are marked-to-market daily. The change in market
value is recorded by the Fund as an unrealized gain or loss. The difference
between the forward rate and the spot rate at the inception of the contract is
amortized or accreted to income over the life of the forward contract on the
straight line method and is included in interest income in the
16
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
accompanying Statement of Operations. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the cost of the
contract as adjusted for accretion or amortization and the value at the time it
was closed.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Fund's portfolio securities, but it
does establish a rate of exchange that can be achieved in the future. Although
forward foreign currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain that might
result should the value of the currency increase. In addition, the Fund could be
exposed to risks if the counterparties to the contracts are unable to meet the
terms of their contracts.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Investment income and
realized and unrealized gains and losses are allocated based upon relative net
assets of each class. Interest income is recorded on the accrual basis.
Dividends and distributions to shareholders: Dividends from net investment
income determined on a class level, if any, of the Fund are declared daily and
paid on the last business day of the Shearson Lehman Brothers Inc. ("Shearson
Lehman Brothers") statement month. Distributions determined on a fund level, if
any, of any net short-and long-term capital gains earned by the Fund will be
declared and paid annually after the close of the fiscal year in which they are
earned. Additional distributions of net investment income and capital gains may
be made at the discretion of the Board of Trustees in order to avoid the
application of a 4% nondeductible excise tax on certain undistributed amounts of
ordinary income and capital gains. Amounts distributed in excess of accumulated
net investment income determined on a Fund level, if any, as determined for
financial statement purposes have been reported as distributions from paid-in
capital at fiscal year end. Certain of these distributions which are reported as
being from paid-in capital for financial statement purposes may be reported to
shareholders as taxable distributions due to differing tax accounting rules.
Return of capital for financial statements purposes is calculated on a Fund
level. Amounts designated as return of capital on a class level have been
calculated by applying the percentage of total return of capital to total
distributions paid by the Fund to each class' individual distribution from net
investment income.
17
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
Federal income taxes: It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Therefore, no Federal income tax provision is required.
Foreign income taxes: Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source.
2. INVESTMENT ADVISORY FEE, SUB-INVESTMENT ADVISORY AND
ADMINISTRATION FEE AND OTHER RELATED PARTY TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with PanAgora Asset Management Limited ("PanAgora U.K."). The issued
and outstanding common stock of PanAgora U.K. is held by Shearson Lehman
Brothers (representing 50% of the voting stock) and Nippon Life Insurance
Company (representing 50% of the voting stock). Shearson Lehman Brothers is a
wholly owned subsidiary of Shearson Lehman Brothers Holdings Inc. ("Holdings").
American Express Company ("American Express") owns 100% of Holdings' issued and
outstanding common stock, which represents approximately 92% of Holdings' issued
and outstanding voting stock. The remainder of Holdings' voting stock is owned
by Nippon Life Insurance Company. Under the Advisory Agreement, the Fund pays a
monthly fee at the annual rate of .55% of the value of its average daily net
assets.
The Fund has also entered into a sub-investment advisory and administration
agreement (the "Sub-Advisory Agreement") with Boston Advisors, an indirect
wholly owned subsidiary of Shearson Lehman Brothers. Under the Sub-Advisory
Agreement, the Fund pays a monthly fee at the annual rate of .20% of the value
of its average daily net assets.
From time to time, PanAgora U.K. and Boston Advisors may waive a portion or
all of their respective fees otherwise payable to them. PanAgora U.K. and Boston
Advisors voluntarily waived fees of $371,498 and $132,737, respectively, for the
year ended April 30, 1993.
On September 14, 1992, Shearson Lehman Brothers entered into an agreement
for the sale of The Boston Company, Inc. ("TBC"), the parent company of Boston
Advisors and Boston Safe Deposit and Trust Company ("Boston Safe"), to Mellon
Bank Corporation ("Mellon"). The transaction,
18
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
which is subject to certain conditions and approvals, is intended to be
consummated during the beginning of the second quarter of 1993. The Board of
Trustees have approved a new administration agreement with Boston Advisors to
take effect upon the closing of the transaction.
On March 12, 1993, Primerica Corporation ("Primerica"), Smith Barney, Harris
Upham & Co. Incorporated ("Smith Barney") and Shearson Lehman Brothers signed a
definitive agreement pursuant to which Primerica and Smith Barney would acquire
the assets of the domestic retail brokerage and asset management businesses of
Shearson Lehman Brothers (the "Transaction"). The Transaction, which is subject
to certain conditions and approvals, is intended to be completed in early July
1993. The Fund's Board has approved a new distribution agreement containing
terms and conditions substantially similar to the current agreement, (which
agreement, by its terms, would terminate upon completion of the Transaction),
together with seeking such other approvals and actions as may be necessary or
appropriate.
For the period ended April 30, 1993, Shearson Lehman Brothers received
$32,846 from investors representing commissions (sales charges) on sales of
Class A shares.
A contingent deferred sales charge is generally payable by a shareholder in
connection with the redemption of Class B shares within three years (eight years
in the case of purchases by certain 401(k) plans) after the date of purchase. In
circumstances in which the charge is imposed, the amount of the charge ranges
between 3% and 1% of Net Asset Value depending on the number of years since the
date of purchase (except in the case of purchases by certain 401(k) plans in
which case a 3% charge is imposed for the eight year period after the date of
purchase). For the year ended April 30, 1993, Shearson Lehman Brothers received
from shareholders $229,678 in contingent deferred sales charges on the
redemption of Class B shares.
No officer or director, or employee of Shearson Lehman Brothers, PanAgora
U.K., Boston Advisors or any of their affiliates, received any compensation from
the Fund for serving as a Trustee or officer of the Fund. The Fund pays each
Trustee who is not an officer, director or employee of Shearson Lehman Brothers,
PanAgora, Boston Advisors or any of their affiliates $3,000 per annum plus $500
per meeting attended and reimburses such Trustees for travel and out-of-pocket
expenses.
19
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
Boston Safe, an indirect wholly owned subsidiary of Shearson Lehman
Brothers, serves as the Fund's custodian. For the year ended April 30, 1993,
Boston Safe voluntarily waived fees of $15,957. The Shareholder Services Group,
Inc. ("TSSG"), a subsidiary of First Data Corporation ("FDC"), in turn a
partially owned subsidiary of American Express, serves as the Fund's transfer
agent.
3. DISTRIBUTION AGREEMENT
Shearson Lehman Brothers acts as distributor of the Fund's shares pursuant
to a distribution agreement with the Fund, and sells shares of the Fund through
Shearson Lehman Brothers or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, as amended, the Fund has adopted
a Services and Distribution Plan (the "Plan"). Effective November 6, 1992, under
this Plan, the Fund compensates Shearson Lehman Brothers for servicing
shareholder accounts for Class A and Class B shareholders, and covers expenses
incurred in distributing Class B shares. Shearson Lehman Brothers is paid an
annual service fee with respect to Class A and Class B shares of the Fund at the
rate of .25% of the value of the average daily net assets of each respective
class of shares. Shearson Lehman Brothers is also paid an annual distribution
fee with respect to Class B shares at the rate of .50% of the value of the
average daily net assets attributable to those shares. Prior to November 6,
1992, the Fund paid distribution fees at an annual rate of .25% of the value of
the average daily net assets of Class A shares. During the period from November
6, 1992 through April 30, 1993, the Fund incurred $131,336 and $69,696 in
service fees for Class A and Class B shares, respectively. During the period
from May 1, 1992 through November 5, 1992, the Fund incurred $261,657 in
distribution fees for Class A shares of which $26,594 was waived. For the period
from November 6, 1992 through April 30, 1993, the Fund incurred $137,227 in
distribution fees for Class B shares.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class. Operating expenses directly attributable to a class of
shares are
20
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
charged to that class' operations. In addition to the above servicing and
distribution fees, class specific operating expenses including the following for
the period ended April 30, 1993.
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C>
- -------------------------------------------------------------------------------------
Transfer agent fees $ 219,390 $ 29,519
Shareholder reports expense 51,727 3,872
Registration and filing fees 341,193 18,879
- -------------------------------------------------------------------------------------
</TABLE>
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding short-
term obligations, during the year ended April 30, 1993, were $55,437,130 and
$131,996,257, respectively.
At April 30, 1993, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $1,158,254,
and aggregate unrealized depreciation for all securities in which there was an
excess of tax cost over value was $4,413,151.
21
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
6. SHARES OF BENEFICIAL INTEREST
The Fund may issue an unlimited number of shares of beneficial interest with
a par value of $.001 per share. Changes in shares of beneficial interest for the
Fund which are divided into two classes, Class A and Class B, were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
Class A Shares: Shares4/30/93Amount Shares4/30/92Amount
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------
Sold 332,668 $ 2,410,013 7,251,162 $ 54,753,339
Issued as reinvestment of
dividends 869,029 6,238,953 2,893,617 21,761,961
Redeemed (26,645,851) (189,913,335) (41,099,596) (308,505,674)
- -----------------------------------------------------------------------------------
Net decrease (25,444,154) $(181,264,369) (30,954,817) $(231,990,374)
- -----------------------------------------------------------------------------------
<CAPTION>
Year Ended
4/30/93*
Class B Shares: Shares Amount
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------
Sold 25,874 $ 176,898
Issued as reinvestment of
dividends 117,598 808,124
Issued in exchange for shares
of
Short-Term Global Income Fund
(Note 10) 11,391,236 78,714,071
Redeemed (4,251,073) (29,226,620)
- -----------------------------------------------------------------------------------
Net increase 7,283,635 $ 50,472,473
- -----------------------------------------------------------------------------------
</TABLE>
*The Fund commenced selling Class B shares on November 6, 1992. Any shares
outstanding prior to November 6, 1992 were designated as Class A shares.
7. ORGANIZATION COSTS
All costs in connection with the organization of the Fund, including the
fees and expenses of registering and qualifying its shares for distribution
under Federal and state securities regulations, are being amortized on the
straight-line method over a period of sixty months from May 22, 1990, the date
that the Fund commenced operations. In the event that any of the initial shares
of the
22
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
Fund are redeemed during such amortization period, the Fund will be reimbursed
for any unamortized costs in the same proportion as the number of initial shares
outstanding at the time of redemption.
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in U.S. companies and in United States government securities. These
risks include revaluation of currencies and future adverse political and
economic developments. Moreover, securities of many foreign companies and
foreign governments and their markets may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies and the United
States government.
9. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Continental Bank N.A. under an Amended and Restated Line
of Credit Agreement (the "Agreement") dated April 30, 1992, primarily for
temporary or emergency purposes, including the meeting of redemption requests
that otherwise might require the untimely disposition of securities. The Fund
may generally borrow up to the lesser of $25 million or 15% of its net assets.
Interest is payable either at the bank's Money Market Rate or the London
Interbank Offered Rate (LIBOR) plus .375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires, among other provisions, each participating fund to maintain
a ratio of net assets (not including funds borrowed pursuant to the Agreement)
to aggregate amount of indebtedness pursuant to the Agreement of no less than 5
to 1. During the year ended April 30, 1993, the Fund did not borrow under the
Agreement.
10. REORGANIZATION
On November 20, 1992, the Fund ("Acquiring Fund") acquired the assets and
certain liabilities of the Short-Term Global Income Portfolio, a series of
Shearson Lehman Brothers Income Funds ("Acquired Fund"), in exchange for shares
of the Acquiring Fund, pursuant to a plan of reorganization approved by the
Acquired Fund's shareholders on October 13, 1992. Total shares issued by
23
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
the Acquiring Fund, value of shares issued by Acquiring Fund, total net assets
of the Acquired Fund and the Acquiring Fund and any unrealized depreciation
included in the Acquired Fund's total net assets are as follows:
<TABLE>
<CAPTION>
Shares Total Net Total Net
Issued by Assets of Assets of
Acquiring Acquired Acquiring Acquired Acquiring
Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C>
- --------------------------------------------------------------
Short-Term
Global
Income Fund 11,391,236 $78,714,071 $140,486,876
The Fund
- --------------------------------------------------------------
</TABLE>
The net assets of the Acquired Fund before acquisition included unrealized
depreciation of $837,536.
The net assets of the Acquiring Fund immediately after the acquisition were
$219,200,947.
11. TAX AND BOOK REPORTING DIFFERENCES
Net investment income (commonly referred to as "book income") is reported in
the accompanying statements under generally accepted accounting principles.
Differences between book and tax accounting may result for a variety of reasons,
including the marking-to-market of certain financial instruments and the
deferral of certain losses for tax purposes. The following is a reconciliation
of net investment income to taxable income. Distributions made by the Fund
during the year were in excess of taxable income and long-term capital gains
represent a tax basis return of capital.
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------
Investment income $17,451,400
Expenses (2,874,276)
- -------------------------------------------------------------------------------------
Net investment income 14,577,124
- -------------------------------------------------------------------------------------
Realized Loss on Forward Foreign Exchange Contracts 5,344
Foreign Currency Realized Loss (1,389,208)
Foreign Currency Loss on Securities (8,326,421)
Forward Contract Payables Mark to Market Loss (2,672,781)
Forward Contract Receivables Mark to Market Gain 315,943
Prior Year Mark to Market Reversal (3,799,000)
- -------------------------------------------------------------------------------------
Net Income Tax Basis (1,288,999)
- -------------------------------------------------------------------------------------
Long-Term Capital Gains Tax Basis $ 435,110
- -------------------------------------------------------------------------------------
</TABLE>
24
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
12. SUBSEQUENT EVENT
The acquisition of TBC by Mellon (see Note 2) was completed on May 21, 1993.
Effective as of close of business on that day, Boston Advisors continued as the
Fund's administrator under a new administration agreement.
25
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
- --------------------------------------------------------------------------------
Report of Independent Accountants
TO THE TRUSTEES AND SHAREHOLDERS OF
SHEARSON LEHMAN BROTHERS SHORT-TERM WORLD INCOME FUND:
We have audited the accompanying statement of assets and liabilities of
Shearson Lehman Brothers Short-Term World Income Fund, including the schedule of
portfolio investments, as of April 30, 1993, and the related statement of
operations for the year then ended, and the statement of changes in net assets
for each of the two years in the period then ended and the condensed financial
information for each of the two years in the period ended April 30, 1993 and for
the period from May 22, 1990 (commencement of operations) to April 30, 1991.
These financial statements and condensed financial information are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and condensed financial information based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and condensed
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of investments
and cash held by the custodian as of April 30, 1993, and confirmation by
correspondence with brokers as to securities purchased, but not received at that
date, or other auditing procedures where confirmations from brokers were not
received. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and condensed financial information
referred to above present fairly, in all material respects, the financial
position of Shearson Lehman Brothers Short-Term World Income Fund as of April
30, 1993, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended and the
condensed financial information for each of the two years in the period ended
April 30, 1993 and for the period from May 22, 1990 (commencement of operations)
to April 30, 1991, in conformity with generally accepted accounting principles.
Coopers & Lybrand
Boston, Massachusetts
June 11, 1993
26
<PAGE>
SHEARSON LEHMAN BROTHERS
Short-Term World Income Fund
TRUSTEES
Paul R. Ades
Herbert Barg
Allan R. Johnson
Heath B. McLendon
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
Chairman of the Board
Richard P. Roelofs
President
Alan J. Brown
Vice President and
Investment Officer
Paul F. Duncombe
Vice President and
Investment Officer
Vincent Nave
Treasurer
Francis J. McNamara, III
Secretary
DISTRIBUTOR
Shearson Lehman Brothers Inc.
American Express Tower
World Financial Center
New York, New York 10285
INVESTMENT ADVISER
PanAgora Asset Management Limited
3 Finsbury Avenue
London, England EC2M 2PA
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
27
<PAGE>
Investor Benefits Monthly Distributions It's your fund's
policy to distribute dividend income
monthly.
Automatic Reinvestment You may reinvest
your dividends and/or capital gains
automatically in additional shares of
your fund at the current net asset value.
Unlimited Exchanges If your investment
goals change, you may exchange into
another Shearson Lehman Brothers mutual
fund with the same sales charge structure
without incurring a sales charge.*
Systematic Investment Plan This program
allows you to invest equal dollar amounts
automatically on a regular basis, monthly
or quarterly.
Automatic Cash Withdrawal Plan With this
plan, you may withdraw money on a regular
basis while maintaining your investment.
For more information about these
benefits, or if you have any other
questions, please call your Financial
Consultant or write:
Mutual Fund Policy Group
Shearson Lehman Brothers
388 Greenwich Street 37th Floor
New York, NY 10013
*After written notification, exchange
privilege may be modified or terminated
at any time.
28
<PAGE>
This report is submitted for the
general information of the
shareholders of Shearson Lehman
Brothers Short-Term World Income
Fund. It is not authorized for
distribution to prospective investors
unless accompanied or preceded by an
effective Prospectus for the Fund,
which contains information concerning
the Fund's investment policies and
applicable sales charges, fees and
expenses as well as other pertinent
information.
SHEARSON LEHMAN BROTHERS
Short-Term
World Income
Fund
Two World Trade Center
New York, New York 10048
Fund 135, 191
FD2218 F3
<PAGE>
SMITH BARNEY SHEARSON SHORT-TERM WORLD INCOME FUND
APPENDIX TO GRAPHIC AND IMAGE MATERIALS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ------------------------------------------------------------------------ -----
<S> <C>
Pie Chart showing portfolio breakdown................................... 4
</TABLE>
<PAGE>
SEMI-ANNUAL REPORT (UNAUDITED) OF
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
DATED OCTOBER 31, 1993
<PAGE>
SEMI-ANNUAL REPORT OCTOBER 31, 1993
SMITH BARNEY SHEARSON
SHORT-TERM
WORLD
INCOME
FUND
[LOGO]
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
DEAR SHAREHOLDER:
INVESTMENT OBJECTIVE
The Fund seeks to maximize current income while protecting the principal
investment. To achieve this objective a currency cross-hedging strategy is
employed with investments in high-quality debt securities of less than three
years maturity, denominated in U.S. dollars and foreign currencies.
PERFORMANCE
Class A shares of Smith Barney Shearson Short-Term World Income Fund returned
0.02% in the six months ended October 31, 1993. Class B shares for the same
period returned -0.29%. These returns are comprised of an income gain offset by
a capital loss.
A margin above money market rates of at least 2.50% was distributed in
dividends by Class A shares over the period. Class B shares distributed 0.50%
less than Class A shares. The net asset value (NAV) of the Fund fell from $6.85
to $6.67 in these six months. This has largely been due to the unfavorable
market conditions that have prevailed within Europe over this period.
MARKET REVIEW
The European currency tensions that resulted in devaluations at the end of
1992, resurfaced over the summer. In an attempt to release these pressures, the
fluctuation bands of the Exchange Rate Mechanism (ERM) were widened to +/- 15%
in August for all members except Germany and the Netherlands. These bands
indicate the range in which bilateral exchange rates of ERM member countries can
move. Many European countries consequently depreciated against the deutschemark
bloc. Currency weakness was exacerbated by members not seizing the opportunity
to aid economic recovery in their countries by reducing interest rates below
those in Germany.
The Bundesbank cut the discount rate six times in the last year. While
immediate currency tensions within the ERM were eased as a result of such cuts,
the pace of cuts has been too slow to make a significant contribution
1
<PAGE>
to European economic recovery. High unemployment and the associated social
problems have consequently placed downward pressure on European currencies,
particularly outside of the deutschemark bloc.
The problems in Europe over the last year have been detrimental to the Fund.
The cross-hedging strategy that the Fund follows uses lower yielding currencies,
typically the deutschemark bloc within Europe, to hedge higher yielding
currencies which have underperformed. The NAV consequently fell during the
months of heightened tension, namely June and July of 1993. In the other months
the NAV has been more stable.
The state of emergency in Russia provoked by opposition to President
Yeltsin's dissolution of parliament impacted currency markets for only a few
weeks in September and October of 1993. The deutschemark bloc suffered against
other European currencies and the U.S. dollar during this period, to the Fund's
advantage.
OUTLOOK
In order for core European currencies to weaken relative to the high yielding
currencies, the pace of German interest rate cuts needs to be accelerated.
Falling money supply and inflation, together with a recessionary economy, will
ensure that interest rates will continue to be cut. Money supply has not yet
fallen into the target growth range of 4.5% to 6.5%. September's growth was just
above the top of the range at 6.8%. The fulfillment of the money supply target,
together with a deepening recession, may well accelerate interest rate cuts in
the coming months.
The future of the ERM remains uncertain. The consequences on the Fund of a
crumbling ERM are on the whole advantageous for the Fund. The range of interest
rates prevailing in Europe due to the pursuit of divergent monetary policies are
likely to widen. This has direct benefits for the Fund since the income received
from its investments would rise relative to the yield it is paying to hedge
their currency exposure.
STRATEGY
The strategy adopted by the Fund is intended to provide a return above money
market rates. To the extent that income assessed for accounting and tax purposes
has failed to meet expectations, the dividends have been paid out of capital.
To help offset the difficulties of the cross-hedging strategy, the Fund has
increased its exposure to the bond market both on a hedged and unhedged basis.
The duration of the Fund has lengthened over the year and has
2
<PAGE>
recently been maintained at the maximum average maturity of one year. We believe
that there is still scope for a reduction in bond yields in Europe on the basis
that real yields are still abnormally high. Economic recovery remains elusive
making a resurgence in inflation unlikely. Real yields will fall therefore only
on the back of a continued European bond rally.
In addition to the above noted changes, the Board of Trustees voted on
October 14, 1993 to approve a change to the Fund's investment objective. If you
were a shareholder on December 2, 1993 you should have received a proxy
statement asking for your approval of the following changes: 1) to approve a
modification to the Fund's investment objective to eliminate the 1-year weighted
average maturity limitation on the Fund's portfolio and to extend the maximum
remaining maturity restriction as to any of the Fund's securities to four years;
and 2) to approve the elimination of the requirement that the Fund invest at
least 25% of its total assets in U.S. dollar-denominated securities. With the
changes we have proposed, we hope to achieve in future months greater total
return potential than the previous strategy and market conditions allowed. If
you have already returned your proxy card, we thank you. If not, please do so.
Your prompt response saves the cost of additional solicitation expense. If you
need another proxy card, please contact the Fund's transfer agent at
1-800-451-2010. Thank you for your help in this proxy effort.
We remain, as always, grateful for your continued support.
Sincerely,
Heath B. McLendon Alan J. Brown
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
AND INVESTMENT OFFICER INVESTMENT OFFICER
3
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS October 31, 1993 (unaudited)
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Short-Term World Income Fund
investment securities held at October 31, 1993 by industry classification. The
pie is broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Commercial Paper, Eurodollar
Commercial Paper 15.6%
Time Deposits 10.8%
Government Bonds 22.9%
Financial Services 12.0%
Banking and Finance 11.3%
Corporate Bonds 12.2%
Repurchase Agreements, Net Other
Assets and Liabilities 5.2%
Eurodollar Certificates of Deposit 10.0%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
Percentage of
Security Net Assets
<S> <C>
- -----------------------------------------------------------------------------------
COLLEGE MORTGAGE SEC#10, PLC, 11.750% DUE 5/31/96 9.1%
DANISH TREASURY BILL, 7.120% DUE 1/3/94 6.3
ABBEY NATIONAL, 4.750% DUE 4/25/96 5.4
KINGDOM OF SWEDEN TREASURY BILL, 6.870% DUE 2/19/94 5.2
BONOS Y OBLIGATION DEL ESTADO, 13.450% DUE 4/15/96 4.5
INTERAMERICAN DEVELOPMENT BANK, 14.150% DUE 2/20/96 4.5
DENMARK BULLET, 9.000% DUE 11/15/95 4.2
WORLD BANK, 8.625% DUE 10/01/95 3.5
UNILEVER, 12.750% DUE 7/04/94 3.4
METROPOLIS OF TOKYO, 9.250% DUE 6/28/94 3.4
</TABLE>
4
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- ---------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS October 31, 1993 (unaudited)
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
----------------------------------------------------------------------------
UNITED STATES DOLLAR BONDS -- 15.6%
USD 5,000,000 Abbey National,
4.750% due 4/25/96 $ 5,029,690
3,000,000 Credit Locale,
7.750% due 5/23/94 3,075,003
3,000,000 Metropolis of Tokyo,
9.250% due 6/28/94 3,110,628
3,000,000 World Bank,
8.625% due 10/01/95 3,246,939
----------------------------------------------------------------------------
TOTAL UNITED STATES DOLLAR
BONDS
(Cost $14,258,631) 14,462,260
----------------------------------------------------------------------------
DANISH KRONER BONDS -- 10.5%
DKK 40,000,000 Danish Treasury Bill,
7.120% due 1/3/94+ 5,848,342
25,000,000 Denmark Bullet,
9.000% due 11/15/95 3,895,811
----------------------------------------------------------------------------
TOTAL DANISH KRONER BONDS
(Cost $10,008,922) 9,744,153
----------------------------------------------------------------------------
GREAT BRITAIN POUND STERLING BONDS -- 9.1% (COST $8,416,931)
GBP 5,000,000 College Mortgage Sec#10, PLC,
11.750% due 5/31/96 8,378,928
----------------------------------------------------------------------------
SPANISH PESETA BONDS -- 8.9%
ESP 500,000,000 Bonos Y Obligation Del Estado,
13.450% due 4/15/96 4,141,023
500,000,000 Interamerican Development
Bank,
14.150% due 2/20/96 4,120,000
----------------------------------------------------------------------------
TOTAL SPANISH PESETA BONDS
(Cost $8,094,109) 8,261,023
----------------------------------------------------------------------------
SWEDISH KRONA BONDS -- 7.9%
Kingdom of Sweden Treasury
Bill:
SEK 20,000,000 6.080% due 11/17/93+ 2,450,034
40,000,000 6.870% due 2/16/94+ 4,816,593
----------------------------------------------------------------------------
TOTAL SWEDISH KRONA BONDS
(Cost $7,462,158) 7,266,627
----------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) October 31, 1993 (unaudited)
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
----------------------------------------------------------------------------
<C> <S> <C>
ITALIAN LIRA BONDS -- 3.4% (COST $4,147,756)
ITL 5,000,000,000 Unilever, 12.750% due 7/04/94 $ 3,140,447
----------------------------------------------------------------------------
FRENCH FRANC BONDS -- 3.0% (COST $2,725,995)
FRF 15,000,000 Guiness Finance B.V.,
9.750% due 3/28/96 2,758,289
----------------------------------------------------------------------------
TIME DEPOSITS -- 10.8%
ITL 3,000,000,000 Salomon Brothers,
8.700% due 11/4/93 1,842,084
Unibank:
ECU 3,595,399 7.4375% due 11/2/93 4,100,013
ECU 3,600,599 7.3125% due 11/4/93 4,105,942
----------------------------------------------------------------------------
TOTAL TIME DEPOSITS
(Cost $10,051,501) 10,048,039
----------------------------------------------------------------------------
COMMERCIAL PAPER -- 10.3%
USD 4,758,000 Ford Motor Credit Corporation,
2.950% due 11/1/93+ 4,758,000
4,758,000 General Electric Capital
Corporation,
2.950% due 11/1/93+ 4,758,000
----------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost $9,516,000) 9,516,000
----------------------------------------------------------------------------
EURODOLLAR CERTIFICATES OF DEPOSIT -- 10.0%
ITL 8,000,000,000 Credito Italiano,
8.830% due 2/14/94+ 4,788,913
ECU 4,000,000 Cassa Risparmi Verna,
7.030% due 1/12/94+ 4,497,293
----------------------------------------------------------------------------
TOTAL EURODOLLAR CERTIFICATES
OF DEPOSIT
(Cost $9,420,941) 9,286,206
----------------------------------------------------------------------------
EURODOLLAR COMMERCIAL PAPER -- 5.3% (COST $5,345,825)
ITL 8,000,000,000 General Electric Capital
Corporation,
6.950% due 11/12/93+ 4,899,921
----------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) October 31, 1993 (unaudited)
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
----------------------------------------------------------------------------
<C> <S> <C>
REPURCHASE AGREEMENTS -- 7.8%
USD 2,460,000 Agreement with U.B.S., 2.920%
dated 10/29/93 to
be repurchased at $2,460,599
on 11/1/93,
collateralized by $2,460,000
U.S. Treasury Note
4.625% due 8/15/95 $ 2,460,000
4,758,000 Agreement with Salomon
Brothers, 2.900% dated
10/29/93 to be repurchased at
$4,759,150 on
11/1/93, collateralized by
$4,555,000 U.S.
Treasury Note 7.750% due
2/15/95 4,758,000
----------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost $7,218,000) 7,218,000
----------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $96,666,769*) 102.6% 94,979,893
----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) (2.6) (2,399,844)
----------------------------------------------------------------------------
NET ASSETS 100.0% $92,580,049
----------------------------------------------------------------------------
<FN>
+ Rate represents annualized yield to maturity.
* Aggregate cost for Federal tax purposes.
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- ---------------------------------------------
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
OCTOBER 31, 1993 (UNAUDITED)
<TABLE>
<CAPTION>
CONTRACT MARKET VALUE
VALUE DATE (NOTE 1)
<S> <C> <C>
- ---------------------------------------------------------------------
FORWARD FOREIGN CURRENCY CONTRACTS
TO BUY
8,250,000 Canadian Dollars 12/02/93 $ 6,235,814
42,000,000 Danish Kroners 11/16/93 6,200,858
78,000,000 Finnish Marrka 11/23/93 13,493,789
16,750,000 New Zealand Dollars 12/21/93 9,261,491
20,000,000 Swedish Kronas 12/08/93 2,444,998
8,150,000 Swiss Francs 11/12/93 5,494,243
- ---------------------------------------------------------------------
TOTAL FORWARD FOREIGN CURRENCY
CONTRACTS TO BUY
(Contract amount $42,923,248) $ 43,131,193
- ---------------------------------------------------------------------
FORWARD FOREIGN CURRENCY CONTRACTS
TO SELL
6,000,000 Australian Dollars 01/10/94 $ (3,984,178)
225,000,000 Belgian Francs 01/04/94 (6,118,620)
8,250,000 Canadian Dollars 12/02/93 (6,235,814)
16,000,000 Danish Kroners 11/16/93 (2,362,232)
140,000,000 Finnish Marrka 11/23/93 (24,219,622)
15,000,000 French Francs 11/10/93 (2,551,049)
37,000,000 French Francs 01/04/94 (6,257,871)
5,890,000 Great Britian Pounds 01/10/94 (8,723,897)
7,500,000 Irish Punts 12/09/93 (10,512,137)
20,000,000 Netherland Guilders 01/21/94 (10,548,317)
101,000,000 Norwegian Krones 01/21/94 (13,717,203)
8,150,000 Swiss Francs 11/12/93 (5,494,243)
- ---------------------------------------------------------------------
TOTAL FORWARD FOREIGN CURRENCY
CONTRACTS TO SELL
(Contract amount $100,718,162) ($ 100,725,183)
- ---------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES October 31, 1993 (unaudited)
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$96,666,769) (Note 1)
See accompanying schedule $ 94,979,893
Currency, at value (Cost $2,946) 3,491
Receivable for forward foreign currency
contracts to sell 100,718,162
Forward foreign currency contracts to
buy, at value
(Contract cost $43,130,841) (Note 1)
See accompanying schedule 43,131,193
Receivable for investment securities
matured 2,076,950
Interest receivable 1,625,521
Unamortized organization costs (Note 7) 73,064
Prepaid expenses 47,073
Receivable for Fund shares sold 3,912
Other assets 19,435
- ------------------------------------------------------------------------------
TOTAL ASSETS 242,678,694
- ------------------------------------------------------------------------------
LIABILITIES:
Forward foreign currency contracts to
sell, at value
(Contract cost $101,157,522) (Note 1)
See accompanying schedule $100,725,183
Payable for forward foreign currency
contracts to buy 42,923,248
Payable for investment securities
purchased 5,948,026
Dividends payable 155,318
Payable for Fund shares redeemed 146,121
Custodian fees payable (Note 2) 71,729
Investment advisory fee payable (Note
2) 22,322
Service fees payable (Note 3) 20,291
Distribution fee payable (Note 3) 14,480
Transfer agent fees payable (Note 2) 13,121
Administration fee payable (Note 2) 8,117
Accrued Trustees' fees and expenses
(Note 2) 6,250
Accrued expenses and other payables 44,439
- ------------------------------------------------------------------------------
TOTAL LIABILITIES 150,098,645
- ------------------------------------------------------------------------------
NET ASSETS $ 92,580,049
- ------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- ---------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
OCTOBER 31, 1993 (UNAUDITED)
<TABLE>
<S> <C>
NET ASSETS consist of:
Distributions in excess of net
investment income earned to date $ (504,809)
Accumulated net realized loss on
security transations, foward
foreign currency contracts, and
foreign currency transactions (7,748,776)
Net unrealized depreciation of
securities, forward foreign
currency contracts, foreign
currencies and net other assets (1,263,687)
Par value 13,879
Paid-in capital in excess of par
value 102,083,442
- ------------------------------------------------------------
TOTAL NET ASSETS $ 92,580,049
- ------------------------------------------------------------
NET ASSETS:
CLASS A SHARES:
NET ASSET VALUE and redemption price
per share
($59,577,998 DIVIDED BY 8,930,110
shares of beneficial interest
outstanding) $6.67
- ------------------------------------------------------------
MAXIMUM OFFERING PRICE PER SHARE ($6.67
DIVIDED BY 0.97)
(based on a sales charge of 3.0% of
the offering price on October 31,
1993) $6.88
- ------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per
share+
($33,002,051 DIVIDED BY 4,949,278
shares of beneficial interest
outstanding) $6.67
- ------------------------------------------------------------
<FN>
+Redemption price per share is equal to Net Asset Value less
any applicable contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1993 (UNAUDITED)
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $3,273,021
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) $316,884
Service fees (Note 3) 144,039
Administration fee (Note 2) 115,231
Distribution fee (Note 3) 103,803
Custodian fees (Note 2) 97,305
Transfer agent fees (Notes 2 and 4) 88,035
Amortization of organization costs (Note 7) 18,249
Legal and audit fees 16,642
Trustees' fees and expenses (Note 2) 15,896
Other 97,068
Fees waived by investment adviser and
administrator (Note 2) (216,057)
- --------------------------------------------------------------------------------
TOTAL EXPENSES 797,095
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,475,926
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized loss on:
Security transactions (6,696,374)
Forward foreign currency contracts (862,785)
Foreign currency transactions (189,617)
- --------------------------------------------------------------------------------
Net realized loss on investments during the
period (7,748,776)
- --------------------------------------------------------------------------------
Net change in unrealized appreciation of:
Securities 1,568,021
Forward foreign currency contracts 3,645,766
Foreign currencies and net other assets 27,567
- --------------------------------------------------------------------------------
Net unrealized appreciation of investments
during the period 5,241,354
- --------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (2,507,422)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (31,496)
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
10/31/93 ENDED
(UNAUDITED) 4/30/93
<S> <C> <C>
Net investment income $ 2,475,926 $ 9,496,246
Net realized loss on security transactions, forward
foreign currency contracts and foreign currency
transactions during the period (7,748,776) (4,014,558)
Net unrealized appreciation\(depreciation) of
securities, forward foreign currency contracts,
foreign currencies and net other assets during the
period 5,241,354 (10,885,654)
- -------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations (31,496) (5,403,966)
Distributions to shareholders from net investment
income:
Class A (1,994,548) (9,393,559)
Class B (986,187) (1,182,153)
Distribution to shareholders from capital (Note 1):
Class A -- (223,984)
Class B -- (28,188)
Net increase/(decrease) in net assets from:
Class A share transactions (Note 6) (26,532,700) (181,264,369)
Class B share transactions (Note 6) (15,770,077) 50,472,473
- -------------------------------------------------------------------------------------
Net decrease in net assets (45,315,008) (147,023,746)
NET ASSETS:
Beginning of period 137,895,057 284,918,803
- -------------------------------------------------------------------------------------
End of period (including distributions in excess of net
investment income earned to date of $504,809 at
October 31, 1993) $92,580,049 $ 137,895,057
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED YEAR YEAR PERIOD
10/31/93 ENDED ENDED ENDED
(UNAUDITED) 4/30/93 4/30/92 4/30/91*
<S> <C> <C> <C> <C>
Operating performance:
Net Asset Value, beginning of
period $ 6.85 $ 7.44 $ 7.62 $ 7.76
- -------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income+ 0.14 0.34 0.63 0.77
Net realized and unrealized
loss on
investments (0.14) (0.54) (0.21) (0.14)
- -------------------------------------------------------------------------------------
Total from investment
operations 0.00 (0.20) 0.42 0.63
Distributions:
Dividends from net investment
income (0.18) (0.38) (0.60) (0.77)
Distributions from capital
(Note 1) -- (0.01) -- --
- -------------------------------------------------------------------------------------
Total distributions (0.18) (0.39) (0.60) (0.77)
- -------------------------------------------------------------------------------------
Net Asset Value, end of period $ 6.67 $ 6.85 $ 7.44 $ 7.62
- -------------------------------------------------------------------------------------
Total return++(a) 0.02% (2.76)% 5.69% 8.34%
- -------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in
000's) $ 59,578 $ 88,034 $284,919 $ 527,832
Ratio of operating expenses to
average net
assets+++ 1.20%** 1.40% 1.26% 1.22%**
Ratio of net investment income
to average
net assets 4.48%** 4.83% 8.33% 10.23%**
Portfolio turnover rate 166% 57% 63% 267%
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on May 22, 1990. On November 6, 1992 the Fund commenced
selling Class B shares. Those shares in existence prior to November 6, 1992 were
designated as Class A shares.
**Annualized.
+Net investment income before waiver of fees by investment adviser, administrator
and/or custodian, distributor and transfer agent for the six months ended October 31,
1993 and the years ended April 30, 1993 and 1992, and for the period ended April 30,
1991 was $0.13, $0.32, $0.62 and $0.76, respectively.
++Total return represents aggregate total return for the periods indicated and does not
reflect any applicable sales charges.
+++Annualized expense ratios before waiver of fees by investment adviser, administrator
and/or custodian, distributor and transfer agent for the six months ended October 31,
1993 and the years ended April 30, 1993 and 1992, and for the period ended April 30,
1991 was 1.57%, 1.67%, 1.31% and 1.28%, respectively.
(a)Unaudited.
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED PERIOD
10/31/93 ENDED
(UNAUDITED) 4/30/93*
<S> <C> <C>
Operating performance:
Net Asset Value, beginning of period $ 6.85 $ 7.02
- --------------------------------------------------------------------
Income from investment operations:
Net investment income+ 0.13 0.15
Net realized and unrealized loss on
investments (0.15) (0.18)
- --------------------------------------------------------------------
Total from investment operations (0.02) (0.03)
Distributions:
Dividends from net investment income (0.16) (0.14)
Distributions from capital (Note 1) -- 0.00***
- --------------------------------------------------------------------
Total distributions (0.16) (0.14)
- --------------------------------------------------------------------
Net Asset Value, end of period $ 6.67 $ 6.85
- --------------------------------------------------------------------
Total return++(a) (0.29)% (0.38)%
- --------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of period (in 000's) $ 33,002 $ 49,861
Ratio of operating expenses to average net
assets+++ 1.71%** 1.75%**
Ratio of net investment income to average
net assets 3.97%** 4.48%**
Portfolio turnover rate 166% 57%
- --------------------------------------------------------------------
<FN>
*The Fund commenced selling Class B shares on November 6, 1992.
**Annualized.
***Represents a number less than one cent per Class B share.
+Net investment income before waiver of fees by investment
adviser, administrator and/or custodian, for the six months ended
October 31, 1993 and the period ended April 30, 1993 was $0.12
and $0.14, respectively.
++Total return represents aggregate total return for the periods
indicated and does not reflect any applicable sales charges.
+++Annualized expense ratios before waiver of fees by investment
adviser, administrator and/or custodian for the six months ended
October 31, 1993 and the period ended April 30, 1993 were 2.09%
and 2.02%, respectively.
(a)Unaudited.
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Short-Term World Income Fund (the "Fund") was
organized under the laws of the Commonwealth of Massachusetts on March 13, 1990
as an entity commonly known as a "Massachusetts business trust." The Fund is
registered with the Securities and Exchange Commission under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a non-diversified, open-end
management investment company. The Fund commenced operations on May 22, 1990. As
of November 6, 1992, the Fund began offering two classes of shares to the
general public: Class A and Class B shares. Class A shares are sold with a
front-end sales charge. Class B shares may be subject to a contingent deferred
sales charge ("CDSC"). Class B shares will automatically convert to Class A
shares eight years after the original purchase date beginning on or about
September 30, 1994. Each class of shares has identical rights and privileges
except with respect to the effect of the respective sales charges, the
distribution and/or service fees borne by each class, expenses allocable
exclusively to each class, voting rights on matters affecting a single class,
the exchange privilege of each class and the conversion feature of Class B
shares. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
PORTFOLIO VALUATION: Generally, the Fund's investments are valued at market
value or, in the absence of a market value, at fair value as determined by or
under the direction of the Fund's Board of Trustees. A security which is traded
primarily on a United States 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. Portfolio securities which are traded primarily on
foreign securities 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 that a value was so established is likely to
have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
Fund's Board of Trustees or its delegates. Debt securities (other than
government securities and short-term obligations) are valued by The Boston
Company Advisors, Inc. ("Boston Advisors") after consultation with independent
pricing services approved by the Fund's Board of Trustees. Investments in
government securities (other than short-term
15
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
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.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation 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 collateral is at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There is potential loss to the
Fund in the event the Fund is delayed or prevented from exercising its rights to
dispose of the collateral securities, including the risk of a possible decline
in the value of the underlying securities during the period while the Fund seeks
to assert its rights. The Fund's investment adviser or administrator, acting
under the supervision of the Board of Trustees, reviews 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.
FOREIGN CURRENCY: The books and records of the Fund are maintained in United
States (U.S.) dollars. Foreign currencies, investments and other assets and
liabilities are translated into U.S. dollars at the exchange rates prevailing at
the end of the period, and purchases and sales of investment securities, income
and expenses are translated on the respective dates of such transactions.
Unrealized gains and losses which result from changes in foreign currency
exchange rates have been included in the unrealized appreciation/(depreciation)
of investments and net other assets. Net unrealized foreign currency gains and
losses resulting from changes in exchange rates include foreign currency gains
and losses between trade date and settlement date on investment securities
transactions, foreign currency transactions and the difference between the
amounts of interest and dividends recorded on the books of the Fund and the
amount actually received. The portion of foreign currency gains and losses
related to
16
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
fluctuation in exchange rates between the initial purchase trade date and
subsequent sale trade date is included in realized gains and losses on
investment securities sold.
FORWARD FOREIGN CURRENCY CONTRACTS: Forward foreign currency contracts are
valued at the forward rate, and are marked-to-market daily. The change in market
value is recorded by the Fund as an unrealized gain or loss. The difference
between the forward rate and the spot rate at the inception of the contract is
amortized or accreted to income over the life of the forward contract on the
straight line method and is included in interest income in the accompanying
Statement of Operations. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the cost of the contract
as adjusted for accretion or amortization and the value at the time it was
closed.
The use of forward foreign currency contracts does not eliminate
fluctuations in the underlying prices of the Fund's portfolio securities, but it
does establish a rate of exchange that can be achieved in the future. Although
forward foreign currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, they also limit any potential gain that might
result should the value of the currency increase. In addition, the Fund could be
exposed to risks if the counterparties to the contracts are unable to meet the
terms of their contracts.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Interest income is recorded on the accrual basis.
Realized gains and losses from securities transactions are recorded on the
identified cost basis. Investment income and realized and unrealized gains and
losses are allocated based upon relative net assets of each class.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are determined on a class level, declared daily and paid on the
last business day of the Smith Barney Shearson Inc. ("Smith Barney Shearson")
statement month. Distributions of net short- and long-term capital gains earned
by the Fund, if any, are determined on a Fund level and will be declared and
paid annually after the close of the fiscal year in which they are earned.
Additional distributions of net investment income and capital gains may be made
at the discretion of the Board of Trustees in order to avoid the application of
a 4% nondeductible excise tax on certain undistributed amounts of ordinary
income and capital gains.
17
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
FEDERAL INCOME TAXES: It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
FOREIGN INCOME TAXES: Investment income received by the Fund from sources
within foreign countries may be subject to foreign income taxes withheld at the
source.
RECLASSIFICATIONS: During the current period, the Fund adopted Statement of
Position 93-2 "Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain, and Return of Capital Distributions by Investment
Companies." Accordingly, certain reclassifications have been made to the
components of capital in the Statement of Net Assets to conform with the
accounting and reporting guidelines of this statement. Distributions in excess
of book basis accumulated realized gains or undistributed net investment income
that were the result of permanent book and tax accounting differences have been
reclassified to paid-in capital. In addition, amounts distributed in excess of
undistributed net investment income as determined for financial statement
purposes but as distributions from net investment income or accumulated net
realized gains for tax purposes, previously reported as distributions from
paid-in capital, have been reclassified to reflect the tax characterization.
Accordingly, amounts as of April 30, 1993 have been restated to reflect a
decrease in paid-in capital and a decrease in accumulated net realized loss of
$38,936,805, respectively. The Statement of Changes in Net Assets and Financial
Highlights for prior periods have not been restated to reflect this change in
presentation. Net investment income, net realized gains, and net assets on a
book and tax basis were not affected by this change.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND OTHER RELATED PARTY
TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with PanAgora Asset Management Limited ("PanAgora U.K."). Fifty
percent of the outstanding voting stock of PanAgora U.K. is owned by Nippon Life
Insurance Company and fifty percent is owned by Lehman Brothers Inc., which is a
wholly owned subsidiary of Lehman Brothers Holding Inc. ("Holdings"). American
Express Company ("American Express") owns 100% of
18
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Holdings' issued and outstanding common stock, which represents approximately
92% of Lehman Holdings' issued and outstanding voting stock. The remainder of
Holdings' voting stock is owned by Nippon Life Insurance Company. Under the
Advisory Agreement, the Fund pays a monthly fee at the annual rate of .55% of
the value of its average daily net assets.
As of the close of business on July 30, 1993, Primerica Corporation and
Smith Barney, Harris Upham & Co. Incorporated completed the acquisition of
substantially all of the domestic retail brokerage and asset management
businesses of Shearson Lehman Brothers Inc. and Smith Barney, Harris Upham & Co.
Incorporated was renamed Smith Barney Shearson.
The Fund has also entered into an administration agreement (the
"Administration Agreement") dated May 21, 1993 with Boston Advisors, an indirect
wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). Under the
Administration Agreement, the Fund pays a monthly fee at the annual rate of .20%
of the value of its average daily net assets. Prior to May 21, 1993, Boston
Advisors served as sub-investment adviser and administrator to the Fund.
From time to time, PanAgora U.K. and Boston Advisors may waive a portion or
all of their respective fees otherwise payable to them. PanAgora U.K. and Boston
Advisors voluntarily waived fees of $158,442 and $57,615, respectively, for the
six months ended October 31, 1993.
For the six months ended October 31, 1993, Smith Barney Shearson received
$2,579 from investors representing commissions (sales charges) on sales of Class
A shares.
A CDSC is generally payable by a shareholder in connection with the
redemption of Class B shares within three years (eight years in the case of
purchases by certain 401(k) plans) after the date of purchase. In circumstances
in which the charge is imposed, the amount of the charge ranges between 3% and
1% of net asset value depending on the number of years since the date of
purchase (except in the case of purchases by certain 401(k) plans in which case
a 3% charge is imposed for the eight year period after the date of purchase).
For the six months ended October 31, 1993, Smith Barney Shearson received from
shareholders $103,409 in CDSC on the redemption of Class B shares.
No officer or director, or employee of Smith Barney Shearson, PanAgora U.K.,
Boston Advisors or any of their affiliates, received any compensation from
19
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
the Fund for serving as a Trustee or officer of the Fund. The Fund pays each
Trustee who is not an officer, director or employee of Smith Barney Shearson,
PanAgora U.K., Boston Advisors or any of their affiliates $3,000 per annum plus
$500 per meeting attended and reimburses such Trustees for travel and out-
of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary
of Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc.,
a subsidiary of First Data Corporation, serves as the Fund's transfer agent.
3. SERVICES AND DISTRIBUTION PLAN
Smith Barney Shearson acts as distributor of the Fund's shares pursuant to a
services and distribution agreement with the Fund, and sells shares of the Fund
through Smith Barney Shearson or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, as amended, the Fund has adopted
a Services and Distribution Plan (the "Plan"). Effective November 6, 1992, under
this Plan, the Fund compensates Smith Barney Shearson for servicing shareholder
accounts for Class A and Class B shareholders, and covers expenses incurred in
distributing Class B shares. Smith Barney Shearson is paid an annual service fee
with respect to Class A and Class B shares of the Fund at the annual rate of
.25% of the value of the average daily net assets of each respective class of
shares. Smith Barney Shearson is also paid an annual distribution fee with
respect to Class B shares at the annual rate of .50% of the value of the average
daily net assets attributable to Class B shares. For the six months ended
October 31, 1993, the Fund incurred $92,134 and $51,905 in service fees for
Class A and Class B shares, respectively. For the six months ended October 31,
1993, the Fund incurred $103,803 in distribution fees for Class B shares.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class of shares. Operating expenses directly attributable to a
class of shares are charged to that class' operations. In addition to the above
servicing and
20
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
distribution fees, class specific operating expenses for the six months ended
October 31, 1993 included transfer agent fees of $54,163 and $33,872 for Class A
and Class B shares, respectively.
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, excluding short-
term obligations, during the six months ended October 31, 1993, were $43,327,537
and $57,718,178, respectively.
At October 31, 1993, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was $550,071 and
aggregate unrealized depreciation for all securities in which there was an
excess of tax cost over value was $2,236,947.
6. SHARES OF BENEFICIAL INTEREST
The Fund may issue an unlimited number of shares of beneficial interest with
a par value of $.001 per share divided into two classes: Class A and Class B.
21
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Changes in shares of beneficial interest outstanding were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
OCTOBER 31, 1993 04/30/93
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 60,889 $ 409,586 332,668 $ 2,410,013
Issued as reinvestment of dividends 183,360 1,234,614 869,029 6,238,953
Redeemed (4,169,945) (28,176,900) (26,645,851) (189,913,335)
- -------------------------------------------------------------------------------------
Net decrease (3,925,696) $ (26,532,700) (25,444,154) $(181,264,369)
- -------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED PERIOD ENDED
OCTOBER 31, 1993 04/30/93*
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Sold 9,538 $ 64,032 25,874 $ 176,898
Issued as reinvestment of dividends 100,249 675,004 117,598 808,124
Issued in exchange for shares of Short-Term
Global Income Fund (Note 10) -- -- 11,391,236 78,714,071
Redeemed (2,444,144) (16,509,113) (4,251,073) (29,226,620)
- -------------------------------------------------------------------------------------
Net increase/(decrease) (2,334,357) $ (15,770,077) 7,283,635 $ 50,472,473
- -------------------------------------------------------------------------------------
<FN>
*The Fund commenced selling Class B shares on November 6, 1992. Any shares outstanding prior to November 6, 1992 were
designated Class A shares.
</TABLE>
7. ORGANIZATION COSTS
All costs in connection with the organization of the Fund, including the
fees and expenses of registering and qualifying its shares for distribution
under Federal and state securities regulations, are being amortized on the
straight-line method over a period of sixty months from May 22, 1990, the date
that the Fund commenced operations. In the event that any of the initial shares
of the Fund are redeemed during such amortization period, the Fund will be
reimbursed for any unamortized costs in the same proportion as the number of
shares redeemed bears to the number of initial shares outstanding at the time of
redemption.
22
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments
involves special risks and considerations not typically associated with
investing in U.S. companies and the United States government. These risks
include revaluation of currencies and future adverse political and economic
developments. Moreover, securities of many foreign companies and foreign
governments and their markets may be less liquid and their prices more volatile
than those of securities of comparable U.S. companies and the United States
government.
9. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Continental Bank N.A. under an Amended and Restated Line
of Credit Agreement (the "Agreement") dated April 30, 1992, primarily for
temporary or emergency purposes, including the meeting of redemption requests
that otherwise might require the untimely disposition of securities. The Fund
may generally borrow up to the lesser of $25 million or 15% of its net assets.
Interest is payable either at the bank's Money Market Rate or the London
Interbank Offered Rate (LIBOR) plus .375% on an annualized basis. The Fund and
the other affiliated entities are charged an aggregate commitment fee of
$125,000 which is allocated equally among each of the participants. The
Agreement requires among other provisions, each participating fund to maintain a
ratio of net assets (not including funds borrowed pursuant to the Agreement) to
aggregate amount of indebtedness pursuant to the Agreement of no less than 5 to
1. During the six months ended October 31, 1993, the Fund did not borrow under
the Agreement.
10. REORGANIZATION
On November 20, 1992, the Fund ("Acquiring Fund") acquired the assets and
certain liabilities of the Short-Term Global Income Fund, a series of the
Shearson Lehman Brothers Income Funds ("Acquired Fund"), in exchange for shares
of the Acquiring Fund, pursuant to a plan of reorganization approved by
23
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
- --------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
the Acquired Fund's shareholders on October 13, 1992. Total shares issued by the
Acquiring Fund and total net assets of the Acquired Fund and the Acquiring Fund
are as follows:
<TABLE>
<CAPTION>
SHARES TOTAL NET TOTAL NET
ISSUED BY ASSETS OF ASSETS OF
ACQUIRING ACQUIRED ACQUIRING ACQUIRED ACQUIRING
FUND FUND FUND FUND FUND
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------
Short-Term
Global
The Fund Income Fund 11,391,236 $78,714,071 $140,486,876
- ---------------------------------------------------------------------
</TABLE>
The total net assets of the Acquired Fund before acquisition included
unrealized depreciation of $837,536. The total net assets of the Acquiring Fund
immediately after the acquisition were $219,200,947.
24
<PAGE>
SMITH BARNEY SHEARSON
SHORT-TERM WORLD INCOME FUND
TRUSTEES
Paul R. Ades
Herbert Barg
Allan R. Johnson
Heath B. McLendon
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
Alan J. Brown
VICE PRESIDENT AND
INVESTMENT OFFICER
Paul F. Duncombe
VICE PRESIDENT AND
INVESTMENT OFFICER
Vincent Nave
TREASURER
Francis J. McNamara, III
SECRETARY
DISTRIBUTOR
Smith Barney Shearson Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
PanAgora Asset Management Limited
3 Finsbury Avenue
London, England EC2M 2PA
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
24
<PAGE>
This report is submitted for the
general information of the shareholders of
Smith Barney Shearson Short-Term World Income
Fund. It is not authorized for distribution
to prospective investors unless accompanied
or preceded by an effective Prospectus for
the Fund, which contains information
concerning the Fund's investment policies and
applicable charges, fees and expenses as well
as other pertinent information.
SMITH BARNEY SHEARSON
SHORT-TERM
WORLD INCOME
FUND
Two World Trade Center
New York, New York 10048
Fund 135
FD0243 J3
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
<PAGE>
1
Smith Barney Shearson
Global Bond Fund/Short-Term World Income Fund
Portfolio of Investments
January 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Value (Note 2)
_______________________________________________________ ______________________________________
SBS SBS
SBS Short-Term Pro Forma SBS Short-Term Pro Forma
Global World Combined Global World Combined
Bond Income (Note 1) Bond Income (Note 1)
<S> <C> <C> <C> <C> <C> <C> <C>
UNITED STATES DOLLAR BONDS
- 35.4%
$3,000,000 0 3,000,000 Intelsat,
7.375% due 8/6/02 . . . . . $3,253,800 $0 $3,253,800
2,000,000 0 2,000,000 Republic of Portugal,
5.750% due 10/8/03 . . . . 1,945,600 0 1,945,600
2,600,000 0 2,600,000 United States Treasury
Notes,
5.750% due 8/15/03 . . . . 2,619,094 0 2,619,094
0 1,000,000 1,000,000 General Electric Cap. Corp.
3.125% due 02/01/1994 . . . 0 1,000,000 1,000,000
0 3,036,000 3,036,000 Goldman Sachs Repo
3.070% due 02/01/1994 . . . 0 3,036,00 3,036,000
0 3,500,000 3,500,000 U.B.S. Repo
3.100% due 02/01/1994 . . . 0 3,500,000 3,500,000
0 3,500,000 3,500,000 Salomon Brothers Repo
3.100% due 02/01/1994 . . . 0 3,500,000 3,500,000
0 3,500,000 3,500,000 Ford Motor C/P
3.100% due 02/01/94 . . . . 0 3,500,000 3,500,000
0 3,000,000 3,000,000 Credit Locale
7.750% due 05/23/1994 . . . 0 3,043,128 3,043,128
0 3,000,000 3,000,000 Metropolis of Tokyo
9.250% due 06/28/1994 . . . 0 3,069,807 3,069,807
0 3,000,000 3,000,000 TransAmerica Finance
0.000% due 02/18/1994 . . . 0 2,995,952 2,995,952
0 3,000,000 3,000,000 World Bank
8.625% due 10/01/1995 . . . 0 3,221,253 3,221,253
0 5,000,000 5,000,000 Abbey National PLC
4.750% due 04/25/1996 . . . 0 5,023,445 5,023,445
0 3,000,000 3,000,000 National Australia Bank
0.000% due 02/18/1994 . . . 0 2,995,952 2,995,952
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
2
Smith Barney Shearson
Global Bond Fund/Short-Term World Income Fund
Portfolio of Investments
January 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Value (Note 2)
______________________________________________________ ______________________________________
SBS SBS
SBS Short-Term Pro Forma SBS Short-Term Pro Forma
Global World Combined Global World Combined
Bond Income (Note 1) Bond Income (Note 1)
<S> <C> <C> <C> <C> <C> <C> <C>
0 5,000,000 5,000,000 ABN Australia
0.000% due 02/16/1994 . . . 0 4,994,096 4,994,096
0 3,000,000 3,000,000 ANZ
0.000% due 02/18/1994 . . . 0 2,995,952 2,995,952
0 3,000,000 3,000,000 Leed's Building Soc
0.000% due 02/10/1994 . . . $ 0 $2,997,975 $2,997,975
TOTAL UNITED STATES DOLLAR
BONDS
(Cost $53,527,078) . . . . 7,818,494 45,873,560 53,692,054
FRENCH FRANC BONDS - 11.4%
FRF 18,000,000 0 18,000,000 Caisse National de
Autoroute,
9.000% due 7/9/01 . . . . . $3,638,087 $0 $3,638,087
15,000,000 0 15,000,000 Credit Local de France,
8.875% due 6/10/02 . . . . 3,027,930 0 3,027,930
10,000,000 0 10,000,000 Deutsche Bank Finance N.V.,
9.250% due 5/9/01 . . . . .
2,046,707 0 2,046,707
17,500,000 0 17,500,000 Electric de France,
8.600% due 4/9/04 . . . . . 3,559,247 0 3,559,247
Government of France:
3,000,000 0 3,000,000 6.750% due 10/25/03 . . . . 546,932 0 546,932
11,000,000 0 11,000,000 6.000% due 10/25/25 . . . . 1,797,241 0 1,797,241
0 15,000,000 15,000,000 Guiness Finance B.V.
9.750% due 03/28/1996 . . . 0 2,737,706 2,737,706
TOTAL FRENCH FRANC BONDS
(Cost $16,947,987) . . . .
14,616,144 2,737,706 17,353,850
ITALIAN LIRA BONDS - 8.6%
ITL 1,400,000,000 0 1,400,000,000 European Investment Bank,
12.200% due 2/18/03 . . . . 1,022,648 0 1,022,648
2,500,000,000 0 2,500,000,000 LKB Baden Wurtenburg,
10.750% due 4/14/03 . . . . 1,693,453 0 1,693,453
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
3
Smith Barney Shearson
Global Bond Fund/Short-Term World Income Fund
Portfolio of Investments
January 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Value (Note 2)
_______________________________________________________ ______________________________________
SBS SBS
SBS Short-Term Pro Forma SBS Short-Term Pro Forma
Global World Combined Global World Combined
Bond Income (Note 1) Bond Income (Note 1)
<S> <C> <C> <C> <C> <C> <C> <C>
1,000,000,000 0 1,000,000,000 Nordiska Investerin,
10.800% due 5/24/03 . . . . $ 679,151 $ 0 $ 679,151
3,300,000,000 0 3,300,000,000 Republic of Italy,
9.000% due 10/1/98 . . . 2,011,531 0 2,011,531
0 6,000,000,000 6,000,000,000 LKB
13.000% due 03/22/1996 0 3,874,963 3,874,963
0 6,000,000,000 6,000,000,000 General Electric Cap Corp
11.875% due 07/11/1996 . . 0 3,834,267 3,834,267
TOTAL ITALIAN LIRA BONDS
(Cost $13,119,116) . . . .
5,406,783 7,709,230 13,116,013
DANISH KRONER BONDS - 7.9%
Kingdom of Denmark:
DKK 4,200,000 0 4,200,000 9.000% due 11/15/00 . . . . 733,110 0 733,110
17,000,000 0 17,000,000 8.000% due 5/15/03 . . . . 2,863,847 0 2,863,847
0 30,000,000 30,000,000 Denmark T-Bill
due 04/05/1994 . . . . . . 0 4,400,725 4,400,725
0 25,000,000 25,000,000 Denmark Bullet
9.000% due 11/15/1995 . . . 0 3,920,821 3,920,821
TOTAL DANISH KRONER BONDS
(Cost $11,731,390) . . . .
3,596,957 8,321,546 11,918,503
JAPANESE YEN BONDS - 7.2%
JPY 200,000,000 0 200,000,000 Asian Development Bank,
5.000% due 2/5/03 . . . . . 1,970,588 0 1,970,588
125,000,000 0 125,000,000 International Bank for
Reconstruction &
Development,
5.250% due 3/20/02 . . . . 1,250,575 0 1,250,575
175,000,000 0 175,000,000 Japan Development Bank,
6.500% due 9/20/01 . . . . 1,865,809 0 1,865,809
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
4
Smith Barney Shearson
Global Bond Fund/Short-Term World Income Fund
Portfolio of Investments
January 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Value (Note 2)
_______________________________________________________ _____________________________________
SBS SBS
SBS Short-Term Pro Forma SBS Short-Term Pro Forma
Global World Combined Global World Combined
Bond Income (Note 1) Bond Income (Note 1)
<S> <C> <C> <C> <C> <C> <C> <C>
200,000,000 0 200,000,000 World Bank,
4.500% due 3/20/03 . . . . 1,917,279 0 1,917,279
0 400,000,000 400,000,000 Credit Foncier
7.125% due 08/29/1995 . . . 0 3,945,956 3,945,956
TOTAL JAPANESE YEN BONDS
(Cost $10,736,940) . . . .
$7,004,251 $3,945,956 $10,950,207
SWEDISH KRONA BONDS - 4.7%
SEK 12,000,000 0 12,000,000 Government of Sweden:
11.000% due 1/21/99 . . . . 1,819,313 0 1,819,313
12,500,000 0 12,500,000 10.250% due 5/5/03 . . . . 1,961,519 0 1,961,519
0 25,000,000 25,000,000 ABB Finance Inc.
10.500% due 06/20/1996 . . 0 3,400,683 3,400,683
TOTAL SWEDISH KRONA BONDS
(Cost $6,840,205) . . . . .
3,780,832 3,400,683 7,181,515
SPANISH PESETA BONDS - 4.2%
ESP 200,000,000 0 200,000,000 Eurofima,
11.350% due 7/22/97 . . . . 1,564,134 0 1,564,134
270,000,000 0 270,000,000 European Investment Bank,
11.700% due 2/10/03 . . . . 2,336,766 0 2,336,766
292,000,000 0 292,000,000 Kingdom of Spain,
10.900% due 8/30/03 . . . . 2,498,078 0 2,498,078
TOTAL SPANISH PESETA BONDS
(Cost $6,254,934) . . . . .
6,398,978 0 6,398,978
CANADIAN DOLLAR BONDS - 3.8%
CAD 3,000,000 0 3,000,000 Eurobank Reconstruction and
Development,
8.375% due 2/25/03 . . . . 2,512,337 0 2,512,337
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
5
Smith Barney Shearson
Global Bond Fund/Short-Term World Income Fund
Portfolio of Investments
January 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Value (Note 2)
_______________________________________________________ ______________________________________
SBS SBS
SBS Short-Term Pro Forma SBS Short-Term Pro Forma
Global World Combined Global World Combined
Bond Income (Note 1) Bond Income (Note 1)
<S> <C> <C> <C> <C> <C> <C> <C>
0 4,000,000 4,000,000 Toyota Motor Car Corp.
11.875% due 08/24/1995 . . 0 3,328,687 3,328,687
TOTAL CANADIAN DOLLAR BONDS
(Cost $5,791,727) . . . . .
2,512,337 3,328,687 5,841,024
GREAT BRITAIN POUND
STERLING BONDS -- 3.5%
GBP 1,500,000 0 1,500,000 Abbey National,
8.000% due 4/2/03 . . . . . $2,432,609 $ 0 $ 2,432,609
1,700,000 0 1,700,000 United Kingdom Treasury,
8.000% due 6/10/03 . . . . 2,871,298 0 2,871,298
TOTAL GREAT BRITAIN POUND
STERLING BONDS (Cost
$5,253,676) . . . . . . . . 5,303,907 0 5,303,907
IRISH PUNT BONDS - 2.9%
(Cost $4,293,092). . . . . . . .
IEP 2,500,000 0 2,500,000 Government of Ireland,
9.250% due 7/11/03 . . . . 4,350,726 0 4,350,726
FINNISH MARRKA BONDS - 2.6%
FIM 9,000,000 0 9,000,000 Republic of Finland:
11.000% due 1/15/99 . . . . 1,990,114 0 1,990,114
9,000,000 0 9,000,000 9.500% due 3/15/04 . . . . 1,995,807 0 1,995,807
TOTAL FINNISH MARRKA BONDS
(Cost $3,394,535) . . . . . 3,985,921 0 3,985,921
AUSTRALIAN DOLLAR BONDS - 2.3%
(Cost $3,480,660)
AUD 4,500,000 0 4,500,000 Western Australia Treasury,
8.000% due 7/15/03 . . . . 3,495,778 0 3,495,778
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
6
Smith Barney Shearson
Global Bond Fund/Short-Term World Income Fund
Portfolio of Investments
January 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Value (Note 2)
______________________________________________________ ______________________________________
SBS SBS
SBS Short-Term Pro Forma SBS Short-Term Pro Forma
Global World Combined Global World Combined
Bond Income (Note 1) Bond Income (Note 1)
<S> <C> <C> <C> <C> <C> <C> <C>
NETHERLAND GUILDER BONDS -
2.3%
NLG 850,000 0 850,000 Dutch Government:
7.000% due 3/15/99 . . . . 471,650 0 471,650
5,000,000 0 5,000,000 7.500% due 1/15/23 . . . . 3,005,745 0 3,005,745
TOTAL NETHERLAND GUILDER
BONDS
(Cost $3,395,939) . . . . . $3,477,395 $ 0 $3,477,395
EUROPEAN CURRENCY UNIT
BONDS - 1.0%
(Cost $1,500,888) . . . . .
ECU 1,150,000 0 1,150,000 Credit Foncier,
8.375% due 3/17/94 . . . . 1,470,810 0 1,470,810
COMMERCIAL PAPER - 2.1%
(Cost $3,125,000) . . . . .
$ 3,125,000 0 3,125,000 Ford Motor Credit
Corporation,
3.100% due 2/1/94 . . . . . 3,125,000 3,125,000
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
7
Smith Barney Shearson
Global Bond Fund/Short-Term World Income Fund
Portfolio of Investments
January 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Value (Note 2)
______________________________________________ ______________________________________
SBS SBS
SBS Short-Term Pro Forma SBS Short-Term Pro Forma
Global World Combined Global World Combined
Bond Income (Note 1) Bond Income (Note 1)
Expiration Strike
Date Price
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CALL OPTIONS PURCHASED - 0.1%
FRF 3,000,000 0 3,000,000 French
Treasury
8.500% due
2023 . . . . 3/15/94 $129.20 $6,602 $0 $6,602
JPY 400,000,000 0 400,000,000 Japan
Government
Bond
4.700% due
3/2017 . . . 2/16/94 105.00 74 0 74
400,000,000 0 400,000,000 Japan
Government
Bond
5.500% due
3/2002 . . . 3/9/94 116.20 404 0 404
ESP 150,000,000 0 150,000,000 Spanish
Government
Bond
8.000% due
2004 . . . . 3/15/94 98.85 22,523 0 22,523
GBP 1,500,000 0 1,500,000 United
Kingdom
Treasury
8.750% due
2017 . . . . 2/17/94 126.00 40,694 0 40,694
$ 7,600,000 0 7,600,000 United States
Dollar . . . 2/10/94 112.00 4,560 0 4,560
7,000 0 7,000 United States
Treasury
6.250% due
2023 . . . . 2/17/94 105.03 280 0 280
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
8
Smith Barney Shearson
Global Bond Fund/Short-Term World Income Fund
Portfolio of Investments
January 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Value (Note 2)
______________________________________________ ______________________________________
SBS SBS
SBS Short-Term Pro Forma SBS Short-Term Pro Forma
Global World Combined Global World Combined
Bond Income (Note 1) Bond Income (Note 1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4,000,000 0 4,000,000 United States
Treasury
6.250% due
2023 . . . . 4/13/94 100.69 $ 58,280 $0 $ 58,280
TOTAL CALL
OPTIONS PURCHASED 133,417 0 133,417
(Cost $463,083) . . . . . . . . . . . .
TOTAL INVESTMENTS
(Cost $149,856,250) . . . . . . . . . . $76,477,730 $75,317,368 $151,795,098
CALL OPTIONS WRITTEN - 0.0%
(Premiums received $12,614)
GBP 1,500,000 0 1,500,000 United
Kingdom
8.750% due
2017 . . . . 2/17/94 129.00 ($8,058) $0 ($8,058)
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
9
Smith Barney Shearson
Global Bond Fund/Short-Term World Income Fund
Portfolio of Investments
January 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Value (Note 2)
______________________________________________ ______________________________________
SBS SBS
SBS Short-Term Pro Forma SBS Short-Term Pro Forma
Global World Combined Global World Combined
Bond Income (Note 1) Bond Income (Note 1)
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS
Contract Market
Value Value
Date (Note 1)
______________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
4,765,111 4,765,111 European Currency Units 3/23/94 $5,297,699 $0 $5,297,699
27,204,746 27,204,746 German Deutschemarks 3/23/94 15,562,742 0 15,562,742
34,443,952 34,443,952 Japanese Yen 4/20/94 317,243 0 317,243
506,831,802 506,831,802 Japanese Yen 4/27/94 4,669,179 0 4,669,179
38,000,000 38,000,000 Swedish Krona 2/10/94 0 4,802,286 4,802,286
20,500,000 20,500,000 Swiss Francs 2/14/94 0 14,000,188 14,000,188
1,480,000,000 1,480,000,000 Portuguese Escudos 3/10/94 0 8,404,798 8,404,798
1,180,000,000 1,180,000,000 Spanish Pesetas 3/10/94 0 8,347,984 8,347,984
3,600,000 3,600,000 European Currency Units 3/14/94 0 4,005,804 4,005,804
7,250,000 7,250,000 New Zealand Dollars 3/15/94 0 4,112,619 4,112,619
45,000,000 45,000,000 Finnish Marrkas 3/15/94 0 8,115,523 8,115,523
152,000,000 152,000,000 Belgium Francs 4/05/94 0 4,216,337 4,216,337
6,250,000 6,250,000 Australian Dollars 4/11/94 0 4,416,480 4,416,480
6,000,000 6,000,000 Great Britain Pounds Sterling 4/12/94 0 8,963,546 8,963,546
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO BUY
(Contract Amount $25,649,631, $68,437,862 and $94,087,493, respectively) . $25,846,863 $69,385,565 $95,232,428
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
569,055,809 569,055,809 Spanish Pesetas 2/24/94 ($4,034,494) $0 ($4,034,494)
825,488 825,488 European Currency Units 3/16/94 (918,365) 0 (918,365)
76,693,140 76,693,140 French Francs 3/16/94 (12,931,667) 0 (12,931,667)
27,135,414 27,135,414 Swedish Krona 3/16/94 (3,414,047) 0 (3,414,047)
4,776,135 4,776,135 Australian Dollars 3/23/94 (3,377,721) 0 (3,377,721)
9,837,465 9,837,465 Danish Kroners 3/23/94 (1,450,387) 0 (1,450,387)
20,438,800 20,438,800 Finnish Marrkas 3/23/94 (3,684,641) 0 (3,684,641)
23,507,843 23,507,843 German Deutschemarks 3/23/94 (13,447,892) 0 (13,447,892)
3,968,466,318 3,968,466,318 Italian Lire 3/23/94 (2,323,043) 0 (2,323,043)
4,178,829 4,178,829 Netherland Guilders 3/23/94 (2,136,587) 0 (2,136,587)
3,368,565 3,368,565 Great Britain Pounds Sterling 4/27/94 (5,028,805) 0 (5,028,805)
1,198,459 1,198,459 Irish Punts 4/27/94 (1,712,914) 0 (1,712,914)
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
10
Smith Barney Shearson
Global Bond Fund/Short-Term World Income Fund
Portfolio of Investments
January 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal Value (Note 2)
______________________________________________ ______________________________________
SBS SBS
SBS Short-Term Pro Forma SBS Short-Term Pro Forma
Global World Combined Global World Combined
Bond Income (Note 1) Bond Income (Note 1)
Contract Market
Value Value
Date (Note 1)
______________________________________
<S> <C> <C> <C> <C> <C> <C> <C>
32,500,000 32,500,000 Austrian Shillings 2/08/94 $0 ($2,655,497) ($2,655,497)
122,000,000 122,000,000 Austrian Shillings 2/08/94 0 (9,968,329) (9,968,329)
1,350,000,000 1,350,000,000 Japanese Yen 2/09/94 0 (12,409,482) (12,409,482)
15,000,000 15,000,000 French Francs 2/09/94 0 (2,537,655) (2,537,655)
20,500,000 20,500,000 Swiss Francs 2/14/94 0 (14,000,188) (14,000,188)
21,000,000 21,000,000 German Deutschemarks 2/16/94 0 (12,046,078) (12,046,078)
1,180,000,000 1,180,000,000 Spanish Pesetas 3/10/94 0 (8,347,984) (8,347,984)
70,000,000 70,000,000 Finnish Marrkas 3/15/94 0 (12,624,147) (12,624,147)
6,000,000 6,000,000 Great Britain Pounds Sterling 4/12/94 0 (8,963,545) (8,963,545)
23,500,000 23,500,000 Netherland Guilders 4/21/94 0 (11,992,002) (11,992,002)
30,000,000 30,000,000 Norwegian Krona 4/21/94 0 (3,998,444) (3,998,444)
TOTAL FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(Contract Amount $53,968,714, $98,374,708 and $152,343,422, respectively) . ($54,460,563) ($99,543,351)($154,003,914)
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
11
Smith Barney Shearson
Global Bond Funds
Pro Forma Combining
Statement of Assets And
Liabilities (Unaudited)
January 31, 1994
<TABLE>
<CAPTION>
SBS Pro
SBS Short-Term Forma
Global Bond World Income Combined
Fund Fund Adjustments (Note 1)
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value (Cost $74,831,201,
$75,025,049 and $149,856,250, respectively)
(Note 2) See accompanying schedule $76,477,730 $75,317,335 $151,795,065
Cash and foreign currency (Cost $2,568,096,
$736,787 and $3,304,885, respectively) 2,576,907 735,895 3,312,802
Dividends and interest receivable 3,053,790 1,975,801 5,029,591
Receivable for investment securities sold 3,482,355 3,482,355
Receivable for forward foreign exchange contracts to 53,968,714 98,374,708 152,343,422
sell
Forward foreign exchange contracts to buy, at value
(Contract cost $25,649,631, $68,437,862 and
$94,087,493,
respectively) See accompanying schedule 25,846,863 69,385,565 95,232,428
Receivable for Fund shares sold 126,996 4,438 131,434
Miscellaneous receivable 0 19,435 19,435
Receivable from adviser 0 0 183,768(a) 183,768
Unamortized organization costs 0 183,768 (183,768)(a)
0
Total Assets 165,533,355 245,996,945 0 411,530,300
LIABILITIES:
Forward foreign exchange contracts to sell, at value 54,460,563 99,543,351 154,003,914
(Contract cost $53,968,714, $98,374,708 and
$152,343,422, respectively) See accompanying
schedule
Payable for forward foreign exchange contracts to buy 25,649,631 68,437,862 94,087,493
Options written, at value (premiums received $12,614) 8,058 0 8,058
See accompanying schedule
Payable for investment securities purchased 5,343,471 0 5,343,471
Payable for fund shares redeemed 0 0 0
Dividends payable 0 10,487 10,487
Investment advisory fee payable 40,196 18,611 58,807
Administration fee payable 13,399 6,767 20,166
Custodian fee payable 28,500 42,000 70,500
Distribution fees payable 32,461 11,955 44,416
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
12
Smith Barney Shearson
Global Bond Funds
Pro Forma Combining
Statement of Assets And
Liabilities (Unaudited)
January 31, 1994
<TABLE>
<CAPTION>
SBS Pro
SBS Short-Term Forma
Global Bond World Income Combined
Fund Fund Adjustments (Note 1)
<S> <C> <C> <C> <C>
Service fees payable 17,410 16,920 34,330
Transfer agent fees payable 7,867 9,518 17,385
Accrued Trustees' fees and expenses 2,833 6,804 9,437
Miscellaneous fees payable 63,936 172,460 236,396
Total Liabilities 85,668,325 166,276,535 0 253,944,860
NET ASSETS $79,865,030 $77,720,410 $0 $157,585,440
(a) - Any remaining unamortized organization costs will be assumed by the investment manager prior to merger date.
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
13
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
PRO FORMA COMBINING
STATEMENT OF ASSETS AND
LIABILITIES (Unaudited)
January 31, 1994
<TABLE>
<CAPTION>
SBS Pro
SBS Short-Term Forma
Global Bond World Income Combined
Fund Fund Adjustments (Note 1)
<S> <C> <C> <C> <C>
NET ASSET VALUE:
Class A Shares:
Net Asset Value and redemption price per share
($2,731,798 divided by 164,799, $50,364,238 divided by
7,613,890, and $53,096,036 divided by 3,202,449 shares
of common stock outstanding) $16.58 $6.61 $16.58
Maximum offering price per share (based on maximum sales
charge of 4.5%, 3.0% and 4.5%, respectively, of offering
price on January 31, 1994) $17.36 $8.81 $17.36
Class B Shares:
Net Asset Value and offering price per share
($77,108,283 divided by 4,651,492, $27,356,171 divided
by 4,135,476 and $104,464,454 divided by 6,301,442
shares of common stock outstanding) $16.58 $6.61 $16.58
Class D Shares:
Net Asset Value, offering price and redemption price per
share ($24,950 divided by 1,505 shares of common stock
outstanding) $16.58 n/a $16.58
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
14
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
PRO FORMA COMBINING
STATEMENT OF NET
INVESTMENT INCOME (Unaudited)
For the Year Ended January 31, 1994
<TABLE>
<CAPTION>
SBS Pro
SBS Short-Term Forma
Global Bond World Income Combined
Fund Fund Adjustments (Note 1)
<S> <C> <C> <C> <C>
INCOME:
Interest $5,587,024 $11,190,669 $16,777,693
TOTAL INCOME 5,587,024 11,190,669 0 16,777,693
EXPENSES:
Investment advisory fee 479,190 427,462 38,860(a) 945,512
Administration fee 159,730 155,441 315,171
Transfer agent fees 94,526 147,550 242,076
Directors' fees and expenses 15,686 28,700 (28,700)(b) 15,686
Custodian fees 117,674 160,976 278,650
Distribution fees 385,666 136,781 522,447
Service fees 199,663 194,300 393,963
Audit and legal fees 59,568 53,000 (30,000)(b) 82,568
Other 138,792 240,921 (107,350)(b) 272,363
TOTAL EXPENSES 1,650,495 1,545,131 (127,190) 3,068,436
NET INVESTMENT INCOME (LOSS) 3,936,529 9,645,538 127,190 13,709,257
<FN>
(a)Adjustment to reflect SBS Global Bond Fund's currently effective fee
schedule.
(b)Reductions reflect expected savings when the two funds become one.
</TABLE>
SEE NOTES TO PRO FORMA FINANCIAL STATEMENTS
<PAGE>
15
Smith Barney Shearson
Global Bond Fund
NOTES TO PRO FORMA FINANCIAL STATEMENTS (Unaudited)
1. Basis of Combination
The unaudited Pro Forma Combining Portfolio of Investments, the Pro Forma
Combining Statement of Assets and Liabilities and the Pro Form Combining
Statement of Net Investment Income reflect the accounts of Smith Barney
Shearson Global Bond Fund ("Global") and Smith Barney Shearson Short-Term
World Income Fund ("WINC") at and for the year ended January 31, 1994. These
statements have been derived from the funds' books and records utilized in
calculating daily net asset value at January 31, 1994.
The pro forma statements give effect to the proposed transfer of the
assets and stated liabilities of WINC to Global in exchange for shares of
Global under generally accepted accounting principles. The historical cost of
investment securities will be carried forward to the surviving entity and the
results of operations of Global for pre-combination periods will not be
restated. The pro forma statements do not reflect the expenses of either fund
in carrying out its obligations under the Agreement and Plan of
Reorganization.
The Pro Forma Combining Portfolio of Investments, the Pro Forma Combining
Statement of Assets and Liabilities and the Pro Forma Combining Statement of
Net Investment Income should be read in conjunction with the historical
financial statements of the funds included or incorporated by reference in the
Statement of Additional Information.
2. Portfolio Valuation
Securities of both Global and WINC are valued at market value, or in the
absence of a market value with respect to any portfolio securities, at fair
value as determined by or under the direction of the funds' Board of Trustees.
Portfolio securities that are primarily traded on an exchange are valued at
the last sale price on that exchange or, if there were no sales during the
day, at the current quoted bid price. Short-term investments that mature in
60 days or less are valued at amortized cost.
3. Capital Shares
The pro forma net asset value per share assumes the issuance of
additional shares of Global which would have been issued at January 31, 1994
in connection with the proposed reorganization. The pro forma number of Class
A and B shares outstanding of 3,202,449 and 6,301,442, respectively, consists
of 3,037,650 and 1,649,950 additional Class A and B shares, respectively,
assumed issued in the reorganization plus 164,799 and 4,651,492 shares of
Global outstanding at January 31, 1994.
<PAGE>
SMITH BARNEY SHEARSON INCOME FUNDS
PART C
OTHER INFORMATION
<TABLE>
<C> <S>
ITEM 15. INDEMNIFICATION
The response to this item is incorporated by reference to "Liability of
Trustees" under the caption "Comparative Information on Shareholder Rights"
in Part A of this Registration Statement.
ITEM 16. 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) Registrant's First Amended and Restated Master Trust Agreement dated
November 5, 1993 and Amendment No. 1 to the Master Trust Agreement dated
July 30, 1993 are incorporated by reference to Post-Effective Amendment No.
36.
(2) Registrant's By-Laws are incorporated by reference to the Registration
Statement.
(3) Not Applicable.
(4) Form of Agreement and Plan of Reorganization.*
(5) Registrant's form of share certificates for Class A, B, C and D shares of
beneficial interest in each of its sub-trusts are incorporated by reference
to Post-Effective Amendment No. 34.
(6)(a) Investment Advisory Agreements between the Registrant and Greenwich Street
Advisors, a Division of Mutual Management Corp., with respect to
Diversified Strategic Income, Utilities, Convertible, High Income,
Tax-Exempt Income and Money Market Funds and between the Registrant and
Boston Advisors with respect to Premium Total Return Fund are incorporated
by reference to Post-Effective Amendment No. 36.
(b) Investment Advisory Agreement between the Registrant and Smith Barney
Shearson Global Capital Management Inc., with respect to Global Bond
Fund.**
(c) Sub-Investment Advisory Agreement between the Registrant and Lehman
Brothers Global Asset Management Ltd. with respect to Diversified Strategic
Income Fund is incorporated by reference to Post-Effective Amendment No.
36.
(7) Distribution Agreement dated July 30, 1993 between the Registrant and Smith
Barney Shearson Inc. is incorporated by reference to Post-Effective
Amendment No. 36.
(8) Not Applicable.
(9)(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
Diversified Strategic Income Fund 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.
(10) Services and Distribution Plan pursuant to Rule 12b-1 dated July 30, 1993
with respect to Diversified Strategic Income, Utilities, Convertible,
Global Bond, High Income, Premium Total Return, Tax-Exempt Income and Money
Market Funds is incorporated by reference to Post-Effective Amendment No.
36.
(11) Opinion and Consent of Willkie Farr & Gallagher with respect to legality
(with Opinion of Francis J. McNamara III, Esq. attached thereto).**
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <S>
(12) Opinion and Consent of Willkie Farr & Gallagher with respect to tax
matters.**
(13)(a) Transfer Agency Agreement between the Registrant and Boston Safe
incorporated by reference to Pre-Effective Amendment No. 1.
(b) Supplement to the Transfer Agency Agreement with respect to Diversified
Strategic Income Fund is incorporated by reference to Post-Effective
Amendment No. 16.
(c) Administration agreement between the Registrant and Boston Advisors with
respect to Option Income Fund is incorporated by reference to
Post-Effective Amendment No. 10.
(d) Administration Agreements dated May 21, 1993 between the Registrant and
Boston Advisors are incorporated by reference to Post-Effective Amendment
No. 36
(e) 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.
(f) Purchase Agreement between the Registrant and Shearson Lehman Hutton
relating to Money Market Portfolio is incorporated by reference to
Post-Effective Amendment No. 6.
(g) 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.
(h) 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) Consent of Coopers & Lybrand.**
(15) Not Applicable.
(16) Powers of Attorney.***
(17)(a) Form of Proxy Card.**
(b) Registrant's Declaration pursuant to Rule 24f-2 is incorporated by
reference to the Registration Statement.
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public reoffering of
the securities registered through the use of a Prospectus which is a part
of this Registration Statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act of
1933, the reoffering Prospectus will contain the information called for by
the applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
(2) The undersigned Registrant agrees that every Prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the
Registration Statement and will not be used until the amendment is
effective, and that, in determining any liability under the Securities Act
of 1933, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the offering
of the securities at that time shall be deemed to be the initial bona fide
offering of them.
</TABLE>
- ------------------------
* Filed herewith as Exhibit A to Registrant's Prospectus/Proxy Statement
contained in Part A of this Registration Statement.
** Filed herewith.
*** Previously filed.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the registrant, in the City of New York and State of
New York on the 2nd day of June, 1994.
<TABLE>
<S> <C>
SMITH BARNEY SHEARSON
INCOME FUNDS, on behalf of
SMITH BARNEY SHEARSON
GLOBAL BOND FUND
By: /s/ HEATH B. MCLENDON
_____________________________________
HEATH B. MCLENDON
CHAIRMAN OF THE BOARD
</TABLE>
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------ --------------------------------------------------------- ----------------
<C> <S> <C>
/s/ HEATH B. MCLENDON
---------------------------- Chairman of the Board June 2, 1994
Heath B. McLendon
*
---------------------------- President June 2, 1994
Stephen J. Treadway
*
---------------------------- Treasurer (Chief Financial and Accounting Officer) June 2, 1994
Vincent Nave
*
---------------------------- Trustee June 2, 1994
Lee Abraham
*
---------------------------- Trustee June 2, 1994
Antoinette C. Bentley
*
---------------------------- Trustee June 2, 1994
Allan J. Bloostein
*
---------------------------- Trustee June 2, 1994
Richard E. Hanson, Jr.
*
---------------------------- Trustee June 2, 1994
Madelon DeVoe Talley
*/s/Heath B, McLendon
----------------------------
Heath B. McLendon
as Attorney-in-Fact
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- --------------- ------------------------------------------------------------ -----
<C> <S> <C>
(6)(b) Investment Advisory Agreement between the Registrant and
Smith Barney Shearson Global Capital Management Inc.
(11) Opinion of Willkie Farr Gallagher with respect to Legality
(with Opinion of Francis J. McNamara III, Esq. attached
thereto).
(12) Opinion of Willkie Farr Gallagher with respect to tax
matters.
(14) Consent of Coopers & Lybrand.
(17)(a) Form of Proxy Card.
</TABLE>
S-2
<PAGE>
Exhibit 6(b)
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>1
Exhibit (11)
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
June 1, 1994
Smith Barney Shearson
Income Funds
Two World Trade Center
New York, New York 10048
Ladies and Gentlemen:
We have acted as counsel for Smith Barney Shearson Income Funds (the
"Trust"), a business trust organized under the laws of The Commonwealth of
Massachusetts, in connection with the proposed acquisition by Smith Barney
Global Bond Fund (the "Fund"), a sub-trust of the Trust, of substantially all of
the assets and certain scheduled liabilities of Smith Barney Shearson Short-Term
World Income Fund (the "Acquired Fund"), a business trust organized under the
laws of The Commonwealth of Massachusetts, in exchange for Class A and Class B
shares of beneficial interest of the Fund (collectively, the "Shares"), pursuant
to an Agreement and Plan of Reorganization to be dated as of June 1, 1994
between the Trust, on behalf of the Fund, and the Acquired Fund (the
"Agreement").
As counsel for the Fund, we have examined its Registration
Statement on Form N-14 substantially in the form in which it is to become
effective (the "Registration Statement"), its Master Trust Agreement and By-
laws, and all amendments thereto, and the Agreement.
We have also examined and relied upon such corporate records of the
Trust and other documents and certificates with respect to factual matters as
we have deemed necessary to render the opinions expressed herein. We have
assumed without independent verification the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity with originals of all documents submitted to us as copies. As to
matters of Massachusetts law, we have relied solely
<PAGE>2
on the opinion of Francis J. McNamara, III, General Counsel of The Boston
Company Advisors, Inc., which serves as sub-administrator to the Fund, with
respect to the matters addressed therein, which is satisfactory to us in form
and scope and a copy of which is annexed hereto.
Based upon the foregoing, we are of the opinion that all necessary
Trust action precedent to the issuance of the Shares pursuant to the
Agreement has been duly taken. We are further of the opinion that the Shares
when issued pursuant to the Agreement will be legally and validly issued,
fully paid and nonassessable by the Trust. In rendering the opinion expressed
in the preceding sentence, we assume that the sale of the Shares will be
effected in compliance with the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and applicable state laws
regulating the sale of securities. We further assume that there will be no
material changes in the facts and conditions on which we base this opinion
between the date hereof and the time of issuance of the Shares.
As indicated above, the Trust is an entity of the type commonly
known as a "Massachusetts business trust." Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable for the obligations of the Trust. The Trust's Master Trust
Agreement provides, however, that if a shareholder of any sub-trust of the Trust
is charged or held personally liable solely by reason of being or having been a
shareholder, the shareholder shall be entitled out of the assets of the
sub-trust to be held harmless from and indemnified against all loss and expense
arising from such liability. Thus, the risk of a shareholder incurring
financial loss on account of shareholder's liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the references to us in the Prospectus/Proxy
Statement included as part of the Registration Statement and to the filing of
this opinion as an exhibit to any application made by or on behalf of the
Trust or any distributor or dealer in connection with the registration or
qualification of the Trust or the Shares under the securities laws of any
state or other jurisdiction.
<PAGE>3
This opinion is furnished by us as counsel to the Trust, is solely
for the benefit of the Trust and its governing board in connection with the
above described acquisition of assets and liabilities and may not be relied
upon for any other purpose or by any other person.
Very truly yours,
/s/ WILLKIE FARR & GALLAGHER
WILLKIE FARR & GALLAGHER
<PAGE>1
[Letterhead of The Boston Company Advisers, Inc.]
June 1, 1994
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Ladies and Gentlemen:
I have acted as special Massachusetts counsel for Smith Barney Shearson Income
Funds (the "Trust"), a business trust organized under the laws of The
Commonwealth of Massachusetts, in connection with the proposed acquisition by
the Smith Barney Shearson Global Bond Fund (the "Fund"), a sub-trust of
the Trust, of substantially all of the assets and certain scheduled liabilities
of Smith Barney Shearson Short-Term World Income Fund (the "Acquired Fund"), a
business trust organized under the laws of The Commonwealth of Massachusetts, in
exchange for Class A and Class B shares of beneficial interest of the Fund
(collectively, the "Shares") pursuant to an Agreement and Plan of Reorganization
to be dated as of June 1, 1994 between the Trust, on behalf of the Fund, and the
Acquired Fund (the "Agreement"). Capitalized terms used herein have the same
meanings ascribed to them in the Agreement unless defined otherwise herein.
As special Massachusetts counsel for the Trust, I have examined its
Master Trust Agreement and By-laws, and all amendments thereto, its Registration
Statement on Form N-14 (the "Registration Statement") and a draft of the
Agreement, and have examined and relied upon such records of the Trust and
other documents and certificates as to factual matters as I have deemed to be
necessary to render the opinion expressed herein. I have assumed without
independent verification the genuineness of all signatures, the authenticity
of all documents submitted to me as originals and the conformity with
originals of all documents submitted to me as copies.
Based upon the foregoing, I am of the opinion that all necessary Trust action
precedent to the issuance of the Shares pursuant to the Agreement has been
duly taken. I am further of the opinion that the Shares when issued pursuant
to the Agreement will be legally and validly
<PAGE>2
Willkie Farr & Gallagher
May 31, 1994
Page 2
issued, fully paid and nonassessable by the Trust. In rendering the opinion
expressed in the preceding sentence, I assume that the sale of the Shares will
be effected in compliance with the Securities Act of 1933, as amended, the
Investment Company Act of 1940, as amended, and applicable state laws
regulating the sale of securities. I further assume that there will be no
material changes in the facts and conditions on which I base this opinion
between the date hereof and the time of issuance of the Shares.
As indicated above, the Trust is an entity of the type commonly known as a
"Massachusetts business trust." Under Massachusetts law, a shareholder of a
business trust may, under certain circumstances, be held personally liable for
the obligations of the Trust. The Trust's Master Trust Agreement
provides, however, that if a shareholder of any sub-trust of the Trust is
charged or held personally liable solely by reason of being or having been a
shareholder, the shareholder shall be entitled out of the assets of said
sub-trust to be held harmless from and indemnified against all loss and expense
arising from such liability. Thus, the risk of a shareholder incurring
financial loss on account of shareholder's liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and to the filing of this opinion as an exhibit to any
application made by or on behalf of the Trust or any distributor or dealer in
connection with the registration or qualification of the Trust or the Shares
under the securities laws of any state or other jurisdiction.
This opinion is furnished by me as counsel to the Trust, is solely for your
benefit in connection with the rendering of an opinion to the Trust regarding
the above-described acquisition of assets and liabilities and may not be
relied upon for any other purpose or by any other person.
Very truly yours,
/s/ Francis J. McNamara, III
Francis J. McNamara, III
<PAGE>1
Exhibit (12)
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
May 25, 1994
Smith Barney Shearson
Short-Term World Income Fund
Two World Trade Center
New York, New York 10048
Smith Barney Shearson
Global Bond Fund
Two World Trade Center
New York, New York 10048
Ladies and Gentlemen:
You have asked us for our opinion concerning certain federal income tax
consequences to the Smith Barney Shearson Short-Term World Income Fund (the
"Short-Term World Income Fund") and its shareholders ("Short-Term World Income
Fund Shareholders") and to the Smith Barney Shearson Global Bond Fund, a
separate investment series of Smith Barney Shearson Income Funds (the "Global
Bond Fund"), when the Short-Term World Income Fund Shareholders receive shares
(including fractional shares) of common stock of the Global Bond Fund ("Global
Bond Fund Shares") in liquidation of their interests in the Short-Term World
Income Fund pursuant to an acquisition by the Global Bond Fund of all or
substantially all of the assets of the Short-Term World Income Fund in
exchange for Global Bond Fund Shares and the assumption by the Global Bond
Fund of certain identified liabilities of the Short-Term World Income Fund,
the liquidation of the Short-Term World Income Fund and the distribution in
liquidation of Global Bond Fund Shares to the Short-Term World Income Fund
Shareholders.
We have reviewed such documents and materials as we have considered necessary
for the purpose of rendering this opinion. In rendering this opinion, we
assume that such documents as yet unexecuted will, when executed, conform in
all material respects to the proposed forms of such documents that we have
examined. In addition, we assume the genuineness of all signatures, the
capacity of each party executing a document so to execute that document, the
authenticity of all documents submitted to us as originals and the conformity
to original documents of all documents submitted to us as certified or
photostatic copies. We have made inquiry as to the underlying facts which we
considered
<PAGE>2
to be relevant to the conclusions set forth in this letter. The opinions
expressed in this letter are based upon certain factual statements relating to
the Short-Term World Income Fund and the Global Bond Fund set forth in the
Registration Statement on Form N-14 (the "Registration Statement") filed by
Smith Barney Shearson Income Funds with the Securities and Exchange Commission
and representations to be made in letters from the Short-Term World Income
Fund and the Global Bond Fund addressed to us for our use in rendering this
opinion. Based on information received from the Short-Term World Income Fund
and the Global Bond Fund, we have no reason to believe that we will not be
able to render this opinion as a final opinion at the Closing. We have no
reason to believe that these representations and facts will not be valid, but
we have not attempted and will not attempt to verify independently any of
these representations and facts, and this opinion is based upon the assumption
that each of them is accurate. Capitalized terms used herein and not
otherwise defined shall have the meaning given them in the Registration
Statement.
The conclusions expressed herein are based upon the Internal Revenue Code of
1986 (the "Code"), Treasury regulations issued thereunder, published rulings
and procedures of the Internal Revenue Service and judicial decisions, all as
in effect on the date of this letter.
Based upon the foregoing, it is our opinion that:
(1) the transfer of all or substantially all of the Short-Term World
Income Fund's assets in exchange for Global Bond Fund Shares and the
assumption by the Global Bond Fund of certain identified liabilities of the
Short-Term World Income Fund will constitute a "reorganization" within the
meaning of Section 368(a)(1)(C) of the Code, and the Short-Term World Income
Fund and the Global Bond Fund are each a "party to a reorganization" within
the meaning of Section 368(b) of the Code;
(2) no gain or loss will be recognized by the Global Bond Fund upon the
receipt of the assets of the Short-Term World Income Fund in exchange for
Global Bond Fund Shares and the assumption by the Global Bond Fund of certain
identified liabilities of the Short-Term World Income Fund;
<PAGE>3
(3) no gain or loss will be recognized by the Short-Term World Income
Fund upon the transfer of the Short-Term World Income Fund's assets to the
Global Bond Fund in exchange for Global Bond Fund Shares and the assumption by
the Global Bond Fund of certain identified liabilities of the Short-Term World
Income Fund or upon the distribution (whether actual or constructive) of
Global Bond Fund Shares to Short-Term World Income Fund Shareholders;
(4) no gain or loss will be recognized by Short-Term World Income Fund
Shareholders upon the exchange of their shares of the Short-Term World Income
Fund for Global Bond Fund Shares and the assumption by the Global Bond Fund of
certain identified liabilities of the Short-Term World Income Fund;
(5) the aggregate tax basis for Global Bond Fund Shares received by each
Short-Term World Income Fund Shareholder pursuant to the Reorganization will
be the same as the aggregate tax basis of the shares of the Short-Term World
Income Fund held by that Shareholder immediately prior to the Reorganization,
and the holding period of the Global Bond Fund Shares to be received by each
Short-Term World Income Fund Shareholder will include the period during which
the shares of the Short-Term World Income Fund exchanged therefor were held by
such Short-Term World Income Fund Shareholder (provided the shares of the
Short-Term World Income Fund were held as capital assets on the date of the
Reorganization); and
(6) the tax basis of the Short-Term World Income Fund's assets acquired
by the Global Bond Fund will be the same as the tax basis of such assets to
the Short-Term World Income Fund immediately prior to the Reorganization, and
the holding period of the assets of the Short-Term World Income Fund in the
hands of the Global Bond Fund will include the period during which those
assets were held by the Short-Term World Income Fund.
<PAGE>4
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name and any reference to our
firm in the Registration Statement or in the Prospectus/Proxy Statement
constituting a part thereof.
Very truly yours,
/s/ WILLKIE FARR & GALLAGHER
WILLKIE FARR & GALLAGHER
<PAGE>1
Exhibit (14)
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Smith Barney Shearson Income Funds:
We hereby consent to the following with respect to the Registration
Statement on Form N-14 under the Securities Act of 1933, as amended, of Smith
Barney Shearson Income Funds:
1. The incorporation by reference of our report dated June 11, 1993,
accompanying the financial statements of the Smith Barney Shearson Short-
Term World Income Fund (formerly the Shearson Lehman Brothers Short-Term
World Income Fund) as of April 30, 1993, which report is included in
Post-Effective Amendment No. 6 to the Registration Statement on Form N-
1A (File No. 33-33912) of the Smith Barney Shearson Short-Term World
Income Fund.
2. The incorporation by reference of our report dated September 10, 1993,
accompanying the financial statements of the Smith Barney Shearson Global
Bond Fund as of July 31, 1993, which report is included in Post-Effective
Amendment No. 37 to the Registration Statement on Form N-1A (File No. 2-
96408) of the Smith Barney Shearson Income Funds.
3. The reference to our firm under the heading "Financial Statements and
Experts" in the Prospectus/Proxy Statement.
/s/ Coopers & Lybrand
COOPERS & LYBRAND
Boston, Massachusetts
May 31, 1994
<PAGE>1
Exhibit (17)(a)
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
..............................................................................
.........................................................
Please indicate your vote by an "X" in the appropriate box below.
This proxy, if properly executed, will be voted in the manner directed by the
undersigned shareholder. IF NOT DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR THE PROPOSAL.
Please refer to the Prospectus/Proxy Statement for a discussion of the
Proposal.
1. To approve the Agreement and Plan of Reorganization FOR / / AGAINST / /
ABSTAIN / /
dated as of June 1, 1994 providing for (i) the acquisition of substantially
all of the assets of Smith Barney Shearson Short-Term World Income Fund
("Short-Term World Income Fund") by Smith Barney Shearson Global Bond Fund
("Global Bond Fund"), a separate investment series of Smith Barney Shearson
Income Funds, in exchange for shares of Global Bond Fund and the assumption by
Global Bond Fund of certain liabilities of Short-Term World Income Fund, (ii)
the distribution of such shares of Global Bond Fund to shareholders of Short-
Term World Income Fund in liquidation of Short-Term World Income Fund and
(iii) the subsequent dissolution and termination of Short-Term World Income
Fund.
<PAGE>2
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
..............................................................................
..............................................................................
SMITH BARNEY SHEARSON SHORT-TERM WORLD INCOME FUND PROXY SOLICITED BY THE
BOARD OF TRUSTEES
The undersigned holder of shares of Short-Term World Income Fund ("Short-Term
World Income Fund") hereby appoints Heath B. McLendon, Christina T. Sydor
and Lee D. Augsburger attorneys and proxies for the undersigned with full
powers of substitution and revocation, to represent the undersigned and to
vote on behalf of the undersigned all shares of the Short-Term World Income
Fund that the undersigned is entitled to vote at the Special meeting of
Shareholders of Short-Term World Income Fund to be held at the offices of the
Short-Term World Income Fund, Two World Trade Center, New York, New York on
July 5, 1994 at 10:00 a.m., and any adjournment or adjournments thereof. The
undersigned hereby acknowledges receipt of the Notice of Special Meeting and
Prospectus/Proxy Statement dated June 2, 1994 and hereby instructs said
attorneys and proxies to vote said shares as indicated herein. In their
discretion, the proxies are authorized to vote upon such other business as may
properly come before the Special Meeting. A majority of the proxies present
and acting at the Special Meeting in person or by substitute (or, if only one
shall be so present, then that one) shall have and may exercise all of the
power and authority of said proxies hereunder. The undersigned hereby revokes
any proxy previously given.
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN THE ENCLOSED ENVELOPE
Note: Please sign exactly as your name appears
on this Proxy. If joint owners, EITHER may sign
this Proxy. When signing as attorney, executor,
administrator, trustee, guardian or corporate
officer, please give your full title.
Date: June __,1994
Signature(s) (Title(s), if applicable)
