Registration No. 2-96408
811-4254
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 39 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 42 X
SMITH BARNEY SHEARSON INCOME FUNDS
(Exact name of Registrant as Specified in Charter)
Two World Trade Center, New York, New York 10048
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (212) 720-9218
Christina T. Sydor, Esq.
Secretary
Smith Barney Shearson Income Funds
One Boston Place
Boston, Massachusetts 02108
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
immediately upon filing pursuant to Rule 485(b)
on pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
X on November 7, 1994 pursuant to Rule 485(a)
The Registrant has previously filed a declaration of indefinite registration
of its shares pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. Registrant's Rule 24f-2 Notice for the fiscal year ended July 31,
1994 will be filed electronically on or before September 30, 1994.
SMITH BARNEY SHEARSON INCOME FUNDS
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
The enclosed Prospectuses relate only to the Smith Barney Shearson
Global Bond Fund, Premium Total Return Fund, Diversified Strategic Income Fund
and Money Market Fund, each a portfolio of the Smith Barney Shearson Income
Funds (the "Trust"), and contain information relating only to those funds.
The prospectuses for Smith Barney Shearson Convertible Fund, High Income Fund,
Tax-Exempt Income Fund and Utilities Fund are not being amended or otherwise
affected by the information in this amendment. The prospectuses of those
funds are incorporated by reference to Post-Effective Amendment No. 38.
Part A.
Item No. Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Information Financial Highlights;
Performance
4. General Description of Registrant Cover Page; Prospectus
Summary;
Investment Objective and
Management Policies;
Additional Information
5. Management of the Fund Management of the Trust and
the Fund;
Distributor; Additional Information
6. Capital Stock and Other Securities Investment Objective
and Management Policies;
Dividends, Distributions and Taxes;
Additional Information
7. Purchase of Securities Being Offered Purchase of Shares;
Redemption of Shares; Valuation of
Shares;
Shareholder Services; Minimum
Account Size;
Distributor; Additional
Information
8. Redemption or Repurchase Purchase of Shares;
Redemption of Shares;
Additional Information
9. Legal Proceedings Not Applicable
Part B
Item No. Statement of Additional Information
Caption
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History Distributor;
Additional Information
13. Investment Objectives and Policies Investment Objectives
and Management
Policies
14. Management of the Fund Management of the Trust and
the Funds;
Distributor
15. Control Persons and Principal Holders of Management of the Trust
and the Funds
Securities
16. Investment Advisory and Other Services Management of the Trust
and the Funds; Distributor
17. Brokerage Allocation Investment Objectives and
Management Policies;
Distributor
18. Capital Stock and Other Securities Purchase of Shares;
Redemption of Shares;
Taxes
19. Purchase, Redemption and Pricing of Purchase of Shares;
Redemption of Shares; Securities Being Offered
Valuation of Shares; Shareholder Services
20. Tax Status Taxes
21. Underwriters Distributor
22. Calculation of Performance Data Performance Data
23. Financial Statements Financial Statements
<PAGE>
NOVEMBER 7, 1994
SMITH BARNEY
GLOBAL
BOND
FUND
PROSPECTUS BEGINS
ON PAGE ONE.
[LOGO]
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
PROSPECTUS November 7,
1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The Smith Barney Global Bond Fund (the "Fund"), a diversified fund, seeks
current income and capital appreciation by investing primarily in bonds,
debentures and notes of foreign and domestic issuers in the U.S. dollar and
foreign currency bond and money markets.
The Fund is one of a number of funds, each having distinct investment
objectives and policies, making up the Smith Barney Income Funds (the
"Trust").
The Trust is an open-end management investment company commonly referred to as
a
mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and
expenses,
which prospective investors will find helpful in making an investment
decision.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other investment funds offered by the Trust are
described in separate prospectuses that may be obtained by calling the Fund at
the telephone number set forth above or by contacting your Smith Barney
Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, 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 Financial Consultant. The
Statement of Additional Information has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into this
Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Investment Adviser
SMITH, BARNEY ADVISERS INC.
Administrator
THE BOSTON COMPANY ADVISORS, INC.
Sub-Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
----------------------------------------------------------------
FINANCIAL HIGHLIGHTS 12
----------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 15
----------------------------------------------------------------
VALUATION OF SHARES 29
----------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 30
----------------------------------------------------------------
PURCHASE OF SHARES 33
----------------------------------------------------------------
SHAREHOLDER SERVICES 44
----------------------------------------------------------------
REDEMPTION OF SHARES 48
----------------------------------------------------------------
MINIMUM ACCOUNT SIZE 50
----------------------------------------------------------------
PERFORMANCE 51
----------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 52
----------------------------------------------------------------
DISTRIBUTOR 54
----------------------------------------------------------------
ADDITIONAL INFORMATION 54
----------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE
PROSPECTUS.
SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified management
investment
company that seeks current income and capital appreciation by investing
primarily in bonds, debentures and notes of foreign and domestic issuers. At
least 85% of the obligations of companies in which the Fund invests will have
an
outstanding debt issue rated no lower than Aa by Moody's Investors Services,
Inc. ("Moody's") or AA by Standard & Poor's Corporation ("S&P") or comparable
unrated securities. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers several classes of shares ("Classes") to investors designed
to
provide them with the flexibility of selecting an investment best suited to
their needs. The general public is offered three classes of shares: Class A
shares, Class B shares and Class C shares, which differ principally in terms
of
sales charges and rate of expenses to which they are subject. A fourth Class
of
shares, Class Y shares, is offered only to investors meeting an initial
investment minimum of $5,000,000. In addition, a fifth Class, Class Z shares,
which is offered pursuant to a separate prospectus, is offered exclusively to
(a) tax-exempt employee benefit and retirement plans of Smith Barney Inc.
("Smith Barney") and its affiliates and (b) unit investment trusts ("UITs")
sponsored by Smith Barney and its affiliates. See "Purchase of Shares,"
"Redemption of Shares" and "Smith Barney 401(k) Program."
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% imposed at the time of purchase. This initial
sales
charge may be reduced or waived for certain purchases. Class A shares also
bear
an annual service fee of 0.25% of the average daily net assets of the Class A
shares. See "Reduced or No Initial Sales Charge" below. Purchases of Class A
shares, which when combined with current Class A shares equal or exceed
$500,000
in the aggregate, will be made at net asset value with no sales charge, but
will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. Smith Barney recommends that,
in
view of the relative sales charge
3
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
and distribution fees applicable to the classes, single investment of
$5,000,000
or more should be directed toward Class Y shares. Shareholders of Class C
shares
may also qualify for purchase of Class A shares within certain conditions. See
"Class C Shares."
CLASS B SHARES. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares bear an annual service fee of 0.25% and an annual distribution
fee of 0.50% of the average daily net assets of this Class. The Class B
shares'
distribution fee will cause that Class to have higher expenses and pay lower
dividends than Class A shares. Smith Barney recommends that, in view of the
relative sales charge and distribution fees applicable to the Classes, single
investments of $250,000 or more should be directed toward Class A shares.
CLASS B SHARES CONVERSION FEATURE. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date
of the original purchase. Upon conversion, these shares will no longer be
subject to annual distribution fees. 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 Class B shares
(other than Class B Dividend Shares). 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 C SHARES. Class C shares are sold at net asset value with no initial
sales charge at the time of purchase. They bear an annual service fee of 0.25%
and an annual distribution fee of 0.50% of the average daily net assets of the
Class C shares, and investors pay a CDSC of 1.00% if they redeem Class C
shares
within 12 months of purchase. This CDSC may be waived for certain redemptions.
The Class C shares' distribution fee will cause that Class to have higher
expenses and pay lower dividends than Class A shares. Purchases of Class C
shares, which when combined with current holdings of Class C shares of the
Fund
equal or exceed $500,000 in
4
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
the aggregate, should be made in Class A shares at net asset value with no
sales
charge, and will be subject to a CDSC of 1% on redemptions made within 12
months
of purchase.
CLASS Y SHARES. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge at the time of purchase. They bear no
service
or distribution fees.
In deciding which class of Fund shares to purchase, investors should
consider
the following factors, as well as any other relevant facts and circumstances:
INTENDED HOLDING PERIOD. The decision as to which Class of shares is more
beneficial to you depends on the amount and intended length of your
investment.
Shareholders who are planning to establish a program of regular investment may
wish to consider Class A shares; as the investment accumulates shareholders
may
qualify for reduced sales charge and the shares are subject to lower ongoing
expenses over the term of the investment. Class B shares are suitable for
single
investments below $250,000 in instances where an investor has a timeframe of
five years or more; Class "C" shares are appropriate for investors with
shorter
investment timeframes generally two years or less. In the case of both Class B
and Class C shares, the investor would pay no up front sales charge but would
be
subject to a distribution fee not applicable to an investment in Class A
shares,
as well as CDSC. If you are investing a minimum of $5,000,000, you should
purchase Class Y shares because there is no initial sales charge, no CDSC and
no
service or distribution fee charges against such shares. The maximum purchase
of
Class A shares is $4,999,999. The maximum purchase of Class B shares is
$249,999. The maximum purchase of Class C shares is $499,999. There is no
maximum purchase amount for Class Y shares.
REDUCED OR NO INITIAL SALES CHARGE. The entire initial sales charge on Class
A
shares may be waived for certain eligible purchasers, and these purchasers'
entire purchase price would be immediately invested in the Fund. In addition,
Class A share purchases, which when combined with current Class A shares equal
or exceed $500,000 in the aggregate, may be made at net asset value with no
initial sales charge, but will be subject to a CDSC of 1.00% on redemptions
made
within 12 months of purchase. The $500,000
5
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
aggregate investment may be met by aggregating the purchase with the net asset
value of all Class A shares held in funds sponsored by Smith Barney listed
under
"Shareholder Services -- Exchange Privileges." Class A share purchases made
under the Fund's reduced sales charge plans may be made at a reduced initial
sales charge (see "Purchase of Shares"). Because the ongoing expenses of Class
A
shares will be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Fund" for a complete
description of the sales charges and service and distribution fees for each
class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes"
and "Shareholder Services" for other differences between the classes of
shares.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist 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, Class C and Class Y shares are available as
investment alternatives for Participating Plans. See "Purchase of Shares --
Smith Barney 401(k) Program."
PURCHASE OF SHARES
Shares may be purchased through the Fund's distributor, Smith Barney, a
broker
that clears securities transactions through Smith Barney on a fully disclosed
basis (an "Introducing Broker") or an investment dealer in the selling group.
Direct purchases by certain retirement plans may be made through the Fund's
transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of
First Data Corporation. See "Purchase of Shares."
6
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
INVESTMENT MINIMUMS
Investors in Class A, Class B and Class C shares may open an account by
making
an initial investment of at least $1,000 for each account, or $250 for an
individual retirement account ("IRA") or a Self-Employed Retirement Plan.
Investors in Class Y shares may open an account for an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes
except Class Y, which has no subsequent minimum requirement. For participants
in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial and subsequent investment requirement is $25. The
minimum and subsequent investment through the Systematic Investment Plan is
$100. There is no minimum investment amount for (a) employees of The Travelers
Inc. and its subsidiaries, including Smith Barney and (b) unitholders of a UIT
sponsored by Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN
The Fund offers shareholders a Systematic Investment Plan under which they
may
authorize the automatic placement of a purchase order each month or quarter
for
Fund shares in an amount of at least $100. See "Purchase of Shares."
REDEMPTION OF SHARES
Shares may be redeemed on each day the New York Stock Exchange, Inc.
("NYSE")
is open for business. Class A and Class Y shares are redeemable at net asset
value and Class B and Class C shares are redeemable at net asset value less
any
applicable CDSC. See "Redemption of Shares."
MANAGEMENT OF THE FUND
Smith Barney Asset Management ("Asset Management") serves as the Fund's
investment adviser. Asset Management is a division of Smith, Barney Advisers,
Inc. ("SBA"). SBA is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of The Travelers Inc.
("Travelers"), a diversified financial services holding company principally
engaged in the business of providing investment, consumer finance and
insurance
services.
7
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
SBA serves as the Fund's administrator and The Boston Company Advisors, Inc.
("Boston Advisors") serves as the Fund's sub-administrator. Boston Advisors is
a
wholly owned subsidiary of The Boston Company, Inc. ("TBC"), which is in turn
a
wholly owned subsidiary of Mellon Bank Corporation ("Mellon"). See "Management
of the Trust and the Fund."
EXCHANGE PRIVILEGE
Shares of a Class may be exchanged for shares of the same class of certain
other funds in the Smith Barney Group of Funds. Certain exchanges may be
subject
to a sales charge differential. See "Shareholder Services."
VALUATION OF SHARES
Net asset value of the Fund is generally quoted daily in the financial
section
of most newspapers and is also available from any Smith Barney Financial
Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS
Dividends are paid monthly 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."
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
8
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
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."
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 C CLASS Y
<S> <C> <C> <C>
<C>
-----------------------------------------------------------------------------
- --------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None
None None
Maximum CDSC (as a percentage of redemption
proceeds) None* 4.50%
1.00% None
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- --------
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>
*Purchase of Class A shares, which when combined with current Class A
shares equal or
exceed $500,000 in the aggregate, will be made at net asset value with no
sales charge,
but will be subject to a CDSC of 1% on redemptions made within 12 months.
**Upon the conversion of Class B shares to Class A shares, such shares will
no longer be
subject to a distribution fee. Class C shares do not have a conversion
feature and,
therefore, are subject to an ongoing distribution fee. As a result, long-
term
shareholders of Class C shares may pay more than the economic equivalent
of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc.
***Expenses for the Fund are based on data for its fiscal year ended July 31,
1994. For
Class Y shares, "Other Expenses" have been based on expenses incurred with
respect to
the Class A shares.
</TABLE>
9
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
The sales charge and CDSC set forth in the above table are the maximum
charges
imposed on purchases or redemptions of Fund shares and investors may pay
actual
charges of less than 4.50%, depending on the amount purchased and, in the case
of Class B and Class C 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." Smith Barney also receives, with respect to Class
B
and Class C shares, an annual 12b-1 fee of .75% of the value of average daily
net assets of Class B and Class C 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 IS INTENDED TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR INDIRECTLY.
THE
EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT THE LEVELS SET
FORTH IN THE TABLE ABOVE. SEE "PURCHASE OF SHARES," "REDEMPTION OF SHARES" AND
"MANAGEMENT OF THE FUND."
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10
YEARS*
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
- ------
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each time period:
Class A $ $ $
$
Class B
Class C
Class Y
You would pay the following expenses on
the same investment, assuming the same
annual return and no redemption:
Class A
Class B
Class C
Class Y
-----------------------------------------------------------------------------
- ------
<FN>
*Ten-year figures assume conversion of Class B shares to Class A shares at
the end
of the eighth year following the date of purchase.
</TABLE>
10
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5% annual
return
assumption. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF 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 RETURN WILL
VARY
AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN 5%.
11
<PAGE>
SMITH BARNEY
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, 1994. THE INFORMATION SET OUT BELOW SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THAT ALSO APPEAR IN THE FUND'S ANNUAL
REPORT DATED JULY 31, 1994, WHICH IS INCORPORATED BY REFERENCE INTO THE
STATEMENT OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94+++
7/31/93*++
<S> <C> <C>
Net asset value, beginning of period
$16.32
-----------------------------------------------------------------------------
- ----
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 C 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.
+++As of March 22, 1994, the Fund changed its investment adviser from Lehman
Brothers Global Asset Management to its current investment adviser, Global
Capital Management.
</TABLE>
12
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
ENDED ENDED ENDED ENDED
7/31/94## 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> <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 selling Class B shares on November 6, 1992.
**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.
##As of March 22, 1994 the Fund changed its investment adviser from Lehman
Brothers Global Asset Management to its
current investment adviser, Global Capital Management.
</TABLE>
13
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED ENDED
7/31/94+++ 7/31/93*++
<S> <C>
<C>
Net asset value, beginning of period
$15.98
-----------------------------------------------------------------------------
- --------
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 C shares (previously designated as 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.
+++As of March 22, 1994, the Fund changed its investment adviser from Lehman
Brothers Global
Asset Management to its current investment adviser, Global Capital
Management.
</TABLE>
14
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is current income and capital appreciation.
The Fund's investment objective may be changed only with the approval of a
majority of the Fund's outstanding shares. The Fund will seek to achieve this
objective by investing at least 65% of its assets in bonds, debentures and
notes
of United States and foreign issuers. The Fund's assets may include
obligations
issued, or guaranteed by, the United States government, its agencies or
instrumentalities ("U.S. government securities") 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 Capital
Management, although up to 15% of these obligations may be of companies rated
as
low as A by Moody's or S&P or deemed to be of comparable quality. Up to 20% of
the Fund's assets may be invested in money market instruments. The Fund's
investment objective may be changed only with the approval of the holders of a
majority of the Fund's outstanding shares. There can be no assurance that the
Fund will achieve its investment objective.
In pursuit of its investment objective, the Fund invests in a diversified
portfolio of issuers located throughout the world. The Fund intends to
diversify
broadly among countries and, under normal circumstances, to invest at least
65%
of its assets in the securities of issuers collectively having their principal
business activities in no fewer than three countries other than the United
States. The Fund's assets will consist predominantly of securities denominated
in the following currencies: the British pound, the Canadian dollar, the U.S.
dollar, the German mark, the French franc, the Swiss franc, the Japanese yen,
the Dutch guilder and the European Currency Unit. (The European Currency Unit
is
a weighted composite of the currencies of member states of the European
Monetary
System.) The Fund may invest up to 5% of its assets in the securities of
companies in or governments of developing countries. In order to mitigate the
effects of uncertainty in future
15
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 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
16
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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. Such loans,
if
and when made, may not exceed 20% of the Fund's assets taken at value. Loans
of
portfolio securities will be collateralized by cash, letters of credit or U.S.
government securities that are maintained at all times in an amount at least
equal to the current market value of the loaned securities. Any gain or loss
in
the market price of the securities loaned that might occur during the term of
the loan would be for the account of the Fund.
COVERED OPTION WRITING. The Fund may write put and call options on
securities.
The Fund realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an
underlying
security at a specified price at any time during the option period. In
contrast,
a call option embodies the right of its purchaser to compel the writer of the
option to sell to the option holder an underlying security at a specified
price
at any time during the option period. Thus, the purchaser of a put option
written by the Fund has the right to compel the Fund to purchase from it the
underlying security at the agreed-upon price for a specified time period,
while
the purchaser of a call option written by the Fund has the right to purchase
from the Fund the underlying security owned by the Fund at the agreed-upon
price
for a specified time period.
Upon the exercise of a put option written by the Fund, the Fund may suffer a
loss equal to the difference between the price at which the Fund is required
to
purchase the underlying security and its market value at the time of the
option
exercise, less the premium received for writing the option.
The Fund will write only covered options. Accordingly, whenever the Fund
writes a call option, it will continue to own or have the present right to
acquire the underlying security for as long as it remains obligated as the
writer of the option. To support its obligation to purchase the underlying
security if a put option is exercised, the Fund will either (a) deposit with
Boston Safe Deposit and Trust Company ("Boston Safe") in a segregated account
cash, U.S. government securities or other high-grade debt obligations having a
value at least equal to the exercise price of the underlying
17
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
securities or (b) continue to own an equivalent number of puts of the same
"series" (that is, puts on the same underlying security having the same
exercise
prices and expiration dates as those written by the Fund), or an equivalent
number of puts of the same "class" (that is, puts on the same underlying
security) with exercise prices greater than those that it has written (or, if
the exercise prices of the puts that it holds are less than the exercise
prices
of those that it has written, it will deposit the difference with Boston Safe
in
a segregated account).
The Fund may engage in a closing purchase transaction to realize a profit,
to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale
or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would
purchase,
prior to the holder's exercise of an option 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
18
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
value of the yield otherwise available from the underlying security, however,
will be partially offset by the amount of the premium paid for the put option
and any related transaction costs. Call options may be purchased by the Fund
in
order to acquire the underlying securities for the Fund at a price that avoids
any additional cost that would result from a substantial increase in the
market
value of a security. The Fund also may purchase call options to increase its
return to investors at a time when the call is expected to increase in value
due
to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing sale
transactions (sales by the Fund, prior to the exercise of options that it has
purchased, or options of the same series), and profit or loss from the sale
will
depend on whether the amount received is more or less than the premium paid
for
the option plus the related transaction costs.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. To the extent permitted
by
the policies of state securities authorities in states where shares of the
Fund
are qualified for offer and sale, the Fund may enter into futures contracts or
related options that are traded on domestic and foreign exchanges or boards of
trade. An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of specified
debt
security at a specified price, date, time and place. The Fund may enter into
futures contracts to sell debt securities or currency when Global Capital
Management believes that the value of the Fund's debt securities will
decrease.
An option on an interest rate futures contract, as contrasted with the direct
investment in a futures contract, gives the purchaser the right, in return for
the premium paid, to assume a position in an interest rate futures contract at
a
specified exercise price at any time prior to the expiration date of the
option.
A call option gives the purchaser of the option the right to enter into a
futures contract to buy and obliges the writer to enter into a futures
contract
to sell the underlying debt securities. A put option gives the purchaser the
right to sell and obliges the writer to buy the underlying contract. A foreign
currency futures contract of the type that the Fund may invest in provides for
the future sale by one party and the purchase by the other party of a certain
amount of a specified foreign currency at a specified price, date, time and
place, and an option on a foreign currency futures contract gives the
purchaser
the right, in return for the premium paid, to assume a position in a foreign
currency futures contract at a specified exercise price at any time prior to
the
expiration date
19
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
of the option. The Fund may enter into futures contracts to purchase debt
securities or currency when Global Capital Management anticipates purchasing
the
underlying debt securities or currency and believes that prices will rise
before
the purchases will be made. When the Fund enters into a futures contract to
purchase an underlying security or currency, an amount of cash, U.S.
government
securities or other high-grade debt securities, equal to the market value of
the
contract, will be deposited in a segregated account with the Trust's custodian
to collateralize the position, thereby insuring that the use of the contract
is
unleveraged.
The Fund may purchase put options on futures contracts to hedge its
portfolio
against the risk of rising interest rates or currency prices, and may purchase
call options on interest rate futures contracts to hedge against a decline in
interest rates or currency prices. The Fund may write put and call options on
futures contracts in entering into closing sale transactions and to increase
its
ability to hedge against changes in interest rates or currency values.
CURRENCY EXCHANGE TRANSACTIONS AND OPTIONS ON FOREIGN CURRENCIES. In order
to
protect against uncertainty in the level of future exchange rates, the Fund
may
engage in currency exchange transactions and purchase exchange-traded put and
call options on foreign currencies. The Fund will conduct its currency
exchange
transactions either on a spot (i.e., cash) basis at the rate prevailing in the
currency exchange market or through entering into forward contracts to
purchase
or sell currencies. The Fund's dealings in forward currency exchange and
options
on foreign currencies are limited to hedging involving either specific
transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
tend
to limit any potential gain that might result should the value of the currency
increase.
The Fund may purchase a call option on a foreign currency to hedge against
an
adverse exchange rate of the currency in which a security that it
20
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the
purchaser, in return for a premium, the right to sell, in the case of a put,
and
buy, in the case of a call, the underlying currency at a specified price
during
the term of the option. Although the purchase of an option on a foreign
currency
may constitute an effective hedge by the Fund against fluctuations in the
exchange rates, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus related transaction
costs.
Although the foreign currency forward market may not necessarily be more
volatile than the market in other commodities, the foreign currency forward
market offers less protection against defaults in the trading of currencies
than
is available when trading in currencies occurs on an exchange. Because a
forward
currency contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits or force the Fund
to cover its commitments for the purchase or resale, if any, at the current
market price.
ADDITIONAL INVESTMENTS
MONEY MARKET INSTRUMENTS. When Global Capital Management believes that
market
conditions warrant, the Fund may adopt a temporary defensive posture and may
invest in short-term instruments without limitation. Short-term instruments in
which the Fund may invest include United States government securities; certain
bank obligations (including certificates of deposit, time deposits and
bankers'
acceptances of domestic or foreign banks, domestic savings and loan
associations
and similar institutions); commercial paper rated no lower than A-2 by S&P or
Prime-2 by Moody's or the equivalent from another major rating service or, if
unrated, of an issuer having an outstanding, unsecured debt issue then rated
within the three highest rating categories; and repurchase agreements as
described below.
UNITED STATES GOVERNMENT SECURITIES. The U.S. government securities in which
the Fund may invest include: direct obligations of the United States Treasury
(such as Treasury Bills, Treasury Notes and Treasury Bonds), and obligations
issued by U.S. government agencies and instrumentalities, including securities
that are supported by the full faith and credit of the
21
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 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 Capital Management or
SBA,
acting under the supervision of the Trust's Board of Trustees, reviews on an
ongoing basis the value of the collateral and the creditworthiness of those
banks and dealers with which the Fund may enter into repurchase agreements to
evaluate potential risks.
22
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
CERTAIN INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable. Notwithstanding the foregoing, the Fund shall not invest
more than 10% of its net assets in securities (excluding those subject to Rule
144A under the Securities Act of 1933, as amended) that are restricted. In
addition, the Fund may invest up to 5% of its assets in the securities of
issuers which have been in continuous operation for less than three years. The
Fund also may borrow from banks for temporary or emergency purposes, but not
for
investment purposes, in an amount up to 10% of its total assets, and may
pledge
its assets to the same extent in connection with such borrowings. Whenever
these
borrowings exceed 5% of the value of the Fund's total assets, the Fund will
not
make any additional investments. Except for the limitations on borrowing, the
investment guidelines set forth in this paragraph may be changed at any time
without shareholder consent by vote of the Trust's Board of Trustees. A
complete
list of investment restrictions that identifies additional restrictions that
cannot be changed without the approval of the majority of the Fund's
outstanding
shares is contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
OPTIONS. Option writing for the Fund may be limited by position and exercise
limits established by the national securities exchanges and the National
Association of Securities Dealers, Inc. (the "NASD") and by requirements in
the
Code for qualification as a regulated investment company (see "Dividends,
Distributions and Taxes"). The Fund may write covered put and call options to
generate current income. In addition, the Fund may enter into options
transactions as hedges to reduce investment risk, generally by making an
investment expected to move in the opposite direction of a portfolio position.
A
hedge is designed to offset a loss on a portfolio position with a gain on the
hedge position; at the same time, however, a properly correlated hedge will
result in a gain on the portfolio position being offset by a loss on the hedge
position. The Fund bears the risk that the prices of the securities being
hedged
will not move in the same amount as the hedge. The Fund will engage in hedging
transactions only when deemed advisable by Global Capital Management.
Successful
use by the Fund of options will depend on Global Capital Management's
23
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ability to correctly predict movements in the direction of the stock or
currency
underlying the option used as a hedge. Losses incurred in hedging transactions
and the costs of these transactions will affect the Fund's performance.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write stock options or options on currencies only
if
there appears to be a liquid secondary market for the options purchased or
sold,
for some options no such secondary market may exist or the market may cease to
exist.
Because option premiums paid or received by the Fund are small in relation
to
the market value of the investments underlying the options, buying and selling
options can result in large amounts of leverage. The leverage offered by
trading
in options may cause the Fund's net asset value to be subject to more frequent
and wider fluctuation than would be the case if the Fund did not invest in
options.
The Fund may write put and covered call options on securities. The Fund
could
realize fees (referred to as "premiums") for granting the rights evidenced by
the options. A put option embodies the right of its purchaser to compel the
writer of the option to purchase from the option holder an underlying security
at a specified price at any time during the option period. In contrast, a call
option embodies the right of its purchaser to compel the writer of the option
to
sell the option holder an underlying security at a specified price at any time
during the option period.
Upon the exercise of a put option written by the Fund, the Fund may suffer a
loss equal to the difference between the price at which the Fund is required
to
purchase the underlying security and its market value at the time of the
option
exercise, less the premium received for writing the option. Upon the exercise
of
a call option written by the Fund, the Fund may suffer a loss equal to the
excess of the security's market value at the time of the option exercise over
the exercise price of the option less the premium received for writing the
option.
Whenever the Fund writes a call option it will continue to own or have the
present right to acquire the underlying security for as long as it remains
obligated as the writer of the option. To support its obligation to purchase
the
underlying security if a put option is exercised, the Fund will either (a)
deposit
24
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
with the Fund's custodian in a segregated account, cash, U.S. government
securities or other high-grade debt obligations having a value at least equal
to
the exercise price of the underlying securities or (b) continue to own an
equivalent number of puts of the same "series" (that is, puts on the
underlying
security having the same exercise prices and expiration dates as those written
by the Fund), or an equivalent number of puts of the same "Class" (that is,
puts
on the same underlying security with exercise prices greater than those that
it
has written (or, if the exercise prices of the puts it holds are less than the
exercise prices of those it has written, it will deposit the difference with
the
Fund's custodian in a segregated account.)
The Fund may engage in a closing purchase transaction to realize a profit,
to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale
or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would
purchase,
prior to the holder's exercise of an option that the Fund has written, an
option
of the same series as that on which the Fund desired to terminate its
obligation. The obligation of the Fund under an option that it has written
would
be terminated but a closing purchase transaction, by the Fund would not be
deemed to own an option as a result of the transaction. No assurance can be
given that the Fund will be able to effect closing transactions at a time when
it wishes to do so. If the Fund cannot enter into a closing transaction, the
Fund may be required to hold a security that it might otherwise have sold, in
which case it would continue to be at market risk on the security and could
face
higher transaction costs, including brokerage commissions.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options or financial futures only if there
appears to be a liquid secondary market for the options or futures sold or
purchased, for some options or futures no such secondary market may exist or
the
market may cease to exist.
FUTURES AND OPTIONS ON FUTURES. When deemed advisable by its investment
adviser, the Fund may enter into futures contracts or related options that are
traded on domestic and foreign exchanges or boards of trade as well as the
over-the-counter market with respect to options on such futures contracts.
Such
investments, if any, by the Fund will be made primarily for
25
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the purpose of hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in interest rates or currency
values and when the transactions are economically appropriate to the reduction
of risks inherent in the management of the Fund. The Fund may enter into
futures
contracts and options on futures contracts (a) without limit for bona fide
hedging purposes and (b) for other purposes provided the aggregate initial
margin deposits and premium paid for unexpired options do not exceed 5% of the
fair market value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
With respect to each long position in a futures contract or option thereon,
the
underlying commodity value of such contract always will be covered by cash and
cash equivalents set aside plus accrued profits held at the futures commission
merchant.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities or currency,
on
the one hand, and price movements in the securities which are the subject of
the
hedge, on the other hand. Positions in futures contracts and options on
futures
contracts may be closed out only on the exchange or board of trade on which
they
were entered into, and there can be no assurance that an active market will
exist for a particular contract or option at any particular time. Losses
incurred in hedging transactions and the costs of these transactions will
affect
the Fund's performance.
FOREIGN COMMODITY EXCHANGES. Unlike trading on domestic commodity exchanges,
trading on foreign commodity exchanges is not regulated by the CFTC and may be
subject to greater risks than trading on domestic exchanges. For example, some
foreign exchanges may be principal markets so that no common clearing facility
exists and a trader may look only to the broker for performance of the
contract.
In addition, unless the Fund hedges against fluctuations in the exchange rate
between the U.S. dollar and the currencies in which trading is done on foreign
exchanges, any profits that the Fund might realize in trading could be
eliminated by adverse changes in the exchange rate, or the Fund could incur
losses as a result of those changes.
SECURITIES OF UNSEASONED ISSUERS. Securities in which the Fund may invest
may
have limited marketability and, therefore, may be subject to wide
26
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
fluctuations in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.
FOREIGN SECURITIES. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in
addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and
economic
developments and the possible imposition of currency exchange blockages or
other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing
and
financial reporting standards or of other regulatory practices and
requirements
comparable to those applicable to domestic companies. The yield of the Fund
may
be adversely affected by fluctuations in value of one or more foreign
currencies
relative to the U.S. dollar. Moreover, securities of many foreign companies
and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic companies. In addition, with respect to
certain foreign countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on the use or removal
of
funds or other assets of the Fund, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that could
reduce
the yield on such securities. Because the Fund will invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may adversely affect the value of portfolio
securities and the appreciation or depreciation of investments. Investment in
foreign securities also may result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions
on
domestic exchanges, and the expense of maintaining securities with foreign
custodians, and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.
Corporate securities in which the Fund may invest include corporate
fixed-income securities of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
and preferred stock.
27
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Certain of the corporate fixed-income securities in which the Fund may
invest
may involve equity characteristics. The Fund may, for example, invest in
warrants for the acquisition of stock of the same or of a different issuer or
in
corporate fixed-income securities that have conversion or exchange rights
permitting their holder to convert or exchange the securities at a stated
price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
FOREIGN CURRENCY. Although the foreign currency market may not necessarily
be
more volatile than the market in other commodities, the foreign currency
market
offers less protection against defaults in the forward trading of currencies
than is available when trading in currencies occurs on an exchange. Because a
forward currency contract is not guaranteed by an exchange or clearing house,
a
default on the contract would deprive the Fund of unrealized profits or force
the Fund to cover its commitments for purchase or resale, if any, at the
current
market price.
SECURITIES OF DEVELOPING COUNTRIES. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are
generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile
than
the markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. The sale of securities that are
not publicly traded is typically restricted under the Federal securities laws.
As a result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell them when Global Capital Management
believes it desirable to do so. The Fund's investments in illiquid securities
are subject to the risk that should the Fund desire to sell any of these
securities when a ready buyer is not available at a price that the Fund deems
representative of their value, the value of the Fund's net assets could be
adversely affected.
28
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transactions in securities and options on behalf of the Fund
are placed by Global Capital Management with broker-dealers that Global
Capital
Management selects, including Smith Barney and other affiliated brokers. The
Fund may utilize Smith Barney or a Smith Barney affiliated-broker in
connection
with a purchase or sale of securities when Global Capital Management believes
that the broker's charge for the transactions does not exceed usual and
customary levels. The same standard applies to the use of Smith Barney as a
commodities broker in connection with entering into options and futures
contracts.
Under certain market conditions, the Fund may experience high portfolio
turnover as a result of its investment strategies. For example, the exercise
of
a substantial number of the options written by the Fund and the purchase or
sale
of securities by the Fund in anticipation of a rise or decline in interest
rates
could result in high portfolio turnover. Short-term gains realized from
portfolio transactions are taxable to shareholders as ordinary income. In
addition, higher portfolio turnover rates can result in corresponding
increases
in brokerage commissions for the Fund. The Fund will not consider portfolio
turnover rate a limiting factor in making investment decisions consistent with
its objective and policies.
- --------------------------------------------------------------------
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of
regular
trading on the NYSE, on each day that the NYSE is open, by dividing the value
of
the Fund's net assets by the total number outstanding. Net asset value is
calculated separately for Class A, B, C and Y shares. Generally, the Fund's
investments are valued at market value or, in the absence of a market value
with
respect to any securities, at fair value as determined by or under the
direction
of the Trust's Board of Trustees.
Portfolio securities that are traded primarily on foreign exchanges
generally
are valued at the preceding closing values of the securities on their
respective
exchanges, except that when an occurrence subsequent to the time that a value
was so established is likely to have changed that value, then the fair market
value of those securities will be determined by consideration of
29
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
other factors by or under the direction of the Trust's Board of Trustees or
its
delegates. A security that is traded primarily on a domestic or foreign stock
exchange is valued at the last sale price on that exchange or, if there were
no
sales during the day, at the current quoted bid price. Over-the-counter
securities are valued on the basis of the bid price at the close of business
on
each day. Investments in U.S. government securities (other than short-term
securities) are valued at the average of the quoted bid and asked prices in
the
over-the-counter market. Short-term investments that mature in 60 days or less
are valued at amortized cost whenever the Trustees determine that amortized
cost
reflects fair value of those investments. An option generally is valued at the
last sale price or, in the absence of the last sale price, the last offer
price.
Further information regarding the Fund's valuation policies is contained in
the
Statement of Additional Information.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds in
determining the amounts of dividends from investment income and distributions
of
capital gains payable to shareholders. Shareholders may direct that
distributions be paid to them through any one of the following options:
(1) Income dividends and capital gains distributions both invested in
additional shares.
(2) Income dividends paid in cash and capital gains distributions invested
in additional shares.
(3) Income dividends and capital gains distributions both paid in cash.
(4) Income dividends invested in additional shares of the Fund and capital
gains paid in cash.
30
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- ---------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
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
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. In order to avoid the application of a 4%
nondeductible excise tax measured with respect to certain undistributed
amounts
of net investment income and capital gains, the Fund may 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
additional shares. The per share dividends and distributions on Class B and
Class C shares will be lower than the per share dividends on Class A and Y
shares as a result of the distribution fee applicable with respect to Class B
and Class C shares. The per share dividends on Class A shares of the Fund will
be lower than the per share dividends on Class Y shares as a result of
31
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
the service fee applicable to Class A shares. Distribution of capital gains,
if
any, will be in the same amount for Class A, B, C and Y 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.
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.
32
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- --------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL. The Fund offers five classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but with higher ongoing expenses and a CDSC
payable upon certain redemptions. Class Y shares are sold without an initial
sales charge, CDSC, service fee or distribution fee and are available only to
investors investing a minimum of $5,000,000. Class Z shares are offered
without
a sales charge, CDSC, service fee or distribution fee, exclusively to: (a)
tax-exempt employee benefit and retirement plans of Smith Barney and its
affiliates and (b) certain UITs sponsored by Smith Barney and its affiliates.
Investors meeting either of these criteria who are interested in acquiring
Class
Z shares should contact their Smith Barney Financial Consultant for a Class Z
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for
a
discussion of factors to consider in selecting which Class of shares to
purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, with an Introducing Broker or with an investment dealer in
the selling group, except for investors purchasing shares of the Fund through
a
qualified retirement plan who may do so directly through TSSG. When purchasing
shares of the Fund, investors must specify whether the purchase is for Class
A,
Class B, Class C or Class Y shares. No maintenance fee will be charged in
connection with a brokerage account through which an investor purchases or
holds
shares.
Investors in Class A, Class B and Class C shares may open an account by
making
an initial investment of at least $1,000 for each account, or $250 for an IRA
or
a Self-Employed Retirement Plan in the Fund. Investors in Class Y shares may
open an account by making an initial investment of $5,000,000. Subsequent
investments of at least $50 may be made for all Classes except for Class Y,
which has no subsequent investment minimum. For participants in retirement
plans
qualified under Section 403(b)(7) or Section 401(a) of the Code, the minimum
initial and subsequent investment in the Fund is $25 and for the Fund's
Systematic Investment Plan, the minimum initial and subsequent investment is
$100. There are no minimum investment requirements for (a) employees of
Travelers and its subsidiaries, including Smith Barney, (b) unitholders of a
UIT
sponsored by Smith Barney and (c) Trustees of the Trust. The Fund reserves the
right to waive or change minimums, to decline any order to purchase its shares
and to suspend the offering of shares from time to time. Shares purchased will
be held in the
33
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
shareholder's account by TSSG. Share certificates are issued only upon a
shareholder's written request to TSSG. IRAs and other retirement plans
approved
by the Internal Revenue Service are available from the Fund or Smith Barney.
Purchase orders received by Smith Barney prior to the close of regular
trading
on the NYSE, on any day the Fund calculates its net asset value, are priced
according to the net asset value determined on that day. Orders received by
dealers or introducing brokers prior to the close of regular trading on the
NYSE
on any day the Fund calculates its net asset value, are priced according to
the
net asset value determined on the next business day. Payment for Fund shares
is
due on the fifth business day (the "settlement date") after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders of Class A, Class B, Class C and Class Y shares may make
additions to their accounts at any time by purchasing shares through a service
known as the Systematic Investment Plan. Under the Systematic Investment Plan,
Smith Barney or TSSG is authorized through preauthorized transfers of $100 or
more to charge the regular bank account or other financial institution
indicated
by the shareholder on a monthly or quarterly basis to provide systematic
additions to the shareholder's Fund account. A shareholder whose check is
returned for insufficient funds will be charged a fee of up to $25. The
Systematic Investment Plan also authorizes Smith Barney to apply cash held in
the shareholder's Smith Barney brokerage account or redeem the shareholder's
shares of a Smith Barney money market fund to make additions to the account.
Additional information is available from the Fund or your Smith Barney
Financial
Consultant.
34
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as
follows:
<TABLE>
<CAPTION>
SALES
CHARGE
AS %
OF
NET
SALES CHARGE AS % ASSET
AMOUNT OF INVESTMENT* OF OFFERING PRICE VALUE
<S> <C> <C>
- ------------------------------------------------------------------------
Less than $25,000 5.00% 5.26%
$25,000 -- $49,999 4.00% 4.17%
$50,000 -- $99,999 3.25% 3.36%
$100,000 -- $249,999 2.50% 2.56%
$250,000 -- $499,999 2.00% 2.04%
$500,000 and more* .00% .00%
- ------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current Class A
shares equal or exceed $500,000 in the aggregate, will be made at net
asset value without any initial sales charge, but will be subject to a
CDSC of 1.00% on redemptions made within 12 months of purchase. A
commission will be paid by Smith Barney to Financial Consultants or
other dealers who initiate and are responsible for purchases of
$500,000 or more. The CDSC on Class A shares is payable to Smith
Barney, which with Boston Advisors, compensates Smith Barney Financial
Consultants upon the sale of these shares. The CDSC is waived in the
same circumstances in which the CDSC applicable to Class B and Class C
shares is waived. See "Waivers of CDSC -- Class B and Class C Shares."
</TABLE>
Members of the selling group will receive 90% of the sales charge and may be
deemed to be underwriters of the Fund as defined in the Securities Act of
1933,
as amended.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual, spouse and children under the age of 21, or a trustee or other
fiduciary of a single trust estate or single fiduciary account. The Class A
initial sales charge is also reduced to 2% for Smith Barney Personal Living
Trust program participants for whom Smith Barney acts as trustee. (Smith
Barney
Personal Living Trust program participants may also purchase Class B and Class
C
shares subject to any applicable CDSC.) The reduced sales charge minimums may
also be met by aggregating the purchase with the net asset value of all Class
A
shares held in certain funds sponsored by Smith Barney listed under
"Shareholder
Services -- Exchange Privileges."
35
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
SALES CHARGE WAIVERS--CLASS A SHARES
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of Class A shares to
directors
of the Fund and employees of Travelers and its subsidiaries, or to members of
the immediate family of such persons (including the surviving spouse of a
deceased director or employee, and retired directors or employees), or sales
to
any trust, pension, profit-sharing or other benefit plan for such persons
provided such sales are made upon the assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
re-sold except through redemption or repurchase; (b) purchases of Class A
shares
if such shares are purchased with the proceeds from a redemption of shares of
an
investment company distributed by an entity other than Smith Barney if such
redemption has occurred no more than 30 days prior to the purchase of shares
of
the Fund and the investor paid a sales charge; (c) offers of Class A shares to
any other investment company in connection with the combination of such
company
with the Fund by merger, acquisition of assets or otherwise; (d) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a
mutual
fund which (i) was sponsored by the Financial Consultant's prior employer,
(ii)
was sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (e) shareholders who have redeemed Class A shares in the Fund
(or
Class A shares of another fund in the Smith Barney Group of Funds that are
sold
with a maximum 5% sales charge) and who wish to reinvest their redemption
proceeds in the Fund, provided the reinvestment is made within 60 calendar
days
of the redemption; and (f) accounts managed by registered investment advisory
subsidiaries of Travelers. In order to obtain such discounts, the purchaser
must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above)
at a reduced sales charge or net asset value determined by
36
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
aggregating the dollar amount of the new purchase and the total net asset
value
of all Class A shares of the Fund and of certain other funds sponsored by
Smith
Barney listed under "Shareholder Services -- Exchange Privileges" sold with a
sales charge then held by such person and applying the sales charge applicable
to such aggregate. In order to obtain such discount, the purchaser must
provide
sufficient information at the time of purchase to permit verification that the
purchase qualifies for the reduced sales charge. The right of accumulation is
subject to modification or discontinuance at any time with respect to all
shares
purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes
the
minimum initial investment required. The sales charge applicable to purchases
by
each member of such a group will be determined by the table set forth above
and
will be based upon the aggregate sales of Class A shares to, and share
holdings
of, all members of the group. To be eligible for such reduced sales charges or
to purchase at net asset value, all purchases must be pursuant to an employer
of
partnership-sanctioned plan meeting certain requirements; one such requirement
is that the plan must be open to specified partners or employees of the
employer
and its subsidiaries, if any. Such plan may, but is not required to, provide
for
payroll deductions, IRAs or investments pursuant to retirement plans under
Sections 401 or 408 of the Code. Smith Barney may also offer a reduced sales
charge or net asset value purchase for aggregating related fiduciary accounts
under such conditions that Smith Barney will realize economies of sales
efforts
and sales related expenses. An individual who is a member of a qualified group
may also purchase Class A shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is based upon the
aggregate
dollar value of Class A shares previously purchased and still owned by the
group, plus the amount of the current purchase. A "qualified group" is one
which
(a) has been in existence for more than six months, (b) has a purpose other
than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enables Smith Barney to realize economies of scale in its costs of
distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the
members,
and must agree to include
37
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
sales and other materials related to the Fund in its publications and mailings
to members at no cost to the Distributor. In order to obtain such reduced
sales
charge or to purchase at net asset value, the purchaser must provide
sufficient
information at the time of purchase to permit verification that the purchase
qualifies for the reduced sales charge. Approval of group purchase reduced
sales
charge plans is subject to the discretion of Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity
for
an investor to obtain a reduced sales charge by aggregating the investments
over
a 13-month period, provided that the investor refers to such Letter when
placing
orders. For purposes of a Letter of Intent, the "Amount of Transaction" as
referred to in the preceding sales charge table includes purchases of all
Class
A shares of the Fund over the 13-month period based on the total amount of
intended purchases plus the value of all Class A shares of the Fund previously
purchased and still owned. An alternative is to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent.
Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If the goal is not achieved within
the period, the investor must pay the difference between the sales charges
applicable to the purchases made and the charges previously paid, or an
appropriate number of escrowed shares will be redeemed. New Letters of Intent
will be accepted beginning January 1, 1995. Please see the form of a Letter of
Intent at the end of this Prospectus.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B AND CLASS C SHARES
The public offering price of the Class B and Class C shares is the net asset
value next determined with no initial sales charge imposed. The Class B and
Class C shares are being sold without an initial sales charge so that the full
amount of the investor's purchase payment may be immediately invested in the
Fund. A CDSC, however, is imposed upon certain redemptions of Class B and
Class
C shares.
Class B shares and Class C shares that are redeemed will not be subject to a
CDSC to the extent that the value of such shares represents: (a) capital
38
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
appreciation of Fund assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class C shares, shares
redeemed more than 12 months after their purchase. Redemptions of other Class
C
shares will be subject to a CDSC of 1.00% on shares redeemed within 12 months
of
purchase. The CDSC will be assessed on an amount equal to the net asset value
at
the time of redemption.
In circumstances in which the CDSC is imposed on Class B shares, the amount
of
the charge will depend on the number of years since the shareholder made the
purchase payment from which the amount is being redeemed. Solely for purposes
of
determining the number of years since a purchase payment, all purchase
payments
made during a month will be aggregated and deemed to have been made on the
last
day of the preceding Smith Barney statement month. The following table sets
forth the rates of the charge for redemptions of Class B shares by
shareholders,
except in the case of purchases by Participating Plans, as described below.
See
"Purchase of Shares -- Smith Barney 401(k) Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE PAYMENT WAS MADE
CDSC
<S> <C>
- ------------------------------------------------------------------------------
- ----
First
5.00%
Second
4.00%
Third
3.00%
Fourth
2.00%
Fifth
1.00%
Sixth
0.00%
Seventh
0.00%
Eighth
0.00%
- ------------------------------------------------------------------------------
- ----
</TABLE>
Class B shares will automatically convert to Class A shares eight years
after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. In addition, a certain portion of 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, equal to 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) owned by the
shareholder. The conversion of Class B shares into Class A shares is subject
to
the continuing availability of an
39
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
opinion of counsel to the effect that such conversions will not constitute
taxable events for Federal tax purposes. Class B shares of Smith Barney
Shearson
Short-Term World Income Fund (the "Short-Term World Income Fund") that were
held
on July 15, 1994 and that are subsequently exchanged for Class B shares of the
Fund will be offered the opportunity to exchange all such Class B shares for
Class A shares of the Fund four years after the date on which those shares
were
deemed to have been purchased. Holders of such Class B shares will be notified
of the pending exchange in writing approximately 60 days before the fourth
anniversary of the purchase date and, unless the exchange has been rejected in
writing, the exchange will occur on or about the fourth anniversary date. See
"Alternative Purchase Arrangements -- Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain
distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that Class B and Class C shares acquired through an
exchange have been held will be calculated from the date that the Class B and
Class C shares exchanged were initially acquired in one of the other
applicable
Smith Barney funds, and Fund shares being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gain
distribution reinvestments in such other funds. For Federal income tax
purposes,
the amount of the CDSC will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any CDSC will be
paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10
per share for a cost of $1,000. Subsequently, the investor acquired 5
additional
shares through dividend reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his or her investment.
Assuming
at the time of the redemption the net asset value had appreciated to $12 per
share, the value of the investor's shares would be $1,260 (105 shares at $12
per
share). The CDSC would not be applied to the amount which represents
appreciation and the value of the reinvested dividend shares ($260).
Therefore,
$240 of the $500 redemption proceeds ($500 minus $260) would be charged at a
rate of 4.00% (the applicable rate for Class B shares) for a total deferred
sales charge of $9.60.
40
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
WAIVERS OF CDSC--CLASS B AND CLASS C SHARES
The CDSC on Class B and Class C shares will be waived on: (a) exchanges (see
"Shareholder Services -- Exchange Privileges"); (b) automatic cash withdrawals
in amounts equal to or less than 1% per month of the value of the
shareholder's
shares at the time the withdrawal plan commences (see below) (provided,
however,
that automatic cash withdrawals in amounts equal to or less than 2% per month
of
the value of the shareholder's shares will be permitted for withdrawal plans
that were established prior to November 7, 1994); (c) redemptions of shares
within twelve months following the death or disability of the shareholder; (d)
redemption of shares from retirement plans or IRAs upon the attainment of age
59 1/2; (e) involuntary redemptions; and (f) redemptions of shares in
connection
with a combination of the Fund with any investment company by merger,
acquisition of assets or otherwise. In addition, a shareholder who has
redeemed
shares from other funds in the Smith Barney Group of Funds may, under certain
circumstances, reinvest all or part of the redemption proceeds within 60 days
and receive PRO RATA credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by TSSG in the case
of
all other shareholders) of the shareholder's status or holdings, as the case
may
be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist 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 Smith Barney 401(k) Program, which include both
401(k) plans and other types of participant directed, tax-qualified employee
benefit plans (collectively, "Participating Plans").
The Fund offers to Participating Plans Class A, Class B, Class C and Class Y
shares, as investment alternatives under the Smith Barney 401(k) Program.
Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different
sales
charge and CDSC schedules than, the Class A,
41
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Class B and Class C shares acquired by other investors. Similar to Class Y
shares available to other investors, Class Y shares acquired through the Smith
Barney 401(k) Program are not subject to any same service or distribution fees
or any sales charge or CDSC. Once a Participating Plan has made an initial
investment in the Fund, all of its subsequent investments in the Fund must be
in
the same Class of shares, except as otherwise described below.
CLASS A SHARES. Class A shares of the Fund are offered without any sales
charge to any Participating Plan that purchases from $500,000 to $4,999,999 of
Class A shares of one or more funds in the Smith Barney Group of Funds. Class
A
shares acquired by such Plans will be subject to a CDSC of 1% of redemption
proceeds, if the Participating Plan terminates within four years of the date
the
Participating Plan first enrolled in the Smith Barney 401(k) Program.
CLASS B SHARES. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds in the Smith
Barney
Group of Funds. Class B shares acquired by such Plans will be subject to a
CDSC
of 3% of redemption proceeds, if the Participating Plan terminates within
eight
years of the date the Participating Plan first enrolled in the Smith Barney
401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith
Barney
401(k) Program, it will be offered the opportunity to exchange all of its
Class
B shares for Class A shares of the Fund. Such Plans will be notified of the
pending exchange in writing approximately 60 days before the eighth
anniversary
of the 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 Class B shares at
that time, each Class B share held by the Participating Plan will have the
same
conversion feature as Class B shares held by other investors. See "Purchase of
Shares -- Deferred Sales Charge Alternative -- Class B and Class C Shares."
CLASS C SHARES. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or
42
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
more funds in the Smith Barney Group of Funds. Class C shares acquired by such
Plans will be subject to a CDSC of 1% of redemption proceeds, if the
Participating Plan terminates within four years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program. One year after the
date
a Participating Plan enrolled in the Smith Barney 401(k) Program and, if its
total Class C holdings equal at least $500,000 at such time, the Participating
Plan will be offered the opportunity to exchange all of its Class C shares for
Class A shares of the Fund. Such plans will be notified in writing within 30
days after the last business day of the calendar year, and unless the exchange
offer has been rejected in writing, the exchange will occur on or about the
last
business day of March in the following calendar year. Once the exchange has
occurred, a Participating Plan will not be eligible to acquire Class C shares
of
the Fund but instead may acquire Class A shares of the Fund. Any Class C
shares
not converted will continue to be subject to the distribution fee.
CLASS Y SHARES. Class Y shares of the Fund are offered without any service
or
distribution fees, sales charge or CDSC to any Participating Plan that
purchases
over $5,000,000 of Class Y shares of one or more funds in the Smith Barney
Group
of Funds.
No CDSC is imposed on redemptions of Class A, Class B or Class C shares to
the
extent that the net asset value of the Class B shares redeemed does not exceed
(a) the current net asset value of the shares purchased through reinvestment
of
dividends or capital gains distributions, plus (b) with respect to Class A and
Class C shares, the current net asset value of such shares purchased more than
one year prior to redemption and, with respect to Class B shares, the current
net asset value of Class B shares purchased more than eight years prior to the
redemption, plus (c) with respect to Class A and Class C shares, increases in
the net asset value of the shareholder's Class A or Class C shares above the
purchase payments made during the preceding year and, with respect to Class B
shares, increases in the net asset value of the shareholder's Class B shares
above the purchase payments made during the preceding eight years. Whether or
not the CDSC applies to a Participating Plan depends on the number of years
since the Participating Plan first became enrolled in the Smith Barney 401(k)
Program, unlike the applicability of the CDSC to other Class B shareholders,
which depends on the number of years since those shareholders made the
purchase
payment from which the amount is being redeemed.
43
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
The CDSC will be waived on redemptions of Class A, Class B and Class C
shares
in connection with lump-sum or other distributions made by a Participating
Plan
as a result of: (a) the retirement of an employee in the Participating Plan;
(b)
the termination of employment of an employee in the Participating Plan; (c)
the
death or disability of an employee in the Participating Plan; (d) the
attainment
of age 59 1/2 by an employee in the Participating Plan; (e) hardship of an
employee in the Participating Plan to the extent permitted under Section
401(k)
of the Code; or (f) redemptions of shares in connection with a loan made by
the
Participating Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For
further
information regarding the Smith Barney 401(k) Program, investors should
contact
their Smith Barney Financial Consultant.
- --------------------------------------------------------------------
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGES
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds in the Smith Barney Group of
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges are subject to minimum investment and other requirements
of
the fund into which exchanges are made and a sales charge differential may
apply.
<TABLE>
<C> <S>
FUND NAME
-----------------------------------------------------------------------------
- ----
MUNICIPAL BOND FUNDS
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Tax-Exempt Income Fund
Smith Barney Arizona Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
Smith Barney Massachusetts Municipals Fund
</TABLE>
44
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
SHAREHOLDER SERVICES (CONTINUED)
<TABLE>
<C> <S>
Smith Barney New Jersey Municipals Fund Inc.
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Muni Funds -- National Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- California Portfolio
* Smith Barney Muni Funds -- California Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Government Securities Fund
Smith Barney Investment Grade Bond Fund
Smith Barney High Income Fund
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
Smith Barney Funds, Inc. -- Income Return Account Portfolio
*** Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
GROWTH AND INCOME FUNDS
Smith Barney Convertible Fund
Smith Barney Growth and Income Fund
Smith Barney Utilities Fund
Smith Barney Strategic Investors Fund
Smith Barney Premium Total Return Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
</TABLE>
45
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
SHAREHOLDER SERVICES (CONTINUED)
<TABLE>
<C> <S>
Smith Barney World Funds -- International Balanced Portfolio
GROWTH FUNDS
Smith Barney Fundamental Value Fund Inc.
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Telecommunications Growth Fund
Smith Barney Appreciation Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Global Opportunities Fund
Smith Barney European Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney Funds, Inc. -- Capital Appreciation Portfolio
MONEY MARKET FUNDS
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
*** Smith Barney Municipal Money Fund, Inc.
*** Smith Barney Muni Funds -- California Money Market Portfolio
*** Smith Barney Muni Funds -- New York Money Market Portfolio.
<FN>
------------------------
*Available for exchange with Class A, Class C and Class Y shares of the
Fund.
**Available for exchange with Class A, Class B and Class C shares of the
Fund.
In addition, shareholders who own Class C shares of the Fund in a
Smith
Barney 401(k) Program may exchange those shares for Class C shares of
this
fund.
***Available for exchange with Class A shares of the Fund.
+Available for exchange with Class B and Class C shares of the Fund.
++Available for exchange with Class A, Class C and Class Y shares of the
Fund.
In addition, shareholders who own Class C shares of the Fund in a
Smith
Barney 401(k) Program may exchange those shares for Class C shares of
this
fund.
</TABLE>
CLASS A EXCHANGES. Class A shareholders of the funds in the Smith Barney
Group
of Funds sold without a sales charge or with a maximum sales charge of less
than
5.00% will be subject to the appropriate "sales charge differential" upon the
exchange of their shares for Class A shares of the Fund or other fund sold
with
a higher sales charge. The "sales charge
46
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
SHAREHOLDER SERVICES (CONTINUED)
differential" is limited to a percentage rate no greater than the excess of
the
sales charge rate applicable to purchases of shares of the mutual fund being
acquired in the exchange over the sales charge rate(s) actually paid on the
mutual fund shares relinquished in the exchange and on any predecessor of
those
shares. For purposes of the exchange privilege, shares obtained through
automatic reinvestment of dividends and capital gains distributions, as
described below, are treated as having paid the same sales charges applicable
to
the shares on which the dividends or distributions were paid; however, except
in
the case of the Smith Barney 401(k) Program, if no sales charge was imposed
upon
the initial purchase of the shares, any shares obtained through automatic
reinvestment will be subject to a sales charge differential upon exchange.
CLASS B EXCHANGES. In the event a Class B shareholder (unless such
shareholder
was a Class B shareholder of the Short-Term World Fund on July 15, 1994)
wishes
to exchange all or a portion of his or her shares in any of the funds imposing
a
CDSC higher than that imposed by the Fund, the exchanged Class B shares will
be
subject to the higher applicable CDSC. Upon an exchange, the new Class B
shares
will be deemed to have been purchased on the same date as the Class B shares
of
the Fund that have been exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be deemed
to
have been purchased on the same date as the Class C shares of the Fund that
have
been exchanged.
CLASS Y EXCHANGES. Class Y shareholders of the Fund who wish to exchange all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any exchange fee or sales
charge.
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Although the
exchange
privilege is an important benefit, excessive exchange transactions can be
detrimental to the Fund's performance and its shareholders. The investment
adviser may determine that a pattern of frequent exchanges is excessive and
contrary to the best interests of the Fund's other shareholders. In this
event,
the investment adviser will notify Smith Barney and Smith Barney may, at its
discretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination, Smith Barney will provide notice in
writing or by telephone to the shareholder at least 15 days
47
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
SHAREHOLDER SERVICES (CONTINUED)
prior to suspending the exchange privilege and during the 15-day period the
shareholder will be required to (a) redeem his or her shares in the Fund or
(b)
remain invested in the Fund or exchange into any of the funds in the Smith
Barney Group of Funds ordinarily available, which position the shareholder
would
be expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.
Exchanges will be processed at the net asset value next determined after the
redemption proceeds are available. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the
shares
of the fund exchanged, no signature guarantee is required. A capital gain or
loss for tax purposes will be realized upon the exchange, depending upon the
cost or other basis of shares redeemed. Before exchanging shares, investors
should read the current prospectus describing the shares to be acquired. The
Fund reserves the right to modify or discontinue exchange privileges upon 60
days' prior notice to shareholders.
- --------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close
of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption
must specify the Class being redeemed. In the event of a failure to specify
which Class, or if the investor owns fewer shares of the Class than specified,
the redemption request will be delayed until the Fund's transfer agent
receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the seventh day following receipt of proper tender,
except on a day on which the NYSE is closed or as permitted under the Act in
extraordinary circumstances. Generally, if the redemption proceeds are
remitted
to a Smith Barney
48
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
brokerage account, these funds will not be invested for the shareholder's
benefit without specific instruction and Smith Barney will benefit from the
use
of temporarily uninvested funds. Redemption proceeds for shares purchased by
check, other than a certified or official bank check, will be remitted upon
clearance of the check, which may take up to ten days or more.
Shares may be redeemed in one of the following ways:
REDEMPTION THROUGH SMITH BARNEY
Redemption requests may be made through Smith Barney, an Introducing Broker
or
dealer in the selling group. A shareholder desiring to redeem shares
represented
by certificates must present the certificates to Smith Barney, the Introducing
Broker or dealer in the selling group endorsed for transfer (or accompanied by
an endorsed stock power), signed exactly as the shares are registered.
Redemption requests involving shares represented by certificates will not be
deemed received until the certificates are received by TSSG in proper form.
REDEMPTION BY MAIL
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. All other shares may
be
redeemed by submitting a written request for redemption to:
Smith Barney Global Bond Fund
Class A, B, C or Y (please specify)
c/o The Shareholders Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request to TSSG or a Smith Barney 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 be accompanied by an endorsed stock power) and must be submitted
to
TSSG together with the redemption request. Any
49
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
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 with a value of at least $10,000 may elect to
receive periodic cash payments of at least $100 monthly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. For additional information, shareholders should
contact their Smith Barney Financial Consultants. Any applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed 1% per month of
the
value of the shareholder's shares subject to the CDSC at the time the
withdrawal
plan commences. With respect to withdrawal plans in effect prior to November
7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not
exceed
2% per month of the shareholder's shares subject to CDSC. For further
information regarding the automatic cash withdrawal plan, shareholders should
contact their Smith Barney Financial Consultants.
- --------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
50
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- --------------------------------------------------------------------
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 dividing the net
investment income per share earned by the Class during the period by the
maximum
offering price per share on the last day of the period. This income is
"annualized" by assuming that the amount of income is generated each month
over
a one-year period and is compounded semi-annually. The annualized income is
then
shown as a percentage of the net asset value.
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total
return and current dividend return in advertisements and/or other types of
sales
literature. These figures are computed separately for Class A, Class B, Class
C
and Class Y shares of the Fund. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS
AND ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE. Total return is computed
for a specified period of time assuming deduction of the maximum sales charge,
if any, from the initial amount invested and reinvestment of all income
dividends and capital gains distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount
invested
and subtracting 100%. The standard average annual total return, as prescribed
by
the SEC is derived from this total return, which provides the ending
redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the
same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Fund class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the
last
day of the period for which current dividend return is presented. The Fund's
current dividend return may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating
expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a class' current
return to yields published for other investment companies and
51
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
PERFORMANCE (CONTINUED)
other investment vehicles. The Fund may also include comparative performance
information in advertising or marketing the Fund's shares. Such performance
information may include data from Lipper Analytical Services, Inc.
- --------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Trust's Board of Trustees. The Trustees approve all significant agreements
between the Trust and companies that furnish services to the Trust and the
Fund,
including agreements with its distributor, investment adviser, administrator,
sub-administrator, custodian and transfer agent. The day-to-day operations of
the Fund are delegated to the Fund's investment adviser, administrator and
sub-administrator. The Statement of Additional Information contains background
information regarding the Trustees and executive officers of the Trust.
INVESTMENT ADVISER--GLOBAL CAPITAL MANAGEMENT
Global Capital Management, located at 10 Piccadilly, London W1V 9LA, United
Kingdom, serves as the Fund's investment adviser, pursuant to an investment
advisory agreement dated March 22, 1994. Global Capital Management has agreed
to
waive 50% of its investment advisory fee until such time as the Trust's Board
of
Trustees and Global Capital Management mutually agree otherwise. Global
Capital
Management has been in the investment counseling business since 1988 and
renders
investment advice to institutional clients and investment companies with total
assets under management, as of September 30, 1994, in excess of $ billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
Global Capital Management manages the Fund in accordance with its stated
investment objective and policies, makes investment decisions for the Fund,
places orders to purchase and sell securities and employs professional
portfolio
managers and securities analysts who provide research services to the Fund.
52
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
PORTFOLIO MANAGEMENT
Mr. Victor S. Filatov, International Strategist and President of Global
Capital Management, was elected by the Board of Trustees on January 20, 1994
to
serve as Vice President and Investment Officer of the Fund. Mr. Filatov is
responsible for managing the day-to-day operations of the Fund, including the
making of all investment decisions. Prior to 1993, Mr. Filatov was Business
Coordinator and head of European Fixed Income Research for J.P. Morgan
Securities Inc.
A management discussion and analysis, and additional performance information
regarding the Fund during the fiscal year ended July 31, 1994 is included in
its
Annual Report dated July 31, 1994. A copy of the Annual Report may be obtained
upon request without charge from your Smith Barney Financial Consultant or by
writing or calling the Fund at the address or phone number listed on page one
of
this Prospectus.
ADMINISTRATOR--SBA
Smith Barney Advisers, Inc. serves as the Fund's administrator and generally
assists in all aspects of the Fund's administration and operation. SBA
provides
investment management and administration services to investment companies that
had aggregate assets under management as of September 30, 1994 in excess of
$___
billion. For administration services rendered to the Fund, the Fund pays SBA a
fee at the annual rate of .20% of the value of the Fund's average daily net
assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors is located at One Boston Place, Boston, Massachusetts 02108,
and serves as the Fund's administrator. Boston Advisors provides advisory,
investment management, investment advisory and/or administrative services to
investment companies, which had aggregate assets under management as of
September 30, 1994, in excess of $ billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBA in all aspects of the Fund's administration and
operation.
Boston Advisors is paid a portion of the fee paid by the Fund to SBA at a rate
agreed upon from time to time between Boston Advisors and SBA.
53
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule
12b-1 under the Act (the "Plan"), Smith Barney is paid an annual service fee
with respect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.25% of the average daily net assets of each respective Class'
shares.
Smith Barney is also paid an annual distribution fee with respect to Class B
and
Class C shares at the annual rate of 0.50% of the average daily net assets
attributable to those shares. With regard to Class B shares that automatically
convert to Class A shares eight years after the date of original purchase,
these
shares will no longer be subject to distribution fees. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder
accounts
and, in the case of Class B and Class C shares, to cover expenses primarily
intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to
potential
investors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distribution
of shares; interest and/or carrying charges; and indirect and overhead costs
of
Smith Barney associated with the sale of Fund shares, including lease,
utility,
communications and sales promotion expenses.
Actual distribution and shareholder service expenses for Class B and Class C
shares of the Fund for any given year may exceed the fees received pursuant to
the Plan and will be carried forward and paid by the Fund in future years so
long as the Plan is in effect. Interest is accrued monthly on such
carryforward
amounts at a rate comparable to that paid by Smith Barney for bank borrowings.
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, under the laws of the
Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust is registered with the SEC as a diversified, open-end
management company. The Trust commenced operations on September 16, 1985,
under
the name Shearson Lehman Special
54
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
Portfolios. On February 21, 1986, December 6, 1988, August 27, 1990, November
5,
1992, July 30, 1993, and October 14, 1994 the Trust changed its name to
Shearson
Lehman Special Income Portfolios, SLH Income Portfolios, Shearson Lehman
Brothers Income Portfolios, Shearson Lehman Brothers Income Funds, Smith
Barney
Shearson Income Funds and Smith Barney Income Funds, respectively. On November
5, 1992, the Fund changed its name from Global Bond Portfolio to Global Bond
Fund, July 30, 1993, the Fund changed its name to Smith Barney Shearson Global
Bond Fund and, on October 14, 1994, the Fund changed its name to Smith Barney
Global Bond Fund. The Trust may issue an unlimited number of shares of
beneficial interest of separate series having a $.001 per share par value.
Shares of beneficial interest are currently classified into five classes --
A,
B, C, Y and Z. Each Class of Fund shares represents an identical interest in
the
Fund's investment portfolio. As a result, the Classes have the same rights,
privileges and preferences, except with respect to: (a) the designation of
each
Class; (b) the effect of the respective sales charges, if any, for each Class;
(c) the distribution and/or service fees, if any, borne by each Class pursuant
to the Plan; (d) the expenses allocable exclusively to each Class; (e) voting
rights on matters exclusively affecting a single Class; (f) the exchange
privilege of each Class; and (g) the conversion feature of the Class B shares.
The Trust's Board of Trustees does not anticipate that there will be any
conflicts among the interests of the holders of the different Classes of
shares
of the Fund. The Trustees, on an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
of
the Fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Generally, shares
of the Trust vote by individual fund on all matters except (a) matters
affecting
only the interest of one or more of the funds, in which case only shares of
the
affected fund or funds would be entitled to vote, or (b) when the 1940 Act
requires that shares of the funds be voted in the aggregate. Similarly, shares
of the Fund will be voted generally on a Fund-wide basis except on matters
affecting the interests of one Class of shares.
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
55
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
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.
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston
Place,
Boston, Massachusetts 02108, and serves 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 Fund sends its shareholders a semi-annual report and an audited annual
report, each of which include listings of the investment securities held by
the
Fund at the end of the reporting period. In an effort to reduce the Fund's
printing and mailing costs, the Trust plans to consolidate the mailing of the
Fund's semi-annual and annual reports by household. This consolidation means
that a household having multiple accounts with the identical address of record
will receive a single copy of each report. In addition, the Trust also plans
to
consolidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (e.g., individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. Any shareholder who does
not want this consolidation to apply to his or her account should contact his
or
her Smith Barney Financial Consultant or TSSG.
---------------
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.
56
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
Date of Letter:
Date of Purchase(s): (must be within 90 days of the date of the letter):
LETTER OF INTENT (Please check one only)
- ------- I wish to establish a new Letter of Intent. (If cumulative discount or
90-day backdate privilege is applicable, provide the amount and
account(s) information below.)
- ------- Please apply this purchase to any existing Letter of Intent with the
account(s) listed below.
- ------- Please amend my existing Letter of Intent with the new amount
indicated
below.
If establishing a Letter of Intent, you will need to purchase over a
thirteen-month period in accordance with the provisions of the prospectus. The
aggregate amount of these purchases will be at least equal to the amount
listed
below:
-- $50,000
-- $100,000
-- $250,000
-- $500,000
<TABLE>
<S> <C>
- -------------------------------- --------------------------------
Fund Name Account Number
- -------------------------------- --------------------------------
Fund Name Account Number
- -------------------------------- --------------------------------
Fund Name Account Number
</TABLE>
Subject to conditions specified below, each purchase of shares of the Fund
or
shares of one or more of the funds within the Smith Barney Group of Funds
during
the 13-month period subsequent to the date of this Letter will be made at the
public offering price applicable to a single transaction of the dollar amount
indicated, as described in the then effective prospectus. The offering price
may
be further reduced under the Rights of Accumulation discount if the Fund is
advised of any shares of this or other Smith Barney fund(s) previously
purchased
and still owned. The purchaser may at any time during the period revise upward
the stated intention by submitting a written request to this effect. Such
revision shall provide for the escrowing of additional shares. The original
period of the Letter, however, shall remain
<PAGE>
SMITH BARNEY
GLOBAL BOND FUND
unchanged. Each separate purchase made pursuant to the Letter is subject to
the
terms and conditions contained in the prospectus in effect at the time of that
particular purchase. It is understood that the purchaser makes no commitment
to
purchase additional shares, but if those shares previously purchased at the
original public offering price, under the Rights of Accumulation discount,
together with purchases so made within thirteen months from this date do not
aggregate the amount specified when valued at the public offering price, the
purchaser must pay the difference between the sales charges applicable to the
purchases made and charges previously paid, or an appropriate number of
escrowed
shares will be redeemed. The purchaser(s) or the purchaser's dealer must refer
to this Letter of Intent in placing each future order for shares while this
Letter is in effect. This cancels and supersedes any previous instructions
which
the purchaser may have given inconsistent with the above.
Client Name:
- ------------------------------------
Client Signature:
- ---------------------------------
Financial Consultant:
- ----------------------------
- ----------------------------
<PAGE>
SMITH BARNEY
GLOBAL
BOND
FUND
388 Greenwich Street
New York, New York 10013
Fund 9,188,214
FD0204 L3
<PAGE>
NOVEMBER 7, 1994
SMITH BARNEY
PREMIUM
TOTAL RETURN
FUND
PROSPECTUS BEGINS
ON PAGE ONE.
[LOGO]
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- ---------------------------------------------------------------------------
PROSPECTUS November 7,
1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The Premium Total Return Fund (the "Fund"), a diversified fund, seeks to
provide shareholders with total return, consisting of long-term capital
appreciation and income, by investing primarily in a diversified portfolio of
dividend-paying common stocks. The Fund also purchases put and call options
and
writes covered put and call options on securities it holds and on stock
indexes
primarily as a hedge to reduce investment risk. The Fund is one of a number of
funds, each having distinct investment objectives and policies, making up
Smith
Barney Income Funds (the "Trust"). The Trust is an open-end management
investment company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution and service fees and
expenses,
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
Financial Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above, or by contacting your Smith Barney Financial Consultant. The
Statement of Additional Information has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into this
Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY STRATEGY ADVISERS INC.
Investment Adviser
SMITH, BARNEY ADVISERS, INC.
Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
---------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 11
---------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES 15
---------------------------------------------------------------------
VALUATION OF SHARES 24
---------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 25
---------------------------------------------------------------------
PURCHASE OF SHARES 26
---------------------------------------------------------------------
SHAREHOLDER SERVICES 38
---------------------------------------------------------------------
REDEMPTION OF SHARES 42
---------------------------------------------------------------------
MINIMUM ACCOUNT SIZE 44
---------------------------------------------------------------------
PERFORMANCE 45
---------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 46
---------------------------------------------------------------------
DISTRIBUTOR 48
---------------------------------------------------------------------
ADDITIONAL INFORMATION 49
---------------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE
PROSPECTUS.
SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVE
The Fund is an open-end diversified management investment company that seeks
total return by investing primarily in a diversified portfolio of
dividend-paying common stocks. The Fund may engage in various portfolio
strategies involving options to seek to increase its return and to hedge its
portfolio against movements in the equity markets and interest rates. See
"Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS
The Fund offers several classes of shares ("Classes") to investors designed
to
provide them with the flexibility of selecting an investment best suited to
their needs. The general public is offered three classes of shares: Class A
shares, Class B shares and Class C shares, which differ principally in terms
of
sales charges and rate of expenses to which they are subject. A fourth Class
of
shares, Class Y shares, is offered only to investors meeting an initial
investment minimum of $5,000,000. In addition, a fifth Class, Class Z shares,
which is offered pursuant to a separate prospectus, is offered exclusively to
(a) tax-exempt employee benefit and retirement plans of Smith Barney Inc.
("Smith Barney") and its affiliates and (b) unit investment trusts ("UITs")
sponsored by Smith Barney and its affiliates. See "Purchase of Shares,"
"Redemption of Shares" and "Smith Barney 401(k) Program."
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% imposed at the time of purchase. This initial
sales
charge may be reduced or waived for certain purchases. Class A shares also
bear
an annual service fee of 0.25% of the average daily net assets of the Class A
shares. See "Reduced or No Initial Sales Charge" below. Purchases of Class A
shares, which when combined with current Class A shares equal or exceed
$500,000
in the aggregate, will be made at net asset value with no sales charge, but
will
be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. Smith Barney recommends that,
in
view of the relative sales charge
3
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
and distribution fees applicable to the classes, single investment of
$5,000,000
or more should be directed toward Class Y shares. Shareholders of Class C
shares
may also qualify for purchase of Class A shares within certain conditions. See
"Class C Shares."
CLASS B SHARES. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares bear an annual service fee of 0.25% and an annual distribution
fee of 0.50% of the average daily net assets of this Class. The Class B
shares'
distribution fee will cause that Class to have higher expenses and pay lower
dividends than Class A shares. Smith Barney recommends that, in view of the
relative sales charge and distribution fees applicable to the Classes, single
investments of $250,000 or more should be directed toward Class A shares.
CLASS B SHARES CONVERSION FEATURE. Class B shares will convert automatically
to Class A shares, based on relative net asset value, eight years after the
date
of the original purchase. Upon conversion, these shares will no longer be
subject to annual distribution fees. 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 Class B shares
(other than Class B Dividend Shares). 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 C SHARES. Class C shares are sold at net asset value with no initial
sales charge at the time of purchase. They bear an annual service fee of 0.25%
and an annual distribution fee of 0.75% of the average daily net assets of the
Class C shares, and investors pay a CDSC of 1.00% if they redeem Class C
shares
within 12 months of purchase. This CDSC may be waived for certain redemptions.
The Class C shares' distribution fee will cause that Class to have higher
expenses and pay lower dividends than Class A shares. Purchases of Class C
shares, which when combined with current holdings of Class C shares of the
Fund
equal or exceed $500,000 in
4
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
the aggregate, should be made in Class A shares at net asset value with no
sales
charge, and will be subject to a CDSC of 1% on redemptions made within 12
months
of purchase.
CLASS Y SHARES. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge at the time of purchase. They bear no
service
or distribution fees.
In deciding which class of Fund shares to purchase, investors should
consider
the following factors, as well as any other relevant facts and circumstances:
INTENDED HOLDING PERIOD. The decision as to which Class of shares is more
beneficial to you depends on the amount and intended length of your
investment.
Shareholders who are planning to establish a program of regular investment may
wish to consider Class A shares; as the investment accumulates shareholders
may
qualify for reduced sales charge and the shares are subject to lower ongoing
expenses over the term of the investment. Class B shares are suitable for
single
investments below $250,000 in instances where an investor has a timeframe of
five years or more; Class C shares are appropriate for investors with shorter
investment timeframes generally two years or less. In the case of both Class B
and Class C shares, the investor would pay no up front sales charge but would
be
subject to a distribution fee not applicable to an investment in Class A
shares,
as well as CDSC. If you are investing a minimum of $5,000,000, you should
purchase Class Y shares because there is no initial sales charge, no CDSC and
no
service or distribution fee charges against such shares. The maximum purchase
of
Class A shares is $4,999,999. The maximum purchase of Class B shares is
$249,999. The maximum purchase of Class C shares is $499,999. There is no
maximum purchase amount for Class Y shares.
REDUCED OR NO INITIAL SALES CHARGE. The entire initial sales charge on Class
A
shares may be waived for certain eligible purchasers, and these purchasers'
entire purchase price would be immediately invested in the Fund. In addition,
Class A share purchases, which when combined with current Class A shares equal
or exceed $500,000 in the aggregate, may be made at net asset value with no
initial sales charge, but will be subject to a CDSC of 1.00% on redemptions
made
within 12 months of purchase. The $500,000
5
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
aggregate investment may be met by aggregating the purchase with the net asset
value of all Class A shares held in funds sponsored by Smith Barney listed
under
"Shareholder Services -- Exchange Privileges." Class A share purchases made
under the Fund's reduced sales charge plans may be made at a reduced initial
sales charge (see "Purchase of Shares"). Because the ongoing expenses of Class
A
shares will be lower than those for Class B and Class C shares, purchasers
eligible to purchase Class A shares at net asset value or at a reduced sales
charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees
for
each class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Shareholder Services" for other differences between the classes of
shares.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist 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, Class C and Class Y shares are available as
investment alternatives for Participating Plans. See "Purchase of Shares --
Smith Barney 401(k) Program."
PURCHASE OF SHARES
Shares may be purchased through the Fund's distributor, Smith Barney, a
broker
that clears securities transactions through Smith Barney on a fully disclosed
basis (an "Introducing Broker") or an investment dealer in the selling group.
Direct purchases by certain retirement plans may be made through the Fund's
transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of
First Data Corporation. See "Purchase of Shares."
6
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
INVESTMENT MINIMUMS
Investors in Class A, Class B and Class C shares may open an account by
making
an initial investment of at least $1,000 for each account, or $250 for an
individual retirement account ("IRA") or a Self-Employed Retirement Plan.
Investors in Class Y shares may open an account for an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes
except Class Y, which has no subsequent minimum requirement. For participants
in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial and subsequent investment requirement is $25. The
minimum and subsequent investment through the Systematic Investment Plan is
$100. There is no minimum investment amount for (a) employees of The Travelers
Inc. and its subsidiaries, including Smith Barney and (b) unitholders of a UIT
sponsored by Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN
The Fund offers shareholders a Systematic Investment Plan under which they
may
authorize the automatic placement of a purchase order each month or quarter
for
Fund shares in an amount of at least $100. See "Purchase of Shares."
REDEMPTION OF SHARES
Shares may be redeemed on each day the New York Stock Exchange, Inc.
("NYSE")
is open for business. Class A and Class Y shares are redeemable at net asset
value and Class B and Class C shares are redeemable at net asset value less
any
applicable CDSC. See "Redemption of Shares."
MANAGEMENT OF THE FUND
Smith Barney Strategy Advisers ("Strategy Advisers") serves as the Fund's
investment adviser. Strategy Advisers is a wholly owned subsidiary of Smith
Barney Holdings, Inc. ("Holdings"), which is in turn a wholly owned subsidiary
of The Travelers Inc. ("Travelers"), a diversified financial services company
engaged through its subsidiaries principally in the business of providing
consumer financial, investment and insurance services. Smith, Barney Advisers,
Inc. ("SBA") serves as the Fund's administrator. SBA is a wholly owned
subisidiary of Holdings. The Boston Company Advisors, Inc.
7
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
("Boston Advisers") serves as the Fund's sub-administrator and sub-adviser.
Boston Advisors is a wholly owned subsidiary of The Boston Company Inc.
("TBC"),
which is in turn a wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
class of certain other funds in the Smith Barney Group of Funds. Certain
exchanges may be subject to a sales charge differential. See "Shareholder
Services."
VALUATION OF SHARES Net asset value of the Fund is quoted daily in the
financial
section of most newspapers and is also available from any Smith Barney
Financial
Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly 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."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Fund may employ investment
techniques which involve certain risks, including entering into repurchase
agreements, reverse repurchase agreements and forward roll transactions,
engaging in when-issued and delayed-delivery transactions, lending portfolio
securities, covered option writing, and options contracts on securities and
indices. See "Investment Objective and Management Policies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an
investor will incur either directly or indirectly as a shareholder
8
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
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 C CLASS Y
<S> <C> <C>
<C> <C>
-----------------------------------------------------------------------------
- --------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge on purchases
(as a percentage of offering price) 5.00% None
None None
Maximum CDSC
(as a percentage of redemption proceeds) None* 5.00%
1.00% None
-----------------------------------------------------------------------------
- --------
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management fees 0.70% 0.70%
0.70% 0.70%
12b-1 fees*** 0.25% 0.75%
0.75% 0.00%
Other expenses+ 0.42% 0.55%
0.48% --
-----------------------------------------------------------------------------
- --------
TOTAL FUND OPERATING EXPENSES 1.37% 2.00%
1.93% --
-----------------------------------------------------------------------------
- --------
<FN>
*Purchase of Class A shares, which when combined with current Class A
shares equal or exceed $500,000
in the aggregate, will be made at net asset value with no sales charge,
but will be subject to a
CDSC of 1% on redemptions made within 12 months.
**Other expenses for the Fund's fiscal year ended July 31, 1994 have been
restated to reflect current
expenses for each Class.
***Upon conversion, Class B shares will no longer be subject to a
distribution fee. Class C shares do
not have a conversion feature and, therefore, are subject to an ongoing
distribution fee. As a
result, long-term shareholders of Class C shares may pay more than the
economic equivalent of the
maximum front-end sales charge permitted by the National Association of
Securities Dealers, Inc.
+Expenses for the Fund are based on data for its fiscal year ended July 31,
1994. For Class Y shares,
"Other Expenses" have been based on expenses incurred with respect to
Class A shares.
</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 5%, depending on the amount purchased and, in the case of
Class B and Class C 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." Smith Barney receives an annual 12b-1 service fee of
.25% of the value of average daily net assets of Class A shares. Smith Barney
also receives with respect to Class B and Class C shares an annual 12b-1 fee
of
0.75% of the value of average daily net assets of the respective classes,
consisting of a 0.50%
9
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
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 IS INTENDED TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS THAT AN INVESTOR IN THE FUND WILL BEAR DIRECTLY OR INDIRECTLY.
THE
EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT THE LEVELS SET
FORTH IN THE TABLE ABOVE. SEE "PURCHASE OF SHARES," "REDEMPTION OF SHARES" AND
"MANAGEMENT OF THE FUND."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10
YEARS*
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
- ---------
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the
end of each time period:
Class A $ $ $
$
Class B
Class C
Class Y
You would pay the following expenses on
the same investment, assuming the same
annual return and no redemption:
Class A
Class B
Class C
Class Y
-----------------------------------------------------------------------------
- --------
<FN>
*Ten-year figures assume conversion of Class B shares to Class A shares at
the end of
the eighth year following the date of purchase.
</TABLE>
The example also provides a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5% annual
return
assumption. THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF 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 RETURN WILL
VARY
AND MAY RESULT IN AN ACTUAL RETURN GREATER OR LESS THAN 5%.
10
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN 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, 1994. THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES THAT ALSO APPEAR IN THE FUND'S ANNUAL REPORT,
WHICH
IS INCORPORATED BY REFERENCE INTO THE STATEMENT OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94++++ 7/31/93*+++
<S> <C> <C>
Net Asset Value, beginning of period $ 15.15
- --------------------------------------------------------------------
Income from investment operations:
Net investment income 0.19
Net realized and unrealized gain on
investments 1.33
- --------------------------------------------------------------------
Total from investment operations 1.52
Distributions to shareholders:
Distributions from net investment income (0.17)
Distributions in excess of net investment
income (0.03)
Distributions from net realized capital
gains (0.44)
Distributions in excess of net realized
capital gains (0.05)
Distributions from capital++ (0.33)
- --------------------------------------------------------------------
Total Distributions (1.02)
- --------------------------------------------------------------------
Net Asset Value, end of period $ 15.65
- --------------------------------------------------------------------
Total return+ 10.31%
- --------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $39,677
Ratio of operating expenses to average net
assets 1.20%**
Ratio of net investment income to average
net assets 1.64%**
Portfolio turnover rate 55%
- --------------------------------------------------------------------
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return for the period indicated
and
does not reflect any applicable sales charges.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the average share method,
which more appropriately presents the per share data for the period
since
the use of the undistributed method does not accord with results of
operations.
++++ As of , the Fund changed its investment adviser from Boston
Advisors to its current investment adviser, Strategy Advisers.
</TABLE>
11
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR
ENDED
ENDED
7/31/94++++
7/31/93+++
<S> <C> <C>
Net Asset Value, beginning of year $
15.21
- ------------------------------------------------------------------------------
- ----
Income from investment operations:
Net investment income
0.23
Net realized and unrealized gain/(loss) on investments
1.47
- ------------------------------------------------------------------------------
- ----
Total from investment operations
1.70
Less Distributions:
Distributions from net investment income
(0.16)
Distributions in excess of net investment income
(0.03)
Distributions from net realized capital gains
(0.57)
Distributions in excess of net realized capital gains
(0.06)
Distributions from capital++ (book basis) --
Distributions from capital++ (tax basis)
(0.44)
- ------------------------------------------------------------------------------
- ----
Total Distributions
(1.26)
- ------------------------------------------------------------------------------
- ----
Net Asset Value, end of year $
15.65
- ------------------------------------------------------------------------------
- ----
Total return+
11.68%
- ------------------------------------------------------------------------------
- ----
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's)
$1,230,737
Ratio of operating expenses to average net assets
1.69%
Ratio of net investment income to average net assets
1.16%
Portfolio turnover rate
55%
- ------------------------------------------------------------------------------
- ----
<FN>
* The Fund commenced operations on September 16, 1985. Those shares in
existence prior to November 6, 1992 were designated as Class B shares.
** Annualized.
+ Total return represents aggregate total return for the periods
indicated
and does not reflect any applicable CDSC.
++ Result from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since the use of the undistributed method does not accord with results
of
operations.
++++ As of , the Fund changed its investment adviser from Boston
Advisors to its current investment adviser, Strategy Advisers.
</TABLE>
12
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
ENDED
7/31/92 7/31/91 7/31/90+++ 7/31/89 7/31/88 7/31/87
7/31/86*
<S> <C> <C> <C> <C> <C>
<C>
$ 14.26 $ 13.30 $ 13.98 $ 12.90 $ 14.47 $ 14.52
$ 13.00
----------------------------------------------------------------------------
- ---------
0.22 0.24 0.22 0.56 0.51 0.28
0.43
1.93 1.92 0.38 2.00 (0.62) 1.37
2.27
----------------------------------------------------------------------------
- ---------
2.15 2.16 0.60 2.56 (0.11) 1.65
2.70
(0.22) (0.24) (0.22) (0.89) (0.18) (0.28)
(0.42)
-- -- -- -- -- --
- --
-- -- -- (0.26) (1.28) (1.42)
(0.76)
(0.98) (0.96) (1.06) (0.33) -- --
- --
-- -- -- -- -- --
- --
-- -- -- -- -- --
- --
----------------------------------------------------------------------------
- ---------
(1.20) (1.20) (1.28) (1.48) (1.46) (1.70)
(1.18)
----------------------------------------------------------------------------
- ---------
$ 15.21 $ 14.26 $ 13.30 $ 13.98 $ 12.90 $ 14.47
$ 14.52
----------------------------------------------------------------------------
- ---------
15.68% 17.53% 4.62% 21.49% 0.21% 12.07%
21.28%
----------------------------------------------------------------------------
- ---------
$585,049 $470,381 $507,762 $599,849 $585,634 $960,898
$533,487
1.69% 1.75% 1.78% 1.75% 1.70% 1.74%
1.87%**
1.53% 1.84% 1.66% 4.17% 3.58% 1.97%
2.99%**
57% 43% 47% 41% 56% 294%
212%
----------------------------------------------------------------------------
- ---------
</TABLE>
13
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
(CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
7/31/94 7/31/93*+++
<S> <C> <C>
Net Asset Value, beginning of period $15.45
- -------------------------------------------------------------------
Income from investment operations:
Net investment income 0.05
Net realized and unrealized gain on
investments 0.35
- -------------------------------------------------------------------
Total from investment operations 0.40
Less Distributions:
Distributions from net investment income (0.03)
Distributions in excess of net investment
income (0.01)
Distributions from net realized capital
gains (0.08)
Distributions in excess of net realized
capital gains (0.01)
Distributions from capital++ (0.07)
- -------------------------------------------------------------------
Total distributions (0.20)
- -------------------------------------------------------------------
Net Asset Value, end of period $15.65
- -------------------------------------------------------------------
Total return+ 2.60%
- -------------------------------------------------------------------
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $ 357
Ratio of net investment income to average
net assets 1.31%**
Ratio of operating expenses to average net
assets 1.54%**
Portfolio turnover rate 55%
- -------------------------------------------------------------------
<FN>
* The Fund commenced selling Class C shares (previously designated as
Class D
shares) on June 1, 1993.
** Annualized.
+ Total return represents aggregate total return for the period indicated.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly average share
method, which more appropriately presents the per share data for the
period
since use of the undistributed method does not accord with results of
operations.
</TABLE>
14
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is total return. The Fund's investment
objective may be changed only with the approval of a majority of the Fund's
outstanding shares. There can be no assurance that the Fund will achieve its
investment objective. The Fund will seek its objective by investing primarily
in
a diversified portfolio of dividend-paying common stocks. The Fund may engage
in
various portfolio strategies involving options to seek to increase its return
and to hedge its portfolio against movements in the equity markets and
interest
rates. Because the Fund seeks total return by emphasizing investments in
dividend-paying common stocks, it will not have as much investment flexibility
as total return funds which may pursue their objective by investing in both
income and equity stocks without such an emphasis. The Fund also may invest up
to 10% of its assets in medium- or low-rated securities or unrated securities
of
comparable quality. Medium- and low-rated securities are securities rated less
than investment grade by Moody's Investors Services, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"). See "Risk Factors and Special
Considerations--Medium-, Low- and Unrated Securities" below; interest-paying
debt securities, such as obligations issued or guaranteed as to principal and
interest by the United States government ("U.S. government securities"); and
other securities, including convertible bonds, convertible preferred stock and
warrants. In addition, the Fund will limit its investments in warrants to 5%
of
its net assets. The Fund also may lend its portfolio securities and enter into
"short sales against the box." Special considerations associated with the
Fund's
investment strategies are described below.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among
others, one or more of the strategies set forth below. More detailed
information
concerning these strategies and their related risks is contained in the
Statement of Additional Information.
In the future, the Fund may desire to employ additional investment
strategies,
including hedging strategies such as entering into futures contracts and
related
options. The Fund will do so only upon 60 days' notice to shareholders and in
conformity with its investment restrictions.
SHORT SALES AGAINST THE BOX. The Fund may make short sales of common stock
if,
at all times when a short position is open, the Fund owns the stock
15
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
or owns preferred stocks or debt securities convertible or exchangeable,
without
payment of further consideration, into the shares of common stock sold short.
Short sales of this kind are referred to as "short sales against the box." The
broker-dealer that executes a short sale generally invests cash proceeds of
the
sale until they are paid to the Fund. Arrangements may be made with the
broker-dealer to obtain a portion of the interest earned by the broker on the
investment of short sale proceeds. The Fund will segregate the common stock or
convertible or exchangeable preferred stock or debt securities in a special
account with Boston Safe Deposit and Trust Company ("Boston Safe"), the
Trust's
custodian. Not more than 10% of the Fund's net assets (taken at current value)
may be held as collateral for such sales at any one time. The extent to which
the Fund may make short sales of common stocks may be limited by the
requirements contained in the Code for qualification as a regulated investment
company. See "Dividends, Distributions and Taxes."
COVERED OPTION WRITING. The Fund may write put and call options on
securities.
The Fund realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an
underlying
security at a specified price at any time during the option period. In
contrast,
a call option embodies the right of its purchaser to compel the writer of the
option to sell to the option holder an underlying security at a specified
price
at any time during the option period. Thus, the purchaser of a put option
written by the Fund has the right to compel the Fund to purchase from it the
underlying security at the agreed-upon price for a specified time period,
while
the purchaser of a call option written by the Fund has the right to purchase
from the Fund the underlying security owned by the Fund at the agreed-upon
price
for a specified time period.
Upon the exercise of a put option written by the Fund, the Fund may suffer a
loss equal to the difference between the price at which the Fund is required
to
purchase the underlying security and its market value at the time of the
option
exercise, less the premium received for writing the option. Upon the exercise
of
a call option written by the Fund, the Fund may suffer a loss equal to the
excess of the security's market value at the time of the option exercise over
the Portfolio's acquisition cost of the security, less the premium received
for
writing the option.
16
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
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 in a segregated account cash, U.S. government securities or other
high grade debt obligations having a value at least equal to the exercise
price
of the underlying securities or (b) continue to own an equivalent number of
puts
of the same "series" (that is, puts on the same underlying security having the
same exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same "class" (that is, puts on the same
underlying security) with exercise prices greater than those that it has
written
(or, if the exercise prices of the puts that it holds are less than the
exercise
prices of those that it has written, it will deposit the difference with
Boston
Safe in a segregated account).
The Fund may engage in a closing purchase transaction to realize a profit,
to
prevent an underlying security from being called or put or, in the case of a
call option, to unfreeze an underlying security (thereby permitting its sale
or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would
purchase,
prior to the holder's exercise of an option the Fund has written, an option of
the same series as that on which the Fund desires to terminate its obligation.
The obligation of the Fund under an option it has written would be terminated
by
a closing purchase transaction, but the Fund would not be deemed to own an
option as the result of the transaction. There can be no assurance the Fund
will
be able to effect closing purchase transactions at a time when it wishes to do
so. To facilitate closing purchase transactions, however, the Fund ordinarily
will write options only if a secondary market for the options exists on a
domestic securities exchange or in the over-the-counter market.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES. The Fund may utilize up to
10%
of its assets to purchase put options on portfolio securities and may do so at
or about the same time that it purchases the underlying security or at a later
time. By buying a put, the Fund limits the risk of loss from a decline in the
market value of the security until the put expires. Any appreciation in the
value of, or in the yield otherwise available from the underlying security,
however, will be partially offset by the amount of the
17
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
premium paid for the put option and any related transaction costs. The Fund
may
utilize up to 10% of its assets to purchase call options on portfolio
securities. Call options may be purchased by the Fund in order to acquire the
underlying securities for the Fund at a price that avoids any additional cost
that would result from a substantial increase in the market value of a
security.
The Fund also may purchase call options to increase its return to investors at
a
time when the call is expected to increase in value due to anticipated
appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing sale
transactions (sales by the Fund, prior to the exercise of options it has
purchased, of options of the same series), and profit or loss from the sale
will
depend on whether the amount received is more or less than the premium paid
for
the option plus the related transaction costs.
STOCK INDEX OPTIONS. The Fund may purchase and write exchange-listed put and
call options on stock indexes primarily to hedge against the effects of
market-wide price movements. A stock index measures the movement of a certain
group of stocks by assigning relative values to the common stocks included in
the index. (Examples of well-known stock indexes are the Standard & Poor's
Daily
Price Index of 500 Common Stocks and the NYSE Composite index.) Options on
stock
indexes are similar to options on securities. However, because options on
stock
indexes do not involve the delivery of an underlying security, the option
represents the holder's right to obtain from the writer in cash a fixed
multiple
of the amount by which the exercise price exceeds (in the case of a put) or is
less than (in the case of a call) the closing value of the underlying index on
the exercise date.
The advisability of using stock index options to hedge against the effects
of
market-wide movements will depend on the extent of diversification of the
Fund's
stock investments and the sensitivity of its stock investments to factors
influencing the underlying index. The effectiveness of purchasing or writing
stock index options as a hedging technique will depend upon the extent to
which
price movements in the portion of the Fund being hedged correlate with price
movements in the stock index selected.
When the Fund writes an option on a stock index, it will deposit cash or
cash
equivalents or a combination of both in an amount equal to the market value of
the option in a segregated account with Boston Safe, and will maintain the
account while the option is open.
18
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
ADDITIONAL INVESTMENTS
MONEY MARKET INSTRUMENTS When Strategy Advisers and Boston Advisors believes
that market conditions warrant, the Fund may invest in short-term instruments
without limitation for temporary defensive posture. Short-term instruments in
which the Fund may invest include U.S. government securities; certain bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of domestic or foreign banks, domestic savings and loan
associations
and similar institutions); commercial paper rated no lower than A-2 by S&P or
Prime-2 by Moody's or the equivalent from another major rating service or, if
unrated, of an issuer having an outstanding, unsecured debt issue then rated
within the three highest rating categories; and repurchase agreements as
described below.
U.S. GOVERNMENT SECURITIES. The U.S.government securities in which the Fund
may invest include: direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds), and obligations issued by
U.S. government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as 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 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
19
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
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.
Boston Advisors, acting under the supervision of the Board of Trustees,
reviews
on an ongoing basis the value of the collateral and the creditworthiness of
those banks and dealers with which the Fund may enter into repurchase
agreements
to evaluate potential risks.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. In order to secure
yields or prices deemed advantageous at the time, the Fund may purchase or
sell
any portfolio securities on a when-issued or delayed-delivery basis. The Fund
will enter into a when-issued transaction for the purpose of acquiring
portfolio
securities and not for the purpose of leverage. In such transactions delivery
of
the securities occurs beyond the normal settlement periods, but no payment or
delivery is made by the Fund prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available
in
the market on the dates when the investments are actually delivered to the
buyers. The Fund will establish a segregated account consisting of cash, U.S.
government securities or other high grade debt obligations in an amount equal
to
the amount of its when-issued and delayed-delivery commitments. Placing
securities rather than cash in the segregated account may have a leveraging
effect on the Fund's net assets. The Fund will not accrue income with respect
to
a when-issued security prior to its stated delivery date.
20
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
LENDING OF PORTFOLIO SECURITIES. The Fund has the ability to lend portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets taken at value.
Loans
of portfolio securities will be collateralized by cash, letters of credit or
U.S. government securities that are maintained at all times in an amount at
least equal to the current market value of the loaned securities.
CERTAIN INVESTMENT GUIDELINES
Up to 10% of the assets of the Fund may be invested in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities
greater
than seven days, (b) time deposits maturing from two business days through
seven
calendar days and (c) to the extent that a liquid secondary market does not
exist for the instruments, futures contracts and options thereon. In addition,
the Fund may invest up to 5% of its assets in the securities of issuers which
have been in continuous operation for less than three years. The Fund also may
borrow from banks for temporary or emergency purposes, but not for investment
purposes, in an amount up to 10% of its total assets, and may pledge its
assets
to the same extent in connection with such borrowings. Whenever these
borrowings
exceed 5% of the value of the Fund's total assets, the Fund will not make any
additional investments. Except for the limitations on borrowing, the
investment
guidelines set forth in this paragraph may be changed at any time without
shareholder consent by vote of the Trust's Board of Trustees. A complete list
of
investment restrictions that identifies additional restrictions that cannot be
changed without the approval of the majority of the Fund's outstanding shares
is
contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
OPTIONS. The Fund may enter into options transactions primarily as hedges to
reduce investment risk, generally by making an investment expected to move in
the opposite direction of a portfolio position. A hedge is designed to offset
a
loss on a portfolio position with a gain on the hedge position; at the same
time, however, a properly correlated hedge will result in a gain on the
portfolio position being offset by a loss on the hedge position. The Fund
bears
the risk that the prices of the securities being hedged will not move in the
same amount as the hedge. The Fund will engage in hedging transactions only
when
deemed
21
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
advisable by Strategy Advisers and Boston Advisors. Successful use by the Fund
of options will depend on Strategy Advisers and Boston Advisors' ability to
correctly predict movements in the direction of the stock or index underlying
the option used as a hedge. Losses incurred in hedging transactions and the
costs of these transactions will affect the Fund's performance.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write stock options and options on stock index
options only if there appears to be a liquid secondary market for the options
purchased or sold; for some options no such secondary market may exist or the
market may cease to exist.
MEDIUM-, LOW- AND UNRATED SECURITIES. The Fund may invest up to 10% of its
assets in medium- or low-rated securities and unrated securities of comparable
quality. Generally, these securities offer a higher return potential than
higher-rated securities but involve greater volatility of price and risk of
loss
of income and principal. The issuers of such securities may be in default or
bankruptcy at the time of purchase or may have a high probability of future
default or bankruptcy. Medium- and low-rated and comparable unrated securities
will likely have large uncertainties or major risk exposures to adverse
conditions and are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the
obligation. Accordingly, it is possible that these types of factors could, in
certain instances, reduce the value of securities held by the Fund, with a
commensurate effect on the value of the Fund's shares.
The markets in which medium- and low-rated or comparable unrated securities
are traded generally are more limited than those in which higher-rated
securities are traded. The existence of limited markets for these securities
may
restrict the availability of securities for the Fund to purchase and also may
have the effect of limiting the ability of the Fund to (a) obtain accurate
market quotations for purposes of valuing securities and calculating net asset
value and (b) sell securities at their fair value either to meet redemption
requests or to respond to changes in the economy or the financial markets. The
market for medium- and low-rated and comparable unrated securities is
relatively
new and has not fully weathered a major economic recession. Any such economic
downturn could adversely affect the ability of the issuers of such securities
to
repay principal and pay interest thereon.
22
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more
traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium-and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional
expenses
to the extent that it is required to seek recovery upon a default in the
payment
of principal or interest on its portfolio holdings.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit
their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding
security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities which are rated B generally lack characteristics of the desirable
investment and assurance of interest and principal payments over any long
period
of time may be small. Securities which are rated Caa or CCC or below are of
poor
standing. Those issues may be in default or present elements of danger with
respect to principal or interest. Securities rated C by Moody's and D by S&P
are
in the lowest rating class and indicate that payments are in default or that a
bankruptcy petition has been filed with respect to the issuer or that the
issuer
is regarded as having extremely poor prospects. See the Appendix in the
Trust's
Statement of Additional Information on bond ratings by Moody's and S&P.
23
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
In light of these risks, Strategy Advisers and Boston Advisors, in
evaluating
the creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of and the community support for the facility financed by
the
issue, the ability of the issuer's management and regulatory matters.
SECURITIES OF UNSEASONED ISSUERS. Securities in which the Fund may invest
may
have limited marketability and, therefore, may be subject to wide fluctuations
in market value. In addition, certain securities may lack a significant
operating history and be dependent on products or services without an
established market share.
PORTFOLIO TRANSACTIONS AND TURNOVER
All orders for transactions in securities and options on behalf of the Fund
are placed by Strategy Advisers and Boston Advisors with broker-dealers that
Strategy Advisers and Boston Advisors selects, including Smith Barney and
other
affiliated brokers. The Fund may utilize Smith Barney or a Smith Barney
affiliated broker in connection with a purchase or sale of securities when
Strategy Advisers and Boston Advisors believes that the broker's charge for
the
transactions does not exceed usual and customary levels. The same standard
applies to the use of Smith Barney as a commodities broker in connection with
entering into options and futures contracts.
- --------------------------------------------------------------------
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of
regular
trading on the NYSE on each day that the NYSE is open by dividing the value of
the Fund's net assets by the total number of shares outstanding. Net asset
value
is calculated separately for Class A, B, C and Y shares. Generally, the Fund's
investments are valued at market value or, in the absence of a market value
with
respect to any securities, at fair value as determined by or under the
direction
of the Fund's Board of Directors. Short-term investments that mature in 60
days
or less are valued at
24
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
amortized cost whenever the Directors determine that amortized cost reflects
fair value of those instruments. Further information regarding the Fund's
valuation policies is contained in the Statement of Additional Information.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
The Fund's policy is to distribute its investment income (that is, its
income
other than its net realized capital gains) and net realized capital gains, if
any, once a year, normally at the end of the year in which earned or at the
beginning of the next year. Shareholders may direct that distributions be paid
to them through any one of the following options:
(1) Income dividends and capital gains distributions both invested in
additional shares.
(2) Income dividends paid in cash and capital gains distributions invested
in additional shares.
(3) Income dividends and capital gains distributions both paid in cash.
(4) Income dividends invested in additional shares of the Fund and capital
gains paid in cash.
Unless a shareholder instructs that dividends and capital gains
distributions
on shares be paid in cash and credited to the shareholder's account at Smith
Barney, dividends and capital gains distributions will be reinvested
automatically in additional shares of the same Class at net asset value,
subject
to no sales charge or CDSC. A shareholder may change the option at any time by
notifying his or her Financial Consultant. Retirement plans held directly at
TSSG should notify TSSG in writing at least five business days prior to the
payment date to permit the change to be entered in the shareholder's account.
In order to avoid the application of a 4% nondeductible excise tax on
certain
undistributed amounts of ordinary income and capital gains, the Fund may make
an
additional distribution shortly before December 31 in each year of any
undistributed ordinary income or capital gains and expects to pay any other
dividends and distributions necessary to avoid the application of this tax.
25
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from net
investment
income and distributions of net realized short-term capital gains are taxable
to
shareholders as ordinary income, regardless of how long shareholders have held
their Fund shares and whether such dividends and distributions are received in
cash or reinvested in additional Fund shares. Distributions of net realized
long-term capital gains will be taxable to shareholders as long-term capital
gains, regardless of how long shareholders have held Fund shares and whether
such distributions are received in cash or are reinvested in additional Fund
shares. Furthermore, as a general rule, a shareholder's gain or loss on a sale
or redemption of Fund shares will be a long-term capital gain or loss if the
shareholder has held the shares for more than one year and will be a short-
term
capital gain or loss if the shareholder has held the shares for one year or
less. Some of the Fund's dividends declared from net investment income may
qualify for the Federal dividends-received deduction for corporations. The per
share dividends on Class B and Class C shares of the Fund will be lower than
the
per share dividends on Class A and Class Y shares as a result of the
distribution fee applicable with respect to Class B and Class C shares. The
per
share dividends on Class A shares of the Fund will be lower than the per share
dividends on Class Y shares as a result of the service fee applicable to Class
A
shares. Distributions of capital gains, if any, will be in the same amount for
Class A, Class B, Class C and Class Y shares.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Each shareholder also will receive, if
appropriate, various written notices after the close of the Fund's prior
taxable
year as to the Federal income tax status of his or her dividends and
distributions which were received from the Fund during the Fund's prior
taxable
year. Shareholders should consult their tax advisors about the status of the
Fund's dividends and distributions for state and local tax liabilities.
- --------------------------------------------------------------------
PURCHASE OF SHARES
GENERAL. The Fund offers five classes of shares. Class A shares are sold to
investors with an initial sales charge and Class B and Class C shares are sold
without an initial sales charge but with higher ongoing expenses and a
26
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
CDSC payable upon certain redemptions. Class Y shares are sold without an
initial sales charge, CDSC, service fee or distribution fee and are available
only to investors investing a minimum of $5,000,000. Class Z shares are
offered
without a sales charge, CDSC, service fee or distribution fee, exclusively to:
(a) tax-exempt employee benefit and retirement plans of Smith Barney and its
affiliates and (b) certain UITs sponsored by Smith Barney and its affiliates.
Investors meeting either of these criteria who are interested in acquiring
Class
Z shares should contact their Smith Barney Financial Consultant for a Class Z
Prospectus. See "Prospectus Summary -- Alternative Purchase Arrangements" for
a
discussion of factors to consider in selecting which Class of shares to
purchase.
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney, with an Introducing Broker or with an investment dealer in
the selling group, except for investors purchasing shares of the Fund through
a
qualified retirement plan who may do so directly through TSSG. When purchasing
shares of the Fund, investors must specify whether the purchase is for Class
A,
Class B, Class C or Class Y shares. No maintenance fee will be charged in
connection with a brokerage account through which an investor purchases or
holds
shares.
Investors in Class A, Class B and Class C shares may open an account by
making
an initial investment of at least $1,000 for each account, or $250 for an IRA
or
a Self-Employed Retirement Plan in the Fund. Investors in Class Y shares may
open an account by making an initial investment of $5,000,000. Subsequent
investments of at least $50 may be made for all Classes except for Class Y,
which has no subsequent investment minimum. For participants in retirement
plans
qualified under Section 403(b)(7) or Section 401(a) of the Code, the minimum
initial and subsequent investment in the Fund is $25 and for the Fund's
Systematic Investment Plan, the minimum initial and subsequent investment is
$100. There are no minimum investment requirements for (a) employees of
Travelers and its subsidiaries, including Smith Barney, (b) unitholders of a
UIT
sponsored by Smith Barney and (c) directors of the Fund. The Fund reserves the
right to waive or change minimums, to decline any order to purchase its shares
and to suspend the offering of shares from time to time. Shares purchased will
be held in the shareholder's account by TSSG. Share certificates are issued
only
27
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
upon a shareholder's written request to TSSG. IRAs and other retirement plans
approved by the Internal Revenue Service are available from the Fund or Smith
Barney.
Purchase orders received by Smith Barney prior to the close of regular
trading
on the NYSE, on any day the Fund calculates its net asset value, are priced
according to the net asset value determined on that day. Orders received by
dealers or introducing brokers prior to the close of regular trading on the
NYSE
on any day the Fund calculates its net asset value, are priced according to
the
net asset value determined on the next business day. Payment for Fund shares
is
due on the fifth business day (the "settlement date") after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders of Class A, Class B, Class C and Class Y shares may make
additions to their accounts at any time by purchasing shares through a service
known as the Systematic Investment Plan. Under the Systematic Investment Plan,
Smith Barney or TSSG is authorized through preauthorized transfers of $100 or
more to charge the regular bank account or other financial institution
indicated
by the shareholder on a monthly or quarterly basis to provide systematic
additions to the shareholder's Fund account. A shareholder whose check is
returned for insufficient funds will be charged a fee of up to $25. The
Systematic Investment Plan also authorizes Smith Barney to apply cash held in
the shareholder's Smith Barney brokerage account or redeem the shareholder's
shares of a Smith Barney money market fund to make additions to the account.
Additional information is available from the Fund or your Financial
Consultant.
28
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund are
as
follows:
<TABLE>
<CAPTION>
SALES
CHARGE
AS %
OF
NET
SALES CHARGE AS % ASSET
AMOUNT OF INVESTMENT* OF OFFERING PRICE VALUE
<S> <C> <C>
- ------------------------------------------------------------------------
Less than $25,000 5.00% 5.26%
$25,000 -- $49,999 4.00% 4.17%
$50,000 -- $99,999 3.25% 3.36%
$100,000 -- $249,999 2.50% 2.56%
$250,000 -- $499,999 2.00% 2.04%
$500,000 and more* .00% .00%
- ------------------------------------------------------------------------
<FN>
*Purchases of Class A shares, which when combined with current Class A
shares equal or exceed $500,000 in the aggregate, will be made at net
asset value without any initial sales charge, but will be subject to a
CDSC of 1.00% on redemptions made within 12 months of purchase. A
commission will be paid by Smith Barney to Financial Consultants or
other dealers who initiate and are responsible for purchases of
$500,000 or more. The CDSC on Class A shares is payable to Smith
Barney, which with Boston Advisors, compensates Smith Barney Financial
Consultants upon the sale of these shares. The CDSC is waived in the
same circumstances in which the CDSC applicable to Class B and Class C
shares is waived. See "Waivers of CDSC -- Class B and Class C Shares."
</TABLE>
Members of the selling group will receive 90% of the sales charge and may be
deemed to be underwriters of the Fund as defined in the Securities Act of
1933,
as amended.
The reduced sales charges shown above apply to the aggregate of purchases of
Class A shares of the Fund made at one time by "any person," which includes an
individual, spouse and children under the age of 21, or a trustee or other
fiduciary of a single trust estate or single fiduciary account. The Class A
initial sales charge is also reduced to 2% for Smith Barney Personal Living
Trust program participants for whom Smith Barney acts as trustee. (Smith
Barney
Personal Living Trust program participants may also purchase Class B and Class
C
shares subject to any applicable CDSC.) The reduced sales charge minimums may
also be met by aggregating the purchase with the net asset value of all Class
A
shares held in certain funds sponsored by Smith Barney listed under
"Shareholder
Services -- Exchange Privileges."
29
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
SALES CHARGE WAIVERS--CLASS A SHARES
Purchases of Class A shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales of Class A shares to
directors
of the Fund and employees of Travelers and its subsidiaries, or to members of
the immediate family of such persons (including the surviving spouse of a
deceased director or employee, and retired directors or employees), or sales
to
any trust, pension, profit-sharing or other benefit plan for such persons
provided such sales are made upon the assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
re-sold except through redemption or repurchase; (b) purchases of Class A
shares
if such shares are purchased with the proceeds from a redemption of shares of
an
investment company distributed by an entity other than Smith Barney if such
redemption has occurred no more than 30 days prior to the purchase of shares
of
the Fund and the investor paid a sales charge; (c) offers of Class A shares to
any other investment company in connection with the combination of such
company
with the Fund by merger, acquisition of assets or otherwise; (d) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a
mutual
fund which (i) was sponsored by the Financial Consultant's prior employer,
(ii)
was sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (e) shareholders who have redeemed Class A shares in the Fund
(or
Class A shares of another fund in the Smith Barney Group of Funds that are
sold
with a maximum 5% sales charge) and who wish to reinvest their redemption
proceeds in the Fund, provided the reinvestment is made within 60 calendar
days
of the redemption; and (f) accounts managed by registered investment advisory
subsidiaries of Travelers. In order to obtain such discounts, the purchaser
must
provide sufficient information at the time of purchase to permit verification
that the purchase would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above)
at a reduced sales charge or net asset value determined by
30
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
aggregating the dollar amount of the new purchase and the total net asset
value
of all Class A shares of the Fund and of certain other funds sponsored by
Smith
Barney listed under "Shareholder Services -- Exchange Privileges" sold with a
sales charge then held by such person and applying the sales charge applicable
to such aggregate. In order to obtain such discount, the purchaser must
provide
sufficient information at the time of purchase to permit verification that the
purchase qualifies for the reduced sales charge. The right of accumulation is
subject to modification or discontinuance at any time with respect to all
shares
purchased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes
the
minimum initial investment required. The sales charge applicable to purchases
by
each member of such a group will be determined by the table set forth above
and
will be based upon the aggregate sales of Class A shares to, and share
holdings
of, all members of the group. To be eligible for such reduced sales charges or
to purchase at net asset value, all purchases must be pursuant to an employer
or
partnership-sanctioned plan meeting certain requirements; one such requirement
is that the plan must be open to specified partners or employees of the
employer
and its subsidiaries, if any. Such plan may, but is not required to, provide
for
payroll deductions, IRAs or investments pursuant to retirement plans under
Sections 401 or 408 of the Code. Smith Barney may also offer a reduced sales
charge or net asset value purchase for aggregating related fiduciary accounts
under such conditions that Smith Barney will realize economies of sales
efforts
and sales related expenses. An individual who is a member of a qualified group
may also purchase Class A shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is based upon the
aggregate
dollar value of Class A shares previously purchased and still owned by the
group, plus the amount of the current purchase. A "qualified group" is one
which
(a) has been in existence for more than six months, (b) has a purpose other
than
acquiring Fund shares at a discount and (c) satisfies uniform criteria which
enables Smith Barney to realize economies of scale in its costs of
distributing
shares. A qualified group must have more than 10 members, must be available to
arrange for group meetings between representatives of the Fund and the
members,
and must agree to include
31
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
sales and other materials related to the Fund in its publications and mailings
to members at no cost to the Distributor. In order to obtain such reduced
sales
charge or to purchase at net asset value, the purchaser must provide
sufficient
information at the time of purchase to permit verification that the purchase
qualifies for the reduced sales charge. Approval of group purchase reduced
sales
charge plans is subject to the discretion of Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity
for
an investor to obtain a reduced sales charge by aggregating the investments
over
a 13-month period, provided that the investor refers to such Letter when
placing
orders. For purposes of a Letter of Intent, the "Amount of Transaction" as
referred to in the preceding sales charge table includes purchases of all
Class
A shares of the Fund over the 13-month period based on the total amount of
intended purchases plus the value of all Class A shares of the Fund previously
purchased and still owned. An alternative is to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent.
Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If the goal is not achieved within
the period, the investor must pay the difference between the sales charges
applicable to the purchases made and the charges previously paid, or an
appropriate number of escrowed shares will be redeemed. New Letters of Intent
will be accepted beginning January 1, 1995. Please see the form of a Letter of
Intent at the end of this Prospectus.
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B AND CLASS C SHARES
The public offering price of the Class B and Class C shares is the net asset
value next determined with no initial sales charge imposed. The Class B and
Class C shares are being sold without an initial sales charge so that the full
amount of the investor's purchase payment may be immediately invested in the
Fund. A CDSC, however, is imposed upon certain redemptions of Class B and
Class
C shares.
Class B shares and Class C shares that are redeemed will not be subject to a
CDSC to the extent that the value of such shares represents: (a) capital
32
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
appreciation of Fund assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class C shares, shares
redeemed more than 12 months after their purchase. Redemptions of other Class
C
shares will be subject to a CDSC of 1.00% on shares redeemed within 12 months
of
purchase. The CDSC will be assessed on an amount equal to the net asset value
at
the time of redemption.
In circumstances in which the CDSC is imposed on Class B shares, the amount
of
the charge will depend on the number of years since the shareholder made the
purchase payment from which the amount is being redeemed. Solely for purposes
of
determining the number of years since a purchase payment, all purchase
payments
made during a month will be aggregated and deemed to have been made on the
last
day of the preceding Smith Barney statement month. The following table sets
forth the rates of the charge for redemptions of Class B shares by
shareholders,
except in the case of purchases by Participating Plans, as described below.
See
"Purchase of Shares -- Smith Barney 401(k) Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE
CDSC
<S> <C>
- ------------------------------------------------------------------------------
- ----
First
5.00%
Second
4.00%
Third
3.00%
Fourth
2.00%
Fifth
1.00%
Sixth
0.00%
Seventh
0.00%
Eighth
0.00%
- ------------------------------------------------------------------------------
- ----
</TABLE>
Class B shares will automatically convert to Class A shares eight years
after
the date on which they were purchased and thereafter will no longer be subject
to any distribution fees. In addition, a certain portion of 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, equal to 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) owned by the
shareholder. The conversion of Class B shares into Class A shares is subject
to
the continuing availability of an
33
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
opinion of counsel to the effect that such conversions will not constitute
taxable events for Federal tax purposes. Class B shares of Smith Barney
Shearson
Short-Term World Income Fund (the "Short-Term World Income Fund") that were
held
on July 15, 1994 and that are subsequently exchanged for Class B shares of the
Fund will be offered the opportunity to exchange all such Class B shares for
Class A shares of the Fund four years after the date on which those shares
were
deemed to have been purchased. Holders of such Class B shares will be notified
of the pending exchange in writing approximately 60 days before the fourth
anniversary of the purchase date and, unless the exchange has been rejected in
writing, the exchange will occur on or about the fourth anniversary date. See
"Alternative Purchase Arrangements -- Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain
distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that Class B and Class C shares acquired through an
exchange have been held will be calculated from the date that the Class B and
Class C shares exchanged were initially acquired in one of the other
applicable
Smith Barney funds, and Fund shares being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gain
distribution reinvestments in such other funds. For Federal income tax
purposes,
the amount of CDSC will reduce the gain or increase the loss, as the case may
be, on the amount realized on redemption. The amount of any CDSC will be paid
to
Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10
per share for a cost of $1,000. Subsequently, the investor acquired 5
additional
shares through dividend reinvestment. During the fifteenth month after the
purchase, the investor decided to redeem $500 of his or her investment.
Assuming
at the time of the redemption the net asset value had appreciated to $12 per
share, the value of the investor's shares would be $1,260 (105 shares at $12
per
share). The CDSC would not be applied to the amount which represents
appreciation and the value of the reinvested dividend shares ($260).
Therefore,
$240 of the $500 redemption proceeds ($500 minus $260) would be charged at a
rate of 4.00% (the applicable rate for Class B shares) for a total deferred
sales charge of $9.60.
34
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
WAIVERS OF CDSC--CLASS B AND CLASS C SHARES
The CDSC on Class B and Class C shares will be waived on: (a) exchanges (see
"Shareholder Services -- Exchange Privileges"); (b) automatic cash withdrawals
in amounts equal to or less than 1% per month of the value of the
shareholder's
shares at the time the withdrawal plan commences (see below) (provided,
however,
that automatic cash withdrawals in amounts equal to or less than 2% per month
of
the value of the shareholder's shares will be permitted for withdrawal plans
that were established prior to November 7, 1994); (c) redemptions of shares
within twelve months following the death or disability of the shareholder; (d)
redemption of shares from retirement plans or IRAs upon the attainment of age
59 1/2; (e) involuntary redemptions; and (f) redemptions of shares in
connection
with a combination of the Fund with any investment company by merger,
acquisition of assets or otherwise. In addition, a shareholder who has
redeemed
shares from other funds in the Smith Barney Group of Funds may, under certain
circumstances, reinvest all or part of the redemption proceeds within 60 days
and receive PRO RATA credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in the
case of shareholders who are also Smith Barney clients or by TSSG in the case
of
all other shareholders) of the shareholder's status or holdings, as the case
may
be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist 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 Smith Barney 401(k) Program, which include both
401(k) plans and other types of participant directed, tax-qualified employee
benefit plans (collectively, "Participating Plans").
The Fund offers to Participating Plans Class A, Class B, Class C and Class Y
shares, as investment alternatives under the Smith Barney 401(k) Program.
Class
A, Class B and Class C shares acquired through the Smith Barney 401(k) Program
are subject to the same service and/or distribution fees as, but different
sales
charge and CDSC schedules than, the Class A,
35
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Class B and Class C shares acquired by other investors. Similar to Class Y
shares available to other investors, Class Y shares acquired through the Smith
Barney 401(k) Program are not subject to any same service or distribution fees
or any sales charge or CDSC. Once a Participating Plan has made an initial
investment in the Fund, all of its subsequent investments in the Fund must be
in
the same Class of shares, except as otherwise described below.
CLASS A SHARES. Class A shares of the Fund are offered without any sales
charge to any Participating Plan that purchases from $500,000 to $4,999,999 of
Class A shares of one or more funds in the Smith Barney Group of Funds. Class
A
shares acquired by such Plans will be subject to a CDSC of 1% of redemption
proceeds, if the Participating Plan terminates within four years of the date
the
Participating Plan first enrolled in the Smith Barney 401(k) Program.
CLASS B SHARES. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds in the Smith
Barney
Group of Funds. Class B shares acquired by such Plans will be subject to a
CDSC
of 3% of redemption proceeds, if the Participating Plan terminates within
eight
years of the date the Participating Plan first enrolled in the Smith Barney
401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith
Barney
401(k) Program, it will be offered the opportunity to exchange all of its
Class
B shares for Class A shares of the Fund. Such Plans will be notified of the
pending exchange in writing approximately 60 days before the eighth
anniversary
of the 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 Class B shares at
that time, each Class B share held by the Participating Plan will have the
same
conversion feature as Class B shares held by other investors. See "Purchase of
Shares -- Deferred Sales Charge Alternative -- Class B and Class C Shares."
CLASS C SHARES. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or
36
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
more funds in the Smith Barney Group of Funds. Class C shares acquired by such
Plans will be subject to a CDSC of 1% of redemption proceeds, if the
Participating Plan terminates within four years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program. One year after the
date
a Participating Plan enrolled in the Smith Barney 401(k) Program and, if its
total Class C holdings equal at least $500,000 at such time, the Participating
Plan will be offered the opportunity to exchange all of its Class C shares for
Class A shares of the Fund. Such plans will be notified in writing within 30
days after the last business day of the calendar year, and unless the exchange
offer has been rejected in writing, the exchange will occur on or about the
last
business day of March in the following calendar year. Once the exchange has
occurred, a Participating Plan will not be eligible to acquire Class C shares
of
the Fund but instead may acquire Class A shares of the Fund. Any Class C
shares
not converted will continue to be subject to the distribution fee.
CLASS Y SHARES. Class Y shares of the Fund are offered without any service
or
distribution fees, sales charge or CDSC to any Participating Plan that
purchases
over $5,000,000 of Class Y shares of one or more funds in the Smith Barney
Group
of Funds.
No CDSC is imposed on redemptions of Class A, Class B or Class C shares to
the
extent that the net asset value of the Class B shares redeemed does not exceed
(a) the current net asset value of the shares purchased through reinvestment
of
dividends or capital gains distributions, plus (b) with respect to Class A and
Class C shares, the current net asset value of such shares purchased more than
one year prior to redemption and, with respect to Class B shares, the current
net asset value of Class B shares purchased more than eight years prior to the
redemption, plus (c) with respect to Class A and Class C shares, increases in
the net asset value of the shareholder's Class A or Class C shares above the
purchase payments made during the preceding year and, with respect to Class B
shares, increases in the net asset value of the shareholder's Class B shares
above the purchase payments made during the preceding eight years. Whether or
not the CDSC applies to a Participating Plan depends on the number of years
since the Participating Plan first became enrolled in the Smith Barney 401(k)
Program, unlike the applicability of the CDSC to other Class B shareholders,
which depends on the number of years since those shareholders made the
purchase
payment from which the amount is being redeemed.
37
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- ---------------------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
The CDSC will be waived on redemptions of Class A, Class B and Class C
shares
in connection with lump-sum or other distributions made by a Participating
Plan
as a result of: (a) the retirement of an employee in the Participating Plan;
(b)
the termination of employment of an employee in the Participating Plan; (c)
the
death or disability of an employee in the Participating Plan; (d) the
attainment
of age 59 1/2 by an employee in the Participating Plan; (e) hardship of an
employee in the Participating Plan to the extent permitted under Section
401(k)
of the Code; or (f) redemptions of shares in connection with a loan made by
the
Participating Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For
further
information regarding the Smith Barney 401(k) Program, investors should
contact
their Smith Barney Financial Consultant.
- --------------------------------------------------------------------
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGES
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds in the Smith Barney Group of
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges are subject to minimum investment and other requirements
of
the fund into which exchanges are made and a sales charge differential may
apply.
<TABLE>
<C> <S>
FUND NAME
-----------------------------------------------------------------------------
- ----
MUNICIPAL BOND FUNDS
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Tax-Exempt Income Fund
Smith Barney Arizona Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
Smith Barney Massachusetts Municipals Fund
Smith Barney New Jersey Municipals Fund Inc.
</TABLE>
38
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
SHAREHOLDER SERVICES (CONTINUED)
<TABLE>
<C> <S>
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Muni Funds -- National Portfolio
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- California Portfolio
* Smith Barney Muni Funds -- California Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
* Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Government Securities Fund
Smith Barney Investment Grade Bond Fund
Smith Barney High Income Fund
Smith Barney Global Bond Fund
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney Funds, Inc. -- Utility Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government Portfolio
Smith Barney Funds, Inc. -- Income Return Account Portfolio
*** Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
GROWTH AND INCOME FUNDS
Smith Barney Convertible Fund
Smith Barney Growth and Income Fund
Smith Barney Utilities Fund
Smith Barney Strategic Investors Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney World Funds -- International Balanced Portfolio
</TABLE>
39
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
SHAREHOLDER SERVICES (CONTINUED)
<TABLE>
<C> <S>
GROWTH FUNDS
Smith Barney Fundamental Value Fund Inc.
Smith Barney Telecommunications Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Global Opportunities Fund
Smith Barney European Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney Funds, Inc. -- Capital Appreciation Portfolio
MONEY MARKET FUNDS
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc. -- Cash Portfolio
++ Smith Barney Money Funds, Inc. -- Government Portfolio
*** Smith Barney Money Funds, Inc. -- Retirement Portfolio
*** Smith Barney Municipal Money Fund, Inc.
*** Smith Barney Muni Funds -- California Money Market Portfolio
*** Smith Barney Muni Funds -- New York Money Market Portfolio
<FN>
------------------------------
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B and Class C shares of the
Fund.
In addition, shareholders who own Class C shares of the Fund in a Smith
Barney 401(k) Program may exchange those shares for Class C shares of
this
fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A, Class C and Class Y shares of the
Fund.
In addition, shareholders who own Class C shares of the Fund in a Smith
Barney 401(k) Program may exchange those shares for Class C shares of
this
fund.
</TABLE>
CLASS A EXCHANGES. Class A shareholders of the funds in the Smith Barney
Group
of Funds sold without a sales charge or with a maximum sales charge of less
than
5.00% will be subject to the appropriate "sales charge differential" upon the
exchange of their shares for Class A shares of the Fund or other fund sold
with
a higher sales charge. The "sales charge differential" is limited to a
percentage rate no greater than the excess of the
40
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
SHAREHOLDER SERVICES (CONTINUED)
sales charge rate applicable to purchases of shares of the mutual fund being
acquired in the exchange over the sales charge rate(s) actually paid on the
mutual fund shares relinquished in the exchange and on any predecessor of
those
shares. For purposes of the exchange privilege, shares obtained through
automatic reinvestment of dividends and capital gains distributions, as
described below, are treated as having paid the same sales charges applicable
to
the shares on which the dividends or distributions were paid; however, except
in
the case of the Smith Barney 401(k) Program, if no sales charge was imposed
upon
the initial purchase of the shares, any shares obtained through automatic
reinvestment will be subject to a sales charge differential upon exchange.
CLASS B EXCHANGES. In the event a Class B shareholder (unless such
shareholder
was a Class B shareholder of the Short-Term World Fund on July 15, 1994)
wishes
to exchange all or a portion of his or her shares in any of the funds imposing
a
CDSC higher than that imposed by the Fund, the exchanged Class B shares will
be
subject to the higher applicable CDSC. Upon an exchange, the new Class B
shares
will be deemed to have been purchased on the same date as the Class B shares
of
the Fund that have been exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be deemed
to
have been purchased on the same date as the Class C shares of the Fund that
have
been exchanged.
CLASS Y EXCHANGES. Class Y shareholders of the Fund who wish to exchange all
or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any exchange fee or sales
charge.
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Although the
exchange
privilege is an important benefit, excessive exchange transactions can be
detrimental to the Fund's performance and its shareholders. The investment
adviser may determine that a pattern of frequent exchanges is excessive and
contrary to the best interests of the Fund's other shareholders. In this
event,
the investment adviser will notify Smith Barney and Smith Barney may, at its
discretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination, Smith Barney will provide notice in
writing or by telephone to the shareholder at least 15 days prior to
suspending
the exchange privilege and during the 15-day period the
41
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
SHAREHOLDER SERVICES (CONTINUED)
shareholder will be required to (a) redeem his or her shares in the Fund or
(b)
remain invested in the Fund or exchange into any of the funds in the Smith
Barney Group of Funds ordinarily available, which position the shareholder
would
be expected to maintain for a significant period of time. All relevant factors
will be considered in determining what constitutes an abusive pattern of
exchanges.
Exchanges will be processed at the net asset value next determined after the
redemption proceeds are available. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the
shares
of the fund exchanged, no signature guarantee is required. A capital gain or
loss for tax purposes will be realized upon the exchange, depending upon the
cost or other basis of shares redeemed. Before exchanging shares, investors
should read the current prospectus describing the shares to be acquired. The
Fund reserves the right to modify or discontinue exchange privileges upon 60
days' prior notice to shareholders.
- --------------------------------------------------------------------
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close
of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption
must specify the Class being redeemed. In the event of a failure to specify
which Class, or if the investor owns fewer shares of the Class than specified,
the redemption request will be delayed until the Fund's transfer agent
receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the seventh day following receipt of proper tender,
except on a day on which the NYSE is closed or as permitted under the Act in
extraordinary circumstances. Generally, if the redemption proceeds are
remitted
to a Smith Barney brokerage account, these funds will not be invested for the
shareholder's
42
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
benefit without specific instruction and Smith Barney will benefit from the
use
of temporarily uninvested funds. Redemption proceeds for shares purchased by
check, other than a certified or official bank check, will be remitted upon
clearance of the check, which may take up to ten days or more.
Shares may be redeemed in one of the following ways:
REDEMPTION THROUGH SMITH BARNEY
Redemption requests may be made through Smith Barney, an Introducing Broker
or
dealer in the selling group. A shareholder desiring to redeem shares
represented
by certificates must present the certificates to Smith Barney, the Introducing
Broker or dealer in the selling group endorsed for transfer (or accompanied by
an endorsed stock power), signed exactly as the shares are registered.
Redemption requests involving shares represented by certificates will not be
deemed received until the certificates are received by TSSG in proper form.
REDEMPTION BY MAIL
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. All other shares may
be
redeemed by submitting a written request for redemption to:
Smith Barney Premium Total Return Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request to TSSG or a Smith Barney 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 be accompanied by an endorsed stock power) and must be submitted
to
TSSG together with the redemption request. Any signature appearing on a
redemption request, share certificate or stock
43
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
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 with a value of at least $10,000 may elect to
receive periodic cash payments of at least $100 monthly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. For additional information, shareholders should
contact their Smith Barney Financial Consultants. Any applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed 1% per month of
the
value of the shareholder's shares subject to the CDSC at the time the
withdrawal
plan commences. With respect to withdrawal plans in effect prior to November
7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not
exceed
2% per month of the shareholder's shares subject to CDSC. For further
information regarding the automatic cash withdrawal plan, shareholders should
contact their Smith Barney Financial Consultants.
- --------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
44
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- --------------------------------------------------------------------
PERFORMANCE
TOTAL RETURN
From time to time, the Fund may advertise the "average annual total return"
over various periods of time for each Class. Such total return figures show
the
average percentage change in the 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 5% 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.
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 5% 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 indicate subtotals of the various components
of total return (that is, 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.
In reports or other communications to shareholders or in advertising
material,
performance of the respective 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 which
monitor
the performance of mutual funds, or other industry or financial publications,
such as BARRON'S, BUSINESS WEEK, CDA INVESTMENT TECHNOLOGIES, INC., FORBES,
FORTUNE, INSTITUTIONAL INVESTOR, MONEY,
45
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
PERFORMANCE (CONTINUED)
MORNINGSTAR MUTUAL FUND VALUES, THE NEW YORK TIMES, USA TODAY or 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 its other Class. 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 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 the distributor, investment adviser, sub-investment
adviser, administrator, sub-administrator, custodian and transfer agent. The
day-to-day operations of the Fund are delegated to the Fund's investment
adviser, sub-investment adviser, administrator and sub-administrator. The
Statement of Additional Information contains background information regarding
the Trustees and executive officers of the Trust.
INVESTMENT ADVISER--STRATEGY ADVISERS
Strategy Advisers, located at 1345 Avenue of the Americas, New York, New
York
10105, serves as the Fund's investment adviser. Strategy Advisers has been in
the investment counseling business since 1968. Strategy Advisers renders
investment advice to investment companies that had aggregate assets under
management as of in excess of billion. For advisory
services
rendered to the Fund, the Fund pays Strategy Advisers a fee at the annual rate
of 0.55% of the value of the Fund's average daily net assets.
ADMINISTRATOR--SBA
SBA, located at 1345 Avenue of the Americas, New York, New York 10105,
serves
as the Fund's administrator. SBA has been in the investment
46
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
counseling business since 1968 and renders investment management and
administration to a wide variety of individual, institutional and investment
company clients that had aggregate assets under management as of
_________________ in excess of ___ billion.
As the Fund's administrator, SBA oversees all aspects of the Fund's
administration and operations. Pursuant to an administration agreement with
the
Fund, SBA is paid a fee at the annual rate of .20% of the Fund's average daily
net assets.
SUB-INVESTMENT ADVISER AND SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-investment adviser and sub-administrator. Boston
Advisors provides investment management, investment advisory and/ or
administrative services to investment companies which had aggregate total
assets
under management, as of ________________ in excess of ___ billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
Strategy Advisers and Boston Advisors manage the Fund's portfolio in
accordance
with the Fund's investment objective and policies, make investment decisions
for
the Fund, place orders to purchase and sell securities and employ professional
portfolio managers and securities analysts who provide research services to
the
Fund. Boston Advisors also calculates the net asset value of the Fund's shares
and generally assists SBA in all aspects of the Fund's administration and
operation. Boston Advisors is paid a portion of the fee paid by the Fund to
SBA
at a rate agreed upon from time to time between Boston Advisors and SBA.
PORTFOLIO MANAGEMENT
John Fullerton, Senior Vice President of Boston Advisors, has served as
Investment Administrator (portfolio manager) of the Fund since it commenced
operations and manages the day-to-day operations of the Fund, including the
oversight of all investment decisions. In addition, Harry Rosenbluth, who also
serves as Investment Administrator, assists Mr. Fullerton in the management of
the Fund. Mr. Rosenbluth has managed investment portfolios since 1986 and has
been directly involved with the management of the Fund since 1992. It is
expected that Mr. Fullerton will
47
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
be taking a sabbatical during 1995. In his absence, it is anticipated that Mr.
Rosenbluth will assume responsibility for day-to-day management of the Fund.
Mr. Fullerton's management discussion and analysis and additional
performance
information regarding the Fund during the fiscal year ended July 31, 1994 is
included in the Annual Report dated July 31, 1994. A copy of the Annual Report
may be obtained upon request without charge from your Smith Barney Financial
Consultant or by writing or calling the Fund at the address or phone number
listed on page one of this Prospectus.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule
12b-1 under the Act (the "Plan"), Smith Barney is paid an annual service fee
with respect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.25% of the average daily net assets of each respective Class'
shares.
Smith Barney is also paid an annual distribution fee with respect to Class B
and
Class C shares at the annual rate of 0.50% of the average daily net assets
attributable to those shares. With regard to Class B shares that automatically
convert to Class A shares eight years after the date of original purchase,
these
shares will no longer be subject to distribution fees. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder
accounts
and, in the case of Class B and Class C shares, to cover expenses primarily
intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to
potential
investors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distribution
of shares; interest and/or carrying charges; and indirect and overhead costs
of
Smith Barney associated with the sale of Fund shares, including lease,
utility,
communications and sales promotion expenses.
48
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
Actual distribution and shareholder service expenses for Class B and Class C
shares of the Fund for any given year may exceed the fees received pursuant to
the Plan and will be carried forward and paid by the Fund in future years so
long as the Plan is in effect. Interest is accrued monthly on such
carryforward
amounts at a rate comparable to that paid by Smith Barney for bank borrowings.
- --------------------------------------------------------------------
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, July 30, 1993 and October 14, 1994, the
Trust
changed its name to Shearson Lehman Special Income Portfolios, SLH Income
Portfolios, Shearson Lehman Brothers Income Portfolios, Smith Barney Shearson
Income Funds and Smith Barney Income Funds, respectively. On May 11, 1992 and
on
November 5, 1992, the Fund changed its name from Option Income Portfolio Fund
to
Premium Total Return Portfolio and Premium Total Return Fund, respectively,
and
began operations with its current investment objective on May 11, 1992. On
July
30, 1993 and October 14, 1994, the Fund changed its name from Shearson Lehman
Brothers Premium Total Return Fund to Smith Barney Shearson Premium Total
Return
Fund and to Smith Barney Premium Total Return Fund, respectively. The Trust
offers shares of beneficial interest of separate series having a $.001 per
share
par value.
Each Class of shares represents identical interests in the Fund's investment
portfolio. As a result, the classes have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b)
the
effect of the respective sales charges if any, for each Class; (c) the
distribution and/or service fees if any, borne by each Class pursuant to the
plan; (d) the expenses allocable exclusively to each Class; (e) voting rights
on
matters exclusively affecting a single Class; (f) the exchange privilege of
each
Class; and (g) the conversion feature of the Class B shares. The Board of
Trustees does not anticipate that there will be any conflicts among the
49
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
interests of the holders of the different Classes of shares of the Fund. The
Trustees, on an ongoing basis, will consider whether any such conflict exists
and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
of
each fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Generally, shares
of the Trust vote by individual fund on all matters except (a) matters
affecting
only the interest of one or more of the funds, in which case only shares of
the
affected fund or funds would be entitled to vote, or (b) when the 1940 Act
requires that shares of the funds be voted in the aggregate. Similarly, shares
of the Fund will be voted generally on a Fund-wide basis except on matters
affecting the interests of one Class of shares.
Normally, there will be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. Shareholders of
record of no less than two-thirds of the outstanding shares of the Trust may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. The Trustees will call a
meeting
for any purpose upon written request of shareholders holding at least 10% of
the
Fund's outstanding shares.
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston
Place,
Boston, Massachusetts 02108, and serves as custodian of the Trust's
investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as
the Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, each of which includes a listing of the investment securities held by
the Fund at the end of the reporting period. In an effort to reduce the
printing
and mailing costs, the Trust plans to consolidate the mailing of the Fund's
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Trust also plans to
consolidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (that is, individual, IRA and/or Self-Employed Retirement
Plan
accounts) will receive a single Prospectus
50
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
annually. Any shareholder who does not want this consolidation to apply to his
or her account should contact his or her Financial Consultant or TSSG.
Shareholders may seek information regarding the Fund and the Trust from their
Smith Barney 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.
51
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
Date of Letter:
Date of Purchase(s): (must be within 90 days of the date of the letter):
LETTER OF INTENT (Please check one only)
- ------- I wish to establish a new Letter of Intent. (If cumulative discount or
90-day backdate privilege is applicable, provide the amount and
account(s) information below.)
- ------- Please apply this purchase to any existing Letter of Intent with the
account(s) listed below.
- ------- Please amend my existing Letter of Intent with the new amount
indicated
below.
If establishing a Letter of Intent, you will need to purchase over a
thirteen-month period in accordance with the provisions of the prospectus. The
aggregate amount of these purchases will be at least equal to the amount
listed
below:
-- $50,000
-- $100,000
-- $250,000
-- $500,000
<TABLE>
<S> <C>
- -------------------------------- --------------------------------
Fund Name Account Number
- -------------------------------- --------------------------------
Fund Name Account Number
- -------------------------------- --------------------------------
Fund Name Account Number
</TABLE>
Subject to conditions specified below, each purchase of shares of the Fund
or
shares of one or more of the funds within the Smith Barney Group of Funds
during
the 13-month period subsequent to the date of this Letter will be made at the
public offering price applicable to a single transaction of the dollar amount
indicated, as described in the then effective prospectus. The offering price
may
be further reduced under the Rights of Accumulation discount if the Fund is
advised of any shares of this or other Smith Barney fund(s) previously
purchased
and still owned. The purchaser may at any time during the period revise upward
the stated intention by submitting a written request to this effect. Such
revision shall provide for the escrowing of additional shares. The original
period of the Letter, however, shall remain unchanged. Each separate purchase
made pursuant to the Letter is subject to
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND
the terms and conditions contained in the prospectus in effect at the time of
that particular purchase. It is understood that the purchaser makes no
commitment to purchase additional shares, but if those shares previously
purchased at the original public offering price, under the Rights of
Accumulation discount, together with purchases so made within thirteen months
from this date do not aggregate the amount specified when valued at the public
offering price, the purchaser must pay the difference between the sales
charges
applicable to the purchases made and charges previously paid, or an
appropriate
number of escrowed shares will be redeemed. The purchaser(s) or the
purchaser's
dealer must refer to this Letter of Intent in placing each future order for
shares while this Letter is in effect. This cancels and supersedes any
previous
instructions which the purchaser may have given inconsistent with the above.
Client Name:
- -----------------------------------
Client Signature:
- --------------------------------
Financial Consultant:
- ----------------------------
- ----------------------------
<PAGE>
SMITH BARNEY
PREMIUM TOTAL RETURN 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
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
John B. Fullerton
INVESTMENT ADMINISTRATOR
Harry Rosenbluth
INVESTMENT ADMINISTRATOR
Lewis E. Daidone
TREASURER
Christina T. Sydor
SECRETARY
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Smith Barney Strategy Advisers Inc.
1345 Avenue of the Americas
New York, New York 10105
ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-INVESTMENT ADVISER
AND SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
52
<PAGE>
SMITH BARNEY
PREMIUM
TOTAL RETURN
FUND
388 Greenwich Street
New York, New York 10013
Fund 17, 178, 247
FD0213 I4
<PAGE>
- ------------------------------------------------------------------------------
- --
- ------------------------------------------------------------------------------
- --
November 7, 1994
SMITH BARNEY
Diversified
Strategic
Income
Fund
Prospectus begins
on page one.
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PROSPECTUS November 7, 1994
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The Diversified Strategic Income Fund (the "Fund"), a diversified fund,
seeks high current income primarily through investment in fixed-income
securities. The Fund attempts to achieve this objective by allocating and
reallocating its assets primarily among various types of fixed-income
securities
selected by its investment adviser on the basis of an analysis of economic and
market conditions and the relative risks and opportunities of those types of
fixed-income securities. The Fund is one of a number of funds, each having
distinct investment objectives and policies, making up the Smith Barney Income
Funds (the "Trust"). The Trust is an open-end management investment company
commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information about the Fund
and
the Trust, including sales charges, distribution and service fees and
expenses,
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 funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the
telephone
number set forth above or by contacting your Smith Barney Financial
Consultant.
Additional information about the Fund and the Trust is contained in a
Statement of Additional Information dated November 7, 1994, as amended or
supplemented from time to time, that is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting your Smith Barney Financial Consultant. The
Statement of Additional Information has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into this
Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
GREENWICH STREET ADVISORS
Investment Adviser
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Sub-Investment Adviser
SMITH, BARNEY ADVISERS, INC.
Administrator
THE BOSTON COMPANY ADVISORS, INC.
Sub-Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A
CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
<TABLE>
- ------------------------------------------------------------------------------
- --
TABLE OF CONTENTS
<S> <C>
PROSPECTUS SUMMARY 3
---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 12
---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 15
---------------------------------------------------------------------------
VALUATION OF SHARES 30
---------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 31
---------------------------------------------------------------------------
PURCHASE OF SHARES 33
---------------------------------------------------------------------------
SHAREHOLDER SERVICES 44
---------------------------------------------------------------------------
REDEMPTION OF SHARES 48
---------------------------------------------------------------------------
MINIMUM ACCOUNT SIZE 50
---------------------------------------------------------------------------
PERFORMANCE 51
---------------------------------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 52
---------------------------------------------------------------------------
DISTRIBUTOR 53
---------------------------------------------------------------------------
ADDITIONAL INFORMATION 54
---------------------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross references in this summary are to headings in the
Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end diversified management
investment
company that seeks high current income primarily through investment in
fixed-income securities. The Fund attempts to achieve this objective by
allocating and reallocating its assets primarily among various types of fixed-
income securities selected by its investment adviser on the basis of an
analysis
of economic and market conditions and the relative risks and opportunities of
those types of fixed-income securities. See "Investment Objective and
Management
Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of shares
("Classes") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of
expenses
to which they are subject. A fourth Class of shares, Class Y shares, is
offered
only to investors meeting an initial investment minimum of $5,000,000. In
addition, a fifth Class, Class Z shares, which is offered pursuant to a
separate
prospectus, is offered exclusively to (a) tax-exempt employee benefit and
retirement plans of Smith Barney Inc. ("Smith Barney") and its affiliates and
(b) unit investment trusts ("UITs") sponsored by Smith Barney and its
affiliates. See "Purchase of Shares," "Redemption of Shares" and "Smith Barney
401(k) Program."
Class A Shares. Class A shares are sold at net asset value plus an initial
sales charge of up to 5.00% imposed at the time of purchase. This initial
sales
charge may be reduced or waived for certain purchases. See "Reduced or No
Initial Sales Charge" below. Class A shares also bear an annual service fee of
0.25% of the average daily net assets of the Class A shares. Purchases of
Class
A shares, which when combined with current Class A shares equal or exceed
$500,000 in the aggregate, will be made at net asset value with no sales
charge,
but will be subject to a contingent deferred sales charge ("CDSC") of 1.00% on
redemptions made within 12 months of purchase. Smith Barney recommends that,
in
view of the relative sales charge and distribution fees applicable to the
classes, single investment of $5,000,000 or more should be directed toward
Class
Y shares. Shareholders of Class C shares may also qualify for purchase of
Class
A shares within certain conditions. See "Class C Shares."
3
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PROSPECTUS SUMMARY (CONTINUED)
Class B Shares. Class B shares are offered at net asset value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by 1% each year after
the date of purchase to zero. This CDSC may be waived for certain redemptions.
Class B shares bear an annual service fee of 0.25% and an annual distribution
fee of 0.50% of the average daily net assets of this Class. The Class B
shares'
distribution fee will cause that Class to have higher expenses and pay lower
dividends than Class A shares. Smith Barney recommends that, in view of the
relative sales charge and distribution fees applicable to the Classes, singles
investments of $250,000 or more should be directed toward Class A shares.
Class B Shares Conversion Feature. Class B shares will convert automatically
to
Class A shares, based on relative net asset value, eight years after the date
of
the original purchase. Upon conversion, these shares will no longer be subject
to annual distribution fees. 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 Class B shares (other than Class
B
Dividend Shares). 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 C Shares. Class C shares are sold at net asset value with no initial
sales charge at the time of purchase. They bear an annual service fee of 0.25%
and an annual distribution fee of 0.50% of the average daily net asset of the
Class C shares, and investors pay a CDSC of 1.00% if they redeem Class C
shares
within 12 months of purchase. This CDSC may be waived for certain redemptions.
The Class C shares' distribution fee will cause that Class to have higher
expenses and pay lower dividends than Class A shares. Purchases of Class C
shares, which when combined with current holdings of Class C shares of the
Fund
equal or exceed $500,000 in the aggregate, should be made in Class A shares at
net asset value with no sales charge, and will be subject to a CDSC of 1% on
redemptions made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to investors meeting an
initial investment minimum of $5,000,000. Class Y shares are sold at net asset
value with no initial sales charge at the time of purchase. They bear no
service
or distribution fees.
4
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PROSPECTUS SUMMARY (CONTINUED)
In deciding which class of Fund shares to purchase, investors should
consider the following factors, as well as any other relevant facts and
circumstances.
Intended Holding Period. The decision as to which Class of shares is more
beneficial to you depends on the amount and intended length of your
investment.
Shareholders who are planning to establish a program of regular investment may
wish to consider Class A shares; as the investment accumulates shareholders
may
qualify for reduced sales charge and the shares are subject to lower ongoing
expenses over the term of the investment. Class B shares are suitable for
single
investments below $250,000 in instances where an investor has a timeframe of
five years or more; Class "C" shares are appropriate for investors with
shorter
investment timeframes generally two years or less. In the case of both Class B
and Class C shares, the investor would pay no up front sales charge but would
be
subject to a distribution fee not applicable to an investment in Class A
shares,
as well as CDSC. If you are investing a minimum of $5,000,000, you should
purchase Class Y shares because there is no initial sales charge, no CDSC and
no
service or distribution fee charges against such shares. The maximum purchase
of
Class A shares is $4,999,999. The maximum purchase of Class B shares if
$249,999. The maximum purchase of Class C shares is $499,999. There is no
maximum purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The entire initial sales charge on Class
A
shares may be waived for certain eligible purchasers, and these purchasers'
entire purchase price would be immediately invested in the Fund. In addition,
Class A share purchases, which when combined with current Class A shares equal
or exceed $500,000 in the aggregate, may be made at net asset value with no
initial sales charge, but will be subject to a CDSC of 1.00% on redemptions
made
within 12 months of purchase. The $500,000 aggregate investment may be met by
aggregating the purchase with the net asset value of all Class A shares held
in
funds sponsored by Smith Barney listed under "Shareholder Services--Exchange
Privileges." Class A share purchases made under the Fund's reduced sales
charge
plans may be made at a reduced initial sales charge (See "Purchase of
Shares").
Because the ongoing expenses of Class A shares will be lower than those for
Class B and Class C shares, purchasers eligible to purchase Class A shares at
net asset value or at a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different compensation for
selling each class of shares. Investors should understand that the purpose of
the
5
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PROSPECTUS SUMMARY (CONTINUED)
CDSC on the Class B and Class C shares is the same as that of the initial
sales
charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and the Fund" for a
complete description of the sales charges and service and distribution fees
for
each class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Shareholder Services" for other differences between the classes of
shares.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith barney 401(k)
Program, which is generally designed to assist 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, Class C and Class Y shares are
available as investment alternatives for Participating Plans. See "Purchase of
Shares--Smith Barney 401(k) Program."
PURCHASE OF SHARES
Shares may be purchased through the Fund's distributor, Smith Barney, a
broker that clears securities transactions through Smith Barney on a fully
disclosed basis (as "Introducing Broker") or an investment dealer in the
selling
group. Direct purchases by certain retirement plans may be made through the
Fund's transfer agent, The Shareholder Services Group, Inc. ("TSSG"), a
subsidiary of First Data Corporation. See "Purchase of Shares."
INVESTMENT MINIMUMS
Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account, or $250 for
an
individual retirement account ("IRA") or a Self-Employed Retirement Plan.
Investors in Class Y shares may open an account for an initial investment of
$5,000,000. Subsequent investments of at least $50 may be made for all Classes
except Class Y, which has no subsequent minimum requirement. For participants
in
retirement plans qualified under Section 403(b)(7) or Section 401(a) of the
Code, the minimum initial and subsequent investment requirement is $25. The
minimum and subsequent investment through the Systematic Investment Plan is
$100. There is no minimum investment amount for (a) employees of The Travelers
Inc. and its subsidiaries, including Smith Barney and (b) unitholders of a UIT
sponsored by Smith Barney. See "Purchase of Shares."
6
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PROSPECTUS SUMMARY (CONTINUED)
SYSTEMATIC INVESTMENT PLAN
The Fund offers shareholders a Systematic Investment Plan under which
they
may authorize the automatic placement of a purchase order each month or
quarter
for Fund shares in an amount of at least $100. See "Purchase of Shares."
REDEMPTION OF SHARES
Shares may be redeemed on each day the New York Stock Exchange, Inc.
("NYSE") is open for business. Class A and Class Y shares are redeemable at
net
asset value and Class B and Class C shares are redeemable at net asset value
less any applicable CDSC. See "Redemption of Shares."
MANAGEMENT OF THE FUND
Greenwich Street Advisors, a division of Mutual Management Corp.
("Greenwich Street Advisors") serves as the Fund's investment adviser. Mutual
Management Corp. provides investment advisory and management services to
investment companies affiliated with Smith Barney. Smith Barney is a wholly
owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), which is in turn
a
wholly owned subsidiary of The Travelers Inc. ("Travelers"). Travelers is a
diversified financial services company engaged through its subsidiaries
principally in the business of consumer financial, investment and insurance
services.
Smith Barney Global Capital Management Inc. ("Global Capital Management")
serves as a sub-investment adviser to the Fund. Global Capital Management is a
wholly owned subsidiary of Holdings.
Smith, Barney Advisers Inc. ("SBA") serves as the Fund's administrator.
SBA
is a wholly owned subsidiary of Holdings.
The Boston Company Advisors, Inc. ("Boston Advisors") serves as the
Fund's
sub-administrator. Boston Advisors is a wholly owned subsidiary of The Boston
Company, Inc. ("TBC"), a financial services holding company, which is a wholly
owned subsidiary of Mellon Bank Corporation ("Mellon"). See "Management of the
Trust and the Fund."
EXCHANGE PRIVILEGE
Shares of a Class may be exchanged for shares of the same class of
certain
other funds in the Smith Barney Group of Funds. Certain exchanges may be
subject
to a sales charge differential. See "Shareholder Services."
7
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PROSPECTUS SUMMARY (CONTINUED)
VALUATION OF SHARES
Net asset value of the Fund is generally quoted daily in the financial
section of most newspapers and is also available from your Smith Barney
Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS
Dividends are paid monthly from net investment income and distributions
are
paid annually from net long-term capital gains, although distributions of
short-term capital gains may be paid more frequently than annually. See
"Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS
Dividends and distributions paid on shares of a Class will be reinvested
automatically unless otherwise specified by an investor in additional shares
of
the same Class at current net asset value. Shares acquired by dividend and
distribution reinvestments will not be subject to any sales charge or CDSC.
Class B shares acquired through dividend and distribution reinvestments will
become eligible for conversion to Class A shares on a pro-rata basis. See
"Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS
There can be no assurance that the Fund will achieve its investment
objective. General changes in interest rates will result in increases or
decreases in the market value of the obligations held by the Fund. The Fund
may
invest up to 35% of its assets in corporate fixed-income securities of
domestic
issuers rated Ba or lower by Moody's Investors Service, Inc. ("Moody's") or BB
or lower by Standard & Poor's Corporation ("S&P") or in nonrated securities
deemed by Greenwich Street Advisors to be of comparable quality. The Fund may
invest in fixed-income securities rated as low as Caa by Moody's or CCC by
S&P.
Securities that are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities that are rated B generally lack characteristics of the desirable
investment and assurance of interest and principal payments over any long
period
of time may be small. Securities that are rated Caa or CCC are of poor
standing.
These issues may be in default or present elements of danger may exist with
respect to principal or interest. Although medium-or low-rated securities
offer
a higher current yield than the yield offered by higher rated securities, they
8
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PROSPECTUS SUMMARY (CONTINUED)
involve greater volatility of price and risk of loss of income and principal,
including the probability of default by or bankruptcy of the issuers of such
securities. Medium-and low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment
of
the rating organization, are outweighed by large uncertainties of major risk
exposures to adverse conditions and (b) are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The Fund's investing in the
securities of foreign issuers involves special risks and considerations not
typically associated with investing in domestic issuers. These risks include
differences in accounting, auditing and financial reporting standards,
generally
higher commission rates on foreign portfolio transactions, the possibility of
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations, political instability that could affect domestic
investments in foreign countries and potential restrictions on the flow of
international capital. Foreign securities often trade with less frequency and
volume than domestic securities and therefore may exhibit greater price
volatility and changes in foreign exchange rates will affect the value of
those
securities held by the Fund that are denominated or quoted in currencies other
than the U.S. dollar. Certain of the investments held by the Fund and certain
of
the investment strategies that the Fund may employ might expose it to certain
risks. The investments presenting the Fund with risks are mortgage-related
securities, medium-or low-rated securities, as described above, foreign
securities, as described above, and securities of unseasoned issuers. The
investment strategies presenting the Fund with risks are entering in
repurchase
agreements and reverse repurchase agreements, entering into forward roll
transactions, purchasing or selling securities on a when-issued or delayed-
delivery basis, lending portfolio securities, entering into transactions
involving options and futures contracts and entering into currency
transactions.
See "Investment Objective and Management Policies."
9
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PROSPECTUS SUMMARY (CONTINUED)
<TABLE>
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an
investor will incur either directly or indirectly as a shareholder of the
Fund,
based on the maximum sales charge or maximum CDSC that may be incurred at the
time of purchase or redemption and an estimate of the Fund's operating
expenses
for its most recent fiscal year:
<CAPTION>
CLASS CLASS
CLASS CLASS
A B C
Y
<S> <C> <C> <C>
<C>
- ------------------------------------------------------------------------------
- ----------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None None
None
Maximum CDSC
(as a percentage of redemption proceeds) None* 4.50%%
1.00% None
- ------------------------------------------------------------------------------
- ----------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees .65% .65%
.65% --
12b-1 fees** 0.25 .75 .75
- --
Other expenses*** .20 .19 .10
- --
- ------------------------------------------------------------------------------
- ----------
TOTAL FUND OPERATING EXPENSES 1.10% 1.59%
1.50%
- ------------------------------------------------------------------------------
- ----------
<FN>
* Purchase of Class A shares, which when combined with current Class A
shares equal or exceed $500,000 in the aggregate, will be made at net
asset value with no sales charge, but will be subject to a CDSC of 1%
on
redemptions made within 12 months.
** Upon conversion, Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee. Class C shares do not have a
conversion feature and, therefore, are subject to an ongoing
distribution
fee. As a result, long-term shareholders of Class C shares may pay more
than the economic equivalent of the maximum front-end sales charge
permitted by the National Association of Securities Dealers, Inc.
*** "Other expenses" are based on data for the Fund's fiscal year ended
July
31, 1994. For Class Y shares "Other Expenses" have been based on
expenses
incurred with respect to the Class A shares.
</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 and Class C 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 Greenwich Street Advisors at the annual rate of .35% of
the value of the Fund's average daily net assets, sub-investment advisory fees
paid to Global Capital Management at the annual rate of .10% of the value of
the
Fund's average daily net assets, and administration
10
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PROSPECTUS SUMMARY (CONTINUED)
fees paid to SBA 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
receives an annual 12b-1 fee of .25% of the value of average daily net assets
of
Class A shares. Smith Barney also receives with respect to Class B and Class C
shares an annual 12b-1 fee of .75% of the value of average daily net assets of
Class B shares and Class C 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.
<TABLE>
The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or
indirectly.
The example assumes payment by the Fund of operating expenses at the levels
set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Fund."
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS
10 YEARS*
- ------------------------------------------------------------------------------
- -------
<S> <C> <C> <C>
<C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A $ $ $
$
Class B
Class C
Class Y
You would pay the following expenses on the same
investment, assuming the same annual return and
no redemption:
Class A
Class B
Class C
Class Y
<FN>
- ------------------------------------------------------------------------------
- --
* Ten-year figures assume conversion of Class B shares to Class A shares at
the
end of the eighth year following the date of purchase.
</TABLE>
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5% annual
return assumption. This example should not be considered a representation of
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
return
will vary and may result in an actual return greater or less than 5%.
11
<PAGE>
SMITH BARNEY
Diversified Strategic Income 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, 1994. This information should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report,
which
is incorporated by reference into the Statement of Additional Information.
<TABLE>
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT THE PERIOD:
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94++
7/31/93*
<S>
<C>
Net asset value, beginning of period $
8.24
- ------------------------------------------------------------------------------
- -------
Income from investment operations:
Net investment income
0.47
Net realized and unrealized gain on investments
0.27
- ------------------------------------------------------------------------------
- -------
Total from investment operations
0.74
Distributions to shareholders:
Distributions from net investment income
(0.45)
Distributions from net realized capital gains
(0.12)
- ------------------------------------------------------------------------------
- -------
Total Distributions
(0.57)
- ------------------------------------------------------------------------------
- -------
Net asset value, end of period $
8.41
- ------------------------------------------------------------------------------
- -------
Total return+
9.30%
- ------------------------------------------------------------------------------
- -------
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's)
$48,334
Ratio of operating expenses to average net assets
1.10% **
Ratio of net investment income to average net assets
8.26% **
Portfolio turnover rate
116%
- ------------------------------------------------------------------------------
- -------
<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.
++ As of March 22, 1994, the Fund changed its sub-investment adviser from
Lehman Brothers Global Asset Management to its current sub-investment
adviser Global Capital Management.
</TABLE>
12
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
<TABLE>
- ------------------------------------------------------------------------------
- --
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<CAPTION>
YEAR YEAR YEAR YEAR
PERIOD
ENDED ENDED ENDED ENDED
ENDED
7/31/94++ 7/31/93 7/31/92 7/31/91
7/31/90*
<S> <C> <C> <C>
<C>
Net asset value, beginning of year $ 8.55 $ 7.98 $ 8.06
$ 8.00
- ------------------------------------------------------------------------------
- ------------
Income from investment operations:
Net investment income 0.65 0.68 0.71
0.41
Net realized and unrealized
gain/(loss) on investments (0.07) 0.64 0.07
0.05
- ------------------------------------------------------------------------------
- ------------
Total from investment operations 0.58 1.32 0.78
0.46
Distributions to Shareholders:
Distributions from net investment income (0.58) (0.68)
(0.71) (0.40)
Distributions from net realized
capital gains (0.14) --
(0.06) --
Distributions from capital -- (0.07)
(0.09) --
- ------------------------------------------------------------------------------
- ------------
Total Distributions (0.72) (0.75)
(0.86) (0.40)
- ------------------------------------------------------------------------------
- ------------
Net asset value, end of year $ 8.41 $ 8.55 $ 7.98
$ 8.06
- ------------------------------------------------------------------------------
- ------------
Total return+ 7.28% 17.12%
10.42% 6.00%
- ------------------------------------------------------------------------------
- ------------
Ratios to average net
assets/Supplemental Data:
Net assets, end of year (in 000's) $2,105,089 $1,464,744 $502,571
$179,496
Ratio of operating expenses to
average net assets 1.59% 1.62%
1.63% 1.74%**
Ratio of net investment income to
average net assets 7.77% 7.99%
9.21% 9.59%**
Portfolio turnover rate 116% 125%
131% 56%
- ------------------------------------------------------------------------------
- ------------
<FN>
* The Fund commenced operations on December 28, 1989. 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.
++ As of March 22, 1994, the Fund changed its sub-investment adviser from
Lehman Brothers Global Asset Management to its current sub-investment
adviser Global Capital Management.
</TABLE>
13
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD:
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
7/31/94++
7/31/93*
<S>
<C>
Net asset value, beginning of period
$ 8.36
- ------------------------------------------------------------------------------
- -------
Income from investment operations:
Net investment income
0.22
Net realized and unrealized gain on investments
0.06
- ------------------------------------------------------------------------------
- -------
Total from investment operations
0.28
Distributions to shareholders:
Distributions from net investment income
(0.20)
Distributions from net realized capital gains
(0.03)
- ------------------------------------------------------------------------------
- -------
Total Distributions
(0.23)
- ------------------------------------------------------------------------------
- -------
Net asset value, end of period
$ 8.41
- ------------------------------------------------------------------------------
- -------
Total return+
3.41%
- ------------------------------------------------------------------------------
- -------
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's)
$ 11
Ratio of operating expenses to average net assets
1.50% **
Ratio of net investment income to average net assets
7.87% **
Portfolio turnover rate
116%
- ------------------------------------------------------------------------------
- -------
<FN>
* The Fund commenced selling Class C shares (previously designated as Class
D
shares) on March 19, 1993.
** Annualized.
+ Total return represents aggregate total return for the period indicated.
++ As of March 22, 1994, the Fund changed its sub-investment adviser from
Lehman Brothers Global Asset Management to its current sub-investment
adviser Global Capital Management.
</TABLE>
14
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund's investment objective is high current income primarily through
investment in fixed-income securities. In attempting to achieve its objective,
the Fund allocates and reallocates its assets primarily among various types of
fixed-income securities selected by Greenwich Street Advisors. The types of
fixed-income securities among which the Fund's assets will be primarily
allocated are: obligations issued or guaranteed as to principal and interest
by
the United States government ("U.S. government securities"); mortgage-related
securities issued by various governmental and non-governmental entities;
domestic and foreign corporate securities; and foreign government securities.
The Fund's investment objective may be changed only with the approval of the
holders of a majority of the Fund's outstanding shares. There can be no
assurance that the Fund will achieve its investment objective.
The allocation and reallocation of the Fund's assets will be undertaken by
Greenwich Street Advisors on the basis of its analysis of economic and market
conditions and the relative risks and opportunities of particular types of
fixed-income securities. In general, the particular types of fixed-income
securities selected for investment by the Fund at any given time will be those
that, in the view of Greenwich Street Advisors, offer the highest income
available at the time. The Fund typically would not invest in fixed-income
securities offering the highest income potential if Greenwich Street Advisors
determined that the income potential is not sufficient to justify the higher
risks associated with the securities.
At any given time, the Fund may be entirely or only partially invested in
a
particular type of fixed-income security. Under normal conditions, at least
65%
of the Fund's assets will be invested in fixed-income securities, which for
this
purpose will include non-convertible preferred stocks. The Fund generally will
invest in intermediate-and long-term fixed-income securities with the result
that, under normal market conditions, the weighted average maturity of the
Fund's securities is expected to be between five and 12 years.
Mortgage-related securities in which the Fund may invest include mortgage
obligations collateralized by mortgage loans or mortgage pass-through
certificates. Under current market conditions, the Fund's holdings of
mortgage-related securities may be expected to consist primarily of securities
issued or guaranteed by Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC"). The composition of the Fund's investments in mortgage-
related securities, however, will vary from time to time based upon the
determination of Greenwich Street Advisors on how best to achieve the Fund's
15
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
investment objective taking into account factors such as the liquidity and
yield of various mortgage-related securities. Mortgage-related securities held
by the Fund generally will be rated no lower than Aa by Moody's or AA by S&P
or,
if not rated, will be of equivalent investment quality as determined by
Greenwich Street Advisors. Greenwich Street Advisors also may consider the
ratings, if any, assigned to mortgage-related securities by recognized rating
agencies other than Moody's and S&P.
The Fund typically will purchase a corporate debt security if Greenwich
Street Advisors believes that the yield and, to a lesser extent, the potential
for capital appreciation, of the security are sufficiently attractive in light
of the risks of ownership of the security. In determining whether the Fund
should invest in particular debt securities, Greenwich Street Advisors will
consider factors such as: the price, coupon and yield to maturity; Greenwich
Street Advisors' assessment of the credit quality of the issuer; the issuer's
available cash flow and the related coverage ratios; the property, if any,
securing the obligation; and the terms of the debt securities, including the
subordination, default, sinking fund and early redemption provisions.
Greenwich
Street Advisors also will review the ratings, if any, assigned to the
securities
by Moody's, S&P or other recognized rating agencies. Greenwich Street
Advisors'
judgment as to credit quality of a debt security may differ, however, from
that
suggested by the ratings published by a rating service.
The Fund may invest up to 35% of its assets in corporate fixed-income
securities of domestic issuers rated Ba or lower by Moody's or BB or lower by
S&P or in nonrated securities deemed by Greenwich Street Advisors to be of
comparable quality. The Fund may invest in fixed-income securities rated as
low
as Caa by Moody's or CCC by S&P.
Corporate fixed-income securities of foreign issuers in which the Fund may
invest will include securities of companies, wherever organized, that have
their
principal business activities and interests outside the United States. Foreign
government securities in which the Fund may invest consist of fixed-income
securities issued by foreign governments. In general, the Fund may invest in
debt securities issued by foreign governments or any of their political
subdivisions that are considered stable by Global Asset Management. Up to 5%
of
the Fund's assets, however, may be invested in foreign securities issued by
countries with developing economies.
The Fund may invest in fixed-income securities issued by supranational
organizations, which are entities designated or supported by a government or
governmental entity to promote economic development, and include, among
16
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
others, the Asian Development Bank, the European Coal and Steel Community,
the European Economic Community and the World Bank. These organizations have
no
taxing authority and are dependent upon their members for payments of interest
and principal. Moreover, the lending activities of supranational entities are
limited to a percentage of their total capital (including "callable capital"
contributed by members at an entity's call), reserves and net income.
ADDITIONAL INVESTMENTS
Money Market Instruments. Up to 20% of the Fund's assets may be invested
in
cash and money market instruments at any time. In addition, when Greenwich
Street Advisors believes that market conditions warrant, the Fund may invest
in
short-term instruments without limitation for temporary defensive posture.
Short-term instruments in which the Fund may invest include: U.S. government
securities; certain bank obligations (including certificates of deposit, time
deposits and bankers' acceptances of domestic or foreign banks, domestic
savings
and loan associations and similar institutions); commercial paper rated no
lower
than Prime-2 by Moody's or A-2 by S&P or the equivalent from another major
rating service or, if unrated, of an issuer having an outstanding, unsecured
debt issue then rated within the three highest rating categories; and
repurchase
agreements with respect to the securities in which the Fund may invest. The
Fund
will invest in obligations of a foreign bank or foreign branch of a domestic
bank only if Greenwich Street Advisors determines that the obligations present
minimum credit risks. These obligations may be traded in the United States or
outside the United States, but will be denominated in U.S. dollars.
U.S. Government Securities. The U.S. government securities in which the
Fund may invest include, direct obligations of the United States Treasury
(such
as Treasury Bills, Treasury Notes and Treasury Bonds), and obligations issued
by
U.S. government agencies and instrumentalities, including: securities that are
supported by the full faith and credit of the United States (such as GNMA
certificates); securities that are supported by the right of the issuer to
borrow from the United States Treasury (such as securities of Federal Home
Loan
Banks); and securities that are supported by the credit of the instrumentality
(such as FNMA and FHLMC bonds). Treasury Bills have maturities of less than
one
year, Treasury Notes have maturities of one to 10 years and Treasury Bonds
generally have maturities of greater than 10 years at the date of issuance.
Certain U.S. government securities, such as those issued or guaranteed by
GNMA,
FNMA and FHLMC, are mortgage-related securities. U.S. government
17
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
securities generally do not involve the credit risks associated with other
types of interest-bearing securities, although, as a result, the yields
available from U.S. government securities are generally lower than the yields
available from interest-bearing corporate securities.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained
in
the Statement of Additional Information.
Repurchase Agreements. The Fund may engage in repurchase agreement
transactions with certain member banks of the Federal Reserve System and with
certain dealers on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the Fund would
acquire an underlying debt obligation for a relatively short period (usually
not
more than one week) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This arrangement
results
in a fixed rate of return that is not subject to market fluctuations during
the
Fund's holding period. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase obligation, including
interest. Repurchase agreements could involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities,
the risk of a possible decline in the value of the underlying securities
during
the period in which the Fund seeks to assert its rights to them, the risk of
incurring expenses associated with asserting those rights and the risk of
losing
all or part of the income from the agreement. Greenwich Street Advisors,
Global
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.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase
agreement transactions with member banks of the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is
considered a borrowing by the Fund, involves a sale by the Fund of securities
that it holds concurrently with an agreement by the Fund to repurchase the
same
securities at an agreed-upon price and date. The Fund typically will invest
18
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the proceeds of a reverse repurchase agreement in money market instruments
or repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The Fund
will enter into a reverse repurchase agreement for leverage purposes only when
the interest income to be earned from the investment of the proceeds is
greater
than the interest expense of the transaction. The Fund also may use the
proceeds
of reverse repurchase agreements to provide liquidity to meet redemption
requests when the sale of the Fund's securities is considered to be
disadvantageous.
Forward Roll Transactions. In order to enhance current income, the Fund
may
enter into forward roll transactions with respect to mortgage-related
securities
issued by GNMA, FNMA and FHLMC. In a forward roll transaction, the Fund sells
a
mortgage security to a financial institution, such as a bank or broker-dealer,
and simultaneously agrees to repurchase a similar security from the
institution
at a later date at an agreed-upon price. The mortgage securities that are
repurchased will bear the same interest rate as those sold, but generally will
be collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase,
the Fund will not be entitled to receive interest and principal payments on
the
securities sold. Proceeds of the sale will be invested in short-term
instruments, particularly repurchase agreements, and the income from these
investments, together with any additional fee income received on the sale will
generate income for the Fund exceeding the yield on the securities sold.
Forward
roll transactions involve the risk that the market value of the securities
sold
by the Fund may decline below the repurchase price of those securities. At the
time the Fund enters into forward roll transactions, it will place in a
segregated account with the Trust's custodian, Boston Safe Deposit and Trust
Company ("Boston Safe"), cash, U.S. government securities or high grade debt
obligations having a value equal to the repurchase price (including accrued
interest) and will subsequently monitor the account to insure that such
equivalent value is maintained.
When-Issued Securities and Delayed-Delivery Transactions. In order to
secure yields or prices deemed advantageous at the time, the Fund may purchase
or sell securities on a when-issued or delayed-delivery basis. The Fund will
enter into a when-issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. In such transactions delivery
of
the securities occurs beyond the normal settlement periods, but no payment or
delivery is made by the Fund prior to the actual delivery or payment by the
other party to
19
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
the transaction. Due to fluctuations in the value of securities purchased
or
sold on a when-issued or delayed-delivery basis, the yields obtained on those
securities may be higher or lower than the yields available in the market on
the
dates when the investments are actually delivered to the buyers. The Fund will
establish with Boston Safe a segregated account consisting of cash, U.S.
government securities or other high-grade debt obligations in an amount equal
to
the amount of its when-issued and delayed-delivery commitments. Placing
securities rather than cash in the segregated account may have a leveraging
effect on the Fund's net assets.
Lending of Portfolio Securities. The Fund has the ability to lend
portfolio
securities to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets taken at value.
Loans
of portfolio securities by the Fund will be collateralized by cash, letters of
credit or U.S. government securities that are maintained at all times in an
amount at least equal to the current market value of the loaned securities.
Any
gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Fund. The Fund
will
segregate the common stock or convertible or exchangeable preferred stock or
debt securities in a special account with Boston Safe.
Covered Option Writing. The Fund may purchase and sell put, call and
other
types of option securities that are traded on domestic or foreign exchanges or
the over-the-counter market including, but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options. The Fund may realize fees (referred to as "premiums") for granting
the
rights evidenced by the options. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option
holder
an underlying security at a specified price at any time during the option
period. In contrast, a call option embodies the right of its purchaser to
compel
the writer of the option to sell to the option holder an underlying security
at
a specified price at any time during the option period. Thus, the purchaser of
a
put option written by the Fund has the right to compel the Fund to purchase
from
it the underlying security at the agreed-upon price for a specified time
period,
while the purchaser of a call option written by the Fund has the right to
purchase from the Fund the underlying security owned by the Fund at the
agreed-upon price for a specified time period.
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
20
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
exercise over the option's exercise price, less the premium received for
writing the option.
The Fund will write only covered options. Thus, whenever the Fund writes a
call option, it will continue to own or have the present right to acquire the
underlying security for as long as it remains obligated as the writer of the
option. To support its obligation to purchase the underlying security if a put
option is exercised, the Fund will either (a) deposit with Boston Safe in a
segregated account cash, U.S. government securities or other high-grade debt
obligations having a value at least equal to the exercise price of the
underlying securities or (b) continue to own an equivalent number of puts of
the
same "series" (that is, puts on the same underlying security having the same
exercise prices and expiration dates as those written by the Fund), or an
equivalent number of puts of the same "class" (that is, puts on the same
underlying security) with exercise prices greater than those that it has
written
(or, if the exercise prices of the puts that it holds are less than the
exercise
prices of those that it has written, it will deposit the difference with
Boston
Safe in a segregated account).
Purchasing Put and Call Options on Securities. The Fund may utilize up to
15% of its assets to purchase options and may do so at or about the same time
that it purchases the underlying security or at a later time. In purchasing
option securities, the Fund will trade only with counterparties of high
standing
in terms of credit quality and commitment to the market. Risks associated with
options transactions and foreign futures contracts are described below under
"Special Considerations."
Futures Contracts and Options on Futures Contracts. The Fund may enter
into
futures contracts or related options that are traded on domestic and foreign
exchanges or boards of trade as well as the over-the-counter market with
respect
to options on such futures contracts. A futures contract provides for the
future
sale by one party and the purchase by the other party of a certain amount of
specified debt security at a specified price, date, time and place. The Fund
may
enter into futures contracts to sell debt securities when Greenwich Street
Advisors believes that the value of the Fund's debt securities will decrease.
The Fund may enter into futures contracts to purchase debt securities when
Greenwich Street Advisors anticipates purchasing the underlying debt
securities
on behalf of the Fund and believes that prices will rise before the purchases
will be made. When the Fund enters into a futures contract to purchase an
underlying security, an amount of cash, U.S. government securities or other
high-grade debt securities, equal to the market value of the contract, will be
deposited in a
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Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
segregated account with Boston Safe to collateralize the position, thereby
insuring that the use of the contract is unleveraged. The Fund will not enter
into futures contracts for speculation and will enter into futures contracts
that are traded on a domestic or foreign exchange or board of trade as well as
the over-the-counter market.
An option on a futures contact, as contrasted with the direct investment
in
a futures contract, gives the purchaser the right, in return for the premium
paid, to assume a position in a futures contract at a specified exercise price
at any time prior to the expiration date of the option. A call option gives
the
purchaser of the option the right to enter into a futures contract to buy and
obliges the writer to enter into a futures contract to sell the underlying
debt
securities. A put option gives the purchaser the right to sell and obliges the
writer to buy the underlying contract.
The Fund may purchase put options on futures contracts to hedge its
portfolio of debt securities against the risk of rising interest rates, and
may
purchase call options on futures contracts to hedge against a decline in
interest rates. The Fund may write put and call options on futures contracts
in
entering into closing sale transactions and to increase its ability to hedge
against changes in interest rates. The Fund will write put and call options on
futures contracts that are traded on a domestic or foreign exchange or board
of
trade as well as the over-the-counter market.
Currency Exchange Transactions and Options on Foreign Currencies. The Fund
will conduct its currency exchange transactions either on a spot (that is,
cash)
basis at the rate prevailing in the currency exchange market or through
entering
into forward contracts to purchase or sell currencies. The Fund's dealings in
forward currency exchange and options on foreign currencies are limited to
hedging involving either specific transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
tend
to limit any potential gain that might result should the value of the currency
increase.
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Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may purchase and sell put, call and other types of options on
foreign currencies that are traded on domestic or foreign exchanges or in the
over-the-counter market, including but not limited to, "spread" options,
"knock-out" options, "knock-in" options and "average rate" or "look-back"
options.
The Fund may purchase put options on a foreign currency in which
securities
held by the Fund are denominated to protect against a decline in the value of
the currency in relation to the currency in which the exercise price is
denominated. The Fund may purchase a call option on a foreign currency to
hedge
against an adverse exchange rate of the currency in which a security that it
anticipates purchasing is denominated in relation to the currency in which the
exercise price is denominated. An option on a foreign currency gives the
purchaser, in return for a premium, the right to sell, in the case of a put,
and
buy, in the case of a call, the underlying currency at a specified price
during
the term of the option. Although the purchase of an option on a foreign
currency
may constitute an effective hedge by the Fund against fluctuations in the
exchange rates, in the event of rate movements adverse to the Fund's position,
the Fund may forfeit the entire amount of the premium plus related transaction
costs. Options on foreign currencies purchased by the Fund may be traded on
domestic and foreign exchanges or over-the-counter.
CERTAIN INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in securities with
contractual or other restrictions on resale and other instruments that are not
readily marketable, including (a) repurchase agreements with maturities
greater
than seven days, (b) time deposits maturing from two business days through
seven
calendar days and (c) to the extent that a liquid secondary market does not
exist for the instruments, futures contracts and options on those contracts.
Notwithstanding the foregoing, the Fund shall not invest more than 10% of its
net assets in securities (excluding those subject to Rule 144A under the
Securities Act of 1933, as amended) that are restricted. In addition, the Fund
may invest up to 5% of its assets in the securities of issuers that have been
in
continuous operation for less than three years. The Fund also may borrow from
banks for temporary or emergency purposes, but not for investment purposes, in
an amount up to 10% of its total assets, and may pledge its assets to the same
extent in connection with such borrowings. Whenever these borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not make any additional
investments. Immediately after any borrowing (including reverse repurchase
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
agreements and forward roll transactions) by the Fund, the Fund will
maintain an asset coverage of at least 300% with respect to all of its
borrowings. Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Trust's Board of Trustees. A complete list of
investment
restrictions that identifies additional restrictions that cannot be changed
without the approval of a majority of the Fund's outstanding shares is
contained
in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Medium-, Low-and Unrated Securities. The Fund may invest in medium-or
low-rated securities and unrated securities of comparable quality. Generally,
these securities offer a higher current yield than the yield offered by
higher-rated securities but involve greater volatility of price and risk of
loss
of income and principal, including the probability of default by or bankruptcy
of the issuers of such securities. Medium-and low-rated and comparable unrated
securities (a) will likely have some quality and protective characteristics
that, in the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay
interest
and repay principal in accordance with the terms of the obligation. Thus, it
is
possible that these types of factors could, in certain instances, reduce the
value of securities held by the Fund with a commensurate effect on the value
of
the Fund's shares. Therefore, an investment in the Fund should not be
considered
as a complete investment program and may not be appropriate for all investors.
While the market values of medium-and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium-and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium-and low-rated and comparable
unrated securities are often highly leveraged and may not have more
traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium-and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
senior indebtedness. The Fund may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of
principal
or interest on its portfolio holdings. In addition, the markets in which
medium-
and low-rated or comparable unrated securities are traded generally are more
limited than those in which higher-rated securities are traded. The existence
of
limited markets for these securities may restrict the availability of
securities
for the Fund to purchase and also may have the effect of limiting the ability
of
the Fund to (a) obtain accurate market quotations for purposes of valuing
securities and calculating net asset value and (b) sell securities at their
fair
value either to meet redemption requests or to respond to changes in the
economy
or the financial markets. The market for medium-and low-rated and comparable
unrated securities is relatively new and has not fully weathered a major
economic recession. Any such recession, however, could likely disrupt severely
the market for such securities and adversely affect the value of such
securities. Any such economic downturn also could adversely affect the ability
of the issuers of such securities to repay principal and pay interest thereon.
Fixed-income securities, including medium-and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit
their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding
security,
resulting in a decreased return to the Fund.
Securities that are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities that are rated B generally lack characteristics of the desirable
investment and assurance of interest and principal payments over any long
period
of time may be small. Securities that are rated Caa or CCC are of poor
standing.
These issues may be in default or present elements of danger may exist with
respect to principal or interest.
In light of the risks described above, Greenwich Street Advisors, in
evaluating the creditworthiness of an issue, whether rated or unrated, will
take
various factors into consideration, which may include, as applicable, the
issuer's financial resources, its sensitivity to economic conditions and
trends,
the operating history of and the community support for the facility financed
by
the issue, the ability of the issuer's management and regulatory matters.
Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide fluctua-
25
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
tions in market value. In addition, certain securities may lack a
significant operating history and be dependent on products or services without
an established market share.
Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations that are in
addition
to the usual risks inherent in domestic investments. These risks include those
resulting from revaluation of currencies, future adverse political and
economic
developments and the possible imposition of limitations on the repatriation of
currencies or other foreign governmental laws or restrictions, reduced
availability of public information concerning issuers and the lack of uniform
accounting, auditing and financial reporting standards or of other regulatory
practices and requirements comparable to those applicable to domestic
companies.
The yield of the Fund may be adversely affected by fluctuations in value of
one
or more foreign currencies relative to the U.S. dollar. Moreover, securities
of
many foreign companies and their markets may be less liquid and their prices
more volatile than those of securities of comparable domestic companies. In
addition, with respect to certain foreign countries, the possibility exists of
expropriation, nationalization, confiscatory taxation and limitations on the
use
or removal of funds or other assets of the Fund, including the withholding of
dividends. Foreign securities may be subject to foreign government taxes that
could reduce the yield on such securities. Because the Fund will invest in
securities denominated or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may adversely affect the value of
portfolio securities and the appreciation or depreciation of investments.
Investment in foreign securities also may result in higher expenses due to the
cost of converting foreign currency to U.S. dollars, the payment of fixed
brokerage commissions on foreign exchanges, which generally are higher than
commissions on domestic exchanges, the expense of maintaining securities with
foreign custodians, and the imposition of transfer taxes or transaction
charges
associated with foreign exchanges.
Corporate securities in which the Fund may invest include corporate fixed-
income securities of both domestic and foreign issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment trust certificates,
and preferred stock. The Fund's investments in each of equipment lease or
equipment trust certificates will not exceed 5% of its assets.
Certain of the corporate fixed-income securities in which the Fund may
invest may involve equity characteristics. The Fund may, for example, invest
in
warrants for the acquisition of stock of the same or of a different issuer or
in
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
corporate fixed-income securities that have conversion or exchange rights
permitting their holder to convert or exchange the securities at a stated
price
within a specified period of time into a specified number of shares of common
stock. In addition, the Fund may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
Mortgage-Related Securities. Mortgage-related securities provide a
monthly
payment consisting of interest and principal payments. Additional payments may
be made out of unscheduled repayments of principal resulting from the sale of
the underlying residential property, refinancing or foreclosure, net of fees
or
costs that may be incurred. Prepayments of principal on mortgage-related
securities may tend to increase due to refinancing of mortgages as interest
rates decline. Mortgage pools created by private organizations generally offer
a
higher rate of interest than government and government-related pools because
no
direct or indirect guarantees of payments are applicable with respect to the
former pools. Timely payment of interest and principal in these pools,
however,
may be supported by various forms of private insurance or guarantees,
including
individual loan, title, pool and hazard insurance. There can be no assurance
that the private insurers can meet their obligations under the policies.
Prompt
payment of principal and interest on GNMA mortgage pass-through certificates
is
backed by the full faith and credit of the United States. FNMA guaranteed
mortgage pass-through certificates and FHLMC participation certificates are
solely the obligations of those entities but are supported by the
discretionary
authority of the United States government to purchase the agencies'
obligations.
Collateralized mortgage obligations are a type of bond secured by an
underlying
pool of mortgages or mortgage pass-through certificates that are structured to
direct payments on underlying collateral to different series or classes of the
obligations.
To the extent that the Fund purchases mortgage-related securities at a
premium, mortgage foreclosures and prepayments of principal by mortgagors
(which
may be made at any time without penalty) may result in some loss of the Fund's
principal investment to the extent of the premium paid. The Fund's yield may
be
affected by reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related
mortgage pools, generally will fluctuate in response to market interest rates.
27
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Securities of Developing Countries. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the fixed-income markets of developing
countries involves exposure to economic structures that are generally less
diverse and mature, and to political systems that can be expected to have less
stability, than those of developed countries. Historical experience indicates
that the markets of developing countries have been more volatile than the
markets of the more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
Non-Publicly Traded and Illiquid Securities. The Fund's sale of
securities
that are not publicly traded is typically restricted under the Federal
securities laws. As a result, the Fund may be forced to sell these securities
at
less than fair market value or may not be able to sell them when Greenwich
Street Advisors believes it desirable to do so. The Fund's investments in
illiquid securities are subject to the risk that should the Fund desire to
sell
any of these securities when a ready buyer is not available at a price that
the
Fund deems representative of their value, the value of the Fund's net assets
could be adversely affected.
Options. Because option premiums paid or received by the Fund are small
in
relation to the market value of the investments underlying the options, buying
and selling options can result in large amounts of leverage. The leverage
offered by trading in options may cause the Fund's net asset value to be
subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
Upon the exercise of a put option written by the Fund, the Fund may suffer
a
loss equal to the difference between the price at which the Fund is required
to
purchase the underlying security and its market value at the time of the
option
exercise, less the premium received for writing the option. Upon the exercise
of
a call option written by the Fund, the Fund may suffer a loss equal to the
excess of the security's market value at the time of the option exercise over
the exercise price of the option less the premium received for writing the
option.
The Fund may engage in a closing purchase transaction to realize a profit,
to prevent an underlying security from being called or put or, in the case of
a
call option, to unfreeze an underlying security (thereby permitting its sale
or
the writing of a new option on the security prior to the outstanding option's
expiration). To effect a closing purchase transaction, the Fund would
purchase,
prior to the holder's exercise of an option that the Fund has written, an
option
of the same series as that on which the Fund desired to terminate its
obligation.
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Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The obligation of the Fund under an option that it has written would be
terminated by a closing purchase transaction, but the Fund would not be deemed
to own an option as a result of the transaction. No assurance can be given
that
the Fund will be able to effect closing transactions at a time when it wishes
to
do so. If the Fund cannot enter into a closing transaction, the Fund may be
required to hold a security that it might otherwise have sold, in which case
it
would continue to be at market risk on the security and could face higher
transaction costs, including brokerage commissions.
The ability of the Fund to engage in closing transactions with respect to
options depends on the existence of a liquid secondary market. While the Fund
generally will purchase or write options or financial futures only if there
appears to be a liquid secondary market for the options or futures sold or
purchased, for some options or futures no such secondary market may exist or
the
market may cease to exist.
Futures and Options on Futures. Investments in futures and options on
futures made by the Fund will be made solely for the purpose of hedging
against
the effects of changes in the value of its portfolio securities due to
anticipated changes in interest rates and when the transactions are
economically
appropriate to the reduction of risks inherent in the management of the Fund.
The Fund may not enter into futures and options contracts for which aggregate
initial margin deposits and premium paid for unexpired options exceed 5% of
the
fair market value of the Fund's assets, after taking into account unrealized
profits and unrealized losses on futures contracts into which it has entered.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. No assurance can be given that a correlation
will
exist between price movements in the underlying securities on the one hand,
and
price movements in the securities which are the subject of the hedge, on the
other hand. Positions in futures contracts and options on futures contracts
may
be closed out only on the exchange or board of trade on which they were
entered
into, and no assurance can be given that an active market will exist for a
particular contract or option at any particular time. Losses incurred in
hedging
transactions and the costs of these transactions will affect the Fund's
performance.
Foreign Commodity Exchanges. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by the
Commodity Futures Trading Commission and may be subject to greater risks than
trading on domestic exchanges. For example, some foreign exchanges may be
principal markets so that no common clearing facility exists and a trader may
29
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SMITH BARNEY
Diversified Strategic Income Fund
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
look only to the broker for performance of the contract. In addition,
unless
the Fund hedges against fluctuations in the exchange rate between the U.S.
dollar and the currencies in which trading is done on foreign exchanges, any
profits that the Fund might realize in trading could be eliminated by adverse
changes in the exchange rate, or the Fund could incur losses as a result of
those changes.
Foreign Currency. Although the foreign currency market may not
necessarily
be more volatile than the market in other commodities, the foreign currency
market offers less protection against defaults in the forward trading of
currencies than is available when trading in currencies occurs on an exchange.
Because a forward currency contract is not guaranteed by an exchange or
clearing
house, a default on the contract would deprive the Fund of unrealized profits
or
force the Fund to cover its commitments for purchase or resale, if any, at the
current market price.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the Fund will be
executed by a number of brokers and dealers, including Smith Barney and
certain
of its affiliated brokers. The Fund may use Smith Barney or a Smith Barney
affiliated broker in connection with a purchase or sale of securities when
Greenwich Street Advisors believes that the charge for the transaction does
not
exceed usual and customary levels. The Fund also may use Smith Barney as a
commodities broker in connection with entering into futures contracts and
commodity options. Smith Barney has agreed to charge the Fund commodity
commissions at rates comparable to those charged by Smith Barney to its most
favored clients for comparable trades in comparable accounts.
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VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close of
regular trading on the NYSE, on each day that the NYSE is open, by dividing
the
value of the Fund's net assets by the total number of shares outstanding. Net
asset value is calculated separately for Class A, B, C, and Y shares.
Generally,
the Fund's investments are valued at market value or, in the absence of a
market
value with respect to any securities, at fair value as determined by or under
the direction of the Trust's Board of Trustees. Portfolio securities which are
traded primarily on foreign exchanges are generally valued at the preceding
closing values of such securities on their respective exchanges, except that
when an
30
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SMITH BARNEY
Diversified Strategic Income Fund
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VALUATION OF SHARES (CONTINUED)
occurrence subsequent to the time a value was so established is likely to have
changed such value, then the fair market value of those securities will be
determined by consideration of other factors by or under the direction of the
Board of Trustees or its delegates. A security that is traded primarily on a
domestic or foreign stock exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted bid
price. Over-the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government securities
(other than short-term securities) are valued at the average of the quoted bid
and asked prices in the over-the-counter market. Short-term investments that
mature in 60 days or less are valued at amortized cost whenever the Trustees
determine that amortized cost reflects fair value of those investments. An
option generally is valued at the last sale price or, in the absence of the
last
sale price, the last offer price. The value of a futures contract equals the
unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the
day
on which the futures contract is being valued. A settlement price may not be
used if the market makes a limit move with respect to a particular commodity
or
if the underlying securities market experiences significant price fluctuations
after the determination of the settlement price. In such event, the futures
contract will be valued at a fair market price to be determined by or under
the
direction of the Board of Trustees. Further information regarding the Trust's
valuation policies with respect to the Fund is contained in the Statement of
Additional Information.
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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. Shareholder may direct that
distributions
be paid to them through any one of the following options:
(1) Income dividends and capital gains distributions both invested in
additional shares.
(2) Income dividends paid in cash and capital gains distributions
invested in additional shares.
(3) Income dividends and capital gains distributions both paid in
cash.
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Diversified Strategic Income Fund
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DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
(4) Income dividends invested in additional shares of the Fund and
capital gains paid in cash.
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
brokerage account, dividends and distributions on shares of any Class will be
reinvested automatically for each shareholder's account at net asset value,
subject to no sales charge or CDSC in additional shares of the Class.
Dividends
from net investment income, if any, of the Fund will be declared each day that
the Trust is open for business and will be paid on the last day of the Smith
Barney statement month. Distributions of any net long-term capital gains
earned
by the Fund will be made annually after the close of the fiscal year in which
they are earned. Distributions of short-term capital gains may be paid more
frequently with dividends from net investment income. In order to avoid the
application of a 4% nondeductible excise tax measured with respect to certain
undistributed amounts of ordinary income and capital gains, the Fund may make
any additional distributions necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions exceed net
investment income and net realized capital gains, the excess distributions
generally will be treated as a tax-free return of capital (up to the amount of
the shareholder's tax basis in his or her shares). The amount treated as a
tax-free return of capital will reduce a shareholder's adjusted basis in his
or
her shares. Pursuant to the requirements of the 1940 Act and other applicable
laws, a notice will accompany any distribution paid from sources other than
net
investment income. In the event the Fund distributes amounts in excess of its
net investment income and net realized capital gains, such distributions may
have the effect of decreasing the Fund's total assets, which may increase the
Fund's expense ratio.
TAXES
The Fund will be treated as a separate taxpayer with the result that, for
Federal income tax purposes, the amount of investment income and capital gains
earned by the Fund will be determined without regard to the earnings of the
other funds of the Trust. The Trust generally will seek to cause the Fund 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.
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Diversified Strategic Income Fund
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DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Dividends paid by the Fund from investment income and distributions of
short-term capital gain will be taxable to shareholders as ordinary income for
Federal income tax purposes, whether received in cash or reinvested in
additional shares. Distributions of long-term capital gain will be taxable to
shareholders as long-term capital gain, whether paid in cash or reinvested in
additional shares, and regardless of the length of time the investor has held
his or her shares of the Fund. Dividends and distributions paid by the Fund
will
not qualify for the Federal dividends-received deduction for corporate
shareholders. The per-share dividends and distributions on Class B and Class C
shares will be lower than the per share dividends on Class A and Class Y
shares
as a result of the distribution fee applicable with respect to Class B and
Class
C shares. The per share dividends on Class A shares of the Fund will be lower
than the per share dividends on Class Y shares as a result of the service fee
applicable to Class A shares. Distributions of capital gains, if any, will be
in
the same amount for Class A, B, C and Y shares.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other foreign taxes. The payment of these taxes
will
reduce the amount of dividends and distributions paid to the Fund's
shareholders. Each shareholder of the Fund will receive a statement annually
from the Trust, which will set forth separately the aggregate dollar amount of
dividends and capital gains distributed to the shareholder by the Fund with
respect to the prior calendar year.
Shareholders should consult their tax advisors about the status of the
Fund's dividends and distributions for Federal, state and local tax
liabilities.
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES
General. The Fund offers five classes of shares. Class A shares are sold
to investors with an initial sales charge and Class B and Class C shares are
sold without an initial sales charge but with higher ongoing expenses and a
CDSC
payable upon certain redemptions. Class Y shares are sold without an initial
sales charge and are available only to investors investing a minimum of
$5,000,000. Class Z shares are offered without a sales charge, CDSC, service
fee
or distribution fee, exclusively to: (a) tax-exempt employee benefit and
retirement plans of Smith Barney and its affiliates and (b) certain UITs
sponsored by Smith Barney and its affiliates. Investors meeting either of
these
criteria who are interested in acquiring Class Z shares should contact their
Smith Barney Finan-
33
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
cial Consultant for a Class Z Prospectus. See "Prospectus Summary--
Alternative
Purchase Arrangements" for a discussion of factors to consider in selecting
which Class of shares to purchase.
Purchases of Fund shares must be made through a brokerage account
maintained with Smith Barney, with an Introducing Broker or with an investment
dealer in the selling group, except for investors purchasing shares of the
Fund
through a qualified retirement plan who may do so directly through TSSG. When
purchasing shares of the Fund, investors must specify whether the purchase is
for Class A, Class B, Class C or Class Y shares. No maintenance fee will be
charged in connection with a brokerage account through which an investor
purchases or holds shares.
Investors in Class A, Class B and Class C shares may open an account by
making an initial investment of at least $1,000 for each account, or $250 for
an
IRA or a Self-Employed Retirement Plan in the Fund. Investors in Class Y
shares
may open an account by making an initial investment of $5,000,000. Subsequent
investments of at least $50 may be made for all Classes except for Class Y,
which has no subsequent investment minimum. For participants in retirement
plans
qualified under Section 403(b)(7) or Section 401(a) of the Code, the minimum
initial and subsequent investment in the Fund is $25 and for the Fund's
Systematic Investment Plan, the minimum initial and subsequent investment is
$100. There are no minimum investment requirements for (a) employees of
Travelers and its subsidiaries, including Smith Barney, (b) unitholders of a
UIT
sponsored by Smith Barney and (c) trustees of the Trust. The Fund reserves the
right to waive or change minimums, to decline any order to purchase its shares
and to suspend the offering of shares from time to time. Shares purchased will
be held in the shareholder's account by TSSG. Share certificates are issued
only
upon a shareholder's written request to TSSG. IRAs and other retirement plans
approved by the Internal Revenue Service are available from the Fund or Smith
Barney.
Purchase orders received by Smith Barney prior to the close of regular
trading on the NYSE, on any day the Fund calculates its net asset value, are
priced according to the net asset value determined on that day. Orders
received
by dealers or introducing brokers prior to the close of regular trading on the
NYSE on any day the Fund calculates its net asset value, are priced according
to
the net asset value determined on the next business day. Payment for Fund
shares
is due on the fifth business day (the "settlement date") after the trade date.
34
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
SYSTEMATIC INVESTMENT PLAN
Shareholders of Class A, Class B, Class C and Class Y shares may make
additions to their accounts at any time by purchasing shares through a service
known as the Systematic Investment Plan. Under the Systematic Investment Plan,
Smith Barney or TSSG is authorized through preauthorized transfers of $100 or
more to charge the regular bank account or other financial institution
indicated
by the shareholder on a monthly or quarterly basis to provide systematic
additions to the shareholder's Fund account. A shareholder whose check is
returned for insufficient funds will be charged a fee of up to $25. The
Systematic Investment Plan also authorizes Smith Barney to apply cash held in
the shareholder's Smith Barney brokerage account or redeem the shareholder's
shares of a Smith Barney money market fund to make additions to the account.
Additional information is available from the Fund or your Smith Barney
Financial
Consultant.
<TABLE>
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund
are
as follows:
<CAPTION>
SALES CHARGE AS % OF
OFFERING PRICE
AMOUNT OF INVESTMENT* NET ASSET VALUE OF
NET ASSET VALUE
-----------------------------------------------------------------------------
- ---------------
<S> <C>
<C>
Less than $25,000 5.00%
5.26%
$25,000-$49,999 4.00%
4.17%
$50,000-$99,999 3.25%
3.36%
$100,000-$249,999 2.50%
2.56%
$250,000-$499,999 2.00%
2.04%
$500,000 and more* .00%
.00%
-----------------------------------------------------------------------------
- ---------------
<FN>
* Purchases of Class A shares, which when combined with current Class A
shares
equal or exceed $500,000 in the aggregate, will be made at net asset value
without any initial sales charge, but will be subject to a CDSC of 1.00%
on
redemptions made within 12 months of purchase. A commission will be paid
by
Smith Barney to Financial Consultants or other dealers who initiate and
are
responsible for purchases of $500,000 or more. The CDSC on Class A shares
is
payable to Smith Barney, which with Boston Advisors, compensates Smith
Barney Financial Consultants upon the sale of these shares. The CDSC is
waived in the same circumstances in which the CDSC applicable to Class B
and
Class C shares is waived. See "Waivers of CDSC--Class B and Class C
Shares."
</TABLE>
Members of the selling group will receive 90% of the sales charge and may
be deemed to be underwriters of the Fund as defined in the Securities Act of
1933, as amended.
35
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
The reduced sales charges shown above apply to the aggregate of purchases
of Class A shares of the Fund made at one time by "any person," which includes
an individual, spouse and children under the age of 21, or a trustee or other
fiduciary of a single trust estate or single fiduciary account. The Class A
initial sales charge is also reduced to 2% for Smith Barney Personal Living
Trust program participants for whom Smith Barney acts as trustee. (Smith
Barney
Personal Living Trust program participants may also purchase Class B and
Class C shares subject to any applicable CDSC.) The reduced sales charge
minimums may also be met by aggregating the purchase with the net asset value
of
all Class A shares held in certain funds sponsored by Smith Barney listed
under
"Shareholder Services--Exchange Privileges."
SALES CHARGE WAIVERS--CLASS A SHARES
Purchases of Class A shares may be made at net asset value without a
sales
charge in the following circumstances: (a) sales of Class A shares to
directors
of the Fund and employees of Travelers and its subsidiaries, or to members of
the immediate family of such persons (including the surviving spouse of a
deceased director or employee, and retired directors or employees), or sales
to
any trust, pension, profit-sharing or other benefit plan for such persons
provided such sales are made upon the assurance of the purchaser that the
purchase is made for investment purposes and that the securities will not be
re-sold except through redemption or repurchase; (b) purchases of Class A
shares
if such shares are purchased with the proceeds from a redemption of shares of
an
investment company distributed by an entity other than Smith Barney if such
redemption has occurred no more than 30 days prior to the purchase of shares
of
the Fund and the investor paid a sales charge; (c) offers of Class A shares to
any other investment company in connection with the combination of such
company
with the Fund by merger, acquisition of assets or otherwise; (d) purchases of
Class A shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of the Financial
Consultant's employment with Smith Barney), on the condition the purchase of
Class A shares is made with the proceeds of the redemption of shares of a
mutual
fund which (i) was sponsored by the Financial Consultant's prior employer,
(ii)
was sold to the client by the Financial Consultant and (iii) was subject to a
sales charge; (e) shareholders who have redeemed Class A shares in the Fund
(or
Class A shares of another fund in the Smith Barney Group of Funds that are
sold
with a maximum 5% sales charge) and who wish to reinvest their redemption
proceeds in the Fund, provided the reinvestment is made within 60 calendar
36
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
days of the redemption; and (f) accounts managed by registered investment
advisory subsidiaries of Travelers. In order to obtain such discounts, the
purchaser must provide sufficient information at the time of purchase to
permit
verification that the purchase would qualify for the elimination of the sales
charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as defined
above) at a reduced sales charge or net asset value determined by aggregating
the dollar amount of the new purchase and the total net asset value of all
Class
A shares of the Fund and of certain other funds sponsored by Smith Barney
listed
under "Shareholder Services--Exchange Privileges" sold with a sales charge
then
held by such person and applying the sales charge applicable to such
aggregate.
In order to obtain such discount, the purchaser must provide sufficient
information at the time of purchase to permit verification that the purchase
qualifies for the reduced sales charge. The right of accumulation is subject
to
modification or discontinuance at any time with respect to all shares
purchased
thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales charge or
purchase at net asset value will also be available to employees (and partners)
of the same employer purchasing as a group, provided each participant makes
the
minimum initial investment required. The sales charge applicable to purchases
by
each member of such a group will be determined by the table set forth above
and
will be based upon the aggregate sales of Class A shares to, and share
holdings
of, all members of the group. To be eligible for such reduced sales charges or
to purchase at net asset value, all purchases must be pursuant to an employer
or
partnership-sanctioned plan meeting certain requirements; one such requirement
is that the plan must be open to specified partners or employees of the
employer
and its subsidiaries, if any. Such plan may, but is not required to, provide
for
payroll deductions, IRAs or investments pursuant to retirement plans under
Sections 401 or 408 of the Code. Smith Barney may also offer a reduced sales
charge or net asset value purchase for aggregating related fiduciary accounts
under such conditions that Smith Barney will realize economies of sales
efforts
and sales related expenses. An individual who is a member of a qualified group
may also purchase Class A shares of the Fund at the reduced sales charge
applicable to the group as a whole. The sales charge is based upon the
37
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
aggregate dollar value of Class A shares previously purchased and still owned
by
the group, plus the amount of the current purchase. A "qualified group" is one
which (a) has been in existence for more than six months, (b) has a purpose
other than acquiring Fund shares at a discount and (c) satisfies uniform
criteria which enables Smith Barney to realize economies of scale in its costs
of distributing shares. A qualified group must have more than 10 members, must
be available to arrange for group meetings between representatives of the Fund
and the members, and must agree to include sales and other materials related
to
the Fund in its publications and mailings to members at no cost to the
Distributor. In order to obtain such reduced sales charge or to purchase at
net
asset value, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. Approval of group purchase reduced sales charge plans is subject
to the discretion of Smith Barney.
LETTER OF INTENT
A Letter of Intent for amounts of $50,000 or more provides an opportunity
for an investor to obtain a reduced sales charge by aggregating the
investments
over a 13-month period, provided that the investor refers to such Letter when
placing orders. For purposes of a Letter of Intent, the "Amount of
Transaction"
as referred to in the preceding sales charge table includes purchases of all
Class A shares of the Fund over the 13-month period based on the total amount
of
intended purchases plus the value of all Class A shares of the Fund previously
purchased and still owned. An alternative is to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent.
Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If the goal is not achieved within
the period, the investor must pay the difference between the sales charges
applicable to the purchases made and the charges previously paid, or an
appropriate number of escrowed shares will be redeemed. New Letters of Intent
will be accepted beginning January 1, 1995. Please see the form of a Letter of
Intent at the end of this Prospectus.
38
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
DEFERRED SALES CHARGE ALTERNATIVE--CLASS B AND CLASS C
SHARES
The public offering price of the Class B and Class C shares is the net
asset value next determined with no initial sales charge imposed. The Class B
and Class C shares are being sold without an initial sales charge so that the
full amount of the investor's purchase payment may be immediately invested in
the Fund. A CDSC, however, is imposed upon certain redemptions of Class B and
Class C shares.
Class B shares and Class C shares that are redeemed will not be subject
to
a CDSC to the extent that the value of such shares represents: (a) capital
appreciation of Fund assets; (b) reinvestment of dividends or capital gain
distributions; (c) with respect to Class B shares, shares redeemed more than
five years after their purchase; or (d) with respect to Class C shares, shares
redeemed more than 12 months after their purchase. Redemptions of other Class
C
shares will be subject to a CDSC of 1.00% on shares redeemed within 12 months
of
purchase. The CDSC will be assessed on an amount equal to the net asset value
at
the time of redemption.
In circumstances in which the CDSC is imposed on Class B shares, the
amount
of the charge will depend on the number of years since the shareholder made
the
purchase payment from which the amount is being redeemed. Solely for purposes
of
determining the number of years since a purchase payment, all purchase
payments
made during a month will be aggregated and deemed to have been made on the
last
day of the preceding Smith Barney statement month.
39
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
The following table sets forth the rates of the charge for redemptions of
Class
B shares by shareholders, except in the case of purchases by Participating
Plans, as described below. See "Purchase of Shares--Smith Barney 401(k)
Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
----------------------------------------------------------------------------
- ---------
<S> <C>
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- ------------------------------------------------------------------------------
- -------
</TABLE>
Class B shares will automatically convert to Class A shares eight years
after the date on which they were purchased and thereafter will no longer be
subject to any distribution fees. In addition, a certain portion of 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, equal
to
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)
owned by the shareholder. 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 B shares of Smith Barney Shearson Short-Term World Income Fund
(the "Short-Term World Income Fund") that were held on July 15, 1994 and that
are subsequently exchanged for Class B shares of the Fund will be offered the
opportunity to exchange all such Class B shares for Class A shares of the Fund
four years after the date on which those shares were deemed to have been
purchased. Holders of such Class B shares will be notified of the pending
exchange in writing approximately 60 days before the fourth anniversary of the
purchase date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the fourth anniversary date. See "Alternative
Purchase Arrangements--Class B Shares Conversion Feature."
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain
distributions
40
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
and finally of other shares held by the shareholder for the longest period of
time. The length of time that Class B and Class C shares acquired through an
exchange have been held will be calculated from the date that the Class B and
Class C shares exchanged were initially acquired in one of the other
applicable
Smith Barney funds, and Fund shares being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and capital gain
distribution reinvestments in such other funds. For Federal income tax
purposes,
the amount of the CDSC will reduce the gain or increase the loss, as the case
may be, on the amount realized on redemption. The amount of any CDSC will be
paid to Smith Barney.
To provide an example, assume an investor purchased 100 Class B shares at
$10 per share for a cost of $1,000. Subsequently, the investor acquired 5
additional shares through dividend reinvestment. During the fifteenth month
after the purchase, the investor decided to redeem $500 of his or her
investment. Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares would be
$1,260
(105 shares at $12 per share). The CDSC would not be applied to the amount
which
represents appreciation and the value of the reinvested dividend shares
($260).
Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B shares) for a
total
deferred sales charge of $9.60.
WAIVERS OF CDSC--CLASS B AND CLASS C SHARES
The CDSC on Class B and Class C shares will be waived on: (a) exchanges
(see "Shareholder Services--Exchange Privileges"); (b) automatic cash
withdrawals in amounts equal to or less than 1% per month of the value of the
shareholder's shares at the time the withdrawal plan commences (see below)
(provided, however, that automatic cash withdrawals in amounts equal to or
less
than 2% per month of the value of the shareholder's shares will be permitted
for
withdrawal plans that were established prior to November 7, 1994); (c)
redemptions of shares within twelve months following the death or disability
of
the shareholder; (d) redemptions of shares from retirement plans or IRAs upon
the attainment of age 59 1/2; (e) involuntary redemptions; and (f) redemptions
of shares in connection with a combination of the Fund with any investment
company by merger, acquisition of assets or otherwise. In addition, a
shareholder who has redeemed shares from other funds in the Smith Barney Group
of Funds may, under certain circumstances, reinvest all or part of
41
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
the redemption proceeds within 60 days and receive pro rata credit for any
CDSC
imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by TSSG in the
case of all other shareholders) of the shareholder's status or holdings, as
the
case may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k)
Program, which is generally designed to assist 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 Smith Barney 401(k) Program, which include both
401(k) plans and other types of participant directed, tax-qualified employee
benefit plans (collectively, "Participant Plans").
The Fund offers to Participating Plans Class A, Class B, Class C and
Class
Y shares, as investment alternatives under the Smith Barney 401(k) Program.
Class A, Class B and Class C shares acquired through the Smith Barney 401(k)
Program are subject to the same service and/or distribution fees as, but
different sales charge and CDSC schedules than, the Class A, Class B and Class
C
shares acquired by other investors. Similar to Class Y shares available to
other
investors, Class Y shares acquired through the Smith Barney 401(k) Program are
not subject to any same service or distribution fees or any sales charge or
CDSC. Once a Participating Plan has made an initial investment in the Fund,
all
of its subsequent investments in the Fund must be in the same Class of shares,
except as otherwise described below.
Class A Shares. Class A shares of the Fund are offered without any sales
charge to any Participating Plan that purchases from $500,000 to $4,999,999 of
Class A shares of one or more funds in the Smith Barney Group of Funds. Class
A
shares acquired by such Plans will be subject to a CDSC of 1% of redemption
proceeds, if the Participating Plan terminates within four years of the date
the
Participating Plan first enrolled in the Smith Barney 401(k) Program.
Class B Shares. Class B shares of the Fund are offered to any
Participating Plan that purchases less than $250,000 of one or more funds in
the
Smith Barney Group of Funds. Class B shares acquired by such Plans will be
subject to a CDSC of 3% of redemption proceeds, if the Participating Plan
terminates within
42
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
eight years of the date the Participating Plan first enrolled in the Smith
Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith
Barney 401(k) Program, it will be offered the opportunity to exchange all of
its
Class B shares for Class A shares of the Fund. Such Plans will be notified of
the pending exchange in writing approximately 60 days before the eighth
anniversary of the 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 Class B shares at
that time, each Class B share held by the Participating Plan will have the
same
conversion feature as Class B shares held by other investors. See "Purchase of
Shares--Deferred Sales Charge Alternative--Class B and Class C Shares."
Class C Shares. Class C shares of the Fund are offered to any
Participating Plan that purchases from $250,000 to $499,999 of one or more
funds
in the Smith Barney Group of Funds. Class C shares acquired by such Plans will
be subject to a CDSC of 1% of redemption proceeds, if the Participating Plan
terminates within four years of the date the Participating Plan first enrolled
in the Smith Barney 401(k) Program. One year after the date a Participating
Plan
enrolled in the Smith Barney 401(k) Program and, if its total Class C holdings
equal at least $500,000 at such time, the Participating Plan will be offered
the
opportunity to exchange all of its Class C shares for Class A shares of the
Fund. such plans will be notified in writing within 30 days after the last
business day of the calendar year, and unless the exchange offer has been
rejected in writing, the exchange will occur on or about the last business day
of March in the following calendar year. Once the exchange has occurred, a
Participating Plan will not be eligible to acquire Class C shares of the Fund
but instead may acquire Class A shares of the Fund. Any Class C shares not
converted will continue to be subject to the distribution fee.
Class Y Shares. Class Y shares of the Fund are offered without any
service
or distribution fees, sales charge or CDSC to any Participating Plan that
purchases over $5,000,000 of Class Y shares of one or more funds in the Smith
Barney Group of Funds.
No CDSC is imposed on redemptions of Class A, Class B or Class C shares
to
the extent that the net asset value of the Class B shares redeemed does not
exceed (a) the current net asset value of the shares purchased through
43
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PURCHASE OF SHARES (CONTINUED)
reinvestment of dividends or capital gains distributions, plus (b) with
respect
to Class A and Class C shares, the current net asset value of such shares
purchased more than one year prior to redemption and, with respect to Class B
shares, the current net asset value of Class B shares purchased more than
eight
years prior to the redemption, plus (c) with respect to Class A and Class C
shares, increases in the net asset value of the shareholder's Class A or Class
C
shares above the purchase payments made during the preceding year and, with
respect to Class B shares, increases in the net asset value of the
shareholder's
Class B shares above the purchase payments made during the preceding eight
years. Whether or not the CDSC applies to a Participating Plan depends on the
number of years since the Participating Plan first became enrolled in the
Smith
Barney 401(k) Program, unlike the applicability of the CDSC to other 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 A, Class B and Class C
shares in connection with lump-sum or other distributions made by a
Participating Plan as a result of: (a) the retirement of an employee in the
Participating Plan; (b) the termination of employment of an employee in the
Participating Plan; (c) the death or disability of an employee in the
Participating Plan; (d) the attainment of age 59 1/2 by an employee in the
Participating Plan; (e) hardship of an employee in the Participating Plan to
the
extent permitted under Section 401(k) of the Code; or (f) redemptions of
shares
in connection with a loan made by the Participating Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the
Smith
Barney 401(k) Program must purchase such shares directly from TSSG. For
further
information regarding the Smith Barney 401(k) Program, investors should
contact
the Smith Barney Financial Consultant.
- ------------------------------------------------------------------------------
- --
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGES
Except as otherwise noted below, shares of each Class may be exchanged
for
shares of the same Class in the following funds in the Smith Barney Group of
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges are subject to minimum investment and other requirements
of
the fund into which exchanges are made and a sales charge differential may
apply.
44
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
SHAREHOLDER SERVICES (CONTINUED)
FUND NAME
Municipal Bonds Funds
* Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Tax-Exempt Income Fund
Smith Barney Arizona Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
Smith Barney Massachusetts Municipals Fund
Smith Barney New Jersey Municipals Fund Inc.
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Muni Funds--National Portfolio
* Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--California Portfolio
* Smith Barney Muni Funds--California Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
* Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--New Jersey Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Georgia Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Income Funds
** Smith Barney Adjustable Rate Government Income Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Government Securities Fund
Smith Barney Investment Grade Bond Fund
Smith Barney High Income Fund
Smith Barney Global Bond Fund
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney Funds, Inc.--Utility Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government Portfolio
Smith Barney Funds, Inc.--Income Return Account Portfolio
45
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
SHAREHOLDER SERVICES (CONTINUED)
*** Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities Portfolio
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Growth and Income Fund
Smith Barney Utilities Fund
Smith Barney Strategic Investors Fund
Smith Barney Premium Total Return Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney World Funds--International Balanced Portfolio
Growth Funds
Smith Barney Fundamental Value Fund Inc.
Smith Barney Telecommunications Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Global Opportunities Fund
Smith Barney European Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney Funds, Inc.--Capital Appreciation Portfolio
Money Market Funds
+ Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc.--Cash Portfolio
++ Smith Barney Money Funds, Inc.--Government Portfolio
*** Smith Barney Money Funds, Inc.--Retirement Portfolio
*** Smith Barney Municipal Money Fund, Inc.
*** Smith Barney Muni Funds--California Money Market Portfolio
*** Smith Barney Muni Funds--New York Money Market Portfolio
- ------------------------------------------------------------------------------
- --
* Available for exchange with Class A, Class C and Class Y shares of the
Fund.
** Available for exchange with Class A, Class B, and Class C shares of the
Fund. In addition, shareholders who own Class C shares of the Fund
through
the Smith Barney 401(k) Program may exchange those shares for Class C
shares of this fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the Fund.
++ Available for exchange with Class A, Class C and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the Fund
through
the Smith Barney 401(k) Program may exchange those shares for Class C
shares of this fund.
Class A Exchanges. Class A shareholders of the funds in the Smith Barney
Group of Funds sold without a sales charge or with a maximum sales charge of
46
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
SHAREHOLDER SERVICES (CONTINUED)
less than 5.00% will be subject to the appropriate "sales charge differential"
upon the exchange of their shares for Class A shares of the Fund or other fund
sold with a higher sales charge. The "sales charge differential" is limited to
a
percentage rate no greater than the excess of the sales charge rate applicable
to purchases of shares of the mutual fund being acquired in the exchange over
the sales charge rate(s) actually paid on the mutual fund shares relinquished
in
the exchange and on any predecessor of those shares. For purposes of the
exchange privilege, shares obtained through automatic reinvestment of
dividends
and capital gains distributions, as described below, are treated as having
paid
the same sales charges applicable to the shares on which the dividends or
distributions were paid; however, except in the case of the Smith Barney
401(k)
Program, if no sales charge was imposed upon the initial purchase of the
shares,
any shares obtained through automatic reinvestment will be subject to a sales
charge differential upon exchange.
Class B Exchanges. In the event a Class B shareholder (unless such
shareholder was a Class B shareholder of the Short-Term World Fund on July 15,
1994) wishes to exchange all or a portion of his or her shares in any of the
funds imposing a CDSC higher than that imposed by the Fund, the exchanged
Class
B shares will be subject to the higher applicable CDSC. Upon an exchange, the
new Class B shares will be deemed to have been purchased on the same date as
the
Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be
deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the
funds
identified above may do so without imposition of any exchange fee or sales
charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions
can
be detrimental to the Fund's performance and its shareholders. The investment
adviser may determine that a pattern of frequent exchanges is excessive and
contrary to the best interests of the Fund's other shareholders. In this
event,
the investment adviser will notify Smith Barney and Smith Barney may, at its
discretion, decide to limit additional purchases and/or exchanges by the
shareholder. Upon such a determination, Smith Barney will provide notice in
writing or by telephone to the shareholder at least 15 days prior to
suspending
the
47
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
SHAREHOLDER SERVICES (CONTINUED)
exchange privilege and during the 15-day period the shareholder will be
required
to (a) redeem his or her shares in the Fund or (b) remain invested in the Fund
or exchange into any of the funds in the Smith Barney Group of Funds
ordinarily
available, which position the shareholder would be expected to maintain for a
significant period of time. All relevant factors will be considered in
determining what constitutes an abusive pattern of exchanges.
Exchanges will be processed at the net asset value next determined after
the redemption proceeds are available. Redemption procedures discussed below
are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the
shares
of the fund exchanged, no signature guarantee is required. A capital gain or
loss for tax purposes will be realized upon the exchange, depending upon the
cost or other basis of shares redeemed. Before exchanging shares, investors
should read the current prospectus describing the shares to be acquired. The
Fund reserves the right to modify or discontinue exchange privileges upon 60
days' prior notice to shareholders.
- ------------------------------------------------------------------------------
- --
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share
next determined after receipt of a written request in proper form at no charge
other than any applicable CDSC. Redemption requests received after the close
of
regular trading on the NYSE are priced at the net asset value next determined.
If a shareholder holds shares in more than one Class, any request for
redemption
must specify the Class being redeemed. In the event of a failure to specify
which Class, or if the investor owns fewer shares of the Class than specified,
the redemption request will be delayed until the Fund's transfer agent
receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the seventh day following receipt of proper tender,
except on a day on which the NYSE is closed or as permitted under the Act in
extraordinary circumstances. Generally, if the redemption proceeds are
remitted
to a Smith Barney brokerage account, these funds will not be invested for the
shareholder's benefit without specific instruction and Smith Barney will
benefit
from the use of temporarily uninvested funds. Redemption proceeds for shares
48
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
REDEMPTION OF SHARES (CONTINUED)
purchased by check, other than a certified or official bank check, will be
remitted upon clearance of the check, which may take up to ten days or more.
Shares may be redeemed in one of the following ways:
REDEMPTION THROUGH SMITH BARNEY
Redemption requests may be made through Smith Barney, an Introducing
Broker
or dealer in the selling group. A shareholder desiring to redeem shares
represented by certificates must present the certificates to Smith Barney, the
Introducing Broker or dealer in the selling group endorsed for transfer (or
accompanied by an endorsed stock power), signed exactly as the shares are
registered. Redemption requests involving shares represented by certificate
will
not be deemed received until the certificates are received by TSSG in proper
form
REDEMPTION BY MAIL
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. All other shares may
be
redeemed by submitting a written request for redemption to:
Smith Barney Diversified Strategic Income Fund Inc.
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request to TSSG or a Smith Barney 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 be accompanied by an endorsed stock power) and must be submitted
to
TSSG together with the redemption request. Any signature appearing on a
redemption request, share certificate or stock power must be guaranteed by 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.
49
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
REDEMPTION OF SHARES (CONTINUED)
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under
which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $100 monthly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. For additional information, shareholders should
contact their Smith Barney Financial Consultants. Any applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed 1% per month of
the
value of the shareholder's shares subject to the CDSC at the time the
withdrawal
plan commences. With respect to withdrawal plans in effect prior to November
7,
1994, any applicable CDSC will be waived on amounts withdrawn that do not
exceed
2% per month of the shareholder's shares subject to CDSC. For further
information regarding the automatic cash withdrawal plan, shareholders should
contract their Smith Barney Financial Consultants.
- ------------------------------------------------------------------------------
- --
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will receive written
notice and will be permitted 60 days to bring accounts up to the minimum to
avoid automatic redemption.
- ------------------------------------------------------------------------------
- --
PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30-day "yield" of each
Class
of shares. The yield refers to the income generated in those shares over the
30-
day period identified in the advertisement, and is computed by dividing the
net
investment income per share earned by the Class during the period by the
maximum
offering price per share on the last day of the period. This income is
"annualized" by assuming that the amount of income is generated each month
over
a one-year period and is compounded semi-annually. The annualized
50
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
PERFORMANCE (CONTINUED)
income is then shown as a percentage of the net asset value. For the 30-day
period ended July 31, 1994 the Fund's Class A, Class B and Class C yield was
%, % and %, respectively.
TOTAL RETURN
From time to time the Fund may include its total return, average annual
total return and current dividend return in advertisements and/or other types
of
sales literature. These figures are computed separately for Class A, Class B,
Class C and Class Y shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance. Total return is
computed for a specified period of time assuming deduction of the maximum
sales
charge, if any, from the initial amount invested and reinvestment of all
income
dividends and capital gains distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value of the
investment at the end of the period so calculated by the initial amount
invested
and subtracting 100%. The standard average annual total return, as prescribed
by
the SEC is derived from this total return, which provides the ending
redeemable
value. Such standard total return information may also be accompanied with
nonstandard total return information for differing periods computed in the
same
manner but without annualizing the total return or taking sales charges into
account. The Fund calculates current dividend return for each Fund class by
annualizing the most recent monthly distribution and dividing by the net asset
value or the maximum public offering price (including sales charge) on the
last
day of the period for which current dividend return is presented. The Fund's
current dividend return may vary from time to time depending on market
conditions, the composition of its investment portfolio and operating
expenses.
These factors and possible differences in the methods used in calculating
current dividend return should be considered when comparing a class' current
return to yields published for other investment companies and other investment
vehicles. The Fund may also include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc.
51
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and companies that furnish services to the Trust
and the Fund, including agreements with the Fund's distributor, investment
adviser, sub-investment adviser, administrator, sub-administrator, custodian
and
transfer agent. The day-to-day operations of the Fund are delegated to
Greenwich
Income for Global Asset Management, manage the day-to-day operations of the
Fund, including making all investment decisions.
INVESTMENT ADVISER--GREENWICH STREET ADVISORS
Greenwich Street Advisors, located at Two World Trade Center, New York,
New
York 10048, serves as the Fund's investment adviser. Greenwich Street Advisors
(through its predecessors) has been in the investment counseling business
since
1934 and is a division of Mutual Management Corp. which was incorporated in
1978. Greenwich Street Advisors renders investment advice to investment
companies that had aggregate assets under management as of May 31, 1994 in
excess of $39 billion.
Subject to the supervision and direction of the Trust's Board of
Trustees,
Greenwich Street Advisors manages the Fund's portfolio in accordance with the
Fund's investment objective and policies, makes investment decisions for the
Fund, places orders to purchase and sell securities and employs professional
portfolio managers and securities analysts who provide research service to the
Fund.
SUB-INVESTMENT ADVISER--GLOBAL CAPITAL MANAGEMENT
Global Capital Management, located at 10 Piccadilly, London W1V 9LA,
United
Kingdom, serves as the Fund's sub-investment adviser pursuant to a sub-
investment advisory agreement dated March 22, 1994. Global Capital Management
has agreed to waive 50% of its investment advisory fee until such time as the
Fund's Board of Trustees and Global Capital Management mutually agree
otherwise.
Global Capital Management has been in the investment counseling business since
1988 and renders advice to client companies with total assets under
management,
as of May 31, 1994 in excess of $1 billion.
In its capacity as a sub-investment adviser, Global Capital Management is
responsible for and selects the Fund's investments in foreign securities and
selects
52
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
the brokers and dealers that execute the Fund's investments in foreign
securities.
PORTFOLIO MANAGEMENT
John C. Bianchi and James E. Conroy, both Managing Directors of Greenwich
Street Advisors, have served as Vice Presidents and Investment Officers of the
Fund since it commenced operations, along with, Michael Zelouf, an Investment
Officer of the Fund since November 2, 1992 and Director of Fixed Income for
Global Asset Management, manage the day-to-day operations of the Fund,
including
making all investment decisions.
Mr. Bianchi's and Mr. Conroy's management discussions and analysis, and
additional performance information regarding the Fund during the fiscal year
ended July 31, 1994 are included in the Annual Report dated July 31, 1994. A
copy of the Annual Report may be obtained upon request and without charge from
your Smith Barney Financial Consultant or by writing or calling the Fund at
the
address or phone number listed on page one of this Prospectus.
Mr. Victor S. Filatov, International Strategist and President of Global
Capital Management, was elected by the Board of Trustees on January 20, 1994
to
serve as Investment Officer of the Fund. Mr. Filatov is responsible for
managing
the day-to-day operations of the Fund's investments in foreign securities.
Prior
to 1993, Mr. Filatov was Business Coordinator and head of European Fixed
Income
Research for J.P. Morgan Securities Inc.
ADMINISTRATOR--SBA
Smith Barney Advisers, Inc. ("SBA") serves as the Fund's administrator and
generally assists in all aspects of the Fund's administration and operation.
SBA
provides investment management and administration services to investment
companies that had aggregate assets under management as of September 30, 1994
in
excess of $ billion. For administration services rendered to the Fund, the
Fund
pays SBA a fee at the annual rate of .20% of the value of the Fund's average
daily net assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors is located at One Boston Place, Boston, Massachusetts
02108,
serves as the Fund's sub-administrator. Boston Advisors provides advisory,
investment management, administrative and/or sub-administrative services
53
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
to investment companies, which had aggregate assets under management as of
September 30, 1994 in excess of $ billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBA in all aspects of the Fund's administration and
operation.
Boston Advisors is paid a portion of the fee paid by the Fund to SBA at a rate
agreed upon from time to time between Boston Advisors and SBA.
- ------------------------------------------------------------------------------
- --
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as
such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule
12b-1 under the Act (the 'Plan"), Smith Barney is paid an annual service fee
with respect to Class A, Class B and Class C shares of the Fund at the annual
rate of 0.25% of the average daily net assets of each respective Class'
shares.
Smith Barney is also paid an annual distribution fee with respect to Class B
and
Class C shares at the annual rate of 0.50% of the average daily net assets
attributable to those shares. With regard to Class B shares that automatically
convert to Class A shares eight years after the date of original purchase,
these
shares will no longer be subject to distribution fees. The fees are used by
Smith Barney to pay its Financial Consultants for servicing shareholder
accounts
and, in the case of Class B and Class C shares, to cover expenses primarily
intended to to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to
potential
investors; payments to and expenses of Smith Barney Financial Consultants and
other persons who provide support services in connection with the distribution
of shares; interest and/or carrying charges; and indirect and overhead costs
of
Smith Barney associated with the sale of Fund shares, including lease,
utility,
communications and sales promotion expenses.
54
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws of the
Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." The Trust is registered with the SEC as a diversified, open-
end
management company. 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, July 30, 1993 and October 14, 1994
the
Trust changed its name to Shearson Lehman Special Income Portfolios, SLH
Income
Portfolios, Shearson Lehman Brothers Income Portfolios, Shearson Lehman
Brothers
Income Funds, Smith Barney Shearson Income Funds and Smith Barney Income Fund,
respectively. On July 30, 1993 and October 14, 1994 the Fund changed its name
from Diversified Strategic Income Fund to Smith Barney Shearson Diversified
Strategic Income Fund and its present name respectively. The Trust may issue
an
unlimited number of shares of beneficial interest, of separate series with a
par
value of $.001 per share. The Fund offers shares of beneficial interest
currently classified into five Classes -- A, B, C, Y and Z.
Each Class of shares represents identical interests in the Fund's
investment
portfolio. As a result, the Classes have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b)
the
effect of the respective sales charges, if any, for each Class; (c) the
distribution and/or service fees, if any, borne by each Class pursuant to the
Plan; (d) the expenses allocable exclusively to each Class; (e) voting rights
on
matters exclusively affecting a single Class; (f) the exchange privilege of
each
Class; and (g) the conversion feature of the Class B shares. The Trust's Board
of Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes of shares of the Fund. The
Trustees, on an ongoing basis, will consider whether any such conflict exists
and, if so, take appropriate action.
When matters are submitted for shareholder vote, shareholders of each
Class
of each Fund will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held of that Class. Generally, shares
of the Trust vote by individual fund on all matters except (a) matters
affecting
only the interests of one or more of the funds, in which case only shares of
the
affected fund or funds would be entitled to vote or (b) when the 1940 Act
requires that shares of the funds be voted in the aggregate. Similarly, shares
of the Fund will be voted generally on a Fund-wide basis except matters
affecting the interests of one Class of shares.
55
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
ADDITIONAL INFORMATION (CONTINUED)
Normally there will be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. Shareholders of
record of no less than two-thirds of the outstanding shares of the Trust may
remove a Trustee through a declaration in writing or by vote cast in person or
by proxy at a meeting called for that purpose. The Trustees will call a
meeting
for any purpose upon written request of shareholders holding at least 10% of
the
Fund's outstanding shares.
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston
Place, Boston, Massachusetts 02108, and serves as custodian of the Trust's
investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund
at
the end of the reporting period. In an effort to reduce the Fund's printing
and
mailing costs, the Trust plans to consolidate the mailing of the Fund's semi-
annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Trust also plans to
consolidate the mailing of the Fund's Prospectus so that a shareholder having
multiple accounts (that is, individual, IRA and/or Self-Employed Retirement
Plan
accounts) will receive a single Prospectus annually. Any shareholder who does
not want this consolidation to apply to his or her account should contact his
or
her Smith Barney Financial Consultant or TSSG.
56
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
ADDITIONAL INFORMATION (CONTINUED)
Date of Letter:
Date of Purchase(s): (must be within 90 days of the date of the letter):
LETTER OF INTENT (Please check one only)
______ I wish to establish a new Letter of Intent. (If cumulative
discount
or 90-day backdate privilege is applicable, provide the amount
and
account(s) information below.)
______ Please apply this purchase to any existing Letter of Intent with
the account(s) listed below.
______ Please amend my existing Letter of Intent with the new amount
indicated below.
If establishing a Letter of Intent, you will need to purchase over a
thirteen-month period in accordance with the provisions of the prospectus. The
aggregate amount of these purchases will be at least equal to the amount
listed
below:
______ $50,000 ______ $100,000 ______ $250,000 ______ $500,000
<TABLE>
<S> <C>
- ----------------------------------------- ---------------------------------
- --------
FUND NAME ACCOUNT NUMBER
- ----------------------------------------- ---------------------------------
- --------
FUND NAME ACCOUNT NUMBER
- ----------------------------------------- ---------------------------------
- --------
FUND NAME ACCOUNT NUMBER
</TABLE>
Subject to conditions specified below, each purchase of shares of the
Fund
or shares of one or more of the funds within the Smith Barney Group of Funds
during the 13-month period subsequent to the date of this Letter will be made
at
the public offering price applicable to a single transaction of the dollar
amount indicated, as described in the then effective prospectus. The offering
price may be further reduced under the Rights of Accumulation discount if the
Fund is advised of any shares of this or other Smith Barney fund(s) previously
purchased and still owned. The purchaser may at any time during the period
revise upward the stated intention by submitting a written request to this
effect. Such revision
57
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
- ------------------------------------------------------------------------------
- --
ADDITIONAL INFORMATION (CONTINUED)
shall provide for the escrowing of additional shares. The original period of
the
Letter, however, shall remain unchanged. Each separate purchase made pursuant
to
the Letter is subject to the terms and conditions contained in the prospectus
in
effect at the time of that particular purchase. It is understood that the
purchaser makes no commitment to purchase additional shares, but if those
shares
previously purchased at the original public offering price, under the Rights
of
Accumulation discount, together with purchases so made within thirteen months
from this date do not aggregate the amount specified when valued at the public
offering price, the purchaser must pay the difference between the sales
charges
applicable to the purchases made and charges previously paid, or an
appropriate
number of escrowed shares will be redeemed. The purchaser(s) or the
purchaser's
dealer must refer to this Letter of Intent in placing each future order for
shares while this Letter is in effect. This cancels and supersedes any
previous
instructions which the purchaser may have given inconsistent with the above.
Client Name: ________________________________________
Client Signature: ___________________________________
Financial Consultant: _______________________________
------------------------
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 Fund's official sales literature in
connection
with the offering of the Fund'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 offer may not lawfully be made.
58
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
TRUSTEES
Lee Abraham
Antoinette C. Bentley
Allan J. Bloostein
Richard E. Hanson, Jr.
Heath B. McLendon
Madelon DeVoe Talley
OFFICERS
Heath B. McLendon
Chairman of the Board
and Investment Officer
Stephen Treadway
President
Richard P. Roelofs
Executive Vice President
John C. Bianchi
Vice President
and Investment Officer
James E. Conroy
Vice President
and Investment Officer
Pauline Barrett
Investment Officer
Victor S. Filatov
Investment Officer
Christine T. Sydor
Secretary
Lewis E. Daidone
Treasurer
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Greenwich Street Advisors
Division of Mutual
Management Corp.
Two World Trade Center
New York, New York 10048
SUB-INVESTMENT ADVISER
Smith Barney Global Capital
Management Inc.
10 Piccadilly
London W1V 9LA
United Kingdom
ADMINISTRATOR
Smith, Barney Advisors, Inc.
1345 Avenue of the Americas,
New York, New York 10105
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and Trust
Company
One Boston Place
Boston, Massachusetts 02108
59
<PAGE>
- ------------------------------------------------------------------------------
- --
- ------------------------------------------------------------------------------
- --
SMITH BARNEY
Diversified
Strategic
Income
Fund
388 Greenwich Street
New York, New York 10013
Fund 128, 175, 211
FD0239 I4
<PAGE>
NOVEMBER 7, 1994
SMITH BARNEY
EXCHANGE
RESERVE
FUND
PROSPECTUS BEGINS
ON PAGE ONE.
[LOGO]
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ---------------------------------------------------------------------------
PROSPECTUS
November 7, 1994
388 Greenwich Street New York, New York 10013 (212) 723-9218
Smith Barney Exchange Reserve Fund (the "Fund"), a diversified fund, seeks to
maximize current income to the extent consistent with the preservation of
capital and the maintenance of liquidity by investing in a diversified
portfolio of high quality money market instruments. ALTHOUGH THE FUND SEEKS TO
MAINTAIN A CONSTANT NET ASSET VALUE OF $1.00 PER SHARE, THERE CAN BE NO
ASSURANCE THAT IT CAN DO SO ON A CONTINUING BASIS. THE FUND IS NEITHER INSURED
NOR GUARANTEED BY THE UNITED STATES GOVERNMENT.
The Fund is one of a number of funds, each having distinct investment
objectives and policies making up the Smith Barney Income Funds (the "Trust").
The Trust is an open-end management investment company commonly referred to as
a mutual fund.
This Prospectus sets forth concisely certain information about the Fund and
the Trust, including sales charges, distribution 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 funds offered by the Trust are described in
separate prospectuses that may be obtained by calling the Trust at the
telephone number set forth above or by contacting your Smith Barney Financial
Consultant. Additional information about the Fund is contained in a Statement
of Additional Information dated November 7, 1994, as amended or supplemented
from time to time, that is available upon request and without charge by
calling or writing the Trust at the telephone number or address set forth
above, or by contacting your Smith Barney Financial Consultant. The Statement
of Additional Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this Prospectus
in its entirety.
SMITH BARNEY INC.
Distributor
GREENWICH STREET ADVISORS
Investment Adviser
SMITH, BARNEY ADVISERS, INC.
Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1 <PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY
3
- ---------------------------------------------------------------FINANCIAL
HIGHLIGHTS 7
- ---------------------------------------------------------------INVESTMENT
OBJECTIVE AND MANAGEMENT POLICIES 9
- ---------------------------------------------------------------VALUATION OF
SHARES 14
- ---------------------------------------------------------------DIVIDENDS,
DISTRIBUTIONS AND TAXES 14
- ---------------------------------------------------------------PURCHASE OF
SHARES 16
- ---------------------------------------------------------------SHAREHOLDER
SERVICES 18
- ---------------------------------------------------------------REDEMPTION OF
SHARES 21
- ---------------------------------------------------------------MINIMUM ACCOUNT
SIZE 23
- ---------------------------------------------------------------PERFORMANCE
24
- ---------------------------------------------------------------MANAGEMENT OF
THE FUND AND THE TRUST 25
- ---------------------------------------------------------------DISTRIBUTOR
26
- ---------------------------------------------------------------ADDITIONAL
INFORMATION 28
- ----------------------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE
PROSPECTUS. SEE "TABLE OF CONTENTS."
INVESTMENT OBJECTIVE The Fund is one of a selection of managed investment
portfolios that comprise the Trust. The Trust is an open-end diversified
management investment company that seeks to maximize current income to the
extent consistent with the preservation of capital and the maintenance of
liquidity by investing in high quality short-term money market instruments.
See "Investment Objective and Management Policies."
PURCHASE OF SHARES Shares of the Fund may be acquired by the general public
only through the exchange of Class B or Class C shares of other funds in the
Smith Barney Group of Funds. Class B or Class C shares of the Fund acquired
through exchange are subject to the CDSC, if any, of the shares with which the
exchange is made. All Class B and Class C shares are subject to an annual
distribution fee of .50% of the value of average daily net assets of the Fund.
Eight years after the date of their original purchase, Class B shares will be
automatically redeemed at net asset value and the redemption proceeds will be
reinvested, at net asset value, in Class A shares of Smith Barney Money Funds
Inc. -- Cash Portfolio. Upon this conversion, the shares will no longer be
subject to the annual distribution fee.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to participate in the
Smith Barney 401(k) Program (the "401(k) Program") which is generally designed
to assist 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"). Shares acquired through the 401(k) Program are subject
to the same distribution fees as, but a different contingent deferred sales
charge ("CDSC") than, the shares acquired by other investors. See "Purchase of
Shares -- Smith Barney 401(k) Program."
INVESTMENT MINIMUMS Investors may open an account by making an initial
investment of at least $1,000 for each account, or $250 for an individual
retirement account ("IRA") or a Self-Employed Retirement Plan. Subsequent
investments of at least $50 may be made. For participants in retirement plans
qualified under Section 403(b)(7) or Section 401(a) of the Code, the minimum
initial and subsequent investment requirement is $25. The minimum and
subsequent investment through the Systematic Investment Plan
3
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------PROSPECTUS SUMMARY
(CONTINUED)
is $100. There is no minimum investment amount for (a) employees of The
Travelers Inc. and its subsidiaries, including Smith Barney and (b)
unitholders of a UIT sponsored by Smith Barney. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day that the Fund's net
asset value is calculated. See "Redemption of Shares."
MANAGEMENT OF THE FUND Greenwich Street Advisors, a division of Mutual
Management Corp. ("Greenwich Street Advisors") serves as the Fund's investment
adviser. Mutual Management Corp. provides investment advisory and management
services to investment companies affiliated with Smith Barney Inc. ("Smith
Barney"). Smith Barney is a wholly owned subsidiary of Smith Barney Holdings
Inc. ("Holdings"), which is in turn a wholly owned subsidiary of The Travelers
Inc. ("Travelers"), a diversified financial services company engaged through
its subsidiaries principally in the business of providing consumer financial,
investment and insurance services. Smith, Barney Advisers, Inc. ("SBA") serves
as the Fund's administrator. SBA is a wholly owned subsidiary of Holdings. The
Boston Company Advisors, Inc. ("Boston Advisors") serves as the Fund's sub-
administrator. Boston Advisors is a wholly owned subsidiary of The Boston
Company, Inc. ("TBC"), a financial services holding company, which is a wholly
owned subsidiary of Mellon Bank Corporation ("Mellon"). See "Management of the
Trust and the Fund."
EXCHANGE PRIVILEGES Shares of the Fund may be exchanged for shares of the same
class of other funds in the Smith Barney Group of Funds. Certain exchanges may
be subject to a sales charge differential. See "Exchange Privileges."
DIVIDENDS AND DISTRIBUTIONS Dividends are declared daily and paid monthly from
net investment income. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of the
Fund will be reinvested automatically, unless otherwise specified by an
investor, in additional shares at current net asset value. Shares acquired by
dividend and distribution reinvestment will not be subject to any CDSC. See
"Dividends, Distributions and Taxes."
4
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------PROSPECTUS SUMMARY
(CONTINUED)
SPECIAL CONSIDERATIONS AND RISK FACTORS There is no assurance that the Fund
will achieve its investment objective. In light of the fees and CDSC imposed
on Class B shares of funds in the Smith Barney Shearson Group of Funds, an
investment in the Fund should be viewed as part of a long-term investment in
the Smith Barney Group of Funds. Investors seeking only to invest in a money
market fund and who do not expect to re-exchange Fund shares for Class B
shares of other funds in the Smith Barney Group of Funds should consider more
suitable investments, including other money market funds offered to the public
by Smith Barney. See "Investment Objective and Management Policies" and
"Purchase of Shares."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
that an investor will incur, either directly or indirectly, as a shareholder
of the Fund, based on the maximum CDSC that may be incurred at the time of
redemption and an estimate of the Fund's operating expenses for its most
recent year:
<TABLE>
<CAPTION>
CLASS
B CLASS C
<S> <C> <C>
- -----------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum CDSC
(as a percentage of redemption proceeds) 5.00% 1.00%
- -----------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees .50% .50%
12b-1 fee* .50 (.50)
Other expenses .25 .25
- -----------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.25%
(1.25)%
- -----------------------------------------------------------------------------
<FN>
*Upon conversion, Class B shares will no longer be subject to a distribution
fee. Class C shares do not have a conversion feature and, therefore, are
subject to an ongoing distribution fee. As a result, long-term shareholders of
Class C shares may pay more than the economic equivalent of the maximum front-
end sales charge permitted by the National Association of Securities Dealers,
Inc.
</TABLE>
5
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------PROSPECTUS SUMMARY
(CONTINUED)
The CDSC set forth in the above table is the maximum CDSC imposed by any of
the funds participating in the Smith Barney Group of Funds exchange program.
Investors may pay actual charges of less than 5% depending on the CDSC of the
Class B shares with which the exchange was made, the length of time the Class
B shares are held, and whether the Class B shares are held through the 401(k)
Program. See "Redemption of Shares." Management fees paid by the Fund include
investment advisory fees paid to Greenwich Street Advisors, at the annual rate
of .30% of the value of the Fund's average daily net assets and administration
fees paid to SBA 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 Fund and the Trust."
Smith Barney receives an annual 12b-1 fee of .50% of the Fund's average daily
net assets. "Other expenses" in the above table include fees for shareholder
services, custodial fees, legal and accounting fees, printing costs and
registration fees.
EXAMPLE
The following example 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.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5
YEARS 10 YEARS* <S> <C>
<C> <C> <C>
- ------------------------------------------------------------------------------
- -Assumes complete redemption at maximum
applicable CDSC at end of each time
period $ $
$ $
Class B
Class C
Assumes no redemption $ $
$ $ Class B
Class C
- ------------------------------------------------------------------------------
- -<FN>
*Ten year figures assume exchange of Class B shares for Class A shares of
Smith
Barney Money Funds, Inc. -- Cash Portfolio at the end of the eighth year
following the date of original purchase of such Class B shares.
</TABLE>
THIS 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%.
6
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE 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, 1994. THIS INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES THAT ALSO APPEAR IN THE FUND'S ANNUAL
REPORT, WHICH IS INCORPORATED BY REFERENCE INTO THE STATEMENT OF ADDITIONAL
INFORMATION.
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
7/31/94 7/31/93
7/31/92 7/31/91
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------Income from investment
operations:
Net investment income 0.0212 0.0400 0.0618
- ------------------------------------------------------------------------------------Less distributions:
Distributions from net investment income (0.0212) (0.0400) (0.0618)
- ------------------------------------------------------------------------------------Net realized and unrealized
gain on
investments 0.0000 0.0000
0.0000
- ------------------------------------------------------------------------------------Net Asset Value, end of
year $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------------Total return+
2.15% 4.06% 6.36%
- ------------------------------------------------------------------------------------Ratios to average net
assets/supplemental
data:
Net assets, end of year (in 000's) $166,262 $225,476 $426,862
Ratio of net investment income to average net
assets 2.16% 4.13% 6.27%
Ratio of operating expenses to average net
assets 1.25% 1.22% 1.17%
- ------------------------------------------------------------------------------------<FN>
+ Total return represents aggregate total return for the period indicated and does not reflect any applicable
CDSC.
</TABLE>
7
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- --------------------------------------------FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
7/31/90 7/31/89 7/31/88 7/31/87
7/31/86*
<S> <C>
<C> <C> <C> <C>
Net Asset Value, beginning of year $ 1.00 $
1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------
- -------
Income from investment operations:
Net investment income 0.0740
0.0802 0.0566 0.0460 0.0032
- ------------------------------------------------------------------------------
- -------
Less distributions:
Distributions from net investment income (0.0740) (0.0802)
(0.0566) (0.0460) (0.0032)
- ------------------------------------------------------------------------------
- -------
Net realized and unrealized gain on
investments 0.0000
0.0000 0.0000 0.0000 0.0001
- ------------------------------------------------------------------------------
- -------
Net Asset Value, end of year $ 1.00 $
1.00 $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------------------------
- -------
Total return+ 7.62%
8.32% 5.85% 4.69% 0.32%
- ------------------------------------------------------------------------------
- -------
Ratios to average net assets/ supplemental
data:
Net assets, end of year (in 000's) $686,756
$829,743 $215,731 $ 83,366 $ 2,778
Ratio of net investment income to average net
assets 7.42% 8.36%
5.69% 4.96% 4.78%**
Ratio of operating expenses to average net
assets 1.15% 1.22%
1.46% 1.61% 1.50%**
- ------------------------------------------------------------------------------
- -------
<FN>
* The Fund commenced operations on July 8, 1986. ** Annualized.
+ Total return represents aggregate total return for the period indicated and
does not reflect any applicable CDSC.
</TABLE>
8
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------------INVESTMENT
OBJECTIVE AND MANAGEMENT POLICIES
The Fund seeks to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. This investment
objective may not be changed without the approval of the holders of a majority
of the Fund's shares. There can be no assurance that the Fund's investment
objective will be achieved.
The Fund attempts to achieve its investment objective by investing in short-
term money market instruments, including: securities issued or guaranteed by
the United States government, its agencies and instrumentalities ("U.S.
government securities"); repurchase agreements with respect to the foregoing;
bank time deposits, certificates of deposit and bankers' acceptances; and high
grade commercial paper. The following is a brief description of the kinds of
instruments in which the Fund may invest:
U.S. GOVERNMENT SECURITIES in which the Fund may invest include: direct
obligations of the United States Treasury such as Treasury Bills, Treasury
Notes and Treasury Bonds; obligations which are supported by the full faith
and credit of the United States such as Government National Mortgage
Association pass-through certificates; obligations which are supported by the
right of the issuer to borrow from the United States Treasury, such as
securities of Federal Home Loan Banks; and obligations which are supported by
the credit of the instrumentality, such as Federal National Mortgage
Association and Federal Home Loan Mortgage Association bonds. Because the
United States government is not obligated by law to provide support for an
instrumentality that it sponsors, the Fund will invest in obligations issued
by such an instrumentality only when the Fund's investment adviser determines
that the credit risk with respect to the instrumentality does not make its
securities unsuitable for investment by the Fund.
CERTIFICATES OF DEPOSIT, TIME DEPOSITS AND BANKERS' ACCEPTANCES in which the
Fund may invest generally are limited to those instruments issued by domestic
and foreign banks, savings and loan associations and other banking
institutions having total assets in excess of $1 billion. Certificates of
deposit ("CDs") are short-term negotiable obligations of commercial banks;
time deposits ("TDs") are non-negotiable deposits maintained in banking
institutions for specified periods of time at stated interest rates; and
bankers' acceptances are time drafts drawn on commercial banks by borrowers
usually in connection with international transactions. The Fund may invest in
U.S. dollar-denominated bank obligations, such as CDs, bankers'
9
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------INVESTMENT
OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
acceptances and TDs, including instruments issued or supported by the credit
of domestic or foreign banks or savings institutions having total assets at
the time of purchase in excess of $1 billion. The Fund generally will invest
at least 25% of its assets in these securities. The Fund will invest in an
obligation of a foreign bank or foreign branch of domestic bank only if the
Fund's investment adviser deems the obligation to present minimal credit
risks. Nevertheless, this kind of obligation entails risks that are different
from those of investments in domestic obligations of domestic banks due to
differences in political, regulatory and economic systems and conditions. The
Fund will not purchase TDs maturing in more than seven calendar days and will
limit to no more than 10% of its assets its investment in TDs maturing from
two business days through seven calendar days.
COMMERCIAL PAPER in which the Fund may invest is limited to direct
obligations of issuers that at the time of purchase are Eligible Securities
(as defined below under "Fund Quality and Diversification") that are (a) rated
by at least one nationally recognized statistical rating organization
("NRSRO") in the highest rating category for short-term debt securities or (b)
comparable unrated securities. The Fund will not purchase commercial paper of
any foreign issuer if after such purchase more than 20% of the value of the
Fund's assets would consist of commercial paper of foreign issuers. The Fund
also may invest in variable rate master demand notes, which are unsecured
demand notes typically purchased directly from large corporate issuers
providing for variable amounts of principal indebtedness and periodic
adjustments in the interest rate according to the terms of the instrument.
Demand notes normally are not traded in a secondary market. However, the Fund
may demand payment of principal and accrued interest in full at any time
without penalty. In addition, while demand notes generally are not rated,
their issuers must satisfy the same criteria as those set forth above for
issuers of commercial paper. Greenwich Street Advisors will consider the
earning power, cash flow and other liquidity ratios of issuers of demand notes
and continually will monitor their financial ability to meet payment on
demand.
CERTAIN INVESTMENT POLICIES
PRICE AND PORTFOLIO MATURITY. The Fund invests only in securities which are
purchased with and payable in U.S. dollars and which have (or, pursuant to
regulations adopted by the SEC, will be deemed to have) remaining
10
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------INVESTMENT
OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
maturities of thirteen months or less at the date of purchase by the Fund. For
this purpose, variable rate master demand notes (as described above under
"Commercial Paper"), which are payable on demand or, under certain conditions,
at specified periodic intervals not exceeding thirteen months, in either case
on not more than 30 days' notice, will be deemed to have remaining maturities
of thirteen months or less. The Fund maintains a dollar-weighted average
portfolio maturity of 90 days or less. The Fund follows these policies to
maintain a constant net asset value of $1.00 per share, although there is no
assurance that it can do so on a continuing basis.
FUND QUALITY AND DIVERSIFICATION. The Fund will limit its investments to
securities that the Trust's Board of Trustees determines present minimal
credit risks and which are "Eligible Securities" at the time of acquisition by
the Fund. The term Eligible Securities includes securities rated by the
"Requisite NRSROs" in one of the two highest short-term rating categories,
securities of issuers that have received such ratings with respect to other
short-term debt securities and comparable unrated securities. "Requisite
NRSROs" means (a) any two NRSROs that have issued a rating with respect to a
security or class of debt obligations of an issuer, or (b) one NRSRO, if only
one NRSRO has issued such a rating at the time that the Fund acquires the
security. If the Fund acquires securities that are unrated or that have been
rated by a single NRSRO, the acquisition must be approved or ratified by the
Trust's Board of Trustees. The NRSROs currently designated as such by the SEC
are Standard & Poor's Corporation, Moody's Investors Service, Inc., Thomson
BankWatch, Fitch Investors Services, Inc., Duff & Phelps Inc. and IBCA Limited
and its affiliate, IBCA, Inc. A discussion of the ratings categories of the
NRSROs is contained in the Appendix to the Statement of Additional
Information.
The Fund generally may not invest more than 5% of its total assets in the
securities of any one issuer, except for U.S. government securities. In
addition, the Fund may not invest more than 5% of its total assets in Eligible
Securities that have not received the highest rating from the Requisite NRSROs
and comparable unrated securities ("Second Tier Securities") and may not
invest more than 1% of its total assets in the Second Tier Securities of any
one issuer. The Fund may invest more than 5% (but no more than 25%) of the
then-current value of the Fund's total assets in the securities of a single
issuer for a period of up to three business days, provided that (a) the
securities are rated by the Requisite NRSROs in the
11
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------INVESTMENT
OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
highest short-term rating category, are securities of issuers that have
received such rating with respect to other short-term debt securities or are
comparable unrated securities, and (b) the Fund does not make more than one
such investment at any one time.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund
would acquire a U.S. government security for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The Fund will enter into
repurchase agreements with banks which are the issuers of instruments
acceptable for purchase by the Fund and certain dealers on the Federal Reserve
Bank of New York's list of reporting dealers. Under each repurchase agreement
the selling institution will be required to maintain the value of the
securities subject to the repurchase agreement at not less than their
repurchase price. Repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays
or restrictions upon the Fund's ability to dispose of the underlying
securities, the risk of a possible decline in the value of the underlying
securities during the period in which the Fund seeks to assert its rights to
them, the risk of incurring expenses associated with asserting those rights
and the risk of losing all or part of the income from the agreement. The
Fund's investment adviser or administrator, acting under the supervision of
the Trust's Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers with which the
Fund enters into repurchase agreements to evaluate potential risks.
CERTAIN INVESTMENT GUIDELINES
The Fund will concentrate its investments in the banking industry except
during temporary defensive periods. Up to 25% of the assets of the Fund may be
invested at any time in the obligations of issuers conducting their principal
business activities in any industry other than banking. The Fund may not
acquire more than 10% of the voting or any other class of securities of any
one issuer, except that U.S. government securities may be purchased without
regard to these limits. In addition, the Fund may invest
12
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------INVESTMENT
OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
up to an aggregate of 10% of its total assets in illiquid securities with
contractual or other restrictions on resale and other instruments which are
not readily marketable, including: (a) repurchase agreements providing for
settlement in more than seven days after notice by the Fund and (b) TDs
maturing from two business days through seven calendar days. Up to 5% of the
Fund's assets may be invested in the securities of issuers that have been in
continuous operation for less than three years. The Fund also is authorized to
borrow in an amount of up to 10% of its total assets for temporary or
emergency purposes, but not for leverage, and to pledge its assets to the same
extent in connection with such borrowings. Whenever borrowings exceed 5% of
the value of the Fund's total assets, the Fund will not make any additional
investments. A more detailed description of these policies, together with an
enumeration of additional investment restrictions which the Fund has adopted
and which cannot be changed without the approval of the holders of a majority
of the Fund's outstanding shares, is contained in the Statement of Additional
Information.
SPECIAL CONSIDERATIONS AND RISK FACTORS
The Fund will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Fund. The market value of the obligations held by the Fund can be expected to
vary inversely to changes in the prevailing interest rates. Investors also
should recognize that, in periods of declining interest rates, the Fund's
yield will tend to be somewhat higher than prevailing market rates and, in
periods of rising interest rates, the Fund's yield will tend to be somewhat
lower. Also, when interest rates are falling, the inflow of net new money to
the Fund from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of its portfolio, thereby
reducing the Fund's current yield. In periods of rising interest rates, the
opposite can be expected to occur. In addition, securities in which the Fund
will invest may not yield as high a level of current income as might be
achieved by investing in securities with less liquidity and safety and longer
maturities.
Investments in foreign banks or foreign issuers present certain risks,
including those resulting from fluctuations in currency exchange rates,
revaluation of currencies, future political and economic developments and the
possible imposition of currency exchange blockages or other foreign
13 <PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
governmental laws or restrictions and reduced availability of public
information. Foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices
and requirements applicable to domestic issuers. In addition, there may be
less publicly available information about a foreign bank than about a domestic
bank.
- -------------------------------------------------------------------VALUATION
OF SHARES
The Fund's net asset value per share is calculated on each day, Monday through
Friday, except on days when the NYSE is closed. The NYSE is currently
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 Fund's net asset value per share is determined as of the close of regular
trading on the NYSE, and is computed by dividing the value of the Fund's net
assets by the total number of its shares outstanding. The Fund's assets are
valued on the basis of amortized cost, which involves valuing a portfolio
instrument at its cost initially and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact
of fluctuating interest rates on the market value of the instrument. The Fund
seeks to maintain a constant net asset value of $1.00 per share, although
there can be no assurance that it can do so on a continuing basis. Further
information regarding the Fund's valuation policies is contained in the
Statement of Additional Information.
- -------------------------------------------------------------------DIVIDENDS,
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund is treated separately from other funds of the Trust in determining
the amounts of dividends from investment income and distributions of capital
gains payable to shareholders. Dividends and distributions will be reinvested
automatically, unless the shareholder instructs the Fund
14
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------DIVIDENDS,
DISTRIBUTIONS AND TAXES (CONTINUED)
otherwise, in each shareholder's account at net asset value in additional
shares of the Fund. Dividends from the Fund's net investment income, if any,
will be declared on each day that the Fund is open for business and will be
paid on the second Friday of each month. Distributions of net realized capital
gains, if any, will be declared after the end of the fiscal year in which they
have been earned and will be reinvested in additional shares of the Fund at
net asset value or, at each shareholder's option, paid in cash and credited to
the shareholder's account at Smith Barney. In addition, in order to avoid the
application of a 4% nondeductible excise tax on certain undistributed amounts
of ordinary income and capital gains, the Fund may make an additional
distribution of any undistributed ordinary income and capital gains shortly
before each December 31, and expects to make any other distributions as are
necessary to avoid the application of this tax. If a shareholder redeems all
shares in the account at any time during the month, all dividends declared up
to and including the date of redemption will be paid together with the
proceeds of the redemption.
TAXES
The Fund has qualified and intends to continue to qualify each year as a
regulated investment company under the Code. Dividends paid from interest and
distributions of any realized short-term capital gains are taxable to
shareholders as ordinary income, whether received in cash or reinvested in
additional shares of the Fund. The Fund is not expected to realize long-term
capital gains and thus does not contemplate paying long-term capital gains
distributions. The Fund's dividends do not qualify for the corporate
dividends-received deduction. Statements as to the tax status of each
shareholder's dividends and distributions are mailed annually.
Shareholders should consult their tax advisors about any state and local taxes
that may apply to payments received. In this regard, shareholders should be
aware that distributions of net investment income may be taxable to
shareholders as dividend income under the laws of certain states, even though
a substantial portion of such distributions may be derived from interest on
U.S. government securities which, if received directly, would be exempt from
state income tax.
15
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------------PURCHASE OF
SHARES
Fund shares may be acquired only through exchanges with Class B and Class C
shares of other funds in the Smith Barney Group of Funds, except that such
shares may be acquired directly by participants in the 401(k) Program
("Participating Plans") and certain non-qualified retirement plans which
purchased shares of the Short Term Investment Series of Hutton Investment
Series Inc. prior to the consolidation of the Series with the Fund on November
4, 1988 ("Non-qualified Plans" and collectively with Participating Plans,
"Benefit Plans"). Investors purchasing shares of the Fund through a qualified
retirement plan may do so directly through the Trust's transfer agent, The
Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data
Corporation. Class B shares acquired through exchange are subject to the CDSC,
if any, of the shares with which the exchange is made. Class B shares
purchased directly by Benefit Plans are subject to a CDSC of 3%. See "Purchase
of Shares -- Smith Barney 401(k) Program" and "Shareholder Services."
In light of the distribution fee and CDSC imposed on Class B and Class C
shares of funds in the Smith Barney Group of Funds, an investment in the Fund
should be viewed as part of a long-term investment in the Smith Barney Group
of Funds. Investors seeking only to invest in a money market fund and who do
not expect to exchange Fund shares for Class B or Class C shares of other
funds in the Smith Barney Group of Funds should consider more suitable
investments, including other money market funds offered to the public by Smith
Barney.
The Fund employs a distribution method which differs from that of certain
other mutual funds that invest in money market instruments. Before investing
in the Fund, among other things, investors should consider that certain other
funds with an investment objective and policies similar to those of the Fund
do not pay distribution expenses or impose any sales charge.
Orders for shares of the Fund received prior to the close of regular trading
on the New York Stock Exchange, Inc. ("NYSE"), currently 4:00 p.m., New York
time, on any day that the Fund calculates its net asset value, are priced
according to the net asset value determined on that day. Orders received after
the close of regular trading on the NYSE are priced as of the time that the
net asset value per share is next determined. See "Valuation of Shares."
16
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------PURCHASE OF SHARES
(CONTINUED)
SMITH BARNEY 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 qualified 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 benefits plans.
It is anticipated that Participating Plans will purchase shares of the Fund as
part of a multi-fund investment program. Participating Plans may acquire
shares of the Fund only through an exchange from Class B shares of another
fund in the Smith Barney Group of Funds or through direct investment only if
they hold Class B shares of another fund in the Smith Barney Group of Funds.
Shares of the Fund acquired by Participating Plans are subject to a CDSC of
3% of redemption proceeds, if redeemed within eight years of the date the
Participating Plan first purchased shares of the Fund. The CDSC applicable to
Participating Plans investing in these shares depends on the number of years
since the Participating Plan first purchased shares of the Fund, rather than
the CDSC applicable to other shareholders which depends on the number of years
since those shareholders made the purchase payment from which the amount is
being redeemed.
The CDSC will be waived on redemptions of 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 by a
Participating Plan to an employee in the Plan.
Eight years after the date of purchase, Class B shares will be automatically
redeemed, and the redemption proceeds will be reinvested, at net asset value,
in Class A shares of Smith Barney Daily Dividend Fund Inc. In
17
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------PURCHASE OF SHARES
(CONTINUED)
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 automatically redeemed at that time and the proceeds therefrom will be
reinvested in Class A shares of Smith Barney Daily Dividend Fund Inc. That
portion will be a percentage of the total number of Class B Dividend Shares
held by the shareholder determined by dividing the total number of Class B
shares being redeemed by the shareholder at the time by the total number of
Class B shares (other than Class B Dividend Shares) held by the shareholder.
Class B shares will first be subject to automatic redemption on or about
September 30, 1994.
- -------------------------------------------------------------------SHAREHOLDER
SERVICES
EXCHANGE PRIVILEGES
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds in the Smith Barney Group of
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges are subject to minimum investment and other requirements
of the fund into which exchanges are made and a sales charge differential may
apply.
<TABLE>
<C> <S>
FUND NAME
- ------------------------------------------------------------------------------
- --MUNICIPAL BOND FUNDS
* Smith Barney Limited Maturity Municipals Fund Smith Barney Managed
Municipals Fund Inc. Smith Barney Tax-Exempt Income Fund Smith Barney Arizona
Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals Fund Smith Barney
California Municipals Fund Inc.
Smith Barney Florida Municipals Fund Smith Barney Massachusetts Municipals
Fund Smith Barney New Jersey Municipals Fund Inc.
* Smith Barney Intermediate Maturity New York Municipals Fund Smith Barney New
York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund Smith Barney Muni Funds -- National
Portfolio
</TABLE>
18
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------SHAREHOLDER
SERVICES (CONTINUED)
<TABLE>
<C> <S>
* Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- California Portfolio * Smith Barney Muni Funds --
California Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio * Smith Barney Muni Funds --
Florida Limited Term Portfolio
Smith Barney Muni Funds -- New Jersey Portfolio Smith Barney Muni Funds -- New
York Portfolio Smith Barney Muni Funds -- Georgia Portfolio Smith Barney Muni
Funds -- Pennsylvania Portfolio Smith Barney Muni Funds -- Ohio Portfolio
INCOME FUNDS
** Smith Barney Adjustable Rate Government Income Fund
* Smith Barney Limited Maturity Treasury Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Government Securities Fund
Smith Barney Investment Grade Bond Fund
Smith Barney High Income Fund
Smith Barney Global Bond Fund
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio Smith
Barney Funds, Inc. -- Utility Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio Smith Barney
Funds, Inc. -- Monthly Payment Government Portfolio Smith Barney Funds, Inc. -
- - Income Return Account Portfolio
GROWTH AND INCOME FUNDS
Smith Barney Convertible Fund
Smith Barney Growth and Income Fund
Smith Barney Utilities Fund
Smith Barney Strategic Investors Fund
Smith Barney Premium Total Return Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio Smith Barney World
Funds -- International Balanced Portfolio
GROWTH FUNDS
Smith Barney Fundamental Value Fund Inc. Smith Barney Telecommunications
Growth Fund Smith Barney Aggressive Growth Fund Inc. Smith Barney Appreciation
Fund Inc. Smith Barney Special Equities Fund
</TABLE>
19
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------SHAREHOLDER
SERVICES (CONTINUED)
<TABLE>
<C> <S>
Smith Barney Global Opportunities Fund
Smith Barney European Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- International Equity Portfolio Smith Barney
World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio Smith Barney
Funds, Inc. -- Capital Appreciation Portfolio
MONEY MARKET FUNDS
+ Smith Barney Money Funds, Inc. -- Cash Portfolio + Smith Barney Money Funds,
Inc. -- Government Portfolio
<FN>
- ------------------------
* Available for exchange with Class C shares of the Fund.
** Available for exchange with Class B and Class C shares of the Fund. In
addition, shareholders who own Class C shares of the Fund in a Smith Barney
401(k) Program may exchange those shares for Class C shares of this fund. +
Available for exchange with Class C shares of the Fund.
++ Available for exchange with Class A, Class C and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the Fund in a Smith
Barney 401(k) Program may exchange those shares for Class C shares of this
fund.
</TABLE>
CLASS B EXCHANGES. In the event a Class B shareholder (unless such shareholder
was a Class B shareholder of the Short-Term World Fund on July 15, 1994)
wishes to exchange all or a portion of his or her shares in any of the funds
imposing a CDSC higher than that imposed by the Fund, the exchanged Class B
shares will be subject to the higher applicable CDSC. Upon an exchange, the
new Class B shares will be deemed to have been purchased on the same date as
the Class B shares of the Fund that have been exchanged.
CLASS C EXCHANGES. Upon an exchange, the new Class C shares will be deemed to
have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Although the exchange
privilege is an important benefit, excessive exchange transactions can be
detrimental to the Fund's performance and its shareholders. The investment
adviser may determine that a pattern of frequent exchanges is excessive and
contrary to the best interests of the Fund's other shareholders. In this
event, the investment adviser will notify Smith Barney and Smith
20
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------SHAREHOLDER
SERVICES (CONTINUED)
Barney may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, Smith Barney will
provide notice in writing or by telephone to the shareholder at least 15 days
prior to suspending the exchange privilege and during the 15-day period the
shareholder will be required to (a) redeem his or her shares in the Fund or
(b) remain invested in the Fund or exchange into any of the funds in the Smith
Barney Group of Funds ordinarily available, which position the shareholder
would be expected to maintain for a significant period of time. All relevant
factors will be considered in determining what constitutes an abusive pattern
of exchanges.
Exchanges will be processed at the net asset value next determined after the
redemption proceeds are available. Redemption procedures discussed below are
also applicable for exchanging shares, and exchanges will be made upon receipt
of all supporting documents in proper form. If the account registration of the
shares of the fund being acquired is identical to the registration of the
shares of the fund exchanged, no signature guarantee is required. A capital
gain or loss for tax purposes will be realized upon the exchange, depending
upon the cost or other basis of shares redeemed. Before exchanging shares,
investors should read the current prospectus describing the shares to be
acquired. The Fund reserves the right to modify or discontinue exchange
privileges upon 60 days' prior notice to shareholders.
- -------------------------------------------------------------------REDEMPTION
OF SHARES
The Fund is required to redeem the shares of the Fund tendered to it, as
described below, at a redemption price equal to their net asset value per
share next determined after receipt of a written request in proper form at no
charge other than any applicable CDSC. Redemption requests received after the
close of regular trading on the NYSE are priced at the net asset value next
determined. If a shareholder holds shares in more than one Class, any request
for redemption must specify the Class being redeemed. In the event of a
failure to specify which Class, or if the investor owns fewer shares of the
Class than specified, the redemption request will be delayed until the Fund's
transfer agent receives further instructions from Smith Barney, or if the
shareholder's account is not with Smith Barney, from the shareholder directly.
The redemption proceeds will be remitted on or before the seventh
21
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------REDEMPTION OF
SHARES (CONTINUED)
day following receipt of proper tender, except on a day on which the NYSE is
closed or as permitted under the Act in extraordinary circumstances.
Generally, if the redemption proceeds are remitted to a Smith Barney brokerage
account, these funds will not be invested for the shareholder's benefit
without specific instruction and Smith Barney will benefit from the use of
temporarily uninvested funds. Redemption proceeds for shares purchased by
check, other than a certified or official bank check, will be remitted upon
clearance of the check, which may take up to ten days or more.
Shares may be redeemed in one of the following ways:
REDEMPTION THROUGH SMITH BARNEY
Redemption requests may be made through Smith Barney, an Introducing Broker or
dealer in the selling group. A shareholder desiring to redeem shares
represented by certificates must present the certificates to Smith Barney, the
Introducing Broker or dealer in the selling group endorsed for transfer (or
accompanied by an endorsed stock power), signed exactly as the shares are
registered. Redemption requests involving shares represented by certificates
will not be deemed received until the certificates are received by TSSG in
proper form.
REDEMPTION BY MAIL
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. All other shares may
be redeemed by submitting a written request for redemption to:
Smith Barney Exchange Reserve Fund
Class B or Class C (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request to TSSG or a Smith Barney 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
22
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------REDEMPTION OF
SHARES (CONTINUED)
shares to be redeemed were issued in certificate form, the certificates must
be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to TSSG together with the redemption request. Any signature
appearing on a redemption request, share certificate or stock power must be
guaranteed by an eligible guarantor institution, such as a domestic bank,
savings and loan institution, domestic credit union, member bank of the
Federal Reserve System or member firm of a national securities exchange. TSSG
may require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or guardians. A redemption
request will not be deemed properly received until TSSG receives all required
documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $100 monthly. Retirement plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. For additional information, shareholders should
contact their Smith Barney Financial Consultants. Any applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed 1% per month of
the value of the shareholder's shares subject to the CDSC at the time the
withdrawal plan commences. With respect to withdrawal plans in effect prior to
November 7, 1994, any applicable CDSC will be waived on amounts withdrawn that
do not exceed 2% per month of the shareholder's shares subject to CDSC. For
further information regarding the automatic cash withdrawal plan, shareholders
should contact their Smith Barney Financial Consultants.
- -------------------------------------------------------------------MINIMUM
ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any shareholder's
account in the Fund if the aggregate net asset value of the shares held in the
Fund account is less than $500. (If a shareholder has more than one account in
this Fund, each account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions in
23
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------MINIMUM ACCOUNT
SIZE (CONTINUED)
net asset value. Before the Fund exercises such right, shareholders will
receive written notice and will be permitted 60 days to bring accounts up to
the minimum to avoid automatic redemption.
- -------------------------------------------------------------------PERFORMANCE
From time to time, the Fund may advertise its "yield" in advertisements or
in reports or other communications to shareholders. The yield refers to the
income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized"
by assuming that the amount of income generated by the investment during that
week is generated each week over a 52-week period and is shown as a percentage
of the investment.
Yield information may be helpful in reviewing the Fund's performance and for
providing a basis for comparison with other investment alternatives. Because
the Fund's net investment income changes in response to fluctuations in
interest rates and expenses of the Fund, however, any given yield should not
be considered representative of the Fund's yield for any future period.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds or
classes of other funds as listed in the rankings prepared by Lipper Analytical
Services, Inc. or similar independent services which monitor the performance
of mutual funds, or other industry or financial publications such as BARRON'S,
BUSINESS WEEK, CHANGING TIMES, CDA INVESTMENT TECHNOLOGIES, INC., FORBES,
FORTUNE, INSTITUTIONAL INVESTOR, INVESTORS DAILY, KIPLINGER'S PERSONAL
FINANCE, MONEY, MORNINGSTAR MUTUAL FUND VALUES, THE NEW YORK TIMES, THE WALL
STREET JOURNAL and USA TODAY.
On occasion, the Fund may compare its yield to the DONOGHUE'S MONEY FUND
AVERAGE, an average compiled by IBC/ DONOGHUE'S MONEY FUND REPORT-R-, a widely
recognized independent publication that monitors the performance of money
market mutual funds, or to the average yield reported by the BANK RATE MONITOR
for money market deposit accounts offered by the 50 leading banks and thrift
institutions in the five largest standard metropolitan statistical areas. As
with yield quotations, yield
24
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------PERFORMANCE
(CONTINUED)
comparisons should not be considered as representative of the Fund's yields
for any future periods. It is important to note that the Fund's yield is based
on historical earnings and its net investment income changes in response to
fluctuations in interest rates and its expenses and, therefore, yield is not
intended to indicate the Fund's future performance. The Statement of
Additional Information further describes the method used to determine the
yield. Current yield quotations may be obtained from your Smith Barney
Financial Consultant.
- -------------------------------------------------------------------MANAGEMENT
OF THE FUND AND THE TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees approve all
significant agreements between the Trust and the companies that furnish
services to the Fund, including agreements with its investment adviser,
administrator, sub-administrator, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to its investment adviser, administrator
and sub-administrator. The Statement of Additional Information contains
general background information regarding each Trustee and executive officer of
the Fund.
INVESTMENT ADVISER--GREENWICH STREET ADVISORS
Greenwich Street Advisors is located at 388 Greenwich Street, New York, New
York 10013, and serves as the Fund's investment adviser. Greenwich Street
Advisors (through its predecessors), has been in the investment counseling
business since 1934 and is a division of Mutual Management Corp. which was
incorporated in 1978. Greenwich Street Advisors renders investment advice to
investment companies that had aggregate assets under management as of
in excess of $ billion.
Subject to the supervision and direction of the Trust's Board of Trustees,
Greenwich Street Advisors manages the Fund in accordance with the Fund's
stated investment objective and policies, makes investment decisions for the
25
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------MANAGEMENT OF THE
FUND AND THE TRUST (CONTINUED)
Fund, places orders to purchase and sell securities on behalf of the Fund and
employs professional portfolio managers and securities analysts who provide
research services to the Fund.
ADMINISTRATOR--SBA
SBA, located at 1345 Avenue of the Americas, New York, New York 10105, serves
as the Fund's administrator and generally assists in all aspects of the Fund's
administration and operation. SBA has been in the investment counseling
business since 1968 and renders investment management and administration
services to a wide variety of individual, institutional and investment company
clients that had aggregate assets under management as of _________ in excess
of $__ billion.
Pursuant to an administration agreement with the Fund, SBA is paid a fee at
the annual rate of .20% of the Fund's average daily net assets.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory and/or administrative services to investment
companies having aggregate assets under management, as of , in
excess of $ billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBA in all aspects of the Fund's administration and
operation. Boston Advisors is paid a portion of the fee paid by the Fund to
SBA at a rate agreed upon from time to time between Boston Advisors and SBA.
- -------------------------------------------------------------------DISTRIBUTOR
Smith Barney distributes shares of the Fund as principal underwriter and as
such conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the Act (the "Plan"), Smith Barney is paid an annual service
fee with respect to Class B and Class C shares of the Fund
26
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------DISTRIBUTOR
(CONTINUED)
at the annual rate of 0.25% of the average daily net assets of each respective
Class' shares. Smith Barney is also paid an annual distribution fee at the
annual rate of 0.25% of the average daily net assets attributable to those
shares. With regard to Class B shares that automatically convert to Class A
shares of Smith Barney Money Funds Inc. -- Cash Portfolio eight years after
the date of original purchase, these shares will no longer be subject to
distribution fees. The fees are used by Smith Barney to pay its Financial
Consultants for servicing shareholder accounts and to cover expenses primarily
intended to result in the sale of those shares. These expenses include:
advertising expenses; the cost of printing and mailing prospectuses to
potential investors; payments to and expenses of Smith Barney Financial
Consultants and other persons who provide support services in connection with
the distribution of shares; interest and/or carrying charges; and indirect and
overhead costs of Smith Barney associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses.
Actual distribution and shareholder service expenses for Class B and Class C
shares of the Fund for any given year may exceed the fees received pursuant to
the Plan and will be carried forward and paid by the Fund in future years so
long as the Plan is in effect. Interest is accrued monthly on such
carryforward amounts at a rate comparable to that paid by Smith Barney for
bank borrowings.
Payments under the Plan are not tied exclusively to the distribution expenses
actually incurred by Smith Barney, and such payments may exceed distribution
expenses actually incurred by Smith Barney. The Board of Trustees evaluates
the appropriateness of the Plan and its payment terms on a continuing basis
and in doing so considers all relevant factors, including expenses borne by
Smith Barney and amounts received under the Plan and the proceeds of CDSC.
During the period from September 16, 1985 (the Trust's commencement of
operations) through July 31, 1994, Shearson Lehman Brothers Inc. ("Shearson
Lehman Brothers"), the Trust's distributor prior to Smith Barney, and Smith
Barney incurred total distribution expenses of approximately $
, while receiving
approximately $ pursuant to the Plan and approximately $
from CDSC. The excess of such distribution expenses incurred by Shearson
Lehman Brothers and Smith Barney over such distribution fees and CDSC, or
approximately $ , was equivalent to approximately % of the
Trust's aggregate net
assets on July 31, 1994.
27
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- -------------------------------------------------------------------ADDITIONAL
INFORMATION
The Trust was organized on March 12, 1985, under the laws of the Commonwealth
of Massachusetts and is an entity commonly known as a "Massachusetts business
trust." The Trust commenced operations on September 16, 1985, under the name
Shearson Lehman Special Portfolios, and on February 21, 1986, December 6,
1988, August 27, 1990, November 5, 1992, July 30, 1993, and October 14, 1994
changed its name to Shearson Lehman Special Income Portfolios, SLH Income
Portfolios, Shearson Lehman Brothers Income Portfolios, Shearson Lehman
Brothers Income Funds, Smith Barney Shearson Income Funds and Smith Barney
Income Funds, respectively.
The Trust offers shares of beneficial interest of separate series having a
$.001 per share par value. When matters are submitted for shareholder vote,
shareholders of each fund of the Trust will have one vote for each full share
owned and a proportionate, fractional vote for any fractional share held.
Generally, shares of the Trust vote by individual funds on all matters except
(a) matters affecting only the interests of one or more of the funds, in which
case only shares of the affected fund or funds would be entitled to vote, or
(b) when the 1940 Act requires that shares of the funds be voted in the
aggregate.
The Trust does not hold annual meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a majority of the
Trustees holding office have been elected by shareholders. The Trustees will
call a meeting for any purpose upon the written request of holders of at least
10% of the Fund's outstanding shares.
Boston Safe Deposit and Trust Company ("Boston Safe") is located at One
Boston Place, Boston, Massachusetts 02108, and serves as custodian of the
Fund's investments. Boston Safe is a wholly owned subsidiary of TBC.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent.
The Trust sends to each shareholder of the Fund a semi-annual report and an
audited annual report, each of which includes a list of the investment
securities held by the Trust. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual
and annual reports by household. This consolidation means that a household
having multiple accounts with the identical address of record will
28
<PAGE>
SMITH BARNEY
EXCHANGE RESERVE FUND
- ------------------------------------------------------------ADDITIONAL
INFORMATION (CONTINUED)
receive a single copy of each report. In addition, the Fund also plans to
consolidate the mailing of its Prospectus so that a shareholder having
multiple accounts will receive a single Prospectus annually. Any shareholder
who does not want this consolidation to apply to his or her account should
contact his or her Financial Consultant or the Trust's transfer agent.
Shareholders may seek information regarding the Trust, including the current
performance of the Fund, from their Smith Barney Financial Consultants.
- -------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE RELATED
STATEMENT OF ADDITIONAL INFORMATION AND/OR THE FUND'S OFFICIAL SALES
LITERATURE IN CONNECTION WITH THE OFFERING OF THE FUND'S SHARES, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND. 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.
29 <PAGE>
SMITH BARNEY
EXCHANGE
RESERVE
FUND
388 Greenwich Street
New York, New York 10013
Fund 26 FD0218 K3
Smith Barney
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION NOVEMBER 7,
1994
This Statement of Additional Information expands upon and supplements the
information contained in the current Prospectuses of Smith Barney Income
Funds (the "Trust"), relating to eight investment funds offered by the
Trust (the "Funds"), each dated November 7, 1994, as amended or supple-
mented from time to time, and should be read in conjunction with the Pro-
spectuses. The Prospectuses may be obtained from your Smith Barney Finan-
cial Consultant or by writing or calling the Trust at the address or tele-
phone number set forth above. This Statement of Additional Information,
although not in itself a prospectus, is incorporated by reference into the
Prospectuses in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the Pro-
spectuses and this Statement of Additional Information, except where shown
below:
Management of the Trust and the Funds
2
Investment Objectives and Management Policies
7
Purchase of Shares
28
Redemption of Shares
29
Distributor
30
Valuation of Shares
31
Exchange Privilege (See in the Prospectuses "Shareholder Services")
32
Performance Data (See in the Prospectuses "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 orga-
nizations that provide services to the Trust. These organizations are the
following:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Smith Barney Inc. Distributor
("Smith Barney")
Greenwich Street Advisors (a division of Investment adviser to Smith
Barney Convertible,
Mutual Management Corp.) High Income, Diversified
Strategic Income, Tax-
Exempt Income, Utilities and
Exchange Reserve Funds
Smith Barney Strategy Advisers Inc. Investment adviser to Smith
Barney Premium Total
("Strategy Advisers") Return Fund
Smith Barney Global Capital Management Inc. Investment adviser to Smith
Barney Global Bond
("Global Capital Management") Fund and sub-investment adviser
to the Diversified
Strategic Income Fund
Smith, Barney Advisers, Inc. Administrator
("SBA")
The Boston Company Advisors, Inc. Sub-Administrator
("Boston Advisors")
Boston Safe Deposit and Trust Company Custodian
("Boston Safe")
The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data
Corporation Transfer Agent
</TABLE>
These organizations and the functions they perform for the Trust are dis-
cussed in the Prospectuses and in this Statement of Additional Informa-
tion.
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
The 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
, 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 Of-
ficer of Associated Merchandising Corporation, a major retail merchandis-
ing and sourcing organization. His address is 1440 Broadway, Suite 1001,
New York, New York 10018.
Antoinette C. Bentley, Trustee. Retired; formerly Senior Vice President
and Associate General Counsel of Crum and Forster, Inc., an insurance
holding company. Her address is 24 Fowler Road, Far Hills, New Jersey
07931.
Allan J. Bloostein, Trustee. Consultant; formerly Vice Chairman of the
Board of and Consultant to The May Department Stores Company; Director of
Crystal Brands, Inc., Melville Corp. and R.G. Barry Corp. His address is
Anderson Road, Sherman, Connecticut 06784.
Richard E. Hanson, Jr., Trustee. Headmaster, The Peck School, Morristown,
NJ; prior to July 1, 1994, Headmaster, Lawrence Country Day School-
Woodmere Academy, Woodmere, New York; prior to July 1, 1990, Headmaster of
Woodmere Academy. His address is 247 South Street, Morristown, NJ 07960.
*Heath B. McLendon, Chairman of the Board and Investment Officer. Execu-
tive Vice President of Smith Barney Inc.; prior to July 1993, Senior Exec-
utive Vice President of Shearson Lehman Brothers Inc. ("Shearson Lehman
Brothers"), Vice Chairman of Shearson Asset Management; a Director of Pa-
nAgora 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 Roths-
child 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; Director and President of Mutual Management Corp., and SBA;
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 Premium Total Return
Fund. Managing Director of Smith Barney; President of Smith Barney Strat-
egy Advisers Inc.; prior to July 1993, Senior Vice President of Shearson
Lehman Brothers, Vice President of Shearson Lehman Investment Strategy Ad-
visors Inc., an investment advisory affiliate of Shearson Lehman Brothers.
His address is Two World Trade Center, New York, New York 10048.
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.
Victor S. Filatov, Investment Officer. International Strategist and Presi-
dent of Global Capital Management; prior to 1993, Business Coordi-
nator and Head of European Fixed Income Research of J.P. Morgan Securities
Inc. His address is 10 Piccadilly, London, W1V 9LA, England.
John B. Fullerton, Sr., Investment Administrator. Vice President of Boston
Advisors; Senior Vice President of The Boston Company Institutional Inves-
tors, Inc. His address is 100 Drake's Landing Road, Greenbrae, California
94904.
Jack S. Levande, Vice President and Investment Officer. Managing Director
of 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 Ad-
visors. Her address is Two World Trade Center, New York, New York 10048.
Lawrence T. McDermott, Vice President and Investment Officer. Managing Di-
rector 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 Man-
ager 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 Advi-
sors; Senior Vice President of The Boston Company Institutional Investors,
Inc. His address is 100 Drake's Landing Road, Greenbrae, California 94904.
Phyllis M. Zahorodny, Vice President and Investment Officer. Managing Di-
rector of 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.
Patricia Zuch, Investment Administrator. Vice President of Boston Advi-
sors. Her address is 100 Drake's Landing Road, Greenbrae, California
94904.
Lewis E. Daidone, Treasurer. Managing Director of Smith Barney and Green-
wich Street Advisors; Director and Senior Vice President of Mutual Manage-
ment Corp. and SBA; prior to January, 1994 Senior Vice President and Chief
Financial Officer of Cortland Financial Group, Inc. His address is 1345
Avenue of the Americas, New York, New York 10105.
Christina T. Sydor, Secretary. Managing Director of Smith Barney and Sec-
retary of Mutual Management Corp. and Smith Barney Advisors. Her address
is 1345 Avenue of the Americas, New York, New York 10105.
Each Trustee also serves as a director, trustee and/or general partner of
certain other mutual funds for which Smith Barney serves as distributor.
Global Capital Management, Greenwich Street Advisors and Strategy Advisers
(the "Advisers") are "affiliated persons" of the Trust as defined in the
1940 Act by virtue of their positions as investment advisers to the Funds.
No director, officer or employee of Smith Barney, the Advisers or any af-
filiate of Smith Barney 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 Smith Bar-
ney 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, 1994, such fees and
expenses totalled $ .
INVESTMENT ADVISERS, SUB-INVESTMENT ADVISER, ADMINISTRATOR, AND SUB-
ADMINISTRATOR
Each Adviser serves as investment adviser to one or more Funds pursuant to
a separate written agreement with the relevant Fund (an "Advisory Agree-
ment"). The Advisory Agreements were most recently approved by the Board
of Trustees, including a majority of the Trustees who are not "interested
persons" of the Trust or the Advisers ("Independent Trustees"), on August
10, 1994, with the exception of Premium Total Return Fund and Global Bond
Fund which were approved on April 4, 1994 and January 20,1994, respec-
tively. SBA serves as administrator to each Fund pursuant to a separate
written agreement dated May 4, 1994 (the "Administration Agreement") which
was approved by the Board of Trustees, including a majority of the Inde-
pendent Trustees, on May 4, 1994. Global Capital Management also serves as
sub-investment adviser to the Diversified Strategic Income Fund, pursuant
to a written agreement dated March 21, 1994 which was approved by the
Fund's Board of Trustees, including a majority of the Independent Trust-
ees, on January 20, 1994 and by the Fund's shareholders on ,
1994. Prior to March 22, 1994, Lehman Brothers Global Asset Management
acted in the capacity as the Fund's sub-investment adviser.
Boston Advisors currently serves as sub-administrator to the Funds under a
written agreement (the "Sub-Administration Agreement") dated May 4, 1994,
which was approved by the Fund's Board of Trustees, including the Indepen-
dent Trustees, on May 4, 1994. Prior to that date, Boston Advisors served
as administrator to the Funds, and prior to April 4, 1994, also served as
investment advisor to the Premium Total Return Fund. Prior to May 21,
1993, Boston Advisors acted in the capacity of sub-investment advisor and
administrator to the Funds. 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").
Certain of the services provided to the Trust by the Advisers, Global Cap-
ital Management, SBA and Boston Advisors are described in the Prospectus
under "Management of the Trust and the Fund." Each Adviser, SBA, as admin-
istrator, and Boston Advisors, as sub-administrator, pay the salaries of
all officers and employees who are employed by both it and the Trust, and
maintain office facilities for the Trust. In addition to those 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 Capital Management, SBA
and Boston Advisors bear all expenses in connection with the performance
of their services.
For the 1992, 1993 and 1994 fiscal years, the Funds paid investment advi-
sory fees to their respective Advisers as follows:
<TABLE>
<CAPTION>
FUND 1992 1993
1994
<S> <C> <C>
<C>
Premium Total Return Fund $ 2,776,638 $4,803,717 $
Tax-Exempt Income Fund 2,884,333 3,978,637
Convertible Fund 305,154 329,323
Global Bond Fund 301,528 356,324
High Income Fund 1,313,890 2,659,448
Diversified Strategic Income Fund 3,346,434 6,226,342
Utilities Fund 4,272,080 10,317,792
Exchange Reserve Fund 970,662 612,812
</TABLE>
For the 1992, 1993 and 1994 fiscal years, the Funds paid administrative
fees to Boston Advisors or SBA as follows:
<TABLE>
<CAPTION>
FUND 1992 1993 1994
<S> <C> <C> <C>
Premium Total Return Fund $ 1,009,687 $1,746,806 $
Tax-Exempt Income Fund 1,442,166 1,989,319
Convertible Fund 122,062 131,729
Global Bond Fund 100,509 118,434
High Income Fund 525,556 1,063,779
Diversified Strategic Income Fund 1,912,279 3,557,910
Utilities Fund 1,898,703 4,584,796
Exchange Reserve Fund 647,081 408,842
</TABLE>
For the fiscal years ended July 31, 1992, 1993 and the period ended Janu-
ary 20, 1994, Diversified Strategic Income Fund paid Global Asset Manage-
ment $956,195, $1,778,955 and $ in sub-investment advisory fees,
respectively. For the period of January 20, 1994 through July 31, 1994,
Diversified Strategic Income Fund paid Global Capital Management $
in sub-investment advisory fees.
Each Adviser and SBA, 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, extraordi-
nary expenses) exceed the expense limitation of any state having jurisdic-
tion over the Fund, the Adviser and SBA will, to the extent required by
state law, reduce their fees by the amount of such excess expenses, such
amount to be allocated between them in the proportion that their respec-
tive fees bear to the aggregate of the fees paid by the Fund. Such fee re-
duction, if any, will be estimated and reconciled on a monthly basis. The
most restrictive state expense limitation applicable to any Fund is 2.5%
of the first $30 million of the Fund's average daily net assets, 2% of the
next $70 million of the average daily net assets and 1.5% of the remaining
average daily net assets of each Fund. No such fee reduction was required
for the fiscal years ended July 31, 1992, 1993 and 1994.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to the Trust. The Trust-
ees who are not "interested persons" of the Fund have selected Stroock &
Stroock & Lavan as their counsel.
Coopers & Lybrand, independent accountants, One Post Office Square, Bos-
ton, 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,
July 30, 1993 and October 14, 1994, the Trust changed its name to Shearson
Lehman Special Income Portfolios, SLH Income Portfolios, Shearson Lehman
Brothers Income Portfolios, Shearson Lehman Brothers Income Funds, Smith
Barney Shearson Income Funds and Smith Barney Income Funds, respectively.
In the interest of economy and convenience, certificates representing
shares in the Trust are not physically issued except upon specific request
made by a shareholder to TSSG. TSSG maintains a record of each sharehold-
er's ownership of Trust shares. Shares do not have cumulative voting
rights, which means that holders of more than 50% of the shares voting for
the election of Trustees can elect all of the Trustees. Shares are trans-
ferable but have no preemptive or subscription rights. Shareholders gener-
ally vote by Fund, except with respect to the election of Trustees and the
selection of independent public accountants.
Massachusetts law provides that, under certain circumstances, shareholders
could be held personally liable for the obligations of the Trust. However,
the Trust Agreement disclaims shareholder liability for acts or obliga-
tions of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the
Trust or a Trustee. The Trust Agreement provides for indemnification from
the Trust's property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a
shareholder's incurring financial loss on account of shareholder liability
is limited to circumstances in which the Trust would be unable to meet its
obligations, a possibility that the Trust's management believes is remote.
Upon payment of any liability incurred by the Trust, the shareholder pay-
ing the liability will be entitled to reimbursement from the general as-
sets of the Trust. The Trustees intend to conduct the operations of the
Trust in such a way so as to avoid, as far as possible, ultimate liability
of the shareholders for liabilities of the Trust.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectuses discuss the investment objectives of the Funds and the
policies to be employed to achieve those objectives. This section contains
supplemental information concerning the types of securities and other in-
struments in which the Funds may invest, the investment policies and port-
folio strategies that the Funds may utilize and certain risks attendant to
such investments, policies and strategies.
U.S. Government Securities (All Funds). United States government securi-
ties include debt obligations of varying maturities issued or guaranteed
by the United States government or its agencies or instrumentalities
("U.S. government securities"). U.S. government securities include not
only direct obligations of the United States Treasury, but also securities
issued or guaranteed by the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association ("GNMA"), General
Services Administration, Central Bank for Cooperatives, Federal Intermedi-
ate Credit Banks, Federal Land Banks, Federal National Mortgage Associa-
tion ("FNMA"), Maritime Administration, Tennessee Valley Authority, Dis-
trict of Columbia Armory Board, Student Loan Marketing Association, Inter-
national Bank for Reconstruction and Development and Resolution Trust
Corporation. Certain U.S. government securities, such as those issued or
guaranteed by GNMA, FNMA and FHLMC, are mortgage-related securities. Be-
cause the United States government is not obligated by law to provide sup-
port to an instrumentality that it sponsors, a Fund will invest in obliga-
tions 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 in-
sured by the Federal Deposit Insurance Corporation (the "FDIC"). Domestic
banks organized under state law are supervised and examined by state bank-
ing authorities but are members of the Federal Reserve System only if they
elect to join. Most state banks are insured by the FDIC (although such in-
surance may not be of material benefit to a Fund, depending upon the prin-
cipal amount of certificates of deposit ("CDs") of each held by the Fund)
and are subject to Federal examination and to a substantial body of Fed-
eral law and regulation. As a result of Federal and state laws and regula-
tions, domestic branches of domestic banks are, among other things, gener-
ally required to maintain specified levels of reserves, and are subject to
other supervision and regulation designed to promote financial soundness.
Obligations of foreign branches of U.S. banks, such as CDs and time depos-
its ("TDs"), may be general obligations of the parent bank in addition to
the issuing branch, or may be limited by the terms of a specific obliga-
tion and governmental regulation. Obligations of foreign branches of U.S.
banks and foreign banks are subject to different risks than are those of
U.S. banks or U.S. branches of foreign banks. These risks include foreign
economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the obliga-
tions, foreign exchange controls and foreign withholding and other taxes
on interest income. Foreign branches of U.S. banks are not necessarily
subject to the same or similar regulatory requirements that apply to U.S.
banks, such as mandatory reserve requirements, loan limitations and ac-
counting, auditing and financial recordkeeping requirements. In addition,
less information may be publicly available about a foreign branch of a
U.S. bank than about a U.S. bank. CDs issued by wholly owned Canadian sub-
sidiaries of U.S. banks are guaranteed as to repayment of principal and
interest, but not as to sovereign risk, by the U.S. parent bank.
Obligations of U.S. branches of foreign banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by
the terms of a specific obligation and by Federal and state regulation as
well as governmental action in the country in which the foreign bank has
its head office. A U.S. branch of a foreign bank with assets in excess of
$1 billion may or may not be subject to reserve requirements imposed by
the Federal Reserve System or by the state in which the branch is located
if the branch is licensed in that state. In addition, branches licensed by
the Comptroller of the Currency and branches licensed by certain states
("State Branches") may or may not be required to: (a) pledge to the regu-
lator by depositing assets with a designated bank within the state, an
amount of its assets equal to 5% of its total liabilities; and (b) main-
tain assets within the state in an amount equal to a specified percentage
of the aggregate amount of liabilities of the foreign bank payable at or
through all of its agencies or branches within the state. The deposits of
State Branches may not necessarily be insured by the FDIC. In addition,
there may be less publicly available information about a U.S. branch of a
foreign bank than about a U.S. bank.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign banks and foreign branches of U.S. banks, a Fund's
Adviser will carefully evaluate such investments on a case-by-case basis.
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 as-
sets (a "Small Issuer CD") so long as the issuer is a member of the FDIC
or Office of Thrift Supervision and is insured by the Savings Association
Insurance Fund ("SAIF") and so long as the principal amount of the Small
Issuer CD is fully insured and is no more than $100,000. The Money Market
Fund will at any one time hold only one Small Issuer CD from any one is-
suer.
Savings and loan associations whose CDs may be purchased by the Funds are
members of the Federal Home Loan Bank and are insured by the SAIF. As a
result, such savings and loan associations are subject to regulation and
examination.
When-Issued Securities and Delayed-Delivery Transactions (Global Bond,
High Income, Premium Total Return, Diversified Strategic Income and Tax-
Exempt Income Funds). To secure an advantageous price or yield, these
Funds may purchase certain securities on a when-issued basis or purchase
or sell securities for delayed delivery. A Fund will enter into such
transactions for the purpose of acquiring portfolio securities and not for
the purpose of leverage. Delivery of the securities in such cases occurs
beyond the normal settlement periods, but no payment or delivery is made
by a Fund prior to the reciprocal delivery or payment by the other party
to the transaction. In entering into a when-issued or delayed- delivery
transaction, a Fund will rely on the other party to consummate the trans-
action and may be disadvantaged if the other party fails to do so.
U.S. government securities and Municipal Securities (as defined below)
normally are subject to changes in value based upon changes, real or an-
ticipated, in the level of interest rates and, although to a lesser extent
in the case of U.S. government securities, the public's perception of the
creditworthiness of the issuers. In general, U.S. government securities
and Municipal Securities tend to appreciate when interest rates decline
and depreciate when interest rates rise. Purchasing these securities on a
when-issued or delayed-delivery basis, therefore, can involve the risk
that the yields available in the market when the delivery takes place may
actually be higher than those obtained in the transaction itself. Simi-
larly, the sale of U.S. government securities for delayed delivery can in-
volve the risk that the prices available in the market when the delivery
is made may actually be higher than those obtained in the transaction it-
self.
In the case of the purchase by a Fund of securities on a when-issued or
delayed-delivery basis, a segregated account in the name of the Fund con-
sisting of cash or liquid debt securities equal to the amount of the when-
issued or delayed-delivery commitments will be established at Boston Safe.
For the purpose of determining the adequacy of the securities in the ac-
counts, the deposited securities will be valued at market or fair value.
If the market or fair value of the securities declines, additional cash or
securities will be placed in the account daily so that the value of the
account will equal the amount of such commitments by the Fund involved. On
the settlement date, a Fund will meet its obligations from then-available
cash flow, the sale of securities held in the segregated account, the sale
of other securities or, although it would not normally expect to do so,
from the sale of the securities purchased on a when-issued or delayed-
delivery basis (which may have a value greater or less than the Fund's
payment obligations).
Lending of Portfolio Securities (Premium Total Return, Utilities, Convert-
ible, Global Bond, High Income and Diversified Strategic Income Fund-
s). These Funds have the ability to lend portfolio securities to brokers,
dealers and other financial organizations. Such loans, if and when made,
may not exceed 20% (33 1/3 % in the case of Diversified Strategic Income
Fund) of a Fund's total assets taken at value. A Fund will not lend port-
folio securities to Smith Barney unless it has applied for and received
specific authority to do so from the SEC. Loans of portfolio securities
will be collateralized by cash, letters of credit or U.S. government secu-
rities which are maintained at all times in an amount at least equal to
the current market value of the loaned securities. From time to time, a
Fund may pay a part of the interest earned from the investment of collat-
eral received for securities loaned to the borrower and/or a third party
which is unaffiliated with the Fund and is acting as a "finder."
By lending its securities, a Fund can increase its income by continuing to
receive interest on the loaned securities as well as by either investing
the cash collateral in short-term instruments or obtaining yield in the
form of interest paid by the borrower when U.S. government securities are
used as collateral. A Fund will comply with the following conditions when-
ever its portfolio securities are loaned: (a) the Fund must receive at
least 100% cash collateral or equivalent securities from the borrower; (b)
the borrower must increase such collateral whenever the market value of
the securities loaned rises above the level of such collateral; (c) the
Fund must be able to terminate the loan at any time; (d) the Fund must re-
ceive reasonable interest on the loan, as well as any dividends, interest
or other distributions on the loaned securities, and any increase in mar-
ket value; (e) the Fund may pay only reasonable custodian fees in connec-
tion with the loan; and (f) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material event ad-
versely affecting the investment in the loaned securities occurs, the
Board of Trustees must terminate the loan and regain the right to vote the
securities. The risks in lending portfolio securities, as with other ex-
tensions of secured credit, consist of a possible delay in receiving addi-
tional collateral or in the recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Loans will
be made to firms deemed by each Fund's Adviser to be of good standing and
will not be made unless, in the judgment of the Adviser, the consideration
to be earned from such loans would justify the risk.
Options on Securities (Premium Total Return, Convertible, Global Bond, Di-
versified Strategic Income and High Income Funds). These Funds may engage
in transactions in options on securities, which depending on the Fund may
include the writing of covered put options and covered call options, the
purchase of put and call options and the entry into closing 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 ad-
verse price movements in the securities that it holds or may wish to pur-
chase and the currencies in which certain portfolio securities may be de-
nominated. In return for a premium, the writer of a covered call option
forfeits the right to any appreciation in the value of the underlying se-
curity above the strike price for the life of the option (or until a clos-
ing purchase transaction can be effected). Nevertheless, the call writer
retains the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to re-
alize income in the form of premiums. The writer of a covered put option
accepts the risk of a decline in the price of the underlying security. The
size of the premiums that a Fund may receive may be adversely affected as
new or existing institutions, including other investment companies, engage
in or increase their option-writing activities.
Options written by a Fund normally will have expiration dates between one
and nine months from the date written. The exercise price of the options
may be below, equal to or above the market values of the underlying secu-
rities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money"
and "out-of-the-money," respectively. A Fund with option-writing authority
may write (a) in-the-money call options when its Adviser expects that the
price of the underlying security will remain flat or decline moderately
during the option period, (b) at-the-money call options when its Adviser
expects that the price of the underlying security will remain flat or ad-
vance moderately during the option period and (c) out-of-the-money call
options when its Adviser expects that the price of the underlying security
may increase but not above a price equal to the sum of the exercise price
plus the premiums received from writing the call option. In any of the
preceding situations, if the market price of the underlying security de-
clines and the security is sold at this lower price, the amount of any re-
alized loss will be offset wholly or in part by the premium received. Out-
of-the-money, at-the-money and in-the-money put options (the reverse of
call options as to the relation of exercise price to market price) may be
utilized in the same market environments that such call options are used
in equivalent transactions.
So long as the obligation of a Fund as the writer of an option continues,
the Fund may be assigned an exercise notice by the broker-dealer through
which the option was sold, requiring the Fund to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security
against payment of the exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase transaction. A Fund
can no longer effect a closing purchase transaction with respect to an op-
tion once it has been assigned an exercise notice. To secure its obliga-
tion to deliver the underlying security when it writes a call option, or
to pay for the underlying security when it writes a put option, a Fund
will be required to deposit in escrow the underlying security or other as-
sets in accordance with the rules of the Options Clearing Corporation (the
"Clearing Corporation") or similar foreign clearing corporation and of the
securities exchange on which the option is written.
The Global Bond and Diversified Strategic Income Funds may purchase and
sell put, call and other types of option securities that are traded on do-
mestic or foreign exchanges or the over-the-counter market including, but
not limited to, "spread" options, "knock-out" options, "knock-in" options
and "average rate" or "look-back" options.
"Spread" options are dependent upon the difference between the price of
two securities or futures contracts, "Knock-out" options are cancelled if
the price of the underlying asset reaches a trigger level prior to expira-
tion, "Knock-in" options only have value if the price of the underlying
asset reaches a trigger level and, "Average rate" or "look-back" options
are options where at expiration, the option's strike price is set based on
either the average, maximum or minimum price of the asset over the period
of the option.
The Global Bond and Diversified Strategic Income Funds may utilize up to
15% of 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 pur-
chasing options on securities, the Funds will trade only with counterpar-
ties of high status in terms of credit quality and commitment to the mar-
ket.
An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities ex-
change or in the over-the-counter market. In light of this fact and cur-
rent trading conditions, the Funds expect to purchase only call or put op-
tions issued by the Clearing Corporation. The Funds with option-writing
authority expect to write options only on U.S. securities exchanges, ex-
cept that the Global Bond and Diversified Strategic Income Funds also may
write options on foreign exchanges and in the over-the-counter market.
A Fund may realize a profit or loss upon entering into a closing transac-
tion. In cases in which a Fund has written an option, it will realize a
profit if the cost of the closing purchase transaction is less than the
premium received upon writing the original option and will incur a loss if
the cost of the closing purchase transaction exceeds the premium received
upon writing the original option. Similarly, when a Fund has purchased an
option and engages in a closing sale transaction, whether the Fund real-
izes a profit or loss will depend upon whether the amount received in the
closing sale transaction is more or less than the premium that the Fund
initially paid for the original option plus the related transaction costs.
Although a Fund generally will purchase or write only those options for
which its Adviser believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance that sufficient
trading interest to create a liquid secondary market on a securities ex-
change will exist for any particular option or at any particular time, and
for some options no such secondary market may exist. A liquid secondary
market in an option may cease to exist for a variety of reasons. In the
past, for example, higher than anticipated trading activity or order flow,
or other unforeseen events, have at times rendered inadequate certain of
the facilities of the Clearing Corporation and U.S. and foreign securities
exchanges and resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders or trading
halts or suspensions in one or more options. There can be no assurance
that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it
might not be possible to effect closing transactions in particular op-
tions. If as a covered call option writer a Fund is unable to effect clos-
ing purchase transaction in a secondary market, it will not be able to
sell the underlying security until the option expires or it delivers the
underlying security upon exercise.
Securities exchanges generally have established limitations governing the
maximum number of calls and puts of each class which may be held or writ-
ten, or exercised within certain time periods, by an investor or group of
investors acting in concert (regardless of whether the options are written
on the same or different securities exchanges or are held, written or ex-
ercised in one or more accounts or through one or more brokers). It is
possible that the Funds with authority to engage in options transactions
and other clients of their respective Advisers and certain of their affil-
iates may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these lim-
its and it may impose certain other sanctions.
In the case of options written by a Fund that are deemed covered by virtue
of the Fund's holding convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange and obtain physical
delivery of the underlying common stocks with respect to which the Fund
has written options may exceed the time within which the Fund must make
delivery in accordance with an exercise notice. In these instances, a Fund
may purchase or borrow temporarily the underlying securities for purposes
of physical delivery. By so doing, the Fund will not bear any market risk
because the Fund will have the absolute right to receive from the issuer
of the underlying security an equal number of shares to replace the bor-
rowed stock, but the Fund may incur additional transaction costs or inter-
est expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the U.S. government se-
curities for which a Fund may write covered call options. If a Fund writes
covered call options on mortgage-backed securities, the securities that it
holds as cover may, because of scheduled amortization or unscheduled pre-
payments, cease to be sufficient cover. The Fund will compensate for the
decline in the value of the cover by purchasing an appropriate additional
amount of those securities.
Stock Index Options (Premium Total Return and Utilities Funds). The Pre-
mium Total Return and Utilities Funds may purchase and write put and call
options on U.S. stock indexes listed on U.S. exchanges for the purpose of
hedging its portfolio. A stock index fluctuates with changes in the market
values of the stocks included in the index. Some stock index options are
based on a broad market index such as the NYSE Composite Index or a nar-
rower market index such as the Standard & Poor's 100. Indexes also are
based on an industry or market segment such as the AMEX Oil and Gas Index
or the Computer and Business Equipment Index.
Options on stock indexes are similar to options on stock except that (a)
the expiration cycles of stock index options are monthly, while those of
stock options currently are quarterly, and (b) the delivery requirements
are different. Instead of giving the right to take or make delivery of
stock at a specified price, an option on a stock index gives the holder
the right to receive a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a put) or is less than (in the case of a call) the closing
value of the underlying index on the date of exercise, multiplied by (b) a
fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. The amount of cash received will be
equal to such difference between the closing price of the index and the
exercise price of the option expressed in dollars times a specified multi-
ple. The writer of the option is obligated, in return for the premium re-
ceived, to make delivery of this amount. The writer may offset its posi-
tion in stock index options prior to expiration by entering into a closing
transaction on an exchange or it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index options as a hedg-
ing technique will depend upon the extent to which price movements in the
portion of a securities portfolio being hedged correlate with price move-
ments of the stock index selected. Because the value of an index option
depends upon movements in the level of the index rather than the price of
a particular stock, whether the Premium Total Return and Utilities Funds
will realize a gain or loss from the purchase or writing of options on an
index depends upon movements in the level of stock prices in the stock
market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by a Fund of options on stock indexes will be
subject to its Adviser's ability to predict correctly movements in the di-
rection of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the
prices of individual stocks.
The Premium Total Return and Utilities Funds will engage in stock index
options transactions only when determined by their respective Advisers to
be consistent with the Funds' efforts to control risk. There can be no as-
surance that such judgment will be accurate or that the use of these port-
folio strategies will be successful. When a Fund writes an option on a
stock index, the Fund will establish a segregated account with Boston Safe
in an amount equal to the market value of the option and will maintain the
account while the option is open.
Mortgage-Related Securities (Diversified Strategic Income Fund). The av-
erage maturity of pass- through pools of mortgage-related securities var-
ies with the maturities of the underlying mortgage instruments. In addi-
tion, a pool's stated maturity may be shortened by unscheduled payments on
the underlying mortgages. Factors affecting mortgage prepayments include
the level of interest rates, general economic and social conditions, the
location of the mortgaged property and age of the mortgage. Because pre-
payment rates of individual pools vary widely, its is not possible to ac-
curately predict the average life of a particular pool. Common practice is
to assume that prepayments will result in an average life ranging from 2
to 10 years for pools of fixed-rate 30-year mortgages. Pools of mortgages
with other maturities or different characteristics will have varying aver-
age life assumptions.
Mortgage-related securities may be classified as private, governmental or
government-related, depending on the issuer or guarantor. Private
mortgage-related securities represent pass-through pools consisting prin-
cipally of conventional residential mortgage loans created by non-
governmental issuers, such as commercial banks, savings and loan associa-
tions and private mortgage insurance companies. Governmental mortgage- re-
lated securities are backed by the full faith and credit of the United
States. GNMA, the principal guarantor of such securities, is a wholly
owned United States government corporation within the Department of Hous-
ing and Urban Development. Government-related mortgage-related securities
are not backed by the full faith and credit of the United States govern-
ment. Issuers of such securities include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders,
which is subject to general regulation by the Secretary of Housing and
Urban Development. Pass-through securities issued by FNMA are guaranteed
as to timely payment of principal and interest by FNMA. FHLMC is a corpo-
rate instrumentality of the United States, the stock of which is owned by
the Federal Home Loan Banks. Participation certificates representing in-
terests in mortgages from FHLMC's national portfolio are guaranteed as to
the timely payment of interest and ultimate collection of principal by
FHLMC.
Private, U.S. governmental or government-related entities create mortgage
loan pools offering pass-through investments in addition to those de-
scribed above. The mortgages underlying these securities may be alterna-
tive mortgage instruments, that is, mortgage instruments whose principal
or interest payments may vary or whose terms to maturity may be shorter
than previously customary. As new types of mortgage-related securities are
developed and offered to investors, the Diversified Strategic Income Fund,
consistent with its investment objective and policies, will consider mak-
ing investments in such new types of securities.
Currency Transactions (Global Bond, Diversified Strategic Income and High
Income Funds). The Funds' dealings in forward currency exchange transac-
tions will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is the purchase or sale of for-
ward currency contracts with respect to specific receivables or payables
of the Fund generally arising in connection with the purchase or sale of
its securities. Position hedging, generally, is the sale of forward cur-
rency contracts with respect to portfolio security positions denominated
or quoted in the currency. A Fund may not position hedge with respect to a
particular currency to an extent greater than the aggregate market value
at any time of the security or securities held in its portfolio denomi-
nated or quoted in or currently convertible (such as through exercise of
an option or consummation of a forward currency contract) into that par-
ticular currency, except that 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 cur-
rency 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 trans-
actions may be made from any foreign currency into dollars or into other
appropriate currencies.
At or before the maturity of a forward contract, a Fund either may sell a
portfolio security and make delivery of the currency, or retain the secu-
rity and offset its contractual obligation to deliver the currency by pur-
chasing a second contract pursuant to which the relevant Fund will obtain,
on the same maturity date, the same amount of the currency which it is ob-
ligated to deliver. If a Fund retains the portfolio security and engages
in an offsetting transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or loss to the extent movement
has occurred in forward contract prices. Should forward prices decline
during the period between a Fund's entering into a forward contract for
the sale of a currency and the date that it enters into an offsetting con-
tract for the purchase of the currency, the Fund will realize a gain to
the extent that the price of the currency it has agreed to sell exceeds
the price of the currency it has agreed to purchase. Should forward prices
increase, the Fund will suffer a loss to the extent the price of the cur-
rency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The cost to a Fund of engaging in currency transactions varies with fac-
tors such as the currency involved, the length of the contract period and
the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commis-
sions are involved. The use of forward currency contracts does not elimi-
nate fluctuations in the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the future. In addi-
tion, although forward currency contracts limit the risk of loss due to a
decline in the value of the hedged currency, at the same time, they limit
any potential gain that might result should the value of the currency in-
crease.
If a devaluation is generally anticipated, the Global Bond, Diversified
Strategic Income and High Income Funds may not be able to contract to sell
the currency at a price above the devaluation level they anticipate.
Foreign Currency Options (Global Bond, Diversified Strategic Income and
High Income Funds) With the exception of 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 pur-
pose of hedging against changes in future currency exchange rates. Foreign
currency options generally have three, six and nine month expiration cy-
cles. 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 cur-
rency 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-
inated, for example, will reduce the dollar value of the securities, even
if their value in the foreign currency remains constant. In order to pro-
tect against such diminutions in the value of securities that it holds,
the Fund may purchase put options on the foreign currency. If the value of
the currency does decline, the Fund will have the right to sell the cur-
rency for a fixed amount in dollars and will thereby offset, in whole or
in part, the adverse effect on its securities that otherwise would have
resulted. Conversely, if a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby poten-
tially increasing the cost of the securities, the Fund may purchase call
options on the particular currency. The purchase of these options could
offset, at least partially, the effects of the adverse movements in ex-
change rates. The benefit to the Fund derived from purchases of foreign
currency options, like the benefit derived from other types of options,
will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direc-
tion or to the extent anticipated, the Fund could sustain losses on trans-
actions in foreign currency options that would require it to forego a por-
tion or all of the benefits of advantageous changes in the rates.
Foreign Government Securities (Diversified Strategic Income and Global
Bond Funds). Among the foreign government securities in which these Funds
may invest are those issued by countries with developing economies, which
are countries in the initial stages of their industrialization cycles. In-
vesting in securities of countries with developing economies involves ex-
posure to economic structures that are generally less diverse and less ma-
ture, and to political systems that can be expected to have less stabil-
ity, than those of developed countries. The markets of countries with
developing economies historically have been more volatile than markets of
the more mature economies of developed countries, but often have provided
higher rates of return to investors.
Municipal Securities (Tax-Exempt Income Fund). Municipal securities gen-
erally are understood to include debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities, refunding of outstanding obligations, payment of gen-
eral operating expenses and extensions of loans to public institutions and
facilities ("Municipal Securities"). Private activity bonds that are is-
sued by or on behalf of public authorities to finance privately operated
facilities are considered to be Municipal Securities if the interest paid
thereon qualifies as excluded from gross income (but not necessarily from
alternative minimum taxable income) for federal income tax purposes in the
opinion of bond counsel to the issuer.
Municipal bonds may be issued to finance life care facilities. Life care
facilities are an alternative form of long-term housing for the elderly
which offer residents the independence of condominium life style and, if
needed, the comprehensive care of nursing home services. Bonds to finance
these facilities have been issued by various state industrial development
authorities. Because the bonds are secured only by the revenues of each
facility and not by state or local government tax payments, they are sub-
ject to a wide variety of risks, including a drop in occupancy levels, the
difficulty of maintaining adequate financial reserves to secure estimated
actuarial liabilities, the possibility of regulatory cost restrictions ap-
plied to health care delivery and competition from alternative health care
or conventional housing facilities.
Municipal leases are Municipal Securities that may take the form of a
lease or an installment purchase contract issued by state and local gov-
ernmental authorities to obtain funds to acquire a wide variety of equip-
ment and facilities such as fire and sanitation vehicles, computer equip-
ment and other capital assets. These obligations have evolved to make it
possible for state and local government authorities to acquire property
and equipment without meeting constitutional and statutory requirements
for the issuance of debt. Thus, municipal leases have special risks not
normally associated with Municipal bonds. These obligations frequently
contain "non-appropriation" clauses providing that the governmental issuer
of the obligation has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
legislative body on a yearly or other periodic basis. In addition to the
"non-appropriation" risk, municipal leases represent a type of financing
that has not yet developed the depth of marketability associated with mu-
nicipal bonds; moreover, although the obligations will be secured by the
leased equipment, the disposition of the equipment in the event of fore-
closure might prove to be difficult. In order to limit the risks, 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 munic-
ipal leases purchased principally from domestic banks or other responsible
third parties which enter into an agreement with the Fund providing the
seller will either remarket or repurchase the municipal lease within a
short period after demand by the Fund.
Temporary Investments (Tax-Exempt Income Fund). When the Tax-Exempt In-
come Fund is maintaining a defensive position, the Fund may invest in
short-term investments ("Temporary Investments") consisting of: (a) the
following tax-exempt securities: (i) tax-exempt notes of municipal issuers
having, at the time of purchase, a rating of MIG 1 through MIG 4 by
Moody's or rated SP-1 or SP-2 by S&P or, if not rated, of issuers having
an issue of outstanding Municipal Securities rated within the four highest
grades by Moody's or S&P; (ii) tax-exempt commercial paper having, at the
time of purchase, a rating not lower than A-2 by S&P or Prime-2 by
Moody's; and (iii) variable rate demand notes rated at the time of pur-
chase within the two highest ratings by any major rating service or deter-
mined to be of comparable quality to instruments with such rating; and (b)
the following taxable securities: (i) U.S. government securities, includ-
ing repurchase agreements with respect to such securities; (ii) other debt
securities rated within the four highest grades by Moody's or S&P; (iii)
commercial paper rated in the highest grade by either of these rating ser-
vices; and (iv) certificates of deposit of domestic banks with assets of
$1 billion or more. Among the tax-exempt notes in which the Fund may in-
vest are Tax Anticipation Notes, Bond Anticipation Notes and Revenue An-
ticipation Notes which are issued in anticipation of receipt of tax funds,
proceeds of bond placements or other revenues. 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 Tempo-
rary 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 in-
clination 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 is-
suer upon liquidation or bankruptcy. Moreover, price disparities within
selected utility groups and discrepancies in relation to averages and in-
dices 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 expecta-
tions or cash requirements of other purchasers and sellers of securities.
Ratings as Investment Criteria (All Funds). In general, the ratings of
nationally recognized statistical rating organizations ("NRSROs") repre-
sent the opinions of these agencies as to the quality of securities that
they rate. Such ratings, however, are relative and subjective, and are not
absolute standards of quality and do not evaluate the market value risk of
the securities. These ratings will be used by the Funds as initial crite-
ria for the selection of portfolio securities, but the Funds also will
rely upon the independent advice of their respective Advisers to evaluate
potential investments. Among the factors that will be considered are the
long-term ability of the issuer to pay principal and interest and general
economic trends. The Appendix to this Statement of Additional Information
contains further information concerning the rating categories of NRSROs
and their significance.
Subsequent to its purchase by a Fund, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for pur-
chase by the Fund. In addition, it is possible that an NRSRO might not
change its rating of a particular issue to reflect subsequent events. None
of these events will require sale of such securities by a Fund, but the
Fund's Adviser will consider such events in its determination 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 ac-
cordance with its investment objective and policies.
Futures Activities, High Income, Utilities and Tax-Exempt Income Fund-
s. These Funds may enter into futures contracts and/or options on 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 mar-
ket 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 securi-
ties. 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 de-
cline, but the value of the Fund's futures contracts would increase at ap-
proximately 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 con-
tracts could only mitigate -- but not totally offset -- the decline in the
value of the Fund.
The Global Bond and Diversified Strategic Income Funds may enter into fu-
tures contracts or related options on futures contracts that are traded on
a domestic or foreign exchange or in the over-the-counter market. These
investments may be made solely for the purpose of hedging against changes
in the value of its portfolio securities due to anticipated changes in in-
terest rates, currency values and/or market conditions when the transac-
tions are economically appropriate to the reduction of risks inherent in
the management of the Fund and not for purposes of speculation. The abil-
ity of the Funds to trade in futures contracts may be limited by the re-
quirements of the Internal Revenue Code of 1986 as amended (the "Code"),
applicable to a regulated investment company.
No consideration is paid or received by a Fund upon entering into a fu-
tures contract. Initially, a Fund will be required to deposit with its
custodian an amount of cash or cash equivalents equal to approximately 1%
to 10% of the contract amount (this amount is subject to change by the
board of trade on which the contract is traded and members of such board
of trade may charge a higher amount). This amount, known as initial mar-
gin, is in the nature of a performance bond or good faith deposit on the
contract and is returned to a Fund upon termination of the futures con-
tract, assuming that all contactual obligations have been satisfied. Sub-
sequent payments, known as variation margin, to and from the broker, will
be made daily as the price of the securities, currency or index underlying
the futures contract fluctuates, making the long and short positions in
the futures contract more or less valuable, a process known as "marking-
to- market." At any time prior to expiration of a futures contract, a Fund
may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract.
Several risks are associated with the use of futures contracts as a hedg-
ing device. Successful use of futures contracts by a Fund is subject to
the ability of its Adviser to predict correctly movements in interest
rates, stock or bond indices or foreign currency values. These predictions
involve skills and techniques that may be different from those involved in
the management of the portfolio being hedged. In addition, there can be no
assurance that there will be a correlation between movements in the price
of the underlying securities, currency or index and movements in the price
of the securities which are the subject of the hedge. A decision of
whether, when and how to hedge involves the exercise of skill and judg-
ment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected trends in interest rates or cur-
rency values.
Although the Funds with authority to engage in futures activity intend to
enter into futures contracts only if there is an active market for such
contracts, there is no assurance that an active market will exist for the
contracts at any particular time. Most futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures contract prices
during a single trading day. Once the daily limit has been reached in a
particular contract, no trades may be made that day at a price beyond that
limit. It is possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting
some futures traders to substantial losses. In such event, and in the
event of adverse price movements, a Fund would be required to make daily
cash payments of variation margin, and an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. As described above, however, there
is no guarantee that the price of the securities being hedged will, in
fact, correlate with the price movements in a futures contract and thus
provide an offset to losses on the futures contract.
If a Fund has hedged against the possibility of a change in interest rates
or currency or market values adversely affecting the value of securities
held in its portfolio and rates or currency or market values move in a di-
rection opposite to that which the Fund has anticipated, the Fund will
lose part or all of the benefit of the increased value of securities which
it has hedged because it will have offsetting losses in its futures posi-
tions. In addition, in such situations, if the Fund had insufficient cash,
it may have to sell securities to meet daily variation margin requirements
at a time when it may be disadvantageous to do so. These sales of securi-
ties may, but will not necessarily, be at increased prices which reflect
the change in interest rates or currency values, as the case may be.
Options on Futures Contracts. An option on an interest rate futures con-
tract, as contrasted with the direct investment in such a contract, gives
the purchaser the right, in return for the premium paid, to assume a posi-
tion in the underlying interest rate futures contract at a specified exer-
cise price at any time prior to the expiration date of the option. An op-
tion on a foreign currency futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, but not the
obligation, to assume a long or short position in the relevant underlying
future currency at a predetermined exercise price at a time in the future.
Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin ac-
count, which represents the amount by which the market price of the fu-
tures contract exceeds, in the case of a call, or is less than, in the
case of a put, the exercise price of the option on the futures contract.
The potential for loss related to the purchase of an option on futures
contracts is limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of sale,
there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily
and that change would be reflected in the net asset value of a Fund in-
vesting in the options.
Several risks are associated with options on futures contracts. The abil-
ity to establish and close out positions on such options will be subject
to the existence of a liquid market. In addition, the purchase of put or
call options on interest rate and foreign currency futures will be based
upon predictions by a Fund's Adviser as to anticipated trends in interest
rates and currency values, as the case may be, which could prove to be in-
correct. Even if the expectations of an Adviser are correct, there may be
an imperfect correlation between the change in the value of the options
and of the portfolio securities or the currencies being hedged.
Foreign Investments. Investors should recognize that investing in foreign
companies involves certain considerations which are not typically associ-
ated with investing in U.S. issuers. Since the Fund will be investing in
securities 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 de-
termined by the forces of supply and demand in the foreign exchange mar-
kets. Changes in the exchange rate may result over time from the interac-
tion of many factors directly or indirectly affecting economic conditions
and political developments in other countries. Of particular importance
are rates of inflation, interest rate levels, the balance of payments and
the extent of government surpluses or deficits in the Unites States and
the particular foreign country, all of which are in turn sensitive to the
monetary, fiscal and trade policies pursued by the governments of the
United States and other foreign countries important to international trade
and finance. Governmental intervention may also play a significant role.
National governments rarely voluntarily allow their currencies to float
freely in response to economic forces. Sovereign governments use a variety
of techniques, such as intervention by a country's central bank or imposi-
tion of regulatory controls or taxes, to affect the exchange rates of
their currencies.
Many of the securities held by the Fund will not be registered with, nor
the issuers thereof be subject to reporting requirements of, the Securi-
ties 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 for-
eign 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 af-
fect 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, cap-
ital reinvestment, resource self-sufficiency and balance of payments posi-
tions. The Fund may invest in securities of foreign governments (or agen-
cies or instrumentalities thereof), and many, if not all, of the foregoing
considerations apply to such investments as well.
Securities of some foreign companies are less liquid and their prices are
more volatile than securities of comparable domestic companies. Certain
foreign countries are known to experience long delays between the trade
and settlement dates of securities purchased or sold. Due to the increased
exposure to the Fund of market and foreign exchange fluctuations brought
about by such delays, and due to the corresponding negative impact on Fund
liquidity, the Fund will avoid investing in countries which are known to
experience settlement delays which may expose the Fund to unreasonable
risk of loss.
The interest payable on the Fund's foreign securities may be subject to
foreign withholding taxes, and while investors may be able to claim some
credit or deductions for such taxes with respect to their allocated shares
of such foreign tax payments, the general effect of these taxes will be to
reduce the Fund's income. Additionally, the operating expenses of the Fund
can be expected to be higher than that of an investment company investing
exclusively in U.S. securities, since the expenses of the Fund, such as
custodial costs, valuation costs and communication costs, as well as the
rate of the investment advisory fees, though similar to such expenses of
some other international funds, are higher than those costs incurred by
other investment companies.
Short Sales (Utilities Fund). The Utilities Fund may from time to time
sell securities short, but the value of securities sold short will not ex-
ceed 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 secu-
rities of any class of an issuer to the extent of more than 2% of the out-
standing 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 obli-
gated to replace the securities borrowed at their market price at the time
of replacement, whatever that price may be. The Fund may have to pay a
premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the broker
that consists of cash or U.S. government securities. In addition, the Fund
will place in a segregated account with its custodian an amount of cash or
U.S. government securities equal to the difference, if any, between (a)
the market value of the securities sold at the time they were sold short
and (b) any cash or U.S. government securities deposited as collateral
with the broker in connection with the short sale (not including the pro-
ceeds of the short sale). Until it replaces the borrowed securities, the
Fund will maintain the segregated account daily at a level so that the
amount deposited in the account plus the amount deposited with the broker
(not including the proceeds from the short sale) (a) will equal the cur-
rent market value of the securities sold short and (b) will not be less
than the market value of the securities at the time they were sold short.
Short Sales Against the Box (Premium Total Return, Convertible and Utili-
ties Funds). These Funds may enter into a short sale of common stock such
that when the short position is open the Fund involved owns an equal
amount of preferred stocks or debt securities, convertible or exchange-
able, without payment of further consideration, into an equal number of
shares of the common stock sold short. This kind of short sale, which is
described as "against the box," will be entered into by a Fund for the
purpose of receiving a portion of the interest earned by the executing
broker from the proceeds of the sale. The proceeds of the sale will be
held by the broker until the settlement date when the Fund delivers the
convertible securities to close out its short position. Although prior to
delivery a Fund will have to pay an amount equal to any dividends paid on
the common stock sold short, the Fund will receive the dividends from the
preferred stock or interest from the debt securities convertible into the
stock sold short, plus a portion of the interest earned from the proceeds
of the short sale. The Funds will deposit, in a segregated account with
their custodian, convertible preferred stock or convertible debt securi-
ties in connection with short sales against the box.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 14 below (other than re-
striction number 10 as applied to 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 repre-
sented by proxy, or (b) more than 50% of the outstanding shares. Invest-
ment 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 re-
gard to this 5% limitation.
2. Purchasing (a) more than 10% of the voting securities of any one is-
suer, (b) more than 10% of the securities of any class of any one issuer
or (c) more than 10% of the outstanding debt securities of any one issuer,
except that limitation (c) does not apply to the Exchange Reserve and Di-
versified Strategic Income Funds and limitations (b) and (c) do not apply
to the Utilities Fund; provided that this limitation shall not apply to
investment in U.S. government securities.
3. Purchasing securities on margin, except that the Fund may obtain any
short-term credits necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures contracts or re-
lated options will not be deemed to be a purchase of securities on margin
by any Fund permitted to engage in transactions in futures contracts or
related options.
4. Making short sales of securities or maintaining a short position ex-
cept that (a) the Premium Total Return, Utilities and Convertible Funds
may engage in such activities if, at all times when a short position is
open, the relevant Fund owns an equal amount of the securities convertible
into or exchangeable, without payment of any further consideration, for
securities of the same issuer as, and at least equal in amount to, the se-
curities sold short, and if, with respect to the Premium Total Return and
Convertible Funds, not more than 10% of the relevant Fund's net assets
(taken at current value) is held as collateral for such sales at any one
time and (b) 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 re-
verse repurchase agreements and forward roll transactions), the Diversi-
fied Strategic Income Fund will maintain an asset coverage of at least
300% with respect to all its borrowings.
6. Pledging, hypothecating, mortgaging or otherwise encumbering more than
10% of the value of the Fund's total assets. For purposes of this restric-
tion, (a) the deposit of assets in escrow in connection with the writing
of covered put or call options and the purchase of securities on a when-
issued or delayed-delivery basis and (b) collateral arrangements with re-
spect to (i) the purchase and sale of stock options, options on foreign
currencies and options on stock indexes and (ii) initial or variation mar-
gin for futures contracts, will not be deemed to be pledges of a Fund's
assets.
7. Underwriting the securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933, as
amended, by virtue of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate, except
that the Fund may purchase and sell securities that are secured by real
estate and may purchase securities issued by companies that invest or deal
in real estate.
9. Investing in commodities, except that (a) the Global Bond, High In-
come, Diversified Strategic Income, Utilities and Tax-Exempt Income Funds
may invest in futures contracts and options on futures contracts as de-
scribed in their Prospectuses and (b) upon 60 days' notice given to its
shareholders, the Premium Total Return and Convertible Funds may engage in
hedging transactions involving futures contracts and related options, in-
cluding stock index futures contracts and financial futures contracts.
10. Investing in oil, gas or other mineral exploration or development
programs, except that the Premium Total Return, Convertible, Diversified
Strategic Income, Global Bond, Utilities and High Income Funds may invest
in the securities of companies that invest in or sponsor those programs.
11. Making loans to others, except through the purchase of qualified debt
obligations, the entry into repurchase agreements and, with respect to
Funds other than the Exchange Reserve Fund, loans of portfolio securities
consistent with the Fund's investment objective.
12. Investing in securities of other investment companies registered or
required to be registered under the 1940 Act, except as they may be ac-
quired as part of a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange.
13. Purchasing any securities which would cause more than 25% of the
value of the Fund's total assets at the time of purchase to be invested in
the securities of issuers conducting their principal business activities
in the same industry, except that the Exchange Reserve Fund and the Util-
ity Fund will invest in excess of 25% of its respective assets in the se-
curities 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 Exchange Re-
serve and Utility Funds, Municipal Securities issued by governments or po-
litical subdivisions of governments.
14. Writing or selling puts, calls, straddles, spreads or combinations
thereof, except, with respect to Funds other than the Exchange Reserve
Fund, as permitted under the Fund's investment objective and policies.
15. Purchasing restricted securities, illiquid securities (such as repur-
chase agreements with maturities in excess of seven days and, in the case
of the Exchange Reserve Fund, time deposits maturing from two business
days through seven calendar days) or other securities that are not readily
marketable if more than 10% or, in the case of High Income, Global Bond
and Diversified Strategic Income Funds, 15% of the total assets of the
Fund would be invested in such securities.
16. Purchasing any security if as a result the Fund would then have more
than 5% of its total assets invested in securities of companies (including
predecessors) that have been in continuous operation for fewer than three
years; provided that in the case of private activity bonds purchased for
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 manage-
ment.
18. Purchasing or retaining securities of any company if, to the knowl-
edge of the Trust, any of the Trust's officers or Trustees or any officer
or director of an Adviser individually owns more than 1/2 of 1% of the
outstanding securities of such company and together they own beneficially
more than 5% of the securities.
19. Investing in warrants (except as permitted under a Fund's investment
objective and policies or other than warrants acquired by the Fund as part
of a unit or attached to securities at the time of purchase) if, as a re-
sult, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Fund's net assets of which not more than 2% of the
Fund's net assets may be invested in warrants not listed on a recognized
United States or foreign stock exchange to the extent permitted by appli-
cable state securities laws.
20. With respect to 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 Exchange Reserve Fund, the first of which is a fundamental policy,
which prohibit the Exchange Reserve Fund from:
1. Investing in common stocks, preferred stocks, warrants, other equity
securities, corporate bonds or debentures, state bonds, municipal bonds or
industrial revenue bonds.
2. Investing more than 10% of its assets in variable rate master demand
notes providing for settlement upon more than seven days' notice by the
Fund.
For purposes of the investment restrictions described above, the issuer of
a Municipal Security is deemed to be the entity (public or private) ulti-
mately responsible for the payment of the principal of and interest on the
security. For purposes of investment restriction number 13, private activ-
ity bonds (other than those issued for charitable, educational and certain
other purposes) the payment of principal and interest on which is the ul-
timate responsibility of companies within the same industry, are grouped
together as an industry. The Trust may make commitments more restrictive
than the restrictions listed above with respect to a Fund so as to permit
the sale of shares of the Fund in certain states. Should the Trust deter-
mine that any such commitment is no longer in the best interests of the
Fund and its shareholders, the Trust will revoke the commitment by termi-
nating the sale of shares of the Fund in the state involved. The percent-
age limitations contained in the restrictions listed above apply at the
time of purchases of securities.
PORTFOLIO TURNOVER
The Funds do not intend to seek profits through short-term trading. Never-
theless, the Funds will not consider portfolio turnover rate a limiting
factor in making investment decisions.
Under certain market conditions, a Fund authorized to engage in transac-
tions in options may experience increased portfolio turnover as a result
of its investment strategies. For instance, the exercise of a substantial
number of options written by a Fund (due to appreciation of the underlying
security in the case of call options on securities or depreciation of the
underlying security in the case of put options on securities) could result
in a turnover rate in excess of 100%. A portfolio turnover rate of 100%
also would occur, for example, if all of a Fund's securities that are in-
cluded in the computation of turnover were replaced once during a period
of one year. A Fund's turnover rate is calculated by dividing the lesser
of purchases or sales of its portfolio securities for the year by the
monthly average value of the portfolio securities. Securities or options
with remaining maturities of one year or less on the date of acquisition
are excluded from the calculation.
Certain other practices which may be employed by a Fund also could result
in high portfolio turnover. For example, portfolio securities may be sold
in anticipation of a rise in interest rates (market decline) or purchased
in anticipation of a decline in interest rates (market rise) and later
sold. In addition, a security may be sold and another of comparable qual-
ity purchased at approximately the same time to take advantage of what a
Fund's Adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur
for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes in the
overall demand for, or supply of, various types of securities.
For the 1993 and 1994 fiscal years, the portfolio turnover rates were as
follows:
<TABLE>
<CAPTION>
FUND 1993 1994
<S> <C> <C>
Premium Total Return Fund 55%
Tax-Exempt Income Fund 34%
Convertible Fund 95%
High Income Fund 95%
Global Bond Fund 216%
Diversified Strategic Income Fund 116%
Utilities Fund 34%
</TABLE>
For regulatory purposes the turnover rate of the Exchange Reserve Fund is
zero.
PORTFOLIO TRANSACTIONS
Most of the purchases and sales of securities for a Fund, whether trans-
acted on a securities exchange or over-the-counter, will be effected in
the primary trading market for the securities, except for Eurobonds which
are principally traded over-the-counter. The primary trading market for a
given security is generally located in the country in which the issuer has
its principal office. Decisions to buy and sell securities for a Fund are
made by its Adviser, which also is responsible for placing these transac-
tions, subject to the overall review of the Trust's Trustees. With respect
to Diversified Strategic Income Fund, decisions to buy and sell domestic
securities for the Fund are made by 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 Capital Management. Although invest-
ment 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 Ad-
viser 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 ex-
changes. There is generally no stated commission in the case of securities
traded in U.S. or foreign over-the-counter markets, but the prices of
those securities include undisclosed commissions or mark-ups. The cost of
securities purchased from underwriters includes an underwriting commission
or concession, and the prices at which securities are purchased from and
sold to dealers include a dealer's mark-up or mark-down. U.S. government
securities generally are purchased from underwriters or dealers, although
certain newly issued U.S. government securities may be purchased directly
from the United States Treasury or from the issuing agency or instrumen-
tality. The following table sets forth certain information regarding each
Fund's payment of brokerage commissions:
<TABLE>
<CAPTION>
PREMIUM
DIVERSIFIED
TOTAL HIGH
STRATEGIC
FISCAL RETURN CONVERTIBLE INCOME
UTILITIES INCOME
YEAR FUND FUND FUND
FUND FUND
<S> <C> <C> <C> <C>
<C> <C>
Total Brokerage Commissions 1992 $762,101 $51,993 $11,296
$ 562,710 --
1992* -- -- --
$ 774,306 --
1993 $1,933,587 $75,836 $17,225
$1,810,481 $19,446
1994
Commissions paid to 1992 $283,190 $2,700 $ 22,419
$ 28,848 --
Shearson Lehman Brothers 1992* -- -- --
$ 51,828 --
or Smith Barney
1993 $355,027 -- --
$97,740 --
1994
% of Total Brokerage 1994
Commissions paid to
Smith Barney
% of Total Transactions 1994
involving Commissions paid
to Smith Barney
<FN>
* Periods disclosed for Utilities Fund are for fiscal year ended February
29, 1992 and the period from March 1, 1992 through July 31, 1992.
</TABLE>
In selecting brokers or dealers to execute securities transactions on be-
half of a Fund, the Fund's Adviser seeks the best overall terms available.
In assessing the best overall terms available for any transaction, each
Adviser will consider the factors that it deems relevant, including the
breadth of the market in the security, the price of the security, the fi-
nancial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and
on a continuing basis. In addition, each Advisory Agreement between the
Trust and an Adviser authorizes the Adviser, in selecting brokers or deal-
ers to execute a particular transaction and in evaluating the best overall
terms available, to consider the brokerage and research services (as those
terms are defined in Section 28(e) of the Securities Exchange Act of 1934)
provided to the Trust, the other Funds and/or other accounts over which
the Adviser or its affiliates exercise investment discretion. The fees
under the Advisory Agreements and the Sub-Advisory and/or Administration
Agreements are not reduced by reason of their receiving such brokerage and
research services. Further, Smith Barney will not participate in commis-
sions brokerage given by the Fund to other brokers or dealers and will not
receive any reciprocal brokerage business resulting therefrom. The 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 and other affiliated broker-dealers if, in the judg-
ment of the Fund's Adviser, the use of such broker-dealer is likely to re-
sult in price and execution at least as favorable as those of other quali-
fied broker-dealers, and if, in the transaction, such broker-dealer
charges the Fund a rate consistent with that charged to comparable unaf-
filiated customers in similar transactions. In addition, under rules re-
cently adopted by the SEC, Smith Barney may directly execute such transac-
tions for the Funds on the floor of any national securities exchange, pro-
vided (a) the Board of Trustees has expressly authorized Smith Barney to
effect such transactions, and (b) Smith Barney annually advises the Trust
of the aggregate compensation it earned on such transactions. Over-the-
counter purchases and sales are transacted directly with principal market
makers except in those cases in which better prices and executions may be
obtained elsewhere.
The Funds will not purchase any security, including U.S. government secu-
rities or Municipal Securities, during the existence of any underwriting
or selling group relating thereto of which Smith Barney is a member, ex-
cept to the extent permitted by the SEC.
The Funds may use Smith Barney as a commodities broker in connection with
entering into futures contracts and options on futures contracts. Smith
Barney has agreed to charge the Funds commodity commissions at rates com-
parable to those charged by Smith Barney to its most favored clients for
comparable trades in comparable accounts.
PURCHASE OF SHARES
VOLUME DISCOUNTS
The schedules of sales charges on Class A shares described in the Prospec-
tuses apply to purchases made by any "purchaser," which is defined to in-
clude the following: (a) an individual; (b) an individual's spouse and
their 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 em-
ployee benefit plans of employers who are "affiliated persons" of each
other within the meaning of the 1940 Act; (e) tax-exempt organizations
enumerated in Section 501(c)(3) or (13) of the Code; (f) any other orga-
nized group of persons, provided that the organization has been in exist-
ence for at least six months and was organized for a purpose other than
the purchase of investment company securities at a discount; or (g) a
trustee or other professional fiduciary (including a bank, or an invest-
ment adviser registered with the SEC under the Investment Advisers Act of
1940) purchasing shares of the Fund for one or more trust estates or fidu-
ciary accounts. Purchasers who wish to combine purchase orders to take ad-
vantage of volume discounts on Class A shares should contact their Smith
Barney Financial Consultants.
COMBINED RIGHT OF ACCUMULATION
Reduced sales charges, in accordance with the schedules in the Prospec-
tuses, apply to any purchase of Class A shares if the aggregate investment
in Class A shares of the relevant Fund and in Class A shares of other
funds in the Smith Barney 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 confir-
mation of the shareholder's holdings through a check of appropriate
records. The Trust reserves the right to terminate or amend the combined
right of accumulation at any time after notice to shareholders. For fur-
ther information regarding the rights of accumulation, shareholders should
contact their Smith Barney 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 the 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, Class C, Class Y and Class Z share (and Class A share pur-
chases, including applicable rights of accumulation, equaling or exceeding
$500,000), is equal to the net asset value per share at the time of pur-
chase 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 and Class C shares, and of Class A shares when purchased in
amounts equaling or exceeding $500,000. The method of computation of the
public offering price is shown in the Fund's financial statements incorpo-
rated by reference in their entirety to this Statement of Additional In-
formation.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of a Fund is included in its
Prospectus. The right of redemption of shares of a Fund may be suspended
or the date of payment postponed (a) for any periods during which the New
York Stock Exchange, Inc. (the "NYSE") is closed (other than for customary
weekend and holiday closings), (b) when trading in the markets the Fund
normally utilizes is restricted, or an emergency exists, as determined by
the SEC, so that disposal of the Fund's investments or determination of
its net asset value is not reasonably practicable or (c) for such other
periods as the SEC by order may permit for the protection of the Fund's
shareholders.
Distributions in Kind. If the 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 re-
ceiving distributions in kind may incur brokerage commissions when subse-
quently 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 $100 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 1% per month of the value of a
shareholder's shares at the time the Withdrawal Plan commences (with re-
spect to withdrawal plans in effect prior to November 7, 1994, any appli-
cable CDSC will be waived on amounts withdrawn that do not exceed 2% per
month of the shareholder's shares subject to a CDSC). To the extent that
withdrawals exceed dividends, distributions and appreciation of a share-
holder'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 pay-
ments should not be considered as income from investment in a Fund. Fur-
thermore, as it generally would not be advantageous to a shareholder to
make additional investments in a Fund at the same time that he or she is
participating in the Withdrawal Plan with respect to that Fund, purchases
by such shareholders of additional shares in the Fund in amounts less than
$5,000 will not ordinarily be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who hold
their shares in certificate form must deposit their share certificates of
the Fund from which withdrawals will be made with TSSG, as agent for With-
drawal Plan members. All dividends and distributions on shares in the
Withdrawal Plan are reinvested automatically at net asset value in addi-
tional shares of the Fund involved. 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. For additional information regarding the
Withdrawal Plan, contact your Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Trust's distributor on a best efforts basis
pursuant to a distribution agreement (the "Distribution Agreement").
Smith Barney 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
may benefit from the temporary use of the funds. The investor may desig-
nate another use for the funds prior to settlement date, such as an in-
vestment in a money market fund (other than Smith Barney Exchange Reserve
Fund) in the Smith Barney Group of Funds. If the investor instructs Smith
Barney to invest the funds in a money market fund, the amount of the in-
vestment 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 Bar-
ney which serve the funds in an investment advisory capacity will benefit
from the fact that they are receiving fees from both such investment com-
panies for managing these assets 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 resulting from five-day settlement procedures and
will take such benefits into consideration when reviewing the Advisory,
Administrative and Distribution Agreements for continuance.
DISTRIBUTION ARRANGEMENTS
Shares of the Trust are distributed on a best efforts basis by Smith Bar-
ney as exclusive sales agent of the Trust pursuant to the Distribution
Agreement. To compensate Smith Barney for the services it provides and for
the expense it bears under the Distribution Agreement, the Trust has
adopted a services and distribution plan (the "Plan") pursuant to Rule
12b-1 under the 1940 Act. Under the Plan, each Fund pays Smith Barney a
service fee, accrued daily and paid monthly, calculated at the annual rate
of .25% (.15% in the case of 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 C shares. In addition, Class B and Class C pay a distribution
fee primarily intended to compensate Smith Barney for its initial expense
of paying Financial Consultants a commission upon sales of the respective
shares. The Class B and Class C distribution fees, accrued daily and paid
monthly, are calculated at the annual rate of .50% of the value of a
Fund's average daily net assets attributable to the shares of the respec-
tive Class.
During the twelve-month periods ended July 31, 1992 and 1993, Shearson Le-
hman Brothers, the Fund's distributor prior to Smith Barney, received
$35,428,596 and $48,427,224, respectively, in the aggregate from the Trust
under the Plan. For the same periods, Shearson Lehman Brothers also re-
ceived $8,915,876 and $9,494,822, respectively, representing CDSC on re-
demptions of Class B shares of the Trust. For the same period, Shearson
Lehman Brothers incurred distribution expenses totalling approximately
$ , consisting of approximately $ for advertising, $
for printing and mailing of Prospectuses, $ for support ser-
vices, $ to Shearson Lehman Brothers Financial Consultants and
$ 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.
For the fiscal year ended July 31, 1994, Smith Barney received $
, in the aggregate from the Trust under the Plan. For the same period,
Smith Barney also received $ , representing CDSC on redemptions of
Class B Shares of the Trust. For the same period, Smith Barney incurred
distribution expenses totaling approximately $ , consisting of ap-
proximately $ for advertising, $ for printing and mailing of
Prospectuses, $ for support services, $ to , and $
in accruals for interest on the excess of Smith Barney expenses in-
curred in distributing the Trust's shares over the sum of the distribution
fees and CDSC received by Smith Barney from the Trust.
Under its terms, the Plan continues from year to year, provided such con-
tinuance 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 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 major-
ity of the Independent Trustees or, with respect to any Fund, by vote of a
majority of the outstanding voting securities of the Class (as defined in
the 1940 Act). Pursuant to the Plan, Smith Barney will provide the Board
of Trustees with periodic reports of amounts expended under the Plan and
the purpose for which such expenditures were made.
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except days on which the NYSE is closed. The NYSE cur-
rently is scheduled to be closed on New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively. Because of the
differences in distribution fees and Class-specific expenses, the per
share net asset value of each Class will differ. The following is a de-
scription of procedures used by a Fund in valuing its assets.
Because of the need to obtain prices as of the close of trading on various
exchanges throughout the world, the calculation of the net asset value of
Funds investing in foreign securities may not take place contemporaneously
with the determination of the prices of many of their respective portfolio
securities used in such calculation. A security which is listed or traded
on more than one exchange is valued at the quotation on the exchange de-
termined to be the primary market for such security. All assets and lia-
bilities initially expressed in foreign currency values will be converted
into U.S. dollar values at the mean between the bid and offered quotations
of such currencies against U.S. dollars as last quoted by any recognized
dealer. If such quotations are not available, the rate of exchange will be
determined in good faith by the Board of Trustees. In carrying out the
Board's valuation policies, SBA, as administrator, may consult with an in-
dependent pricing service (the "Pricing Service") retained by the Trust.
Debt securities of United States issuers (other than U.S. government secu-
rities and short-term investments), including Municipal Securities held by
the Tax-Exempt Income Fund, are valued by SBA, 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 in-
vestments are readily available and are representative of the bid side of
the market, these investments are valued at the mean between the quoted
bid prices and asked prices. Investments for which, in the judgment of the
Pricing Service, there are no readily obtainable market quotations are
carried at fair value as determined by the Pricing Service. The procedures
of the Pricing Service are reviewed periodically by the officers of the
Trust under the general supervision and responsibility of the Board of
Trustees.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund in the Smith Barney Group
of Funds may exchange all or part of their shares for shares of the same
class of other funds in the Smith Barney Group of Funds, to the extent
such shares are offered for sale in the shareholder's state of residence,
on the basis of relative net asset value per share at the time of exchange
as follows:
A. Class A shares of any fund purchased with a sales charge may be ex-
changed for Class A shares of any of the other funds, and the sales charge
differential, if any, will be applied. Class A shares of any fund may be
exchanged without a sales charge for shares of the funds that are offered
without a sales charge. Class A shares of any fund purchased without a
sales charge may be exchanged for shares sold with a sales charge, and the
appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of shares
purchased with a sales charge may be exchanged for Class A shares of any
of the other funds, and the sales charge differential, if any, will be ap-
plied.
C. Class B shares of any fund may be exchanged without a sales charge.
Class B shares of a Fund exchanged for Class B shares of another fund will
be subject to the higher applicable CDSC of the two funds and, for pur-
poses of calculating CDSC rates and conversion periods, will be deemed to
have been held since the date the shares being exchanged were purchased.
Dealers other than Smith Barney must notify TSSG of the investor's prior
ownership of Class A shares of Smith Barney High Income Fund and the ac-
count number in order to accomplish an exchange of shares of Smith Barney
High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the same
class in a fund with different investment objectives when they believe
that a shift between funds is an appropriate investment decision. This
privilege is available to shareholders resident in any state in which the
fund shares being acquired may legally be sold. Prior to any exchange, the
shareholder should obtain and review a copy of the current prospectus of
each fund into which an exchange is being considered. Prospectuses may be
obtained from your Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting docu-
ments, shares submitted for exchange are redeemed at the then-current net
asset value and, subject to any applicable CDSC, the proceeds immediately
invested, at a price as described above, in shares of the fund being ac-
quired. Smith Barney reserves the right to reject any exchange request.
The exchange privilege may be modified or terminated at any time after no-
tice 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 Class A, Class B, Class C or Class Y, it
will also disclose such information for the other Classes.
YIELD
Exchange Reserve Fund. The current yield for the Fund is computed by (a)
determining the net change in the value of a hypothetical pre-existing ac-
count in the Fund having a balance of one share at the beginning of a
seven-calendar-day period for which yield is to be quoted, (b) dividing
the net change by the value of the account at the beginning of period to
obtain the base period return and (c) annualizing the results (i.e., mul-
tiplying the base period return by 365/7). The net change in the value of
the account reflects the value of additional shares purchased with divi-
dends declared on the original share and any such additional shares, but
does not include realized gains and losses or unrealized appreciation and
depreciation. In addition, the Fund may calculate a compound effective an-
nualized yield by adding 1 to the base period return (calculated as de-
scribed above), raising the sum to a power equal to 365/7 and subtracting
1.
For the seven-day period ended July 31, 1994, the annualized yield was
%, and the compound effective yield was %. For the same seven-day
period, the Fund's average portfolio maturity was days.
Other Funds. The 30-day yield figure of a Fund other than the Money Mar-
ket Fund is calculated according to a formula prescribed by the SEC. The
formula can be expressed as follows:
YIELD =2 [ ( a-bcd +1)6--1]
Where: a =dividends and interest earned during the period.
b =expenses accrued for the period (net of waiver and reimburse-
ment).
c =the average daily number of shares outstanding during the pe-
riod that were entitled to receive dividends.
d =the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount
or premium, the formula generally calls for amortization of the discount
or premium; the amortization schedule will be adjusted monthly to reflect
changes in the market values of the debt obligations.
The Class B yields for the 30-day period ended July 31, 1994 for the High
Income, Diversified Strategic Income, Global Bond and Utilities Funds were
%, %, % and %, respectively.
Class A's yields for the Tax-Exempt Income Fund for the 30-day period
ended July 31, 1994, was % and the equivalent taxable yield for Class
A for that period was % assuming payment of Federal income taxes at a
rate of 28%.
Investors should recognize that, in periods of declining interest rates, a
Fund's yield will tend to be somewhat higher than prevailing market rates,
and in periods of rising interest rates the Fund's yield will tend to be
somewhat lower. In addition, when interest rates are falling, the inflow
of net new money to the Fund from the continuous sale of its shares will
likely be invested in portfolio instruments producing lower yields than
the balance of such Fund's investments, thereby reducing the current yield
of the Fund. In periods of rising interest rates, the opposite can be ex-
pected to occur.
AVERAGE ANNUAL TOTAL RETURN
The "average annual total return" figures for 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 por-
tion 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 peri-
ods shown. Principal changes are based on the difference between the be-
ginning 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 indi-
cated 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, 1994 JULY 31, 1994
JULY 31, 1994
<S> <C> <C>
<C>
Premium Total Return<F1>
Tax-Exempt Income<F1><F6>
Convertible<F2>
High Income<F2><F6>
Global Bond<F3><F6>
Diversified Strategic Income<F4><F6>
Utilities<F5>
<FN>
<F1> Fund commenced operations on September 16, 1985.
<F2> Fund commenced operations on September 2, 1986.
<F3> Fund commenced operations on October 27, 1986.
<F4> Fund commenced operations on December 28, 1989.
<F5> Fund commenced operations on March 28, 1988.
<F6> Prior to November 6, 1992 the maximum CDSC imposed on redemptions was
5%.
</TABLE>
A Class' total return figures calculated in accordance with the above for-
mula assume that the maximum sales charge or maximum applicable CDSC, as
the case may be, has been deducted for the hypothetical $1,000 initial in-
vestment at the time of purchase.
AGGREGATE TOTAL RETURN
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 invest-
ment made at the beginning of the 1-, 5- or 10-year period
at the end of the 1-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of all dividends
and distributions.
The aggregate total returns 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, 1994* 1994* JULY 31, 1994*
1994** 1994** JULY 31, 1994**
<S> <C> <C> <C>
<C> <C> <C>
Premium Total Return<F1> 11.68% 92.98% 162.83%
6.68% 91.98% 162.83%
Tax-Exempt Income<F1><F6> 8.28 56.09 109.46
3.78 55.09 109.46
Convertible<F2> 13.40 54.95 77.93
8.40 53.95 77.93
High Income<F2><F6> 18.55 55.58 87.58
14.05 54.72 87.58
Global Bond<F3><F6> 8.67 54.73 89.10
4.17 53.74 89.10
Diversified Strategic
Income<F4><F6> 7.28 -- 47.05
2.85 -- 45.05
Utilities<F5> 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 maxi-
mum 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 av-
erage 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 ap-
plicable CDSC and the annual service fee of .25% (.15% for the Tax-
Exempt Income Fund) and Class B distribution fee of .50% of the aver-
age net assets of the Class.
<F1> Fund commenced operations on September 16, 1985.
<F2> Fund commenced operations on September 2, 1986.
<F3> Fund commenced operations on October 27, 1986.
<F4> Fund commenced operations on December 28, 1989.
<F5> Fund commenced operations on March 28, 1988.
<F6> Prior to November 6, 1992 the maximum CDSC imposed on redemptions was
5%.
</TABLE>
The aggregate total returns of the Class A and Class C shares of the Funds
indicated were as follows for the periods indicated:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
NOVEMBER 6, 1992 NOVEMBER 6,
1992
THROUGH THROUGH
NAME OF FUND JULY 31, 1994* JULY 31,
1994**
<S> <C> <C>
Premium Total Return
Class A 10.31% 4.79%
Class C 2.60 2.60
Tax-Exempt Income
Class A 10.24 5.28
Convertible
Class A 12.63 7.00
Class C -- --
High Income
Class A 17.29 12.01
Class C -- --
Global Bond
Class A 7.70% 2.85%
Class C 6.19 6.19
Diversified Strategic Income
Class A 9.30 4.38
Class C 3.86 3.86
Utilities
Class A 17.01 11.16
Class C 8.08 8.08
<FN>
* Figures do not include the effect of the maximum sales charge or maxi-
mum applicable CDSC.
** Figures include the effect of the maximum sales charge or maximum ap-
plicable CDSC.
</TABLE>
It is important to note that the yield and total return figures set forth
above are based on historical earnings and are not intended to indicate
future performance.
A Class' performance will vary from time to time depending upon market
conditions, the composition of the relevant Fund's portfolio and operating
expenses and the expenses exclusively attributable to that Class. Conse-
quently, any given performance quotation should not be considered repre-
sentative of the Class' performance for any specified period in the fu-
ture. Because performance will vary, it may not provide a basis for com-
paring an investment in the Class with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing a Class' performance with that of other mutual funds should give
consideration to the quality and maturity of the respective investment
company's portfolio securities.
TAXES
Set forth below is a summary of certain Federal income tax considerations
generally affecting the Trust and its shareholders. The summary is not in-
tended as a substitute for individual tax advice, and investors are urged
to consult their tax advisors with specific reference to their own Fed-
eral, state or local tax situations.
TAX STATUS OF THE FUNDS
Each Fund will be treated as a separate taxable entity for Federal income
tax purposes.
Each Fund has qualified and the Trust intends that each Fund continue to
qualify separately each year as a "regulated investment company" under the
Code. A qualified Fund will not be liable for Federal income taxes to the
extent its taxable net investment income and net realized capital gains
are distributed to its shareholders, provided that each Fund distributes
at least 90% of its net investment income. One of the several requirements
for qualification is that a Fund receive at least 90% of its gross income
each year from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of equity or debt secu-
rities or foreign currencies, or other income (including but not limited
to gains from options, futures, or forward contracts) derived with respect
to the Fund's investment in such stock, securities, or currencies. The
Trust does not expect any Fund to have difficulty meeting this test.
To qualify as a regulated investment company, a Fund also must earn less
than 30% of its gross income from the disposition of securities held for
less than three months. The 30% test will limit the extent to which a Fund
may sell securities held for less than three months; effect short sales of
securities held for less than three months; write options which expire in
less than three months; and effect closing transactions with respect to
call or put options that have been written or purchased within the preced-
ing three months. (If a Fund purchases a put option for the purpose of
hedging an underlying portfolio security, the acquisition of the option is
treated as a short sale of the underlying security unless the option and
the security are acquired on the same date.) Finally, as discussed below,
this requirement also may limit investments by certain Funds in options on
stock indexes, options on nonconvertible debt securities, futures con-
tracts and options on futures contracts, and foreign currencies (or op-
tions, futures or forward contracts on foreign currencies) but only to the
extent that such foreign currencies are not directly related to the
Trust's principal business of investing in securities.
TAXATION OF INVESTMENT BY THE FUNDS
Gains or losses on sales of securities by a Fund generally will be long-
term capital gains or losses if the Fund has held the securities for more
than one year. Gains or losses on sales of securities held for not more
than one year generally will be short-term. If a Fund acquires a debt se-
curity at a substantial discount, a portion of any gain upon sale or re-
demption will be taxed as ordinary income, rather than capital gain, to
the extent that it reflects accrued market discount.
Options and Futures Transactions. The tax consequences of options trans-
actions entered into by a Fund will vary depending on the nature of the
underlying security, whether the option is written or purchased, and
whether the "straddle" rules, discussed separately below, apply to the
transaction. When a Fund writes a call or put option on an equity or con-
vertible debt security, it will receive a premium that will, subject to
the straddle rules, be treated as follows for tax purposes. If the option
expires unexercised, or if the Fund enters into a closing purchase trans-
action, the Fund will realize a gain (or loss if the cost of the closing
purchase transaction exceeds the amount of the premium) without regard to
any unrealized gain or loss on the underlying security. Any such gain or
loss will be a short-term capital gain or loss, except that any loss on a
"qualified" covered call stock option that is not treated as a part of a
straddle may be treated as long-term capital loss. If a call option writ-
ten by a Fund is exercised, the Fund will recognize a capital gain or loss
from the sale of the underlying security, and will treat the premium as
additional sales proceeds. Whether the gain or loss will be long-term or
short-term will depend on the holding period of the underlying security.
If a put option written by a Fund is exercised, the amount of the premium
will reduce the tax basis of the security that the Fund then purchases.
If a put or call option that a Fund has purchased on an equity or convert-
ible debt security expires unexercised, the Fund will realize capital loss
equal to the cost of the option. If the Fund enters into a closing sale
transaction with respect to the option, it will realize a capital gain or
loss (depending on whether the proceeds from the closing transaction are
greater or less than the cost of the option). The gain or loss will be
short-term or long-term, depending on the Fund's holding period in the op-
tion. If the Fund exercises such a put option, it will realize a short-
term capital gain or loss (long-term if the Fund holds the underlying se-
curity for more than one year before it purchases the put) from the sale
of the underlying security measured by the sales proceeds decreased by the
premium paid. If the Fund exercises such a call option, the premium paid
for the option will be added to the tax basis of the security purchased.
One or more Funds may invest in section 1256 contracts, and the Code im-
poses a special "mark-to-market" system for taxing these contracts. These
contracts generally include options on nonconvertible debt securities (in-
cluding United States government securities), options on stock indexes,
futures contracts, options on futures contracts and certain foreign cur-
rency contracts. Options on foreign currency, futures contracts on foreign
currency and options on foreign currency futures will qualify as "section
1256" contracts if the options or futures are traded on or subject to the
rules of a qualified board or exchange. Generally, most of the foreign
currency options and foreign currency futures and related options in which
certain Funds may invest will qualify as section 1256 contracts. In gen-
eral, gain or loss on section 1256 contracts will be taken into account
for tax purposes when actually realized (by a closing transaction, by ex-
ercise, by taking delivery or by other termination). In addition, any sec-
tion 1256 contracts held at the end of a taxable year will be treated as
sold at their year-end fair market value (that is, marked to the market),
and the resulting gain or loss will be recognized for tax purposes. Pro-
vided that section 1256 contracts are held as capital assets and are not
part of a straddle, both the realized and the unrealized year-end gain or
loss from these investment positions (including premiums on options that
expire unexercised) will be treated as 60% long-term and 40% short-term
capital gain or loss, regardless of the period of time particular posi-
tions actually are held by a Fund.
A portion of the mark-to-market gain on instruments held for less than
three months at the close of a Fund's taxable year may represent a gain on
securities held for less than three months for purposes of the 30% test
discussed above. Accordingly, a Fund may have to restrict its fourth-
quarter transactions in section 1256 contracts.
Straddles. While the mark-to-market system is limited to section 1256
contracts, the Code contains other rules applicable to transactions which
create positions which offset positions in section 1256 or other invest-
ment contracts. Those rules, applicable to "straddle" transactions, are
intended to eliminate any special tax advantages for such transactions.
"Straddles" are defined to include "offsetting positions" in actively-
traded personal property. Under current law, it is not clear under what
circumstances one investment made by a Fund, such as an option or futures
contract, would be treated as "offsetting" another investment also held by
the Fund, such as the underlying security (or vice versa) and, therefore,
whether the Fund would be treated as having entered into a straddle. In
general, investment positions may be "offsetting" if there is a substan-
tial diminution in the risk of loss from holding one position by reason of
holding one or more other positions (although certain "qualified" covered
call stock options written by a Fund may be treated as not creating a
straddle). Also, the forward currency contracts entered into by a Fund may
result in the creation of "straddles" for Federal income tax purposes.
If two (or more) positions constitute a straddle, a realized loss from one
position (including a mark-to-market loss) must be deferred to the extent
of unrecognized gain in an offsetting position. Also, the holding period
rules described above may be modified to recharacterize long-term gain as
short-term gain, or to recharacterize short-term loss as long-term loss,
in connection with certain straddle transactions. Furthermore, interest
and other carrying charges allocable to personal property that is part of
a straddle must be capitalized. In addition, "wash sale" rules apply to
straddle transactions to prevent the recognition of loss from the sale of
a position at a loss where a new offsetting position is or has been ac-
quired within a prescribed period. To the extent that the straddle rules
apply to positions established by a Fund, losses realized by the Fund may
be either deferred or recharacterized as long-term losses, and long-term
gains realized by the Fund may be converted to short-term gains.
If a Fund chooses to identify particular offsetting positions as being
components of a straddle, a realized loss will be recognized, but only
upon the liquidation of all of the components of the identified straddle.
Special rules apply to the treatment of "mixed" straddles (that is, strad-
dles consisting of a section 1256 contract and an offsetting position that
is not a section 1256 contract). If a Fund makes certain elections, the
section 1256 contract components of such straddles will not be subject to
the "60%/40%" mark-to-market rules. If any such election is made, the
amount, the nature (as long-or short-term) and the timing of the recogni-
tion of the Fund's gains or losses from the affected straddle positions
will be determined under rules that will vary according to the type of
election made.
Section 988. Foreign currency gain or loss from transactions in (a) bank
forward contracts not traded in the interbank market and (b) futures con-
tracts traded on a foreign exchange may be treated as ordinary income or
loss under Code section 988. A Fund may elect to have section 988 apply to
section 1256 contracts. Pursuant to that election, foreign currency gain
or loss from these transactions would be treated entirely as ordinary in-
come or loss when realized. A Fund will make the election necessary to
gain such treatment if the election is otherwise in the best interests of
the Fund.
TAXATION OF THE TRUST'S SHAREHOLDERS
Dividends paid by a Fund from investment income and distributions of
short-term capital gains will be taxable to shareholders as ordinary in-
come for Federal income tax purposes, whether received in cash or rein-
vested in additional shares. Distributions of long-term capital gains will
be taxable to shareholders as long-term capital gain, whether paid in cash
or reinvested in additional shares, and regardless of the length of time
that the shareholder has held his or her shares of the Fund.
Dividends of investment income (but not capital gains) from any Fund gen-
erally will qualify for the Federal dividends-received deduction for do-
mestic corporate shareholders to the extent that such dividends do not ex-
ceed the aggregate amount of dividends received by the Fund from domestic
corporations. If securities held by a Fund are considered to be "debt-
financed" (generally, acquired with borrowed funds), are held by the Fund
for less than 46 days (91 days in the case of certain preferred stock), or
are subject to certain forms of hedges or short sales, the portion of the
dividends paid by the Fund which corresponds to the dividends paid with
respect to such securities will not be eligible for the corporate
dividends-received deduction.
If a shareholder (a) incurs a sales charge in acquiring or redeeming Fund
shares and (b) disposes of those shares and acquires within 90 days after
the original acquisition, or (c) acquires within 90 days of the redemp-
tion, shares in a mutual fund for which the otherwise applicable sales
charge is reduced by reason of a reinvestment right (i.e., exchange privi-
lege), the original sales charge increases the shareholder's tax basis in
the original shares only to the extent the otherwise applicable sales
charge for the second acquisition is not reduced. The portion of the orig-
inal sales charge that does not increase the shareholder's tax basis in
the original shares would be treated as incurred with respect to the sec-
ond acquisition and, as a general rule, would increase the shareholder's
tax basis in the newly acquired shares. Furthermore, the same rule also
applies to a disposition of the newly acquired or redeemed shares made
within 90 days of the second acquisition. This provision prevents a share-
holder from immediately deducting the sales charge by shifting his or her
investment in a family of mutual funds.
Capital Gains Distribution. As a general rule, a shareholder who redeems
or exchanges his or her shares will recognize long-term capital gain or
loss if the shares have been held for more than one year, and will recog-
nize short-term capital gain or loss if the shares have been held for one
year or less. However, if a shareholder receives a distribution taxable as
long-term capital gain with respect to shares of a Fund and redeems or ex-
changes the shares before he or she has held them for more than six
months, any loss on such redemption or exchange that is less than or equal
to the amount of the distribution will be treated as a long-term capital
loss.
Backup Withholding. If a shareholder fails to furnish a correct taxpayer
identification number, fails to fully report dividend or interest income,
or fails to certify that he or she has provided a correct taxpayer identi-
fication number and that he or she is not subject to such withholding,
then the shareholder may be subject to a 31% "backup withholding tax" with
respect to (a) any taxable dividends and distributions and (b) any pro-
ceeds of any redemption of Trust shares. An individual's taxpayer identi-
fication number is his or her social security number. The backup withhold-
ing tax is not an additional tax and may be credited against a sharehold-
er's regular Federal income tax liability.
Tax-Exempt Income Fund Because the Tax-Exempt Income Fund will distrib-
ute exempt-interest dividends, interest on indebtedness incurred by share-
holders, 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 ex-
tent of the dividend received. Also, that portion of any dividend from the
Fund which represents income from private activity bonds other than those
issued for charitable, educational and certain other purposes held by the
Fund may not retain its tax-exempt status in the hands of a shareholder
who is a "substantial user" of a facility financed by such bonds or a per-
son "related" to a substantial user. Investors should consult their own
tax advisors to see whether they may be substantial users or related per-
sons with respect to a facility financed by bonds in which the Fund may
invest. Moreover, investors receiving social security or certain other re-
tirement benefits should be aware that tax-exempt interest received from
the Fund may under certain circumstances cause up to one-half of such re-
tirement benefits to be subject to tax. If the Fund receives taxable in-
vestment income, it will designate as taxable the same percentage of each
dividend as the actual taxable income bears to the total investment income
earned during the period for which the dividend is paid. The percentage of
each dividend designated as taxable, if any, may, therefore, vary. Divi-
dends derived from interest from Municipal Securities which are exempt
from Federal tax also may be exempt from personal income taxes in the
state where the issuer is located, but in most cases will not be exempt
under the tax laws of other states or local authorities. Annual statements
will set forth the amount of interest from Municipal Securities earned by
the Fund in each state or possession in which issuers of portfolio securi-
ties are located.
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 autho-
rized 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 ser-
vices to the Trust, Boston Safe receives monthly fees based upon the
month-end aggregate net asset value of the Trust, plus certain charges for
securities transactions including out-of-pocket expenses, and costs of any
foreign and domestic sub-custodians. The assets of the Trust are held
under bank custodianship in compliance with the 1940 Act.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as the Trust's transfer agent. Under the transfer agency agreement, TSSG
maintains the shareholder account records for the Trust, handles certain
communications between shareholders and the Trust and distributes divi-
dends and distributions payable by each Fund. For these services TSSG re-
ceives from each Fund a monthly fee computed on the basis of the number of
shareholder accounts maintained during the year for each Fund and is reim-
bursed for certain out-of-pocket expenses.
FINANCIAL STATEMENTS
The Funds' Annual Reports for the fiscal year ended July 31, 1994, accom-
pany this Statement of Additional Information and are incorporated herein
by reference in their entirety. In addition, the Report of Independent Ac-
countants dated on the Financial Highlights tables ap-
pearing in the Prospectus is also incorporated by reference into this
Statement of Additional Information in its entirety.
APPENDIX
Description of Ratings
DESCRIPTION OF S&P CORPORATE BOND RATINGS
AAA
Bonds rated AAA have the highest rating assigned by S&P to a debt obliga-
tion. Capacity to pay interest and repay principal is extremely strong.
AA
Bonds rated AA have a very strong capacity to pay interest and repay prin-
cipal and differ from the highest rated issues only in small degree.
A
Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher
rated categories.
BBB
Bonds rated BBB are regarded as having an adequate capacity to pay inter-
est and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
BB, B AND CCC
Bonds rated BB and B are regarded, on balance, as predominantly specula-
tive with respect to capacity to pay interest and repay principal in ac-
cordance with the terms of the obligation. BB represents a lower degree of
speculation than B and CCC the highest 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 ele-
ments are likely to change, such changes as can be visualized are most un-
likely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because mar-
gins of protection may not be as large as in Aaa securities, or fluctua-
tion of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A
Bonds which are rated A possess favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the fu-
ture.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest pay-
ments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of in-
terest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B
Bonds which are rated B generally lack characteristics of desirable in-
vestments. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. These issues may be in de-
fault or present elements of danger may exist with respect to principal or
interest.
Moody's applies the numerical modifier 1, 2 and 3 to each generic rating
classification from Aa through B. The modifier 1 indicates that the secu-
rity ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
DESCRIPTION OF S&P MUNICIPAL BOND RATINGS
AAA
Prime -- These are obligations of the highest quality. They have the
strongest capacity for timely payment of debt service.
General Obligation Bonds -- In a period of economic stress, the issuers
will suffer the smallest declines in income and will be least susceptible
to autonomous decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure requirements. Qual-
ity of management appears superior.
Revenue Bonds -- Debt service coverage has been, and is expected to re-
main, substantial. Stability of the pledged revenues is also exceptionally
strong due to the competitive position of the municipal enterprise or to
the nature of the revenues. Basic security provisions (including rate cov-
enant, earnings test for issuance of additional bonds, debt service re-
serve requirements) are rigorous. There is evidence of superior manage-
ment.
AA
High Grade -- The investment characteristics of bonds in this group are
only slightly less marked than those of the prime quality issues. Bonds
rated AA have the second strongest capacity for payment of debt service.
A
Good Grade -- Principal and interest payments on bonds in this category
are regarded as safe although the bonds are somewhat more susceptible to
the adverse affects of changes in circumstances and economic conditions
than bonds in higher rated categories. This rating describes the third
strongest capacity for payment of debt service. Regarding municipal bonds,
the ratings differ from the two higher ratings because:
General Obligation Bonds -- There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and expen-
ditures, or in quality of management. Under certain adverse circumstances,
any one such weakness might impair the ability of the issuer to meet debt
obligations at some future date.
Revenue Bonds -- Debt service coverage is good, but not exceptional. Sta-
bility of the pledged revenues could show some variations because of in-
creased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB
Medium Grade -- Of the investment grade ratings, this is the lowest. Bonds
in this group are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection pa-
rameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
General Obligation Bonds -- Under certain adverse conditions, several of
the above factors could contribute to a lesser capacity for payment of
debt service. The difference between A and BBB ratings is that the latter
shows more than one fundamental weakness, or one very substantial funda-
mental weakness, whereas the former shows only one deficiency among the
factors considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged rev-
enues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more
than adequate. Management performance could be stronger.
BB, B, CCC AND CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as predominately
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. BB includes the lowest de-
gree of speculation and CC the highest degree of speculation. While such
bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C
The rating C is reserved for income bonds on which no interest is being
paid.
D
Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating cat-
egories, except in the AAA-Prime Grade category.
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP-1, -2 or -3) to distinguish more clearly the
credit quality of notes as compared to bonds. Notes rated SP-1 have a very
strong or strong capacity to pay principal and interest. Those issues de-
termined to possess overwhelming safety characteristics are given the des-
ignation of SP-1+. Notes rated SP-2 have satisfactory capacity to pay
principal and interest.
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS
Aaa
Bonds which are rated Aaa are judged to be the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an excep-
tionally stable margin and principal is secure. While the various protec-
tive elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all stan-
dards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because mar-
gins of protection may not be as large as in Aaa securities, or fluctua-
tion of protective elements may be of greater amplitude, or there may be
other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving se-
curity to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest pay-
ments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of in-
terest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterize bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in de-
fault or there may be present elements of danger with respect to principal
or interest.
Ca
Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked short-
comings.
C
Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the secu-
rity ranks in the higher end of its generic ratings category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic ratings category.
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable rate demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are the best
quality, enjoying strong protection from established cash flows of funds
for their servicing or from established and broad-based access to the mar-
ket 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 al-
though not distinctly or predominantly speculative, there is specific
risk.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
The rating A-1+ is the highest, and A-1 the second highest, commercial
paper rating assigned by S&P. Paper rated A-1+ must have either the direct
credit support of an issuer or guarantor that possesses excellent long-
term operating and financial strength combined with strong liquidity char-
acteristics (typically, such issuers or guarantors would display credit
quality characteristics which would warrant a senior bond rating of A- or
higher) or the direct credit support of an issuer or guarantor that pos-
sesses above average long-term fundamental operating and financing capa-
bilities combined with ongoing excellent liquidity characteristics. Paper
rated A-1 must have the following characteristics: liquidity ratios are
adequate to meet cash requirements; long-term senior debt is rated A or
better; the issuer has access to at least two additional channels of bor-
rowing; basic earnings and cash flow have an upward trend with allowance
made for unusual circumstances; typically, the issuer's industry is well
established and the issuer has a strong position within the industry; and
the reliability and quality of management are unquestioned.
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are
the following: (a) evaluation of the management of the issuer; (b) eco-
nomic evaluation of the issuer's industry or industries and an appraisal
of speculative-type risks which may be inherent in certain areas; (c)
evaluation of the issuer's products in relation to competition and cus-
tomer acceptance; (d) liquidity; (e) amount and quality of long-term debt;
(f) trend of earnings over a period of ten years; (g) financial strength
of parent company and the relationships which exist with the issue; and
(h) recognition by the management of obligations which may be present or
may arise as a result of public interest questions and preparations to
meet such obligations.
Short-term obligations, including commercial paper, rated A-1+ by IBCA
Limited or its affiliate IBCA Inc. are obligations supported by the high-
est capacity for timely repayment. Obligations rated A-1 have a very
strong capacity for timely repayment. Obligations rated A-2 have a strong
capacity for timely repayment, although such capacity may be susceptible
to adverse changes in business, economic and financial conditions.
Thomson BankWatch employs the rating "TBW-1" as its highest category,
which indicates that the degree of safety regarding timely repayment of
principal and interest is very strong. "TBW-2" is its second highest rat-
ing category. While the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is not as
high as for issues rated "TBW-1."
Fitch Investors Services, Inc. employs the rating F-1+ to indicate issues
regarded as having the strongest degree of assurance of timely payment.
The rating F-1 reflects an assurance of timely payment only slightly less
in degree than issues rated F-1+, while the rating F-2 indicated a satis-
factory degree of assurance of timely payment although the margin of
safety is not as great as indicated by the F-1+ and F-1 categories.
Duff & Phelps Inc. employs the designation of Duff 1 with respect to top
grade commercial paper and bank money instruments. Duff 1+ indicated the
highest certainty of timely payment: short-term liquidity is clearly out-
standing and safety is just below risk-free U.S. Treasury short-term obli-
gations. Duff 1- indicates high certainty of timely payment. Duff 2 indi-
cates good certainty of timely payment: liquidity factors and company fun-
damentals are sound.
Various NRSROs utilize rankings within ratings categories indicated by a +
or -. The Funds, in accordance with industry practice, recognize such rat-
ings within categories as gradations, viewing for example S&P's rating of
A-1+ and A-1 as being in S&P's highest rating category.
SMITH BARNEY
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
Smith Barney
INCOME FUNDS
PREMIUM TOTAL RETURN
FUND
CONVERTIBLE FUND
GLOBAL BOND FUND
HIGH INCOME FUND
DIVERSIFIED STRATEGIC
INCOME FUND
TAX-EXEMPT INCOME FUND
UTILITIES FUND
EXCHANGE RESERVE FUND
STATEMENT OF
ADDITIONAL INFORMATION
NOVEMBER 7, 1994
SMITH BARNEY SHEARSON INCOME FUNDS
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
To be filed by amendment.
Included in Part B:
Portfolio Highlights
Portfolio of Investments
Schedule of Forward Foreign Exchange Contracts
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights
Report of Independent Accountants
to be filed by amendment.
Included in Part C:
The Registrant's Annual Reports for the fiscal year
ended July 31, 1994 and the Reports of Independent
Accountants will be filed by amendment
(b) Exhibits
All references are to the Registrant's Registration Statement on form N-
1A as filed with the Securities and Exchange Commission (the "SEC") on March
13, 1985. File Nos. 2-96408 and 811-4254 (the "Registration Statement").
(1) 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)(a) Registrant's By-Laws are incorporated by reference to the
Registration Statement.
(3) Not Applicable.
(4) Registrant's form of share certificates for Class A, B, C
and Y shares will be filed by amendment.
(5)(a) Investment Advisory Agreements between the Registrant and
Greenwich Street Advisors Division of Mutual Management Corp. with respect to
Utilities, Convertible, High Income, Tax-Exempt Income, Money Market and
Premium Total Return Funds are incorporated by reference to Post-Effective
Amendment No. 36. Investment Advisory Agreements between the Registrant and
Greenwich Street Advisors Division of Mutual Management Corp. with respect to
Diversified Strategic Income Fund and between the Registrant and Smith Barney
Global Capital Management, Inc. with respect to Global Bond Fund will be filed
by amendment.
(b) Sub-Investment Advisory Agreements between the Registrant
and Smith Barney Global Capital Management, Inc. with respect to Diversified
Strategic Income Fund and between the Registrant and The Boston Company
Advisors, Inc. with respect to Premium Total Return Fund will be filed by
amendment.
(6)(a) Distribution Agreement dated July 30, 1993 between the
The Registrant and Smith Barney Shearson Inc. is incorporated by reference to
Post-Effective Amendment No. 38.
(7) Not Applicable.
(8)(a) Custodian Agreement between the Registrant and Boston Safe
Deposit and Trust Company ("Boston Safe") is incorporated by reference to Pre-
Effective Amendment No. 1.
(b) Supplement to the Registrant's Custodian Agreement with
respect to SLH Diversified Strategic Income Portfolio is incorporated by
reference to Post-Effective Amendment No. 16.
(c) Sub-Custodian Agreement between the Registrant and Boston
Safe is incorporated by reference to Pre-Effective Amendment No. 3.
(9)(a) Transfer Agency and Registrar Agreement dated August 4,
1993 between the Registrant and The Shareholder Services Group, Inc. is filed
herewith.
(b) Administration Agreements between the Registrant and Smith,
Barney Advisers, Inc. and Sub-Administration Agreements between the Registrant
and The Boston Company Advisors, Inc. will be filed by amendment.
(10) Opinion of Counsel will be filed with the Registrant's 24f-2
notice on or before September 30, 1994..
(11) Consent of Independent Accountants will be filed by
amendment.
(12) Not Applicable.
(13)(a) Purchase Agreements between the Registrant and Shearson
Lehman Hutton are incorporated by reference to Post-Effective Amendment No. 3.
to the Registration Statement, filed on August 30, 1985 and Post-Effective
Amendment No. 2.
(b) Purchase Agreement between the Registrant and Shearson
Lehman Hutton relating to Money Market Portfolio is incorporated by reference
to Post-Effective Amendment No. 6.
(c) Purchase Agreement between the Registrant and Shearson
Lehman Hutton relating to Global Bond, Mortgage Securities, Convertible
Securities and High Income Bond Portfolios is incorporated by reference to
Post-Effective Amendment No. 7.
(d) Purchase Agreement between the Registrant and Shearson
Lehman Hutton with respect to SLH Diversified Strategic Income Portfolio is
incorporated by reference to Post-Effective Amendment No. 16.
(14) Not Applicable.
(15) 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.
(16) Performance Data for Registrant is incorporated by reference to
Post-Effective Amendments Nos. 14, 15 and 30 to the Registration Statement
filed on September 30, 1988, December 30, 1988 and January 29, 1992,
respectively.
25. Persons Controlled by or Under Common Control with
Registrant
None.
26. Number of Holders of Securities
(1) (2)
Number of Record
Title of Class Holders by Class as of August 12,
1994
Beneficial
Interest par value $.001
# per share
Class A Class B Class C Class
Y Class Z
Tax-Exempt Income 546 26,429 * * *
Convertible 258 8,977 1 * *
High Income 16,759 32,340 2 * 5
Premium Total Return 6,679 125,753 26 *
*
Global Bond 4,459 8,162 3 * *
Utilities 4,384 150,729 37 *
11
Diversified Strategic Income 5,076 126,871 37 *
6
Money Market * 16,423 * *
*
* The Fund does not presently offer this class of shares.
27. Indemnification
The response to this item is incorporated by reference to Registrant's
Post-Effective
Amendment No. 2.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Greenwich Street Advisors
Greenwich Street Advisors, through its predecessors, has been in the
investment counseling business since 1934 and is a division of Mutual
Management Corp. ("MMC"). MMC was incorporated in 1978 and is a wholly owned
subsidiary of Smith Barney Holdings Inc. (formerly known as Smith Barney
Shearson Holdings Inc.) ("Holdings"), which is in turn a wholly owned
subsidiary of The Travelers Inc. (formerly known as Primerica Corporation)
("Travelers").
The list required by this Item 28 of officers and directors of MMC and
Greenwich Street Advisors, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two fiscal years, is incorporated by
reference to Schedules A and D of FORM ADV filed by MMC on behalf of Greenwich
Street Advisors pursuant to the Advisers Act (SEC File No. 801-14437).
Prior to the close of business on July 30, 1993 (the "Closing"), Shearson
Lehman Advisors, a member of the Asset Management Group of Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers"), served as the Registrant's
investment adviser. On the Closing, Travelers and Smith Barney Inc. (formerly
known as Smith Barney Shearson Inc.) acquired the domestic retail brokerage
and asset management business of Shearson Lehman Brothers, which included the
business of the Registrant's prior investment adviser. Shearson Lehman
Brothers was a wholly owned subsidiary of Shearson Lehman Brothers Holdings
Inc. ("Shearson Holdings"). All of the issued and outstanding common stock of
Shearson Holdings (representing 92% of the voting stock) was held by American
Express Company. Information as to any past business vocation or employment
of a substantial nature engaged in by officers and directors of Shearson
Lehman Advisors can be located in Schedules A and D of FORM ADV filed by
Shearson Lehman Brothers on behalf of Shearson Lehman Advisors prior to July
30, 1993. (SEC FILE NO. 801-3701)
8/30/94
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Global Capital Management, Inc.
Investment Adviser - - Smith Barney Global Capital Management, Inc. ("SBGCM")
was incorporated on January 22, 1988 under the laws of the State of Delaware.
SBGCM is an indirect wholly owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.), which in turn is a
wholly owned subsidiary of The Travelers Inc. (formerly known as Primerica
Corporation) ("Travelers"). SBGCM is an investment adviser registered with
the Securities and Exchange Commission in the United States and with the
Investment Management Regulatory Organization Limited in the United Kingdom.
SBGCM conducts its operations primarily in the United Kingdom.
The list required by this Item 28 of officers and directors of SBGCM, together
with information as to any other business, profession, vocation or employment
of a substantial nature engaged in by such officers and directors during the
past two years, is incorporated by reference to Schedules A and D of FORM ADV
filed by SBGCM pursuant to the Advisers Act (SEC File No. 801-31824).
8/30/94
Item 28(b). Business and Other Connections of Sub-Investment Adviser
Investment Adviser -- The Boston Company Advisors, Inc.
The Boston Company Advisors, Inc. ("Boston Advisors") is a wholly owned
subsidiary of The Boston Company, Inc., which is in turn a wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Mellon is a publicly owned
multibank holding company registered under the Federal Bank Holding Company
Act of 1956 and through its subsidiaries Mellon provides a comprehensive range
of financial products and services in domestic and selected international
markets. Boston Advisors is an investment adviser registered under the
Investment Advisers Act of 1940 (the "Advisers Act") and serves as investment
counsel for individuals with substantial capital, executors, trustees and
institutions. It also serves as investment adviser, sub-investment adviser,
administrator or sub-administrator to numerous investment companies.
The list required by this Item 28 of officers and directors of Boston
Advisors, together with information as to any other business profession,
vocation or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to Schedules
A and D of FORM ADV filed by Boston Advisors pursuant to the Advisers Act (SEC
File No. 801-14158).
8/30/94
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as distributor for Smith
Barney Shearson Managed Municipals Fund Inc., Smith Barney Shearson New York
Municipals Fund Inc., Smith Barney Shearson California Municipals Fund Inc.,
Smith Barney Shearson Massachusetts Municipals Fund, Smith Barney Shearson
Global Opportunities Fund, Smith Barney Shearson Aggressive Growth Fund Inc.,
Smith Barney Shearson Appreciation Fund Inc., Smith Barney Shearson Principal
Return Fund, Smith Barney Shearson Municipal Money Market Fund Inc., Smith
Barney Shearson Daily Dividend Fund Inc., Smith Barney Shearson Government and
Agencies Fund Inc., Smith Barney Shearson Managed Governments Fund Inc., Smith
Barney Shearson New York Municipal Money Market Fund, Smith Barney Shearson
California Municipal Money Market Fund, Smith Barney Shearson Income Funds,
Smith Barney Shearson Equity Funds, Smith Barney Shearson Investment Funds
Inc., Smith Barney Shearson Precious Metals and Minerals Fund Inc., Smith
Barney Shearson Telecommunications Trust, Smith Barney Shearson Arizona
Municipals Fund Inc., Smith Barney Shearson New Jersey Municipals Fund Inc.,
The USA High Yield Fund N.V., Garzarelli Sector Analysis Portfolio N.V., The
Advisors Fund L.P., Smith Barney Shearson Fundamental Value Fund Inc., Smith
Barney Shearson Series Fund, Consulting Group Capital Markets Funds, Smith
Barney Shearson Income Trust, Smith Barney Shearson Adjustable Rate Government
Income Fund, Smith Barney Shearson Florida Municipals Fund, Smith Barney
Shearson Oregon Municipals Fund, Smith Barney Funds, Inc., Smith Barney Muni
Funds, Smith Barney World Funds, Inc., Smith Barney Money Funds, Inc., Smith
Barney Tax Free Money Fund, Inc., Smith Barney Variable Account Funds, Smith
Barney U.S. Dollar Reserve Fund (Cayman), Worldwide Special Fund, N.V.,
Worldwide Securities Limited, (Bermuda), Smith Barney International Fund
(Luxembourg) and various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Smith Barney Holdings Inc.
(formerly known as Smith Barney Shearson Holdings Inc.), which in turn is a
wholly owned subsidiary of The Travelers Inc. (formerly known as Primerica
Corporation) ("Travelers"). On June 1, 1994, Smith Barney changed its name
from Smith Barney Shearson Inc. to its current name. The information required
by this Item 29 with respect to each director, officer and partner of Smith
Barney is incorporated by reference to Schedule A of FORM BD filed by Smith
Barney pursuant to the Securities Exchange Act of 1934 (SEC File No. 812-
8510).
8/30/94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended 9the
"1933 and the Investment Company Act of 1940, as amended, the Registrant,
SHEARSON LEHMAN BROTHERS INCOME FUNDS has duly caused this amendment to
Registration Statement to be signed on its behalf by the undersigned, unto
duly authorized, all in the City of Boston, Commonwealth of Massachusetts on
the 8th day of September, 1994.
SMITH BARNEY SHEARSON
INCOME FUNDS
By:/s/ Heath B. McLendon*
Heath B. McLendon, Chairman of the Board
Pursuant to the requirement of the 1933 Act, this Amendment to the
Registration statement and the above Power of Attorney has been signed below
by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Heath B. McLendon* Chairman of the Board
9/8/94
Heath B. McLendon
/s/ Lewis E. Daidone** Treasurer (Chief Financial
9/8/94
Lewis E. Daidone and Accounting Officer)
/s/ Lee Abraham Trustee
Lee Abraham
/s/ Antoinette C. Bentley Trustee
Antoinette C. Bentley
/s/ Allan J. Bloostein* Trustee
9/8/94
Allan J. Bloostein
/s/ Richard E. Hanson* Trustee
9/8/94
Richard E. Hanson
/s/ Madelon DeVoe Talley* Trustee
9/8/94
Madelon DeVoe Talley
*Signed by Francis J. McNamara, III, their
duly authorized attorney-in-fact, pursuant
to power of attorney dated August 14, 1992.
/s/ Francis J. McNamara, III
Francis J. McNamara, III
** I, the undersigned, hereby constitute and appoint Heath B. McLendon,
Francis J. McNamara, III, Lee D. Augsburger and Ellen E. Crane and each of
them singly, my true and lawful attorneys, with full power to them and each of
them, to sign for me, and in my hand and in the capacities indicated below,
any and all Post-Effective Amendments to this Registration Statement and to
file the same, with all exhibits thereto, and other documents therewith, with
the Securities and Exchange Commission, granting unto said attorneys, and each
of them, acting alone, full authority and power to do and perform each and
every act and thing requisite or necessary to be done in the premises, as
fully to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys or any of them may lawfully
do or cause to be done by virtue thereof.
WITNESS my hand on date set forth below.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and the above Power of Attorney has been signed below
by the following person in the capacity and on the date indicated.
Signature Title Date
Treasurer (Chief
Financial 9/8/94
Lewis E. Daidone and Accounting Officer)
Location of Accounts and Records
(1) Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Shearson Income Funds
Two World Trade Center
New York, New York 10048
(3) Greenwich Street Advisors,
a Division of Mutual Management Corp.
Two World Trade Center
New York, New York 10048
(4) Global Asset Management
Two Broadgate
London EC2M7HA
United Kingdom
(5) Boston Advisors
One Boston Place
Boston, Massachusetts 02108
(6) Boston Safe
One Boston Place
Boston, Massachusetts 02108
(7) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Ma 02109
Management Services
Not Applicable.
Undertakings
(a) Registrant hereby undertakes to call a meeting of its shareholders for
the purpose of voting upon the question of removal of a trustee or trustees of
Registrant when requested in to do so by the holders of at least 10% of
Registrant's outstanding shares. Registrant undertakes further, in connection
with the meeting, to comply with the provisions of Section 16(c) 1940 Act
relating to communications with the shareholders of certain common-law trusts.
shared/domestic/clients/shearson/funds/slip/pea39.doc
TRANSFER AGENCY AND REGISTRAR AGREEMENT
AGREEMENT, dated as of August 4, 1993 between Smith Barney Shearson
Income Funds, (the "Fund"), a business trust organized under the laws of
Massachusetts and having its principal place of business at Two World Trade
Center, New York, NY 10048, and THE SHAREHOLDER SERVICES GROUP, INC. (MA) (the
"Transfer Agent"), a Massachusetts corporation with principal offices at One
Exchange Place, 53 State Street, Boston, Massachusetts 02109.
W I T N E S S E T H
That for and in consideration of the mutual covenants and promises
hereinafter set forth, the Fund and the Transfer Agent agree as follows:
1. Definitions. Whenever used in this Agreement, the following words
and phrases, unless the context otherwise requires, shall have the following
meanings:
(a) "Articles of Incorporation" shall mean the Articles of
Incorporation, Declaration of Trust, Partnership Agreement, or similar
organizational document as the case may be, of the Fund as the same may be
amended from time to time.
(b) "Authorized Person" shall be deemed to include any person,
whether or not such person is an officer or employee of the Fund, duly
authorized to give Oral Instructions or Written Instructions on behalf of the
Fund as indicated in a certificate furnished to the Transfer Agent pursuant to
Section 4(c) hereof as may be received by the Transfer Agent from time to
time.
(c) "Board of Directors" shall mean the Board of Directors, Board
of Trustees or, if the Fund is a limited partnership, the General Partner(s)
of the Fund, as the case may be.
(d) "Commission" shall mean the Securities and Exchange
Commission.
(e) "Custodian" refers to any custodian or subcustodian of
securities and other property which the Fund may from time to time deposit, or
cause to be deposited or held under the name or account of such a custodian
pursuant to a Custodian Agreement.
(f) "Fund" shall mean the entity executing this Agreement, and if
it is a series fund, as such term is used in the 1940 Act, such term shall
mean each series of the Fund hereafter created, except that appropriate
documentation with respect to each series must be presented to the Transfer
Agent before this Agreement shall become effective with respect to each such
series.
(g) "1940 Act" shall mean the Investment Company Act of 1940.
(h) "Oral Instructions" shall mean instructions, other than
Written Instructions, actually received by the Transfer Agent from a person
reasonably believed by the Transfer Agent to be an Authorized Person;
(i) "Prospectus" shall mean the most recently dated Fund
Prospectus and Statement of Additional Information, including any supplements
thereto if any, which has become effective under the Securities Act of 1933
and the 1940 Act.
(j) "Shares" refers collectively to such shares of capital stock,
beneficial interest or limited partnership interests, as the case may be, of
the Fund as may be issued from time to time and, if the Fund is a closed-end
or a series fund, as such terms are used in the 1940 Act any other classes or
series of stock, shares of beneficial interest or limited partnership
interests that may be issued from time to time.
(k) "Shareholder" shall mean a holder of shares of capital stock,
beneficial interest or any other class or series, and also refers to partners
of limited partnerships.
(l) "Written Instructions" shall mean a written communication
signed by a person reasonably believed by the Transfer Agent to be an
Authorized Person and actually received by the Transfer Agent. Written
Instructions shall include manually executed originals and authorized
electronic transmissions, including telefacsimile of a manually executed
original or other process.
2. Appointment of the Transfer Agent. The Fund hereby appoints and
constitutes the Transfer Agent as transfer agent, registrar and dividend
disbursing agent for Shares of the Fund and as shareholder servicing agent for
the Fund. The Transfer Agent accepts such appointments and agrees to perform
the duties hereinafter set forth.
3. Compensation.
(a) The Fund will compensate or cause the Transfer Agent to be
compensated for the performance of its obligations hereunder in accordance
with the fees set forth in the written schedule of fees annexed hereto as
Schedule A and incorporated herein. The Transfer Agent will transmit an
invoice to the Fund as soon as practicable after the end of each calendar
month which will be detailed in accordance with Schedule A, and the Fund will
pay to the Transfer Agent the amount of such invoice within thirty (30) days
after the Fund's receipt of the invoice.
In addition, the Fund agrees to pay, and will be billed
separately for, reasonable out-of-pocket expenses incurred by the Transfer
Agent in the performance of its duties hereunder. Out-of-pocket expenses shall
include, but shall not be limited to, the items specified in the written
schedule of out-of-pocket charges annexed hereto as Schedule B and
incorporated herein. Unspecified out-of-pocket expenses shall be limited to
those out-of-pocket expenses reasonably incurred by the Transfer Agent in the
performance of its obligations hereunder. Reimbursement by the Fund for
expenses incurred by the Transfer Agent in any month shall be made as soon as
practicable but no later than 15 days after the receipt of an itemized bill
from the Transfer Agent.
(b) Any compensation agreed to hereunder may be adjusted from
time to time by attaching to Schedule A, a revised fee schedule executed and
dated by the parties hereto.
4. Documents. In connection with the appointment of the Transfer Agent
the Fund shall deliver or caused to be delivered to the Transfer Agent the
following documents on or before the date this Agreement goes into effect, but
in any case within a reasonable period of time for the Transfer Agent to
prepare to perform its duties hereunder:
(a) If applicable, specimens of the certificates for Shares of
the Fund;
(b) All account application forms and other documents relating to
Shareholder accounts or to any plan, program or service offered by the Fund;
(c) A signature card bearing the signatures of any officer of the
Fund or other Authorized Person who will sign Written Instructions or is
authorized to give Oral Instructions.
(d) A certified copy of the Articles of Incorporation, as
amended;
(e) A certified copy of the By-laws of the Fund, as amended;
(f) A copy of the resolution of the Board of Directors
authorizing the execution and delivery of this Agreement;
(g) A certified list of Shareholders of the Fund with the name,
address and taxpayer identification number of each Shareholder, and the number
of Shares of the Fund held by each, certificate numbers and denominations (if
any certificates have been issued), lists of any accounts against which stop
transfer orders have been placed, together with the reasons therefore, and the
number of Shares redeemed by the Fund; and
(h) An opinion of counsel for the Fund with respect to the
validity of the Shares and the status of such Shares under the Securities Act
of 1933, as amended.
5. Further Documentation. The Fund will also furnish the Transfer
Agent with copies of the following documents promptly after the same shall
become available:
(a) each resolution of the Board of Directors authorizing the
issuance of Shares;
(b) any registration statements filed on behalf of the Fund and
all pre-effective and post-effective amendments thereto filed with the
Commission;
(c) a certified copy of each amendment to the Articles of
Incorporation or the By-laws of the Fund;
(d) certified copies of each resolution of the Board of Directors
or other authorization designating Authorized Persons; and
(e) such other certificates, documents or opinions as the
Transfer Agent may reasonably request in connection with the performance of
its duties hereunder.
6. Representations of the Fund. The Fund represents to the Transfer
Agent that all outstanding Shares are validly issued, fully paid and
non-assessable. When Shares are hereafter issued in accordance with the terms
of the Fund's Articles of Incorporation and its Prospectus, such Shares shall
be validly issued, fully paid and non-assessable.
7. Distributions Payable in Shares. In the event that the Board of
Directors of the Fund shall declare a distribution payable in Shares, the Fund
shall deliver or cause to be delivered to the Transfer Agent written notice of
such declaration signed on behalf of the Fund by an officer thereof, upon
which the Transfer Agent shall be entitled to rely for all purposes,
certifying (i) the identity of the Shares involved, (ii) the number of Shares
involved, and (iii) that all appropriate action has been taken.
8. Duties of the Transfer Agent. The Transfer Agent shall be
responsible for administering and/or performing those functions typically
performed by a transfer agent; for acting as service agent in connection with
dividend and distribution functions; and for performing shareholder account
and administrative agent functions in connection with the issuance, transfer
and redemption or repurchase (including coordination with the Custodian) of
Shares in accordance with the terms of the Prospectus and applicable law. The
operating standards and procedures to be followed shall be determined from
time to time by agreement between the Fund and the Transfer Agent and shall
initially be as described in Schedule C attached hereto. In addition, the
Fund shall deliver to the Transfer Agent all notices issued by the Fund with
respect to the Shares in accordance with and pursuant to the Articles of
Incorporation or By-laws of the Fund or as required by law and shall perform
such other specific duties as are set forth in the Articles of Incorporation
including the giving of notice of any special or annual meetings of
shareholders and any other notices required thereby.
9. Record Keeping and Other Information. The Transfer Agent shall
create and maintain all records required of it pursuant to its duties
hereunder and as set forth in Schedule C in accordance with all applicable
laws, rules and regulations, including records required by Section 31(a) of
the 1940 Act. All records shall be available during regular business hours
for inspection and use by the Fund. Where applicable, such records shall be
maintained by the Transfer Agent for the periods and in the places required by
Rule 31a-2 under the 1940 Act.
Upon reasonable notice by the Fund, the Transfer Agent shall make
available during regular business hours such of its facilities and premises
employed in connection with the performance of its duties under this Agreement
for reasonable visitation by the Fund, or any person retained by the Fund as
may be necessary for the Fund to evaluate the quality of the services
performed by the Transfer Agent pursuant hereto.
10. Other Duties. In addition to the duties set forth in Schedule C,
the Transfer Agent shall perform such other duties and functions, and shall be
paid such amounts therefor, as may from time to time be agreed upon in writing
between the Fund and the Transfer Agent. The compensation for such other
duties and functions shall be reflected in a written amendment to Schedule A
or B and the duties and functions shall be reflected in an amendment to
Schedule C, both dated and signed by authorized persons of the parties hereto.
11. Reliance by Transfer Agent; Instructions
(a) The Transfer Agent will have no liability when acting upon
Written or Oral Instructions believed to have been executed or orally
communicated by an Authorized Person and will not be held to have any notice
of any change of authority of any person until receipt of a Written
Instruction thereof from the Fund pursuant to Section 4(c). The Transfer
Agent will also have no liability when processing Share certificates which it
reasonably believes to bear the proper manual or facsimile signatures of the
officers of the Fund and the proper countersignature of the Transfer Agent.
(b) At any time, the Transfer Agent may apply to any Authorized
Person of the Fund for Written Instructions and may seek advice from legal
counsel for the Fund, or its own legal counsel, with respect to any matter
arising in connection with this Agreement, and it shall not be liable for any
action taken or not taken or suffered by it in good faith in accordance with
such Written Instructions or in accordance with the opinion of counsel for the
Fund or for the Transfer Agent. Written Instructions requested by the
Transfer Agent will be provided by the Fund within a reasonable period of
time. In addition, the Transfer Agent, its officers, agents or employees,
shall accept Oral Instructions or Written Instructions given to them by any
person representing or acting on behalf of the Fund only if said
representative is an Authorized Person. The Fund agrees that all Oral
Instructions shall be followed within one business day by confirming Written
Instructions, and that the Fund's failure to so confirm shall not impair in
any respect the Transfer Agent's right to rely on Oral Instructions. The
Transfer Agent shall have no duty or obligation to inquire into, nor shall the
Transfer Agent be responsible for, the legality of any act done by it upon the
request or direction of a person reasonably believed by the Transfer Agent to
be an Authorized Person.
(c) Notwithstanding any of the foregoing provisions of this
Agreement, the Transfer Agent shall be under no duty or obligation to inquire
into, and shall not be liable for: (i) the legality of the issuance or sale
of any Shares or the sufficiency of the amount to be received therefor; (ii)
the legality of the redemption of any Shares, or the propriety of the amount
to be paid therefor; (iii) the legality of the declaration of any dividend by
the Board of Directors, or the legality of the issuance of any Shares in
payment of any dividend; or (iv) the legality of any recapitalization or
readjustment of the Shares.
12. Acts of God, etc. The Transfer Agent will not be liable or
responsible for delays or errors by acts of God or by reason of circumstances
beyond its control, including acts of civil or military authority, national
emergencies, labor difficulties, mechanical breakdown, insurrection, war,
riots, or failure or unavailability of transportation, communication or power
supply, fire, flood or other catastrophe.
13. Duty of Care and Indemnification. Each party hereto (the
"Indemnifying Party') will indemnify the other party (the "Indemnified Party")
against and hold it harmless from any and all losses, claims, damages,
liabilities or expenses of any sort or kind (including reasonable counsel fees
and expenses) resulting from any claim, demand, action or suit or other
proceeding (a "Claim") unless such Claim has resulted from a negligent failure
to act or omission to act or bad faith of the Indemnified Party in the
performance of its duties hereunder. In addition, the Fund will indemnify the
Transfer Agent against and hold it harmless from any Claim, damages,
liabilities or expenses (including reasonable counsel fees) that is a result
of: (i) any action taken in accordance with Written or Oral Instructions, or
any other instructions, or share certificates reasonably believed by the
Transfer Agent to be genuine and to be signed, countersigned or executed, or
orally communicated by an Authorized Person; (ii) any action taken in
accordance with written or oral advice reasonably believed by the Transfer
Agent to have been given by counsel for the Fund or its own counsel; or (iii)
any action taken as a result of any error or omission in any record (including
but not limited to magnetic tapes, computer printouts, hard copies and
microfilm copies) delivered, or caused to be delivered by the Fund to the
Transfer Agent in connection with this Agreement.
In any case in which the Indemnifying Party may be asked to indemnify or
hold the Indemnified Party harmless, the Indemnifying Party shall be advised
of all pertinent facts concerning the situation in question. The Indemnified
Party will notify the Indemnifying Party promptly after identifying any
situation which it believes presents or appears likely to present a claim for
indemnification against the Indemnifying Party although the failure to do so
shall not prevent recovery by the Indemnified Party. The Indemnifying Party
shall have the option to defend the Indemnified Party against any Claim which
may be the subject of this indemnification, and, in the event that the
Indemnifying Party so elects, such defense shall be conducted by counsel
chosen by the Indemnifying Party and satisfactory to the Indemnified Party,
and thereupon the Indemnifying Party shall take over complete defense of the
Claim and the Indemnified Party shall sustain no further legal or other
expenses in respect of such Claim. The Indemnified Party will not confess any
Claim or make any compromise in any case in which the Indemnifying Party will
be asked to provide indemnification, except with the Indemnifying Party's
prior written consent. The obligations of the parties hereto under this
Section shall survive the termination of this Agreement.
14. Consequential Damages. In no event and under no circumstances
shall either party under this Agreement be liable to the other party for
indirect loss of profits, reputation or business or any other special damages
under any provision of this Agreement or for any act or failure to act
hereunder.
15. Term and Termination.
(a) This Agreement shall be effective on the date first written
above and shall continue until August 4, 1994, and thereafter shall
automatically continue for successive annual periods ending on the anniversary
of the date first written above, provided that it may be terminated by either
party upon written notice given at least 60 days prior to termination.
(b) In the event a termination notice is given by the Fund, it
shall be accompanied by a resolution of the Board of Directors, certified by
the Secretary of the Fund, designating a successor transfer agent or transfer
agents. Upon such termination and at the expense of the Fund, the Transfer
Agent will deliver to such successor a certified list of shareholders of the
Fund (with names and addresses), and all other relevant books, records,
correspondence and other Fund records or data in the possession of the
Transfer Agent, and the Transfer Agent will cooperate with the Fund and any
successor transfer agent or agents in the substitution process.
16. Confidentiality. Both parties hereto agree that any non public
information obtained hereunder concerning the other party is confidential and
may not be disclosed to any other person without the consent of the other
party, except as may be required by applicable law or at the request of the
Commission or other governmental agency. The parties further agree that a
breach of this provision would irreparably damage the other party and
accordingly agree that each of them is entitled, without bond or other
security, to an injunction or injunctions to prevent breaches of this
provision.
17. Amendment. This Agreement may only be amended or modified by a
written instrument executed by both parties.
18. Subcontracting. The Fund agrees that the Transfer Agent may, in
its discretion, subcontract for certain of the services described under this
Agreement or the Schedules hereto; provided that the appointment of any such
Transfer Agent shall not relieve the Transfer Agent of its responsibilities
hereunder.
19. Miscellaneous.
(a) Notices. Any notice or other instrument authorized or
required by this Agreement to be given in writing to the Fund or the Transfer
Agent, shall be sufficiently given if addressed to that party and received by
it at its office set forth below or at such other place as it may from time to
time designate in writing.
To the Fund:
Smith Barney Shearson Equity Funds
Two World Trade Center, Floor 100
New York, NY 10048
Attention:Richard Roelofs
To the Transfer Agent:
The Shareholder Services Group
One Exchange Place
53 State Street
Boston, Massachusetts 02109
Attention: Robert F. Radin, President
with a copy to TSSG Counsel
(b) Successors. This Agreement shall extend to and shall be
binding upon the parties hereto, and their respective successors and assigns,
provided, however, that this Agreement shall not be assigned to any person
other than a person controlling, controlled by or under common control with
the assignor without the written consent of the other party, which consent
shall not be unreasonably withheld.
(c) Governing Law. This Agreement shall be governed exclusively
by the laws of the State of New York without reference to the choice of law
provisions thereof. Each party hereto hereby agrees that (i) the Supreme
Court of New York sitting in New York County shall have exclusive jurisdiction
over any and all disputes arising hereunder; (ii) hereby consents to the
personal jurisdiction of such court over the parties hereto, hereby waiving
any defense of lack of personal jurisdiction; and (iii) appoints the person to
whom notices hereunder are to be sent as agent for service of process.
(d) Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original; but such
counterparts shall, together, constitute only one instrument.
(e) Captions. The captions of this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(f) Use of Transfer Agent's Name. The Fund shall not use the
name of the Transfer Agent in any Prospectus, Statement of Additional
Information, shareholders' report, sales literature or other material relating
to the Fund in a manner not approved prior thereto in writing; provided, that
the Transfer Agent need only receive notice of all reasonable uses of its name
which merely refer in accurate terms to its appointment hereunder or which are
required by any government agency or applicable law or rule. Notwithstanding
the foregoing, any reference to the Transfer Agent shall include a statement
to the effect that it is a wholly owned subsidiary of First Data Corporation.
(g) Use of Fund's Name. The Transfer Agent shall not use the
name of the Fund or material relating to the Fund on any documents or forms
for other than internal use in a manner not approved prior thereto in writing;
provided, that the Fund need only receive notice of all reasonable uses of its
name which merely refer in accurate terms to the appointment of the Transfer
Agent or which are required by any government agency or applicable law or
rule.
(h) Independent Contractors. The parties agree that they are
independent contractors and not partners or co-venturers.
(i) Entire Agreement; Severability. This Agreement and the
Schedules attached hereto constitute the entire agreement of the parties
hereto relating to the matters covered hereby and supersede any previous
agreements. If any provision is held to be illegal, unenforceable or invalid
for any reason, the remaining provisions shall not be affected or impaired
thereby.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers, as of the day and
year first above written.
SMITH BARNEY SHEARSON
INCOME FUNDS
By: /s/Richard P. Roelofs
Title: President
THE SHAREHOLDER SERVICES
GROUP, INC.
By: /s/Michael G. McCarthy
Title: Vice President
A-1
Transfer Agent Fee
Schedule A
Class A shares
The Fund shall pay the Transfer Agent an annualized fee of $11.00 per
shareholder account that is open during any monthly period. Such fee shall be
billed by the Transfer Agent monthly in arrears on a prorated basis of 1/12 of
the annualized fee for all accounts that are open during such a month.
The Fund shall pay the Transfer Agent an additional fee of $.125 per closed
account per month applicable to those shareholder accounts which close in a
given month and remain closed through the following month-end billing cycle.
Such fee shall be billed by the Transfer Agent monthly in arrears.
Class B shares
The Fund shall pay the Transfer Agent an annualized fee of $12.50 per
shareholder account that is open during any monthly period. Such fee shall be
billed by the Transfer Agent monthly in arrears on a prorated basis of 1/12 of
the annualized fee for all accounts that are open during such a month.
The Fund shall pay the Transfer Agent an additional fee of $.125 per closed
account per month applicable to those shareholder accounts which close in a
given month and remain closed through the following month-end billing cycle.
Such fee shall be billed by the Transfer Agent monthly in arrears.
Class C shares
The Fund shall pay the Transfer Agent an annualized fee of $8.50 per
shareholder account that is open during any monthly period. Such fee shall be
billed by the Transfer Agent monthly in arrears on a prorated basis of 1/12 of
the annualized fee for all accounts that are open during such a month.
The Fund shall pay the Transfer Agent an additional fee of $.125 per closed
account per month applicable to those shareholder accounts which close in a
given month and remain closed through the following month-end billing cycle.
Such fee shall be billed by the Transfer Agent monthly in arrears.
A-2
Class D shares
The Fund shall pay the Transfer Agent an annualized fee of $9.50 per
shareholder account that is open during any monthly period. Such fee shall be
billed by the Transfer Agent monthly in arrears on a prorated basis of 1/12 of
the annualized fee for all accounts that are open during such a month.
The Fund shall pay the Transfer Agent an additional fee of $.125 per closed
account per month applicable to those shareholder accounts which close in a
given month and remain closed through the following month-end billing cycle.
Such fee shall be billed by the Transfer Agent monthly in arrears.
B-1
Schedule B
OUT-OF-POCKET EXPENSES
The Fund shall reimburse the Transfer Agent monthly for applicable
out-of-pocket expenses, including, but not limited to the following items:
- Microfiche/microfilm production
- Magnetic media tapes and freight
- Printing costs, including certificates, envelopes,
checks and stationery
- Postage (bulk, pre-sort, ZIP+4, barcoding, first class)
direct pass through
to the Fund
- Due diligence mailings
- Telephone and telecommunication costs, including
all lease, maintenance and line costs
- Proxy solicitations, mailings and tabulations
- Daily & Distribution advice mailings
- Shipping, Certified and Overnight mail and insurance
- Year-end form production and mailings
- Terminals, communication lines, printers and other
equipment and any expenses incurred in
connection with such terminals and lines
- Duplicating services
- Courier services
- Incoming and outgoing wire charges
- Federal Reserve charges for check clearance
- Record retention, retrieval and destruction costs,
including, but not limited to exit fees charged by third
party
record keeping vendors
- Third party audit reviews
- Insurance
- Such other miscellaneous expenses reasonably incurred by
the
Transfer Agent in performing its duties and
responsibilities under this
Agreement.
The Fund agrees that postage and mailing expenses will be paid on the
day of or prior to mailing as agreed with the Transfer Agent. In addition,
the Fund will promptly reimburse the Transfer Agent for any other unscheduled
expenses incurred by the Transfer
Agent whenever the Fund and the Transfer Agent mutually agree that such
expenses are not otherwise properly borne by the Transfer Agent as part of its
duties and obligations under the Agreement.
C-1
Schedule C
DUTIES OF THE TRANSFER AGENT
1. Shareholder Information. The Transfer Agent or its agent
shall maintain a record of the number of Shares held by each holder of record
which shall include name, address, taxpayer identification and which shall
indicate whether such Shares are held in certificates or uncertificated form.
2. Shareholder Services. The Transfer Agent or its agent will
investigate all inquiries from shareholders of the Fund relating to
Shareholder accounts and will respond to all communications from Shareholders
and others relating to its duties hereunder and such other correspondence as
may from time to time be mutually agreed upon between the Transfer Agent and
the Fund. The Transfer Agent shall provide the Fund with reports concerning
shareholder inquires and the responses thereto by the Transfer Agent, in such
form and at such times as are agreed to by the Fund and the Transfer Agent.
3. Share Certificates.
(a) At the expense of the Fund, it shall supply the Transfer
Agent or its agent with an adequate supply of blank share certificates to meet
the Transfer Agent or its agent's requirements therefor. Such Share
certificates shall be properly signed by facsimile. The Fund agrees that,
notwithstanding the death, resignation, or removal of any officer of the Fund
whose signature appears on such certificates, the Transfer Agent or its agent
may continue to countersign certificates which bear such signatures until
otherwise directed by Written Instructions.
(b) The Transfer Agent or its agent shall issue replacement Share
certificates in lieu of certificates which have been lost, stolen or
destroyed, upon receipt by the Transfer Agent or its agent of properly
executed affidavits and lost certificate bonds, in form satisfactory to the
Transfer Agent or its agent, with the Fund and the Transfer Agent or its agent
as obligees under the bond.
(c) The Transfer Agent or its agent shall also maintain a record
of each certificate issued, the number of Shares represented thereby and the
holder of record. With respect to Shares held in open accounts or
uncertificated form, i.e., no certificate being issued with respect thereto,
the Transfer Agent or its agent shall maintain comparable records of the
record holders thereof, including their names, addresses and taxpayer
identification. The Transfer Agent or its agent shall further maintain a stop
transfer record on lost and/or replaced certificates.
C-2
4. Mailing Communications to Shareholders; Proxy Materials. The
Transfer Agent or its agent will address and mail to Shareholders of the Fund,
all reports to Shareholders, dividend and distribution notices and proxy
material for the Fund's meetings of Shareholders. In connection with meetings
of Shareholders, the Transfer Agent or its Agent will prepare Shareholder
lists, mail and certify as to the mailing of proxy materials, process and
tabulate returned proxy cards, report on proxies voted prior to meetings, act
as inspector of election at meetings and certify Shares voted at meetings.
5. Sales of Shares
(a) Suspension of Sale of Shares. The Transfer Agent or its
agent shall not be required to issue any Shares of the Fund where it has
received a Written Instruction from the Fund or official notice from any
appropriate authority that the sale of the Shares of the Fund has been
suspended or discontinued. The existence of such Written Instructions or such
official notice shall be conclusive evidence of the right of the Transfer
Agent or its agent to rely on such Written Instructions or official notice.
(b) Returned Checks. In the event that any check or other order
for the payment of money is returned unpaid for any reason, the Transfer Agent
or its agent will: (i) give prompt notice of such return to the Fund or its
designee; (ii) place a stop transfer order against all Shares issued as a
result of such check or order; and (iii) take such actions as the Transfer
Agent may from time to time deem appropriate.
6. Transfer and Repurchase
(a) Requirements for Transfer or Repurchase of Shares. The
Transfer Agent or its agent shall process all requests to transfer or redeem
Shares in accordance with the transfer or repurchase procedures set forth in
the Fund's Prospectus.
The Transfer Agent or its agent will transfer or repurchase Shares
upon receipt of Oral or Written Instructions or otherwise pursuant to the
Prospectus and Share certificates, if any, properly endorsed for transfer or
redemption, accompanied by such documents as the Transfer Agent or its agent
reasonably may deem necessary.
The Transfer Agent or its agent reserves the right to refuse to
transfer or repurchase Shares until it is satisfied that the endorsement on
the instructions is valid and genuine. The Transfer Agent or its agent also
reserves the right to refuse to transfer or repurchase Shares until it is
satisfied that the requested transfer or repurchase is legally authorized, and
it shall incur no liability for the refusal, in good faith, to make transfers
or repurchases which the Transfer Agent or its agent, in its good judgement,
deems improper or unauthorized, or until it is reasonably satisfied that there
is no basis to any claims adverse to such transfer or repurchase.
C-3
(b) Notice to Custodian and Fund. When Shares are redeemed, the
Transfer Agent or its agent shall, upon receipt of the instructions and
documents in proper form, deliver to the Custodian and the Fund or its
designee a notification setting forth the number of Shares to be repurchased.
Such repurchased shares shall be reflected on appropriate accounts maintained
by the Transfer Agent or its agent reflecting outstanding Shares of the Fund
and Shares attributed to individual accounts.
(c) Payment of Repurchase Proceeds. The Transfer Agent or its
agent shall, upon receipt of the moneys paid to it by the Custodian for the
repurchase of Shares, pay such moneys as are received from the Custodian, all
in accordance with the procedures described in the written instruction
received by the Transfer Agent or its agent from the Fund.
The Transfer Agent or its agent shall not process or effect any
repurchase with respect to Shares of the Fund after receipt by the Transfer
Agent or its agent of notification of the suspension of the determination of
the net asset value of the Fund.
7. Dividends
(a) Notice to Agent and Custodian. Upon the declaration of each
dividend and each capital gains distribution by the Board of Directors of the
Fund with respect to Shares of the Fund, the Fund shall furnish or cause to be
furnished to the Transfer Agent or its agent a copy of a resolution of the
Fund's Board of Directors certified by the Secretary of the Fund setting forth
the date of the declaration of such dividend or distribution, the ex-dividend
date, the date of payment thereof, the record date as of which shareholders
entitled to payment shall be determined, the amount payable per Share to the
shareholders of record as of that date, the total amount payable to the
Transfer Agent or its agent on the payment date and whether such dividend or
distribution is to be paid in Shares of such class at net asset value.
On or before the payment date specified in such resolution of the
Board of Directors, the Custodian of the Fund will pay to the Transfer Agent
sufficient cash to make payment to the shareholders of record as of such
payment date.
(b) Insufficient Funds for Payments. If the Transfer Agent or
its agent does not receive sufficient cash from the Custodian to make total
dividend and/or distribution payments to all shareholders of the Fund as of
the record date, the Transfer Agent or its agent will, upon notifying the
Fund, withhold payment to all Shareholders of record as of the record date
until sufficient cash is provided to the Transfer Agent or its agent.
C-4
Exhibit 1
to
Schedule C
Summary of Services
The services to be performed by the Transfer Agent or its agent shall be
as follows:
A. DAILY RECORDS
Maintain daily the following information with respect to each
Shareholder account as received:
o Name and Address (Zip Code)
o Class of Shares
o Taxpayer Identification Number
o Balance of Shares held by Agent
o Beneficial owner code: i.e., male, female, joint tenant,
etc.
o Dividend code (reinvestment)
o Number of Shares held in certificate form
B. OTHER DAILY ACTIVITY
o Answer written inquiries relating to Shareholder accounts
(matters relating to portfolio management, distribution of Shares and other
management policy questions will be referred to the Fund).
o Process additional payments into established Shareholder
accounts in accordance with Written Instruction from the Agent.
o Upon receipt of proper instructions and all required
documentation, process requests for repurchase of Shares.
o Identify redemption requests made with respect to accounts
in which Shares have been purchased within an agreed-upon period of time for
determining whether good funds have been collected with respect to such
purchase and process as agreed by the Agent in accordance with written
instructions set forth by the Fund.
o Examine and process all transfers of Shares, ensuring that
all transfer requirements and legal documents have been supplied.
C-5
o Issue and mail replacement checks.
o Open new accounts and maintain records of exchanges between
accounts
C. DIVIDEND ACTIVITY
o Calculate and process Share dividends and distributions as
instructed by the Fund.
o Compute, prepare and mail all necessary reports to
Shareholders or various authorities as requested by the Fund. Report to the
Fund reinvestment plan share purchases and determination of the reinvestment
price.
D. MEETINGS OF SHAREHOLDERS
o Cause to be mailed proxy and related material for all
meetings of Shareholders. Tabulate returned proxies (proxies must be
adaptable to mechanical equipment of the Agent or its agents) and supply daily
reports when sufficient proxies have been received.
o Prepare and submit to the Fund an Affidavit of Mailing.
o At the time of the meeting, furnish a certified list of
Shareholders, hard copy, microfilm or microfiche and, if requested by the
Fund, Inspection of Election.
E. PERIODIC ACTIVITIES
o Cause to be mailed reports, Prospectuses, and any other enclosures
requested by the Fund (material must be adaptable to mechanical equipment of
Agent or its agents).
o Receive all notices issued by the Fund with respect to the
Preferred Shares in accordance with and pursuant to the Articles of
Incorporation and the Indenture and perform such other specific duties as are
set forth in the Articles of Incorporation including a giving of notice of a
special meeting and notice of redemption in the circumstances and otherwise in
accordance with all relevant provisions of the Articles of Incorporation.
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