As filed with the Securities and Exchange Commission
on November 28, 1995
Registration No. 2-96408
811-4254
- - ------------------------------------------------------------
- - -----
- - -----------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. [X] Post-
Effective Amendment No. 42
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
Amendment No. 45 [X]
SMITH BARNEY INCOME FUNDS
(Exact name of Registrant as Specified in Charter)
Area Code and Telephone Number: (212) 723-9218
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Christina T. Sydor
Secretary
388 Greenwich Street New York, New York 10013
(Name and Address of Agent for Service)
copies to:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, NY 10022
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing become effective:
__X___ Immediately upon filing pursuant to Rule 485(b)
_____ on [ ], 1995 pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
_____ on -------------- pursuant to Rule 485(a)
The Registrant has previously filed a declaration of
indefinite registration of its shares pursuant to Rule
24f-2 under the Investment Company Act of 1940, as amended.
Registrant's Rule 24f-2. Notice of the fiscal year ended
July 31, 1995 was filed on September 29, 1995.
SMITH BARNEY INCOME FUNDS
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages
and documents:
Front Cover
Contents Page
Cross-Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
SMITH BARNEY INCOME FUNDS
FORM N-1A CROSS REFERENCE SHEET
Pursuant to Rule 495(b) Under the Securities Act of 1933, as
amended
Part A
Item No. and Caption Prospectus
Caption
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Information Financial
Highlights;
4. General Description of Registrant Cover
Page; Prospectus Summary;
Investment Objective
and Policies;
Distributor; Additional
Information
5 Management of the Fund Prospectus
Summary; Management of
the Trust and the
Fund; Distributor;
Additional Information
5A Management's Discussion of Management of
the Trust and the Fund
Fund Performance
6. Capital Stock and Other Securities Investment
Objective and Policies;
Dividends, Distributions
and Taxes;
Additional Information
7. Purchase of Securities Being Offered Valuation
of Shares; Purchase of
Shares; Exchange
Privilege; Redemption
of Shares; Minimum
Account Size;
Distributor
8. Redemption or Repurchase of Shares Purchase
of Shares; Redemption of Shares;
Exchange Privilege
9. Pending Legal Proceedings Not Applicable
**********
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Diversified
Strategic
Income
Fund
November 28, 1995
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PROSPECTUS
NOVEMBER 28, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Diversified Strategic Income Fund (the
"Fund"), a diversified
fund, seeks high current income primarily through investment
in fixed-income
securities. The Fund attempts to achieve this objective by
allocating and real-
locating 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 dis-
tinct investment objectives and policies, making up the
Smith Barney Income
Funds (the "Trust"). The Trust is an open-end, management
investment company
commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information
about the Fund and
the Trust, including sales charges, distribution and service
fees and expenses,
that prospective investors will find helpful in making an
investment decision.
Investors are encouraged to read this Prospectus carefully
and retain it for
future reference. Shares of other funds offered by the Trust
are described in
separate prospectuses that may be obtained by calling the
Trust at the tele-
phone number set forth above or by contacting a Smith Barney
Financial Consul-
tant.
Additional information about the Fund and the Trust is
contained in a State-
ment of Additional Information dated November 28, 1995, as
amended or supple-
mented from time to time, that is available upon request and
without charge by
calling or writing the Trust at the telephone number or
address set forth above
or by contacting a Smith Barney Financial Consultant. The
Statement of Addi-
tional Information has been filed with the Securities and
Exchange Commission
(the "SEC") and is incorporated by reference into this
Prospectus in its
entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Sub-Investment Adviser
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
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FINANCIAL HIGHLIGHTS 11
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INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
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VALUATION OF SHARES 29
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DIVIDENDS, DISTRIBUTIONS AND TAXES 30
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PURCHASE OF SHARES 32
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EXCHANGE PRIVILEGE 42
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REDEMPTION OF SHARES 46
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MINIMUM ACCOUNT SIZE 49
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PERFORMANCE 49
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MANAGEMENT OF THE TRUST AND THE FUND 50
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DISTRIBUTOR 52
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ADDITIONAL INFORMATION 53
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</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 Prospec-
tus. 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 Manage-
ment 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 addi-
tion, 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 affili-
ates. See "Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset value
plus an initial
sales charge of up to 4.50% and are subject to an annual
service fee of 0.25%
of the average daily net assets of the Class. The initial
sales charge may be
reduced or waived for certain purchases. Purchases of Class
A shares, which
when combined with current holdings of Class A shares
offered with a sales
charge equal or exceed $500,000 in the aggregate, will be
made at net asset
value with no initial sales charge, but will be subject to a
contingent
deferred sales charge ("CDSC") of 1.00% on redemptions made
within 12 months of
purchase. See "Prospectus Summary--Reduced or No Initial
Sales Charge."
Class B Shares. Class B shares are offered at net asset
value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by
0.50% the first year
after purchase and 1.00% each year thereafter to zero. This
CDSC may be waived
for certain redemptions. Class B shares are subject to an
annual service
3
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PROSPECTUS SUMMARY (CONTINUED)
fee of 0.25% and an annual distribution fee of 0.50% of the
average daily net
assets of the Class. The Class B shares' distribution fee
may cause that Class
to have higher expenses and pay lower dividends than Class A
shares.
Class B Shares Conversion Feature. Class B shares will
convert automatically
to Class A shares, based on relative net asset value, eight
years after the
date of the original purchase. Upon conversion, these shares
will no longer be
subject to an annual distribution fee. In addition, a
certain portion of Class
B shares that have been acquired through the reinvestment of
dividends and dis-
tributions ("Class B Dividend Shares") will be converted at
that time. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value
with no initial
sales charge. They are subject to an annual service fee of
0.25% and an annual
distribution fee of 0.45% of the average daily net assets of
the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares
within 12 months of
purchase. This CDSC may be waived for certain redemptions.
The Class C shares'
distribution fee may cause that Class to have higher
expenses and pay lower
dividends than Class A shares. Purchases of Fund shares,
which when combined
with current holdings of Class C shares of the Fund equal or
exceed $500,000 in
the aggregate, should be made in Class A shares at net asset
value with no
sales charge, and will be subject to a CDSC of 1.00% on
redemptions made within
12 months of purchase.
Class Y Shares. Class Y shares are available only to
investors meeting an
initial investment minimum of $5,000,000. Class Y shares are
sold at net asset
value with no initial sales charge or CDSC. They are not
subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase,
investors should consider
the following factors, as well as any other relevant facts
and circumstances:
Intended Holding Period. The decision as to which Class of
shares is more
beneficial to an investor depends on the amount and intended
length of his or
her investment. Shareholders who are planning to establish a
program of regular
investment may wish to consider Class A shares; as the
investment accumulates
shareholders may qualify for reduced sales charges and the
shares are subject
to lower ongoing expenses over the term of the investment.
As an alternative,
Class B and Class C shares are sold without any initial
sales charge so the
entire purchase price is immediately invested in the Fund.
Any investment
return on these additional invested amounts may partially or
wholly offset the
4
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PROSPECTUS SUMMARY (CONTINUED)
higher annual expenses of these Classes. Because the Fund's
future return can-
not be predicted, however, there can be no assurance that
this would be the
case.
Finally, investors should consider the effect of the CDSC
period and any con-
version rights of the Classes in the context of their own
investment time
frame. For example, while Class C shares have a shorter CDSC
period than Class
B shares, they do not have a conversion feature, and
therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be
more attractive than
Class C shares to investors with longer term investment
outlooks.
Investors investing a minimum of $5,000,000 must purchase
Class Y shares,
which are not subject to an initial sales charge, CDSC or
service or distribu-
tion fee. The maximum purchase amount for Class A shares is
$4,999,999, Class B
shares is $249,999 and Class C shares is $499,999. There is
no maximum purchase
amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales
charge on Class A
shares may be waived for certain eligible purchasers, and
the entire purchase
price will be immediately invested in the Fund. In addition,
Class A share pur-
chases which when combined with current holdings of Class A
shares offered with
a sales charge equal or exceed $500,000 in the aggregate,
will be made at net
asset value with no initial sales charge, but will be
subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The
$500,000 aggregate
investment may be met by adding the purchase to the net
asset value of all
Class A shares held in funds sponsored by Smith Barney
listed under "Exchange
Privilege." Class A share purchases may also be eligible for
a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing
expenses of Class A
shares may be lower than those for Class B and Class C
shares, purchasers eli-
gible to purchase Class A shares at net asset value or at a
reduced sales
charge should consider doing so.
Smith Barney Financial Consultants may receive different
compensation for
selling each Class of shares. Investors should understand
that the purpose of
the CDSC on the Class B and Class C shares is the same as
that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and
the Fund" for a
complete description of the sales charges and service and
distribution fees for
each Class of shares and "Valuation of Shares," "Dividends,
Distributions and
Taxes" and "Exchange Privilege" for other differences
between the Classes of
shares.
5
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PROSPECTUS SUMMARY (CONTINUED)
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to
participate in the
Smith Barney 401(k) Program, which is generally designed to
assist plan spon-
sors 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 (col-
lectively, "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, First Data Investor
Services Group, Inc.
("FDISG"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class
C shares may open
an account by making an initial investment of at least
$1,000 for each account,
or $250 for an individual retirement account ("IRA") or a
Self- Employed
Retirement Plan. Investors in Class Y shares may open an
account for an initial
investment of $5,000,000. Subsequent investments of at least
$50 may be made
for all Classes. For participants in retirement plans
qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial
investment
requirement for Class A, Class B and Class C shares and the
subsequent invest-
ment requirement for all Classes is $25. The minimum initial
investment
requirement for Class A, Class B and Class C shares and the
subsequent invest-
ment requirement for all Classes through the Systematic
Investment Plan
described below is $50. See "Purchases of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a
Systematic Investment
Plan under which they may authorize the automatic placement
of a purchase order
each month or quarter for Fund shares in an amount of at
least $50. See "Pur-
chase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the
New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase
of Shares" and "Re-
demption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management
Inc. ("SBMFM"),
serves as the Fund's investment adviser and administrator.
SBMFM provides
investment advisory and management services to investment
6
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PROSPECTUS SUMMARY (CONTINUED)
companies affiliated with Smith Barney. SBMFM is a wholly
owned subsidiary of
Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly owned subsidiary
of Travelers Group Inc. ("Travelers"), a diversified
financial services holding
company engaged, through its subsidiaries, principally in
four business seg-
ments: Investment Services, Consumer Finance Services, Life
Insurance Services
and Property & Casualty Insurance Services.
Smith Barney Global Capital Management Inc. ("Global
Capital Management")
serves as a sub-investment adviser to the Fund. Global
Capital Management is a
wholly owned subsidiary of Holdings. See "Management of the
Trust and the
Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for
shares of the same
Class of certain other funds of the Smith Barney Mutual
Funds at the respective
net asset values next determined, plus any applicable sales
charge differen-
tial. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the
prior day generally is
quoted daily in the financial section of most newspapers and
is also available
from Smith Barney Financial Consultants. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment
income are declared
and paid on the last Friday of the month. Distributions of
net realized long-
and short-term capital gains, if any, are declared and paid
annually after the
end of the fiscal year in which they are earned. See
"Dividends, Distributions
and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid
on shares of a Class
will be reinvested automatically, unless otherwise specified
by an investor, in
additional shares of the same Class at current net asset
value. Shares acquired
by dividend and distribution reinvestments will not be
subject to any sales
charge or CDSC. Class B shares acquired through dividend and
distribution rein-
vestments will become eligible for conversion to Class A
shares on a pro rata
basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no
assurance that the
Funds investment objective will be achieved. General changes
in interest rates
will result in increases or decreases in the market value of
the obligations
held by the Fund. The Fund may invest up to 35% of its
assets in corporate
fixed-income securities of domestic issuers rated Ba or
lower by Moody's
Investors Service, Inc. ("Moody's") or BB or lower by
Standard & Poor's Cor-
7
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PROSPECTUS SUMMARY (CONTINUED)
poration ("S&P") or in nonrated securities deemed by SBMFM
to be of comparable
quality. The Fund may invest in fixed-income securities
rated as low as Caa by
Moody's or CCC by S&P. Securities that are rated Ba by
Moody's or BB by S&P
have speculative characteristics with respect to capacity to
pay interest and
repay principal. Securities that are rated B generally lack
characteristics of
a desirable investment and assurance of interest and
principal payments over
any long period of time may be small. Securities that are
rated Caa or CCC are
of poor standing. These issues may be in default or present
elements of danger
may exist with respect to principal or interest. Although
medium- or low-rated
securities offer a higher current yield than the yield
offered by higher rated
securities, they involve greater volatility of price and
risk of loss of
income and principal, including the probability of default
by or bankruptcy of
the issuers of such securities. Medium- and low-rated and
comparable unrated
securities (a) will likely have some quality and protective
characteristics
that, in the judgment of the rating organization, are
outweighed by large
uncertainties of major risk exposures to adverse conditions
and (b) are pre-
dominantly 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 con-
siderations 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 transac-
tions, 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 denomi-
nated 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 secu-
rities, entering into transactions involving options and
futures contracts and
entering into currency transactions. See "Investment
Objective and Management
Policies."
8
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the
costs and expenses
an investor will incur either directly or indirectly as a
shareholder of the
Fund, based on the maximum sales charge or maximum CDSC that
may be incurred
at the time of purchase or redemption and, unless otherwise
noted, the Fund's
operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS
B CLASS C CLASS Y
- - ------------------------------------------------------------
- - ------------------
<S> <C> <C>
<C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.50% None
None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever
is lower) None*
4.50% 1.00% None
- - ------------------------------------------------------------
- - ------------------
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees** 0.65%
0.65% 0.65% 0.65%
12b-1 fees*** 0.25 0.75
0.70 None
Other expenses**** 0.24 0.21
0.16 0.24
- - ------------------------------------------------------------
- - ------------------
TOTAL FUND OPERATING EXPENSES 1.14%
1.61% 1.51% 0.89%
- - ------------------------------------------------------------
- - ------------------
</TABLE>
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge, equal or
exceed $500,000 in
the aggregate, will be made at net asset value with no
sales charge, but
will be subject to a CDSC of 1.00% on redemptions made
within 12 months.
** Prior to August 9, 1995, Global Capital Management
voluntarily waived 50%
of its sub-investment advisory fee. On August 9, 1995,
the Board of
Trustees of the Fund approved the elimination of this
fee waiver.
*** Upon conversion of Class B shares to Class A shares,
such shares will no
longer be subject to a distribution fee. Class C shares
do not have a
conversion feature and, therefore, are subject to an
ongoing distribution
fee. As a result, long-term shareholders of Class C
shares may pay more
than the economic equivalent of the maximum front-end
sales charge
permitted by the National Association of Securities
Dealers, Inc.
**** For Class Y shares, "Other expenses" have been
estimated based on
expenses incurred by Class A shares because no Class Y
shares were
outstanding as of July 31, 1995.
The sales charge and CDSC set forth in the above table are
the maximum
charges imposed upon purchases or redemptions of Fund shares
and investors may
actually pay lower or no charges, depending on the amount
purchased and, in
the case of Class B, Class C and certain Class A shares, the
length of time
the shares are held and whether the shares are held through
the Smith Barney
401(k) Program. See "Purchase of Shares" and "Redemption of
Shares." Smith
Barney receives an annual 12b-1 service fee of 0.25% of the
value of average
daily net assets of Class A shares. Smith Barney also
receives, with respect
to Class B shares, an annual 12b-1 fee of 0.75% of the value
of the average
9
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PROSPECTUS SUMMARY (CONTINUED)
daily net assets of that Class, consisting of a 0.50%
distribution fee and a
0.25% service fee. For Class C shares, Smith Barney receives
an annual 12b-1
fee of .70% of the value of average daily net assets of this
Class, consisting
of a 0.45% distribution fee and a 0.25% service fee. "Other
expenses" in the
above table include fees for shareholder services, custodial
fees, legal and
accounting fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in
understanding the
various costs that an investor in the Fund will bear
directly or indirectly.
The example assumes payment by the Fund of operating
expenses at the levels set
forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and
"Management of the Trust and the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
5 YEARS 10 YEARS*
- - ------------------------------------------------------------
- - ------------------
<S> <C> <C>
<C> <C>
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A................................. $56 $80
$105 $177
Class B................................. 61 81
98 178
Class C................................. 25 48
82 180
Class Y................................. 9 28
49 110
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A................................. 56 80
105 177
Class B................................. 16 51
88 178
Class C................................. 15 48
82 180
Class Y................................. 9 28
49 110
- - ------------------------------------------------------------
- - ------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to
Class A shares at
the end of the eighth year following the date of
purchase.
The example also provides a means for the investor to
compare expense levels
of funds with different fee structures over varying
investment periods. To
facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN
THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended July 31,
1995 has been
audited by KPMG Peat Marwick, LLP, independent accountants,
whose report
thereon appears in the Fund's Annual Report dated July 31,
1995. The following
information for the fiscal years ended July 31, 1989 through
July 31, 1994 has
been audited by Coopers & Lybrand L.L.P. The information set
out below should
be read in conjunction with the financial statements and
related notes that
also appear in the Fund's Annual Report, which is
incorporated by reference
into the Statement of Additional Information. No information
is presented for
Class Y shares because no Class Y shares were outstanding
for the periods
shown.
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR
PERIOD
ENDED ENDED
ENDED
7/31/95
7/31/94 7/31/93(1)
- - ------------------------------------------------------------
- - --------------
<S> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.76 $
8.41 $ 8.24
- - ------------------------------------------------------------
- - --------------
INCOME FROM OPERATIONS:
Net investment income(2) 0.94
0.63 0.47
Net realized and unrealized gain/(loss) on
investments (0.18)
(0.52) 0.27
- - ------------------------------------------------------------
- - --------------
Total Income From Operations 0.76
0.11 0.74
- - ------------------------------------------------------------
- - --------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.48)
(0.56) (0.45)
Overdistributions of net investment income --
(0.06) --
Net realized gains --
(0.10) (0.12)
Capital (0.19)
(0.04) --
- - ------------------------------------------------------------
- - --------------
Total Distributions (0.67)
(0.76) (0.57)
- - ------------------------------------------------------------
- - --------------
NET ASSET VALUE, END OF PERIOD $ 7.85 $
7.76 $ 8.41
- - ------------------------------------------------------------
- - --------------
TOTAL RETURN++ 10.35%
1.16% 9.30%+++
- - ------------------------------------------------------------
- - --------------
NET ASSETS, END OF PERIOD (IN 000'S) $177,336
$76,019 $48,334
- - ------------------------------------------------------------
- - --------------
RATIO TO AVERAGE NET ASSETS:
Expenses(2) 1.09%
1.10% 1.10%+
Net investment income 8.15
7.67% 8.26+
- - ------------------------------------------------------------
- - --------------
PORTFOLIO TURNOVER RATE 83%
93% 116%
- - ------------------------------------------------------------
- - --------------
</TABLE>
(1) For the period from November 6, 1992 (inception date) to
July 31, 1993.
(2) The manager has waived part of its fees for the years
ended July 31,1995
and 1994. If such fees were not waived, the per share
effect on expenses
and the ratios of expenses to average net assets would
be as follows:
<TABLE>
<CAPTION>
RATIOS WITHOUT
PER SHARE DECREASE FEE WAIVERS
-----------------------------------------------
1995 1994 1995 1994
---------- --------- ------- -------
<S> <C> <C> <C> <C>
Class A $0.01 --* 1.14% 1.12%
</TABLE>
* Net investment income per share decrease is less than
$0.01.
+++Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents the aggregate total return for
the period indicated
and does not reflect any applicable sales charge.
11
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR YEAR PERIOD
ENDED ENDED ENDED
ENDED ENDED ENDED
7/31/95 7/31/94 7/31/93
7/31/92 7/31/91 7/31/90(1)
- - ------------------------------------------------------------
- - -----------------------------------
<S> <C> <C> <C>
<C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 7.76 $ 8.41 $ 8.55
$ 7.98 $ 8.06 $ 8.00
- - ------------------------------------------------------------
- - -----------------------------------
INCOME FROM OPERATIONS:
Net investment income
(2) 0.70 0.59 0.65
0.68 0.71 0.41
Net realized and
unrealized gain/(loss)
on investments 0.02 (0.51) (0.07)
0.64 0.07 0.05
- - ------------------------------------------------------------
- - -----------------------------------
Total Income From
Operations 0.72 0.08 0.58
1.32 0.78 0.46
- - ------------------------------------------------------------
- - -----------------------------------
LESS DISTRIBUTIONS
FROM:
Net investment income (0.44) (0.54) (0.58)
(0.68) (0.71) (0.40)
Overdistributions of
net investment income -- (0.06) --
- - -- -- --
Net realized gains -- (0.10) (0.14)
- - -- (0.06) --
Capital (0.18) (0.03) --
(0.07) (0.09) --
- - ------------------------------------------------------------
- - -----------------------------------
Total Distributions (0.62) (0.73) (0.72)
(0.75) (0.86) (0.40)
- - ------------------------------------------------------------
- - -----------------------------------
NET ASSET VALUE, END OF
PERIOD $ 7.86 $ 7.76 $ 8.41
$ 8.55 $ 7.98 $ 8.06
- - ------------------------------------------------------------
- - -----------------------------------
TOTAL RETURN++ 10.00% 0.66% 7.28%
17.12% 10.42% 6.00%+++
- - ------------------------------------------------------------
- - -----------------------------------
NET ASSETS, END OF
PERIOD (000'S) $2,366,680 $2,468,922 $2,105,089
$1,464,744 $502,571 $179,496
- - ------------------------------------------------------------
- - -----------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses (2) 1.56% 1.57% 1.59%
1.62% 1.63% 1.74%+
Net investment income 6.82 7.20 7.77
7.99 9.21 9.59+
- - ------------------------------------------------------------
- - -----------------------------------
PORTFOLIO TURNOVER RATE 83% 93% 116%
125% 131% 56%
- - ------------------------------------------------------------
- - -----------------------------------
</TABLE>
(1) For the period from December 28, 1989. (commencement of
operations) to July
31, 1990.
(2) The manager has waived part of its fees for the years
ended July 31,1995
and 1994. If such fees were not waived, the per share
effect on expenses
and the ratios of expenses to average net assets would
be as follows:
<TABLE>
<CAPTION>
RATIOS WITHOUT
PER SHARE DECREASE FEE WAIVERS
-------------------------------------------------
1995 1994 1995 1994
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Class B --* --* 1.61% 1.59%
</TABLE>
* Net investment income per share decrease is less than
$0.01.
+++Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents the aggregate total return for
the period indicated
and does not reflect any applicable sales charge.
12
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE (1) OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH
PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR
PERIOD
ENDED ENDED
ENDED
7/31/95 7/31/94
7/31/93(2)
- - ------------------------------------------------------------
- - -------------
<S> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.76 $ 8.41
$ 8.36
- - ------------------------------------------------------------
- - -------------
INCOME FROM OPERATIONS:
Net investment income (3) 1.16 0.55
0.22
Net realized and unrealized gain (loss) on
investments (0.46) (0.47)
0.06
- - ------------------------------------------------------------
- - -------------
Total Income From Operations 0.70 0.08
0.28
- - ------------------------------------------------------------
- - -------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.44) (0.54)
(0.20)
Overdistributions of net investment income -- (0.06)
- - --
Net realized gains -- (0.10)
(0.03)
Capital (0.18) (0.03)
- - --
- - ------------------------------------------------------------
- - -------------
Total Distributions (0.62) (0.73)
(0.23)
- - ------------------------------------------------------------
- - -------------
NET ASSET VALUE, END OF PERIOD $ 7.84 $ 7.76
$ 8.41
- - ------------------------------------------------------------
- - -------------
TOTAL RETURN++ 9.73% 0.66%
3.41%+++
- - ------------------------------------------------------------
- - -------------
NET ASSETS, END OF PERIOD (000S) $12,730 $1,065
$ 11
- - ------------------------------------------------------------
- - -------------
RATIO TO AVERAGE NET ASSETS
Expenses (3) 1.46% 1.57%
1.50%+
Net investment income 10.23 7.20
7.87+
- - ------------------------------------------------------------
- - -------------
PORTFOLIO TURNOVER RATE 83% 93%
116%
- - ------------------------------------------------------------
- - -------------
</TABLE>
(1) On November 7, 1994, the former Class D shares were
renamed Class C shares.
(2) For the period from March 19, 1993 (inception date) to
July 31, 1993.
(3) The manager has waived part of its fees for the years
ended July 31,1995
and 1994. If such fees were not waived, the per share
effect on expenses
and the ratios of expenses to average net assets would
be as follows:
<TABLE>
<CAPTION>
RATIOS WITHOUT
PER SHARE DECREASE FEE WAIVERS
-------------------------------------------------
1995 1994 1995 1994
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Class C --* --* 1.51% 1.58%
</TABLE>
* Net investment income per share decrease is less than
$0.01.
+++Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents the aggregate total return for
the period indicated
and does not reflect any applicable sales charge.
13
<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 SBMFM. The types of
fixed-income securi-
ties among which the Fund's assets will be primarily
allocated are: obliga-
tions issued or guaranteed as to principal and interest by
the United States
government ("U.S. government securities"); mortgage-related
securities issued
by various governmental and non-governmental entities;
domestic and foreign
corporate securities; and foreign government securities. The
Fund's investment
objective may be changed only with the approval of the
holders of a majority
of the Fund's outstanding shares. There can be no assurance
that the Fund will
achieve its investment objective.
The allocation and reallocation of the Fund's assets will
be undertaken by
SBMFM on the basis of its analysis of economic and market
conditions and the
relative risks and opportunities of particular types of
fixed-income securi-
ties. In general, the particular types of fixed-income
securities selected for
investment by the Fund at any given time will be those that,
in the view of
SBMFM, offer the highest income available at the time. The
Fund typically
would not invest in fixed-income securities offering the
highest income poten-
tial if SBMFM determined that the income potential is not
sufficient to jus-
tify 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 gen-
erally 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 certifi-
cates. 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 Corpora-
tion ("FHLMC"). The composition of the Fund's investments in
mortgage-related
securities, however, will vary from time to time based upon
the determination
of SBMFM on how best to achieve the Fund's investment
objective taking into
account factors such as the liquidity and yield of various
14
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
mortgage-related securities. Mortgage-related securities
held by the Fund gen-
erally 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
SBMFM. SBMFM also may
consider the ratings, if any, assigned to mortgage-related
securities by recog-
nized rating agencies other than Moody's and S&P.
The Fund typically will purchase a corporate debt security
if SBMFM believes
that the yield and, to a lesser extent, the potential for
capital appreciation,
of the security are sufficiently attractive in light of the
risks of ownership
of the security. In determining whether the Fund should
invest in particular
debt securities, SBMFM will consider factors such as: the
price, coupon and
yield to maturity; the credit quality of the issuer; the
issuer's available
cash flow and the related coverage ratios; the property, if
any, securing the
obligation; and the terms of the debt securities, including
the subordination,
default, sinking fund and early redemption provisions. SBMFM
also will review
the ratings, if any, assigned to the securities by Moody's,
S&P or other recog-
nized rating agencies. SBMFM's judgment as to credit quality
of a debt security
may differ, however, from that suggested by the ratings
published by a rating
service.
The Fund may invest up to 35% of its assets in corporate
fixed-income securi-
ties of domestic issuers rated Ba or lower by Moody's or BB
or lower by S&P or
in nonrated securities deemed by SBMFM to be of comparable
quality. The Fund
may invest in fixed-income securities rated as low as Caa by
Moody's or CCC by
S&P.
Corporate fixed-income securities of foreign issuers in
which the Fund may
invest will include securities of companies, wherever
organized, that have
their principal business activities and interests outside
the United States.
Foreign government securities in which the Fund may invest
consist of fixed-
income securities issued by foreign governments. In general,
the Fund may
invest in debt securities issued by foreign governments or
any of their politi-
cal subdivisions that are considered stable by Global
Capital Management. Up to
5% of the Fund's assets, however, may be invested in foreign
securities issued
by countries with developing economies.
The Fund may invest in fixed-income securities issued by
supranational orga-
nizations, which are entities designated or supported by a
government or gov-
ernmental entity to promote economic development, and
include, among 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
15
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
interest and principal. Moreover, the lending activities of
supranational
entities are limited to a percentage of their total capital
(including "call-
able capital" contributed by members at an entity's call),
reserves and net
income.
ADDITIONAL INVESTMENTS
Money Market Instruments. Up to 20% of the Fund's assets
may be invested in
cash and money market instruments at any time. In addition,
when SBMFM
believes that market conditions warrant, the Fund may invest
in short-term
instruments without limitation for temporary defensive
purposes. Short-term
instruments in which the Fund may invest include: U.S.
government securities;
certain bank obligations (including certificates of deposit,
time deposits and
bankers' acceptances of domestic or foreign banks, domestic
savings and loan
associations and similar institutions); commercial paper
rated no lower than
Prime-2 by Moody's or A-2 by S&P or the equivalent from
another major rating
service or, if unrated, of an issuer having an outstanding,
unsecured debt
issue then rated within the three highest rating categories;
and repurchase
agreements with respect to the securities in which the Fund
may invest. The
Fund will invest in obligations of a foreign bank or foreign
branch of a
domestic bank only if SBMFM determines that the obligations
present minimum
credit risks. These obligations may be traded in the United
States or outside
the United States, but will be denominated in U.S. dollars.
U.S. Government Securities. The U.S. government securities
in which the Fund
may invest include, direct obligations of the United States
Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds), and
obligations issued by
U.S. government agencies and instrumentalities, including:
securities that are
supported by the full faith and credit of the United States
(such as GNMA cer-
tificates); 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 securi-
ties 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.
16
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the
Fund may employ,
among others, one or more of the strategies set forth below.
More detailed
information concerning these strategies and their related
risks is contained
in the Statement of Additional Information.
Repurchase Agreements. The Fund may engage in repurchase
agreement transac-
tions 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 obliga-
tion, including interest. Repurchase agreements could
involve certain risks in
the event of default or insolvency of the other party,
including possible
delays or restrictions upon the Fund's ability to dispose of
the underlying
securities, the risk of a possible decline in the value of
the underlying
securities during the period in which the Fund seeks to
assert its rights to
them, the risk of incurring expenses associated with
asserting those rights
and the risk of losing all or part of the income from the
agreement. SBMFM or
Global Capital Management, acting under the supervision of
the Trust's Board
of Trustees, reviews on an ongoing basis the value of the
collateral and the
creditworthiness of those banks and dealers with which the
Fund may enter into
repurchase agreements to evaluate potential risks.
Reverse Repurchase Agreements. The Fund may enter into
reverse repurchase
agreement transactions with member banks of the Federal
Reserve Bank of New
York's list of reporting dealers. A reverse repurchase
agreement, which is
considered a borrowing by the Fund, involves a sale by the
Fund of securities
that it holds concurrently with an agreement by the Fund to
repurchase the
same securities at an agreed-upon price and date. The Fund
typically will
invest the proceeds of a reverse repurchase agreement in
money market instru-
ments 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
17
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
than the interest expense of the transaction. The Fund also
may use the pro-
ceeds of reverse repurchase agreements to provide liquidity
to meet redemp-
tion requests when the sale of the Fund's securities is
considered to be dis-
advantageous.
Forward Roll Transactions. In order to enhance current
income, the Fund may
enter into forward roll transactions with respect to
mortgage-related securi-
ties 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 bro-
ker-dealer, and simultaneously agrees to repurchase a
similar security from
the institution at a later date at an agreed-upon price. The
mortgage securi-
ties that are repurchased will bear the same interest rate
as those sold, but
generally will be collateralized by different pools of
mortgages with differ-
ent prepayment histories than those sold. During the period
between the sale
and repurchase, the Fund will not be entitled to receive
interest and princi-
pal 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 securi-
ties 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, Morgan Guar-
anty Trust Company of New York ("Morgan"), cash, U.S.
government securities or
high grade debt obligations having a value equal to the
repurchase price (in-
cluding accrued interest) and will subsequently monitor the
account to insure
that such equivalent value is maintained.
When-Issued Securities and Delayed-Delivery Transactions.
In order to secure
yields or prices deemed advantageous at the time, the Fund
may purchase or
sell securities on a when-issued or delayed-delivery basis.
The Fund will
enter into a when-issued transaction for the purpose of
acquiring portfolio
securities and not for the purpose of leverage. In such
transactions delivery
of the securities occurs beyond the normal settlement
periods, but no payment
or delivery is made by the Fund prior to the actual delivery
or payment by the
other party to the transaction. Due to fluctuations in the
value of securities
purchased or sold 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 Morgan a segregated
account consisting of
cash, U.S. government securities or other high-grade debt
obligations in an
amount equal
18
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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, let-
ters 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 securi-
ties. 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 Morgan.
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 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 exer-
19
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
cised, the Fund will either (a) deposit with Morgan 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 expi-
ration 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 Morgan in a
segregated account).
Purchasing Put and Call Options on Securities. The Fund
may utilize up to 15%
of its assets to purchase options and may do so at or about
the same time that
it purchases the underlying security or at a later time. In
purchasing option
securities, the Fund will trade only with counterparties of
high standing in
terms of credit quality and commitment to the market. Risks
associated with
options transactions and foreign futures contracts are
described below under
"Special Considerations."
Futures Contracts and Options on Futures Contracts. The
Fund may enter into
futures contracts or related options that are traded on
domestic and foreign
exchanges or boards of trade as well as the over-the-counter
market with
respect to options on such futures contracts. A futures
contract provides for
the future sale by one party and the purchase by the other
party of a certain
amount of specified debt security at a specified price,
date, time and place.
The Fund may enter into futures contracts to sell debt
securities when SBMFM
believes that the value of the Fund's debt securities will
decrease. The Fund
may enter into futures contracts to purchase debt securities
when SBMFM antici-
pates 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
segregated account
with Morgan 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
20
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
time prior to the expiration date of the option. A call
option gives the pur-
chaser 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 con-
tracts 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 posi-
tions.
A forward currency contract involves an obligation to
purchase or sell a spe-
cific 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 and sell put, call and other types
of options on for-
eign 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 denomi-
nated. The Fund may purchase a call option on a foreign
currency to hedge
21
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 pur-
chaser, 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 dur-
ing 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 posi-
tion, 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 con-
tractual 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 mar-
ket 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 addi-
tion, 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. When-
ever these borrowings exceed 5% of the value of the Fund's
total assets, the
Fund will not make any additional investments. Immediately
after any borrowing
(including reverse repurchase agreements and forward roll
transactions) by the
Fund, the Fund will maintain an asset coverage of at least
300% with respect
to all of its borrowings. Except for the limitations on
borrowing, the invest-
ment 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.
22
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 high-
er-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 character-
istics 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 inter-
est 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 secu-
rities 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 tradi-
tional 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 compa-
rable unrated securities generally are unsecured and
frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund
may incur addi-
tional 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 secu-
rities 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
23
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
meet redemption requests or to respond to changes in the
economy or the finan-
cial 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 mar-
ket 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 yield-
ing security, resulting in a decreased return to the Fund.
Securities that are rated Ba by Moody's or BB by S&P have
speculative char-
acteristics with respect to capacity to pay interest and
repay principal.
Securities that are rated B generally lack characteristics
of a desirable
investment and assurance of interest and principal payments
over any long
period of time may be small. Securities that are rated Caa
or CCC are of poor
standing. These issues may be in default or present elements
of danger may
exist with respect to principal or interest.
In light of the risks described above, SBMFM, in
evaluating the creditwor-
thiness of an issue, whether rated or unrated, will take
various factors into
consideration, which may include, as applicable, the
issuer's financial
resources, its sensitivity to economic conditions and
trends, the operating
history of and the community support for the facility
financed by the issue,
the ability of the issuer's management and regulatory
matters.
The Fund's fixed-income security holdings (as rated by
Moody's) for the fis-
cal year ended July 31, 1995 were composed as follows: 0.19%
rated Baa; 8.85%
rated Ba; 17.59% rated B; 0.75% rated Caa and 0.85% in non-
rated securities.
The percentages were calculated on a dollar weighted average
basis by deter-
mining monthly the percentage of the Fund's net assets
invested in each rating
category and does not necessarily indicate what the
composition of the Fund's
holdings will be in subsequent years.
Securities of Unseasoned Issuers. Securities in which the
Fund may invest
may have limited marketability and, therefore, may be
subject to wide fluctua-
24
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
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 estab-
lished market share.
Foreign Securities. There are certain risks involved in
investing in securi-
ties 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 eco-
nomic developments and the possible imposition of
limitations on the repatria-
tion 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 compa-
nies. 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, secu-
rities 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 possi-
bility 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. dol-
lars, the payment of fixed brokerage commissions on foreign
exchanges, which
generally are higher than commissions on domestic exchanges,
the expense of
maintaining securities with foreign custodians, and the
imposition of transfer
taxes or transaction charges associated with foreign
exchanges.
Corporate securities in which the Fund may invest include
corporate fixed-
income securities of both domestic and foreign issuers, such
as bonds, deben-
tures, notes, equipment lease certificates, equipment trust
certificates, and
preferred stock. The Fund's investments in each of equipment
lease or equip-
ment trust certificates will not exceed 5% of its assets.
Certain of the corporate fixed-income securities in which
the Fund may
invest may involve equity characteristics. The Fund may, for
example, invest
in warrants for the acquisition of stock of the same or of a
different issuer
or in corporate fixed-income securities that have conversion
or exchange
rights permit-
25
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ting 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 secu-
rities 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 mort-
gage 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' obliga-
tions. 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 premi-
um, 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 orig-
inal investment. In addition, like other debt securities,
the values of mort-
gage-related securities, including government and government-
related mortgage
pools, generally will fluctuate in response to market
interest rates.
Securities of Developing Countries. A developing country
generally is consid-
ered 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
26
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 devel-
oping 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 securi-
ties laws. As a result, the Fund may be forced to sell these
securities at less
than fair market value or may not be able to sell them when
SBMFM believes it
desirable to do so. The Fund's investments in illiquid
securities are subject
to the risk that should the Fund desire to sell any of these
securities when a
ready buyer is not available at a price that the Fund deems
representative of
their value, the value of the Fund's net assets could be
adversely affected.
Options. Because option premiums paid or received by the
Fund are small in
relation to the market value of the investments underlying
the options, buying
and selling options can result in large amounts of leverage.
The leverage
offered by trading in options may cause the Fund's net asset
value to be sub-
ject 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. 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
27
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 pur-
chased, 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 appropri-
ate 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 con-
tracts 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 mar-
kets 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
28
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 cur-
rent market price.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the
Fund will be exe-
cuted 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 affili-
ated broker in connection with a purchase or sale of
securities when SBMFM
believes that the charge for the transaction does not exceed
usual and custom-
ary levels. The Fund also may use Smith Barney as a
commodities broker in con-
nection with entering into futures contracts and commodity
options. Smith Bar-
ney 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.
In selecting a broker for a transaction, including Smith
Barney or its affil-
iates, the primary consideration is prompt and effective
execution of orders at
the most favorable price. Subject to that primary
consideration, dealers may be
selected for research, statistical or other services to
enable SBMFM to supple-
ment its own research and analysis with the views and
information of other
securities firms.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of
the close of regular
trading on the NYSE on each day that the NYSE is open, by
dividing the value of
the Fund's net assets attributable to each Class by the
total number of shares
of the Class outstanding.
29
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
VALUATION OF SHARES (CONTINUED)
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. Portfo-
lio securities which are traded primarily on foreign
exchanges are generally
valued at the preceding closing values of such securities on
their respective
exchanges, except that when an occurrence subsequent to the
time a value was
so established is likely to have changed such value, then
the fair market
value of those securities will be determined by
consideration of other factors
by or under the direction of the Board of Trustees or its
delegates. A secu-
rity that is traded primarily on a domestic or foreign stock
exchange is val-
ued 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 val-
ued 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 val-
ued 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 set-
tlement 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 deter-
mination of the settlement price. In such event, the futures
contract will be
valued at a fair market price to be determined by or under
the direction of
the Board of Trustees. Further information regarding the
Trust's valuation
policies with respect to the Fund is contained in the
Statement of Additional
Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other
funds in deter-
mining the amount of dividends from net investment income
and distributions of
capital gains payable to shareholders.
If a shareholder does not otherwise instruct, dividends
and capital gains
distributions will be reinvested automatically in additional
shares of the
same
30
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Class at net asset value, subject to no sales charge or
CDSC. Dividends and
distributions are treated the same for tax purposes whether
taken in cash or
reinvested in additional shares. The Fund declares dividends
monthly consisting
of estimated daily net investment income, and pays dividends
monthly. Any net
realized gains, after utilization of capital loss
carryforwards, will be dis-
tributed at least annually, and net realized short-term
capital gains (includ-
ing short-term capital gains from options transactions, if
any) may be paid
more frequently, with the distribution of dividends from net
investment income.
The per share dividends on Class B and Class C shares of
the Fund may be
lower than the per share dividends on Class A and Class Y
shares principally as
a result of the distribution fee applicable with respect to
Class B and Class C
shares. The per share dividends on Class A shares of the
Fund may be lower than
the per share dividends on Class Y shares principally as a
result of the serv-
ice fee applicable to Class A shares. Distributions of
capital gains, if any,
will be in the same amount for Class A, Class B, Class C and
Class Y shares.
In addition, as determined by the Board of Trustees,
distributions of the
Fund may include a return of capital. Shareholders will be
notified of the
amount of any distribution that represents a return of
capital. In order to
comply with a calendar year distribution requirement under
the Code, it may be
necessary for the Fund to make distributions at times other
than those set
forth above.
TAXES
The Fund will be treated as a separate taxpayer with the
result that, for
Federal income tax purposes, the amount of investment income
and capital gains
earned by the Fund will be determined on a fund by fund
basis, rather than on a
Trust wide basis. The Fund intends to qualify each year as a
regulated invest-
ment company under Subchapter M of the Code. To meet those
requirements, the
Fund may need to restrict the degree to which it engages in
short-term trading
and transactions in options. If the Fund qualifies as a
regulated investment
company and meets certain distribution requirements, the
Fund will not be sub-
ject 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 Fed-
eral income tax purposes, whether received in cash or
reinvested in additional
shares. Distributions of long-term capital gain will be
taxable to share-
31
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
holders as long-term capital gain, whether paid in cash or
reinvested in addi-
tional 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 share-
holders.
Income received by the Fund from sources within foreign
countries may be sub-
ject to withholding and other foreign taxes. The payment of
these taxes will
reduce the amount of dividends and distributions paid to the
Fund's sharehold-
ers. Each shareholder of the Fund will receive a statement
annually from the
Trust, which will set forth separately the aggregate dollar
amount of dividends
and capital gains distributed to the shareholder by the Fund
with respect to
the prior calendar year.
Shareholders should consult their tax advisors about the
status of the Fund's
dividends and distributions for Federal, state and local tax
liabilities.
PURCHASE OF SHARES
GENERAL
The Fund offers five Classes of shares. Class A shares are
sold to investors
with an initial sales charge and Class B and Class C shares
are sold without an
initial sales charge but are subject to a CDSC payable upon
certain redemp-
tions. Class Y shares are sold without an initial sales
charge or a CDSC and
are available only to investors investing a minimum of
$5,000,000. Class Z
shares are offered without a sales charge, CDSC, or service
or distribution
fee, exclusively to: (a) tax-exempt employee benefit and
retirement plans of
Smith Barney and its affiliates and (b) certain UITs
sponsored by Smith Barney
and its affiliates. Investors meeting either of these
criteria who are inter-
ested in acquiring Class Z shares should contact a Smith
Barney Financial Con-
sultant for a Class Z Prospectus. See "Prospectus Summary--
Alternative Purchase
Arrangements" for a discussion of factors to consider in
selecting which Class
of shares to purchase.
Purchases of Fund shares must be made through a brokerage
account maintained
with Smith Barney, an Introducing Broker or an investment
dealer in the selling
group, except for investors purchasing shares of the Fund
through a qualified
retirement plan who may do so directly through FDISG. When
purchasing shares of
the Fund, investors must specify whether the purchase is for
Class A, Class B,
Class C or Class Y shares. No maintenance fee will be
charged by the
32
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PURCHASE OF SHARES (CONTINUED)
Fund in connection with a brokerage account through which an
investor purchases
or holds shares.
Investors in Class A, Class B and Class C shares may open
an account by mak-
ing an initial investment of at least $1,000 for each
account, or $250 for an
IRA or a Self-Employed Retirement Plan in the Fund.
Investors in Class Y shares
may open an account by making an initial investment of
$5,000,000. Subsequent
investments of at least $50 may be made for all Classes. For
participants in
retirement plans qualified under Section 403(b)(7) or
Section 401(a) of the
Code, the minimum initial investment requirement for Class
A, Class B and Class
C shares and the subsequent investment requirement for all
Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the
minimum initial invest-
ment requirement for Class A, Class B and Class C shares and
the subsequent
investment requirement for all Classes is $50. There are no
minimum investment
requirements for Class A shares for employees of Travelers
and its subsidiar-
ies, including Smith Barney, or Trustees of the Trust and
their spouses and
children. The Fund reserves the right to waive or change
minimums, to decline
any order to purchase its shares and to suspend the offering
of shares from
time to time. Shares purchased will be held in the
shareholder's account by the
Trust's transfer agent, FDISG. Share certificates are issued
only upon a share-
holder's written request to FDISG.
Purchase orders received by the Fund or Smith Barney prior
to the close of
regular trading on the NYSE, on any day the Fund calculates
its net asset val-
ue, 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 trad-
ing on the NYSE on any day the Fund calculates its net asset
value, are priced
according to the net asset value determined on that day,
provided the order is
received by the Fund or Smith Barney prior to Smith Barney's
close of business
(the "trade date"). Payment for Fund shares is due on the
third business day
after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any
time by purchasing
shares through a service known as the Systematic Investment
Plan. Under the
Systematic Investment Plan, Smith Barney or FDISG is
authorized through preau-
thorized transfers of $50 or more to charge the regular bank
account or other
financial institution indicated by the shareholder on a
monthly or quarterly
basis to provide systematic additions to the shareholder's
Fund account. A
shareholder who has insufficient funds to complete the
transfer will be charged
33
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PURCHASE OF SHARES (CONTINUED)
a fee of up to $25 by Smith Barney or FDISG. The Systematic
Investment Plan
also authorizes Smith Barney to apply cash held in the
shareholder's Smith Bar-
ney brokerage account or redeem the shareholder's shares of
a Smith Barney
money market fund to make additions to the account.
Additional information is
available from the Fund or a Smith Barney Financial
Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A
shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------
DEALERS'
AMOUNT OF % OF % OF
REALLOWANCE AS %
INVESTMENT OFFERING PRICE AMOUNT INVESTED OF
OFFERING PRICE
- - ------------------------------------------------------------
- - -----------
<S> <C> <C> <C>
Less than $ 25,000 4.50% 4.71%
4.00%
$ 25,000 - $ 49,999 4.00% 4.17%
3.60%
$ 50,000 - $ 99,999 3.50% 3.63%
3.15%
$100,000 - $249,999 2.50% 2.56%
2.25%
$250,000 - $499,999 1.50% 1.52%
1.35%
$500,000 and over * *
*
- - ------------------------------------------------------------
- - -----------
</TABLE>
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge, equal or
exceed $500,000 in the
aggregate, will be made at net asset value without any
initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions
made within 12 months
of purchase. The CDSC on Class A shares is payable to
Smith Barney, which
compensates Smith Barney Financial Consultants and other
dealers whose
clients make purchases of $500,000 or more. The CDSC is
waived in the same
circumstances in which the CDSC applicable to Class B and
Class C shares is
waived. See "Deferred Sales Charge Alternatives" and
"Waivers of CDSC."
Members of the selling group may receive up to 90% of the
sales charge and
may be deemed to be underwriters of the Fund as defined in
the Securities Act
of 1933, as amended.
The reduced sales charges shown above apply to the
aggregate of purchases of
Class A shares of the Fund made at one time by "any person,"
which includes an
individual, his or her spouse and children, or a trustee or
other fiduciary of
a single trust estate or single fiduciary account. The
reduced sales charge
minimums may also be met by aggregating the purchase with
the net asset value
of all Class A shares held in funds sponsored by Smith
Barney that are offered
with a sales charge listed under "Exchange Privilege."
34
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value
without a sales
charge in the following circumstances: (a) sales of Class A
shares to Trustees
of the Trust, employees of Travelers and its subsidiaries or
the spouses and
children of such persons (including the surviving spouse of
a deceased Trustee
or employee, and retired Trustees or employees), employees
of members of the
National Association of Securities Dealers, Inc., or sales
to any trust, pen-
sion, profit-sharing or other benefit plan for such persons
provided such
sales are made upon the assurance of the purchaser that the
purchase is made
for investment purposes and that the securities will not be
re-sold except
through redemption or repurchase; (b) offers of Class A
shares to any other
investment company in connection with the combination of
such company with the
Fund by merger, acquisition of assets or otherwise; (c)
purchases of Class A
shares by any client of a newly employed Smith Barney
Financial Consultant
(for a period up to 90 days from the commencement of the
Financial Consul-
tant's employment with Smith Barney), on the condition the
purchase of Class A
shares is made with the proceeds of the redemption of shares
of a mutual fund
which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was
sold to the client by the Financial Consultant and (iii) was
subject to a
sales charge; (d) shareholders who have redeemed Class A
shares in the Fund
(or Class A shares of another fund of the Smith Barney
Mutual Funds that are
offered with a sales charge equal to or greater than the
maximum sales charge
of the Fund) and who wish to reinvest their redemption
proceeds in the Fund,
provided the reinvestment is made within 60 calendar days of
the redemption;
and (e) accounts managed by registered investment advisory
subsidiaries of
Travelers. In order to obtain such discounts, the purchaser
must provide suf-
ficient information at the time of purchase to permit
verification that the
purchase would qualify for the elimination of the sales
charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any
person" (as defined
above) at a reduced sales charge or at net asset value
determined by aggregat-
ing the dollar amount of the new purchase and the total net
asset value of all
Class A shares of the Fund and of funds sponsored by Smith
Barney, which are
offered with a sales charge listed under "Exchange
Privilege" then held by
such person and applying the sales charge applicable to such
aggregate. In
order to obtain such discount, the purchaser must provide
sufficient informa-
tion at the time of purchase to permit verification that the
purchase quali-
fies for the
35
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PURCHASE OF SHARES (CONTINUED)
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 pur-
chase at net asset value will also be available to employees
(and partners) of
the same employer purchasing as a group, provided each
participant makes the
minimum initial investment required. The sales charge
applicable to purchases
by each member of such a group will be determined by the
table set forth above
under "Initial Sales Charge Alternative--Class A Shares,"
and will be based
upon the aggregate sales of Class A shares of Smith Barney
Mutual Funds
offered with a sales charge to, and share holdings of, all
members of the
group. To be eligible for such reduced sales charges or to
purchase at net
asset value, all purchases must be pursuant to an employer-
or partnership-
sanctioned plan meeting certain requirements. One such
requirement is that the
plan must be open to specified partners or employees of the
employer and its
subsidiaries, if any. Such plan may, but is not required to,
provide for pay-
roll deductions, IRAs or investments pursuant to retirement
plans under Sec-
tions 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 quali-
fied group may also purchase Class A shares at the reduced
sales charge appli-
cable to the group as a whole. The sales charge is based
upon the aggregate
dollar value of Class A shares offered with a sales charge
that have been pre-
viously purchased and are still owned by the group, plus the
amount of the
current purchase. A "qualified group" is one which (a) has
been in existence
for more than six months, (b) has a purpose other than
acquiring Fund shares
at a discount and (c) satisfies uniform criteria which
enable Smith Barney to
realize economies of scale in its costs of distributing
shares. A qualified
group must have more than 10 members, must be available to
arrange for group
meetings between representatives of the Fund and the
members, and must agree
to include sales and other materials related to the Fund in
its publications
and mailings to members at no cost to Smith Barney. In order
to obtain such
reduced sales charge or to purchase at net asset value, the
purchaser must
provide sufficient information at the time of purchase to
permit verification
that the purchase qualifies for the reduced sales charge.
Approval of group
purchase reduced sales charge plans is subject to the
discretion of Smith Bar-
ney.
36
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PURCHASE OF SHARES (CONTINUED)
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000
or more provides an
opportunity for an investor to obtain a reduced sales charge
by aggregating
investments over a 13 month period, provided that the
investor refers to such
Letter when placing orders. For purposes of a Letter of
Intent, the "Amount of
Investment" as referred to in the preceding sales charge
table includes pur-
chases of all Class A shares of the Fund and other funds of
the Smith Barney
Mutual Funds offered with a sales charge over the 13 month
period based on the
total amount of intended purchases plus the value of all
Class A shares previ-
ously 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. Please con-
tact a Smith Barney Financial Consultant or FDISG to obtain
a Letter of Intent
application.
Class Y Shares. A Letter of Intent may also be used as a
way for investors to
meet the minimum investment requirement for Class Y shares.
Such investors must
make an initial minimum purchase of $1,000,000 in Class Y
shares of the Fund
and agree to purchase a total of $5,000,000 of Class Y
shares of the same Fund
within six months from the date of the Letter. If a total
investment of
$5,000,000 is not made within the six-month period, all
Class Y shares pur-
chased to date will be transferred to Class A shares, where
they will be sub-
ject to all fees (including a service fee of 0.25%) and
expenses applicable to
the Fund's Class A shares, which may include a CDSC of
1.00%. The Fund expects
that such transfer will not be subject to Federal income
taxes. Please contact
a Smith Barney Financial Consultant or FDISG for further
information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined
without an initial
sales charge so that the full amount of an investor's
purchase payment may be
immediately invested in the Fund. A CDSC, however, may be
imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B
shares; (b) Class C
shares; and (c) Class A shares which when combined with
Class A shares offered
with a sales charge currently held by an investor equal or
exceed $500,000 in
the aggregate.
37
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PURCHASE OF SHARES (CONTINUED)
Any applicable CDSC will be assessed on an amount equal to
the lesser of the
original cost of shares being redeemed or their net asset
value at the time of
redemption. CDSC Shares that are redeemed will not be
subject to a CDSC to the
extent that the value of such shares represents: (a) capital
appreciation of
Fund assets; (b) reinvestment of dividends or capital gain
distributions; (c)
with respect to Class B shares, shares redeemed more than
five years after
their purchase; or (d) with respect to Class C shares and
Class A shares that
are CDSC Shares, shares redeemed more than 12 months after
their purchase.
Class C shares and Class A shares that are CDSC Shares are
subject to a
1.00% CDSC if redeemed within 12 months of purchase. In
circumstances in which
the CDSC is imposed on Class B shares, the amount of the
charge will depend on
the number of years since the shareholder made the purchase
payment from which
the amount is being redeemed. Solely for purposes of
determining the number of
years since a purchase payment, all purchase payments made
during a month will
be aggregated and deemed to have been made on the last day
of the preceding
Smith Barney statement month. The following table sets forth
the rates of the
charge for redemptions of Class B shares by shareholders,
except in the case
of purchases by Participating Plans, as described below. See
"Purchase of
Shares--Smith Barney 401(k) Program."
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- - ---------------------------------
<S> <C>
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- - ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A
shares eight years
after the date on which they were purchased and thereafter
will no longer be
subject to any distribution fees. There also will be
converted at that time
such portion of Class B Dividend Shares owned by the
shareholder as the total
number of his or her Class B shares converting at the time
bears to the total
number of outstanding Class B shares (other than Class B
Dividend Shares)
owned by the shareholder. Shareholders who held Class B
shares of Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World
Income Fund") on
38
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PURCHASE OF SHARES (CONTINUED)
July 15, 1994 and who subsequently exchange those shares for
Class B shares of
the Fund will be offered the opportunity to exchange all
such Class B shares
for Class A shares of the Fund four years after the date on
which those shares
were deemed to have been purchased. Holders of such Class B
shares will be
notified of the pending exchange in writing approximately 30
days before the
fourth anniversary of the purchase date and, unless the
exchange has been
rejected in writing, the exchange will occur on or about the
fourth anniversary
date. See "Prospectus Summary--Alternative Purchase
Arrangements--Class B
Shares Conversion Feature."
The length of time that CDSC Shares acquired through an
exchange have been
held will be calculated from the date that the shares
exchanged were initially
acquired in one of the other applicable Smith Barney Mutual
Funds, and Fund
shares being redeemed will be considered to represent, as
applicable, capital
appreciation or dividend and capital gain distribution
reinvestments in such
other funds. For Federal income tax purposes, the amount of
the CDSC will
reduce the gain or increase the loss, as the case may be, on
the amount real-
ized 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 addi-
tional shares through dividend reinvestment. During the
fifteenth month after
the purchase, the investor decided to redeem $500 of his or
her investment.
Assuming at the time of the redemption the net asset value
had appreciated to
$12 per share, the value of the investor's shares would be
$1,260 (105 shares
at $12 per share). The CDSC would not be applied to the
amount which represents
appreciation ($200) and the value of the reinvested dividend
shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be
charged at a rate of 4.00% (the applicable rate for Class B
shares) for a total
deferred sales charge of $9.60.
WAIVER OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) au-
tomatic cash withdrawals in amounts equal to or less than
1.00% per month of
the value of the shareholder's shares at the time the
withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however,
that automatic cash
withdrawals in amounts equal to or less than 2.00% per month
of the value of
the shareholder's shares will be permitted for withdrawal
plans that were
established prior to November 7, 1994); (c) redemptions of
shares within 12
months following the death or disability of the shareholder;
39
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PURCHASE OF SHARES (CONTINUED)
(d) redemptions of shares made in connection with qualified
distributions from
retirement plans or IRAs upon the attainment of age 59 1/2;
(e) involuntary
redemptions; and (f) redemptions of shares in connection
with a combination of
the Fund with any investment company by merger, acquisition
of assets or other-
wise. In addition, a shareholder who has redeemed shares
from other funds of
the Smith Barney Mutual Funds may, under certain
circumstances, reinvest all or
part of the redemption proceeds within 60 days and receive
pro rata credit for
any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by
Smith Barney in the
case of shareholders who are also Smith Barney clients or by
FDISG in the case
of all other shareholders) of the shareholder's status or
holdings, as the case
may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith
Barney 401(k) Program,
which is generally designed to assist plan sponsors in the
creation and opera-
tion of retirement plans under Section 401(a) of the Code.
To the extent appli-
cable, the same terms and conditions are offered to all
Participating Plans in
the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B,
Class C and Class Y
shares as investment alternatives under the Smith Barney
401(k) Program. Class
A, Class B and Class C shares acquired through the Smith
Barney 401(k) Program
are subject to the same service and/or distribution fees as,
but different
sales charge and CDSC schedules than, the Class A, Class B
and Class C shares
acquired by other investors. Similar to those available to
other investors,
Class Y shares acquired through the Smith Barney 401(k)
Program are not subject
to any initial sales charge, CDSC or service or distribution
fee. Once a Par-
ticipating Plan has made an initial investment in the Fund,
all of its subse-
quent investments in the Fund must be in the same Class of
shares, except as
otherwise described below.
Class A Shares. Class A shares of the Fund are offered
without any initial
sales charge to any Participating Plan that purchases from
$500,000 to
$4,999,999 of Class A shares of one or more funds of the
Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney
401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of
redemption proceeds, if the
Participating Plan terminates within four years of the date
the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
40
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PURCHASE OF SHARES (CONTINUED)
Class B Shares. Class B shares of the Fund are offered to
any Participating
Plan that purchases less than $250,000 of one or more funds
of the Smith Bar-
ney Mutual Funds. Class B shares acquired through the Smith
Barney 401(k) Pro-
gram are subject to a CDSC of 3.00% of redemption proceeds,
if the Participat-
ing 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 Bar-
ney 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 anni-
versary of the enrollment date and, unless the exchange has
been rejected in
writing, the exchange will occur on or about the eighth
anniversary date. Once
the exchange has occurred, a Participating Plan will not be
eligible to
acquire additional Class B shares of the Fund but instead
may acquire Class A
shares of the Fund. If the Participating Plan elects not to
exchange all of
its Class B shares at that time, each Class B share held by
the Participating
Plan will have the same conversion feature as Class B shares
held by other
investors. See "Purchase of Shares--Deferred Sales Charge
Alternatives."
Class C Shares. Class C shares of the Fund are offered to
any Participating
Plan that purchases from $250,000 to $499,999 of one or more
funds of the
Smith Barney Mutual Funds. Class C shares acquired through
the Smith Barney
401(k) Program after November 7, 1994 will be subject to a
CDSC of 1.00% of
redemption proceeds, if the Participating Plan terminates
within four years of
the date the Participating Plan first enrolled in the Smith
Barney 401(k) Pro-
gram. In any year after the date a Participating Plan
enrolled in the Smith
Barney 401(k) Program, if its total Class C holdings equal
at least $500,000
as of the calendar year-end, the Participating Plan will be
offered the oppor-
tunity to exchange all of its Class C shares for Class A
shares of the Fund.
Such Plans will be notified in writing within 30 days after
the last business
day of the calendar year, and unless the exchange offer has
been rejected in
writing, the exchange will occur on or about the last
business day of the fol-
lowing March. Once the exchange has occurred, a
Participating Plan will not be
eligible to acquire Class C shares of the Fund but instead
may acquire Class A
shares of the Fund. Class C shares not converted will
continue to be subject
to the distribution fee.
Class Y Shares. Class Y shares of the Fund are offered
without any service
or distribution fees, sales charge or CDSC to any
Participating Plan that pur-
41
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PURCHASE OF SHARES (CONTINUED)
chases $5,000,000 or more of Class Y shares of one or more
funds of the Smith
Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the
extent that the net
asset value of the shares redeemed does not exceed the
current net asset value
of the shares purchased through reinvestment of dividends or
capital gain dis-
tributions, plus (a) with respect to Class A and Class C
shares, the current
net asset value of such shares purchased more than one year
prior to redemption
and, with respect to Class B shares, the current net asset
value of Class B
shares purchased more than eight years prior to the
redemption, plus (b) with
respect to Class A and Class C shares, increases in the net
asset value of the
shareholder's Class A or Class C shares above the purchase
payments made during
the preceding year and, with respect to Class B shares,
increases in the net
asset value of the shareholder's Class B shares above the
purchase payments
made during the preceding eight years. Whether or not the
CDSC applies to a
Participating Plan depends on the number of years since the
Participating Plan
first became enrolled in the Smith Barney 401(k) Program,
unlike the applica-
bility of the CDSC to other shareholders, which depends on
the number of years
since those shareholders made the purchase payment from
which the amount is
being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in
connection with
lump-sum or other distributions made by a Participating Plan
as a result of:
(a) the retirement of an employee in the Participating Plan;
(b) the termina-
tion 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 Par-
ticipating 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 FDISG. For fur-
ther information regarding the Smith Barney 401(k) Program,
investors should
contact a Smith Barney Financial Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may
be exchanged at the
net asset value next determined for shares of the same Class
in the follow-
42
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
EXCHANGE PRIVILEGE (CONTINUED)
ing funds of the Smith Barney Mutual Funds, to the extent
shares are offered
for sale in the shareholder's state of residence. Exchanges
of Class A, Class B
and Class C shares are subject to minimum investment
requirements and all
shares are subject to the other requirements of the fund
into which exchanges
are made and a sales charge differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed--Income Funds
*Smith Barney Adjustable Rate Government Income Fund
**Smith Barney Funds, Inc.--Income Return Account
Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government
Portfolio
+Smith Barney Funds, Inc.--Short-Term U.S. Treasury
Securities
Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities
Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
**Smith Barney Intermediate Maturity California
Municipals Fund
43
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
EXCHANGE PRIVILEGE (CONTINUED)
**Smith Barney Intermediate Maturity New York Municipals
Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
**Smith Barney Muni Funds--California Limited Term
Portfolio
**Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
**Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc.--Emerging Markets
Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond
Portfolio
Smith Barney World Funds, Inc.--International Balanced
Portfolio
Smith Barney World Funds, Inc.--International Equity
Portfolio
Smith Barney World Funds, Inc.--Pacific 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 Market 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 B and Class Y
shares of the
Fund. In addition, shareholders who own Class C shares
of the Fund through
the Smith Barney 401(k) Program may exchange those
shares for Class C
shares of this fund.
** Available for exchange with Class A, Class C and Class Y
shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class A and Class Y shares
of the Fund.
++ Available for exchange with Class B and Class C shares
of the Fund.
+++ Available for exchange with Class A and Class Y shares
of the Fund. In
addition, shareholders who own Class C shares of the
Fund through the
Smith Barney 401(k) Program may exchange those shares
for Class C shares
of this fund.
44
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
EXCHANGE PRIVILEGE (CONTINUED)
Class A Exchanges. Class A shares of Smith Barney Mutual
Funds sold without
a sales charge or with a maximum sales charge of less than
the maximum charged
by other Smith Barney Mutual Funds will be subject to the
appropriate "sales
charge differential" upon the exchange of such shares for
Class A shares of a
fund sold with a higher sales charge. The "sales charge
differential" is lim-
ited 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 pur-
poses of the exchange privilege, shares obtained through
automatic reinvest-
ment of dividends and capital gain distributions are treated
as having paid
the same sales charges applicable to the shares on which the
dividends or dis-
tributions 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 share-
holder was a Class B shareholder of the Short-Term World
Income Fund on July
15, 1994) wishes to exchange all or a portion of his or her
shares in any of
the funds imposing a higher CDSC than that imposed by the
Fund, the exchanged
Class B shares will be subject to the higher applicable
CDSC. Upon an
exchange, the new Class B shares will be deemed to have been
purchased on the
same date as the Class B shares of the Fund that have been
exchanged.
Class C Exchanges. Upon an exchange, the new Class C
shares will be deemed
to have been purchased on the same date as the Class C
shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who
wish to exchange all
or a portion of their Class Y shares for Class Y shares in
any of the funds
identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege.
Although the
exchange privilege is an important benefit, excessive
exchange transactions
can be detrimental to the Fund's performance and its
shareholders. SBMFM may
determine that a pattern of frequent exchanges is excessive
and contrary to
the best interests of the Fund's other shareholders. In this
event, SBMFM will
notify Smith Barney that the Fund may, at its discretion,
decide to limit
additional purchases and/or exchanges by a shareholder. Upon
such a determina-
tion, the Fund will provide notice in writing or by
telephone to the share-
holder
45
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
EXCHANGE PRIVILEGE (CONTINUED)
at least 15 days prior to suspending the exchange privilege
and during the 15
day period the shareholder will be required to (a) redeem
his or her shares in
the Fund or (b) remain invested in the Fund or exchange into
any of the funds
of the Smith Barney Mutual Funds ordinarily available, which
position the
shareholder would be expected to maintain for a significant
period of time.
All relevant factors will be considered in determining what
constitutes an
abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by
telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange
Program". Exchanges will
be processed at the net asset value next determined, plus
any applicable sales
charge differential. Redemption procedures discussed below
are also applicable
for exchanging shares, and exchanges will be made upon
receipt of all support-
ing 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 redemp-
tion proceeds will be remitted on or before the third day
following receipt of
proper tender, except on any days on which the NYSE is
closed or as permitted
under the 1940 Act in extraordinary circumstances.
Generally, if the redemp-
tion proceeds
46
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
REDEMPTION OF SHARES (CONTINUED)
are remitted to a Smith Barney brokerage account, these
funds will not be
invested for the shareholder's benefit without specific
instruction and Smith
Barney will benefit from the use of temporarily uninvested
funds. Redemption
proceeds for shares purchased by check, other than a
certified or official
bank check, will be remitted upon clearance of the check,
which may take up to
ten days or more.
Shares held by Smith Barney as custodian must be redeemed
by submitting a
written request to a Smith Barney Financial Consultant.
Shares other than
those held by Smith Barney as custodian may be redeemed
through an investor's
Financial Consultant, Introducing Broker or dealer in the
selling group or by
submitting a written request for redemption to:
Smith Barney Diversified Strategic Income Fund Inc.
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and
number or dollar
amount of shares to be redeemed, (b) identify the
shareholder's account number
and (c) be signed by each registered owner exactly as the
shares are regis-
tered. If the shares to be redeemed were issued in
certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied
by an endorsed
stock power) and must be submitted to FDISG together with
the redemption
request. Any signature appearing on a written redemption
request in excess of
$2,000, 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. Written redemption
requests of $2,000
or less do not require a signature guarantee unless more
than one such redemp-
tion request is made in any 10-day period or the redemption
proceeds are to be
sent to an address other than the address of record. Unless
otherwise direct-
ed, redemption proceeds will be mailed to an investor's
address of record.
FDISG may require additional supporting documents for
redemptions made by cor-
porations, executors, administrators, trustees or guardians.
A redemption
request will not be deemed properly received until FDISG
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
47
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
REDEMPTION OF SHARES (CONTINUED)
to receive cash payments of at least $50 monthly or
quarterly. Retirement plan
accounts are eligible for automatic cash withdrawal plans
only where the share-
holder is eligible to receive qualified distributions and
has an account value
of at least $5,000. The withdrawal plan will be carried over
on exchanges
between funds or Classes of the Fund. Any applicable CDSC
will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per
month of the value of
the shareholder's shares subject to the CDSC at the time the
withdrawal plan
commences. For further information regarding the automatic
cash withdrawal
plan, shareholders should contract a Smith Barney Financial
Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage
account may be eligible
to redeem and exchange Fund shares by telephone. To
determine if a shareholder
is entitled to participate in this program, he or she should
contact FDISG at
1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete
and return a Telephone/Wire Authorization Form, a signature
guarantee that will
be provided by FDISG upon request. (Alternatively, an
investor may authorize
telephone redemption on the new account application with a
signature guarantee
when making his/her initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any
class or classes of
the Fund's shares may be made by eligible shareholders by
calling FDISG at 1-
800-451-2010. Such requests may be made between 9:00 a.m.
and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption
requests received after
the close of regular trading on the NYSE are priced at the
net asset value next
determined. Redemptions of shares (i) by retirement plans or
(ii) for which
certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the
redemption proceeds mailed
to his/her address of record or wired to a bank account
predesignated by the
shareholder. Generally, redemption proceeds will be mailed
or wired, as the
case may be, on the next business day following the
redemption request. In
order to use the wire procedures, the bank receiving the
proceeds must be a
member of the Federal Reserve System or have a correspondent
with a member
bank. The Fund reserves the right to charge shareholders a
nominal fee for each
wire redemption. Such charges, if any, will be assessed
against the sharehold-
er's account from which shares were redeemed. In order to
change the bank
account designated to receive redemption proceeds, a
shareholder must com-
48
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
REDEMPTION OF SHARES (CONTINUED)
plete a new Telephone/Wire Authorization Form and, for the
protection of the
shareholder's assets, will be required to provide a
signature guarantee and
certain other documentation.
Exchanges. Eligible shareholders may make exchanges by
telephone if the
account registration of the shares of the fund being
acquired is identical to
the registration of the shares of the fund exchanged. Such
exchange requests
may be made by calling FDISG at 1-800-451-2010 between 9:00
a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open.
Exchange requests
received after the close of regular trading on the NYSE are
processed at the
net asset value next determined.
Additional Information regarding Telephone Redemption and
Exchange
Program. Neither the Fund nor its agents will be liable for
following instruc-
tions communicated by telephone that are reasonably believed
to be genuine. The
Fund and its agents will employ procedures designed to
verify the identity of
the caller and legitimacy of instructions (for example, a
shareholder's name
and account number will be required and phone calls may be
recorded). The Fund
reserves the right to suspend, modify or discontinue the
telephone redemption
and exchange program or to impose a charge for this service
at any time follow-
ing at least seven (7) days prior notice to shareholders.
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, how-
ever, will not redeem shares based solely on market
reductions in net asset
value. Before the Fund exercises such right, shareholders
will receive written
notice and will be permitted 60 days to bring accounts up to
the minimum to
avoid automatic redemption.
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30-day "yield"
of each Class of
shares. The Fund's yield refers to the income generated by
an investment in
49
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
PERFORMANCE (CONTINUED)
those shares over the 30-day period identified in the
advertisement and is com-
puted by dividing the net investment income per share earned
by the Class dur-
ing the period by the maximum public offering price per
share on the last day
of the period. This income is "annualized" by assuming the
amount of income is
generated each month over a one-year period and is
compounded semi-annually.
The annualized income is then shown as a percentage of the
net asset value.
TOTAL RETURN
From time to time the Fund may include its total return,
average annual total
return and current dividend return in advertisements and/or
other types of
sales literature. These figures are computed separately for
Class A, Class B,
Class C and Class Y shares of the Fund. These figures are
based on historical
earnings and are not intended to indicate future
performance. Total return is
computed for a specified period of time assuming deduction
of the maximum sales
charge, if any, from the initial amount invested and
reinvestment of all income
dividends and capital gain distributions on the reinvestment
dates at prices
calculated as stated in this Prospectus, then dividing the
value of the invest-
ment 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 redeem-
able value. Such standard total return information may also
be accompanied with
nonstandard total return information for differing periods
computed in the same
manner but without annualizing the total return or taking
sales charges into
account. The Fund calculates current dividend return for
each Class by
annualizing the most recent monthly distribution and
dividing by the net asset
value or the maximum public offering price (including sales
charge) on the last
day of the period for which current dividend return is
presented. The current
dividend return for each Class may vary from time to time
depending on market
conditions, the composition of its investment portfolio and
operating expenses.
These factors and possible differences in the methods used
in calculating cur-
rent dividend return should be considered when comparing a
Class' current
return to yields published for other investment companies
and other investment
vehicles. The Fund may also include comparative performance
information in
advertising or marketing its shares. Such performance
information may include
data from Lipper Analytical Services, Inc. and other
financial publications.
50
<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 the companies that furnish services to
the Trust and the
Fund, including agreements with the Fund's distributor,
investment adviser,
sub-investment adviser, administrator, custodian and
transfer agent. The day-
to-day operations of the Fund are delegated to the Fund's
investment adviser,
sub-investment adviser, and administrator. The Statement of
Additional Informa-
tion contains background information regarding each Trustee
and executive offi-
cer of the Fund.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York
10013, serves as
the Fund's investment adviser. SBMFM (through its
predecessors) has been in the
investment counseling business since 1934 and is a
registered investment advis-
er. SBMFM renders investment advice to investment companies
that had aggregate
assets under management as of September 30, 1995 in excess
of $60 billion.
Subject to the supervision and direction of the Trust's
Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the
Fund's investment
objective and policies, makes investment decisions for the
Fund, places orders
to purchase and sell securities and employs professional
portfolio managers and
securities analysts who provide research service to the
Fund. For advisory
services rendered to the Fund, the Fund pays SBMFM a fee at
the annual rate of
0.45% of the value of the Fund's average daily net assets.
From its fee, SBMFM
pays Global Capital Management a fee of 0.10% of the value
of the Fund's aver-
age daily net assets for its services as sub-investment
adviser.
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- invest-
ment advisory agreement dated August 31, 1995. Global
Capital Management has
been in the investment counseling business since 1988 and
renders advice to
client companies with aggregate assets under management, as
of September 30,
1995 in excess of $1.7 billion.
In its capacity as a sub-investment adviser, Global
Capital Management is
responsible for and selects the Fund's investments in
foreign securities and
selects the brokers and dealers that execute the Fund's
investments in foreign
securities.
51
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
PORTFOLIO MANAGEMENT
John C. Bianchi and James E. Conroy, both Managing
Directors of Smith Bar-
ney, have served as Vice Presidents and Investment Officers
of the Fund since
it commenced operations. Along with Victor S. Filatov, an
Investment Officer
of the Fund since March 21, 1994 and President of Global
Capital Management,
they manage the day-to-day operations of the Fund, including
making all domes-
tic investment decisions.
Victor S. Filatov, International Strategist and President
of Global Capital
Management, is responsible for managing the day-to-day
operations of the
Fund's investments in foreign securities. Prior to 1993, Mr.
Filatov was
Business Coordinator and head of European Fixed Income
Research for J.P. Mor-
gan Securities Inc.
Management's discussions and analysis, and additional
performance informa-
tion regarding the Fund during the fiscal year ended July
31, 1995 are
included in the Annual Report dated July 31, 1995. A copy of
the Annual Report
may be obtained upon request and without charge from a Smith
Barney Financial
Consultant or by writing or calling the Fund at the address
or phone number
listed on page one of this Prospectus.
ADMINISTRATOR--SBMFM
SBMFM also serves as the Fund's administrator and oversees
all aspects of
the Fund's administration and operation. For administration
services rendered
to the Fund, the Fund pays SBMFM a fee at the annual rate of
.20% of the value
of the Fund's average daily net assets.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York,
New York 10013.
Smith Barney distributes shares of the Fund as principal
underwriter and as
such conducts a continuous offering pursuant to a "best
efforts" arrangement
requiring Smith Barney to take and pay for only such
securities as may be sold
to the public. Pursuant to a plan of distribution adopted by
the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is
paid an annual
service fee with respect to Class A, Class B and Class C
shares of the Fund at
the annual rate of 0.25% of the average daily net assets of
the respective
Class. Smith Barney is also paid an annual distribution fee
with respect to
Class B and Class C shares at the annual rate of 0.50% and
0.45%, respective-
52
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
DISTRIBUTOR (CONTINUED)
ly, of the average daily net assets attributable to those
Classes. Class B
shares which automatically convert to Class A shares eight
years after the
date of original purchase will no longer be subject to
distribution fee. The
fees are used by Smith Barney to pay its Financial
Consultants for servicing
shareholder accounts and, in the case of Class B and Class C
shares, to cover
expenses primarily intended to result in the sale of those
shares. These
expenses include: advertising expenses; the cost of printing
and mailing pro-
spectuses to potential investors; payments to and expenses
of Smith Barney
Financial Consultants and other persons who provide support
services in con-
nection with the distribution of shares; interest and/or
carrying charges; and
indirect and overhead costs of Smith Barney associated with
the sale of Fund
shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for
selling shares of a
Class include a commission or fee paid by the investor or
Smith Barney at the
time of sale and, with respect to Class A, Class B and Class
C shares, a con-
tinuing fee for servicing shareholder accounts for as long
as a shareholder
remains a holder of that Class. Smith Barney Financial
Consultants may receive
different levels of compensation for selling different
Classes of shares.
Payments under the Plan with respect to Class B and Class
C shares are not
tied exclusively to the distribution and shareholder service
expenses actually
incurred by Smith Barney and the payments may exceed
distribution expenses
actually incurred. The Trust's Board of Trustees will
evaluate the appropri-
ateness of the Plan and its payment terms on a continuing
basis and in so
doing will consider all relevant factors, including expenses
borne by Smith
Barney, amounts received under the Plan and proceeds of the
CDSC.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws
of the Commonwealth
of Massachusetts and is a business entity commonly known as
a "Massachusetts
business trust." The Trust may issue an unlimited number of
shares of benefi-
cial interest, of separate series with a par value of $.001
per share. The
Fund offers shares of beneficial interest currently
classified into five Clas-
ses--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 pref-
erences, except with respect to: (a) the designation of each
Class; (b) the
effect of
53
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
ADDITIONAL INFORMATION (CONTINUED)
the respective sales charges for each Class; (c) the
distribution and/or serv-
ice fees borne by each Class pursuant to the Plan; (d) the
expenses allocable
exclusively to each Class; (e) voting rights on matters
exclusively affecting
a single Class; (f) the exchange privilege of each Class;
and (g) the conver-
sion feature of the Class B shares. The Trust's Board of
Trustees does not
anticipate that there will be any conflicts among the
interests of the holders
of the different Classes. The Trustees, on an ongoing basis,
will consider
whether any such conflict exists and, if so, take
appropriate action.
When matters are submitted for shareholder vote,
shareholders of each Class
of each Fund will have one vote for each full share owned
and a proportionate,
fractional vote for any fractional share held of that Class.
Generally, shares
of the Trust vote by individual fund on all matters except
(a) matters affect-
ing only the interests of one or more of the funds, in which
case only shares
of the affected fund or funds would be entitled to vote or
(b) when the 1940
Act requires that shares of the funds be voted in the
aggregate. Similarly,
shares of the Fund will be voted generally on a Fund-wide
basis except matters
affecting the interests of one Class of shares.
Normally there will be no meetings of shareholders for the
purpose of elect-
ing Trustees unless and until such time as less than a
majority of the Trust-
ees holding office have been elected by shareholders.
Shareholders of record
of no less than two-thirds of the outstanding shares of the
Trust may remove a
Trustee through a declaration in writing or by vote cast in
person or by proxy
at a meeting called for that purpose. The Trustees will call
a meeting for any
purpose upon written request of shareholders holding at
least 10% of the
Fund's outstanding shares and the Fund will assist
shareholders in calling
such a meeting as required by the 1940 Act.
Morgan, located at 60 Wall Street, New York, NY 10260,
serves as custodian
of the Fund's investments.
FDISG 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
54
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
ADDITIONAL INFORMATION (CONTINUED)
single copy of each report. In addition, the Trust also
plans to consolidate
the mailing of the Fund's Prospectus so that a shareholder
having multiple
accounts (that is, individual, IRA and/or Self-Employed
Retirement Plan
accounts) will receive a single Prospectus annually.
Shareholders who do not
want this consolidation to apply to their accounts should
contact a Smith Bar-
ney Financial Consultant or FDISG.
No person has been authorized to give any information or
to make any repre-
sentations in connection with this offering other than those
contained in this
Prospectus, and, if given or made, such other information or
representations
must not be relied upon as having been authorized by the
Trust or the distrib-
utor. This Prospectus does not constitute an offer by the
Fund or the distrib-
utor to sell or a solicitation of an offer to buy any of the
securities
offered hereby in any jurisdiction to any person to whom it
is unlawful to
make such offer or solicitation in such jurisdiction.
55
<PAGE>
SMITH BARNEY
- - ------------
A Member of
Travelers Group LOGO
SMITH BARNEY
DIVERSIFIED STRATEGIC
INCOME FUND
388 Greenwich Street
New
York, New York 10013
FD 0239 11/95
<PAGE>
SMITH BARNEY
Diversified
Strategic
Income
Fund
Class Z Shares Only
November 28, 1995
PROSPECTUS BEGINS ON PAGE ONE
P R O S P E C T U S
[LOGO] Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
PROSPECTUS
NOVEMBER 28, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Diversified Strategic Income Fund (the
"Fund") a diversified
fund, seeks high current income primarily through investment
in fixed-income
securities. The Fund attempts to achieve this objective by
allocating and
reallocating its assets primarily among various types of
fixed-income securi-
ties selected by its investment adviser on the basis of an
analysis of eco-
nomic 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 objec-
tives and policies, making up Smith Barney Income Funds (the
"Trust"). The
Trust is an open-end, management investment company commonly
referred to as a
mutual fund.
This Prospectus sets forth concisely certain information
about the Fund and
the Trust, including expenses, that prospective investors
will find helpful in
making an investment decision. Investors are encouraged to
read this Prospec-
tus carefully and retain it for future reference.
The Class Z shares described in this Prospectus
(previously designated as
Class C shares) are currently offered exclusively for sale
to tax-exempt
employee benefit and retirement plans of Smith Barney Inc.
("Smith Barney") or
any of its affiliates ("Qualified Plans") and to certain
unit investment
trusts sponsored by Smith Barney or any of its affiliates ("Smith
Barney
UITs").
Additional information about the Fund and the Trust is
contained in a State-
ment of Additional Information dated November 28, 1995, as
amended or supple-
mented from time to time, that is available upon request and
without charge by
calling or writing the Trust at the telephone number or
address set forth
above or by contacting a Smith Barney Financial Consultant.
The Statement of
Additional Information has been filed with the Securities
and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this
Prospectus in its
entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
SMITH BARNEY GLOBAL CAPITAL MANAGEMENT INC.
Sub-Investment Adviser
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
- - -------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- - -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
- - -------------------------------------------------
VALUATION OF SHARES 21
- - -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 22
- - -------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES 24
- - -------------------------------------------------
EXCHANGE PRIVILEGE 25
- - -------------------------------------------------
PERFORMANCE 27
- - -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 28
- - -------------------------------------------------
ADDITIONAL INFORMATION 31
- - -------------------------------------------------
</TABLE>
- - ------------------------------------------------------------
- - --------------------
No person has been authorized to give any information or
to make any
representations in connection with this offering other than
those contained in
this Prospectus, and, if given or made, such other
information or
representations must not be relied upon as having been
authorized by the Trust
or the distributor. This Prospectus does not constitute an
offer by the Fund or
the distributor to sell or a solicitation of an offer to buy
any of the
securities offered hereby in any jurisdiction to any person
to whom it is
unlawful to make such offer or solicitation in such
jurisdiction.
- - ------------------------------------------------------------
- - --------------------
2
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
THE FUND'S EXPENSES
The following expense table lists the costs and expenses an
investor will incur
either directly or indirectly as a shareholder of Class Z
shares of the Fund,
based on the Fund's operating expenses for its most recent
fiscal year:
<TABLE>
<CAPTION>
AS A % OF
AVERAGE NET ASSETS
- - ------------------------------------------------------------
- - --------------------
<S>
<C>
ANNUAL FUND OPERATING EXPENSES
Management fees*
.65
Other expenses
.15
- - ------------------------------------------------------------
- - --------------------
TOTAL FUND OPERATING
EXPENSES.............................. .80 %
- - ------------------------------------------------------------
- - --------------------
</TABLE>
* Prior to August 9, 1995, Smith Barney Global Capital
Management Inc. ("Global
Capital Management") voluntarily waived 50% of its sub-
investment advisory
fee. On August 9, 1995, the Board of Trustees of the Fund
approved the
elimination of this fee waiver.
The nature of the services for which the Fund pays
management fees is
described under "Management of the Trust and the Fund."
"Other expenses" in the
above table include fees for shareholder services, custodial
fees, legal and
accounting fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in
understanding the
various costs that an investor in the Fund will bear
directly or indirectly.
The example assumes payment by the Fund of operating
expenses at the levels set
forth in the table above. See "Purchase and Redemption of
Shares" and "Manage-
ment of the Trust and the Fund."
<TABLE>
<CAPTION>
1 YEAR 3
YEARS 5 YEARS 10 YEARS
- - ------------------------------------------------------------
- - -------------------
<S> <C> <C>
<C> <C>
An investor would pay the following expenses
on a $1,000 investment in Class Z shares of
the Fund, assuming (1) 5% annual return and
(2) redemption at the end of each time period: $ 8 $26
$44 $99
</TABLE>
The example also provides a means for the investor to
compare expense levels
of funds with different fee structures over varying
investment periods. To
facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
3
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended July
31, 1995 has been
audited by KPMG Peat Marwick LLP, independent accountants,
whose report thereon
appears in the Fund's Annual Report dated July 31, 1995. The
following informa-
tion for the fiscal years ended July 31, 1993 through July
31, 1994 has been
audited by Coopers & Lybrand L.L.P. The information set
forth below should be
read in conjunction with the financial statements and
related notes that also
appear in the Fund's 1995 Annual Report, which is
incorporated by reference
into the Statement of Additional Information.
FOR A CLASS Z SHARE(1) OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH
PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR
PERIOD
ENDED ENDED
ENDED
7/31/95 7/31/94
7/31/93(2)
- - ------------------------------------------------------------
- - -------------
<S> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 7.76 $ 8.41
$ 8.24
- - ------------------------------------------------------------
- - -------------
INCOME FROM OPERATIONS:
Net investment income (3) 0.84 0.68
0.51
Net realized and unrealized gain (loss) on
investments (0.06)
(0.54) 0.25
- - ------------------------------------------------------------
- - -------------
Total Income From Operations 0.78 0.14
0.76
- - ------------------------------------------------------------
- - -------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.49)
(0.59) (0.47)
Overdistributions of net investment income --
(0.06) --
Net realized gains --
(0.10) (0.12)
Capital (0.20)
(0.04) --
- - ------------------------------------------------------------
- - -------------
Total Distributions (0.69)
(0.79) (0.59)
- - ------------------------------------------------------------
- - -------------
NET ASSET VALUE, END OF PERIOD $ 7.85 $ 7.76
$ 8.41
- - ------------------------------------------------------------
- - -------------
TOTAL RETURN++ 10.94%
1.43% 9.47%(4)
- - ------------------------------------------------------------
- - -------------
NET ASSETS, END OF PERIOD (000S) $14,361 $11,552
$11,803
- - ------------------------------------------------------------
- - -------------
RATIOS TO AVERAGE NET ASSETS:
Expenses (3) 0.75%
0.75% 0.80%+
Net investment income 8.30 8.02
8.56+
- - ------------------------------------------------------------
- - -------------
PORTFOLIO TURNOVER RATE 83%
93% 116%
- - ------------------------------------------------------------
- - -------------
</TABLE>
(1) On November 7, 1994, the former Class C shares were
renamed Class Z shares.
(2) For the period from November 6, 1992 (inception date) to
July 31, 1993.
(3) The manager has waived part of its fees for the years
ended July 31, 1995
and 1994. If such fees were not waived, the per share
effect on expenses
and the ratios of expenses to average net assets would
be as follows:
<TABLE>
<CAPTION>
RATIOS WITHOUT
PER SHARE DECREASE FEE WAIVERS
---------------------------------------------------
1995 1994 1995 1994
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Class Z -- * -- * 0.80% 0.77%
</TABLE>
* Net investment income per share decrease is less than
$0.01.
(4) Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents the aggregate total return for
the period indicated
and does not reflect any applicable sales charge.
4
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The investment objective of the Fund is high current
income primarily
through investment in fixed-income securities. In attempting
to achieve its
objective, the Fund allocates and reallocates its assets
primarily among vari-
ous types of fixed-income securities selected by Smith
Barney Mutual Funds
Management Inc. ("SBMFM"). The types of fixed-income
securities among which
the Fund's assets will be primarily allocated are:
obligations issued or guar-
anteed as to principal and interest by the United States
government ("U.S.
government securities"); mortgage-related securities issued
by various govern-
mental and non-governmental entities; domestic and foreign
corporate securi-
ties; and foreign government securities. The Fund's
investment objective may
be changed only with the approval of the holders of a
majority of the Fund's
outstanding shares. There can be no assurance that the Fund
will achieve its
investment objective.
The allocation and reallocation of the Fund's assets will
be undertaken by
SBMFM on the basis of its analysis of economic and market
conditions and the
relative risks and opportunities of particular types of
fixed-income securi-
ties. In general, the particular types of fixed-income
securities selected for
investment by the Fund at any given time will be those that,
in the view of
SBMFM, offer the highest income available at the time. The
Fund typically
would not invest in fixed-income securities offering the
highest income poten-
tial if SBMFM determined that the income potential is not
sufficient to jus-
tify 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 gen-
erally 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 certifi-
cates. 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 Corpora-
tion ("FHLMC"). The composition of the Fund's investments in
mort-
5
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
gage-related securities, however, will vary from time to
time based upon the
determination of SBMFM on how best to achieve the Fund's
investment objective
taking into account factors such as the liquidity and yield
of various mort-
gage-related securities. Mortgage-related securities held by
the Fund gener-
ally will be rated no lower than Aa by Moody's Investors
Service, Inc.
("Moody's") or AA by Standard & Poor's Corporation ("S&P")
or, if not rated,
will be of equivalent investment quality as determined by
SBMFM. SBMFM also
may consider the ratings, if any, assigned to mortgage-
related securities by
recognized rating agencies other than Moody's and S&P.
The Fund typically will purchase a corporate debt security
if SBMFM believes
that the yield and, to a lesser extent, the potential for
capital apprecia-
tion, of the security are sufficiently attractive in light
of the risks of
ownership of the security. In determining whether the Fund
should invest in
particular debt securities, SBMFM will consider factors such
as: the price,
coupon and yield to maturity; the credit quality of the
issuer; the issuer's
available cash flow and the related coverage ratios; the
property, if any,
securing the obligation; and the terms of the debt
securities, including the
subordination, default, sinking fund and early redemption
provisions. SBMFM
also will review the ratings, if any, assigned to the
securities by Moody's,
S&P or other recognized rating agencies. SBMFM's judgment as
to credit quality
of a debt security may differ, however, from that suggested
by the ratings
published by a rating service.
The Fund may invest up to 35% of its assets in corporate
fixed-income secu-
rities of domestic issuers rated Ba or lower by Moody's or
BB or lower by S&P
or in nonrated securities deemed by SBMFM to be of
comparable quality. The
Fund may invest in fixed-income securities rated as low as
Caa by Moody's or
CCC by S&P.
Corporate fixed-income securities of foreign issuers in
which the Fund may
invest will include securities of companies, wherever
organized, that have
their principal business activities and interests outside
the United States.
Foreign government securities in which the Fund may invest
consist of fixed-
income securities issued by foreign governments. In general,
the Fund may
invest in debt securities issued by foreign governments or
any of their polit-
ical subdivisions that are considered stable by Global
Capital Management. Up
to 5% of the Fund's assets, however, may be invested in
foreign securities
issued by countries with developing economies.
6
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may invest in fixed-income securities issued by
supranational orga-
nizations, which are entities designated or supported by a
government or gov-
ernmental entity to promote economic development, and
include, among others,
the Asian Development Bank, the European Coal and Steel
Community, the Euro-
pean 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 lim-
ited to a percentage of their total capital (including
"callable capital" con-
tributed by members at an entity's call), reserves and net
income.
ADDITIONAL INVESTMENTS
Money Market Instruments. Up to 20% of the Fund's assets
may be invested in
cash and money market instruments at any time. In addition,
when SBMFM
believes that market conditions warrant, the Fund may invest
in short-term
instruments without limitation for temporary defensive
purposes. Short-term
instruments in which the Fund may invest include: U.S.
government securities;
certain bank obligations (including certificates of deposit,
time deposits and
bankers' acceptances of domestic or foreign banks, domestic
savings and loan
associations and similar institutions); commercial paper
rated no lower than
Prime-2 by Moody's or A-2 by S&P or the equivalent from
another major rating
service or, if unrated, of an issuer having an outstanding,
unsecured debt
issue then rated within the three highest rating categories;
and repurchase
agreements with respect to the securities in which the Fund
may invest. The
Fund will invest in obligations of a foreign bank or foreign
branch of a
domestic bank only if SBMFM determines that the obligations
present minimum
credit risks. These obligations may be traded in the United
States or outside
the United States, but will be denominated in U.S. dollars.
U.S. Government Securities. The U.S. government securities
in which the Fund
may invest include, direct obligations of the United States
Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds), and
obligations issued by
U.S. government agencies and instrumentalities, including:
securities that are
supported by the full faith and credit of the United States
(such as GNMA cer-
tificates); 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
7
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 securi-
ties 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 transac-
tions 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 obliga-
tion, including interest. Repurchase agreements could
involve certain risks in
the event of default or insolvency of the other party,
including possible
delays or restrictions upon the Fund's ability to dispose of
the underlying
securities, the risk of a possible decline in the value of
the underlying
securities during the period in which the Fund seeks to
assert its rights to
them, the risk of incurring expenses associated with
asserting those rights
and the risk of losing all or part of the income from the
agreement. SBMFM or
Global Capital Management, 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.
8
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Reverse Repurchase Agreements. The Fund may enter into
reverse repurchase
agreement transactions with member banks of the Federal
Reserve Bank of New
York's list of reporting dealers. A reverse repurchase
agreement, which is
considered a borrowing by the Fund, involves a sale by the
Fund of securities
that it holds concurrently with an agreement by the Fund to
repurchase the
same securities at an agreed-upon price and date. The Fund
typically will
invest the proceeds of a reverse repurchase agreement in
money market instru-
ments 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 securi-
ties 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 securi-
ties that are repurchased will bear the same interest rate
as those sold, but
generally will be collateralized by different pools of
mortgages with differ-
ent prepayment histories than those sold. During the period
between the sale
and repurchase, the Fund will not be entitled to receive
interest and princi-
pal 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 securi-
ties 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, Morgan Guar-
anty Trust Company of New York ("Morgan"), cash, U.S.
government securities or
high grade debt obligations having a value equal to the
repurchase price (in-
cluding accrued interest) and will subsequently monitor the
account to insure
that such equivalent value is maintained.
9
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
When-Issued Securities and Delayed-Delivery Transactions.
In order to secure
yields or prices deemed advantageous at the time, the Fund
may purchase or
sell 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 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 Morgan 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 commit-
ments. 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, let-
ters 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 securi-
ties. 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 Morgan.
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
secu-
10
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
rity at a specified price at any time during the option
period. Thus, the pur-
chaser 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 speci-
fied 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 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
Morgan in a segre-
gated account cash, U.S. government securities or other high
grade debt obli-
gations 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 exer-
cise prices and expiration dates as those written by the
Fund), or an equiva-
lent 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 Mor-
gan 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 stand-
ing 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
11
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
future sale by one party and the purchase by the other party
of a certain
amount of specified debt security at a specified price,
date, time and place.
The Fund may enter into futures contracts to sell debt
securities when SBMFM
believes that the value of the Fund's debt securities will
decrease. The Fund
may enter into futures contracts to purchase debt securities
when SBMFM antic-
ipates 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 securi-
ties, equal to the market value of the contract, will be
deposited in a segre-
gated account with Morgan 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 portfo-
lio of debt securities against the risk of rising interest
rates, and may pur-
chase 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 enter-
ing into closing sale transactions and to increase its
ability to hedge
against changes in interest rates. The Fund will write put
and call options on
future contracts that are traded on a domestic or foreign
exchange or board of
trade as well as the over-the-counter market.
Currency Exchange Transactions and Options on Foreign
Currencies. The Fund
will conduct its currency exchange transactions either on a
spot (that is,
cash) basis at the rate prevailing in the currency exchange
market or through
entering into forward contracts to purchase or sell
currencies. The Fund's
dealings in forward currency exchange and options on foreign
currencies are
limited to hedging involving either specific transactions or
portfolio posi-
tions.
12
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
A forward currency contract involves an obligation to
purchase or sell a
specific currency for an agreed-upon price at an agreed-upon
date which may be
any fixed number of days from the date of the contract
agreed upon by the par-
ties. 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 and sell put, call and other types
of options on for-
eign 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 denom-
inated. 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 pur-
chaser, 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 dur-
ing 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 posi-
tion, the Fund may forfeit the entire amount of the premium
plus related
transaction costs. Options on foreign currencies purchased
by the Fund may be
traded on domestic and foreign exchanges or traded over-the-
counter.
CERTAIN INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in
securities with con-
tractual 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 mar-
ket does not
13
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 Secu-
rities 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
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 restric-
tions that identifies additional restrictions that cannot be
changed without
the approval of the majority of the Fund's outstanding
shares is contained in
the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Medium-, Low- and Unrated Securities. The Fund may invest
in medium- or low-
rated securities and unrated securities of comparable
quality. Generally,
these securities offer a higher current yield than the yield
offered by high-
er-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 character-
istics 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 inter-
est 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.
14
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
While the market values of medium- and low-rated and
comparable unrated
securities tend to react less to fluctuations in interest
rate levels than do
those of higher-rated securities, the market values of
certain of these secu-
rities 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 tradi-
tional 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 compa-
rable unrated securities generally are unsecured and
frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund
may incur addi-
tional 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 secu-
rities 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 securi-
ties 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 eco-
nomic 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 yield-
ing security, resulting in a decreased return to the Fund.
15
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Securities that are rated Ba by Moody's or BB by S&P have
speculative char-
acteristics with respect to capacity to pay interest and
repay principal.
Securities that are rated B generally lack characteristics
of a desirable
investment and assurance of interest and principal payments
over any long
period of time may be small. Securities that are rated Caa
or CCC are of poor
standing. These issues may be in default or present elements
of danger may
exist with respect to principal or interest.
In light of the risks described above, SBMFM, in
evaluating the creditwor-
thiness 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-
tions in market value. In addition, certain securities may
lack a significant
operating history and be dependent on products or services
without an estab-
lished market share.
The Fund's fixed-income security holdings (as rated by
Moody's) for the fis-
cal year ended July 31, 1995 were composed as follows: 0.19%
rated Baa; 8.85%
rated Ba; 17.59% rated B; 0.75% rated Caa and 0.85% in non-
rated securities.
The percentages were calculated on a dollar weighted average
basis by deter-
mining monthly the percentage of the Fund's net assets
invested in each rating
category and does not necessarily indicate what the
composition of the Fund's
holdings will be in subsequent years.
Foreign Securities. There are certain risks involved in
investing in securi-
ties 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 eco-
nomic developments and the possible imposition of
limitations on the repatria-
tion 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 require-
16
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
ments 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 securi-
ties 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 con-
verting foreign currency to U.S. dollars, the payment of
fixed brokerage com-
missions on foreign exchanges, which generally are higher
than commissions on
domestic exchanges, the expense of maintaining securities
with foreign custo-
dians, and the imposition of transfer taxes or transaction
charges associated
with foreign exchanges.
Corporate securities in which the Fund may invest include
corporate fixed-
income securities of both domestic and foreign issuers, such
as bonds, deben-
tures, notes, equipment lease certificates, equipment trust
certificates, and
preferred stock. The Fund's investments in each of equipment
lease or equip-
ment trust certificates will not exceed 5% of its assets.
Certain of the corporate fixed-income securities in which
the Fund may
invest may involve equity characteristics. The Fund may, for
example, invest
in warrants for the acquisition of stock of the same or of a
different issuer
or in corporate fixed-income securities that have conversion
or exchange
rights permitting their holder to convert or exchange the
securities at a
stated price within a specified period of time into a
specified number of
shares of common stock. In addition, the Fund may invest in
participations
that are based on revenues, sales or profits of an issuer or
in common stock
offered as a unit with corporate fixed-income securities.
Mortgage-Related Securities. Mortgage-related securities
provide a monthly
payment consisting of interest and principal payments.
Additional payments may
be made out of unscheduled repayments of principal resulting
from the sale of
the underlying residential property, refinancing or
foreclosure, net of fees
17
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
or costs that may be incurred. Prepayments of principal on
mortgage-related
securities may tend to increase due to refinancing of
mortgages as interest
rates decline. Mortgage pools created by private
organizations generally offer
a higher rate of interest than governmental and government-
related pools
because no direct or indirect guarantees of payments are
applicable with
respect to the former pools. Timely payment of interest and
principal in these
pools, however, may be supported by various forms of private
insurance or
guarantees, including individual loan, title, pool and
hazard insurance. There
can be no assurance that the private insurers can meet their
obligations under
the policies. Prompt payment of principal and interest on
GNMA mortgage pass-
through certificates is backed by the full faith and credit
of the United
States. FNMA guaranteed mortgage pass-through certificates
and FHLMC partici-
pation certificates are solely the obligations of those
entities but are sup-
ported by the discretionary authority of the United States
government to pur-
chase 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 col-
lateral to different series or classes of the obligations.
To the extent that the Fund purchases mortgage-related
securities at a pre-
mium, 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.
Securities of Developing Countries. A developing country
generally is con-
sidered 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 pro-
vided higher rates of return to investors.
18
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Non-Publicly Traded and Illiquid Securities. The Fund's
sale of securities
that are not publicly traded is typically restricted under
the Federal securi-
ties laws. As a result, the Fund may be forced to sell these
securities at
less than fair market value or may not be able to sell them
when SBMFM
believes it desirable to do so. The Fund's investments in
illiquid securities
are subject to the risk that should the Fund desire to sell
any of these secu-
rities when a ready buyer is not available at a price that
the Fund deems rep-
resentative 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 sub-
ject 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 and underlying security (thereby
permitting its
sale or the writing of a new option on the security prior to
the outstanding
option's expiration). To effect a closing purchase
transaction, the Fund would
purchase, prior to the holder's exercise of an option that
the Fund has writ-
ten, an option of the same series as that on which the Fund
desired to termi-
nate its obligation. The obligation of the Fund under an
option that it has
written would be terminated by a closing purchase
transaction, but the Fund
would not be deemed to own an option as a result of the
transaction. No assur-
ance 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 trans-
action, 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 secu-
rity and could face higher transaction costs, including
brokerage commissions.
19
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The ability of the Fund to engage in closing transactions
with respect to
options depends on the existence of a liquid secondary
market. While the Fund
generally will purchase or write 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 economi-
cally 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 mar-
kets 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.
20
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 cur-
rent market price.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the
Fund will be exe-
cuted by a number of brokers and dealers, including Smith
Barney. The Fund may
use Smith Barney in connection with a purchase or sale of
securities when SBMFM
believes that the charge for the transaction does not exceed
usual and custom-
ary levels. The Fund also may use Smith Barney as a
commodities broker in con-
nection with entering into futures contracts and commodity
options. Smith Bar-
ney 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.
In selecting a broker for a transaction, including Smith
Barney or its affil-
iates, the primary consideration is prompt and effective
execution of orders at
the most favorable price. Subject to that primary
consideration, dealers may be
selected for research, statistical or other services to
enable SBMFM to supple-
ment its own research and analysis with the views and
information of other
securities firms.
VALUATION OF SHARES
The net asset value per share of Class Z shares is
determined as of the close
of regular trading on the New York Stock Exchange, Inc. (the
"NYSE"), on each
day that the NYSE is open, by dividing the value of the
Fund's net assets
attributable to Class Z by the number of shares of the Class
outstanding. The
per share net asset value of Class Z shares may be higher
than those of other
Classes because of the lower expenses attributable to Class
Z shares.
21
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
VALUATION OF SHARES (CONTINUED)
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. Portfo-
lio securities which are traded primarily on foreign
exchanges are generally
valued at the preceding closing values of such securities on
their respective
exchanges, except that when an occurrence subsequent to the
time a value was
so established is likely to have changed such value, then
the fair market
value of those securities will be determined by
consideration of other factors
by or under the direction of the Board of Trustees or its
delegates. A secu-
rity that is traded primarily on an exchange is valued at
the last sale price
on that exchange or, if there were no sales during the day,
at the current
quoted bid price. Over-the-counter securities are valued on
the basis of the
bid price at the close of business on each day. Investments
in U.S. government
securities (other than short-term securities) are valued at
the average of the
quoted bid and asked prices in the over-the-counter market.
Short-term invest-
ments that mature in 60 days or less are valued at amortized
cost whenever the
Trustees determine that amortized cost reflects fair value
of those invest-
ments. 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 settle-
ment 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 sig-
nificant price fluctuations after the determination of the
settlement price.
In such event, the futures contract will be valued at a fair
market price to
be determined by or under the direction of the Board of
Trustees. Further
information regarding the Trust's valuation policies with
respect to the Fund
is contained in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other
funds in deter-
mining the amounts of dividends from investment income and
distributions of
capital gains payable to shareholders. Dividends and
distributions will be
reinvested automatically for each shareholder's account at
net asset value in
additional
22
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Class Z shares of the Fund, unless the shareholder instructs
the Fund to pay
dividends and distributions in cash. Dividends from net
investment income, if
any, of the Fund will be declared monthly and will be paid
on the last Friday
of the 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 fre-
quently with dividends from net investment income. The Fund
is subject to a 4%
nondeductible excise tax measured with respect to certain
undistributed
amounts of net investment income and capital gains. If it is
in the best
interests of shareholders, the Fund expects to make such
additional distribu-
tions shortly before December 31 in each year as may be
necessary to avoid the
application of this tax.
If, for any full fiscal year, the Fund's total
distributions exceed net
investment income and net realized capital gains, the excess
distributions
generally will be treated as a tax-free return of capital
(up to the amount of
the shareholder's tax basis in his or her shares). The
amount treated as a
tax-free return of capital will reduce a shareholder's
adjusted basis in his
or her shares. Pursuant to the requirements of the
Investment Company Act of
1940, as amended (the "1940 Act") and other applicable laws,
a notice will
accompany any distribution paid from sources other than net
investment income.
In the event the Fund distributes amounts in excess of its
net investment
income and net realized capital gains, such distributions
may have the effect
of decreasing the Fund's total assets, which may increase
the Fund's expense
ratio.
TAXES
The Fund will be treated as a separate taxpayer with the
result that, for
Federal income tax purposes, the amount of investment income
and capital gains
earned by the Fund will be determined on a fund by fund
basis, rather than on
a Trust wide basis. The Fund has qualified and intends to
continue to qualify
each year as a regulated investment company under Subchapter
M of the Internal
Revenue Code of 1986, as amended. To meet those
requirements, the Fund may
need to restrict the degree to which it engages in short-
term trading and
transactions in options. If the Fund qualifies as a
regulated investment com-
pany 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.
23
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Dividends paid by the Fund from investment income and
distributions of short-
term capital gains will be taxable to shareholders as
ordinary income for Fed-
eral income tax purposes, whether received in cash or
reinvested in additional
shares. Distributions of long-term capital gain will be
taxable to shareholders
as long-term capital gain, whether paid in cash or
reinvested in additional
shares, and regardless of the length of time the investor
has held his or her
shares of the Fund.
Income received by the Fund from sources within foreign
countries may be sub-
ject to withholding and other foreign taxes. The payment of
these taxes will
reduce the amount of dividends and distributions paid to the
Fund's sharehold-
ers. Each shareholder of the Fund will receive a statement
annually from the
Trust, which will set forth separately the aggregate dollar
amount of dividends
and capital gains distributed to the shareholder by the Fund
with respect to
the prior calendar year.
Shareholders should consult their plan document or tax
advisors about the tax
consequences associated with participating in a Qualified
Plan or Smith Barney
UIT.
PURCHASE AND REDEMPTION OF SHARES
Purchases of the Fund's Class Z shares must be made in
accordance with the
terms of a Qualified Plan or Smith Barney UIT. Purchases are
effected at the
net asset value next determined after a purchase order is
received by Smith
Barney (the "trade date"). Payment is due to Smith Barney on
the third business
day (the "settlement date") after the trade date. Investors
who make payment
prior to the settlement date may designate a temporary
investment (such as a
money market fund of the Smith Barney Mutual Funds) for such
payment until set-
tlement date. The Fund reserves the right to reject any
purchase order and to
suspend the offering of shares for a period of time. There
are no minimum
investment requirements for Class Z shares; however, the
Fund reserves the
right to vary this policy at any time.
Purchase orders received by the Fund or Smith Barney prior
to the close of
regular trading on the NYSE, currently 4:00 p.m., New York
time, on any day
that the Fund's calculates its net asset value, are priced
according to the net
24
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
PURCHASE AND REDEMPTION OF SHARES (CONTINUED)
asset value determined on that day. See "Valuation of
Shares." Certificates for
Fund shares are issued upon request to the Trust's transfer
agent.
Shareholders may redeem their shares on any day the Fund
calculates its net
asset value. See "Valuation of Shares." Redemption requests
received in proper
form prior to the close of regular trading on the NYSE are
priced at the net
asset value per share determined on that day. Redemption
requests received
after the close of regular trading on the NYSE are priced at
the net asset
value as next determined. Shareholders acquiring Class Z
shares through a Smith
Barney Qualified Plan or a Smith Barney UIT should consult
the terms of their
respective plans for redemption provisions.
EXCHANGE PRIVILEGE
Holders of Class Z shares in the Fund may exchange their
shares at the net
asset value next determined for shares of the same Class in
the following funds
of the Smith Barney Mutual Funds to the extent shares are
offered for sale in
the shareholder's state of residence. Exchanges of shares
may be made at any
time without payment of any exchange fee.
FUND NAME
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Income Return Account
Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities
Portfolio
Smith Barney High Income Fund
Smith Barney Money Funds, Inc. -- Cash Portfolio
Smith Barney Money Funds, Inc. -- Government Portfolio
Smith Barney Utilities Fund
Smith Barney World Funds, Inc. -- International Equity
Portfolio
The exchange of shares of one fund for shares of another
fund is generally
treated for Federal income tax purposes as a sale of the
shares given in
exchange by the shareholder. Therefore, an exchanging
shareholder may realize
25
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
EXCHANGE PRIVILEGE (CONTINUED)
a taxable gain or loss in connection with the exchange.
Shareholders should
consult their plan prospectus and/or other governing
documents regarding
exchanges. Generally, exchanges within such a plan are not
treated as a tax-
able event.
Shareholders exercising the exchange privilege with any of
the other funds
of the Smith Barney Mutual Funds should review the
prospectus of that fund
carefully prior to making an exchange. Smith Barney reserves
the right to
reject any exchange request.
Although the exchange privilege is an important benefit,
excessive exchange
transactions can be detrimental to the Fund's performance
and its sharehold-
ers. SBMFM may determine that a pattern of frequent
exchanges is excessive and
contrary to the best interests of the Fund's other
shareholders. In this
event, SBMFM will notify Smith Barney, and Smith Barney may,
at its discre-
tion, decide to limit additional purchases and/or exchanges
by the sharehold-
er. Upon such a determination, Smith Barney will provide
notice in writing or
by telephone to the shareholder at least 15 days prior to
suspending the
exchange privilege and during the 15 day period the
shareholder will be
required to (a) redeem his or her shares in the Fund or (b)
remain invested in
the Fund or exchange into any of the funds of the Smith
Barney Mutual Funds
listed above, which position the shareholder would be
expected to maintain for
a significant period of time. All relevant factors will be
considered in
determining what constitutes an abusive pattern of
exchanges. The Fund
reserves the right to modify or discontinue exchange
privileges upon 60 days'
prior notice to shareholders.
26
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30 day "yield"
of its Class Z
shares. The Fund's yield refers to the income generated by
an investment in the
Fund over the 30 day period identified in the advertisement,
and is computed by
dividing the net investment income per share earned by the
Fund with respect to
the Class during the period by the maximum public offering
price per share on
the last day of the period. This income is "annualized" by
assuming that the
amount of income is generated each month over a one-year
period and is com-
pounded 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 for Class Z shares in
advertisements and/or
in other types of sales literature. These figures are based
on historical earn-
ings and are not intended to indicate future performance.
Total return is com-
puted for a specified period of time assuming deduction of
the maximum sales
charge, if any, from the initial amount invested and
reinvestment of all income
dividends and capital gain distributions on the reinvestment
dates at prices
calculated as stated in this Prospectus, then dividing the
value of the invest-
ment 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 redeem-
able value. Such standard total return information may also
be accompanied with
nonstandard total return information for differing periods
computed in the same
manner but without annualizing the total return or taking
sales charges into
account. The Fund calculates current dividend return for
Class Z shares by
annualizing the most recent monthly distribution and
dividing by the net asset
value on the last day of the period for which current
dividend return is pre-
sented. The current dividend return may vary from time to
time depending on
market conditions, the composition of its investment
portfolio and operating
expenses. These factors and possible differences in the
methods used in calcu-
lating current dividend return should be considered when
comparing the Fund's
current return to yields published for other investment
companies and other
investment vehicles. The Fund may also include comparative
performance informa-
tion in advertising or marketing the Class Z shares. Such
performance infor-
27
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
PERFORMANCE (CONTINUED)
mation may include data from Lipper Analytical Services,
Inc. and other finan-
cial publications.
Class Z's average annual total return was as follows for
the periods indi-
cated:
10.94% for the one-year period beginning August 1, 1994
through July 31,
1995.
7.93% per annum during the period from commencement of
operations
(November 6, 1992) through July 31, 1995.
Class Z's aggregate total return was as follows for the
periods indicated:
10.94% for the one-year period beginning on August 1, 1994
through July
31, 1994.
7.93% for the period from commencement of operations
(November 6, 1992)
through July 31, 1995.
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, custodian and
transfer agent. The day-
to-day operations of the Fund are delegated to the Fund's
investment adviser,
sub-investment adviser and administrator. The Statement of
Additional Informa-
tion contains background information regarding each Trustee
and executive
officer of the Trust.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York
10013, serves as
the Fund's investment adviser. SBMFM is a wholly owned
subsidiary of Smith
Barney Holdings Inc. ("Holdings"). Holdings is a wholly
owned sub-
28
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
sidiary of Travelers Group Inc. ("Travelers") a diversified
financial services
holding company engaged, through its subsidiaries,
principally in four business
segments: Investment Services, Consumer Finance Services,
Life Insurance
Services and Property & Casualty Insurance Services. SBMFM
(through predecessor
entities) has been in the investment counseling business
since 1934 and is a
registered investment adviser. SBMFM renders investment
advice to investment
companies that had aggregate assets under management as of
September 30, 1995
in excess of $60 billion.
Subject to the supervision and direction of the Trust's
Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the
Fund's investment
objective and policies, makes investment decisions for the
Fund, places orders
to purchase and sell securities and employs professional
portfolio managers and
securities analysts who provide research service to the
Fund. For investment
advisory services rendered to the Fund, the Fund pays SBMFM
a fee at the annual
rate of 0.45% of the value of the Fund's average daily net
assets.
From its fee, SBMFM pays Global Capital Management a fee
of 0.10% of the
value of the Fund's average daily net assets for its
services as sub-investment
adviser.
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- invest-
ment advisory agreement dated August 31, 1995. Global
Capital Management has
been in the investment counseling business since 1988 and
renders advice to
client companies with total assets under management, as of
September 30, 1995
in excess of $1.7 billion.
In its capacity as a sub-investment adviser, Global
Capital Management is
responsible for and selects the Fund's investments in
foreign securities and
selects the brokers and dealers that execute the Fund's
investments in foreign
securities.
PORTFOLIO MANAGEMENT
John C. Bianchi and James E. Conroy, both Managing
Directors of Smith Barney,
have served as Vice Presidents and Investment Officers of
the Fund
29
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund--
Class Z Shares
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
since it commenced operations. Along with Victor S. Filatov,
an Investment
Officer of the Fund since March 21, 1994 and President of
Global Capital Man-
agement, they manage the day-to-day operations of the Fund,
including making
all domestic investment decisions.
Victor S. Filatov, International Strategist and President
of Global Capital
Management, was elected by the Board of Trustees on January
20, 1994 to serve
as an Investment Officer of the Fund. Mr. Filatov is
responsible for managing
the day-to-day operations of the Fund's investments in
foreign securities.
Prior to 1993, Mr. Filatov was Business Coordinator and head
of European Fixed
Income Research for J.P. Morgan Securities Inc.
Management's discussion and analysis, and additional
performance information
regarding the Fund during the fiscal year ended July 31,
1995 are included in
the Annual Report dated July 31, 1995. A copy of the Annual
Report may be
obtained upon request and without charge from a Smith Barney
Financial Consul-
tant or by writing or calling the Fund at the address or
phone number listed
on page one of this Prospectus.
ADMINISTRATOR--SBMFM
SBMFM also serves as the Fund's administrator and oversees
all aspects of
the Fund's administration and operation. For administration
services rendered
to the Fund, the Fund pays SBMFM a fee at the annual rate of
.20% of the value
of the Fund's average daily net assets.
DISTRIBUTOR--SMITH BARNEY
Smith Barney is located at 388 Greenwich Street, New York,
New York 10013,
and serves as the Fund's distributor. Smith Barney is a
wholly owned subsidi-
ary of Travelers.
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 offers shares of beneficial interest of separate
series having a
$.001 per share par value. Shares of beneficial interest of
the Fund are cur-
rently classified into five Classes--A, B, C, Y and Z. Each
Class represents
an identical pro
30
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
ADDITIONAL INFORMATION
rata interest in the Fund's investment portfolio. As a
result, the Classes
have the same rights, privileges and preferences, except
with respect to: (a)
the designation of each Class; (b) the effect of the
respective sales charges,
if any, for each Class; (c) the distribution and/or service
fees, if any,
borne by each Class pursuant to a Plan adopted by the Fund
pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended
(the "1940 Act");
(d) the expenses allocable exclusively to each Class; (e)
voting rights on
matters exclusively affecting a single Class; (f) the
exchange privilege of
each Class; and (g) the conversion feature of the Class B
shares. The Trust's
Board of Trustees does not anticipate that there will be any
conflicts among
the interests of the holders of different Classes of shares
of the Fund. The
Trustees, on an ongoing basis, will consider whether any
such conflict exists
and, if so, take appropriate action.
When matters are submitted for shareholder vote,
shareholders of each Class
of each Fund will have one vote for each full share owned
and a proportionate,
fractional vote for any fractional share held of that Class.
Generally, shares
of the Trust vote by individual fund on all matters except
(a) matters affect-
ing only the interests of one or more of the funds, in which
case only shares
of the affected fund or funds would be entitled to vote or
(b) when the 1940
Act requires that shares of the funds be voted in the
aggregate. Similarly,
shares of the Fund will be voted generally on a Fund-wide
basis except matters
affecting the interests of one Class of shares.
Normally there will be no meetings of shareholders for the
purpose of elect-
ing Trustees unless and until such time as less than a
majority of the Trust-
ees holding office have been elected by shareholders.
Shareholders of record
of no less than two-thirds of the outstanding shares of the
Trust may remove a
Trustee through a declaration in writing or by vote cast in
person or by proxy
at a meeting called for that purpose. The Trustees will call
a meeting for any
purpose upon written request of shareholders holding at
least 10% of the
Fund's outstanding shares and the Fund will assist
shareholders in calling
such a meeting as required by the 1940 Act.
The Fund sends its shareholders a semi-annual report and
an audited annual
report, which include listings of the investment securities
held by the Fund
at the end of the period covered. 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
31
<PAGE>
SMITH BARNEY
Diversified Strategic Income Fund
Class Z Shares
ADDITIONAL INFORMATION (CONTINUED)
single copy of each report. In addition, the Trust also
plans to consolidate
the mailing of the Fund's Prospectus so that a shareholder
having multiple
accounts (that is, individual, IRA and/or Self-Employed
Retirement Plan
accounts) will receive a single Prospectus annually.
Shareholders who do not
want this consolidation to apply to their accounts should
contact a Smith Bar-
ney Financial Consultant or FDISG.
Morgan, located at 60 Wall Street, New York, New York
10260, serves as cus-
todian of the Fund's investments.
First Data Investor Services Group, Inc. is located at
Exchange Place, Bos-
ton, Massachusetts 02109, and serves as the Trust's transfer
agent.
Shareholders may seek information regarding the Fund from
their Smith Barney
Financial Consultants.
32
<PAGE>
SmithBarney
- - -----------
A Member of
TravelersGroup [LOGO]
SMITH BARNEY
DIVERSIFIED STRATEGIC
INCOME FUND
388 Greenwich Street
New
York, New York 10013
FD 0240 11/95
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Utilities
Fund
November 28, 1995
PROSPECTUS BEGINS ON PAGE ONE
LOGO Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
SMITH BARNEY
Utilities Fund
PROSPECTUS
NOVEMBER 28, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The Smith Barney Utilities Fund (the "Fund") is a
diversified fund that seeks
current income by investing in equity and debt securities of
utility companies
selected by the Fund's investment adviser. Long-term capital
appreciation is a
secondary objective of the Fund. The Fund is one of a number
of funds, each
having distinct investment objectives and policies, making
up the Smith Barney
Income Funds (the "Trust"). The Trust is an open-end
management investment com-
pany commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain information
about the Fund and
the Trust, including sales charges, distribution and service
fees and expenses,
that prospective investors will find helpful in making an
investment decision.
Investors are encouraged to read this Prospectus carefully
and retain it for
future reference. Shares of other funds offered by the Trust
are described in
separate prospectuses that may be obtained by calling the
Trust at the tele-
phone number set forth above or by contacting a Smith Barney
Financial Consul-
tant.
Additional information about the Fund and the Trust is
contained in a State-
ment of Additional Information dated November 28, 1995, as
amended or supple-
mented from time to time, that is available upon request and
without charge by
calling or writing the Trust at the telephone number or
address set forth above
or by contacting a Smith Barney Financial Consultant. The
Statement of Addi-
tional Information has been filed with the Securities and
Exchange Commission
(the "SEC") and is incorporated by reference into this
Prospectus in its
entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Utilities Fund
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- - -------------------------------------------------
FINANCIAL HIGHLIGHTS 11
- - -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 14
- - -------------------------------------------------
VALUATION OF SHARES 27
- - -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 28
- - -------------------------------------------------
PURCHASE OF SHARES 30
- - -------------------------------------------------
EXCHANGE PRIVILEGE 40
- - -------------------------------------------------
REDEMPTION OF SHARES 44
- - -------------------------------------------------
MINIMUM ACCOUNT SIZE 47
- - -------------------------------------------------
PERFORMANCE 47
- - -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 48
- - -------------------------------------------------
DISTRIBUTOR 49
- - -------------------------------------------------
ADDITIONAL INFORMATION 51
- - -------------------------------------------------
</TABLE>
2
<PAGE>
SMITH BARNEY
Utilities Fund
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by
detailed information
appearing elsewhere in this Prospectus and in the Statement
of Additional
Information. Cross references in this summary are to
headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified
management invest-
ment company that seeks current income by investing in the
equity and debt
securities of companies in the utility industries. Long-term
capital apprecia-
tion is a secondary objective. The utility industries are
comprised of compa-
nies principally engaged (that is, at least 50% of a
company's assets, gross
income or net profits results from utility operations or the
company is regu-
lated as a utility by a government agency or authority) in
the manufacture,
production, generation, transmission and sale of electric
and gas energy and
companies principally engaged in the communications field,
including entities
such as telephone, telegraph, satellite, microwave and other
companies regu-
lated by governmental agencies as utilities that provide
communication facili-
ties for the public benefit, but not including those in
public broadcasting.
Under normal circumstances, the Fund will invest at least
65% of its assets in
equity and debt securities of companies in the utility
industries and will
concentrate in excess of 25% of its assets in the securities
of these compa-
nies. 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 pur-
suant to a separate prospectus, is offered exclusively to
(a) tax-exempt
employee benefit and retirement plans of Smith Barney Inc.
("Smith Barney")
and its affiliates and (b) unit investment trusts ("UITs")
sponsored by Smith
Barney and its affiliates. See "Purchase of Shares" and
"Redemption of
Shares."
Class A Shares. Class A shares are sold at net asset value
plus an initial
sales charge of up to 5.00% imposed at the time of purchase
and are subject to
an annual service fee of 0.25% of the average daily net
assets of the Class.
The initial sales charge may be reduced or waived for
certain purchases. Pur-
chases of Class A shares, which when combined with current
holdings of Class A
shares offered with a sales charge equal or exceed $500,000
in the aggregate,
3
<PAGE>
SMITH BARNEY
Utilities Fund
PROSPECTUS SUMMARY (CONTINUED)
will be made at net asset value with no initial sales
charge, but will be sub-
ject to a contingent deferred sales charge ("CDSC") of 1.00%
on redemptions
made within 12 months of purchase. See "Prospectus Summary--
Reduced or No Ini-
tial Sales Charge."
Class B Shares. Class B shares are offered at net asset
value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by
1.00% each year
after the date of purchase to zero. This CDSC may be waived
for certain
redemptions. Class B shares are subject to an annual service
fee of 0.25% and
an annual distribution fee of 0.50% of the average daily net
assets of the
Class. The Class B shares' distribution fee may cause that
Class to have
higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will
convert automatically
to Class A shares, based on relative net asset value, eight
years after the
date of the original purchase. Upon conversion, these shares
will no longer be
subject to an annual distribution fee. In addition, a
certain portion of Class
B shares that have been acquired through the reinvestment of
dividends and
distributions ("Class B Dividend Shares") will be converted
at that time. See
"Purchase of Shares--Deferred Sales Charge Alternative."
Class C Shares. Class C shares are sold at net asset value
with no initial
sales charge. They are subject to an annual service fee of
0.25% and an annual
distribution fee of 0.45% of the average daily net assets of
the Class C
shares, and investors pay a CDSC of 1.00% if they redeem
Class C shares within
12 months of purchase. This CDSC may be waived for certain
redemptions. The
Class C shares' distribution fee may cause that Class to
have higher expenses
and pay lower dividends than Class A shares. Purchases of
Fund shares, which
when combined with current holdings of Class C shares of the
Fund equal or
exceed $500,000 in the aggregate, should be made in Class A
shares at net
asset value with no sales charge, and will be subject to a
CDSC of 1.00% on
redemptions made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to
investors meeting an
initial investment minimum of $5,000,000. Class Y shares are
sold at net asset
value with no initial sales charge or CDSC. They are not
subject to any serv-
ice or distribution fees.
4
<PAGE>
SMITH BARNEY
Utilities Fund
PROSPECTUS SUMMARY (CONTINUED)
In deciding which Class of Fund shares to purchase,
investors should consider
the following factors, as well as any other relevant facts
and circumstances:
Intended Holding Period. The decision as to which Class of
shares is more
beneficial to an investor depends on the amount and intended
length of his or
her investment. Shareholders who are planning to establish a
program of regular
investment may wish to consider Class A shares; as the
investment accumulates
shareholders may qualify for reduced sales charges and the
shares are subject
to lower ongoing expenses over the term of the investment.
As an investment
alternative, Class B and Class C shares are sold without any
initial sales
charge so the entire purchase price is immediately invested
in the Fund. Any
investment return on these additional invested amounts may
partially or wholly
offset the higher annual expenses of these Classes. Because
the Fund's future
return cannot be predicted, however, there can be no
assurance that this would
be the case.
Finally, investors should consider the effect of the CDSC
period and any con-
version rights of the Classes in the context of their own
investment time
frame. For example, while Class C shares have a shorter CDSC
period than Class
B shares, they do not have a conversion feature, and
therefore, are subject to
an ongoing distribution fee. Thus, Class B shares may be
more attractive than
Class C shares to investors with longer term investment
outlooks.
Investors investing a minimum of $5,000,000 must purchase
Class Y shares,
which are not subject to an initial sales charge, CDSC or
service or distribu-
tion fee. The maximum purchase amount for Class A shares is
$4,999,999, Class B
shares is $249,999 and Class C shares is $499,999. There is
no maximum purchase
amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales
charge on Class A
shares may be waived for certain eligible purchasers, and
the entire purchase
price will be immediately invested in the Fund. In addition,
Class A share pur-
chases, which when combined with current holdings of Class A
shares offered
with a sales charge equal or exceed $500,000 in the
aggregate, will be made at
net asset value with no initial sales charge, but will be
subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The
$500,000 aggregate
investment may be met by adding the purchase to the net
asset value of all
Class A shares held in funds sponsored by Smith Barney
listed under "Exchange
Privilege." Class A share purchases may also be eligible for
a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing
expenses of
5
<PAGE>
SMITH BARNEY
Utilities Fund
PROSPECTUS SUMMARY (CONTINUED)
Class A shares will be lower than those for Class B and
Class C shares, pur-
chasers eligible to purchase Class A shares at net asset
value or at a reduced
sales charge should consider doing so.
Smith Barney Financial Consultants may receive different
compensation for
selling each Class of shares. Investors should understand
that the purpose of
the CDSC on the Class B and Class C shares is the same as
that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and
the Fund" for a
complete description of the sales charges and service and
distribution fees
for each Class of shares and "Valuation of Shares,"
"Dividends, Distributions
and Taxes" and "Exchange Privilege" for other differences
between the Classes
of shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to
participate in the
Smith Barney 401(k) Program, which is generally designed to
assist plan spon-
sors 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 (collec-
tively, "Participating Plans"). Class A, Class B, Class C
and Class Y shares
are available as investment alternatives for Participating
Plans. See "Pur-
chase 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 Bar-
ney 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, First Data
Investor Services Group,
Inc. ("FDISG"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class
C shares may open
an account by making an initial investment of at least
$1,000 for each
account, or $250 for an individual retirement account
("IRA") or a Self-
Employed Retirement Plan. Investors in Class Y shares may
open an account for
an initial investment of $5,000,000. Subsequent investments
of at least $50
may be made for all Classes. For participants in retirement
plans qualified
under Section 403(b)(7) or Section 401(a) of the Code, the
minimum initial
investment requirement for Class A, Class B and Class C
shares and the subse-
quent investment requirement for all Classes is $25. The
minimum initial
investment requirement for Class A, Class B and Class C
shares and the subse-
quent
6
<PAGE>
SMITH BARNEY
Utilities Fund
PROSPECTUS SUMMARY (CONTINUED)
investment requirement for all Classes through the
Systematic Investment Plan
described below is $50. There is no minimum investment
required in Class A for
unitholders who invest distributions from a UIT sponsored by
SmithBarney. See
"Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a
Systematic Invest-
ment 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 $50. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the
New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase
of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Mutual
Funds Management Inc.
("SBMFM"), serves as the Fund's investment adviser and
administrator. SBMFM
provides investment advisory and management services to
investment companies
affiliated with Smith Barney. SBMFM is a wholly owned
subsidiary of Smith Bar-
ney Holdings Inc. ("Holdings"). Holdings is a wholly owned
subsidiary of Trav-
elers Group Inc. ("Travelers"), a diversified financial
services holding com-
pany engaged, through its subsidiaries, principally in four
business segments:
Investment Services, Consumer Finance Services, Life
Insurance Services and
Property & Casualty Insurance Services. See "Management of
the Trust and the
Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for
shares of the same
Class of certain other funds of the Smith Barney Mutual
Funds. Certain ex-
changes may be subject to a sales charge differential. See
"Exchange Privi-
lege."
VALUATION OF SHARES Net asset value of the Fund generally is
quoted daily in
the financial section of most newspapers and is also
available from Smith Bar-
ney Financial Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment
income are declared
and paid monthly. Distributions of net realized capital
gains are paid annual-
ly, although distributions of short-term capital gains may
be paid more fre-
quently 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
7
<PAGE>
SMITH BARNEY
Utilities Fund
PROSPECTUS SUMMARY (CONTINUED)
sales charge or CDSC. Class B shares acquired through
dividend and distribution
reinvestments will become eligible for conversion to Class A
shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no
assurance that the
Fund's investment objective will be achieved. Because the
Fund concentrates its
investments in one sector, its portfolio may be subject to
greater risk and
market fluctuations than a portfolio of securities
representing a broader range
of investment alternatives. The Fund will be affected by
general changes in
interest rates which will result in increases or decreases
in the market value
of the debt securities held by the Fund; the market value of
the debt securi-
ties held by the Fund can be expected to vary inversely to
changes in
prevailinginterest rates. The Fund may invest up to 10% of
its assets in lower-
ratedfixed-income securities, which securities (a) will
likely have some qual-
ity and protective characteristics that, in the judgment of
a rating organiza-
tion, are outweighed by large uncertainties or major risk
exposures to adverse
conditions and (b) are predominantly speculative with
respect to the issuer's
capacity to pay interest and repay principal in accordance
with the terms of
the securities. Certain of the investments held by the Fund
and certain of the
investment strategies and techniques that the Fund may
employ might expose it
to certain risks. The investments presenting the Fund with
risks are low-rated
securities, as described above, foreign securities and non-
publicly traded and
illiquid securities. The investment strategies and
techniques presenting the
Fund with risks are entering in repurchase agreements,
lending portfolio secu-
rities, engaging in short sales against the box and entering
into transactions
involving options and futures contracts. See "Investment
Objectives and Manage-
ment Policies."
8
<PAGE>
SMITH BARNEY
Utilities Fund
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the
costs and expenses
an investor will incur either directly or indirectly as a
shareholder of the
Fund, based on the maximum sales charge or maximum CDSC that
may be incurred
at the time of purchase or redemption and, unless otherwise
noted, the Fund's
operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS
B CLASS C CLASS Y
- - ------------------------------------------------------------
- - ------------------
<S> <C> <C>
<C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None
None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is
lower) None*
5.00% 1.00% None
- - ------------------------------------------------------------
- - ------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.65%
0.65% 0.65% 0.65%
12b-1 fees** 0.25 0.75
0.70 None
Other expenses*** 0.17 0.16
0.16 0.17
- - ------------------------------------------------------------
- - ------------------
TOTAL FUND OPERATING EXPENSES 1.07%
1.56% 1.51% 0.82%
- - ------------------------------------------------------------
- - ------------------
</TABLE>
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge equal or
exceed $500,000 in the
aggregate, will be made at net asset value with no sales
charge, but will
be subject to a CDSC of 1.00% on redemptions made within
12 months.
** Upon conversion of Class B shares to Class A shares,
such shares will no
longer be subject to a distribution fee. Class C shares
do not have a
conversion feature and, therefore, are subject to an
ongoing distribution
fee. As a result, long-term shareholders of Class C
shares may pay more
than the economic equivalent of the maximum front-end
sales charge
permitted by the National Association of Securities
Dealers, Inc.
*** For Class Y shares, "Other expenses" have been estimated
based on expenses
incurred by the Class A shares, because as of July 31,
1995, no Class Y
shares were outstanding.
The sales charge and CDSC set forth in the above table are
the maximum
charges imposed on purchases or redemptions of Fund shares
and investors may
actually pay lower or no charges, depending on the amount
purchased and, in
the case of Class B, Class C and certain Class A shares the
length of time the
shares are held and whether the shares are held through the
Smith Barney
401(k) Program. See "Purchase of Shares" and "Redemption of
Shares." Smith
Barney receives an annual 12b-1 service fee of 0.25% of the
value of average
daily net assets of Class A shares. Smith Barney also
receives an annual 12b-1
fee of 0.75% of the value of average daily net assets of
Class B shares, con-
sisting of a 0.50% distribution fee and a 0.25% service fee.
In Class C
shares, Smith Barney receives an annual 12b-1 fee of 0.70%
of the value of
average daily net assets of this Class, consisting of a
0.45% distribution fee
and a
9
<PAGE>
SMITH BARNEY
Utilities Fund
PROSPECTUS SUMMARY (CONTINUED)
0.25% service fee. "Other expenses" in the above table
include fees for share-
holder services, custodial fees, legal and accounting fees,
printing costs and
registration fees.
EXAMPLE The following example is intended to assist an
investor in understand-
ing the various costs that an investor in the Fund will bear
directly or indi-
rectly. The example assumes payment by the Fund of operating
expenses at the
levels set forth in the table above. See "Purchase of
Shares," "Redemption of
Shares" and "Management of the Trust and the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
5 YEARS 10 YEARS*
- - ------------------------------------------------------------
- - ------------------
<S> <C> <C>
<C> <C>
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A $60 $82
$106 $174
Class B 66 79
95 172
Class C 25 48
82 180
Class Y 8 26
46 101
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A 60 82
106 174
Class B 16 49
85 172
Class C 15 48
82 180
Class Y 8 26
46 101
- - ------------------------------------------------------------
- - ------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to
Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to
compare expense levels
of funds with different fee structures over varying
investment periods. To
facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN
THOSE SHOWN.
10
<PAGE>
SMITH BARNEY
Utilities Fund
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended July 31,
1995 has been
audited by KPMG Peat Marwick LLP, independent accountants,
whose report
thereon appears in the Fund's Annual Report dated July 31,
1995. The following
information for the fiscal years ended July 31, 1989 through
July 31, 1994 has
been audited by Coopers & Lybrand L.L.P. The information set
out below should
be read in conjunction with the financial statements and
related notes that
also appear in the Fund's Annual Report, which is
incorporated by reference
into the Statement of Additional Information. No information
is presented for
Class Y shares because no Class Y shares were outstanding
for the periods
shown.
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR
PERIOD
ENDED ENDED
ENDED
7/31/95
7/31/94 7/31/93(1)
- - ------------------------------------------------------------
- - ---------------
<S> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.28 $
15.97 $ 14.36
- - ------------------------------------------------------------
- - ---------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.85
0.56 0.66
Net realized and unrealized gain (loss) on
investments 0.82
(1.92) 1.72
- - ------------------------------------------------------------
- - ---------------
Total Income (Loss) From Operations 1.67
(1.36) 2.38
- - ------------------------------------------------------------
- - ---------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.82)
(0.80) (0.63)
Overdistribution of net investment income --
(0.03) (0.01)
Net realized gains --
(0.50) (0.13)
Overdistribution of net realized gains (0.08) -
- - - --
Capital (0.02) -
- - - --
- - ------------------------------------------------------------
- - ---------------
Total Distributions (0.92)
(1.33) (0.77)
- - ------------------------------------------------------------
- - ---------------
NET ASSET VALUE, END OF PERIOD $ 14.03 $
13.28 $ 15.97
- - ------------------------------------------------------------
- - ---------------
TOTAL RETURN++ 13.24%
(8.99)% 17.01%+++
- - ------------------------------------------------------------
- - ---------------
NET ASSETS, END OF PERIOD (000S) $168,963
$41,458 $53,856
- - ------------------------------------------------------------
- - ---------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.07%
1.07% 1.07%+
Net investment income 6.36
5.54 5.67+
- - ------------------------------------------------------------
- - ---------------
PORTFOLIO TURNOVER RATE 36%
28% 37%
- - ------------------------------------------------------------
- - ---------------
</TABLE>
(1) For the period from November 6, 1992 (inception date) to
July 31, 1993.
+++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents the aggregate total return for
the period
indicated and does not reflect any applicable sales
charge.
11
<PAGE>
SMITH BARNEY
Utilities Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR PERIOD YEAR YEAR YEAR
ENDED ENDED ENDED
ENDED ENDED ENDED ENDED ENDED
7/31/95 7/31/94 7/31/93
7/31/92(1) 2/28/92(2) 2/28/91 2/28/90 2/28/89(3)
- - ------------------------------------------------------------
- - ----------------------------------------------
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $13.28 $15.97 $14.83
$13.95 $13.21 $12.93 $12.09 $12.00
- - ------------------------------------------------------------
- - ----------------------------------------------
INCOME (LOSS) FROM
OPERATIONS:
Net investment income 0.78 0.75 0.79
0.35 0.82 0.88 0.87 0.64
Net realized and
unrealized gain (loss)
on investments 0.82 (2.19) 1.30
0.89 0.94 0.40 1.08 0.17
- - ------------------------------------------------------------
- - ----------------------------------------------
Total Income (Loss) From
Operations 1.60 (1.44) 2.09
1.24 1.76 1.28 1.95 0.81
- - ------------------------------------------------------------
- - ----------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.76) (0.72) (0.79)
(0.35) (0.84) (0.90) (0.90) (0.57)
Overdistribution of net
Investment income -- (0.03) (0.01)
- - -- -- -- -- --
Net realized gains -- (0.50) (0.15)
- - -- (0.15) (0.10) (0.21) (0.15)
Overdistribution of net
realized gains (0.08) -- --
- - -- -- -- -- --
Capital (0.02) -- --
(0.01) (0.03) -- -- --
- - ------------------------------------------------------------
- - ----------------------------------------------
TOTAL DISTRIBUTIONS (0.86) (1.25) (0.95)
(0.36) (1.02) (1.00) (1.11) (0.72)
- - ------------------------------------------------------------
- - ----------------------------------------------
NET ASSET VALUE, END OF
PERIOD $14.02 $13.28 $15.97
$14.83 $13.95 $13.21 $12.93 $12.09
- - ------------------------------------------------------------
- - ----------------------------------------------
TOTAL RETURN++ 12.62% (9.52)% 14.69%
8.98%++ 13.63% 10.46% 16.34% 6.80%+++
- - ------------------------------------------------------------
- - ----------------------------------------------
NET ASSETS, END OF
PERIOD (MILLIONS) $1,573 $1,823 $2,766
$1,721 $1,275 $ 707 $ 604 $ 416
- - ------------------------------------------------------------
- - ----------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.56% 1.54% 1.56%
1.57%+ 1.58% 1.65% 1.70% 1.77%+
Net investment income 5.82 5.07 5.17
5.78+ 6.04 6.89 6.83 6.99+
- - ------------------------------------------------------------
- - ----------------------------------------------
PORTFOLIO TURNOVER RATE 36% 28% 37%
10% 33% 31% 50% 46%
- - ------------------------------------------------------------
- - ----------------------------------------------
</TABLE>
(1) For the period from March 1, 1992 to July 31, 1992.
(2) For the period from March 1, 1991 to February 28, 1992.
(3) For the period from March 28, 1988 (commencement of
operations) to
February 28, 1989.
+++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents the aggregate total return for
the period
indicated and does not reflect any applicable sales
charge.
12
<PAGE>
SMITH BARNEY
Utilities Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE(/1/) OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH
PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR
PERIOD
ENDED ENDED
ENDED
7/31/95 7/31/94
7/31/93(2)
- - ------------------------------------------------------------
- - --------------
<S> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.28 $15.97
$15.17
- - ------------------------------------------------------------
- - --------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.78 0.73
0.35
Net realized and unrealized gain (loss) on
investments 0.82 (2.17)
0.86
- - ------------------------------------------------------------
- - --------------
Total Income (Loss) From Operations 1.60 (1.44)
1.21
- - ------------------------------------------------------------
- - --------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.76) (0.72)
(0.38)
Overdistribution of net investment income -- (0.03)
(0.01)
Net realized gains -- (0.50)
(0.02)
Overdistribution of net realized gains (0.08) --
- - --
Capital (0.02) --
- - --
- - ------------------------------------------------------------
- - --------------
Total Distributions (0.86) (1.25)
(0.41)
- - ------------------------------------------------------------
- - --------------
NET ASSET VALUE, END OF PERIOD $14.02 $13.28
$15.97
- - ------------------------------------------------------------
- - --------------
TOTAL RETURN ++ 12.62%
(9.52)% 8.08%+++
- - ------------------------------------------------------------
- - --------------
NET ASSETS, END OF PERIOD (000) $3,925 $1,894
$ 252
- - ------------------------------------------------------------
- - --------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.51% 1.48%
1.49%+
Net investment income 5.77 5.13
5.25+
- - ------------------------------------------------------------
- - --------------
PORTFOLIO TURNOVER RATE 36% 28%
37%
- - ------------------------------------------------------------
- - --------------
</TABLE>
(1) On November 7, 1994, the former Class D shares were
renamed Class C
shares.
(2) For the period from February 4, 1993 (inception date) to
July 31, 1993.
+++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents the aggregate total return for
the period
indicated and does not reflect any applicable sales
change.
13
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
INVESTMENT OBJECTIVE
The primary investment objective of the Fund is to provide
current income.
Long-term capital appreciation is a secondary objective. The
Fund's investment
objectives may be changed only with the approval of a
majority of the Fund's
outstanding shares. There can be no assurance that the Fund
will achieve its
investment objectives.
INVESTMENT POLICIES
The Fund seeks to achieve its objectives by investing in
equity and debt
securities of companies in the utility industries. For
purposes of this Pro-
spectus, the utility industries are deemed to be comprised
of companies prin-
cipally engaged (that is, at least 50% of a company's
assets, gross income or
net profits results from utility operations or the company
is regulated as a
utility by a government agency or authority) in the
manufacture, production,
generation, transmission and sale of electric and gas energy
and companies
principally engaged in the communications field, including
entities such as
telephone, telegraph, satellite, microwave and other
companies regulated by
governmental agencies as utilities that provide
communication facilities for
the public benefit, but not including those in public
broadcasting. The Fund
will invest primarily in utility equity and debt securities
that have a high
expected rate of return, as determined by the Fund's
investment adviser,
SBMFM. Under normal market conditions, the Fund will invest
at least 65% of
its assets in such securities. The Fund may invest up to 35%
of its assets in
equity and debt securities of non-utility companies believed
to afford a rea-
sonable opportunity for achieving the Fund's investment
objectives. When SBMFM
believes that market conditions warrant, the Fund may adopt
a temporary defen-
sive posture and may invest, without limit, in: debt
securities (whether or
not they are utility securities) such as rated or unrated
bonds, debentures
and commercial paper, United States government securities
and money market
instruments. The Fund may invest up to 10% of its assets in
securities rated
BB or B by Standard & Poor's Corporation ("S&P") or Ba or B
by Moody's Invest-
ors Service, Inc. ("Moody's") whenever SBMFM believes that
the incremental
yield on such securities is advantageous to the Fund in
comparison to the
additional risk involved. Securities rated BBB/Baa are
considered medium grade
obligations, neither highly protected nor poorly secured.
Interest payments
and principal security of BBB/Baa rated securities appear
adequate for the
present but certain protective elements may be lacking or
may be unreliable
over any great length of time. BBB/Baa rated securities lack
outstanding
investment characteristics and may in fact have speculative
characteristics.
The yields on lower-rated fixed-income securities generally
are
14
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
higher than the yields available on higher-rated securities.
See "Risk Factors
and Special Considerations" below. In addition, the Fund may
enter into repur-
chase agreements.
INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
The Fund has the ability to engage in a number of
specialized investment
strategies and techniques designed to enable the Fund to
achieve its investment
objectives. Included among these strategies are lending its
portfolio securi-
ties, selling securities "short against the box," writing
covered call and
secured put options, as well as purchasing options on
securities, purchasing
and selling interest rate futures contracts, options on
futures contracts,
stock index put and call options and stock index futures
contracts, each of
which is discussed below.
United States Government Securities. United States
government securities are
obligations of, or guaranteed by, the United States
government, its agencies or
instrumentalities ("U.S. government securities"). These
include bills, certifi-
cates of indebtedness, notes and bonds issued by the United
States Treasury or
by agencies or instrumentalities of the United States
government. Some U.S.
government securities, such as Treasury bills and bonds, are
supported by the
full faith and credit of the United States; others, such as
those of Federal
Home Loan Banks, are supported by the right of the issuer to
borrow from the
United States Treasury; others, such as those of the Federal
National Mortgage
Association, are supported by the discretionary authority of
the United States
government to purchase the agency's obligations; still
others, such as those of
the Student Loan Marketing Association, are supported only
by the credit of the
instrumentality. U.S. government securities generally do not
involve the credit
risks associated with other types of interest-bearing
securities, although, as
a result, the yields available from U.S. government
securities are generally
lower than the yields available from interest-bearing
corporate securities.
Repurchase Agreements. The Fund may engage in repurchase
agreements with cer-
tain 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) sub-
ject 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 dur-
ing 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
15
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
to the total amount of the repurchase obligation, including
interest. Repur-
chase agreements could involve certain risks in the event of
default or insol-
vency of the other party, including possible delays or
restrictions upon the
Fund's ability to dispose of the underlying securities, the
risk of a possible
decline in the value of the underlying securities during the
period in which
the Fund seeks to assert its right to them, the risk of
incurring expenses
associated with asserting those rights and the risk of
losing all or part of
the income from the agreement. SBMFM, acting under the
supervision of the
Trust's Board of Trustees, reviews on an ongoing basis the
value of the col-
lateral and creditworthiness of those banks and dealers with
which the Fund
enters into repurchase agreements to evaluate potential
risks.
Lending Portfolio Securities. The Fund is authorized to
lend its portfolio
securities to brokers, dealers and other financial
organizations. The Fund's
loans of securities will be collateralized by cash, letters
of credit or U.S.
government securities that are maintained at all times in an
amount at least
equal to the current market value of the loaned securities.
By lending its
securities, the Fund seeks to generate income by continuing
to receive inter-
est on the loaned securities, by investing the cash
collateral in short-term
instruments or by obtaining yield in the form of interest
paid by the borrower
when U.S. government securities are used as collateral.
Short Sales Against the Box. The Fund may make short sales
(except to the
extent of 5% of the Fund's net assets) if at all times when
a position is
open, the Fund owns the stock or owns preferred stock or
debt securities con-
vertible or exchangeable without payment of further
consideration for, securi-
ties of the same issue as the securities sold short. Short
sales of this kind
are referred to as "against the box." Short sales against
the box are used to
defer recognition of capital gains or losses.
Options Activities. The Fund may write (that is, sell)
call options
("calls") if the calls are covered throughout the life of
the option. A call
is covered if the Fund (a) owns the optioned securities, (b)
maintains in a
segregated account with the Trust's custodian, PNC Bank,
National Association
("PNC Bank"), cash, cash equivalents or U.S. government
securities with a
value sufficient to meet the Fund's obligations under the
call, or (c) owns an
offsetting call option. The aggregate value of the
obligations underlying
calls on securities which are written by the Fund and
covered with cash, cash
equivalents or U.S. government securities, together with the
aggregate value
of the obligations underlying put options written by the
Fund, will not exceed
50% of the Fund's net assets. When the Fund writes a call,
it receives a pre-
mium and gives the purchaser the
16
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
right to buy the underlying security at any time during the
call period (usu-
ally not more than nine months in the case of common stock
or fifteen months
in the case of U.S. government securities) at a fixed
exercise price regard-
less of market price changes during the call period. If the
call is exercised,
the Fund forgoes any gain from an increase in the market
price of the under-
lying security over the exercise price. The Fund may
purchase calls on securi-
ties. The Fund also may purchase and sell stock index calls
which differ from
calls on individual securities in that they are settled in
cash based on the
values of the securities in the underlying index, rather
than by delivery of
the underlying securities. In writing a call on a stock
index, the Fund
receives a premium and agrees that during the call period
purchasers of a
call, upon exercise of the call, will receive an amount of
cash if the closing
level of the stock index upon which the call is based is
greater than the
exercise price of the call. When the Fund buys a call on a
stock index, it
pays a premium and during the call period the Fund, upon
exercise of the call,
receives an amount of cash if the closing level of the stock
index upon which
the call is based is greater than the exercise price of the
call.
The Fund may write and purchase put options ("puts"). When
the Fund writes a
put, it receives a premium and gives the purchaser of the
put the right to
sell the underlying security to the Fund at the exercise
price at any time
during the option period. When the Fund purchases a put, it
pays a premium in
return for the right to sell the underlying security at the
exercise price at
any time during the option period. For the purchase of a put
to be profitable,
the market price of the underlying security must decline
sufficiently below
the exercise price to cover the premium and transaction
costs, unless the put
is sold in a closing sale transaction; otherwise, the
purchase of the put
effectively increases the cost of the security and thus
reduces its yield. The
Fund also may purchase and sell stock index puts, which
differ from puts on
individual securities in that they are settled in cash based
on the values of
the securities in the underlying index, rather than by
delivery of the under-
lying securities. Purchase of a stock index put is designed
to protect against
a decline in the value of the Fund's portfolio generally,
rather than an indi-
vidual security in the portfolio. Stock index puts are sold
primarily to real-
ize income from the premiums received on the sale of such
options. If any put
is not exercised or sold, it will become worthless on its
expiration date. The
Fund will not purchase puts or calls on securities if more
than 5% of its
assets would be invested in premiums on puts and calls, not
including that
portion of the premium which reflects the value of the
securities owned by the
Fund and underlying a put at the time of purchase.
17
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may write puts on securities only if they are
"secured." A put is
"secured" if the Fund maintains cash, cash equivalents or
U.S. government
securities with a value equal to the exercise price in a
segregated account or
holds a put on the same underlying security at an equal or
greater exercise
price. The aggregate value of the obligations underlying
puts written by the
Fund, together with the aggregate value of the obligations
underlying calls on
securities which are written by the Fund and covered with
cash, cash equiva-
lents or U.S. government securities, will not exceed 50% of
the Fund's net
assets. The Fund also may write "straddles," which are
combinations of secured
puts and covered calls on the same underlying security.
The Fund will realize a gain (or loss) on a closing
purchase transaction
with respect to a call or put previously written by the Fund
if the premium,
plus commission costs, paid to purchase the call or put is
less (or greater)
than the premium, less commission costs, received on the
sale of the call or
put. A gain also will be realized if a call or put which the
Fund has written
lapses unexercised, because the Fund would retain the
premium. See "Dividends,
Distributions and Taxes" below. The Fund will purchase and
sell only options
which are listed on a national securities exchange and will
write options only
through a national options clearing organization.
There can be no assurance that a liquid secondary market
will exist at a
given time for any particular option. In this regard,
trading in options on
U.S. government securities is relatively new, so that it is
impossible to pre-
dict to what extent liquid markets will develop or continue.
See the Statement
of Additional Information for a further discussion of risks
involved in
options trading, and particular risks applicable to options
trading on U.S.
government securities, including risks involved in options
trading on Govern-
ment National Mortgage Association ("GNMA") certificates and
the characteris-
tics and risks of stock index options transactions.
Futures Contracts--General. The Fund may not purchase
futures contracts or
related options if, immediately thereafter, more than 30% of
the Fund's total
assets would be so invested. In purchasing and selling
futures contracts and
related options, the Fund will comply with rules and
interpretations of the
Commodity Futures Trading Commission ("CFTC"), under which
the Fund is
excluded from regulation as a "commodity pool." CFTC
regulations require,
among other things, that (a) futures and related options be
used solely for
bona fide hedging purposes (or that the underlying commodity
value of the
Fund's long positions not exceed the sum of certain
identified liquid invest-
ments) and (b) the Fund not enter into futures and related
options for which
the aggregate
18
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
initial margin and premiums exceed 5% of the fair market
value of the Fund's
assets. In order to prevent leverage in connection with the
purchase of
futures contracts by the Fund, an amount of cash and cash
equivalents equal to
the market value of futures contracts purchased will be
maintained in a segre-
gated account with PNC Bank. The Fund will engage only in
futures contracts
and related options which are listed on a national
commodities exchange.
Interest Rate Futures Contracts. The Fund may purchase and
sell interest
rate futures contracts as a hedge against changes in
interest rates. An inter-
est rate futures contract is an agreement between two
parties to buy and sell
a security for a set price on a future date. Interest rate
futures contracts
are traded on designated "contracts markets" which, through
their clearing
corporations, guarantee performance of the contracts.
Currently, there are
interest rate futures contracts based on securities such as
long-term Treasury
bonds, Treasury notes, GNMA certificates and three-month
Treasury bills.
Generally, if market interest rates increase, the value of
outstanding debt
securities declines (and vice versa). Entering into an
interest rate futures
contract for the sale of securities has an effect similar to
the actual sale
of securities, although sale of the interest rate futures
contract might be
accomplished more easily and quickly. For example, if the
Fund holds long-term
U.S. government securities and SBMFM anticipates a rise in
long-term interest
rates, the Fund could, in lieu of disposing of its portfolio
securities, enter
into interest rate futures contracts for the sale of similar
long-term securi-
ties. If interest rates increased and the value of the
Fund's securities
declined, the value of the Fund's interest rate futures
contracts would
increase, thereby protecting the Fund by preventing the net
asset value from
declining as much as it otherwise would have declined.
Similarly, entering
into interest rate futures contracts for the purchase of
securities has an
effect similar to the actual purchase of the underlying
securities, but per-
mits the continued holding of securities other than the
underlying securities.
For example, if SBMFM expects long-term interest rates to
decline, the Fund
might enter into interest rate futures contracts for the
purchase of long-term
securities, so that it could gain rapid market exposure that
may offset antic-
ipated increases in the cost of securities that it intends
to purchase, while
continuing to hold higher-yielding short-term securities or
waiting for the
long-term market to stabilize.
The Fund may purchase and sell listed put and call options
on interest rate
futures contracts. An option on an interest rate futures
contract gives the
purchaser the right, in return for the premium paid, to
assume a position in
an interest rate futures contract (a long position if the
option is a call and
a short
19
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
position if the option is a put), at a specified exercise
price at any time
during the option period. When an option on a futures
contract is exercised,
delivery of the interest rate futures position is
accompanied by cash repre-
senting the difference between the current market price of
the interest rate
futures contract and the exercise price of the option. The
Fund may purchase
put options on interest rate futures contracts in lieu of,
and for the same
purpose as, sale of a futures contract. It also may purchase
such put options
in order to hedge a long position in the underlying interest
rate futures con-
tract in the same manner as it purchases "protective puts"
on securities. The
purchase of call options on interest rate futures contracts
is intended to
serve the same purpose as the actual purchase of the futures
contract, and the
Fund will set aside cash and cash equivalents sufficient to
purchase the
amount of portfolio securities represented by the underlying
futures con-
tracts. See "Options Activities" and "Dividends,
Distributions and Taxes."
Stock Index Futures Contracts. The Fund may purchase and
sell stock index
futures contracts. These transactions, if any, by the Fund
will be made solely
for the purpose of hedging against the effects of changes in
the value of its
portfolio securities due to anticipated changes in market
conditions and will
be made when the transactions are economically appropriate
to the reduction of
risks inherent in the management of the Fund. A stock index
futures contract
is an agreement under which two parties agree to take or
make delivery of the
amount of cash based on the difference between the value of
a stock index at
the beginning and at the end of the contract period. When
the Fund enters into
a stock index futures contract, it must make an initial
deposit, known as
"initial margin," as a partial guarantee of its performance
under the con-
tract. As the value of the stock index fluctuates, either
party to the con-
tract is required to make additional margin deposits, known
as "variation mar-
gin," to cover any additional obligation that it may have
under the contract.
The Fund may not at any time commit more than 5% of its
total assets to ini-
tial margin deposits on futures contracts.
Successful use of stock index futures contracts by the
Fund is subject to
certain special risk considerations. A liquid stock index
futures market may
not be available when the Fund seeks to offset adverse
market movements. In
addition, there may be an imperfect correlation between
movements in the secu-
rities included in the index and movements in the securities
in the Fund. Suc-
cessful use of stock index futures contracts is further
dependent on SBMFM's
ability to predict correctly movements in the direction of
the stock markets
and no assurance can be given that its judgment in this
respect will be cor-
rect. Risks in the
20
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
purchase and sale of stock index futures are further
referred to in the State-
ment of Additional Information.
Foreign Securities and American Depositary Receipts. The
Fund may purchase
foreign securities or American Depositary Receipts ("ADRs").
ADRs are U.S.
dollar-denominated receipts issued generally by domestic
banks and represent-
ing the deposit with the bank of a security of a foreign
issuer. ADRs are pub-
licly traded on exchanges or over-the-counter in the United
States.
Investing in the securities of foreign companies involves
special risks and
considerations not typically associated with investing in
U.S. companies.
These risks include differences in accounting, auditing and
financial report-
ing standards, generally higher commission rates on foreign
portfolio transac-
tions, the possibility of expropriation or confiscatory
taxation, adverse
changes in investment or exchange control regulations,
political instability
which could affect U.S. investments in foreign countries and
potential
restrictions on the flow of international capital.
Additionally, dividends
payable on foreign securities may be subject to foreign
taxes withheld prior
to distribution. Foreign securities often trade with less
frequency and volume
than domestic securities and therefore may exhibit greater
price volatility.
Changes in foreign exchange rates will affect the value of
those securities
which are denominated or quoted in currencies other than the
U.S. dollar. Many
of the foreign securities held by the Fund will not be
registered with, nor
will the issuers thereof be subject to the reporting
requirements of, the SEC.
Accordingly, there may be less publicly available
information about the secu-
rities and the foreign company or government issuing them
than is available
about a domestic company or government entity. Moreover,
individual foreign
economies may differ favorably or unfavorably from the U.S.
economy in such
respects as growth of gross national product, rate of
inflation, capital rein-
vestment, resource self-sufficiency and balance of payment
positions.
Non-Publicly Traded and Illiquid Securities. The sale of
securities that are
not publicly traded is typically restricted under the
Federal securities laws.
As a result, the Fund may be forced to sell these securities
at less than fair
market value or may not be able to sell them when SBMFM
believes it desirable
to do so. The Fund's investments in illiquid securities are
subject to the
risk that 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.
21
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment
restrictions with
respect to the Fund that may not be changed without approval
of a majority of
the Fund's outstanding shares. The fundamental investment
restrictions adopted
by the Trust prohibit the Fund from:
1. Purchasing the securities of any issuer (other than
U.S. government
securities) if as a result more than 5% of the value of the
Fund's total
assets would be invested in the securities of the issuer,
except that up to
25% of the value of the Fund's total assets may be invested
without regard
to this 5% limitation.
2. Purchasing more than 10% of the voting securities of
any one issuer,
provided that this limitation shall not apply to
investments in U.S. govern-
ment 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 ini-
tial or variation margin in connection with futures
contracts or related
options will not be deemed to be a purchase of securities
on margin by the
Fund.
4. Making short sales of securities or maintaining a
short position,
except to the extent of 5% of the Fund's net assets and
except that the Fund
may engage in such activities without limit if, at all
times when a short
position is open, the Fund owns an equal amount of the
securities or securi-
ties convertible into or exchangeable, without payment of
any further con-
sideration, for securities of the same issuer as, and at
least equal in
amount to, the securities sold short.
5. Borrowing money, including reverse repurchase
agreements, except that
the Fund may borrow from banks for temporary or emergency
(not leveraging)
purposes including the meeting of redemption requests that
might otherwise
require the untimely disposition of securities, in an
amount not exceeding
20% of the value of the Fund's total assets (including the
amount borrowed)
valued at market less liabilities (not including the amount
borrowed) at the
time the borrowing is made. Whenever borrowings exceed 5%
of the value of
the Fund's total assets, the Fund will not make any
additional investments.
6. Pledging, hypothecating, mortgaging or otherwise
encumbering more than
10% of the value of the Fund's total assets as security for
any indebted-
ness. For purposes of this restriction (a) the deposit of
assets in escrow
in
22
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
connection with the writing of covered put or call options
and the purchase
of securities on a when-issued or delayed-delivery basis
and (b) collateral
arrangements with respect to (i) the purchase and sale of
stock options,
options on foreign currencies and options on stock indexes
and (ii) initial
or variation margin for futures contracts will not be
deemed to be pledges
of the Fund's assets.
7. Investing in commodities, except that the Fund may
purchase or write
futures contracts and options on futures contracts as
described in this Pro-
spectus.
8. Making loans to others, except through the purchase of
qualified debt
obligations, loans of portfolio securities and the entry
into repurchase
agreements.
9. Concentrating in any industry, except that the Fund
will concentrate in
excess of 25% of its assets in the securities of companies
within the util-
ity industries.
In addition, the Fund will not purchase restricted
securities, illiquid
securities (such as repurchase agreements with maturities in
excess of seven
days) or other securities that are not readily marketable if
more than 10% of
the total assets of the Fund would be invested in such
securities.
Certain other investment restrictions, including
fundamental restrictions as
well as restrictions that may be changed without a
shareholder vote, adopted
by the Trust are described in the Statement of Additional
Information.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the
Fund will be exe-
cuted by a number of brokers and dealers, including Smith
Barney and certain
of its affiliated brokers. The Fund may use Smith Barney or
a Smith Barney-
affiliated broker in connection with a purchase or sale of
securities when
SBMFM believes that the charge for the transaction does not
exceed usual and
customary levels. The Fund also may use Smith Barney as a
commodities broker
in connection with entering into futures contracts and
commodity options.
Smith Barney has agreed to charge the Fund commodity
commissions at rates com-
parable to those charged by Smith Barney to its most favored
clients for com-
parable trades in comparable accounts. In selecting a broker
for a transac-
tion, including Smith Barney or its affiliates, the primary
consideration is
prompt and effective execution of orders at the most
favorable price. Subject
to that primary consideration, dealers may be selected for
research, statisti-
cal or other services
23
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
to enable SBMFM to supplement its own research and analysis
with the views and
information of other securities firms.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves special considerations,
such as those
described below:
General. Investment in the Fund may involve above-average
risk of loss
because of, among other things, the Fund's use of strategies
and techniques
that may be considered to be speculative. The strategy
followed by the Fund
and certain of the strategies and techniques used by the
Fund depend on fore-
casts made by Greenwich Street Advisors that may or may not
prove to be cor-
rect.
Low-Rated Securities. Low-rated and comparable unrated
securities (a) will
likely have some quality and protective characteristics
that, in the judgment
of the rating organization, are outweighed by large
uncertainties or major
risk exposures to adverse conditions and (b) are
predominantly speculative
with respect to the issuer's capacity to pay interest and
repay principal in
accordance with the terms of the securities.
While the market values of low-rated and comparable
unrated securities tend
to react less to fluctuations in interest rate levels than
the market values
of higher-rated securities, the market values of certain low-
rated and compa-
rable unrated securities also tend to be more sensitive to
individual corpo-
rate development and changes in economic conditions than
higher-rated securi-
ties. In addition, low-rated securities and comparable
unrated securities gen-
erally present a higher degree of credit risk. Issuers of
low-rated and compa-
rable unrated securities are often highly leveraged and may
not have more tra-
ditional methods of financing available to them so that
their ability to serv-
ice their debt obligations during an economic downturn or
during sustained
periods of rising interest rates may be impaired. The risk
of loss due to
default by such issuers is significantly greater because low-
rated and compa-
rable unrated securities generally are unsecured and
frequently are subordi-
nated to the prior payment of senior indebtedness. The Fund
may incur addi-
tional expenses to the extent it is required to seek
recovery upon a default
in the payment of principal or interest on its portfolio
holdings. The exist-
ence of limited markets for low-rated and comparable unrated
securities may
diminish the Fund's ability to (a) obtain accurate market
quotations for pur-
poses of valuing such securities and calculating its net
asset value and (b)
sell the securities at fair value either to meet redemption
requests or to
respond to changes in the economy or in the financial
markets.
24
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Fixed-income securities, including low-rated securities
and comparable
unrated securities, frequently have call or buy-back
features that permit
their issuers to call or repurchase the securities from
their holders, such as
the Fund. If an issuer exercises these rights during periods
of declining
interest rates, the Fund may have to replace the security
with a lower yield-
ing security, thus resulting in a decreased return to the
Fund.
The market for certain low-rated and comparable unrated
securities is rela-
tively new and has not fully weathered a major economic
recession. Any such
economic downturn could adversely affect the ability of the
issuers of such
securities to repay principal and pay interest thereon.
Investment in Utility Securities. Because the Fund
concentrates its invest-
ments in one sector, its portfolio may be subject to greater
risk and market
fluctuations than a portfolio of securities representing a
broader range of
investment alternatives. The Fund is particularly subject to
risks that are
inherent to the utility industries that make up this sector,
including diffi-
culty in obtaining an adequate return on invested capital,
difficulty in
financing large construction programs during an inflationary
period, restric-
tions on operations and increased cost and delays
attributable to environmen-
tal considerations and regulation, difficulty in raising
capital in adequate
amounts on reasonable terms in periods of high inflation and
unsettled capital
markets, increased costs and reduced availability of certain
types of fuel,
occasional reduced availability and high costs of natural
gas for resales, the
effects of energy conservation, the effects of a national
energy policy and
lengthy delays and greatly increased costs and other
problems associated with
the design, construction, licensing, regulation and
operation of nuclear
facilities for electric generation, including, among other
considerations, the
problems associated with the use of radioactive materials
and the disposal of
radioactive wastes. There are substantial differences
between the regulatory
practices and policies of various jurisdictions, and any
given regulatory
agency may make major shifts in policy from time to time.
There is no assur-
ance that regulatory authorities will grant rate increases
in the future or
that such increases will be adequate to permit the payment
of dividends on
common stocks. Additionally, existing and possible future
regulatory legisla-
tion may make it even more difficult for these utilities to
obtain adequate
relief. Certain of the issuers of securities held by the
Fund may own or oper-
ate nuclear generating facilities. Governmental authorities
may from time to
time review existing policies, and impose additional
requirements governing
the licensing, construction and operation of nuclear power
plants.
25
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Each of the risks referred to above could adversely affect
the ability and
inclination of public utilities to declare or pay dividends
and the ability of
holders of common stock to realize any value from the assets
of the issuer
upon liquidation or bankruptcy. All of the utilities which
are issuers of the
securities held by the Fund have been experiencing one or
more of these prob-
lems in varying degrees. Moreover, price disparities within
selected utility
groups and discrepancies in relation to averages and indices
have occurred
frequently for reasons not directly related to the general
movements or price
trends of utility common stocks. Causes of these
discrepancies include changes
in the overall demand for and supply of various securities
(including the
potentially depressing effect of new stock offerings), and
changes in invest-
ment objectives, market expectations or cash requirements of
other purchasers
and sellers of securities.
Interest Rate Risk. The Fund will be affected by general
changes in interest
rates which will result in increases or decreases in the
market value of the
debt securities held by the Fund. The market value of the
debt securities held
by the Fund can be expected to vary inversely to changes in
prevailing inter-
est rates.
Options on Securities. Because option premiums paid by the
Fund are small in
relation to the market value of the investments underlying
the options, buying
put options can result in large amounts of leverage. The
leverage offered by
trading in options could cause the Fund's net asset value to
be subject to
more frequent and wider fluctuation than would be the case
if the Fund did not
invest in options.
No assurance can be given that the Fund will be able to
effect closing
transactions at a time when it wishes to do so. If the Fund
cannot enter into
a closing transaction, the Fund will continue to be subject
to the risk that a
put option it has purchased will decline in value or become
worthless as a
result of any increase in the value of the underlying
security. The Fund also
could face higher transaction costs, including brokerage
commissions.
Lending of Portfolio Securities. The risk associated with
lending portfolio
securities, as with other extensions of credit, consists of
possible loss of
rights in the collateral should the borrower fail
financially.
Short Sales. Possible losses from short sales differ from
losses that could
be incurred from a purchase of a security, because losses
from short sales may
be unlimited, whereas losses from purchases can equal only
the total amount
invested.
26
<PAGE>
SMITH BARNEY
Utilities Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Futures Transactions. The use of futures contracts as a
hedging device
involves several risks. No assurance can be given that a
correlation will
exist between price movements in the stock index and price
movements in the
securities that are the subject of the hedge; the risk of
imperfect correla-
tion increases as the composition of the securities held by
the Fund diverges
from the securities included in the applicable stock index.
Positions in
futures contracts may be closed out only on the exchange on
which they were
entered into (or through a linked exchange) and no secondary
market exists for
those contracts. In addition, although the Fund intends to
enter into futures
contracts only if an active market exists for the contracts,
no assurance can
be given that an active market will exist for the contracts
at any particular
time. Certain exchanges do not permit trading in particular
contracts at
prices that represent a fluctuation in price during a single
day's trading
beyond a certain set limit. If prices fluctuate during a
single day's trading
beyond those limits, the Fund could be prevented from
promptly liquidating
unfavorable positions and thus be subjected to losses.
Losses incurred in
hedging transactions and the costs of these transactions
will affect the
Fund's performance. Successful use of stock index futures by
the Fund for
hedging purposes is subject to the ability of SBMFM to
correctly predict move-
ments in the direction of the stock market.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of
the close of regu-
lar trading on the NYSE on each day that the NYSE is open,
by dividing the
value of the Fund's net assets attributable to each Class by
the total number
of shares of the Class outstanding.
Generally, the Fund's investments are valued at market
value or, in the
absence of a market value with respect to any securities, at
fair value as
determined by or under the direction of the Trust's Board of
Trustees. Portfo-
lio securities which are traded primarily on foreign
exchanges are generally
valued at the preceding closing values of such securities on
their respective
exchanges, except that when an occurrence subsequent to the
time a value was
so established is likely to have changed such value, then
the fair market
value of those securities will be determined by
consideration of other factors
by or under the direction of the Board of Trustees or its
delegates. A secu-
rity that is traded primarily on an exchange is valued at
the last sale price
on that exchange or, if there were no sales during the day,
at the current
quoted bid price. Over-the-counter securities are valued on
the basis of the
bid price at the close of
27
<PAGE>
SMITH BARNEY
Utilities Fund
VALUATION OF SHARES (CONTINUED)
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 cur-
rent settlement price for a like contract acquired on the
day on which the
stock index futures contract is being valued. A settlement
price may not be
used if the market makes a limited move with respect to a
particular commodity
or if the underlying securities market experiences
significant price fluctua-
tions 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 State-
ment of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other
funds in determin-
ing the amounts of dividends from investment income and
distributions of capi-
tal gains payable to shareholders.
If a shareholder does not otherwise instruct, dividends
and capital gain dis-
tributions will be reinvested automatically in additional
shares of the same
Class at net asset value, subject to no sales charge or
CDSC. Dividends from
net investment income, if any, of the Fund will be declared
monthly and will be
paid on the last Friday of the month. Distributions of any
net long-term capi-
tal gains earned by the Fund will be made annually after the
close of the fis-
cal year in which they are earned. Distributions of short-
term capital gains
may be paid more frequently with dividends from net
investment income. In order
to avoid the application of a 4% nondeductible excise tax
measured with respect
to certain undistributed amounts of ordinary income and
capital gains, the Fund
may make such additional distributions as may be necessary
to avoid the appli-
cation 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 gen-
erally
28
<PAGE>
SMITH BARNEY
Utilities Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
will be treated as a tax-free return of capital (up to the
amount of the share-
holder's tax basis in his or her shares). The amount treated
as a tax-free
return of capital will reduce a shareholder's adjusted basis
in his or her
shares. Pursuant to the requirements of the Investment
Company Act of 1940, as
amended (the "1940 Act") and other applicable laws, a notice
will accompany any
distribution paid from sources other than net investment
income. In the event
the Fund distributes amounts in excess of its net investment
income and net
realized capital gains, such distributions may have the
effect of decreasing
the Fund's total assets, which may increase the Fund's
expense ratio.
The per share dividends on Class B and Class C shares may
be lower than the
per share dividends on Class A and Y shares principally as a
result of the dis-
tribution fee applicable with respect to Class B and Class C
shares. The per
share dividends on Class A shares of the Fund may be lower
than the per share
dividends on Class Y shares principally as a result of the
service fee applica-
ble to Class A shares. Distributions of capital gains, if
any, will be in the
same amount for Class A, Class B, Class C and Class Y
shares.
TAXES
The Fund will be treated as a separate taxpayer with the
result that, for
Federal income tax purposes, the amount of investment income
and capital gains
earned by the Fund will be determined without regard to the
earnings of the
other funds of the Trust. The Fund has qualified and intends
to continue to
qualify each year as a "regulated investment company" under
the Code. To meet
those requirements, the Fund may need to restrict the degree
to which it
engages in short-term trading, short sales of securities and
transactions in
options. If the Fund qualifies as a regulated investment
company and meets cer-
tain 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 Fed-
eral income tax purposes, whether received in cash or
reinvested in additional
shares. Distributions of long-term capital gain will be
taxable to shareholders
as long-term capital gain, whether paid in cash or
reinvested in additional
shares, and regardless of the length of time the investor
has held his or her
shares of the Fund. Generally, dividends of investment
income (to the extent
derived from most types of dividends from domestic
corporations) from the Fund
will qualify for the Federal dividends-received deduction
for corporate
29
<PAGE>
SMITH BARNEY
Utilities Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
shareholders. Each shareholder of the Fund will receive a
statement annually
from the Trust, which will set forth separately the
aggregate dollar amount of
dividends and capital gains distributed to the shareholder
by the Fund with
respect to the prior calendar year and the amount of the
distributions that
qualifies for the dividends-received deduction.
Shareholders should consult their tax advisors about the
status of the Fund's
dividends and distributions for Federal, state and local tax
liabilities.
PURCHASE OF SHARES
GENERAL
The Fund offers five Classes of shares. Class A shares are
sold to investors
with an initial sales charge and Class B and Class C shares
are sold without an
initial sales charge but are subject to a CDSC payable upon
certain redemp-
tions. Class Y shares are sold without an initial sales
charge or a CDSC and
are available only to investors investing a minimum of
$5,000,000. Class Z
shares are offered without a sales charge, CDSC, or service
or distribution
fee, exclusively to: (a) tax-exempt employee benefit and
retirement plans of
Smith Barney and its affiliates and (b) certain UITs
sponsored by Smith Barney
and its affiliates. Investors meeting either of these
criteria who are inter-
ested in acquiring Class Z shares should contact a Smith
Barney Financial Con-
sultant for a Class Z Prospectus. See "Prospectus Summary--
Alternative Purchase
Arrangements" for a discussion of factors to consider in
selecting which Class
of shares to purchase.
Purchases of Fund shares must be made through a brokerage
account maintained
with Smith Barney, an Introducing Broker or an investment
dealer in the selling
group, except for investors purchasing shares of the Fund
through a qualified
retirement plan who may do so directly through FDISG. When
purchasing shares of
the Fund, investors must specify whether the purchase is for
Class A, Class B,
Class C or Class Y shares. No maintenance fee will be
charged by the Fund in
connection with a brokerage account through which an
investor purchases or
holds shares.
Investors in Class A, Class B and Class C shares may open
an account by mak-
ing an initial investment of at least $1,000 for each
account, or $250 for an
IRA or a Self-Employed Retirement Plan in the Fund.
Investors in Class Y shares
may open an account by making an initial investment of
$5,000,000. Subsequent
investments of at least $50 may be made for all Classes. For
partici-
30
<PAGE>
SMITH BARNEY
Utilities Fund
PURCHASE OF SHARES (CONTINUED)
pants in retirement plans qualified under Section 403(b)(7)
or Section 401(a)
of the Code, the minimum initial investment requirement for
Class A, Class B
and Class C shares and the subsequent investment requirement
for all Classes in
the Fund is $25. For the Fund's Systematic Investment Plan,
the minimum initial
investment requirement for Class A, Class B and Class C
shares and the subse-
quent investment requirement for all Classes is $50. There
are no minimum
investment requirements for Class A shares for employees of
Travelers and its
subsidiaries, including Smith Barney, Trustees of the Trust
and their spouses
and children and unitholders who invest distributions from a
UIT sponsored by
Smith Barney. The Fund reserves the right to waive or change
minimums, to
decline any order to purchase its shares and to suspend the
offering of shares
from time to time. Shares purchased will be held in the
shareholder's account
by the Fund's transfer agent, FDISG. Share certificates are
issued only upon a
shareholder's written request to FDISG.
Purchase orders received by the Fund or Smith Barney prior
to the close of
regular trading on the NYSE, on any day the Fund calculates
its net asset val-
ue, 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 trad-
ing on the NYSE on any day the Fund calculates its net asset
value, are priced
according to the net asset value determined on that day,
provided the order is
received by the Fund or Smith Barney prior to Smith Barney's
close of business
(the "trade date"). Payment for Fund shares is due on the
third business day
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any
time by purchasing
shares through a service known as the Systematic Investment
Plan. Under the
Systematic Investment Plan, Smith Barney or FDISG is
authorized through preau-
thorized transfers of $50 or more to charge the regular bank
account or other
financial institution indicated by the shareholder on a
monthly or quarterly
basis to provide systematic additions to the shareholder's
Fund account. A
shareholder who has insufficient funds to complete the
transfer will be charged
a fee of up to $25 by Smith Barney or FDISG. The Systematic
Investment Plan
also authorizes Smith Barney to apply cash held in the
shareholder's Smith Bar-
ney brokerage account or redeem the shareholder's shares of
a Smith Barney
money market fund to make additions to the account.
Additional information is
available from the Fund or a Smith Barney Financial
Consultant.
31
<PAGE>
SMITH BARNEY
Utilities Fund
PURCHASE OF SHARES (CONTINUED)
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A
shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS
DEALERS
% OF % OF AMOUNT
REALLOWANCE AS
AMOUNT OF INVESTMENT OFFERING PRICE INVESTED %
OF OFFERING PRICE
- - ------------------------------------------------------------
- - -----------------
<S> <C> <C>
<C>
Less than $25,000 5.00% 5.26%
4.50%
$25,000-$49,999 4.00% 4.21%
3.60%
$50,000-$99,999 3.50% 3.63%
3.15%
$100,000-$249,999 3.00% 3.09%
2.70%
$250,000-$499,999 2.00% 2.04%
1.80%
$500,000 and more * *
*
- - ------------------------------------------------------------
- - -----------------
</TABLE>
* Purchases of Class A shares which, when combined with
current holdings of
Class A shares offered with a sales charge, equal or
exceed $500,000 in
the aggregate, will be made at net asset value without
any initial sales
charge, but will be subject to a CDSC of 1.00% on
redemptions made within
12 months of purchase. The CDSC on Class A shares is
payable to Smith
Barney, which compensates Smith Barney Financial
Consultants and other
dealers whose clients make purchases of $500,000 or
more. The CDSC is
waived in the same circumstances in which the CDSC
applicable to Class B
and Class C shares is waived. See "Deferred Sales Charge
Alternatives" and
"Waivers of CDSC."
Members of the selling group may receive up to 90% of the
sales charge and
may be deemed to be underwriters of the Fund as defined in
the Securities Act
of 1933, as amended.
The reduced sales charges shown above apply to the
aggregate of purchases of
Class A shares of the Fund made at one time by "any person,"
which includes an
individual, his or her spouse and children, or a trustee or
other fiduciary of
a single trust estate or single fiduciary account. The
reduced sales charge
minimums may also be met by aggregating the purchase with
the net asset value
of all Class A shares held in funds sponsored by Smith
Barney that are offered
with a sales charge listed under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value
without a sales
charge in the following circumstances: (a) sales of Class A
shares to Trustees
of the Trust, employees of Travelers and its subsidiaries or
the spouses and
children of such persons (including the surviving spouse of
a deceased Trustee
or employee, and retired Trustees or employees), employee of
members of the
National Association of Securities Dealers, Inc., or sales
to any trust, pen-
sion,
32
<PAGE>
SMITH BARNEY
Utilities Fund
PURCHASE OF SHARES (CONTINUED)
profit-sharing or other benefit plan for such persons
provided such sales are
made upon the assurance of the purchaser that the purchase
is made for invest-
ment purposes and that the securities will not be re-sold
except through
redemption or repurchase; (b) offers of Class A shares to
any other investment
company in connection with the combination of such company
with the Fund by
merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by
any client of a newly employed Smith Barney Financial
Consultant (for a period
up to 90 days from the commencement of the Financial
Consultant's employment
with Smith Barney), on the condition the purchase of Class A
shares is made
with the proceeds of the redemption of shares of a mutual
fund which (i) was
sponsored by the Financial Consultant's prior employer, (ii)
was sold to the
client by the Financial Consultant and (iii) was subject to
a sales charge;
(d) shareholders who have redeemed Class A shares in the
Fund (or Class A
shares of another fund of the Smith Barney Mutual Funds that
are offered with
a sales charge equal to or greater than the maximum sales
charge of the Fund)
and who wish to reinvest their redemption proceeds in the
Fund, provided the
reinvestment is made within 60 calendar days of the
redemption; (e) accounts
managed by registered investment advisory subsidiaries of
Travelers; and (f)
investments from a UIT sponsored by Smith Barney. In order
to obtain such dis-
counts, the purchaser must provide sufficient information at
the time of pur-
chase to permit verification that the purchase would qualify
for the elimina-
tion of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any
person" (as defined
above) at a reduced sales charge or at net asset value
determined by aggregat-
ing the dollar amount of the new purchase and the total
asset value of all
Class A shares of the Fund and of funds sponsored by Smith
Barney, which are
offered with a sales charge listed under "Exchange
Privilege" then held by
such person and applying the sales charge applicable to such
aggregate. In
order to obtain such discount, the purchaser must provide
sufficient informa-
tion at the time of purchase to permit verification that the
purchase quali-
fies for the reduced sales charge. The right of accumulation
is subject to
modification or discontinuance at any time with respect to
all shares pur-
chased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced
sales charge or pur-
chase 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
min-
33
<PAGE>
SMITH BARNEY
Utilities Fund
PURCHASE OF SHARES (CONTINUED)
imum initial investment required. The sales charge
applicable to purchases by
each member of such a group will be determined by the table
set forth above
under "Initial Sales Charge Alternative--Class A Shares" and
will be based upon
the aggregate sales of Class A shares of Smith Barney Mutual
Funds offered with
a sales charge to, and share holdings of, all members of the
group. To be eli-
gible for such reduced sales charges or to purchase at net
asset value, all
purchases must be pursuant to an employer- or partnership-
sanctioned plan meet-
ing certain requirements. One such requirement is that the
plan must be open to
specified partners or employees of the employer and its
subsidiaries, if any.
Such plan may, but is not required to, provide for payroll
deductions, IRAs or
investments pursuant to retirement plans under Sections 401
or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net
asset value purchase
for aggregating related fiduciary accounts under such
conditions that Smith
Barney will realize economies of sales efforts and sales
related expenses. An
individual who is a member of a qualified group may also
purchase Class A
shares at the reduced sales charge applicable to the group
as a whole. The
sales charge is based upon the aggregate dollar value of
Class A shares offered
with a sales charge that have been previously purchased and
are still owned by
the group, plus the amount of the current purchase. A
"qualified group" is one
which (a) has been in existence for more than six months,
(b) has a purpose
other than acquiring Fund shares at a discount and (c)
satisfies uniform crite-
ria which enable Smith Barney to realize economies of scale
in its costs of
distributing shares. A qualified group must have more than
10 members, must be
available to arrange for group meetings between
representatives of the Fund and
the members, and must agree to include sales and other
materials related to the
Fund in its publications and mailings to members at no cost
to Smith Barney. In
order to obtain such reduced sales charge or to purchase at
net asset value,
the purchaser must provide sufficient information at the
time of purchase to
permit verification that the purchase qualifies for the
reduced sales charge.
Approval of group purchase reduced sales charge plans is
subject to the discre-
tion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000
or more provides an
opportunity for an investor to obtain a reduced sales charge
by aggregating
investments over a 13-month period, provided that the
investor refers to such
Letter when placing orders. For purposes of a Letter of
Intent, the "Amount of
Investment" as referred to in the preceding sales charge
table includes pur-
chases of all Class A shares of the Fund and other funds of
the Smith Barney
Mutual
34
<PAGE>
SMITH BARNEY
Utilities Fund
PURCHASE OF SHARES (CONTINUED)
Funds offered with a sales charge over the 13-month period
based on the total
amount of intended purchases plus the value of all Class A
shares previously
purchased and still owned. An alternative is to compute the
13-month period
starting up to 90 days before the date of execution of a
Letter of Intent.
Each investment made during the period receives the reduced
sales charge
applicable to the total amount of the investment goal. If
the goal is not
achieved within the period, the investor must pay the
difference between the
sales charges applicable to the purchases made and the
charges previously
paid, or an appropriate number of escrowed shares will be
redeemed. Please
contact a Smith Barney Financial Consultant or FDISG to
obtain a Letter of
Intent application.
Class Y Shares. A Letter of Intent may also be used as a
way for investors
to meet the minimum investment requirement for Class Y
shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class
Y shares of the
Fund and agree to purchase a total of $5,000,000 of Class Y
shares of the same
Fund within six months from the date of the Letter. If a
total investment of
$5,000,000 is not made within the six-month period, all
Class Y shares pur-
chased to date will be transferred to Class A shares, where
they will be sub-
ject to all fees (including a service fee of 0.25%) and
expenses applicable to
the Fund's Class A shares, which may include a CDSC of
1.00%. The Fund expects
that such transfer will not be subject to Federal income
taxes. Please contact
a Smith Barney Financial Consultant or FDISG for further
information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined
without an initial
sales charge so that the full amount of an investor's
purchase payment may be
immediately invested in the Fund. A CDSC, however, may be
imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B
shares; (b) Class
C shares; and (c) Class A shares which, when combined with
Class A shares
offered with a sales charge currently held by an investor,
equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to
the lesser of the
original cost of the shares being redeemed or their net
asset value at the
time of redemption. CDSC Shares that are redeemed will not
be subject to a
CDSC to the extent that the value of such shares represents:
(a) capital
appreciation of Fund assets; (b) reinvestment of dividends
or capital gain
distributions; (c) with respect to Class B shares, shares
redeemed more than
five years after their purchase; or (d) with respect to
Class C shares and
Class A shares that are CDSC Shares, shares redeemed more
than 12 months after
their purchase.
35
<PAGE>
SMITH BARNEY
Utilities Fund
PURCHASE OF SHARES (CONTINUED)
Class C shares and Class A shares that are CDSC shares are
subject to a
1.00% CDSC if redeemed within 12 months of purchase. In
circumstances in which
the CDSC is imposed on Class B shares, the amount of the
charge will depend on
the number of years since the shareholder made the purchase
payment from which
the amount is being redeemed. Solely for purposes of
determining the number of
years since a purchase payment, all purchase payments made
during a month will
be aggregated and deemed to have been made on the last day
of the proceeding
Smith Barney statement month. The following table sets forth
the rates of the
charge for redemptions of Class B shares by shareholders,
except in the case
of purchases by Participating Plans, as described below. See
"Purchase of
Shares--Smith Barney 401(k) Program.
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- - ---------------------------------
<S> <C>
First 5.00%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- - ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A
shares eight years
after the date on which they were purchased and thereafter
will no longer be
subject to any distribution fees. There also will be
converted at that time
such proportion of Class B Dividend Shares owned by the
shareholder as the
total number of his or her Class B shares converting at the
time bears to the
total number of outstanding Class B shares (other than Class
B Dividend
shares) owned by the shareholder. Shareholders who held
Class B shares of
Smith Barney Shearson Short-Term World Income Fund (the
"Short-Term World
Income Fund") that were held on July 15, 1994 and who
subsequently exchange
those shares for Class B shares of the Fund will be offered
the opportunity to
exchange all such Class B shares for Class A shares of the
Fund four years
after the date on which those shares were deemed to have
been purchased. Hold-
ers of such Class B shares will be notified of the pending
exchange in writing
approximately 30 days before the fourth anniversary of the
purchase date and,
unless the exchange has been rejected in writing, the
exchange will occur on
or about the fourth anniversary date. See "Prospectus
Summary--Alternative
Purchase Arrangements--Class B Shares Conversion Feature."
36
<PAGE>
SMITH BARNEY
Utilities Fund
PURCHASE OF SHARES (CONTINUED)
The length of time that CDSC Shares acquired through an
exchange have been
held will be calculated from the date that the shares
exchanged were initially
acquired in one of the other applicable Smith Barney Mutual
Funds, and Fund
shares being redeemed will be considered to represent, as
applicable, capital
appreciation or dividend and capital gain distribution
reinvestments in such
other funds. For Federal income tax purposes, the amount of
the CDSC will
reduce the gain or increase the loss, as the case may be, on
the amount real-
ized 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 addi-
tional shares through dividend reinvestment. During the
fifteenth month after
the purchase, the investor decided to redeem $500 of his or
her investment.
Assuming at the time of the redemption the net asset value
had appreciated to
$12 per share, the value of the investor's shares would be
$1,260 (105 shares
at $12 per share). The CDSC would not be applied to the
amount which represents
appreciation ($200) and the value of the reinvested dividend
shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be
charged at a rate of 4.00% (the applicable rate for Class B
shares) for a total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than
1.00% per month of
the value of the shareholders's shares at the time the
withdrawal plan com-
mences (see "Automatic Cash Withdrawal Plan") (provided,
however, that auto-
matic cash withdrawals in amounts equal to or less than
2.00% per month of the
value of the shareholder's shares will be permitted for
withdrawal plans that
were established prior to November 7, 1994); (c) redemptions
of shares within
12 months following the death or disability of the
shareholder; (d) redemption
of shares made in connection with qualified distributions
from retirement plans
or IRAs upon the attainment of age 59 1/2; (e) involuntary
redemptions; and (f)
redemptions of shares in connection with a combination of
the Fund with any
investment company by merger, acquisition of assets or
otherwise. In addition,
a shareholder who has redeemed shares from other funds of
the Smith Barney
Mutual Funds may, under certain circumstances, reinvest all
or part of the
redemption proceeds within 60 days and receive pro rata
credit for any CDSC
imposed on the prior redemption.
37
<PAGE>
SMITH BARNEY
Utilities Fund
PURCHASE OF SHARES (CONTINUED)
CDSC waivers will be granted subject to confirmation (by
Smith Barney in the
case of shareholders who are also Smith Barney clients or by
FDISG in the case
of all other shareholders) of the shareholder's status or
holdings, as the
case may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith
Barney 401(k) Program,
which is generally designed to assist plan sponsors in the
creation and opera-
tion of retirement plans under Section 401(a) of the Code.
To the extent
applicable, the same terms and conditions are offered to all
Participating
Plans in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B,
Class C and Class Y
shares as investment alternatives under the Smith Barney
401(k) Program. Class
A, Class B and Class C shares acquired through the Smith
Barney 401(k) Program
are subject to the same service and/or distribution fees as,
but different
sales charge and CDSC schedules than, the Class A, Class B
and Class C shares
acquired by other investors. Similar to those available to
other investors,
Class Y shares acquired through the Smith Barney 401(k)
Program are not sub-
ject to any initial sales charge, CDSC or service or
distribution fee. Once a
Participating Plan has made an initial investment in the
Fund, all of its sub-
sequent investments in the Fund must be in the same Class of
shares, except as
otherwise described below.
Class A Shares. Class A shares of the Fund are offered
without any initial
sales charge to any Participating Plan that purchases from
$500,000 to
$4,999,999 of Class A shares of one or more funds of the
Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney
401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of
redemption proceeds, if the
Participating Plan terminates within four years of the date
the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Class B Shares. Class B shares of the Fund are offered to
any Participating
Plan that purchases less than $250,000 of one or more funds
of the Smith Bar-
ney Mutual Funds. Class B shares acquired through the Smith
Barney 401(k) Pro-
gram are subject to a CDSC of 3.00% of redemption proceeds,
if the Participat-
ing Plan terminates within eight years of the date the
Participating Plan
first enrolled in the Smith Barney 401(k) Program.
38
<PAGE>
SMITH BARNEY
Utilities Fund
PURCHASE OF SHARES (CONTINUED)
Eight years after the date the Participating Plan enrolled
in the Smith Bar-
ney 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 anni-
versary of the enrollment date and, unless the exchange has
been rejected in
writing, the exchange will occur on or about the eighth
anniversary date. Once
the exchange has occurred, a Participating Plan will not be
eligible to acquire
additional Class B shares of the Fund but instead may
acquire Class A shares of
the Fund. If the Participating Plan elects not to exchange
all of its Class B
shares at that time, each Class B share held by the
Participating Plan will
have the same conversion feature as Class B shares held by
other investors. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of the Fund are offered to
any Participating
Plan that purchases from $250,000 to $499,999 of one or more
funds of the Smith
Barney Mutual Funds. Class C shares acquired through the
Smith Barney 401(k)
Program after November 7, 1994 are subject to a CDSC of
1.00% of redemption
proceeds, if the Participating Plan terminates within four
years of the date
the Participating Plan first enrolled in the Smith Barney
401(k) Program. In
any year after the date a Participating Plan enrolled in the
Smith Barney
401(k) Program, if its total Class C holdings equal at least
$500,000 as of the
calendar year-end, the Participating Plan will be offered
the opportunity to
exchange all of its Class C shares for Class A shares of the
Fund. Such Plans
will be notified in writing within 30 days after the last
business day of the
calendar year, and unless the exchange offer has been
rejected in writing, the
exchange will occur on or about the last business day of the
following March.
Once the exchange has occurred, a Participating Plan will
not be eligible to
acquire Class C shares of the Fund but instead may acquire
Class A shares of
the Fund. Class C shares not converted will continue to be
subject to the dis-
tribution 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 pur-
chases $5,000,000 or more of Class Y shares of one or more
funds of the Smith
Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the
extent that the net
asset value of the shares redeemed does not exceed the
current net asset value
of the shares purchased through reinvestment of dividends or
capital gain dis-
tributions, plus (a) with respect to Class A and Class C
shares, the current
39
<PAGE>
SMITH BARNEY
Utilities Fund
PURCHASE OF SHARES (CONTINUED)
net asset value of such shares purchased more than one year
prior to redemption
and, with respect to Class B shares, the current net asset
value of Class B
shares purchased more than eight years prior to the
redemption, plus (b) with
respect to Class A and Class C shares, increases in the net
asset value of the
shareholder's Class A or Class C shares above the purchase
payments made during
the preceding year and, with respect to Class B shares,
increases in the net
asset value of the shareholder's Class B shares above the
purchase payments
made during the preceding eight years. Whether or not the
CDSC applies to a
Participating Plan depends on the number of years since the
Participating Plan
first became enrolled in the Smith Barney 401(k) Program,
unlike the applica-
bility of the CDSC to other shareholders, which depends on
the number of years
since those shareholders made the purchase payment from
which the amount is
being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in
connection with
lump-sum or other distributions made by a Participating Plan
as a result of:
(a) the retirement of an employee in the Participating Plan;
(b) the termina-
tion 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 Par-
ticipating 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 FDISG. For fur-
ther information regarding the Smith Barney 401(k) Program,
investors should
contact a Smith Barney Financial Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may
be exchanged at the
net asset value next determined for shares of the same Class
in the following
funds of the Smith Barney Mutual Funds, to the extent shares
are offered for
sale in the shareholder's state of residence. Exchanges of
Class A, Class B and
Class C shares are subject to minimum investment
requirements and all shares
are subject to the other requirements of the fund into which
exchanges are made
and a sales charge differential may apply.
40
<PAGE>
SMITH BARNEY
Utilities Fund
EXCHANGE PRIVILEGE (CONTINUED)
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Taxable Fixed-Income Funds
*Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
**Smith Barney Funds, Inc.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government
Portfolio
+Smith Barney Funds, Inc.--Short-Term U.S. Treasury
Securities Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities
Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
**Smith Barney Intermediate Maturity California Municipals
Fund
**Smith Barney Intermediate Maturity New York Municipals
Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
**Smith Barney Muni Funds--California Limited Term Portfolio
**Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
**Smith Barney Muni Funds--Limited Term Portfolio
41
<PAGE>
SMITH BARNEY
Utilities Fund
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc.--Emerging Markets
Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond
Portfolio
Smith Barney World Funds, Inc.--International Balanced
Portfolio
Smith Barney World Funds, Inc.--International Equity
Portfolio
Smith Barney World Funds, Inc.--Pacific 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 Market 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 B and Class Y
shares of the
Fund. In addition, shareholders who own Class C shares
of the Fund through
the Smith Barney 401(k) Program may exchange those
shares for Class C
shares of this fund.
** Available for exchange with Class A, Class C and Class Y
shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class A and Class Y shares
of the Fund.
++ Available for exchange with Class B and Class C shares
of the Fund.
+++ Available for exchange with Class A and Class Y shares
of the Fund. In
addition, shareholders who own Class C shares of the
Fund through the Smith
Barney 401(k) Program may exchange those shares for
Class C shares of this
fund.
Class A Exchanges. Class A shares of Smith Barney Mutual
Funds sold without
a sales charge or with a maximum sales charge of less than
the maximum charged
by the Fund will be subject to the appropriate "sales charge
differential"
upon the exchange of such shares for Class A shares of the
Fund or other funds
sold with a higher sales charge. The "sales charge
differential" is limited to
a percentage rate no greater than the excess of the sales
charge rate applica-
ble to purchases of shares of the mutual fund being acquired
in the exchange
42
<PAGE>
SMITH BARNEY
Utilities Fund
EXCHANGE PRIVILEGE (CONTINUED)
over the sales charge rate(s) actually paid on the mutual
fund shares relin-
quished in the exchange and on any predecessor of those
shares. For purposes
of the exchange privilege, shares obtained through automatic
reinvestment of
dividends and capital gain distributions are treated as
having paid the same
sales charges applicable to the shares on which the
dividends or distributions
were paid; however, except in the case of the Smith Barney
401(k) Program, if
no sales charge was imposed upon the initial purchase of the
shares, any
shares obtained through automatic reinvestment will be
subject to a sales
charge differential upon exchange.
Class B Exchanges. In the event a Class B shareholder
(unless such share-
holder was a Class B shareholder of the Short-Term World
Income Fund on July
15, 1994) wishes to exchange all or a portion of his or her
shares in any of
the funds imposing a higher CDSC than that imposed by the
Fund, the exchanged
Class B shares will be subject to the higher applicable
CDSC. Upon an
exchange, the new Class B shares will be deemed to have been
purchased on the
same date as the Class B shares of the Fund that have been
exchanged.
Class C Exchanges. Upon an exchange, the new Class C
shares will be deemed
to have been purchased on the same date as the Class C
shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who
wish to exchange all
or a portion of their Class Y shares for Class Y shares in
any of the funds
identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege.
Although the
exchange privilege is an important benefit, excessive
exchange transactions
can be detrimental to the Fund's performance and its
shareholders. SBMFM may
determine that a pattern of frequent exchanges is excessive
and contrary to
the best interests of the Fund's other shareholders. In this
event, SBMFM will
notify Smith Barney that the Fund may, at its discretion,
decide to limit
additional purchases and/or exchanges by a shareholder. Upon
such a determina-
tion, the Fund will provide notice in writing or by
telephone to the share-
holder at least 15 days prior to suspending the exchange
privilege and during
the 15-day period the shareholder will be required to (a)
redeem his or her
shares in the Fund or (b) remain invested in the Fund or
exchange into any of
the funds of the Smith Barney Mutual Funds ordinarily
available, which posi-
tion the shareholder would be expected to maintain for a
significant period of
time. All relevant factors will be considered in determining
what constitutes
an abusive pattern of exchanges.
43
<PAGE>
SMITH BARNEY
Utilities Fund
EXCHANGE PRIVILEGE (CONTINUED)
Certain shareholders may be able to exchange shares by
telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange
Program". Exchanges will
be processed at the net asset value next determined, plus
any applicable sales
charge differential, after the redemption proceeds are
available. Redemption
procedures discussed below are also applicable for
exchanging shares, and
exchanges will be made upon receipt of all supporting
documents in proper form.
If the account registration of the shares of the fund being
acquired is identi-
cal to the registration of the shares of the fund exchanged,
no signature guar-
antee 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 describ-
ing the shares to be acquired. The Fund reserves the right
to modify or discon-
tinue 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 redemp-
tion must specify the Class being redeemed. In the event of
a failure to spec-
ify which Class, or if the investor owns fewer shares of the
Class than speci-
fied, 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 third day
following receipt of
proper tender, except on any days on which the NYSE is
closed or as permitted
under the 1940 Act in extraordinary circumstances.
Generally, if the redemption
proceeds are remitted to a 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. Redemp-
tion proceeds for shares purchased by check, other than a
certified or official
bank check, will be remitted upon clearance of the check,
which may take up to
ten days or more.
Shares held by Smith Barney as custodian must be redeemed
by submitting a
written request to a Smith Barney Financial Consultant.
Shares other than those
44
<PAGE>
SMITH BARNEY
Utilities Fund
REDEMPTION OF SHARES (CONTINUED)
held by Smith Barney as custodian may be redeemed through an
investor's Finan-
cial Consultant, Introducing Broker or dealer in the selling
group or by sub-
mitting a written request for redemption to:
Smith Barney Utilities Fund
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and
number or dollar
amount of shares to be redeemed, (b) identify the
shareholder's account number
and (c) be signed by each registered owner exactly as the
shares are regis-
tered. If the shares to be redeemed were issued in
certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied
by an endorsed
stock power) and must be submitted to FDISG together with
the redemption
request. Any signature appearing on a written redemption
request in excess of
$2000, 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. Written redemption
requests of $2000
or less do not require a signature guarantee unless more
than one such redemp-
tion request is made in any 10-day period or the redemption
proceeds are to be
sent to an address other than the address of record. Unless
otherwise direct-
ed, redemption proceeds will be mailed to an investor's
address of record.
FDISG may require additional supporting documents for
redemptions made by cor-
porations, executors, administrators, trustees or guardians.
A redemption
request will not be deemed properly received until FDISG
receives all required
documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal
plan, under which
shareholders who own shares with a value of at least $10,000
may elect to
receive cash payments of at least $50 monthly or quarterly.
Retirement plan
accounts are eligible for automatic cash withdrawal plans
only where the
shareholder is eligible to receive qualified distributions
and has an account
value of at least $5,000. The withdrawal plan will be
carried over on
exchanges between funds or Classes of the Fund. Any
applicable CDSC will not
be waived on amounts withdrawn by a shareholder that exceed
1.00% per month of
the value of the shareholder's shares subject to the CDSC at
the time the
withdrawal plan commences. For further information regarding
the automatic
cash withdrawal plan, shareholders should contact a Smith
Barney Financial
Consultant.
45
<PAGE>
SMITH BARNEY
Utilities Fund
REDEMPTION OF SHARES (CONTINUED)
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage
account may be eligible
to redeem and exchange Fund shares by telephone. To
determine if a shareholder
is entitled to participate in this program, he or she should
contact FDISG at
1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete
and return a Telephone/Wire Authorization Form, along with a
signature guaran-
tee that will be provided by FDISG upon request.
(Alternatively, an investor
may authorize telephone redemptions on the new account
application with the
applicant's signature guarantee when making his/her initial
investment in the
Fund.)
Redemptions. Redemption requests of up to $10,000 of any
class or classes of
the Fund's shares may be made by eligible shareholders by
calling FDISG at 1-
800-451-2010. Such requests may be made between 9:00 a.m.
and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption
requests received after
the close of regular trading on the NYSE are priced at the
net asset value next
determined. Redemptions of shares (i) by retirement plans or
(ii) for which
certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the
redemption proceeds mailed
to his/her address of record or wired to a bank account
predesignated by the
shareholder. Generally, redemption proceeds will be mailed
or wired, as the
case may be, on the next business day following the
redemption request. In
order to use the wire procedures, the bank receiving the
proceeds must be a
member of the Federal Reserve System or have a correspondent
with a member
bank. The Fund reserves the right to charge shareholders a
nominal fee for each
wire redemption. Such charges, if any, will be assessed
against the sharehold-
er's account from which shares were redeemed. In order to
change the bank
account designated to receive redemption proceeds, a
shareholder must complete
a new Telephone/Wire Authorization Form and, for the
protection of the share-
holder's assets, will be required to provide a signature
guarantee and certain
other documentation.
Exchanges. Eligible shareholders may make exchanges by
telephone if the
account registration of the shares of the fund being
acquired is identical to
the registration of the shares of the fund exchanged. Such
exchange requests
may be made by calling FDISG at 1-800-451-2010 between 9:00
a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open.
Exchange requests
received after the close of regular trading on the NYSE are
processed at the
net asset value next determined.
46
<PAGE>
SMITH BARNEY
Utilities Fund
REDEMPTION OF SHARES (CONTINUED)
Additional Information regarding Telephone Redemption and
Exchange Program.
Neither the Fund nor its agents will be liable for following
instructions com-
municated by telephone that are reasonably believed to be
genuine. The Fund and
its agents will employ procedures designed to verify the
identity of the caller
and legitimacy of instructions (for example, a shareholder's
name and account
number will be required and phone calls may be recorded).
The Fund reserves the
right to suspend, modify or discontinue the telephone
redemption and exchange
program or to impose a charge for this service at any time
following at least
seven (7) days prior notice to shareholders.
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, how-
ever, will not redeem shares based solely on market
reductions in net asset
value. Before the Fund exercises such right, shareholders
will receive written
notice and will be permitted 60 days to bring accounts up to
the minimum to
avoid automatic redemption.
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30-day "yield"
of each Class of
shares. The Fund's yield refers to the income generated by
an investment in
those shares over the 30-day period identified in the
advertisement and is com-
puted by dividing the net investment income per share earned
by the Class dur-
ing 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
47
<PAGE>
SMITH BARNEY
Utilities Fund
PERFORMANCE (CONTINUED)
sales charge, if any, from the initial amount invested and
reinvestment of all
income dividends and capital gains distributions on the
reinvestment dates at
prices calculated as stated in this Prospectus, then
dividing the value of the
investment at the end of the period so calculated by the
initial amount
invested and subtracting 100%. The standard average annual
total return, as
prescribed by the SEC, is derived from this total return,
which provides the
ending redeemable value. Such standard total return
information may also be
accompanied with nonstandard total return information for
differing periods
computed in the same manner but without annualizing the
total return or taking
sales charges into account. The Fund calculates current
dividend return for
each Class by annualizing the most recent monthly
distribution and dividing by
the net asset value or the maximum public offering price
(including sales
charge) on the last day of the period for which current
dividend return is pre-
sented. The current dividend return for each Class may vary
from time to time
depending on market conditions, the composition of its
investment portfolio and
operating expenses. These factors and possible differences
in the methods used
in calculating current dividend return should be considered
when comparing a
Class' current return to yields published for other
investment companies and
other investment vehicles. The Fund may also include
comparative performance
information in advertising or marketing its shares. Such
performance informa-
tion may include data from Lipper Analytical Services, Inc.
and other financial
publications.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of
the Fund rests with
the Trust's Board of Trustees. The Trustees approve all
significant agreements
between the Trust and the companies that furnish services to
the Trust and the
Fund, including agreements with the Fund's distributor,
investment adviser,
administrator, custodian and transfer agent. The day-to-day
operations of the
Fund are delegated to the Fund's investment adviser and
administrator. The
Statement of Additional Information contains background
information regarding
each Trustee and executive officer of the Trust.
INVESTMENT ADVISER--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York
10013, serves as
the Fund's investment adviser. SBMFM is a wholly owned
subsidiary of Holdings).
SBMFM (through predecessor entities) has been in the
investment
48
<PAGE>
SMITH BARNEY
Utilities Fund
MANAGEMENT OF THE FUND AND THE TRUST (CONTINUED)
counseling business since 1934 and is a registered
investment adviser. SBMFM
renders investment advice to investment companies that had
aggregate assets
under management as of September 30, 1995 in excess of $60
billion.
Subject to the supervision and direction of the Fund's
Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the
Fund's investment
objective and policies, makes investment decisions for the
Fund, places orders
to purchase and sell securities and employs professional
portfolio managers
and securities analysts who provide research services to the
Fund. For invest-
ment advisory services rendered to the Fund, the Fund pays
SBMFM a fee at the
annual rate of 0.45% of the value of the Fund's average
daily net assets.
PORTFOLIO MANAGEMENT
Jack S. Levande, a Managing Director of Smith Barney, has
served as Vice
President and Investment Officer of the Fund since it
commenced operations and
manages the day-to-day operations of the Fund, including
making all investment
decisions.
Management's discussion and analysis, and additional
performance information
regarding the Fund during the fiscal year ended July 31,
1995 is included in
the Annual Report dated July 31, 1995. A copy of the Annual
Report may be
obtained upon request without charge from a Smith Barney
Financial Consultant
or by writing or calling the Fund at the address or phone
number listed on
page one of this Prospectus.
ADMINISTRATOR--SBMFM
SBMFM also serves as the Fund's administrator and oversees
all aspects of
the Fund's administration. For administration services
rendered to the Fund,
the Fund pays SBMFM a fee at the annual rate of 0.20% of the
value of the
Fund's average daily net assets.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York,
New York 10013.
Smith Barney distributes shares of the Fund as principal
underwriter and as
such conducts a continuous offering pursuant to a "best
efforts" arrangement
requiring Smith Barney to take and pay for only such
securities as may be sold
to the public. Pursuant to a plan of distribution adopted by
the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is
paid an
49
<PAGE>
SMITH BARNEY
Utilities Fund
DISTRIBUTOR (CONTINUED)
annual service fee with respect to Class A, Class B and
Class C shares of the
Fund at the annual rate of 0.25% of the average daily net
assets of the
respective Class. Smith Barney is also paid an annual
distribution fee with
respect to Class B and Class C shares at the annual rate of
0.50% and 0.45%,
respectively, of the average daily net assets attributable
to these Classes.
Class B shares that automatically convert to Class A shares
eight years after
the date of original purchase will no longer be subject to
distribution fees.
The fees are used by Smith Barney to pay its Financial
Consultants for servic-
ing 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 pro-
spectuses to potential investors; payments to and expenses
of Smith Barney
Financial Consultants and other persons who provide support
services in con-
nection with the distribution of shares; interest and/or
carrying charge; and
indirect and overhead costs of Smith Barney associated with
the sale of Fund
shares, including lease, utility, communications and sales
promotion expenses.
Actual distribution and shareholder service expenses for
Class B and Class C
shares of the Fund for any given year may exceed the fees
received pursuant to
the Plan and will be carried forward and paid by the Fund in
future years so
long as the Plan is in effect. Interest is accrued monthly
on such
carryforward amounts at a rate comparable to that paid by
Smith Barney for
bank borrowings.
The payments to Smith Barney Financial Consultants for
selling shares of a
Class include a commission or fee paid by the investor or
Smith Barney at the
time of sale and, with respect to Class A, Class B and Class
C shares, a con-
tinuing fee for servicing shareholder accounts for as long
as a shareholder
remains a holder of that Class. Smith Barney Financial
Consultants may receive
different levels of compensation for selling different
Classes of shares.
Payments under the Plan with respect to Class B and Class
C shares are not
tied exclusively to the distribution and shareholder service
expenses actually
incurred by Smith Barney and the payments may exceed
distribution expenses
actually incurred. The Trust's Board of Trustee's will
evaluate the appropri-
ateness of the Plan and its payment terms on a continuing
basis and in so
doing will consider all relevant factors, including expenses
borne by Smith
Barney, amounts received under the Plan and proceeds of the
CDSC.
50
<PAGE>
SMITH BARNEY
Utilities Fund
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 under the laws
of the Commonwealth
of Massachusetts and is an entity commonly known as a
"Massachusetts business
trust." The Trust offers shares of beneficial interest of
separate series hav-
ing a $.001 per share par value. Shares of beneficial
interest of the Fund are
currently classified into five Classes: A, B, C, Y and Z.
When matters are sub-
mitted for shareholder vote, shareholders of each Class will
have one vote for
each full share owned and a proportionate, fractional vote
for any fractional
share held of that Class. Generally, shares of the Trust
vote by individual
fund on all matters except (a) matters affecting only the
interest of one or
more of the funds, in which case only shares of the affected
fund or funds
would be entitled to vote, or (b) when the 1940 Act requires
that shares of the
funds be voted in the aggregate. Similarly, shares of the
Fund will be voted
generally on a Fund-wide basis except matters affecting the
interests of one
Class of shares.
Each Class of Fund shares represents identical interests
in the Fund's
investment portfolio. As such, they have the same rights,
privileges and pref-
erences, except with respect to: (a) the designation of each
Class; (b) the
effect of the respective sales charges for each Class; (c)
the distribution
and/or service fees, if any, borne by each Class; (d) the
expenses allocable
exclusively to each Class; (e) voting rights on matters
exclusively affecting a
single Class; (f) the exchange privilege of each Class; and
(g) the conversion
feature of the Class B shares. The Trust's Board of Trustees
does not antici-
pate that there will be any conflicts among the interests of
the holders of the
different Classes. The Trustees, on an ongoing basis, will
consider whether any
such conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There
normally will be
no meetings of shareholders for the purpose of electing
Trustees unless and
until such time as less than a majority of the Trustees
holding office have
been elected by shareholders. The Trustees will call a
meeting for any purpose
for voting on the written request of shareholders holding at
least 10% of the
Fund's outstanding shares and the Fund will assist
shareholders in calling such
a meeting as required by the 1940 Act.
PNC Bank, located at 17th and Chestnut Streets,
Philadelphia, PA 19103,
serves as custodian of the Trust's investments.
FDISG is located at Exchange Place, Boston, Massachusetts
02109, and serves
as the Trust's transfer agent.
51
<PAGE>
SMITH BARNEY
Utilities Fund
ADDITIONAL INFORMATION (CONTINUED)
The Fund sends its shareholders a semi-annual report and
an audited annual
report, each of which includes a list of the investment
securities held by the
Fund at the end of the reporting period. In an effort to
reduce the Fund's
printing and mailing costs, the Trust plans to consolidate
the mailing of the
Fund's semi-annual and annual reports by household. This
consolidation means
that a household having multiple accounts with the identical
address of record
will receive a single copy of each report. In addition, the
Trust also plans
to consolidate the mailing of the Fund's Prospectus so that
a shareholder hav-
ing multiple accounts (e.g., individual, IRA and/or Self-
Employed Retirement
Plan accounts) will receive a single Prospectus annually.
Shareholders who do
not want this consolidation to apply to their accounts
should contact their
Smith Barney Financial Consultants or the Fund's transfer
agent.
----------------------
No person has been authorized to give any information or
to make any repre-
sentations in connection with this offering other than those
contained in this
Prospectus and, if given or made, such other information or
representations
must not be relied upon as having been authorized by the
Trust or the distrib-
utor. This Prospectus does not constitute an offer by the
Trust or the dis-
tributor to sell or a solicitation of an offer to buy any of
the securities
offered hereby in any jurisdiction to any person to whom it
is unlawful to
make such offer or solicitation in such jurisdiction.
52
<PAGE>
SMITH BARNEY
- - ------------
A Member of
Travelers Groups LOGO
SMITH BARNEY
UTILITIES FUND
388 Greenwich Street
New
York, New York 10013
FD 0229 11/95
<PAGE>
SMITH BARNEY
Utilities
Fund
Class Z Shares Only
November 28, 1995
PROSPECTUS BEGINS ON PAGE ONE
P R O S P E C T U S
[LOGO] Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
PROSPECTUS
NOVEMBER 28, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Utilities Fund (the "Fund") is a diversified
fund that seeks
current income by investing in equity and debt securities of
utility companies
selected by the Fund's investment adviser. Long-term capital
appreciation is a
secondary objective of the Fund.
The Fund is one of a number of funds, each having distinct
investment objec-
tives and policies, making up the Smith Barney Income Funds
(the "Trust"). The
Trust is an open-end, management investment company commonly
referred to as a
mutual fund.
This Prospectus sets forth concisely certain information
about the Fund and
the Trust, including expenses, that prospective investors
will find helpful in
making an investment decision. Investors are encouraged to
read this Prospec-
tus carefully and retain it for future reference.
The Class Z shares described in this Prospectus
(previously designated as
Class C shares) are currently offered exclusively for sale
to tax-exempt
employee benefit and retirement plans of Smith Barney Inc.
("Smith Barney") or
any of its affiliates ("Qualified Plans") and to certain
unit investment
trusts sponsored by Smith Barney or any of its affiliates ("Smith
Barney
UITs").
Additional information about the Fund and the Trust is
contained in a State-
ment of Additional Information dated November 28, 1995 as
amended or supple-
mented from time to time, that is available upon request and
without charge by
calling or writing the Trust at the telephone number or
address set forth
above or by contacting a Smith Barney Financial Consultant.
The Statement of
Additional Information has been filed with the Securities
and Exchange Commis-
sion (the "SEC") and is incorporated by reference into this
Prospectus in its
entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE FUND'S EXPENSES 3
- - -------------------------------------------------
FINANCIAL HIGHLIGHTS 4
- - -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 5
- - -------------------------------------------------
VALUATION OF SHARES 18
- - -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 19
- - -------------------------------------------------
PURCHASE AND REDEMPTION OF SHARES 21
- - -------------------------------------------------
EXCHANGE PRIVILEGE 22
- - -------------------------------------------------
PERFORMANCE 23
- - -------------------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 24
- - -------------------------------------------------
ADDITIONAL INFORMATION 26
- - -------------------------------------------------
</TABLE>
- - ------------------------------------------------------------
- - --------------------
No person has been authorized to give any information or
to make any
representations in connection with this offering other than
those contained in
this Prospectus and, if given or made, such other
information or
representations must not be relied upon as having been
authorized by the Trust
or the distributor. This Prospectus does not constitute an
offer to buy any of
the securities offered hereby in any jurisdiction to any
person to whom it is
unlawful to make such an offer or solicitation in such
jurisdiction.
- - ------------------------------------------------------------
- - --------------------
2
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
THE FUND'S EXPENSES
The following expense table lists the costs and expenses an
investor will incur
either directly or indirectly as a shareholder of Class Z
shares of the Fund,
based on the Fund's operating expenses for its most recent
fiscal year:
<TABLE>
<CAPTION>
AS A % OF
AVERAGE NET ASSETS
- - --------------------------------------------------
<S> <C>
ANNUAL FUND OPERATING EXPENSES
Management fees 0.65%
Other expenses 0.16%
- - --------------------------------------------------
Total Fund Operating Expenses 0.81%
- - --------------------------------------------------
</TABLE>
The nature of the services for which the Fund pays
management fees is
described under "Management of the Trust and the Fund."
"Other expenses" in the
above table include fees for shareholder services, custodial
fees, legal and
accounting fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in
understanding the
various costs that an investor in the Fund will bear
directly or indirectly.
The example assumes payment by the Fund of operating
expenses at the levels set
forth in the table above. See "Purchase and Redemption of
Shares" and "Manage-
ment of the Trust and the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
5 YEARS 10 YEARS
- - ------------------------------------------------------------
- - ----------------
<S> <C> <C>
<C> <C>
You would pay the following expenses on a
$1,000 investment in Class Z shares of the
Fund, assuming (1) 5% annual return and (2)
redemption at the end of each time period: $ 8 $26
$45 $100
- - ------------------------------------------------------------
- - ----------------
</TABLE>
The example also provides a means for the investor to
compare expense levels
of funds with different fee structures over varying
investment periods. To
facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN
THOSE SHOWN.
3
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended July 31,
1995 has been
audited by KPMG Peat Marwick LLP., independent accountants
and appears in the
Fund's Annual Report dated July 31, 1995. The following
information for the
fiscal years ended July 31, 1993 through July 31, 1994 has
been audited by
Coopers & Lybrand L.L.P. The information set out below
should be read in con-
junction with the financial statements and related notes
that also appear in
the Fund's 1995 Annual Report, which is incorporated by
reference into the
Statement of Additional Information.
FOR A CLASS Z SHARE(1) OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH
PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR
PERIOD
ENDED ENDED
ENDED
7/31/95 7/31/94
7/31/93(2)
- - ------------------------------------------------------------
- - --------------
<S> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.28 $ 15.97
$ 14.36
- - ------------------------------------------------------------
- - --------------
INCOME (LOSS) FROM OPERATIONS:
Net investment income 0.89 0.89
0.69
Net realized and unrealized gain (loss) on
investments 0.82
(2.21) 1.72
- - ------------------------------------------------------------
- - --------------
Total Income (Loss) From Operations 1.71
(1.32) 2.41
- - ------------------------------------------------------------
- - --------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.87)
(0.84) (0.65)
Overdistribution of net investment income --
(0.03) (0.01)
Net realized gains --
(0.50) (0.14)
Overdistribution of net realized gains (0.08) --
- - --
Capital (0.02) --
- - --
- - ------------------------------------------------------------
- - --------------
Total Distributions (0.97)
(1.37) (0.80)
- - ------------------------------------------------------------
- - --------------
NET ASSET VALUE, END OF PERIOD $ 14.02 $ 13.28
$ 15.97
- - ------------------------------------------------------------
- - --------------
TOTAL RETURN++ 13.55%
(8.78)% 17.21%(3)
- - ------------------------------------------------------------
- - --------------
NET ASSETS, END OF PERIOD (000S) $14,631 $11,372
$22,251
- - ------------------------------------------------------------
- - --------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 0.81%
0.69% 0.68%+
Net investment income 6.58 5.92
6.06+
- - ------------------------------------------------------------
- - --------------
PORTFOLIO TURNOVER RATE 36%
28% 37%
- - ------------------------------------------------------------
- - --------------
</TABLE>
(1) On November 7, 1994, the former Class C shares were
renamed Class Z shares.
(2) For the period from November 6, 1992 (inception date) to
July 31, 1993.
(3) Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charge.
4
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
INVESTMENT OBJECTIVES
The primary investment objective of the Fund is to provide
current income.
Long-term capital appreciation is a secondary objective. The
Fund's investment
objectives may be changed only with the approval of the
holders of a majority
of the Fund's outstanding shares. There can be no assurance
that the Fund's
investment objectives will be achieved.
INVESTMENT POLICIES
The Fund seeks to achieve its objectives by investing in
equity and debt
securities of companies in the utility industries. For
purposes of this Pro-
spectus, the utility industries are deemed to be comprised
of companies prin-
cipally engaged (that is, at least 50% of a company's
assets, gross income or
net profits results from utility operations or the company
is regulated as a
utility by a government agency or authority) in the
manufacture, production,
generation, transmission and sale of electric and gas energy
and companies
principally engaged in the communications field, including
entities such as
telephone, telegraph, satellite, microwave and other
companies regulated by
governmental agencies as utilities that provide
communication facilities for
the public benefit, but not including those in public
broadcasting. The Fund
will invest primarily in utility equity and debt securities
that have a high
expected rate of return, as determined by the Fund's
investment adviser, Smith
Barney Mutual Funds Management Inc. ("SBMFM"). Under normal
market conditions,
the Fund will invest at least 65% of its assets in such
securities. The Fund
may invest up to 35% of its assets in equity and debt
securities of non-util-
ity companies believed to afford a reasonable opportunity
for achieving the
Fund's investment objectives. When SBMFM believes that
market conditions war-
rant, the Fund may adopt a temporary defensive posture and
may invest without
limit in: debt securities (whether or not they are utility
securities) such as
rated or unrated bonds, debentures and commercial paper,
United States govern-
ment securities and money market instruments. The Fund may
invest up to 10% of
its assets in securities rated BB or B by Standard & Poor's
Corporation
("S&P") or Ba or B by Moody's Investors Service, Inc.
("Moody's") whenever
SBMFM believes that the incremental yield on such securities
is advantageous
to the Fund in comparison to the additional risk involved.
Securities rated
BBB/Baa are considered medium grade obligations, neither
highly protected nor
poorly secured. Interest payments and principal security of
BBB/Baa rated
securities appear adequate for the present but certain
protective elements may
be lacking or may be unreliable over any great length of
time. Such securities
lack outstanding investment characteristics and may in fact
have speculative
characteristics. The yields on lower-rated fixed-
5
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
income securities generally are higher than the yields
available on higher-
rated securities. See "Risk Factors and Special
Considerations" below. In addi-
tion, the Fund may enter into repurchase agreements.
INVESTMENT SECURITIES, STRATEGIES AND TECHNIQUES
The Fund has the ability to engage in a number of
specialized investment
strategies and techniques designed to enable the Fund to
achieve its investment
objectives. Included among these strategies are lending its
portfolio securi-
ties, selling securities "short against the box," writing
covered call and
secured put options as well as purchasing options on
securities, purchasing and
selling interest rate futures contracts, options on futures
contracts, stock
index put and call options and stock index futures
contracts, each of which is
discussed below.
United States Government Securities. United States
government securities are
obligations of, or guaranteed by, the United States
government, its agencies or
instrumentalities ("U.S. government securities"). These
include bills, certifi-
cates of indebtedness, notes and bonds issued by the United
States Treasury or
by agencies or instrumentalities of the United States
government. Some U.S.
government securities, such as Treasury bills and bonds, are
supported by the
full faith and credit of the United States; others, such as
those of Federal
Home Loan Banks, are supported by the right of the issuer to
borrow from the
United States Treasury; others, such as those of the Federal
National Mortgage
Association, are supported by the discretionary authority of
the United States
government to purchase the agency's obligations; still
others, such as those of
the Student Loan Marketing Association, are supported only
by the credit of the
instrumentality. U.S. government securities generally do not
involve the credit
risks associated with other types of interest-bearing
securities, although, as
a result, the yields available from U.S. government
securities are generally
lower than the yields available from interest-bearing
corporate securities.
Repurchase Agreements. The Fund may engage in repurchase
agreements with cer-
tain 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) sub-
ject 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 dur-
ing 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
6
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
to the total amount of the repurchase obligation, including
interest. Repur-
chase agreements could involve certain risks in the event of
default or insol-
vency of the other party, including possible delays or
restrictions upon the
Fund's ability to dispose of the underlying securities, the
risk of a possible
decline in the value of the underlying securities during the
period in which
the Fund seeks to assert its right to them, the risk of
incurring expenses
associated with asserting those rights and the risk of
losing all or part of
the income from the agreement. SBMFM, acting under the
supervision of the
Trust's Board of Trustees, reviews on an ongoing basis the
value of the collat-
eral and creditworthiness of those banks and dealers with
which the Fund enters
into repurchase agreements to evaluate potential risks.
Lending Portfolio Securities. The Fund is authorized to
lend its portfolio
securities to brokers, dealers and other financial
organizations. The Fund's
loans of securities will be collateralized by cash, letters
of credit or U.S.
government securities that are maintained at all times in an
amount at least
equal to the current market value of the loaned securities.
By lending its
securities, the Fund seeks to generate income by continuing
to receive interest
on the loaned securities, by investing the cash collateral
in short-term
instruments or by obtaining yield in the form of interest
paid by the borrower
when U.S. government securities are used as collateral.
Short Sales Against the Box. The Fund may make short sales
(except to the
extent of 5% of the Fund's net assets) if at all times when
a position is open,
the Fund owns the stock or owns preferred stock or debt
securities convertible
or exchangeable without payment of further consideration
for, securities of the
same issue as the securities sold short. Short sales of this
kind are referred
to as "against the box." Short sales against the box are
used to defer recogni-
tion of capital gains or losses.
Options Activities. The Fund may write (that is, sell)
call options ("calls")
if the calls are covered throughout the life of the option.
A call is covered
if the Fund (a) owns the optioned securities, (b) maintains
in a segregated
account with the Trust's custodian, PNC Bank, National
Association ("PNC Bank")
cash, cash equivalents or U.S. government securities with a
value sufficient to
meet the Fund's obligations under the call, or (c) owns an
offsetting call
option. The aggregate value of the obligations underlying
calls on securities
which are written by the Fund and covered with cash, cash
equivalents or U.S.
government securities, together with the aggregate value of
the obligations
underlying put options written by the Fund, will not exceed
50% of the Fund's
net assets.
7
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
When the Fund writes a call, it receives a premium and gives
the purchaser the
right to buy the underlying security at any time during the
call period (usu-
ally not more than nine months in the case of common stock
or fifteen months
in the case of U.S. government securities) at a fixed
exercise price regard-
less of market price changes during the call period. If the
call is exercised,
the Fund forgoes any gain from an increase in the market
price of the under-
lying security over the exercise price. The Fund may
purchase calls on securi-
ties. The Fund also may purchase and sell stock index calls
which differ from
calls on individual securities in that they are settled in
cash based on the
values of the securities in the underlying index, rather
than by delivery of
the underlying securities. In writing a call on a stock
index, the Fund
receives a premium and agrees that during the call period
purchasers of a
call, upon exercise of the call, will receive an amount of
cash if the closing
level of the stock index upon which the call is based is
greater than the
exercise price of the call. When the Fund buys a call on a
stock index, it
pays a premium and during the call period the Fund, upon
exercise of the call,
receives an amount of cash if the closing level of the stock
index upon which
the call is based is greater than the exercise price of the
call.
The Fund may write and purchase put options ("puts"). When
the Fund writes a
put, it receives a premium and gives the purchaser of the
put the right to
sell the underlying security to the Fund at the exercise
price at any time
during the option period. When the Fund purchases a put, it
pays a premium in
return for the right to sell the underlying security at the
exercise price at
any time during the option period. For the purchase of a put
to be profitable,
the market price of the underlying security must decline
sufficiently below
the exercise price to cover the premium and transaction
costs, unless the put
is sold in a closing sale transaction; otherwise, the
purchase of the put
effectively increases the cost of the security and thus
reduces its yield. The
Fund also may purchase and sell stock index puts, which
differ from puts on
individual securities in that they are settled in cash based
on the values of
the securities in the underlying index, rather than by
delivery of the under-
lying securities. Purchase of a stock index put is designed
to protect against
a decline in the value of the Fund's portfolio generally,
rather than an indi-
vidual security in the portfolio. Stock index puts are sold
primarily to real-
ize income from the premiums received on the sale of such
options. If any put
is not exercised or sold, it will become worthless on its
expiration date. The
Fund will not purchase puts or calls on securities if more
than 5% of its
assets would be invested in premiums on puts and calls, not
including that
portion of the premium which reflects the value of the
securities owned by the
Fund and underlying a put at the time of purchase.
8
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund may write puts on securities only if they are
"secured." A put is
"secured" if the Fund maintains cash, cash equivalents or
U.S. government
securities with a value equal to the exercise price in a
segregated account or
holds a put on the same underlying security at an equal or
greater exercise
price. The aggregate value of the obligations underlying
puts written by the
Fund, together with the aggregate value of the obligations
underlying calls on
securities which are written by the Fund and covered with
cash, cash equiva-
lents or U.S. government securities, will not exceed 50% of
the Fund's net
assets. The Fund also may write "straddles," which are
combinations of secured
puts and covered calls on the same underlying security.
The Fund will realize a gain (or loss) on a closing
purchase transaction
with respect to a call or put previously written by the Fund
if the premium,
plus commission costs, paid to purchase the call or put is
less (or greater)
than the premium, less commission costs, received on the
sale of the call or
put. A gain also will be realized if a call or put which the
Fund has written
lapses unexercised, because the Fund would retain the
premium. See "Dividends,
Distributions and Taxes" below. The Fund will purchase and
sell only options
which are listed on a national securities exchange and will
write options only
through a national options clearing organization.
There can be no assurance that a liquid secondary market
will exist at a
given time for any particular option. In this regard,
trading in options on
U.S. government securities is relatively new, so that it is
impossible to pre-
dict to what extent liquid markets will develop or continue.
See the Statement
of Additional Information for a further discussion of risks
involved in
options trading, and particular risks applicable to options
trading on U.S.
government securities, including risks involved in options
trading on Govern-
ment National Mortgage Association ("GNMA") certificates and
the characteris-
tics and risks of stock index options transactions.
Futures Contracts--General. The Fund may not purchase
futures contracts or
related options if, immediately thereafter, more than 30% of
the Fund's total
assets would be so invested. In purchasing and selling
futures contracts and
related options, the Fund will comply with rules and
interpretations of the
Commodity Futures Trading Commission ("CFTC"), under which
the Fund is
excluded from regulation as a "commodity pool." CFTC
regulations require,
among other things, that (a) futures and related options be
used solely for
bona fide hedging purposes (or that the underlying commodity
value of the
Fund's long positions not exceed the sum of certain
identified liquid invest-
ments) and (b) the Fund not enter into futures and related
options for which
the aggregate
9
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
initial margin and premiums exceed 5% of the fair market
value of the Fund's
assets. In order to prevent leverage in connection with the
purchase of
futures contracts by the Fund, an amount of cash and cash
equivalents equal to
the market value of futures contracts purchased will be
maintained in a segre-
gated account with PNC Bank. The Fund will engage only in
futures contracts
and related options which are listed on a national
commodities exchange.
Interest Rate Futures Contracts. The Fund may purchase and
sell interest
rate futures contracts as a hedge against changes in
interest rates. An inter-
est rate futures contract is an agreement between two
parties to buy and sell
a security for a set price on a future date. Interest rate
futures contracts
are traded on designated "contracts markets" which, through
their clearing
corporations, guarantee performance of the contracts.
Currently, there are
interest rate futures contracts based on securities such as
long-term Treasury
bonds, Treasury notes, GNMA certificates and three-month
Treasury bills.
Generally, if market interest rates increase, the value of
outstanding debt
securities declines (and vice versa). Entering into an
interest rate futures
contract for the sale of securities has an effect similar to
the actual sale
of securities, although sale of the interest rate futures
contract might be
accomplished more easily and quickly. For example, if the
Fund holds long-term
U.S. government securities and SBMFM anticipates a rise in
long-term interest
rates, the Fund could, in lieu of disposing of its portfolio
securities, enter
into interest rate futures contracts for the sale of similar
long-term securi-
ties. If interest rates increased and the value of the
Fund's securities
declined, the value of the Fund's interest rate futures
contracts would
increase, thereby protecting the Fund by preventing the net
asset value from
declining as much as it otherwise would have declined.
Similarly, entering
into interest rate futures contracts for the purchase of
securities has an
effect similar to the actual purchase of the underlying
securities, but per-
mits the continued holding of securities other than the
underlying securities.
For example, if SBMFM expects long-term interest rates to
decline, the Fund
might enter into interest rate futures contracts for the
purchase of long-term
securities, so that it could gain rapid market exposure that
may offset antic-
ipated increases in the cost of securities that it intends
to purchase, while
continuing to hold higher-yielding short-term securities or
waiting for the
long-term market to stabilize.
The Fund may purchase and sell listed put and call options
on interest rate
futures contracts. An option on an interest rate futures
contract gives the
purchaser the right, in return for the premium paid, to
assume a position in
an interest rate futures contract (a long position if the
option is a call and
a short
10
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
position if the option is a put), at a specified exercise
price at any time
during the option period. When an option on a futures
contract is exercised,
delivery of the interest rate futures position is
accompanied by cash repre-
senting the difference between the current market price of
the interest rate
futures contract and the exercise price of the option. The
Fund may purchase
put options on interest rate futures contracts in lieu of,
and for the same
purpose as, sale of a futures contract. It also may purchase
such put options
in order to hedge a long position in the underlying interest
rate futures con-
tract in the same manner as it purchases "protective puts"
on securities. The
purchase of call options on interest rate futures contracts
is intended to
serve the same purpose as the actual purchase of the futures
contract, and the
Fund will set aside cash and cash equivalents sufficient to
purchase the
amount of portfolio securities represented by the underlying
futures con-
tracts. See "Options Activities" and "Dividends,
Distributions and Taxes."
Stock Index Futures Contracts. The Fund may purchase and
sell stock index
futures contracts. These transactions, if any, by the Fund
will be made solely
for the purpose of hedging against the effects of changes in
the value of its
portfolio securities due to anticipated changes in market
conditions and will
be made when the transactions are economically appropriate
to the reduction of
risks inherent in the management of the Fund. A stock index
futures contract
is an agreement under which two parties agree to take or
make delivery of the
amount of cash based on the difference between the value of
a stock index at
the beginning and at the end of the contract period. When
the Fund enters into
a stock index futures contract, it must make an initial
deposit, known as
"initial margin," as a partial guarantee of its performance
under the con-
tract. As the value of the stock index fluctuates, either
party to the con-
tract is required to make additional margin deposits, known
as "variation mar-
gin," to cover any additional obligation that it may have
under the contract.
The Fund may not at any time commit more than 5% of its
total assets to ini-
tial margin deposits on futures contracts.
Successful use of stock index futures contracts by the
Fund is subject to
certain special risk considerations. A liquid stock index
futures market may
not be available when the Fund seeks to offset adverse
market movements. In
addition, there may be an imperfect correlation between
movements in the secu-
rities included in the index and movements in the securities
in the Fund. Suc-
cessful use of stock index futures contracts is further
dependent on SBMFM's
ability to predict correctly movements in the direction of
the stock markets
and no assurance can be given that its judgment in this
respect will be cor-
rect. Risks in the
11
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
purchase and sale of stock index futures are further
referred to in the State-
ment of Additional Information.
Foreign Securities and American Depositary Receipts. The
Fund may purchase
foreign securities or American Depositary Receipts ("ADRs").
ADRs are U.S.
dollar-denominated receipts issued generally by domestic
banks and represent-
ing the deposit with the bank of a security of a foreign
issuer. ADRs are pub-
licly traded on exchanges or over-the-counter in the United
States.
Investing in the securities of foreign companies involves
special risks and
considerations not typically associated with investing in
U.S. companies.
These risks include differences in accounting, auditing and
financial report-
ing standards, generally higher commission rates on foreign
portfolio transac-
tions, the possibility of expropriation or confiscatory
taxation, adverse
changes in investment or exchange control regulations,
political instability
which could affect U.S. investments in foreign countries and
potential
restrictions on the flow of international capital.
Additionally, dividends
payable on foreign securities may be subject to foreign
taxes withheld prior
to distribution. Foreign securities often trade with less
frequency and volume
than domestic securities and therefore may exhibit greater
price volatility.
Changes in foreign exchange rates will affect the value of
those securities
which are denominated or quoted in currencies other than the
U.S. dollar. Many
of the foreign securities held by the Fund will not be
registered with, nor
will the issuers thereof be subject to the reporting
requirements of, the SEC.
Accordingly, there may be less publicly available
information about the secu-
rities and the foreign company or government issuing them
than is available
about a domestic company or government entity. Moreover,
individual foreign
economies may differ favorably or unfavorably from the U.S.
economy in such
respects as growth of gross national product, rate of
inflation, capital rein-
vestment, resource self-sufficiency and balance of payment
positions.
Non-Publicly Traded and Illiquid Securities. The sale of
securities that are
not publicly traded is typically restricted under the
Federal securities laws.
As a result, the Fund may be forced to sell these securities
at less than fair
market value or may not be able to sell them when SBMFM
believes it desirable
to do so. The Fund's investments in illiquid securities are
subject to the
risk that 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.
12
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment
restrictions with
respect to the Fund that may not be changed without approval
of a majority of
the Fund's outstanding shares. The fundamental investment
restrictions adopted
by the Trust prohibit the Fund from:
1. Purchasing the securities of any issuer (other than
U.S. government
securities) if as a result more than 5% of the value of
the Fund's total
assets would be invested in the securities of the issuer,
except that up
to 25% of the value of the Fund's total assets may be
invested without
regard to this 5% limitation.
2. Purchasing more than 10% of the voting securities of
any one issuer,
provided that this limitation shall not apply to
investments in U.S. gov-
ernment securities.
3. Purchasing securities on margin, except that the Fund
may obtain any
short-term credits necessary for the clearance of
purchases and sales of
securities. For purposes of this restriction, the deposit
or payment of
initial or variation margin in connection with futures
contracts or
related options will not be deemed to be a purchase of
securities on mar-
gin by the Fund.
4. Making short sales of securities or maintaining a short
position,
except to the extent of 5% of the Fund's net assets and
except that the
Fund may engage in such activities without limit if, at
all times when a
short position is open, the Fund owns an equal amount of
the securities or
securities convertible into or exchangeable, without
payment of any fur-
ther consideration, for securities of the same issuer as,
and at least
equal in amount to, the securities sold short.
5. Borrowing money, including reverse repurchase
agreements, except that
the Fund may borrow from banks for temporary or emergency
(not leveraging)
purposes including the meeting of redemption requests that
might otherwise
require the untimely disposition of securities, in an
amount not exceeding
20% of the value of the Fund's total assets (including the
amount borrow-
ed) valued at market less liabilities (not including the
amount borrowed)
at the time the borrowing is made. Whenever borrowings
exceed 5% of the
value of the Fund's total assets, the Fund will not make
any additional
investments.
13
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
6. Pledging, hypothecating, mortgaging or otherwise
encumbering more than
10% of the value of the Fund's total assets as security
for any indebted-
ness. For purposes of this restriction (a) the deposit of
assets in escrow
in connection with the writing of covered put or call
options and the pur-
chase of securities on a when-issued or delayed-delivery
basis and (b)
collateral arrangements with respect to (i) the purchase
and sale of stock
options, options on foreign currencies and options on
stock indexes and
(ii) initial or variation margin for futures contracts
will not be deemed
to be pledges of the Fund's assets.
7. Investing in commodities, except that the Fund may
purchase or write
futures contracts and options on futures contracts as
described in this
Prospectus.
8. Making loans to others, except through the purchase of
qualified debt
obligations, loans of portfolio securities and the entry
into repurchase
agreements.
9. Concentrating in any industry, except that the Fund
will concentrate in
excess of 25% of its assets in the securities of companies
within the
utility industries.
In addition, the Fund will not purchase restricted
securities, illiquid
securities (such as repurchase agreements with maturities in
excess of seven
days) or other securities that are not readily marketable if
more than 10% of
the total assets of the Fund would be invested in such
securities.
Certain other investment restrictions, including
fundamental restrictions as
well as restrictions that may be changed without a
shareholder vote, adopted
by the Trust are described in the Statement of Additional
Information.
PORTFOLIO TRANSACTIONS
Securities and commodities transactions on behalf of the
Fund will be exe-
cuted by a number of brokers and dealers, including Smith
Barney. The Fund may
use Smith Barney in connection with a purchase or sale of
securities when
SBMFM believes that the charge for the transaction does not
exceed usual and
customary levels. The Fund also may use Smith Barney as a
commodities broker
in connection with entering into futures contracts and
commodity options.
Smith Barney has agreed to charge the Fund commodity
commissions at rates com-
parable to those charged by Smith Barney to its most favored
clients for com-
parable trades in comparable accounts.
14
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
In selecting a broker for a transaction, including Smith
Barney or its affil-
iates, the primary consideration is prompt and effective
execution of orders at
the most favorable price. Subject to that primary
consideration, dealers may be
selected for research, statistical or other services to
enable SBMFM to supple-
ment its own research and analysis with the views and
information of other
securities firms.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves special considerations,
such as those
described below:
General. Investment in the Fund may involve above-average
risk of loss
because of, among other things, the Fund's use of strategies
and techniques
that may be considered to be speculative. The strategy
followed by the Fund and
certain of the strategies and techniques used by the Fund
depend on forecasts
made by SBMFM that may or may not prove to be correct.
Low-Rated Securities. Low-rated and comparable unrated
securities (a) will
likely have some quality and protective characteristics
that, in the judgment
of the rating organization, are outweighed by large
uncertainties or major risk
exposures to adverse conditions and (b) are predominantly
speculative with
respect to the issuer's capacity to pay interest and repay
principal in accor-
dance with the terms of the securities.
While the market values of low-rated and comparable
unrated securities tend
to react less to fluctuations in interest rate levels than
the market values of
higher-rated securities, the market values of certain low-
rated and comparable
unrated securities also tend to be more sensitive to
individual corporate
development and changes in economic conditions than higher-
rated securities. In
addition, low-rated securities and comparable unrated
securities generally
present a higher degree of credit risk. Issuers of low-rated
and comparable
unrated securities are often highly leveraged and may not
have more traditional
methods of financing available to them so that their ability
to service their
debt obligations during an economic downturn or during
sustained periods of
rising interest rates may be impaired. The risk of loss due
to default by such
issuers is significantly greater because low-rated and
comparable unrated secu-
rities generally are unsecured and frequently are
subordinated to the prior
payment of senior indebtedness. The Fund may incur
additional expenses to the
extent it is required to seek recovery upon a default in the
payment of princi-
pal or interest on its portfolio holdings. The existence of
limited markets for
low-rated and
15
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
comparable unrated securities may diminish the Fund's
ability to (a) obtain
accurate market quotations for purposes of valuing such
securities and calcu-
lating its net asset value and (b) sell the securities at
fair value either to
meet redemption requests or to respond to changes in the
economy or in the
financial markets.
Fixed-income securities, including low-rated securities
and comparable
unrated securities, frequently have call or buy-back
features that permit
their issuers to call or repurchase the securities from
their holders, such as
the Fund. If an issuer exercises these rights during periods
of declining
interest rates, the Fund may have to replace the security
with a lower yield-
ing security, thus resulting in a decreased return to the
Fund.
The market for certain low-rated and comparable unrated
securities is rela-
tively new and has not fully weathered a major economic
recession. Any such
economic downturn could adversely affect the ability of the
issuers of such
securities to repay principal and pay interest thereon.
Investment in Utility Securities. Because the Fund
concentrates its invest-
ments in one sector, its portfolio may be subject to greater
risk and market
fluctuations than a portfolio of securities representing a
broader range of
investment alternatives. The Fund is particularly subject to
risks that are
inherent to the utility industries that make up this sector,
including diffi-
culty in obtaining an adequate return on invested capital,
difficulty in
financing large construction programs during an inflationary
period, restric-
tions on operations and increased cost and delays
attributable to environmen-
tal considerations and regulation, difficulty in raising
capital in adequate
amounts on reasonable terms in periods of high inflation and
unsettled capital
markets, increased costs and reduced availability of certain
types of fuel,
occasional reduced availability and high costs of natural
gas for resales, the
effects of energy conservation, the effects of a national
energy policy and
lengthy delays and greatly increased costs and other
problems associated with
the design, construction, licensing, regulation and
operation of nuclear
facilities for electric generation, including, among other
considerations, the
problems associated with the use of radioactive materials
and the disposal of
radioactive wastes. There are substantial differences
between the regulatory
practices and policies of various jurisdictions, and any
given regulatory
agency may make major shifts in policy from time to time.
There is no assur-
ance that regulatory authorities will grant rate increases
in the future or
that such increases will be adequate to permit the payment
of dividends on
common stocks. Additionally, existing and possible future
regulatory legisla-
tion may make it even more difficult for these utilities to
obtain adequate
relief. Certain
16
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
of the issuers of securities held by the Fund may own or
operate nuclear gen-
erating facilities. Governmental authorities may from time
to time review
existing policies, and impose additional requirements
governing the licensing,
construction and operation of nuclear power plants.
Each of the risks referred to above could adversely affect
the ability and
inclination of public utilities to declare or pay dividends
and the ability of
holders of common stock to realize any value from the assets
of the issuer
upon liquidation or bankruptcy. All of the utilities which
are issuers of the
securities held by the Fund have been experiencing one or
more of these prob-
lems in varying degrees. Moreover, price disparities within
selected utility
groups and discrepancies in relation to averages and indices
have occurred
frequently for reasons not directly related to the general
movements or price
trends of utility common stocks. Causes of these
discrepancies include changes
in the overall demand for and supply of various securities
(including the
potentially depressing effect of new stock offerings), and
changes in invest-
ment objectives, market expectations or cash requirements of
other purchasers
and sellers of securities.
Interest Rate Risk. The Fund will be affected by general
changes in interest
rates which will result in increases or decreases in the
market value of the
debt securities held by the Fund. The market value of the
debt securities held
by the Fund can be expected to vary inversely to changes in
prevailing inter-
est rates.
Options on Securities. Because option premiums paid by the
Fund are small in
relation to the market value of the investments underlying
the options, buying
put options can result in large amounts of leverage. The
leverage offered by
trading in options could cause the Fund's net asset value to
be subject to
more frequent and wider fluctuation than would be the case
if the Fund did not
invest in options.
No assurance can be given that the Fund will be able to
effect closing
transactions at a time when it wishes to do so. If the Fund
cannot enter into
a closing transaction, the Fund will continue to be subject
to the risk that a
put option it has purchased will decline in value or become
worthless as a
result of any increase in the value of the underlying
security. The Fund also
could face higher transaction costs, including brokerage
commissions.
Lending of Portfolio Securities. The risk associated with
lending portfolio
securities, as with other extensions of credit, consists of
possible loss of
rights in the collateral should the borrower fail
financially.
17
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Short Sales. Possible losses from short sales differ from
losses that could
be incurred from a purchase of a security, because losses
from short sales may
be unlimited, whereas losses from purchases can equal only
the total amount
invested.
Futures Transactions. The use of futures contracts as a
hedging device
involves several risks. No assurance can be given that a
correlation will
exist between price movements in the stock index and price
movements in the
securities that are the subject of the hedge; the risk of
imperfect correla-
tion increases as the composition of the securities held by
the Fund diverges
from the securities included in the applicable stock index.
Positions in
futures contracts may be closed out only on the exchange on
which they were
entered into (or through a linked exchange) and no secondary
market exists for
those contracts. In addition, although the Fund intends to
enter into futures
contracts only if an active market exists for the contracts,
no assurance can
be given that an active market will exist for the contracts
at any particular
time. Certain exchanges do not permit trading in particular
contracts at
prices that represent a fluctuation in price during a single
day's trading
beyond a certain set limit. If prices fluctuate during a
single day's trading
beyond those limits, the Fund could be prevented from
promptly liquidating
unfavorable positions and thus be subjected to losses.
Losses incurred in
hedging transactions and the costs of these transactions
will affect the
Fund's performance. Successful use of stock index futures by
the Fund for
hedging purposes is subject to the ability of SBMFM to
correctly predict move-
ments in the direction of the stock market.
VALUATION OF SHARES
The net asset value per share of Class Z shares is
determined as of the
close of regular trading on the New York Stock Exchange,
Inc. (the "NYSE"), on
each day that the NYSE is open, by dividing the value of the
Fund's net assets
attributable to Class Z by the total number of shares of the
Class outstand-
ing. The per share net asset value of the Class Z shares may
be higher than
those of other Classes because of the lower expenses
attributable to Class Z
shares.
Generally, the Fund's investments are valued at market
value or, in the
absence of a market value with respect to any securities, at
fair value as
determined by or under the direction of the Trust's Board of
Trustees. Portfo-
lio securities which are traded primarily on foreign
exchanges are generally
valued at the preceding closing values of such securities on
their respective
exchanges, except that when an occurrence subsequent to the
time a value was
so estab-
18
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
VALUATION OF SHARES (CONTINUED)
lished is likely to have changed such value, then the fair
market value of
those securities will be determined by consideration of
other factors by or
under the direction of the Board of Trustees or its
delegates. A security that
is traded primarily on an exchange is valued at the last
sale price on that
exchange or, if there were no sales during the day, at the
current quoted bid
price. Over-the-counter securities are valued on the basis
of the bid price at
the close of business on each day. Investments in U.S.
government securities
(other than short-term securities) are valued at the average
of the quoted bid
and asked prices in the over-the-counter market. Short-term
investments that
mature in 60 days or less are valued at amortized cost
whenever the Trustees
determine that amortized cost reflects fair value of those
investments. An
option generally is valued at the last sale price or, in the
absence of the
last sale price, the last offer price. The value of a
futures contract equals
the unrealized gain or loss on the contract, which is
determined by marking the
contract to the current settlement price for a like contract
acquired on the
day on which the stock index futures contract is being
valued. A settlement
price may not be used if the market makes a limited move
with respect to a par-
ticular commodity or if the underlying securities market
experiences signifi-
cant 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 informa-
tion regarding the Trust's valuation policies with respect
to the Fund is con-
tained 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 determin-
ing the amounts of dividends from investment income and
distributions of capi-
tal gains payable to shareholders. Dividends and capital
gain distributions
will be reinvested automatically for each shareholder's
account at net asset
value in additional Class Z shares of the Fund, unless the
shareholder is eli-
gible for qualified distributions and instructs the Fund to
pay all dividends
and capital gain distributions in cash. Dividends from net
investment income,
if any, of the Fund will be declared monthly and will be
paid on the last Fri-
day of the 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 fre-
quently with dividends from net investment income. In
addition, in order to
avoid the application of a 4%
19
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
nondeductible excise tax measured with respect to certain
undistributed amounts
of ordinary income and capital gains, the Fund may make an
additional distribu-
tion shortly before December 31 in each year of any
undistributed ordinary
income on capital gains and expects to pay any other
dividends and distribu-
tions 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 gen-
erally will be treated as a tax-free return of capital (up
to the amount of the
shareholder's tax basis in his or her shares). The amount
treated as a tax-free
return of capital will reduce a shareholder's adjusted basis
in his or her
shares. Pursuant to the requirements of the Investment
Company Act of 1940, as
amended (the "1940 Act") and other applicable laws, a notice
will accompany any
distribution paid from sources other than net investment
income. In the event
the Fund distributes amounts in excess of its net investment
income and net
realized capital gains, such distributions may have the
effect of decreasing
the Fund's total assets, which may increase the Fund's
expense ratio.
TAXES
The Fund will be treated as a separate taxpayer with the
result that, for
Federal income tax purposes, the amount of investment income
and capital gains
earned by the Fund will be determined without regard to the
earnings of the
other funds of the Trust. The Fund has qualified and intends
to continue to
qualify each year as a regulated investment company under
Subchapter M of the
Internal Revenue Code of 1986, as amended. To meet those
requirements, the Fund
may need to restrict the degree to which it engages in short-
term trading,
short sales of securities and transactions in options. If
the Fund qualifies as
a regulated investment company and meets certain
distribution requirements, the
Fund will not be subject to Federal income tax on its net
investment income and
net capital gains that it distributes to its shareholders.
Dividends paid by the Fund from investment income and
distributions of short-
term capital gain will be taxable to shareholders as
ordinary income for Fed-
eral income tax purposes, whether received in cash or
reinvested in additional
shares. Distributions of long-term capital gain will be
taxable to shareholders
as long-term capital gain, whether paid in cash or
reinvested in additional
shares, and regardless of the length of time the investor
has held his or her
shares of the Fund. Generally, dividends of investment
income (to the extent
derived from most types of dividends from domestic
corporations) from the Fund
will qualify for the Federal dividends-received deduction
for corporate
20
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
shareholders. Each shareholder of the Fund will receive a
statement annually
from the Trust, which will set forth separately the
aggregate dollar amount of
dividends and capital gains distributed to the shareholder
by the Fund with
respect to the prior calendar year and the amount of the
distributions that
qualifies for the dividends-received deduction.
Shareholders should consult their plan document or tax
advisors about the
consequences associated with participating in a Qualified
Plan or Smith Barney
UIT.
PURCHASE AND REDEMPTION OF SHARES
Purchases of the Fund's Class Z shares must be made in
accordance with the
terms of a Qualified Plan or Smith Barney UIT. Purchases are
effected at net
asset value next determined after a purchase order is
received by Smith Barney
(the "trade date"). Payment is due to Smith Barney on the
third business day
(the "settlement date") after the trade date. Investors who
make payment prior
to the settlement date may designate a temporary investment
(such as a money
market fund of the Smith Barney Mutual Funds) for such
payment until settlement
date. The Fund reserves the right to reject any purchase
order and to suspend
the offering of shares for a period of time. There are no
minimum investment
requirements for Class Z shares; however, the Fund reserves
the right to vary
this policy at any time.
Purchase orders received by the Fund or Smith Barney prior
to the close of
regular trading on the NYSE, currently 4:00 p.m., New York
time, on any day
that the Fund calculates its net asset value, are priced
according to the net
asset value determined on that day. See "Valuation of
Shares." Certificates for
Fund shares are issued upon request to the Trust's transfer
agent.
Shareholders may redeem their shares on any day on which
the Fund calculates
its net asset value. See "Valuation of Shares." Redemption
requests received in
proper form prior to the close of regular trading on the
NYSE are priced at the
net asset value per share determined on that day. Redemption
requests received
after the close of regular trading on the NYSE are priced at
the net asset
value as next determined. Shareholders acquiring Class Z
shares through a Qual-
ified Plan or a Smith Barney UIT should consult the terms of
their respective
plans for redemption provisions.
21
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
EXCHANGE PRIVILEGE
Holders of Class Z shares in the Fund may exchange their
shares at the net
asset value next determined for shares of the same Class in
the following
funds of the Smith Barney Mutual Funds to the extent shares
are offered for
sale in the shareholder's state of residence. Exchanges of
shares may be made
at any time without payment of any exchange fee.
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Funds, Inc.--Income Return Account
Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities
Portfolio
Smith Barney High Income Fund
Smith Barney Money Funds, Inc.--Cash Portfolio
Smith Barney Money Funds, Inc.--Government Portfolio
Smith Barney World Funds, Inc.--International Equity
Portfolio
The exchange of shares of one fund for shares of another
fund is generally
treated for Federal income tax purposes as a sale of the
shares given in
exchange by the shareholder. Therefore, an exchanging
shareholder may realize
a taxable gain or loss in connection with the exchange.
Shareholders should
consult their plan prospectus and/or other governing
documents regarding
exchanges. Generally, exchanges within such a plan are not
treated as a tax-
able event.
Shareholders exercising the exchange privilege with any of
the other funds
of the Smith Barney Mutual Funds should review the
prospectus of that fund
carefully prior to making an exchange. Smith Barney reserves
the right to
reject any exchange request.
Although the exchange privilege is an important benefit,
excessive exchange
transactions can be detrimental to the Fund's performance
and its sharehold-
ers. SBMFM may determine that a pattern of frequent
exchanges is excessive and
contrary to the best interests of the Fund's other
shareholders. In this
event, SBMFM will notify Smith Barney, and Smith Barney may,
at its discre-
tion, decide to limit additional purchases and/or exchanges
by the sharehold-
er. 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
22
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
EXCHANGE PRIVILEGE (CONTINUED)
(a) redeem his or her shares in the Fund or (b) remain
invested in the Fund or
exchange into any of the funds of the Smith Barney Mutual
Funds listed above,
which position the shareholder would be expected to maintain
for a significant
period of time. All relevant factors will be considered in
determining what
constitutes an abusive pattern of exchanges. The Fund
reserves the right to
modify or discontinue exchange privileges upon 60 days'
prior notice to share-
holders.
PERFORMANCE
YIELD
From time to time, the Fund advertises the 30-day "yield"
of its Class Z
shares. The yield refers to the income generated by an
investment in the Fund
over the 30-day period identified in the advertisement and
is computed by
dividing the net investment income per share earned by the
Fund with respect to
a Class during the period by the maximum public offering
price per share on the
last day of the period. This income is "annualized" by
assuming the amount of
income is generated each month over a one-year period and is
compounded semi-
annually. The annualized income is then shown as a
percentage of the net asset
value.
TOTAL RETURN
From time to time the Fund may include its total return,
average annual total
return and current dividend return for Class Z shares in
advertisements and/or
other types of sales literature. These figures are based on
historical earnings
and are not intended to indicate future performance. Total
return is computed
for a specified period of time assuming deduction of the
maximum sales charge,
if any, from the initial amount invested and reinvestment of
all income divi-
dends and capital gains distributions on the reinvestment
dates at prices cal-
culated 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 sub-
tracting 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 non-
standard total return information for differing periods
computed in the same
manner but without annualizing the total return or taking
sales charges into
account. The Fund calculates current dividend return by
annualizing the
23
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
PERFORMANCE (CONTINUED)
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 div-
idend return may vary from time to time depending on market
conditions, the
composition of its investment portfolio and operating
expenses. These factors
and possible differences in the methods used in calculating
current dividend
return should be considered when comparing the Fund's
current return to yields
published for other investment companies and other
investment vehicles. The
Fund may also include comparative performance information in
advertising or
marketing the Fund's shares. Such performance information
may include data
from Lipper Analytical Services, Inc. and other financial
publications.
Class Z's average annual total return was as follows for
the periods
indicated:
13.55% for the one-year period beginning August 1, 1994
through July
31, 1995.
7.35% per annum during the period from commencement of
operations
(November 6, 1992) through July 31, 1995.
Class Z's aggregate total return was as follows for the
periods indicated:
13.54% for the one-year period beginning on August 1,
1994 through
July 31, 1995.
21.38% for the period from commencement of operations
(November 6,
1992) through July 31, 1995.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of
the Fund rests with
the Trust's Board of Trustees. The Trustees approve all
significant agreements
between the Trust and companies that furnish services to the
Trust and the
Fund, including agreements with the Fund's distributor,
investment adviser,
administrator, custodian and transfer agent. The day-to-day
operations of the
Fund are delegated to the Fund's investment adviser and
administrator. The
Statement of Additional Information contains background
information regarding
each Trustees and executive officer of the Trust.
24
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
INVESTMENT ADVISER--SBMFM
SBMFM (formerly known as Smith, Barney Advisers, Inc.) is
a registered
investment adviser whose principal executive offices are
located at 388 Green-
wich Street, New York, New York 10013, and serves as the
Fund's investment
adviser. SBMFM is a wholly owned subsidiary of Smith Barney
Holdings Inc.
("Holdings"). Holdings is a wholly owned subsidiary of
Travelers Group Inc.
("Travelers"), a diversified financial services holding
company engaged,
through its subsidiaries, principally in four business
segments: Investment
Services, Consumer Finance Services, Life Insurance Services
and Property &
Casualty Insurance Service. SBMFM (through its predecessor
entities) has been
in the investment counseling business since 1934 and is a
registered invest-
ment adviser. SBMFM renders investment advice to investment
companies that had
aggregate assets under management as of September 30, 1995
in excess of $60
billion.
Subject to the supervision and direction of the Fund's
Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the
Fund's investment
objectives and policies, makes investment decisions for the
Fund, places
orders to purchase and sell securities and employs
professional portfolio man-
agers and securities analysts who provide research services
to the Fund. For
investment advisory services rendered the Fund pays SBMFM a
fee at the annual
rate of 0.45% of the value of the Fund's daily net assets.
PORTFOLIO MANAGEMENT
Jack S. Levande, a Managing Director of Smith Barney, has
served as Vice
President and Investment Officer of the Fund since it
commenced operations and
manages the day to day operations of the Fund, including
making all investment
decisions.
Management's discussion and analysis, and additional
performance information
regarding the Fund during the fiscal year ended July 31,
1995 is included in
the Annual Report dated July 31, 1995. A copy of the Annual
Report may be
obtained upon request and without charge from a Smith Barney
Financial Consul-
tant or by writing or calling the Fund at the address or
phone number listed
on page one of this Prospectus.
ADMINISTRATOR -- SBMFM
SBMFM also serves as the Fund's administrator and oversees
all aspects of
the Fund's administration. For administration services
rendered, the Fund pays
25
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
SBMFM a fee at the annual rate of .20% of the value of the
Fund's average daily
net assets.
DISTRIBUTOR -- SMITH BARNEY
Smith Barney is located at 388 Greenwich Street, New York,
New York 10013,
and serves as the Fund's distributor. Smith Barney is a
wholly owned subsidiary
of Holdings.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985 in the
Commonwealth of Massachu-
setts and is a business entity commonly known as a
"Massachusetts business
trust."
The Trust offers shares of beneficial interest of separate
series having a
$.001 per share par value. Shares of beneficial interest of
the Fund are cur-
rently classified into five Classes: A, B, C, Y and Z. Each
Class of shares
represents identical pro rata interests in the Fund's
investment portfolio. As
a result, the Classes have the same rights, privileges and
preferences, except
with respect to: (a) the designation of each Class; (b) the
effect of the
respective sales charges, if any, for each Class; (c) the
distribution and/or
service fees, if any, borne by each Class pursuant to a plan
adopted under Rule
12b-1 under the 1940 Act; (d) the expenses allocable
exclusively to each Class;
(e) voting rights on matters exclusively affecting a single
Class; (f) the
exchange privilege of each Class; and (g) the conversion
feature of a Class.
The Trust's Board of Trustees does not anticipate that there
will be any con-
flicts among the interests of the holders of the different
Classes of shares of
the Fund. The Trustees, on an ongoing basis, will consider
whether any such
conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings. There
normally will be
no meeting of shareholders for the purpose of electing
Trustees unless and
until such time as less than a majority of the Trustees
holding office have
been elected by shareholders. The Trustees will call a
meeting for any purpose
upon the written request of shareholders holding at least
10% of the Fund's
outstanding shares and the Trust will assist shareholders in
calling such a
meeting as required by the 1940 Act. When matters are
submitted for shareholder
vote, shareholders of each Class of the Fund will have one
vote for each full
share owned and a proportionate, fractional vote for any
fractional share held
of that
26
<PAGE>
SMITH BARNEY
Utilities Fund -- Class Z Shares
ADDITIONAL INFORMATION (CONTINUED)
Class. Generally, shares of the Trust vote by individual
fund on all matters
except (a) matters affecting only the interests of one or
more of the funds,
in which case only shares of the affected fund or funds
would be entitled to
vote or (b) when the 1940 Act requires that shares of the
funds be voted in
the aggregate. Similarly, shares of the Fund will be voted
generally on a
Fund-wide basis except on matters affecting only the
interests of one or more
of the Classes of shares.
The Fund sends its shareholders a semi-annual report and
an audited annual
report, which include a listing of the investment securities
held by the Fund
at the end of the reporting period. 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.
Shareholders who do
not want this consolidation to apply to their accounts
should contact a Smith
Barney Financial Consultant or FDISG.
PNC Bank, located at 17th and Chestnut Streets,
Philadelphia, PA 19103,
serves as custodian of the Fund's investments.
First Data Investor Services Group, Inc. is located at
Exchange Place, Bos-
ton, Massachusetts 02109, and serves as the Trust's transfer
agent.
27
<PAGE>
SmithBarney
- - -----------
A Member of
TravelersGroup [LOGO]
SMITH BARNEY
UTILITIES FUND
388 Greenwich Street
New
York, New York 10013
FD 0791 11/95
<PAGE>
P R O S P E C T U S
SMITH BARNEY
Premium
Total
Return
Fund
November 28, 1995
PROSPECTUS BEGINS ON PAGE ONE
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Everyday.
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PROSPECTUS
NOVEMBER 28, 1995
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Premium Total Return Fund (the "Fund"), a
diversified fund,
seeks to provide shareholders with total return, consisting
of long-term capi-
tal 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, mak-
ing up Smith Barney Income Funds (the "Trust"). The Trust is
an open-end man-
agement investment company commonly referred to as a mutual
fund.
This Prospectus sets forth concisely certain information
about the Fund and
the Trust, including sales charges, distribution and service
fees and expenses,
that prospective investors will find helpful in making an
investment decision.
Investors are encouraged to read this Prospectus carefully
and retain it for
future reference. Shares of other investment funds offered
by the Trust are
described in separate prospectuses that may be obtained by
calling the Fund at
the telephone number set forth above, or by contacting a
Smith Barney Financial
Consultant.
Additional information about the Fund and the Trust is
contained in a State-
ment of Additional Information dated November 28, 1995, as
amended or supple-
mented from time to time, that is available upon request and
without charge by
calling or writing the Trust at the telephone number or
address set forth above
or by contacting a Smith Barney Financial Consultant. The
Statement of Addi-
tional Information has been filed with the Securities and
Exchange Commission
(the "SEC") and is incorporated by reference into this
Prospectus in its
entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY STRATEGY ADVISERS INC.
Investment Adviser
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Premium Total Return Fund
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- - -----------------------------------------
FINANCIAL HIGHLIGHTS 10
- - -----------------------------------------
INVESTMENT OBJECTIVES AND POLICIES 14
- - -----------------------------------------
VALUATION OF SHARES 23
- - -----------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 23
- - -----------------------------------------
PURCHASE OF SHARES 24
- - -----------------------------------------
EXCHANGE PRIVILEGE 35
- - -----------------------------------------
REDEMPTION OF SHARES 38
- - -----------------------------------------
MINIMUM ACCOUNT SIZE 42
- - -----------------------------------------
PERFORMANCE 42
- - -----------------------------------------
MANAGEMENT OF THE TRUST AND THE FUND 43
- - -----------------------------------------
DISTRIBUTOR 44
- - -----------------------------------------
ADDITIONAL INFORMATION 45
- - -----------------------------------------
</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 Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified
management invest-
ment company that seeks total return by investing primarily
in a diversified
portfolio of dividend-paying common stocks. The Fund may
engage in various
portfolio strategies involving options to seek to increase
its return and to
hedge its portfolio against movements in the equity markets
and interest
rates. See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several
classes of shares
("Classes") to investors designed to provide them with the
flexibility of
selecting an investment best suited to their needs. The
general public is
offered three Classes of shares: Class A shares, Class B
shares and Class C
shares, which differ principally in terms of sales charges
and rate of
expenses to which they are subject. A fourth Class of
shares, Class Y shares,
is offered only to investors meeting an initial investment
minimum of
$5,000,000. See "Purchases of Shares" and "Redemption of
Shares."
Class A Shares. Class A shares are sold at net asset value
plus an initial
sales charge of up to 5.00% and are subject to an annual
service fee of 0.25%
of the average daily net assets of the Class. The initial
sales charge may be
reduced or waived for certain purchases. Purchases of Class
A shares, which
when combined with current holdings of Class A shares
offered with a sales
charge equal or exceed $500,000 in the aggregate, will be
made at net asset
value with no initial sales charge, but will be subject to a
contingent
deferred sales charge ("CDSC") of 1.00% on redemptions made
within 12 months
of purchase. See "Prospectus Summary--Reduced or No Initial
Sales Charge."
Class B Shares. Class B shares are offered at net asset
value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by
1.00% each year
after the date of purchase to zero. This CDSC may be waived
for certain
redemptions. Class B shares are subject to an annual service
fee of 0.25% and
an annual distribution fee of 0.50% of the average daily net
assets of the
Class. The Class B shares' distribution fee may cause that
Class to have
higher expenses and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will
convert automatically
to Class A shares, based on relative net asset value, eight
years after the
date of
3
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PROSPECTUS SUMMARY (CONTINUED)
the original purchase. Upon conversion, these shares will no
longer be subject
to an annual distribution fee. In addition, a certain
portion of Class B shares
that have been acquired through the reinvestment of
dividends and distributions
("Class B Dividend Shares") will be converted at that time.
See "Purchase of
Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value
with no initial
sales charge. They are subject to an annual service fee of
0.25% and an annual
distribution fee of 0.45% of the average daily net assets of
the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares
within 12 months of
purchase. The CDSC may be waived for certain redemptions.
The Class C shares'
distribution fee may cause that Class to have higher
expenses and pay lower
dividends than Class A shares. Purchases of Fund shares,
which when combined
with current holdings of Class C shares of the Fund equal or
exceed $500,000 in
the aggregate, should be made in Class A shares at net asset
value with no
sales charge, and will be subject to a CDSC of 1.00% on
redemptions made within
12 months of purchase.
Class Y Shares. Class Y shares are available only to
investors meeting an
initial investment minimum of $5,000,000. Class Y shares are
sold at net asset
value with no initial sales charge or CDSC. They are not
subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase,
investors should consider
the following factors, as well as any other relevant facts
and circumstances:
Intended Holding Period. The decision as to which Class of
shares is more
beneficial to an investor depends on the amount and intended
length of his or
her investment. Shareholders who are planning to establish a
program of regular
investment may wish to consider Class A shares; as the
investment accumulates
shareholders may qualify for reduced sales charges and the
shares are subject
to lower ongoing expenses over the term of the investment.
As an investment
alternative, Class B and Class C shares are sold without any
initial sales
charge so the entire purchase price is immediately invested
in the Fund. Any
investment return on these additional invested amounts may
partially or wholly
offset the higher annual expenses of these Classes. Because
the Fund's future
return cannot be predicted, however, there can be no
assurance that this would
be the case.
Finally, investors should consider the effect of the CDSC
period and any con-
version rights of the Classes in the context of their own
investment time
frame.
4
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PROSPECTUS SUMMARY (CONTINUED)
For example, while Class C shares have a shorter CDSC period
than Class B
shares, they do not have a conversion feature, and
therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more
attractive than
Class C shares to investors with longer term investment
outlooks.
Investors investing a minimum of $5,000,000 must purchase
Class Y shares,
which are not subject to an initial sales charge, CDSC or
service or distribu-
tion fee. The maximum purchase amount for Class A shares is
$4,999,999, Class B
shares is $249,999 and Class C shares is $499,999. There is
no maximum purchase
amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales
charge on Class A
shares may be waived for certain eligible purchasers, and
the entire purchase
price will be immediately invested in the Fund. In addition,
Class A share pur-
chases, which when combined with current holdings of Class A
shares offered
with a sales charge equal or exceed $500,000 in the
aggregate, will be made at
net asset value with no initial sales charge, but will be
subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The
$500,000 aggregate
investment may be met by adding the purchase to the net
asset value of all
Class A shares offered with a sales charge held in funds
sponsored by Smith
Barney Inc. ("Smith Barney") listed under "Exchange
Privilege." Class A share
purchases may also be eligible for a reduced initial sales
charge. See "Pur-
chase of Shares." Because the ongoing expenses of Class A
shares may be lower
than those for Class B and Class C shares, purchasers
eligible to purchase
Class A shares at net asset value or at a reduced sales
charge should consider
doing so.
Smith Barney Financial Consultants may receive different
compensation for
selling each Class of shares. Investors should understand
that the purpose of
the CDSC on the Class B and Class C shares is the same as
that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and
the Fund" for a
complete description of the sales charges and service and
distribution fees for
each Class of shares and "Valuation of Shares," "Dividends,
Distributions and
Taxes" and "Exchange Privilege" for other differences
between the Classes
of shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to
participate in the
Smith Barney 401(k) Program, which is generally designed to
assist plan spon-
sors in the creation and operation of retirement plans under
Section 401(a)
5
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PROSPECTUS SUMMARY (CONTINUED)
of the Internal Revenue Code of 1986, as amended (the
"Code"), as well as other
types of participant directed, tax-qualified employee
benefit plans (collec-
tively, "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, First Data Investor
Services Group, Inc.
("FDISG"). 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 Retire-
ment Plan. Investors in Class Y shares may open an account
for an initial
investment of $5,000,000. Subsequent investments of at least
$50 may be made
for all Classes. For participants in retirement plans
qualified under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial
investment
requirement for Class A, Class B and Class C shares and the
subsequent invest-
ment requirement for all Classes is $25. The minimum initial
investment
requirement for Class A, Class B and Class C shares and the
subsequent invest-
ment requirement for all Classes through the Systematic
Investment Plan
described below is $50. 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 $50. See "Pur-
chase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the
New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase
of Shares" and "Re-
demption of Shares."
MANAGEMENT OF THE FUND Smith Barney Strategy Advisers Inc.
("Strategy Advis-
ers") serves as the Fund's investment adviser. Strategy
Advisers is a wholly
owned subsidiary of Smith Barney Mutual Funds Management
Inc. ("SBMFM"). SBMFM
provides investment advisory and management services to
investment companies
affiliated with Smith Barney. SBMFM is a wholly
6
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PROSPECTUS SUMMARY (CONTINUED)
owned subsidiary of Smith Barney Holdings Inc. ("Holdings").
Holdings is a
wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified
financial services holding company engaged, through its
subsidiaries princi-
pally in four business segments: Investment Services,
Consumer Finance Servic-
es, Life Insurance Services and Property & Casualty
Insurance Services.
SBMFM also serves as the Fund's administrator. Boston
Partners Asset
Management, L.P. ("Boston Partners") serves as the Fund's
sub-adviser. See
"Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for
shares of the same
Class of certain other funds of the Smith Barney Mutual
Funds at the respective
net asset value next determined, plus any applicable sales
charge differential.
See "Exchange Privilege."
VALUATION OF SHARES The net asset value of the Fund for the
prior day generally
is quoted daily in the financial section of most newspapers
and is also avail-
able from any Smith Barney Financial Consultant. See
"Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly
generally from net
investment income and annually from net realized capital
gains. See "Dividends,
Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid
on shares of a Class
will be reinvested automatically, unless otherwise specified
by an investor, in
additional shares of the same Class at current net asset
value. Shares acquired
by dividend and distribution reinvestments will not be
subject to any sales
charge or CDSC. Class B shares acquired through dividend and
distribution rein-
vestments will become eligible for conversion to Class A
shares on a pro rata
basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no
assurance that the
Fund's investment objective will be achieved. The Fund may
employ investment
techniques which involve certain risks, including entering
into repurchase
agreements, reverse repurchase agreements and forward roll
transactions, engag-
ing in when-issued and delayed-delivery transactions,
lending portfolio securi-
ties, covered option writing, and options contracts on
securities and indices.
See "Investment Objective and Management Policies."
7
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the
costs and expenses an
investor will incur either directly or indirectly as a
shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may
be incurred at the
time of purchase or redemption and, unless otherwise noted,
the Fund's operat-
ing expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
CLASS A CLASS
B CLASS C CLASS Y
- - ------------------------------------------------------------
- - ------------------
<S> <C> <C>
<C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None
None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever
is lower) None*
5.00% 1.00% None
- - ------------------------------------------------------------
- - ------------------
ANNUAL FUND OPERATING EXPENSE
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management fees 0.75%
0.75% 0.75% 0.75%
12b-1 fees** 0.25%
0.75% 0.70% None
Other expenses*** 0.16%
0.16% 0.17% 0.16
- - ------------------------------------------------------------
- - ------------------
TOTAL FUND OPERATING EXPENSES 1.16%
1.66% 1.62% 0.91%
- - ------------------------------------------------------------
- - ------------------
</TABLE>
* Purchase of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge equal or
exceed $500,000 in the
aggregate, will be made at net asset value with no sales
charge, but will
be subject to a CDSC of 1.00% on redemptions made within
12 months.
** Upon conversion of Class B shares to Class A shares,
such shares will no
longer be subject to a distribution fee. Class C shares
do not have a
conversion feature and, therefore, are subject to an
ongoing distribution
fee. As a result, long-term shareholders of Class C
shares may pay more
than the economic equivalent of the maximum front-end
sales charge
permitted by the National Association of Securities
Dealers, Inc.
*** For Class Y shares, "Other expenses" have been estimated
based on expenses
incurred by the Class A shares because as of July 31,
1995, no Class Y
shares were outstanding.
The sales charge and CDSC set forth in the above table are
the maximum
charges imposed on purchases or redemptions of Fund shares
and investors
may actually pay lower or no charges, depending on the
amount purchased and, in
the case of Class B, Class C shares and certain Class A
shares, the length of
time the shares are held and whether the shares are held
through the
Smith Barney 401(k) Program. See "Purchase of Shares" and
"Redemption of
Shares." Smith Barney receives an annual 12b-1 service fee
of 0.25% of the
value of average daily net assets of Class A shares. Smith
Barney also
receives, with respect to Class B shares, an annual 12b-1
fee of 0.75% of the
value of average daily net assets of that Class, consisting
of a 0.50% distri-
bution fee and a 0.25% service fee. With respect to Class C
shares, Smith Bar-
ney receives an annual 12b-1 fee of 0.70% of the value of
the average daily net
assets,
8
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PROSPECTUS SUMMARY (CONTINUED)
consisting of a 0.45% distribution fee and a 0.25% service
fee. "Other
expenses" in the above table include fees for shareholder
services, custodial
fees, legal and accounting fees, printing costs and
registration fees.
EXAMPLE
The following example is intended to assist an investor in
understanding the
various costs that an investor in the Fund will bear
directly or indirectly.
The example assumes payment by the Fund of operating
expenses at the levels set
forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and
"Management of the Fund."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
5 YEARS 10 YEARS*
- - ------------------------------------------------------------
- - ------------------
<S> <C> <C>
<C> <C>
An investor would pay the following
expenses on a $1,000 investment, assuming
(1) 5.00% annual return and (2) redemption
at the end of each time period:
Class A................................. $61 $85
$111 $184
Class B................................. 67 82
100 184
Class C................................. 26 51
88 192
Class Y................................. 9 29
50 112
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A................................. $61 $85
$111 $184
Class B................................. 17 52
90 183
Class C................................. 16 51
88 192
Class Y................................. 9 29
50 112
- - ------------------------------------------------------------
- - ------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to
Class A shares at
the end of the eighth year following the date of
purchase.
The example also provides a means for the investor to
compare expense levels
of funds with different fee structures over varying
investment periods. To
facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN
THOSE SHOWN.
9
<PAGE>
SMITH BARNEY
Premium Total Return Fund
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended July 31,
1995 has been
audited by KPMG Peat Marwick LLP, independent accountants,
whose report thereon
appears in the Fund's Annual Report dated July 31, 1995. The
following informa-
tion for the fiscal years ended July 31, 1986 through July
31, 1994 has been
audited by Coopers & Lybrand LLP. The information set out
below should be read
in conjunction with the financial statements and related
notes that also appear
in the Fund's Annual Report, which is incorporated by
reference into the State-
ment of Additional Information. No information is presented
for Class Y shares
because no Class Y shares were outstanding for the periods
shown.
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR
YEAR PERIOD
ENDED
ENDED ENDED
7/31/95
7/31/94 7/31/93(1)
- - ------------------------------------------------------------
- - -------------------
<S> <C>
<C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.69 $
15.65 $ 15.15
- - ------------------------------------------------------------
- - -------------------
INCOME FROM OPERATIONS:
Net investment income 0.44
0.33 0.19
Net realized and unrealized gain on investments 1.48
0.99 1.33
- - ------------------------------------------------------------
- - -------------------
Total Income From Operations 1.92
1.32 1.52
- - ------------------------------------------------------------
- - -------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.43)
(0.31) (0.17)
Overdistribution of net investment income --
(0.24) (0.03)
Net realized gains (0.14)
(0.52) (0.44)
Overdistribution of net realized gains --
- - -- (0.05)
Capital (0.71)
(0.21) (0.33)
- - ------------------------------------------------------------
- - -------------------
Total Distributions (1.28)
(1.28) (1.02)
- - ------------------------------------------------------------
- - -------------------
NET ASSET VALUE, END OF PERIOD $ 16.33 $
15.69 $ 15.65
- - ------------------------------------------------------------
- - -------------------
TOTAL RETURN++ 12.92%
8.65% 10.31%+++
- - ------------------------------------------------------------
- - -------------------
NET ASSETS, END OF PERIOD (000S) $471,578
$67,699 $39,677
- - ------------------------------------------------------------
- - -------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.16%
1.19% 1.20%+
Net investment income 2.81
2.05 1.64+
- - ------------------------------------------------------------
- - -------------------
PORTFOLIO TURNOVER RATE 63%
34% 55%
- - ------------------------------------------------------------
- - -------------------
</TABLE>
(1) For the period from November 6, 1992 (inception date) to
July 31, 1993.
+++Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents the aggregate total return for
the period indicated
and does not reflect any applicable sales charge.
10
<PAGE>
SMITH BARNEY
Premium Total Return Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR
YEAR YEAR YEAR
ENDED ENDED
ENDED ENDED ENDED
7/31/95 7/31/94
7/31/93 7/31/92 7/31/91
- - ------------------------------------------------------------
- - ---------------------
<S> <C> <C> <C>
<C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $15.69 $15.65
$15.21 $14.26 $13.30
- - ------------------------------------------------------------
- - ---------------------
INCOME FROM OPERATIONS:
Net investment income 0.36 0.25
0.23 0.22 0.24
Net realized and unrealized gain on
investments 1.48 1.00
1.47 1.93 1.92
- - ------------------------------------------------------------
- - ---------------------
Total Income From Operations 1.84 1.25
1.70 2.15 2.16
- - ------------------------------------------------------------
- - ---------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.34) (0.27)
(0.16) (0.22) (0.24)
Overdistribution of net investment
income -- (0.22)
(0.03) -- --
Net realized gains (0.14) (0.52)
(0.57) -- --
Overdistribution of net realized
gains -- --
(0.06) -- --
Capital (0.72) (0.20)
(0.44) (0.98) (0.96)
- - ------------------------------------------------------------
- - ---------------------
Total Distributions (1.20) (1.21)
(1.26) (1.20) (1.20)
- - ------------------------------------------------------------
- - ---------------------
NET ASSET VALUE, END OF PERIOD $16.33 $15.69
$15.65 $15.21 $14.26
- - ------------------------------------------------------------
- - ---------------------
TOTAL RETURN++ 12.36% 8.12%
11.68% 15.68% 17.53%
- - ------------------------------------------------------------
- - ---------------------
NET ASSETS, END OF PERIOD (000S) $1,655 $1,697
$1,231 $ 585 $ 470
- - ------------------------------------------------------------
- - ---------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.66% 1.66%
1.69% 1.69% 1.75%
Net investment income 2.31 1.58
1.16 1.53 1.84
- - ------------------------------------------------------------
- - ---------------------
PORTFOLIO TURNOVER RATE 63% 34%
55% 57% 43%
- - ------------------------------------------------------------
- - ---------------------
</TABLE>
++ Total return represents the aggregate total return for
the period indicated
and does not reflect any applicable sales charges.
11
<PAGE>
SMITH BARNEY
Premium Total Return Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OF BENEFICIAL INTEREST 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(1)
- - ------------------------------------------------------------
- - --------------------
<S> <C> <C> <C>
<C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $ 13.98 $ 12.90 $ 14.47 $
14.52 $ 13.00
- - ------------------------------------------------------------
- - --------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.22 0.56 0.51
0.28 0.43
Net realized and
unrealized gain/(loss)
on investments 0.38 2.00 (0.62)
1.37 2.27
- - ------------------------------------------------------------
- - --------------------
Total From Investment
Operations 0.60 2.56 (0.11)
1.65 2.70
- - ------------------------------------------------------------
- - --------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.22) (0.89) (0.18)
(0.28) (0.42)
Overdistribution of net
investment income -- -- --
- - -- --
Net realized capital gains -- (0.26) (1.28)
(1.42) (0.76)
Overdistribution of net
realized capital gains -- -- --
- - -- --
Capital (1.06) (0.33) --
- - -- --
- - ------------------------------------------------------------
- - --------------------
Total Distributions (1.28) (1.48) (1.46)
(1.70) (1.18)
- - ------------------------------------------------------------
- - --------------------
NET ASSET VALUE, END OF
PERIOD $ 13.30 $ 13.98 $ 12.90 $
14.47 $ 14.52
- - ------------------------------------------------------------
- - --------------------
TOTAL RETURN++ 4.62% 21.49% 0.21%
12.07% 21.28%+++
- - ------------------------------------------------------------
- - --------------------
NET ASSETS, END OF PERIOD
(000S) $507,762 $599,849 $585,634
$960,898 $533,487
- - ------------------------------------------------------------
- - --------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.78% 1.75% 1.70%
1.74% 1.87%+
Net investment income 1.66% 4.17% 3.58%
1.97% 2.99%+
- - ------------------------------------------------------------
- - --------------------
PORTFOLIO TURNOVER RATE 47% 41% 56%
294% 212%
- - ------------------------------------------------------------
- - --------------------
</TABLE>
(1) For the period from September 16, 1985 (commencement of
operations) to July
31, 1986.
+++Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents the aggregate total return for
the period
indicated and does not reflect any applicable sales
charge.
12
<PAGE>
SMITH BARNEY
Premium Total Return Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE (1) OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH
PERIOD:
<TABLE>
<CAPTION>
YEAR
YEAR PERIOD
ENDED
ENDED ENDED
7/31/95
7/31/94 7/31/93(2)
- - ------------------------------------------------------------
- - ------------------
<S> <C>
<C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 15.69
$15.65 $15.45
- - ------------------------------------------------------------
- - ------------------
INCOME FROM OPERATIONS:
Net investment income 0.36
0.23 0.05
Net realized and unrealized gain on investments 1.48
1.02 0.35
- - ------------------------------------------------------------
- - ------------------
Total Income From Operations 1.84
1.25 0.40
- - ------------------------------------------------------------
- - ------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.35)
(0.27) (0.03)
Overdistribution of net investment income --
(0.22) (0.01)
Net realized gains (0.14)
(0.52) (0.08)
Overdistribution of net realized gains --
- - -- (0.01)
Capital (0.71)
(0.20) (0.07)
- - ------------------------------------------------------------
- - ------------------
Total Distributions (1.20)
(1.21) (0.20)
- - ------------------------------------------------------------
- - ------------------
NET ASSET VALUE, END OF PERIOD $ 16.33
$15.69 $15.65
- - ------------------------------------------------------------
- - ------------------
TOTAL RETURN++ 12.36%
8.12% 2.60%+++
- - ------------------------------------------------------------
- - ------------------
NET ASSETS, END OF PERIOD (000S) $12,937
$1,878 $ 357
- - ------------------------------------------------------------
- - ------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.62%
1.60% 1.31%+
Net investment income 2.35
1.65 1.54+
- - ------------------------------------------------------------
- - ------------------
PORTFOLIO TURNOVER RATE 63%
34% 55%
- - ------------------------------------------------------------
- - ------------------
</TABLE>
(1) On November 7, 1994 the former Class D shares were
renamed Class C shares.
(2) For the period from June 1, 1993 (inception date) to
July 31, 1993.
+++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized
++ Total return represents the aggregate total return for
the period indicated
and does not reflect any applicable sales charge.
13
<PAGE>
SMITH BARNEY
Premium Total Return Fund
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is total return. The
Fund's investment objec-
tive may be changed only with the approval of a majority of
the Fund's out-
standing 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 invest-
ments in dividend-paying common stocks, it will not have as
much investment
flexibility as total return funds which may pursue their
objective by investing
in both income and equity stocks without such an emphasis.
The Fund also may
invest up to 10% of its assets in: (a) medium- or low-rated
securities or
unrated securities of comparable quality. Medium- and low-
rated securities are
securities rated less than investment grade by Moody's
Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P"). See
"Risk Factors and
Special Considerations--Medium-, Low- and Unrated
Securities" below; (b) inter-
est-paying debt securities, such as obligations issued or
guaranteed as to
principal and interest by the United States government
("U.S. government secu-
rities"); and (c) other securities, including convertible
bonds, convertible
preferred stock and warrants. In addition, the Fund will
limit its investments
in warrants to 5% of its net assets. The Fund also may lend
its portfolio secu-
rities 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 informa-
tion 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 strate-
gies, including hedging strategies such as entering into
futures contracts and
related options. The Fund will do so only upon 60 days'
notice to shareholders
and in conformity with its investment restrictions.
Short Sales Against the Box. The Fund may make short sales
of common stock
if, at all times when a short position is open, the Fund
owns the stock or owns
preferred stocks or debt securities convertible or
exchangeable, without pay-
ment 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
14
<PAGE>
SMITH BARNEY
Premium Total Return Fund
INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
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 PNC Bank, National Association ("PNC Bank"),
the Fund's custodi-
an. 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 securi-
ties. The Fund realizes fees (referred to as "premiums") for
granting the
rights evidenced by the options. A put option embodies the
right of its pur-
chaser 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 com-
pel the writer of the option to sell to the option holder an
underlying secu-
rity at a specified price at any time during the option
period. Thus, the pur-
chaser 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 speci-
fied 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 Fund's acquisition cost of the security,
less the premium
received for writing the option.
The Fund will write only covered options. Accordingly,
whenever the Fund
writes a call option, it will continue to own or have the
present right to
acquire the underlying security for as long as it remains
obligated as the
writer of the option. To support its obligation to purchase
the underlying
security if a put option is exercised, the Fund will either
(a) deposit with
PNC Bank in a segregated account cash, U.S. government
securities or other
high grade debt obliga-
15
<PAGE>
SMITH BARNEY
Premium Total Return Fund
INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
tions 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 "se-
ries" (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 secu-
rity) 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 PNC Bank 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 ordi-
narily will write options only if a secondary market for the
options exists on
a domestic securities exchange or in the over-the-counter
market.
Purchasing Put and Call Options on Securities. The Fund
may utilize up to 10%
of its assets to purchase put options on portfolio
securities and may do so at
or about the same time that it purchases the underlying
security or at a later
time. By buying a put, the Fund limits the risk of loss from
a decline in the
market value of the security until the put expires. Any
appreciation in the
value of, or in the yield otherwise available from the
underlying security,
however, will be partially offset by the amount of the
premium paid for the put
option and any related transaction costs. The Fund may
utilize up to 10% of its
assets to purchase call options on portfolio securities.
Call options may be
purchased by the Fund in order to acquire the underlying
securities for the
Fund at a price that avoids any additional cost that would
result from a sub-
stantial 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 pur-
16
<PAGE>
SMITH BARNEY
Premium Total Return Fund
INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
chased, 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 rep-
resents 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 fac-
tors influencing the underlying index. The effectiveness of
purchasing or writ-
ing 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 PNC Bank, and will
maintain the account
while the option is open.
ADDITIONAL INVESTMENTS
Money Market Instruments. When Strategy Advisers and
Boston Partners believe
that market conditions warrant, the Fund may adopt a
temporary defensive pos-
ture and invest in short-term instruments without
limitation. Short-term
instruments in which the Fund may invest include U.S.
government securities;
certain bank obligations (including certificates of deposit,
time deposits and
bankers' acceptances of domestic or foreign banks, domestic
savings and loan
associations and similar institutions); commercial paper
rated no lower than
A-2 by S&P or Prime-2 by Moody's or the equivalent from
another major rating
service or, if unrated, of an issuer having an outstanding,
unsecured debt
17
<PAGE>
SMITH BARNEY
Premium Total Return Fund
INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
issue then rated within the three highest rating categories;
and repurchase
agreements as described below.
United States Government Securities. U.S. government
securities are obliga-
tions of, or guaranteed by, the United States government,
its agencies or
instrumentalities. The U.S. government securities in which
the Fund may invest
include: direct obligations of the United States Treasury
(such as Treasury
Bills, Treasury Notes and Treasury Bonds) and obligations
issued by U.S. gov-
ernment agencies and instrumentalities, including securities
that are sup-
ported by the full faith and credit of the United States
(such as Government
National Mortgage Association ("GNMA") certificates);
securities that are sup-
ported 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 sup-
ported by the credit of the instrumentality (such as Federal
National Mortgage
Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC")
bonds). Treasury Bills have maturities of less than 1 year,
Treasury Notes
have maturities of 1 to 10 years and Treasury Bonds
generally have maturities
of greater than 10 years at the date of issuance. Certain
U.S. government
securities, such as those issued or guaranteed by GNMA, FNMA
and FHLMC, are
mortgage-related securities. U.S. government securities
generally do not
involve the credit risks associated with other types of
interest-bearing secu-
rities, although, as a result, the yields available from
U.S. government secu-
rities are generally lower than the yields available from
interest-bearing
corporate securities.
Repurchase Agreements. The Fund may engage in repurchase
agreement transac-
tions with banks which are the issuers of instruments
acceptable for purchase
by the Fund and with certain dealers on the Federal Reserve
Bank of New York's
list of reporting dealers. Under the terms of a typical
repurchase agreement,
the Fund would acquire an underlying debt obligation for a
relatively short
period (usually not more than one week), subject to an
obligation of the
seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon
price and time, thereby determining the yield during the
Fund's holding peri-
od. 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 under-
lying 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 par-
ty, including possible delays or restrictions upon the
Fund's ability to dis-
pose 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
18
<PAGE>
SMITH BARNEY
Premium Total Return Fund
INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
of incurring expenses associated with asserting those rights
and the risk of
losing all or part of the income from the agreement.
Strategy Advisers, SBMFM
or Boston Partners, acting under the supervision of the
Trust's Board of
Trustees, reviews on an ongoing basis the value of the
collateral and the
creditworthiness of those banks and dealers with which the
Fund may enter into
repurchase agreements to evaluate potential risks.
When-Issued Securities and Delayed-Delivery Transactions.
In order to secure
yields or prices deemed advantageous at the time, the Fund
may purchase or
sell any portfolio securities on a when-issued or delayed-
delivery basis. The
Fund will enter into a when-issued transaction for the
purpose of acquiring
portfolio securities and not for the purpose of leverage. In
such transac-
tions, 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 consist-
ing 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 com-
mitments. Placing securities rather than cash in the
segregated account may
have a leveraging effect on the Fund's net assets. The Fund
will not accrue
income with respect to a when-issued security prior to its
stated delivery
date.
Lending of Portfolio Securities. The Fund has the ability
to lend portfolio
securities to brokers, dealers and other financial
organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets
taken at value.
Loans of portfolio securities will be collateralized by
cash, letters of
credit or U.S. government securities that are maintained at
all times in an
amount at least equal to the current market value of the
loaned securities.
CERTAIN INVESTMENT GUIDELINES
Up to 10% of the assets of the Fund may be invested in
securities with con-
tractual 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 mar-
ket 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
19
<PAGE>
SMITH BARNEY
Premium Total Return Fund
INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
been in continuous operation for less than three years. The
Fund also may bor-
row 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 restric-
tions that cannot be changed without the approval of the
majority of the
Fund's outstanding shares is contained in the Statement of
Additional Informa-
tion.
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 port-
folio position being offset by a loss on the hedge position.
The Fund bears
the risk that the prices of the securities being hedged will
not move in the
same amount as the hedge. The Fund will engage in hedging
transactions only
when deemed advisable by Strategy Advisers and Boston
Partners. Successful use
by the Fund of options will depend on Strategy Advisers' and
Boston Partners'
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
20
<PAGE>
SMITH BARNEY
Premium Total Return Fund
INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
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 securi-
ties 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 mar-
ket quotations for purposes of valuing securities and
calculating net asset
value and (b) sell securities at their fair value either to
meet redemption
requests or to respond to changes in the economy or the
financial markets. The
market for certain medium- and low-rated and comparable
unrated securities has
not fully weathered a major economic recession. Any such
economic downturn
could adversely affect the value of such securities and the
ability of the
issuers of these securities to repay principal and pay
interest thereon.
While the market values of medium- and low-rated and
comparable unrated secu-
rities 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 securi-
ties are often highly leveraged and may not have more
traditional methods of
financing available to them so that their ability to service
their debt obliga-
tions during an economic downturn or during sustained
periods of rising inter-
est 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.
21
<PAGE>
SMITH BARNEY
Premium Total Return Fund
INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
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 char-
acteristics with respect to capacity to pay interest and
repay principal. Secu-
rities which are rated B generally lack characteristics of a
desirable invest-
ment 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.
In light of these risks, Strategy Advisers and Boston
Partners, 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 operat-
ing history and be dependent on products or services without
an established
market share.
PORTFOLIO TRANSACTIONS
All orders for transactions in securities and options on
behalf of the Fund
are placed by Strategy Advisers and Boston Partners with
broker-dealers that
Strategy Advisers and Boston Partners select, including
Smith Barney and other
affiliated brokers. The Fund may utilize Smith Barney or a
Smith Barney-
affiliated broker in connection with a purchase or sale of
securities when
Strategy Advisers and Boston Partners believe that the
broker's charge for the
transactions does not exceed usual and customary levels. The
same standard
applies to the use of Smith Barney as a commodities broker
in connection with
entering into options and futures contracts.
22
<PAGE>
SMITH BARNEY
Premium Total Return Fund
VALUATION OF SHARES
The Fund's net asset value per share is determined as of
the close of regu-
lar trading on the NYSE on each day that the NYSE is open,
by dividing the
value of the Fund's net assets attributable to each Class by
the total number
of shares of the Class outstanding.
Generally, the Fund's investments are valued at market
value or, in the
absence of a market value with respect to any securities, at
fair value as
determined by or under the direction of the Trust's Board of
Trustees. Short-
term investments that mature in 60 days or less are valued
at amortized cost
whenever the Trustees determine that amortized cost reflects
fair value of
those instruments. Further information regarding the Fund's
valuation policies
is contained in the Statement of Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other
funds in deter-
mining the amounts of dividends from net investment income
and distributions
of capital gains payable to shareholders.
If a shareholder does not otherwise instruct, dividends
and capital gains
distributions will be reinvested automatically in additional
shares of the
same Class at net asset value, subject to no sales charge or
CDSC. Dividends
from net investment income, if any, of the Fund will be
declared monthly and
paid on the last Friday of the month. The Fund's final
distribution for each
calendar year will include any remaining net investment
income and net real-
ized long- and short-term capital gains realized during the
year and deemed
undistributed during the year for Federal income tax
purposes. In order to
avoid the application of a 4% nondeductible excise tax on
certain undistrib-
uted amounts of ordinary income and capital gains, the Fund
may make an addi-
tional distribution shortly before December 31 in each year
of any undistrib-
uted ordinary income or capital gains and expects to pay any
other dividends
and distributions necessary to avoid the application of this
tax.
The per share dividends on Class B and Class C shares of
the Fund may be
lower than the per share dividends on Class A and Class Y
shares principally
as a result of the distribution fee applicable with respect
to Class B and
Class C shares. The per share dividends on Class A shares of
the Fund may be
lower than the per share dividends on Class Y shares
principally as a result
of the
23
<PAGE>
SMITH BARNEY
Premium Total Return Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
service fee applicable to Class A shares. Distributions of
capital gains, if
any, will be in the same amount for Class A, Class B, Class
C and Class Y
shares.
TAXES
The Fund has qualified and intends to continue to qualify
each year as a reg-
ulated investment company under the Code. Dividends paid
from net investment
income and distributions of net realized short-term capital
gains are taxable
to shareholders as ordinary income, regardless of how long
shareholders have
held their Fund shares and whether such dividends and
distributions are
received in cash or reinvested in additional Fund shares.
Distributions of net
realized long-term capital gains will be taxable to
shareholders as long-term
capital gains, regardless of how long shareholders have held
Fund shares and
whether such distributions are received in cash or are
reinvested in additional
Fund shares. Furthermore, as a general rule, a shareholder's
gain or loss on a
sale or redemption of Fund shares will be a long-term
capital gain or loss if
the shareholder has held the shares for more than one year
and will be a short-
term capital gain or loss if the shareholder has held the
shares for one year
or less. Some of the Fund's dividends declared from net
investment income may
qualify for the Federal dividends-received deduction for
corporations.
Statements as to the tax status of each shareholder's
dividends and distribu-
tions are mailed annually. Each shareholder also will
receive, if appropriate,
various written notices after the close of the Fund's prior
taxable year as to
the Federal income tax status of his or her dividends and
distributions which
were received from the Fund during the Fund's prior taxable
year. Shareholders
should consult their tax advisors about the status of the
Fund's dividends and
distributions for state and local tax liabilities.
PURCHASE OF SHARES
GENERAL
The Fund offers four Classes of shares. Class A shares are
sold to investors
with an initial sales charge and Class B and Class C shares
are sold without an
initial sales charge but are subject to a CDSC payable upon
certain redemp-
tions. Class Y shares are sold without an initial sales
charge or CDSC, and are
available only to investors investing a minimum of
$5,000,000. See "Prospectus
Summary--Alternative Purchase Arrangements" for a discussion
of factors to con-
sider in selecting which Class of shares to purchase.
24
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PURCHASE OF SHARES (CONTINUED)
Purchases of Fund shares must be made through a brokerage
account maintained
with Smith Barney, an Introducing Broker or an investment
dealer in the selling
group, except for investors purchasing shares of the Fund
through a qualified
retirement plan who may do so directly through FDISG. When
purchasing shares of
the Fund, investors must specify whether the purchase is for
Class A, Class B,
Class C or Class Y shares. No maintenance fee will be
charged by the Fund in
connection with a brokerage account through which an
investor purchases or
holds shares.
Investors in Class A, Class B and Class C shares may open
an account by mak-
ing an initial investment of at least $1,000 for each
account, or $250 for an
IRA or a Self-Employed Retirement Plan in the Fund.
Investors in Class Y shares
may open an account by making an initial investment of
$5,000,000. Subsequent
investments of at least $50 may be made for all Classes. For
participants in
retirement plans qualified under Section 403(b)(7) or
Section 401(a) of the
Code, the minimum initial investment requirement for Class
A, Class B and Class
C shares and the subsequent investment requirement for all
Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the
minimum initial invest-
ment requirement for Class A, Class B and Class C shares and
the subsequent
investment requirement for all Classes is $50. There are no
minimum investment
requirements for Class A shares for employees of Travelers
and its subsidiar-
ies, including Smith Barney, Trustees of the Trust and their
spouses and chil-
dren. The Fund reserves the right to waive or change
minimums, to decline any
order to purchase its shares and to suspend the offering of
shares from time to
time. Shares purchased will be held in the shareholder's
account by the Fund's
transfer agent, FDISG. Share certificates are issued only
upon a shareholder's
written request to FDISG.
Purchase orders received by the Fund or Smith Barney prior
to the close of
regular trading on the NYSE, on any day the Fund calculates
its net asset val-
ue, 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 trad-
ing on the NYSE on any day the Fund calculates its net asset
value, are priced
according to the net asset value determined on that day,
provided the order is
received by the Fund or Smith Barney prior to Smith Barney's
close of business
(the "trade date"). Payment for Fund shares is due on the
third business day
after the trade date.
25
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PURCHASE OF SHARES (CONTINUED)
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any
time by purchasing
shares through a service known as the Systematic Investment
Plan. Under the
Systematic Investment Plan, Smith Barney or FDISG is
authorized through preau-
thorized transfers of $50 or more to charge the regular bank
account or other
financial institution indicated by the shareholder on a
monthly or quarterly
basis to provide systematic additions to the shareholder's
Fund account.
A shareholder who has insufficient funds to complete the
transfer will be
charged a fee of up to $25 by Smith Barney or FDISG. The
Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the
shareholder's Smith
Barney brokerage account or redeem the shareholder's shares
of a Smith Barney
money market fund to make additions to the account.
Additional information is
available from the Fund or a Smith Barney Financial
Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A
shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES CHARGE
------------------------------
DEALERS'
AMOUNT OF % OF % OF
REALLOWANCE AS %
INVESTMENT OFFERING PRICE AMOUNT INVESTED OF
OFFERING PRICE
- - ------------------------------------------------------------
- - -----------
<S> <C> <C> <C>
Less than $ 25,000 5.00% 5.26%
4.50%
$ 25,000 - $ 49,999 4.00% 4.17%
3.60%
$ 50,000 - $ 99,999 3.50% 3.63%
3.15%
$100,000 - $249,999 3.00% 3.09%
2.70%
$250,000 - $499,999 2.00% 2.04%
1.80%
$500,000 and over * *
*
- - ------------------------------------------------------------
- - -----------
</TABLE>
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge, equal or
exceed $500,000 in the
aggregate, will be made at net asset value without any
initial sales charge,
but will be subject to a CDSC of 1.00% on redemptions
made within 12 months
of purchase. The CDSC on Class A shares is payable to
Smith Barney, which
compensates Smith Barney Financial Consultants and other
dealers whose
clients make purchases of $500,000 or more. The CDSC is
waived in the same
circumstances in which the CDSC applicable to Class B and
Class C shares is
waived. See "Deferred Sales Charge Alternatives" and
"Waivers of CDSC."
Members of the selling group may receive up to 90% of the
sales charge and
may be deemed to be underwriters of the Fund as defined in
the Securities Act
of 1933, as amended.
26
<PAGE>
SMITH BARNEY
Premium Total Return 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, his or her spouse and children, or a trustee or
other fiduciary of
a single trust estate or single fiduciary account. The
reduced sales charge
minimums may also be met by aggregating the purchase with
the net asset value
of all Class A shares offered with a sales charge held in
funds sponsored by
Smith Barney listed under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value
without a sales
charge in the following circumstances: (a) sales of Class A
shares to Trustees
of the Trust, employees of Travelers and its subsidiaries or
the spouses and
children of such persons (including the surviving spouse of
a deceased Trustee
or employee, and retired Trustees or employees), employees
of members of the
National Association of Securities Dealers, Inc., or sales
to any trust, pen-
sion, profit-sharing or other benefit plan for such persons
provided such
sales are made upon the assurance of the purchaser that the
purchase is made
for investment purposes and that the securities will not be
re-sold except
through redemption or repurchase; (b) offers of Class A
shares to any other
investment company in connection with the combination of
such company with the
Fund by merger, acquisition of assets or otherwise; (c)
purchases of Class A
shares by any client of a newly employed Smith Barney
Financial Consultant
(for a period up to 90 days from the commencement of the
Financial Consul-
tant's employment with Smith Barney), on the condition the
purchase of Class A
shares is made with the proceeds of the redemption of shares
of a mutual fund
which (i) was sponsored by the Financial Consultant's prior
employer, (ii) was
sold to the client by the Financial Consultant and (iii) was
subject to a
sales charge; (d) shareholders who have redeemed Class A
shares in the Fund
(or Class A shares of another of the Smith Barney Mutual
Funds that are
offered with a sales charge equal to or greater than the
maximum sales charge
of the Fund) and who wish to reinvest their redemption
proceeds in the Fund,
provided the reinvestment is made within 60 calendar days of
the redemption;
and (e) accounts managed by registered investment advisory
subsidiaries of
Travelers. In order to obtain such discounts, the purchaser
must provide suf-
ficient information at the time of purchase to permit
verification that the
purchase would qualify for the elimination of the sales
charge.
27
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PURCHASE OF SHARES (CONTINUED)
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any
person" (as defined
above) at a reduced sales charge or at net asset value
determined by aggregat-
ing the dollar amount of the new purchase and the total net
asset value of all
Class A shares of the Fund and of funds sponsored by Smith
Barney which are
offered with a sales charge listed under "Exchange
Privilege" then held by
such person and applying the sales charge applicable to such
aggregate. In
order to obtain such discount, the purchaser must provide
sufficient informa-
tion at the time of purchase to permit verification that the
purchase quali-
fies for the reduced sales charge. The right of accumulation
is subject to
modification or discontinuance at any time with respect to
all shares pur-
chased thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced
sales charge or pur-
chase at net asset value will also be available to employees
(and partners) of
the same employer purchasing as a group, provided each
participant makes the
minimum initial investment required. The sales charge
applicable to purchases
by each member of such a group will be determined by the
table set forth above
under "Initial Sales Charge Alternative--Class A Shares,"
and will be based
upon the aggregate sales of Class A shares of certain Smith
Barney Mutual
Funds offered with a sales charge to, and share holdings of,
all members of
the group. To be eligible for such reduced sales charges or
to purchase at net
asset value, all purchases must be pursuant to an employer-
or partnership-
sanctioned plan meeting certain requirements. One such
requirement is that the
plan must be open to specified partners or employees of the
employer and its
subsidiaries, if any. Such plan may, but is not required to,
provide for pay-
roll deductions, IRAs or investments pursuant to retirement
plans under Sec-
tions 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 quali-
fied group may also purchase Class A shares at the reduced
sales charge appli-
cable to the group as a whole. The sales charge is based
upon the aggregate
dollar value of Class A shares offered with a sales charge
that have been pre-
viously purchased and are still owned by the group, plus the
amount of the
current purchase. A "qualified group" is one which (a) has
been in existence
for more than six months, (b) has a purpose other than
acquiring Fund shares
at a discount and (c) satisfies uniform criteria which
enable Smith Barney to
realize economies of scale in its costs of distributing
shares. A qualified
group must have more than 10 mem-
28
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PURCHASE OF SHARES (CONTINUED)
bers, must be available to arrange for group meetings
between representatives
of the Fund and the members, and must agree to include sales
and other materi-
als related to the Fund in its publications and mailings to
members at no cost
to Smith Barney. In order to obtain such reduced sales
charge or to purchase
at net asset value, the purchaser must provide sufficient
information at the
time of purchase to permit verification that the purchase
qualifies for the
reduced sales charge. Approval of group purchase reduced
sales charge plans is
subject to the discretion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000
or more provides
an opportunity for an investor to obtain a reduced sales
charge by aggregating
investments over a 13 month period, provided that the
investor refers to such
Letter when placing orders. For purposes of a Letter of
Intent, the "Amount of
Investment" as referred to in the preceding sales charge
table includes pur-
chases of all Class A shares of the Fund and other funds of
the Smith Barney
Mutual Funds offered with a sales charge over the 13 month
period based on the
total amount of intended purchases plus the value of all
Class A shares previ-
ously 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. Please
contact a Smith Barney Financial Consultant or FDISG to
obtain a Letter of
Intent application.
Class Y Shares. A Letter of Intent may also be used as a
way for investors
to meet the minimum investment requirement for Class Y
shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class
Y shares of the
Fund and agree to purchase a total of $5,000,000 of Class Y
shares of the same
Fund within six months from the date of the Letter. If a
total investment of
$5,000,000 is not made within the six month period, all
Class Y shares pur-
chased to date will be transferred to Class A shares, where
they will be sub-
ject to all fees (including a service fee of 0.25%) and
expenses applicable to
the Fund's Class A shares, which may include a CDSC of
1.00%. Please contact a
Smith Barney Financial Consultant or FDISG for further
information.
29
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PURCHASE OF SHARES (CONTINUED)
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined
without an initial
sales charge so that the full amount of an investor's
purchase payment may be
immediately invested in the Fund. A CDSC, however, may be
imposed on certain
redemptions of these shares. "CDSC Shares" are: (a) Class B
shares; (b) Class
C shares; and (c) Class A shares which when combined with
Class A shares
offered with a sales charge currently held by an investor
equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal to
the lesser of the
original cost of the shares being redeemed or their net
asset value at the
time of redemption. CDSC Shares that are redeemed will not
be subject to a
CDSC to the extent that the value of such shares represents:
(a) capital
appreciation of Fund assets; (b) reinvestment of dividends
or capital gain
distributions; (c) with respect to Class B shares, shares
redeemed more than
five years after their purchase; or (d) with respect to
Class C shares and
Class A shares that are CDSC Shares, shares redeemed more
than 12 months after
their purchase.
Class C shares and Class A shares that are CDSC Shares are
subject to a
1.00% CDSC if redeemed within 12 months of purchase. In
circumstances in which
the CDSC is imposed on Class B shares, the amount of the
charge will depend on
the number of years since the shareholder made the purchase
payment from which
the amount is being redeemed. Solely for purposes of
determining the number of
years since a purchase payment, all purchase payments made
during a month will
be aggregated and deemed to have been made on the last day
of the preceding
Smith Barney statement month. The following table sets forth
the rates of the
charge for redemptions of Class B 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>
30
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PURCHASE OF SHARES (CONTINUED)
Class B shares will convert automatically to Class A
shares eight years after
the date on which they were purchased and thereafter will no
longer be subject
to any distribution fees. There also will be converted at
that time such pro-
portion of Class B Dividend Shares owned by the shareholder
as the total number
of his or her Class B shares converting at the time bears to
the total number
of outstanding Class B shares (other than Class B Dividend
Shares) owned by the
shareholder. Shareholders who held Class B shares of Smith
Barney Shearson
Short-Term World Income Fund (the "Short-Term World Income
Fund") on July 15,
1994 and who subsequently exchange those shares for Class B
shares of the Fund
will be offered the opportunity to exchange all such Class B
shares for Class A
shares of the Fund four years after the date on which those
shares were deemed
to have been purchased. Holders of such Class B shares will
be notified of the
pending exchange in writing approximately 30 days before the
fourth anniversary
of the purchase date and, unless the exchange has been
rejected in writing, the
exchange will occur on or about the fourth anniversary date.
See "Prospectus
Summary--Alternative Purchase Arrangements Class B Shares
Conversion Feature."
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 gains distribu-
tions and finally, of other shares held by the shareholder
for the longest
period of time. The length of time that CDSC Shares acquired
through an
exchange have been held will be calculated from the date
that the shares
exchanged were initially acquired in one of the other Smith
Barney Mutual
Funds, and Fund shares being redeemed will be considered to
represent, as
applicable, capital appreciation or dividend and capital
gain distribution
reinvestments in such other funds. For Federal income tax
purposes, the amount
of the CDSC will reduce the gain or increase the loss, as
the case may be, on
the amount realized on redemption. The amount of any CDSC
will be paid to Smith
Barney.
To provide an example, assume an investor purchased 100
Class B shares at $10
per share for a cost of $1,000. Subsequently, the investor
acquired 5 addi-
tional shares through dividend reinvestment. During the
fifteenth month after
the purchase, the investor decided to redeem $500 of his or
her investment.
Assuming at the time of the redemption the net asset value
had appreciated to
$12 per share, the value of the investor's shares would be
$1,260 (105 shares
at $12 per share). The CDSC would not be applied to the
amount which represents
appreciation ($200) and the value of the reinvested dividend
shares ($60).
Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be
31
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PURCHASE OF SHARES (CONTINUED)
charged at a rate of 4.00% (the applicable rate for Class B
shares) for a total
deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) au-
tomatic cash withdrawals in amounts equal to or less than
1.00% per month of
the value of the shareholder's shares at the time the
withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however,
that automatic cash
withdrawals in amounts equal to or less than 2.00% per month
of the value of
the shareholder's shares will be permitted for withdrawal
plans that were
established prior to November 7, 1994); (c) redemptions of
shares within 12
months following the death or disability of the shareholder;
(d) redemption of
shares made in connection with qualified distributions from
retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary
redemptions; and (f)
redemptions of shares in connection with a combination of
the Fund with any
investment company by merger, acquisition of assets or
otherwise. In addition,
a shareholder who has redeemed shares from other of the
Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part
of the redemption
proceeds within 60 days and receive pro rata credit for any
CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by
Smith Barney in the
case of shareholders who are also Smith Barney clients or by
FDISG in the case
of all other shareholders) of the shareholder's status or
holdings, as the case
may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith
Barney 401(k) Program,
which is generally designed to assist plan sponsors in the
creation and opera-
tion of retirement plans under Section 401(a) of the Code.
To the extent appli-
cable, the same terms and conditions are offered to all
Participating Plans in
the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B,
Class C and Class Y
shares as investment alternatives under the Smith Barney
401(k) Program. Class
A, Class B and Class C shares acquired through the Smith
Barney 401(k) Program
are subject to the same service and/or distribution fees as,
but different
sales charge and CDSC schedules than, the Class A, Class B
and Class C shares
acquired by other investors. Similar to those available to
other investors,
32
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PURCHASE OF SHARES (CONTINUED)
Class Y shares acquired through the Smith Barney 401(k)
Program are not subject
to any initial sales charge, CDSC or service or distribution
fee. Once a Par-
ticipating Plan has made an initial investment in the Fund,
all of its subse-
quent investments in the Fund must be in the same Class of
shares, except as
otherwise described below.
Class A Shares. Class A shares of the Fund are offered
without any initial
sales charge to any Participating Plan that purchases from
$500,000 to
$4,999,999 of Class A shares of one or more funds of the
Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney
401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of
redemption proceeds, if the
Participating Plan terminates within four years of the date
the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Class B Shares. Class B shares of the Fund are offered to
any Participating
Plan that purchases less than $250,000 of one or more funds
of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith
Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if
the Participating
Plan terminates within eight years of the date the
Participating Plan first
enrolled in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled
in the Smith Bar-
ney 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 anni-
versary of the enrollment date and, unless the exchange has
been rejected in
writing, the exchange will occur on or about the eighth
anniversary date. Once
the exchange has occurred, a Participating Plan will not be
eligible to acquire
additional Class B shares of the Fund but instead may
acquire Class A shares of
the Fund. If the Participating Plan elects not to exchange
all of its Class B
shares at that time, each Class B share held by the
Participating Plan will
have the same conversion feature as Class B shares held by
other investors. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of the Fund are offered to
any Participating
Plan that purchases from $250,000 to $499,999 of one or more
funds of the Smith
Barney Mutual Funds. Class C shares acquired through the
Smith Barney 401(k)
Program after November 7, 1994 are subject to a CDSC of
1.00% of redemption
proceeds, if the Participating Plan terminates within four
years of the date
the Participating Plan first enrolled in the Smith Barney
401(k) Program. Each
year after the date a Participating Plan enrolled in the
Smith Barney
33
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PURCHASE OF SHARES (CONTINUED)
401(k) Program, if its total Class C holdings equal at least
$500,000 as of the
calendar year-end, the Participating Plan will be offered
the opportunity to
exchange all of its Class C shares for Class A shares of the
Fund. Such Plans
will be notified in writing within 30 days after the last
business day of the
calendar year, and unless the exchange offer has been
rejected in writing, the
exchange will occur on or about the last business day of the
following March.
Once the exchange has occurred, a Participating Plan will
not be eligible to
acquire Class C shares of the Fund but instead may acquire
Class A shares of
the Fund. Class C shares not converted will continue to be
subject to the dis-
tribution 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 pur-
chases $5,000,000 or more of Class Y shares of one or more
funds of the
Smith Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the
extent that the net
asset value of the shares redeemed does not exceed the
current net asset value
of the shares purchased through reinvestment of dividends or
capital gain dis-
tributions, plus (a) with respect to Class A and Class C
shares, the current
net asset value of such shares purchased more than one year
prior to redemption
and, with respect to Class B shares, the current net asset
value of Class B
shares purchased more than eight years prior to the
redemption, plus (b) with
respect to Class A and Class C shares, increases in the net
asset value of the
shareholder's Class A or Class C shares above the purchase
payments made during
the preceding year and, with respect to Class B shares,
increases in the net
asset value of the shareholder's Class B shares above the
purchase payments
made during the preceding eight years. Whether or not the
CDSC applies to a
Participating Plan depends on the number of years since the
Participating Plan
first became enrolled in the Smith Barney 401(k) Program,
unlike the applica-
bility of the CDSC to other shareholders, which depends on
the number of years
since those shareholders made the purchase payment from
which the amount is
being redeemed.
The CDSC will be waived on redemptions of CDSC Shares in
connection with
lump-sum or other distributions made by a Participating Plan
as a result of:
(a) the retirement of an employee in the Participating Plan;
(b) the termina-
tion 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;
34
<PAGE>
SMITH BARNEY
Premium Total Return Fund
PURCHASE OF SHARES (CONTINUED)
or (f) redemptions of shares in connection with a loan made
by the Participat-
ing 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 FDISG. For
further information regarding the Smith Barney 401(k)
Program, investors should
contact a Smith Barney Financial Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may
be exchanged at the
net asset value next determined for shares of the same Class
in the following
funds of the Smith Barney Mutual Funds, to the extent shares
are offered for
sale in the shareholder's state of residence. Exchanges of
Class A, Class B and
Class C shares are subject to minimum investment
requirements and all shares
are subject to the other requirements of the fund into which
exchanges are made
and a sales charge differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
*Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
**Smith Barney Funds, Inc.--Income Return Account
Portfolio
35
<PAGE>
SMITH BARNEY
Premium Total Return Fund
EXCHANGE PRIVILEGE (CONTINUED)
+Smith Barney Funds, Inc.--Short-Term U.S. Treasury
Securities
Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities
Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
**Smith Barney Intermediate Maturity California
Municipals Fund
**Smith Barney Intermediate Maturity New York Municipals
Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
**Smith Barney Muni Funds--California Limited Term
Portfolio
**Smith Barney Muni Funds--Florida Limited Term
Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
**Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc.--Emerging Markets
Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond
Portfolio
Smith Barney World Funds, Inc.--International Balanced
Portfolio
Smith Barney World Funds, Inc.--International Equity
Portfolio
Smith Barney World Funds, Inc.--Pacific 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
36
<PAGE>
SMITH BARNEY
Premium Total Return Fund
EXCHANGE PRIVILEGE (CONTINUED)
+Smith Barney Municipal Money Market 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 B and Class Y
shares of the
Fund. In addition, shareholders who own Class C shares
of the Fund through
the Smith Barney 401(k) Program may exchange those
shares for Class C
shares of this fund.
** Available for exchange with Class A, Class C and Class Y
shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class A and Class Y shares
of the Fund.
++ Available for exchange with Class B and Class C shares
of the Fund.
+++ Available for exchange with Class A and Class Y shares
of the Fund. In
addition, shareholders who own Class C shares of the
Fund through the
Smith Barney 401(k) Program may exchange those shares
for Class C shares
of this fund.
Class A Exchanges. Class A shares of Smith Barney Mutual
Funds sold without
a sales charge or with a maximum sales charge of less than
the maximum charged
by other Smith Barney Mutual Funds will be subject to the
appropriate "sales
charge differential" upon the exchange of such shares for
Class A shares of a
fund sold with a higher sales charge. The "sales charge
differential" is lim-
ited 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 pur-
poses of the exchange privilege, shares obtained through
automatic reinvest-
ment of dividends and capital gains distributions are
treated as having paid
the same sales charges applicable to the shares on which the
dividends or dis-
tributions 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 share-
holder was a Class B shareholder of the Short-Term World
Income Fund on July
15, 1994) wishes to exchange all or a portion of his or her
shares in any of
the funds imposing a higher CDSC than that imposed by the
Fund, the exchanged
Class B shares will be subject to the higher applicable
CDSC. Upon an
exchange, the new Class B shares will be deemed to have been
purchased on the
same date as the Class B shares of the Fund that have been
exchanged.
Class C Exchanges. Upon an exchange, the new Class C
shares will be deemed
to have been purchased on the same date as the Class C
shares of the Fund that
have been exchanged.
37
<PAGE>
SMITH BARNEY
Premium Total Return Fund
EXCHANGE PRIVILEGE (CONTINUED)
Class Y Exchanges. Class Y shareholders of the Fund who
wish to exchange all
or a portion of their Class Y shares for Class Y shares in
any of the funds
identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege.
Although the
exchange privilege is an important benefit, excessive
exchange transactions
can be detrimental to the Fund's performance and its
shareholders. Strategy
Advisers may determine that a pattern of frequent exchanges
is excessive and
contrary to the best interests of the Fund's other
shareholders. In this
event, Strategy Advisers will notify Smith Barney that the
Fund may, at its
discretion, decide to limit additional purchases and/or
exchanges by a share-
holder. Upon such a determination, the Fund will provide
notice in writing or
by telephone to the shareholder at least 15 days prior to
suspending the
exchange privilege and during the 15-day period the
shareholder will be
required to (a) redeem his or her shares in the Fund or (b)
remain invested in
the Fund or exchange into any of the funds of the Smith
Barney Mutual Funds
ordinarily available, which position the shareholder would
be expected to
maintain for a significant period of time. All relevant
factors will be con-
sidered in determining what constitutes an abusive pattern
of exchanges.
Certain shareholders may be able to exchange shares by
telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange
Program." Exchanges will
be processed at the net asset value next determined, plus
any applicable sales
charge differential. Redemption procedures discussed below
are also applicable
for exchanging shares, and exchanges will be made upon
receipt of all support-
ing 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
38
<PAGE>
SMITH BARNEY
Premium Total Return Fund
REDEMPTION OF SHARES (CONTINUED)
of regular trading on the NYSE are priced at the net asset
value next deter-
mined.
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 redemp-
tion proceeds will be remitted on or before the third day
following receipt of
proper tender, except on any days on which the NYSE is
closed or as permitted
under the Investment Company Act of 1940 (the "1940 Act") in
extraordinary
circumstances. Generally, if the redemption proceeds are
remitted to a Smith
Barney brokerage account, these funds will not be invested
for the sharehold-
er's benefit without specific instruction and Smith Barney
will benefit from
the use of temporarily uninvested funds. Redemption proceeds
for shares pur-
chased by check, other than a certified or official bank
check, will be remit-
ted upon clearance of the check, which may take up to ten
days or more.
Shares held by Smith Barney as custodian must be redeemed
by submitting a
written request to a Smith Barney Financial Consultant.
Shares other than
those held by Smith Barney as custodian may be redeemed
through an investor's
Financial Consultant, Introducing Broker or dealer in the
selling group or by
submitting a written request for redemption to:
Smith Barney Premium Total Return Fund
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and
number or dollar
amount of shares to be redeemed, (b) identify the
shareholder's account number
and (c) be signed by each registered owner exactly as the
shares are regis-
tered. If the shares to be redeemed were issued in
certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied
by an endorsed
stock power) and must be submitted to FDISG together with
the redemption
request. Any signature appearing on a written redemption
request in excess of
$2,000, 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 secu
39
<PAGE>
SMITH BARNEY
Premium Total Return Fund
REDEMPTION OF SHARES (CONTINUED)
rities exchange. Written redemption requests of $2,000 or
less do not require a
signature guarantee unless more than one such redemption
request is made in any
10-day period or the redemption proceeds are to be sent to
an address other
than the address of record. Unless otherwise directed,
redemption proceeds will
be mailed to an investor's address of record. FDISG may
require additional sup-
porting documents for redemptions made by corporations,
executors, administra-
tors, trustees or guardians. A redemption request will not
be deemed properly
received until FDISG receives all required documents in
proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal
plan, under which
shareholders who own shares with a value of at least $10,000
may elect to
receive cash payments of at least $50 monthly or quarterly.
Retirement plan
accounts are eligible for automatic cash withdrawal plans
only where the share-
holder is eligible to receive qualified distributions and
has an account value
of at least $5,000. The withdrawal plan will be carried over
on exchanges
between funds or Classes of the Fund. Any applicable CDSC
will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per
month of the value of
the shareholder's shares subject to the CDSC at the time the
withdrawal plan
commences. For further information regarding the automatic
cash withdrawal
plan, shareholders should contact a Smith Barney Financial
Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage
account may be eligible
to redeem and exchange Fund shares by telephone. To
determine if a shareholder
is entitled to participate in this program, he or she should
contact FDISG at
1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete
and return a Telephone/Wire Authorization Form, including a
signature guarantee
that will be provided by FDISG upon request. (Alternatively,
an investor may
authorize telephone redemptions on the new account
application with a signature
guarantee when making his/her initial investment in the
Fund.)
Redemptions. Redemption requests of up to $10,000 of any
class or classes of
the Fund's shares may be made by eligible shareholders by
calling FDISG at 1-
800-451-2010. Such requests may be made between 9:00 a.m.
and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption
requests received after
the close of regular trading on the NYSE are priced at the
net asset value next
determined. Redemptions of shares (i) by retirement plans or
40
<PAGE>
SMITH BARNEY
Premium Total Return Fund
REDEMPTION OF SHARES (CONTINUED)
(ii) for which certificates have been issued are not
permitted under this pro-
gram.
A shareholder will have the option of having the
redemption proceeds mailed
to his/her address of record or wired to a bank account
predesignated by the
shareholder. Generally, redemption proceeds will be mailed
or wired, as the
case may be, on the next business day following the
redemption request. In
order to use the wire procedures, the bank receiving the
proceeds must be a
member of the Federal Reserve System or have a correspondent
with a member
bank. The Fund reserves the right to charge shareholders a
nominal fee for each
wire redemption. Such charges, if any, will be assessed
against the sharehold-
er's account from which shares were redeemed. In order to
change the bank
account designated to receive redemption proceeds, a
shareholder must complete
a new Telephone/Wire Authorization Form and, for the
protection of the share-
holder's assets, will be required to provide a signature
guarantee and certain
other documentation.
Exchanges. Eligible shareholders may make exchanges by
telephone if the
account registration of the shares of the fund being
acquired is identical to
the registration of the shares of the fund exchanged. Such
exchange requests
may be made by calling FDISG at 1-800-451-2010 between 9:00
a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open.
Exchange requests
received after the close of regular trading on the NYSE are
processed at the
net asset value next determined.
Additional Information regarding Telephone Redemption and
Exchange
Program. Neither the Fund nor its agents will be liable for
following instruc-
tions communicated by telephone that are reasonably believed
to be genuine. The
Fund and its agents will employ procedures designed to
verify the identity of
the caller and legitimacy of instructions (for example, a
shareholder's name
and account number will be required and phone calls may be
recorded). The Fund
reserves the right to suspend, modify or discontinue the
telephone redemption
and exchange program or to impose a charge for this service
at any time follow-
ing at least seven (7) days prior notice to shareholders.
41
<PAGE>
SMITH BARNEY
Premium Total Return Fund
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any
shareholder's
account in the Fund if the aggregate net asset value of the
shares held in the
Fund account is less than $500. (If a shareholder has more
than one account in
this Fund, each account must satisfy the minimum account
size.) The Fund, how-
ever, will not redeem shares based solely on market
reductions in net asset
value. Before the Fund exercises such right, shareholders
will receive written
notice and will be permitted 60 days to bring accounts up to
the minimum to
avoid automatic redemption.
PERFORMANCE
TOTAL RETURN
From time to time the Fund may include its total return,
average annual total
return and current dividend return in advertisements and/or
other types of
sales literature. These figures are computed separately for
Class A, Class B,
Class C and Class Y shares of the Fund. These figures are
based on historical
earnings and are not intended to indicate future
performance. Total return is
computed for a specified period of time assuming deduction
of the maximum sales
charge, if any, from the initial amount invested and
reinvestment of all income
dividends and capital gain distributions on the reinvestment
dates at prices
calculated as stated in this Prospectus, then dividing the
value of the invest-
ment 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 redeem-
able value. Such standard total return information may also
be accompanied with
nonstandard total return information for differing periods
computed in the same
manner but without annualizing the total return or taking
sales charges into
account. The Fund calculates current dividend return for
each Class by
annualizing the most recent monthly distribution and
dividing by the net asset
value or the maximum public offering price (including sales
charge) on the last
day of the period for which current dividend return is
presented. The current
dividend return for each Class may vary from time to time
depending on market
conditions, the composition of its investment portfolio and
operating expenses.
These factors and possible differences in the methods used
in calculating cur-
rent dividend return should be considered when comparing a
Class' current
return to yields published for other investment companies
and other investment
vehicles. The Fund may also include comparative performance
information in
advertising or marketing its shares. Such performance
information may include
data from Lipper Analytical Services, Inc. and other
financial publications.
42
<PAGE>
SMITH BARNEY
Premium Total Return Fund
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of
the Fund rests with
the Trust's Board of Trustees. The Trustees approve all
significant agreements
between the Trust and the companies that furnish services to
the Trust and the
Fund, including agreements with the Fund's distributor,
investment adviser,
sub-investment adviser, administrator, custodian and
transfer agent. The day-
to-day operations of the Fund are delegated to the Fund's
investment adviser,
sub-investment adviser and administrator. The Statement of
Additional Informa-
tion contains background information regarding each Trustee
and executive offi-
cer of the Trust.
INVESTMENT ADVISER--STRATEGY ADVISERS
Strategy Advisers, located at 388 Greenwich Street, New
York, New York 10013,
serves as the Fund's investment adviser. Strategy Advisers
has been in the
investment counseling business since 1968 and is a wholly
owned subsidiary of
SBMFM. SBMFM is a registered investment adviser whose
principal executive
offices are located at 388 Greenwich Street, New York, New
York 10013. Strategy
Advisers renders investment advice to investment companies
that had aggregate
assets under management as of October 31, 1995 in excess of
$2.7 billion. For
advisory services rendered to the Fund, under an Advisory
Agreement dated
August 31, 1995, the Fund pays Strategy Advisers a fee at
the annual rate of
0.55% of the value of the Fund's average daily net assets.
From its fee, Strat-
egy Advisers pays Boston Partners a fee of 0.10% of the
value of the Fund's
average daily net assets, for its services as sub-investment
adviser.
ADMINISTRATOR--SBMFM
SBMFM serves as the Fund's administrator and generally
assists in all aspects
of the Fund's administration and operation. SBMFM provides
investment manage-
ment and administration services to investment companies
that had aggregate
assets under management as of September 30, 1995 in excess
of $60 billion.
As the Fund's administrator, SBMFM oversees all aspects of
the Fund's admin-
istration and operations. Pursuant to an administration
agreement with the
Fund, SBMFM is paid a fee at the annual rate of 0.20% of the
Fund's average
daily net assets.
43
<PAGE>
SMITH BARNEY
Premium Total Return Fund
MANAGEMENT OF THE TRUST AND THE FUND (CONTINUED)
SUB-INVESTMENT ADVISER--BOSTON PARTNERS
Boston Partners, located at One Financial Center, Boston,
Massachusetts
02111, serves as the Fund's sub-investment adviser. Boston
Partners provides
investment management and investment advisory services to
investment companies
that had aggregate total assets under management as of
October 31, 1995, in
excess of $2.2 billion.
Subject to the supervision and direction of the Trust's
Board of Trustees,
Strategy Advisers and Boston Partners manage the Fund's
portfolio in accor-
dance with the Fund's investment objective and policies,
make investment deci-
sions 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.
PORTFOLIO MANAGEMENT
Harry Rosenbluth, Equity Portfolio Manager of Boston
Partners, has served as
Portfolio Manager of the Fund since August 16, 1995 and
manages the day-to-day
operations of the Fund, including the oversight of all
investment decisions.
Mr. Rosenbluth previously served as Investment Administrator
of the Fund from
1992 until April, 1995, while he was a Senior Vice President
of The Boston
Company Asset Management, Inc. Mr. Rosenbluth has managed
investment portfo-
lios since 1986.
Management's discussion and analysis and additional
performance information
regarding the Fund during the fiscal year ended July 31,
1995 is included in
the Annual Report dated July 31, 1995. A copy of the Annual
Report may be
obtained upon request without charge from a Smith Barney
Financial Consultant
or by writing or calling the Fund at the address or phone
number listed on
page one of this Prospectus.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York,
New York 10013.
Smith Barney distributes shares of the Fund as principal
underwriter and as
such conducts a continuous offering pursuant to a "best
efforts" arrangement
requiring Smith Barney to take and pay for only such
securities as may be sold
to the public. Pursuant to a plan of distribution adopted by
the Fund under
Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is
paid a serv-
44
<PAGE>
SMITH BARNEY
Premium Total Return Fund
DISTRIBUTOR (CONTINUED)
ice fee with respect to Class A, Class B and Class C shares
of the Fund at the
annual rate of 0.25% of the average daily net assets of the
respective Class.
Smith Barney is also paid a distribution fee with respect to
Class B and Class
C shares at the annual rate of 0.50% and 0.45% of the
average daily net assets
attributable to each of those Classes, respectively. Class B
shares that auto-
matically convert to Class A shares eight years after the
date of original
purchase will no longer be subject to a distribution fee.
The fees are used by
Smith Barney to pay its Financial Consultants for servicing
shareholder
accounts and, in the case of Class B and Class C shares, to
cover expenses
primarily intended to result in the sale of those shares.
These expenses
include: advertising expenses; the cost of printing and
mailing prospectuses
to potential investors; payments to and expenses of Smith
Barney Financial
Consultants and other persons who provide support services
in connection with
the distribution of shares; interest and/or carrying
charges; and indirect and
overhead costs of Smith Barney associated with the sale of
Fund shares,
including lease, utility, communications and sales promotion
expenses.
The payments to Smith Barney Financial Consultants for
selling shares of a
Class include, a commission or fee paid by the investor or
Smith Barney at the
time of sale and, with respect to Class A, Class B and Class
C shares, a con-
tinuing fee for servicing shareholder accounts for as long
as a shareholder
remains a holder of that Class. Smith Barney Financial
Consultants may receive
different levels of compensation for selling different
Classes of shares.
Payments under the Plan with respect to Class B and Class
C shares are not
tied exclusively to the distribution and shareholder service
expenses actually
incurred by Smith Barney and the payments may exceed
distribution expenses
actually incurred. The Trust's Board of Trustees will
evaluate the appropri-
ateness of the Plan and its payment terms on a continuing
basis and in so
doing will consider all relevant factors, including expenses
borne by Smith
Barney, amounts received under the Plan and proceeds of the
CDSC.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, under the laws
of the Common-
wealth of Massachusetts and is an entity commonly known as a
"Massachusetts
business trust." The Trust offers shares of beneficial
interest currently
classified into four Classes--A, B, C and Y. Each Class of
shares represents
identical interests in the Fund's investment portfolio. As a
result, the Clas-
ses have the same rights, privileges and preferences, except
with respect to:
(a) the designation of
45
<PAGE>
SMITH BARNEY
Premium Total Return Fund
ADDITIONAL INFORMATION (CONTINUED)
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 affect-
ing 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 mat-
ters 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 meet-
ing for any purpose upon written request of shareholders
holding at least 10%
of the Fund's outstanding shares and the Trust will assist
shareholders in
calling such a meeting as required by the 1940 Act.
PNC Bank, located at 17th and Chestnut Streets,
Philadelphia, PA 19103,
serves as custodian of the Trust's investments.
FDISG 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 print-
ing 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 house-
46
<PAGE>
SMITH BARNEY
Premium Total Return Fund
ADDITIONAL INFORMATION (CONTINUED)
hold having multiple accounts with the identical address of
record will
receive a single copy of each report. In addition, the Trust
also plans to
consolidate the mailing of the Fund's Prospectus so that a
shareholder having
multiple accounts (that is, individual, IRA and/or Self-
Employed Retirement
Plan accounts) will receive a single Prospectus annually.
Shareholders who do
not want this consolidation to apply to their accounts
should contact their
Smith Barney Financial Consultants or FDISG.
----------------------
No person has been authorized to give any information or
to make any repre-
sentations in connection with this offering other than those
contained in this
Prospectus and, if given or made, such other information or
representations
must not be relied upon as having been authorized by the
Trust or the distrib-
utor. This Prospectus does not constitute an offer by the
Trust or the dis-
tributor to sell or a solicitation of an offer to buy any of
the securities
offered hereby in any jurisdiction to any person to whom it
is unlawful to
make such offer or solicitation in such jurisdiction.
47
<PAGE>
SMITH BARNEY
- - ------------
A Member of
Travelers Group LOGO
SMITH BARNEY
PREMIUM TOTAL
RETURN FUND
388 Greenwich Street
New
York, New York 10013
FD 0213 11/95
<PAGE>
- - ----------
PROSPECTUS
- - ----------
SMITH BARNEY
Convertible
Fund
November 28, 1995
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus
November 28, 1995
- - ------------------------------------------------------------
- - --------------------
388 Greenwich Street
New York, New York 10013
(212) 723-9218
The Smith Barney Convertible Fund (the "Fund") is a
diversified fund that
seeks current income and capital appreciation by investing
in convertible
securities and in combinations of nonconvertible fixed-
income securities and
warrants or call options that together resemble convertible
securities. The Fund
is one of a number of funds, each having distinct investment
objectives and
policies, making up Smith Barney Income Funds (the "Trust").
The Trust is an
open-end management investment company commonly referred to
as a mutual fund.
This Prospectus sets forth concisely certain
information about the Fund and
the Trust, including sales charges, distribution and service
fees and expenses,
that prospective investors will find helpful in making an
investment decision.
Investors are encouraged to read this Prospectus carefully
and retain it for
future reference. Shares of other investment funds offered
by the Trust are
described in separate prospectuses that may be obtained by
calling the Trust at
the telephone number set forth above or by contacting a
Smith Barney Financial
Consultant.
Additional information about the Fund and the Trust is
contained in a
Statement of Additional Information dated November 28, 1995,
as amended or
supplemented from time to time, that is available upon
request and without
charge by calling or writing the Trust at the telephone
number or address set
forth above or by contacting a Smith Barney Financial
Consultant. The Statement
of Additional Information has been filed with the Securities
and Exchange
Commission (the "SEC") and is incorporated by reference into
this Prospectus in
its entirety.
Smith Barney Inc.
Distributor
Smith Barney Mutual Funds Management Inc.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Table of Contents
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary
3
- - ------------------------------------------------------------
- - --------------------
Financial Highlights
11
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies
15
- - ------------------------------------------------------------
- - --------------------
Valuation of Shares
25
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes
25
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares
27
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege
37
- - ------------------------------------------------------------
- - --------------------
Redemption of Shares
41
- - ------------------------------------------------------------
- - --------------------
Minimum Account Size
43
- - ------------------------------------------------------------
- - --------------------
Performance
44
- - ------------------------------------------------------------
- - --------------------
Management of the Trust and the Fund
45
- - ------------------------------------------------------------
- - --------------------
Distributor
46
- - ------------------------------------------------------------
- - --------------------
Additional Information
47
============================================================
====================
No person has been authorized to give any information
or to make any
representations in connection with this offering other than
those contained in
this Prospectus and, if given or made, such other
information and
representations must not be relied upon as having been
authorized by the Fund or
the Distributor. This Prospectus does not constitute an
offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any
of the securities
offered hereby in any jurisdiction to any person to whom it
is unlawful to make
such offer or solicitation in such jurisdiction.
============================================================
====================
2
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary
- - ------------------------------------------------------------
- - --------------------
The following summary is qualified in its entirety by
detailed information
appearing elsewhere in this Prospectus and in the Statement
of Additional
Information. Cross references in this summary are to
headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified
management investment
company that seeks current income and capital appreciation
by investing in
convertible securities and in combinations of nonconvertible
fixed-income
securities and warrants or call options that together
resemble convertible
securities ("synthetic convertible securities"). Under
normal circumstances, the
Fund will invest at least 65% of its assets in convertible
securities, and may
invest up to 35% of its assets in synthetic convertible
securities and in equity
and debt securities that are not convertible into common
stock. See "Investment
Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several
classes of shares
("Classes") to investors designed to provide them with the
flexibility of
selecting an investment best suited to their needs. The
general public is
offered three classes of shares: Class A shares, Class B
shares and Class C
shares, which differ principally in terms of sales charges
and rate of expenses
to which they are subject. A fourth Class of shares, Class Y
shares, is offered
only to investors meeting an initial investment minimum of
$5,000,000. See
"Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset
value plus an initial
sales charge of up to 5.00% and are subject to an annual
service fee of 0.25% of
the average daily net assets of the Class. The initial sales
charge may be
reduced or waived for certain purchases. Purchases of Class
A shares, which when
combined with current holdings of Class A shares offered
with a sales charge
equal or exceed $500,000 in the aggregate, will be made at
net asset value with
no initial sales charge, but will be subject to a contingent
deferred sales
charge ("CDSC") of 1.00% on redemptions made within 12
months of purchase. See
"Prospectus Summary -- Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset
value subject to a
maximum CDSC of 5.00% of redemption proceeds, declining by
1.00% each year after
the date of purchase to zero. This CDSC may be waived for
certain redemptions.
Class B shares are subject to an annual service fee of 0.25%
and an annual
3
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
distribution fee of 0.50% of the average daily net assets of
the Class. The
Class B shares' distribution fee may cause that Class to
have higher expenses
and pay lower dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will
convert
automatically to Class A shares, based on relative net asset
value, eight years
after the date of the original purchase. Upon conversion,
these shares will no
longer be subject to an annual distribution fee. In
addition, a certain portion
of Class B shares that have been acquired through the
reinvestment of dividends
and distributions ("Class B Dividend Shares") will be
converted at that time.
See "Purchase of Shares -- Deferred Sales Charge
Alternatives."
Class C Shares. Class C shares are sold at net asset
value with no initial
sales charge. They are subject to an annual service fee of
0.25% and an annual
distribution fee of 0.45% of the average daily net assets of
the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares
within 12 months of
purchase. The CDSC may be waived for certain redemptions.
The Class C shares'
distribution fee may cause that Class to have higher
expenses and pay lower
dividends than Class A shares. Purchases of Fund shares,
which when combined
with current holdings of Class C shares of the Fund equal or
exceed $500,000 in
the aggregate, should be made in Class A shares at net asset
value with no sales
charge, and will be subject to a CDSC of 1.00% on
redemptions made within 12
months of purchase.
Class Y Shares. Class Y shares are available only to
investors meeting an
initial investment minimum of $5,000,000. Class Y shares are
sold at net asset
value with no initial sales charge or CDSC. They are not
subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase,
investors should
consider the following factors, as well as any other
relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class
of shares is more
beneficial to an investor depends on the amount and intended
length of his or
her investment. Shareholders who are planning to establish a
program of regular
investment may wish to consider Class A shares; as the
investment accumulates
shareholders may qualify for reduced sales charge and the
shares are subject to
lower ongoing expenses over the term of the investment. As
an alternative, Class
B and Class C shares are sold without any initial sales
charge so the entire
4
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
purchase price is immediately invested in the Fund. Any
investment return on
these additional invested amounts may partially or wholly
offset the higher
annual expenses of these Classes. Because the Fund's future
return cannot be
predicted, however, there can be no assurance that this
would be the case.
Finally, investors should consider the effect of the
CDSC period and any
conversion rights of the Classes in the context of their own
investment time
frame. For example, while Class C shares have a shorter CDSC
period than Class B
shares, they do not have a conversion feature, and
therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more
attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must
purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or
service or
distribution fee. The maximum purchase amount for Class A
shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999.
There is no maximum
purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales
charge on Class A
shares may be waived for certain eligible purchasers, and
the entire purchase
price will be immediately invested in the Fund. In addition,
Class A share
purchases, which when combined with current holdings of
Class A shares offered
with a sales charge equal or exceed $500,000 in the
aggregate, will be made at
net asset value with no initial sales charge, but will be
subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The
$500,000 aggregate
investment may be met by adding the purchase to the net
asset value of all Class
A shares held in funds sponsored by Smith Barney Inc.
("Smith Barney") listed
under "Exchange Privilege." Class A share purchases may also
be eligible for a
reduced initial sales charge. See "Purchase of Shares."
Because the ongoing
expenses of Class A shares may be lower than those for Class
B and Class C
shares, purchasers eligible to purchase Class A shares at
net asset value or at
a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive
different compensation for
selling each Class of shares. Investors should understand
that the purpose of
the CDSC on the Class B and Class C shares is the same as
that of the initial
sales charge on the Class A shares.
5
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
See "Purchase of Shares" and "Management of the Trust
and the Fund" for a
complete description of the sales charges and service and
distribution fees for
each Class of shares and "Valuation of Shares," "Dividends,
Distributions and
Taxes" and "Exchange Privilege" for other differences
between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to
participate in the
Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors
in the creation and operation of retirement plans under
Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as
well as other types
of participant directed, tax-qualified employee benefit
plans (collectively,
"Participating Plans"). Class A, Class B, Class C and Class
Y shares are
available as investment alternatives for Participating
Plans. See "Purchase of
Shares -- Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the
Fund's distributor,
Smith Barney, a broker that clears securities transactions
through Smith Barney
on a fully disclosed basis (an "Introducing Broker") or an
investment dealer in
the selling group. Direct purchases by certain retirement
plans may be made
through the Fund's transfer agent, First Data Investor
Services Group, Inc.
("FDISG"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class
C shares may open
an account by making an initial investment of at least
$1,000 for each account,
or $250 for an individual retirement account ("IRA") or a
Self-Employed
Retirement Plan. Investors in Class Y shares may open an
account for an initial
investment of $5,000,000. Subsequent investments of at least
$50
may be made for
all Classes. For participants in retirement plans qualified
under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial
investment
requirement for Class A, Class B and Class C shares and the
subsequent
investment requirement for all Classes is $25. The minimum
initial investment
requirement for Class A, Class B and Class C shares and the
subsequent
investment requirement for all Classes through the
Systematic Investment Plan
described below is $50. There is no minimum investment
requirement in Class A
for unitholders who invest distributions from a unit
investment trust ("UIT")
sponsored by Smith Barney. See "Purchase of Shares."
6
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a
Systematic Investment
Plan under which they may authorize the automatic placement
of a purchase order
each month or quarter for Fund shares in an amount of at
least $50. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the
New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase
of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Mutual
Funds Management Inc.
("SBMFM") serves as the Fund's investment adviser and
administrator. SBMFM
provides investment advisory and management services to
investment companies
affiliated with Smith Barney. SBMFM is a wholly owned
subsidiary of Smith Barney
Holdings Inc. ("Holdings"), which is in turn a wholly owned
subsidiary of
Travelers Group Inc. ("Travelers"), a diversified financial
services holding
company engaged, through its subsidiaries, principally in
four business
segments: Investment Services, Consumer Finance Services,
Life Insurance
Services and Property & Casualty Insurance Services.
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for
shares of the same
Class of certain other funds of the Smith Barney Mutual
Funds at the respective
net asset values, next determined, plus any applicable sales
charge
differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the
prior day generally is
quoted daily in the financial section of most newspapers and
is also available
from Smith Barney Financial Consultants. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly from
net investment
income and distributions of net realized capital gains, if
any, are declared and
paid annually. See "Dividends, Distributions and Taxes."
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
7
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
charge or CDSC. Class B shares acquired through dividend and
distribution
reinvestments will become eligible for conversion to Class A
shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no
assurance that the
Fund's investment objective will be achieved. The market
value of fixed-income
securities, which constitute a major part of the investments
of the Fund, may
vary inversely in response to changes in prevailing interest
rates. The foreign
securities in which the Fund may invest may be subject to
certain risks in
addition to those inherent in domestic investments. The
medium- or lower-rated
securities in which the Fund may invest, some of which have
speculative
characteristics, may be subject to greater market
fluctuations and greater risk
of loss of income or principal than higher-rated securities.
The Fund may employ
investment techniques which involve certain other risks,
including entering into
repurchase agreements, engaging in when-issued and delayed-
delivery
transactions, lending portfolio securities, entering into
options on securities
and short sales "against the box." See "Investment Objective
and Management
Policies."
8
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
The Fund's Expenses The following expense table lists the
costs and expenses an
investor will incur either directly or indirectly as a
shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may
be incurred at the
time of purchase or redemption and, unless otherwise noted,
the Fund's operating
expenses for its most recent fiscal year:
Class A Class
B Class C Class Y
============================================================
====================
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% None
None None
Maximum CDSC
(as a percentage of original cost or
redemption proceeds whichever is lower) None*
5.00% 1.00% None
============================================================
====================
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.70%
0.70% 0.70% 0.70%
12b-1 fees** 0.25%
0.75% 0.70% None
Other expenses*** 0.45%
0.45% 0.47% 0.45%
============================================================
====================
TOTAL FUND OPERATING EXPENSES 1.40%
1.90% 1.87% 1.15%
============================================================
====================
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge, equal or
exceed $500,000 in the
aggregate, will be made at net asset value with no
sales charge, but will
be subject to a CDSC of 1.00% on redemptions made
within 12 months.
** Upon conversion of Class B shares to Class A shares,
such shares will no
longer be subject to a distribution fee. Class C shares
do not have a
conversion feature and, therefore, are subject to an
ongoing distribution
fee. As a result, long-term shareholders of Class C
shares may pay more
than the economic equivalent of the maximum front-end
sales charge
permitted by the National Association of Securities
Dealers, Inc.
*** For Class Y shares. "other expenses" have been
estimated based on expenses
incurred by Class A share because, as of July 31, 1995,
no Class Y shares
were outstanding.
The sales charge and CDSC set forth in the above table are
the maximum charges
imposed on purchases or redemptions of Fund shares and
investors may actually
pay lower or no charges, depending on the amount purchased
and, in the case of
Class B, Class C and certain Class A shares, the length of
time the shares are
held and whether the shares are held through the Smith
Barney 401(k) Program.
See "Purchase of Shares" and "Redemption of Shares." Smith
Barney receives an
annual 12b-1 service fee of 0.25% of the value of average
daily net assets of
Class A shares. Smith Barney also receives, with respect to
Class B shares, an
annual 12b-1 fee of 0.75% of the value of average daily net
assets of that
Class, consisting of a 0.50% distribution fee and a 0.25%
service fee. For Class
C shares, Smith Barney receives an annual 12b-1 fee of 0.70%
of the value of
average daily net assets, consisting of a 0.45% distribution
fee and a 0.25%
service fee. "Other expenses" in the above table include
fees for shareholder
9
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
services, custodial fees, legal and accounting fees,
printing costs and
registration fees.
Example The following example is intended to assist an
investor in understanding
the various costs that an investor in the Fund will bear
directly or indirectly.
The example assumes payment by the Fund of operating
expenses at the levels set
forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and
"Management of the Trust and the Fund."
1 Year 3 Years
5 Years 10 Years*
============================================================
====================
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return
and (2) redemption at the end
of each time period:
Class A $64 $92
$123 $210
Class B 69 90
113 209
Class C 29 59
101 219
Class Y 12 37
63 140
An investor would pay the following
expenses on the same investment,
assuming the same annual return
and no redemption:
Class A 64 92
123 210
Class B 19 60
103 209
Class C 19 59
101 219
Class Y 12 37
63 140
============================================================
====================
* Ten-year figures assume conversion of Class B shares to
Class A shares at
the end of the eighth year following the date of
purchase.
The example also provides a means for the investor to
compare expense
levels of funds with different fee structures over varying
investment periods.
To facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. This example should not be
considered a
representation of past or future expenses and actual
expenses may be greater or
less than those shown.
10
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights
- - ------------------------------------------------------------
- - --------------------
The following information for the fiscal year ended July 31,
1995, has been
audited by KPMG Peat Marwick LLP, independent accountants,
whose report thereon
appears in the Fund's Annual Report dated July 31, 1995. The
following
information for the fiscal years ended July 31, 1987 through
July 31, 1994 has
been audited by Coopers & Lybrand L.L.P. The information set
out below should be
read in conjunction with the financial statements and
related notes that also
appear in the Fund's Annual Report, which is incorporated by
reference into the
Statement of Additional Information. No information is
presented for Class Y
shares, because no Class Y shares were outstanding for the
periods shown.
For a Class A share of beneficial interest outstanding
throughout each period:
Year
Year Period
Ended
Ended Ended
7/31/95
7/31/94 7/31/93(1)
============================================================
====================
Net Asset Value, Beginning of Period $14.56
$14.99 $13.82
- - ------------------------------------------------------------
- - --------------------
Income From Operations:
Net investment income 0.74
0.72 0.49
Net realized and unrealized gain (loss)
on investments 0.70
(0.42) 1.22
- - ------------------------------------------------------------
- - --------------------
Total Income From Operations 1.44
0.30 1.71
- - ------------------------------------------------------------
- - --------------------
Less Distributions From:
Net investment income (0.73)
(0.70) (0.50)
Overdistribution of net investment income --
(0.03) (0.01)
Overdistribution of net realized gains -- -
- - - (0.03)
- - ------------------------------------------------------------
- - --------------------
Total Distributions (0.73)
(0.73) (0.54)
- - ------------------------------------------------------------
- - --------------------
Net Asset Value, End of Period $15.27
$14.56 $14.99
- - ------------------------------------------------------------
- - --------------------
Total Return++ 10.35%
1.99% 12.63%+++
- - ------------------------------------------------------------
- - --------------------
Net Assets, End of Year (000s) $35,238
$2,294 $1,655
- - ------------------------------------------------------------
- - --------------------
Ratios to Average Net Assets:
Expenses 1.40%
1.40% 1.37%+
Net investment income 5.13
4.80 4.86+
- - ------------------------------------------------------------
- - --------------------
Portfolio Turnover Rate 48%
54% 95%
============================================================
====================
(1) For the period from November 6, 1992 (inception date)
to July 31, 1993.
+++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charge.
11
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights (continued)
- - ------------------------------------------------------------
- - --------------------
<TABLE>
<CAPTION>
For a Class B share of beneficial interest outstanding
throughout each period:
Year
Year Year Year Year
Ended
Ended Ended Ended Ended
7/31/95
7/31/94 7/31/93 7/31/92 7/31/91
============================================================
=====================================================
<S> <C>
<C> <C> <C> <C>
Net Asset Value, Beginning of Period $14.56
$14.99 $13.84 $12.51 $12.21
- - ------------------------------------------------------------
- - -----------------------------------------------------
Income From Operations:
Net investment income 0.67
0.65 0.61 0.64 0.68
Net realized and unrealized
gain (loss) on investments 0.70
(0.42) 1.20 1.35 0.33
- - ------------------------------------------------------------
- - -----------------------------------------------------
Total Income From Operations 1.37
0.23 1.81 1.99 1.01
- - ------------------------------------------------------------
- - -----------------------------------------------------
Less Distributions From:
Net investment income (0.66)
(0.64) (0.60) (0.64) (0.68)
Overdistribution of net
investment income --
(0.02) (0.02) -- --
Net realized gains --
- - -- (0.04) -- --
Capital --
- - -- -- (0.02) (0.03)
- - ------------------------------------------------------------
- - -----------------------------------------------------
Total Distributions (0.66)
(0.66) (0.66) (0.66) (0.71)
- - ------------------------------------------------------------
- - -----------------------------------------------------
Net Asset Value, End of Period $15.27
$14.56 $14.99 $13.84 $12.51
- - ------------------------------------------------------------
- - -----------------------------------------------------
Total Return++ 9.80%
1.50% 13.40% 16.25% 8.86%
- - ------------------------------------------------------------
- - -----------------------------------------------------
Net Assets, End of Period (000s) $45,524
$85,190 $74,857 $57,120 $65,523
Ratios to Average Net Assets:
Expenses 1.90%
1.88% 2.00% 1.88% 1.92%
Net investment income 4.63
4.32 4.20 4.76 5.81
- - ------------------------------------------------------------
- - -----------------------------------------------------
Portfolio Turnover Rate 48%
54% 95% 77% 26%
============================================================
=====================================================
</TABLE>
12
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights (continued)
- - ------------------------------------------------------------
- - --------------------
<TABLE>
<CAPTION>
For a Class B share of beneficial interest outstanding
throughout each period (continued):
Year
Year Year Year
Ended
Ended Ended Ended
7/31/90
7/31/89 7/31/88 7/31/87*
============================================================
=========================================
<S> <C>
<C> <C> <C>
Net Asset Value, Beginning of Period $13.80
$13.04 $13.93 $13.00
- - ------------------------------------------------------------
- - -----------------------------------------
Income From Operations:
Net investment income 0.79
0.85 0.87 0.63
Net realized and unrealized
gain (loss) on investments (1.40)
0.78 (0.64) 0.95
- - ------------------------------------------------------------
- - -----------------------------------------
Total Income From Operations (0.61)
1.63 0.23 1.58
- - ------------------------------------------------------------
- - -----------------------------------------
Less Distributions From:
Net investment income (0.83)
(0.86) (0.85) (0.62)
Overdistribution of net
investment income --
- - -- -- --
Net realized gains (0.11)
(0.01) (0.27) (0.03)
Capital (0.4)
- - -- -- --
- - ------------------------------------------------------------
- - -----------------------------------------
Total Distributions (0.98)
(0.87) (1.12) (0.65)
- - ------------------------------------------------------------
- - -----------------------------------------
Net Asset Value, End of Period $12.21
$13.80 $13.04 $13.93
- - ------------------------------------------------------------
- - -----------------------------------------
Total Return++ (4.53)%
13.09% 2.22% 12.34%+++
- - ------------------------------------------------------------
- - -----------------------------------------
Net Assets, End of Period (000s) $97,157
$153,157 $172,587 $235,685
Ratios to Average Net Assets:
Expenses 1.85%
1.74% 1.75% 1.78%+**
Net investment income 6.10%
6.41% 6.74% 5.85%+
- - ------------------------------------------------------------
- - -----------------------------------------
Portfolio Turnover Rate 24%
32% 45% 21%
============================================================
=========================================
</TABLE>
+++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
* On November 6, 1992, the Fund commenced selling Class A
shares. All shares
previously in existence were designated as Class B
shares.
** Annualized expense ratio before waiver of fees by
investment adviser and
sub-investment adviser and administrator was 1.82%.
13
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights (continued)
- - ------------------------------------------------------------
- - --------------------
Class C share(1) outstanding throughout each year:
Period
Ended
7/31/95(2)
============================================================
====================
Net Asset Value, Beginning of Year
$14.09
- - ------------------------------------------------------------
- - --------------------
Income From Operations:
Net investment income
0.50
Net realized and unrealized
gain on investments
1.17
- - ------------------------------------------------------------
- - --------------------
Total Income From Operations
1.67
- - ------------------------------------------------------------
- - --------------------
Less Distributions From:
Net investment income
(0.49)
- - ------------------------------------------------------------
- - --------------------
Total Distributions
(0.49)
- - ------------------------------------------------------------
- - --------------------
Net Asset Value, End of Year
$15.27
- - ------------------------------------------------------------
- - --------------------
Total Return
12.17%++
- - ------------------------------------------------------------
- - --------------------
Net Assets, End of Year (000s)
$83
- - ------------------------------------------------------------
- - --------------------
Ratios to Average Net Assets:
Expenses
1.87%+
Net investment income
4.77+
- - ------------------------------------------------------------
- - --------------------
Portfolio Turnover Rate
48%
============================================================
====================
(1) On November 7, 1994, the former Class D shares were
renamed Class C shares.
(2) For the period from November 7, 1994 (inception date)
to July 31, 1995.
++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
There were no Class Y shares outstanding as of July 31,
1995, therefore, no
comparable financial information is available at this time
for this Class.
14
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies
- - ------------------------------------------------------------
- - --------------------
The Fund's investment objective is current income and
capital appreciation.
The Fund's investment objective may not be changed without
the approval of a
majority of the Fund's outstanding shares. There can be no
assurance that the
Fund's investment objective will be achieved.
The Fund seeks to achieve its objective by investing in
convertible
securities and "synthetic convertible securities." Under
normal circumstances,
the Fund will invest at least 65% of its assets in
convertible securities. The
Fund is not required to sell securities to conform to this
65% limitation and
may retain on a temporary basis securities received upon
conversion of
convertible securities or upon exercise of warrants or call
options that are
components of synthetic convertible securities to permit
their orderly
disposition, to establish long-term holding periods for tax
purposes or for
other reasons. The Fund will not invest in fixed-income
securities that are
rated lower than B by Moody's Investors Services, Inc.
("Moody's") or Standard &
Poor's Corporation ("S&P") or, if unrated, deemed by SBMFM
to be comparable to
securities rated lower than B. The Fund may invest up to 35%
of its assets in
synthetic convertible securities and in equity and debt
securities that are not
convertible into common stock and, for temporary defensive
purposes when deemed
appropriate by the Fund's investment adviser in light of
current market
conditions, may invest in these securities without
limitation. In seeking to
achieve its investment objective, the Fund may write covered
call options on a
small portion of its assets, lend portfolio securities and
enter into short
sales "against the box." The Fund may utilize up to 10% of
its assets to
purchase put options on securities for hedging purposes and
may invest up to 10%
of its assets in foreign securities. Special considerations
associated with the
Fund are described under "Risk Factors and Special
Considerations."
Certain Investment Strategies
In attempting to achieve its investment objective, the
Fund may employ,
among others, one or more of the strategies set forth below.
More detailed
information concerning these strategies and their related
risks is contained in
the Statement of Additional Information.
In the future, the Fund may desire to employ additional
investment
strategies, including such hedging strategies as entering
into futures contracts
and related options. The Fund will do so only upon 60 days'
notice to
shareholders and in conformity with its investment
restrictions.
Lending of Portfolio Securities. The Fund has the
ability to lend portfolio
securities to brokers, dealers and other financial
organizations. These loans,
15
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
if and when made, may not exceed 20% of the Fund's assets
taken at value. Loans
of portfolio securities will be collateralized by cash,
letters of credit or
U.S. government securities that are maintained at all times
in an amount at
least equal to the current market value of the loaned
securities. Any gain or
loss in the market price of the securities loaned that might
occur during the
term of the loan would be for the account of the Fund.
Short Sales Against the Box. The Fund may make short
sales of common stock
if, at all times when a short position is open, the Fund
owns the stock or owns
preferred stocks or debt securities convertible or
exchangeable, without payment
of further consideration, into the shares of common stock
sold short. Short
sales of this kind are referred to as short sales "against
the box." The
broker-dealer that executes a short sale generally invests
cash proceeds of the
sale until they are paid to the Fund. Arrangements may be
made with the
broker-dealer to obtain a portion of the interest earned by
the broker on the
investment of short sale proceeds. The Fund will segregate
the common stock or
convertible or exchangeable preferred stock or debt
securities in a special
account with PNC Bank, National Association ("PNCBank"), the
Trust's custodian.
The Fund may utilize up to 50% of its assets as collateral
for short sales
against the box. The extent to which the Fund may make short
sales of common
stocks may be limited by the requirements contained in the
Code for
qualification as a regulated investment company. See
"Dividends, Distributions
and Taxes."
Covered Option Writing. The Fund may write call options
on securities. The
Fund realizes fees (referred to as "premiums") for granting
the rights evidenced
by the options. A call option embodies the right of its
purchaser to compel the
writer of the option to sell to the option holder an
underlying security at a
specified price at any time during the option period. Thus,
the purchaser of a
call option written by the Fund has the right to purchase
from the Fund the
underlying security owned by the Fund at the agreed-upon
price for a specified
time period.
Upon the exercise of a call option written by the Fund,
the Fund may suffer
a loss equal to the excess of the security's market value at
the time of the
option exercise over the Fund's acquisition cost of the
security, less the
premium received for writing the option. The Fund will write
only covered
options. Accordingly, whenever the Fund writes a call
option, it will continue
to own or have the present right to acquire the underlying
security for as long
as it remains obligated as the writer of the option.
The Fund may engage in a closing purchase transaction
to realize a profit,
to prevent an underlying security from being called or put
or to unfreeze an
underlying security (thereby permitting its sale or the
writing of a new option
16
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
on the security prior to the outstanding option's
expiration). To effect a
closing purchase transaction, the Fund would purchase, prior
to the holder's
exercise of an option that the Fund has written, an option
of the same series as
that on which the Fund desires to terminate its obligation.
The obligation of
the Fund under an option that it has written would be
terminated by a closing
purchase transaction, but the Fund would not be deemed to
own an option as the
result of the transaction. There can be no assurance that
the Fund will be able
to effect closing purchase transactions at a time when it
wishes to do so. To
facilitate closing purchase transactions, however, the Fund
will write options
only if a secondary market for the options exists on a
domestic securities
exchange or in the over-the-counter market.
Purchasing Put and Call Options on Securities. The Fund
may purchase put
and call options that are traded on a domestic securities
exchange. The Fund may
utilize up to 10% of its assets to purchase put options on
portfolio securities
and may do so at or about the same time that it purchases
the underlying
security or at a later time. By buying a put, the Fund
limits the risk of loss
from a decline in the market value of the security until the
put expires. Any
appreciation in the value of the yield otherwise available
from the underlying
security, however, will be partially offset by the amount of
the premium paid
for the put option and any related transaction costs. Call
options may be
purchased by the Fund in order to acquire the underlying
securities for the Fund
at a price that avoids any additional cost that would result
from a substantial
increase in the market value of a security. The Fund also
may purchase call
options to increase its return to investors at a time when
the call is expected
to increase in value due to anticipated appreciation of the
underlying security.
Prior to their expirations, put and call options may be
sold in closing
sale transactions (sales by the Fund, prior to the exercise
of options that it
has purchased, or options of the same series), and profit or
loss from the sale
will depend on whether the amount received is more or less
than the premium paid
for the option plus the related transaction costs.
Additional Investments
Money Market Instruments. When SBMFM believes that
market conditions
warrant, the Fund may adopt a temporary defensive posture
and may invest in
short-term instruments without limitation. Short-term
instruments in which the
Fund may invest include: U.S. government securities; certain
bank obligations
(including certificates of deposit, time deposits and
bankers' acceptances of
domestic or foreign banks, domestic savings and loan
associations and similar
17
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
institutions); commercial paper rated no lower than A-2 by
S&P or Prime-2 by
Moody's or the equivalent from another major rating service
or, if unrated, of
an issuer having an outstanding, unsecured debt issue then
rated within the
three highest rating categories; and repurchase agreements
as described below.
U.S. Government Securities. The U.S. government
securities in which the
Fund may invest include: direct obligations of the United
States Treasury (such
as Treasury Bills, Treasury Notes and Treasury Bonds), and
obligations issued by
U.S. government agencies and instrumentalities, including
securities that are
supported by the full faith and credit of the United States
(such as Government
National Mortgage Association ("GNMA") certificates);
securities that are
supported by the right of the issuer to borrow from the
United States Treasury
(such as securities of Federal Home Loan Banks); and
securities that are
supported by the credit of the instrumentality. Treasury
Bills have maturities
of less than 1 year, Treasury Notes have maturities of 1 to
10 years and
Treasury Bonds generally have maturities of greater than 10
years at the date of
issuance. Certain U.S. government securities, such as those
issued or guaranteed
by GNMA, Federal National Mortgage Association ("FNMA") and
Federal Home Loan
Mortgage Corporation ("FHLMC"), are mortgage-related
securities. U.S. government
securities generally do not involve the credit risks
associated with other types
of interest-bearing securities, although, as a result, the
yields available from
U.S. government securities are generally lower than the
yields available from
interest-bearing corporate securities.
Repurchase Agreements. The Fund may engage in
repurchase agreement
transactions with certain member banks of the Federal
Reserve System and with
certain dealers on the Federal Reserve Bank of New York's
list of reporting
dealers. Under the terms of a typical repurchase agreement,
the Fund would
acquire an underlying debt obligation for a relatively short
period (usually not
more than one week) subject to an obligation of the seller
to repurchase, and
the Fund to resell, the obligation at an agreed-upon price
and time, thereby
determining the yield during the Fund's holding period. This
arrangement results
in a fixed rate of return that is not subject to market
fluctuations during the
Fund's holding period. The value of the underlying
securities will be at least
equal at all times to the total amount of the repurchase
obligation, including
interest. Repurchase agreements could involve certain risks
in the event of
default or insolvency of the other party, including possible
delays or
restrictions upon the Fund's ability to dispose of the
underlying securities,
the risk of a possible decline in the value of the
underlying securities during
the period in which the Fund seeks to assert its rights to
them, the risk of
incurring expenses associated with asserting those rights
and the risk of losing
all or part of the income from the agreement. SBMFM, acting
under the
18
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
supervision of the Board of Trustees, reviews on an ongoing
basis the value of
the collateral and the creditworthiness of those banks and
dealers with which
the Fund may enter into repurchase agreements to evaluate
potential risks.
Certain Investment Guidelines
Up to 15% of the assets of the Fund may be invested in
securities with
contractual or other restrictions on resale and other
instruments that are not
readily marketable, including (a) repurchase agreements with
maturities greater
than seven days and (b) time deposits maturing from two
business days through
seven calendar days. Not withstanding the foregoing, the
Fund shall not invest
more than 10% of its net assets on securities excluding
those subject to Rule
144A under the Securities Act of 1933, as amended, that are
restricted. In
addition, the Fund may invest up to 5% of its assets in the
securities of
issuers which have been in continuous operation for less
than three years. The
Fund also may borrow from banks for temporary or emergency
purposes, but not for
investment purposes, in an amount up to 10% of its total
assets, and may pledge
its assets to the same extent in connection with such
borrowings. Whenever these
borrowings exceed 5% of the value of the Fund's total
assets, the Fund will not
make any additional investments. Except for the limitations
on borrowing, the
investment guidelines set forth in this paragraph may be
changed at any time
without shareholder consent by vote of the Trust's Board of
Trustees. A complete
list of investment restrictions that identifies additional
restrictions that
cannot be changed without the approval of the majority of
the Fund's outstanding
shares is contained in the Statement of Additional
Information.
Risk Factors and Special Considerations
Convertible Securities and Synthetic Convertible
Securities. Convertible
securities are fixed-income securities that may be converted
at either a stated
price or stated rate into underlying shares of common stock.
Convertible
securities have general characteristics similar to both
fixed-income and equity
securities. Although to a lesser extent than with fixed-
income securities
generally, the market value of convertible securities tends
to decline as
interest rates increase and, conversely, tends to increase
as interest rates
decline. In addition, because of the conversion feature, the
market value of
convertible securities tends to vary with fluctuations in
the market value of
the underlying common stocks and, therefore, also will react
to variations in
the general market for equity securities. A unique feature
of convertible
securities is that as the market price of the underlying
common stock declines,
19
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
convertible securities tend to trade increasingly on a yield
basis, and so may
not experience market value declines to the same extent as
the underlying common
stock. When the market price of the underlying common stock
increases, the
prices of the convertible securities tend to rise as a
reflection of the value
of the underlying common stock. While no securities
investments are without
risk, investments in convertible securities generally entail
less risk than
investments in common stock of the same issuer.
As fixed-income securities, convertible securities are
investments which
provide for a stable stream of income with generally higher
yields than common
stocks. Of course, like all fixed-income securities, there
can be no assurance
of current income because the issuers of the convertible
securities may default
on their obligations. Convertible securities, however,
generally offer lower
interest or dividend yields than non-convertible securities
of similar quality
because of the potential for capital appreciation. A
convertible security, in
addition to providing fixed income, offers the potential for
capital
appreciation through the conversion feature, which enables
the holder to benefit
from increases in the market price of the underlying common
stock. However,
there can be no assurance of capital appreciation because
securities prices
fluctuate.
Convertible securities generally are subordinated to
other similar but
non-convertible securities of the same issuer, although
convertible bonds, as
corporate debt obligations, enjoy seniority in right of
payment to all equity
securities, and convertible preferred stock is senior to
common stock of the
same issuer. Because of the subordination feature, however,
convertible
securities typically have lower ratings than similar non-
convertible securities.
Unlike a convertible security which is a single
security, a synthetic
convertible security is comprised of two distinct securities
that together
resemble convertible securities in certain respects.
Synthetic convertible
securities are created by combining non-convertible bonds or
preferred stocks
with warrants or stock call options. The options that will
form elements of
synthetic convertible securities will be listed on a
securities exchange or on
the National Association of Securities Dealers Automated
Quotations System. The
two components of a synthetic convertible security, which
will be issued with
respect to the same entity, generally are not offered as a
unit, and may be
purchased and sold by the Fund at different times. Synthetic
convertible
securities differ from convertible securities in certain
respects, including
that each component of a synthetic convertible security has
a separate market
value and responds differently to market fluctuations.
Investing in synthetic
convertible securities involves the risks normally involved
in holding the
securities comprising the synthetic convertible security.
20
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
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. Accordingly,
it is possible that these types of factors could, in certain
instances, reduce
the value of securities held by the Fund, with a
commensurate effect on the
value of the Fund's shares. Therefore, an investment in the
Fund should not be
considered as a complete investment program and may not be
appropriate for all
investors.
While the market values of medium- and low-rated and
comparable unrated
securities tend to react less to fluctuations in interest
rate levels than do
those of higher-rated securities, the market values of
certain of these
securities also tend to be more sensitive to individual
corporate developments
and changes in economic conditions than higher-rated
securities. In addition,
medium- and low-rated and comparable unrated securities
generally present a
higher degree of credit risk. Issuers of medium- and low-
rated and comparable
unrated securities are often highly leveraged and may not
have more traditional
methods of financing available to them so that their ability
to service their
debt obligations during an economic downturn or during
sustained periods of
rising interest rates may be impaired. The risk of loss due
to default by such
issuers is significantly greater because medium- and low-
rated and comparable
unrated securities generally are unsecured and frequently
are subordinated to
the prior payment of senior indebtedness. The Fund may incur
additional expenses
to the extent that it is required to seek recovery upon a
default in the payment
of principal or interest on its portfolio holdings. In
addition, the markets in
which medium- and low-rated or comparable unrated securities
are traded
generally are more limited than those in which higher-rated
securities are
traded. The existence of limited markets for these
securities may restrict the
availability of securities for the Fund to purchase and also
may have the effect
of limiting the ability of the Fund to (a) obtain accurate
market quotations for
purposes of valuing securities and calculating net asset
value and (b) sell
securities at their fair value either to meet redemption
requests or to respond
to changes in the economy or the financial markets. The
market for medium- and
21
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
low-rated and comparable unrated securities is relatively
new and has not
weathered a major economic recession. The effect that such a
recession might
have on such securities is not known. Any such recession,
however, could likely
disrupt severely the market for such securities and
adversely affect the value
of such securities. Any such economic downturn also could
adversely affect the
ability of the issuers of such securities to repay principal
and pay interest
thereon.
Fixed-income securities, including medium- and low-
rated and comparable
unrated securities, frequently have call or buy-back
features that permit their
issuers to call or repurchase the securities from their
holders, such as the
Fund. If an issuer exercises these rights during periods of
declining interest
rates, the Fund may have to replace the security with a
lower yielding security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P
have speculative
characteristics with respect to capacity to pay interest and
repay principal.
Securities which are rated B generally lack characteristics
of the desirable
investment and assurance of interest and principal payments
over any long period
of time may be small.
In light of these risks, SBMFM, in evaluating the
creditworthiness of an
issue, whether rated or unrated, will take various factors
into consideration,
which may include, as applicable, the issuer's financial
resources, its
sensitivity to economic conditions and trends, the operating
history of and the
community support for the facility financed by the issue,
the ability of the
issuer's management and regulatory matters.
The Fund's fixed-income security holdings (as rated by
Moody's) for the
fiscal year ended July 31, 1995 were composed as follows:
11.10% rated Aa;
12.80% rated A; 23.20% rated Baa; 19.40% rated Ba; 8.60%
rated B; and 5.40% in
non-rated securities. The percentages were calculated on a
dollar weighted
average basis by determining monthly the percentage of the
Fund's net assets
invested in each rating category and does not necessarily
indicate what the
composition of the Fund's holdings will be in subsequent
years.
Options. Option writing for the Fund may be limited by
position and
exercise limits established by the national securities
exchanges and the
National Association of Securities Dealers, Inc. (the
"NASD") and by
requirements in the Code for qualification as a regulated
investment company
(see "Dividends, Distributions and Taxes"). The Fund may
write covered call
options to generate current income. In addition, the Fund
may enter into options
transactions as hedges to reduce investment risk, generally
by making an
22
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
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 its investment
adviser. Successful
use by the Fund of options will depend on SBMFM's ability to
correctly predict
movements in the direction of the securities underlying the
option used as a
hedge. Losses incurred in hedging transactions and the costs
of these
transactions will affect the Fund's performance.
The ability of the Fund to engage in closing
transactions with respect to
options depends on the existence of a liquid secondary
market. While the Fund
generally will purchase or write options only if there
appears to be a liquid
secondary market for the options purchased or sold, for some
options no such
secondary market may exist or the market may cease to exist.
Securities of Unseasoned Issuers. Securities in which
the Fund may invest
may have limited marketability and, therefore, may be
subject to wide
fluctuations in market value. In addition, certain
securities may lack a
significant operating history and be dependent on products
or services without
an established market share.
Foreign Securities. There are certain risks involved in
investing in
securities of companies and governments of foreign nations
which are in addition
to the usual risks inherent in domestic investments. These
risks include those
resulting from revaluation of currencies, future adverse
political and economic
developments and the possible imposition of currency
exchange blockages or other
foreign governmental laws or restrictions, reduced
availability of public
information concerning issuers and the lack of uniform
accounting, auditing and
financial reporting standards or of other regulatory
practices and requirements
comparable to those applicable to domestic companies. The
yield of the Fund may
be adversely affected by fluctuations in value of one or
more foreign currencies
relative to the U.S. dollar. Moreover, securities of many
foreign companies and
their markets may be less liquid and their prices more
volatile than those of
securities of comparable domestic companies. In addition,
with respect to
certain foreign countries, there is the possibility of
expropriation,
nationalization, confiscatory taxation and limitations on
the use or removal of
funds or other assets of the Fund, including the withholding
of dividends.
Foreign securities may be subject to foreign government
taxes that could reduce
the yield on such securities. Because the Fund may invest in
securities
23
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
denominated or quoted in currencies other than the U.S.
dollar, changes in
foreign currency exchange rates may adversely affect the
value of portfolio
securities and the appreciation or depreciation of
investments. Investment in
foreign securities also may result in higher expenses due to
the cost of
converting foreign currency to U.S. dollars, the payment of
fixed brokerage
commissions on foreign exchanges, which generally are higher
than commissions on
domestic exchanges, and the expense of maintaining
securities with foreign
custodians, and the imposition of transfer taxes or
transaction charges
associated with foreign exchanges.
Corporate securities in which the Fund may invest
include corporate
fixed-income securities of both domestic and foreign
issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment
trust certificates,
and preferred stock.
Certain of the corporate fixed-income securities in
which the Fund may
invest may involve equity characteristics. The Fund may, for
example, invest in
warrants for the acquisition of stock of the same or of a
different issuer or in
corporate fixed-income securities that have conversion or
exchange rights
permitting their holder to convert or exchange the
securities at a stated price
within a specified period of time into a specified number of
shares of common
stock. In addition, the Fund may invest in participations
that are based on
revenues, sales or profits of an issuer or in common stock
offered as a unit
with corporate fixed-income securities.
Non-Publicly Traded and Illiquid Securities. The sale
of securities that
are not publicly traded is typically restricted under the
Federal securities
laws. As a result, the Fund may be forced to sell these
securities at less than
fair market value or may not be able to sell them when its
investment adviser
believes it desirable to do so. The Fund's investments in
illiquid securities
are subject to the risk that should the Fund desire to sell
any of these
securities when a ready buyer is not available at a price
that the Fund deems
representative of their value, the value of the Fund's net
assets could be
adversely affected.
Portfolio Transactions and Turnover
All orders for transactions in securities and options
on behalf of the Fund
are placed by SBMFM with broker-dealers that SBMFM selects,
including Smith
Barney and other affiliated brokers. The Fund may utilize
Smith Barney or a
Smith Barney affiliated broker in connection with a purchase
or sale of
securities when SBMFM believes that the broker's charge for
the transactions
does not exceed usual and customary levels. In selecting a
broker, including
Smith Barney, for a transaction, the primary consideration
is prompt and
24
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
effective execution of orders at the most favorable prices.
Subject to that
primary consideration, dealers may be selected for research,
statistical or
other services to enable SBMFM to supplement its own
research and analysis with
the views and information of other securities firms.
- - ------------------------------------------------------------
- - --------------------
Valuation of Shares
- - ------------------------------------------------------------
- - --------------------
The Fund's net asset value per share is determined as
of the close of
regular trading on the NYSE on each day that the NYSE is
open, by dividing the
value of the Fund's net assets attributable to each Class by
the total number of
shares of the Class outstanding. Net asset value is
calculated separately for
Class A, B, C and Y.
Generally, the Fund's investments are valued at market
value, or in the
absence of a market value with respect to any securities, at
fair value as
determined by or under the direction of the Fund's Board of
Trustees. Short-term
investments that mature in 60 days or less are valued at
amortized cost whenever
the Trustees determine that amortized cost reflects fair
value of those
instruments. Amortized cost valuation involves valuing an
instrument at its
cost, initially and, thereafter, assuming a constant
amortization to maturity of
any discount or premium, regardless of the impact of
fluctuating interest rates
or the market value of the instrument. Further information
regarding the Fund's
valuation policies is contained in the Statement of
Additional Information.
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes
- - ------------------------------------------------------------
- - --------------------
Dividends and Distributions
The Fund will be treated separately from the Trust's
other funds in
determining the amounts of dividends from investment income
and distributions of
capital gain payable to shareholders. The Fund's policy is
to distribute its
investment income (that is, income other than its net
realized capital gains)
and net realized capital gains, if any, once a year,
normally at the end of the
year in which earned or at the beginning of the next year.
If a shareholder does not otherwise instruct, dividends
and capital gain
distributions will be reinvested automatically in additional
shares of the same
Class at net asset value, subject to no sales charge or
CDSC. In order to avoid
25
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes (continued)
- - ------------------------------------------------------------
- - --------------------
the application of a 4% nondeductible excise tax on certain
undistributed
amounts of ordinary income and capital gains, the Fund may
make an additional
distribution shortly before December 31 in each year of any
undistributed
ordinary income or capital gains and expects to pay any
other dividends and
distributions necessary to avoid the application of this
tax.
The per share dividends on Class B and Class C shares
of the Fund may be
lower than the per share dividends on Class A and Class Y
shares principally as
a result of the distribution fee applicable with respect to
Class B and Class C
shares. The per share dividends on Class A shares of the
Fund may be lower than
the per share dividends on Class Y shares principally as a
result of the service
fee applicable to Class A shares. Distributions of capital
gains, if any, will
be in the same amount for Class A, Class B, Class C and
Class Y shares.
Taxes
The Fund will be treated as a separate taxpayer with
the result that, for
Federal income tax purposes, the amount of investment income
and capital gains
earned by the Fund will be determined without regard to the
earnings of the
other funds of the Trust. The Fund has qualified and intends
to continue to
qualify each year as a regulated investment company under
the Code. Dividends
paid from net investment income and distributions of net
realized short-term
capital gains are taxable to shareholders as ordinary
income, regardless of how
long shareholders have held their Fund shares and whether
such dividends and
distributions are received in cash or reinvested in
additional Fund shares.
Distributions of net realized long-term capital gains will
be taxable to
shareholders as long-term capital gains, regardless of how
long shareholders
have held Fund shares and whether such distributions are
received in cash or are
reinvested in additional Fund shares. Furthermore, as a
general rule, a
shareholder's gain or loss on a sale or redemption of Fund
shares will be a
long-term capital gain or loss if the shareholder has held
the shares for more
than one year and will be a short-term capital gain or loss
if the shareholder
has held the shares for one year or less. Some of the Fund's
dividends declared
from net investment income may qualify for the Federal
dividends-received
deduction for corporations.
Statements as to the tax status of each shareholder's
dividends and
distributions are mailed annually. Each shareholder also
will receive, if
appropriate, various written notices after the close of the
Fund's prior taxable
year as to the Federal income tax status of his or her
dividends and
distributions which were received from the Fund during the
Fund's prior taxable
26
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes (continued)
- - ------------------------------------------------------------
- - --------------------
year. Shareholders should consult their tax advisors about
the status of the
Fund's dividends and distributions for state and local tax
liabilities.
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares
- - ------------------------------------------------------------
- - --------------------
General
The Fund offers four classes of shares. Class A shares
are sold to
investors with an initial sales charge and Class B and Class
C shares are sold
without an initial sales charge but are subject to a CDSC
payable upon certain
redemptions. Class Y shares are sold without an initial
sales charge or a CDSC
and are available only to investors investing a minimum of
$5,000,000. See
"Prospectus Summary -- Alternative Purchase Arrangements"
for a discussion of
factors to consider in selecting which Class of shares to
purchase.
Purchases of Fund shares must be made through a
brokerage account
maintained with Smith Barney, an Introducing Broker or an
investment dealer in
the selling group, except for investors purchasing shares of
the Fund through a
qualified retirement plan who may do so directly through
FDISG. When purchasing
shares of the Fund, investors must specify whether the
purchase is for Class A,
Class B, Class C or Class Y shares. No maintenance fee will
be charged by the
Fund in connection with a brokerage account through which an
investor purchases
or holds shares.
Investors in Class A, Class B and Class C shares may
open an account by
making an initial investment of at least $1,000 for each
account, or $250 for an
IRA or a Self-Employed Retirement Plan in the Fund.
Investors in Class Y shares
may open an account by making an initial investment of
$5,000,000. Subsequent
investments of at least $50 may be made for all Classes. For
participants in
retirement plans qualified under Section 403(b)(7) or
Section 401(a) of the
Code, the minimum initial investment requirement for Class
A, Class B and Class
C shares and the subsequent investment requirement for all
Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the
minimum initial
investment requirement for Class A, Class B and Class C
shares and the
subsequent investment requirement for all Classes is $50.
There are no minimum
investment requirements for Class A shares for employees of
Travelers and its
subsidiaries, including Smith Barney, Trustees of the Fund
and their spouses and
children and unitholders who invest distributions from a UIT
sponsored by Smith
Barney. The Fund reserves the right to waive or change
minimums, to decline any
order to purchase its shares and to suspend the offering of
shares from time to
27
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
time. Shares purchased will be held in the shareholder's
account by the Fund's
transfer agent, FDISG. Share certificates are issued only
upon a shareholder's
written request to FDISG.
Purchase orders received by the Fund or Smith Barney
prior to the close of
regular trading on the NYSE, on any day the Fund calculates
its net asset value,
are priced according to the net asset value determined on
that day. Orders
received by dealers or Introducing Brokers prior to the
close of regular trading
on the NYSE on any day the Fund calculates its net asset
value, are priced
according to the net asset value determined on that day,
provided the order is
received by the Fund or Smith Barney prior to Smith Barney's
close of business
(the "trade date"). Payment for Fund shares is due on the
third business day
after the trade date.
Systematic Investment
Plan Shareholders may make additions to their accounts
at any time by
purchasing shares through a service known as the Systematic
Investment Plan.
Under the Systematic Investment Plan, Smith Barney or FDISG
is authorized
through preauthorized transfers of $50 or more to charge the
regular bank
account or other financial institution indicated by the
shareholder on a monthly
or quarterly basis to provide systematic additions to the
shareholder's Fund
account. A shareholder who has insufficient funds to
complete the transfer will
be charged a fee of up to $25 by Smith Barney or FDISG. The
Systematic
Investment Plan also authorizes Smith Barney to apply cash
held in the
shareholder's Smith Barney brokerage account or redeem the
shareholder's shares
of a Smith Barney money market fund to make additions to the
account. Additional
information is available from the Fund or a Smith Barney
Financial Consultant.
28
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
Initial Sales Charge Alternative -- Class A Shares
The sales charges applicable to purchases of Class A
shares of the Fund are
as follows:
Dealers
Sales Charge Sales Charge
Reallowance
as % of as % of
as % of
Amount of Investment Offering Price Amount
Invested Offering Price
============================================================
====================
Less than $25,000 5.00% 5.26%
4.50%
$25,000-$49,999 4.00% 4.17%
3.60%
$50,000-$99,999 3.50% 3.63%
3.15%
$100,000-$249,999 3.00% 3.09%
2.70%
$250,000-$499,999 2.00% 2.04%
1.80%
$500,000 and over * *
*
============================================================
====================
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge, equal or
exceed $500,000 in the
aggregate, will be made at net asset value without any
initial sales
charge, but will be subject to a CDSC of 1.00% on
redemptions made within
12 months of purchase. The CDSC on Class A shares is
payable to Smith
Barney, which compensates Smith Barney Financial
Consultants and other
dealers whose clients make purchases of $500,000 or
more. The CDSC is
waived in the same circumstances in which the CDSC
applicable to Class B
and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and
"Waivers of CDSC."
Members of the selling group may receive up to 90% of
the sales charge and
may be deemed to be underwriters of the Fund as defined in
the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the
aggregate of purchases
of Class A shares of the Fund made at one time by "any
person," which includes
an individual, his or her spouse and children, or a trustee
or other fiduciary
of a single trust estate or single fiduciary account. The
reduced sales charge
minimums may also be met by aggregating the purchase with
the net asset value of
all Class A shares held in funds sponsored by Smith Barney
that are offered with
a sales charge listed under "Exchange Privilege."
Initial Sales Charge Waivers
Purchases of Class A shares may be made at net asset
value without a sales
charge in the following circumstances: (a) sales of Class A
shares to Trustees
of the Fund, employees of Travelers and its subsidiaries or
the spouses and
children of such persons (including the surviving spouse of
a deceased Trustee
or employee, and retired Trustees or employees), employees
of members of the
NASD, 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
29
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
that the purchase is made for investment purposes and that
the securities will
not be re-sold except through redemption or repurchase; (b)
offers of Class A
shares to any other investment company in connection with
the combination of
such company with the Fund by merger, acquisition of assets
or otherwise; (c)
purchases of Class A shares by any client of a newly
employed Smith Barney
Financial Consultant (for a period up to 90 days from the
commencement of the
Financial Consultant's employment with Smith Barney), on the
condition the
purchase of Class A shares is made with the proceeds of the
redemption of shares
of a mutual fund which (i) was sponsored by the Financial
Consultant's prior
employer, (ii) was sold to the client by the Financial
Consultant and (iii) was
subject to a sales charge; (d) shareholders who have
redeemed Class A shares in
the Fund (or Class A shares of another Fund of the Smith
Barney Mutual Funds
that are offered with a sales charge equal to or greater
than the maximum sales
charge of the Fund) and who wish to reinvest their
redemption proceeds in the
Fund, provided the reinvestment is made within 60 calendar
days of the
redemption; (e) accounts managed by registered investment
advisory subsidiaries
of Travelers; and (f) investments of distributions from a
UIT sponsored by Smith
Barney. In order to obtain such discounts, the purchaser
must provide sufficient
information at the time of purchase to permit verification
that the purchase
would qualify for the elimination of the sales charge.
Right of Accumulation
Class A shares of the Fund may be purchased by "any
person" (as defined
above) at a reduced sales charge or at net asset value
determined by aggregating
the dollar amount of the new purchase and the total net
asset value of all Class
A shares of the Fund and of funds sponsored by Smith Barney
which are offered
with a sales charge listed under "Exchange Privilege" then
held by such person
and applying the sales charge applicable to such aggregate.
In order to obtain
such discount, the purchaser must provide sufficient
information at the time of
purchase to permit verification that the purchase qualifies
for the reduced
sales charge. The right of accumulation is subject to
modification or
discontinuance at any time with respect to all shares
purchased thereafter.
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
30
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
each member of such a group will be determined by the table
set forth above
under "Initial Sales Charge Alternative Class A Shares," and
will be based upon
the aggregate sales of Class A shares of Smith Barney Mutual
Funds offered with
a sales charge to, and share holdings of, all members of the
group. To be
eligible for such reduced sales charges or to purchase at
net asset value, all
purchases must be pursuant to an employer- or partnership-
sanctioned plan
meeting certain requirements. One such requirement is that
the plan must be open
to specified partners or employees of the employer and its
subsidiaries, if any.
Such plan may, but is not required to, provide for payroll
deductions, IRAs or
investments pursuant to retirement plans under Sections 401
or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net
asset value purchase
for aggregating related fiduciary accounts under such
conditions that Smith
Barney will realize economies of sales efforts and sales
related expenses. An
individual who is a member of a qualified group may also
purchase Class A shares
at the reduced sales charge applicable to the group as a
whole. The sales charge
is based upon the aggregate dollar value of Class A shares
offered with a sales
charge that have been previously purchased and are still
owned by the group,
plus the amount of the current purchase. A "qualified group"
is one which (a)
has been in existence for more than six months, (b) has a
purpose other than
acquiring Fund shares at a discount and (c) satisfies
uniform criteria which
enable Smith Barney to realize economies of scale in its
costs of distributing
shares. A qualified group must have more than 10 members,
must be available to
arrange for group meetings between representatives of the
Fund and the members,
and must agree to include sales and other materials related
to the Fund in its
publications and mailings to members at no cost to Smith
Barney. In order to
obtain such reduced sales charge or to purchase at net asset
value, the
purchaser must provide sufficient information at the time of
purchase to permit
verification that the purchase qualifies for the reduced
sales charge. Approval
of group purchase reduced sales charge plans is subject to
the discretion of
Smith Barney.
Letter of Intent
Class A Shares. A Letter of Intent for amounts of
$50,000 or more provides
an opportunity for an investor to obtain a reduced sales
charge by aggregating
investments over a 13 month period, provided that the
investor refers to such
Letter when placing orders. For purposes of a Letter of
Intent, the "Amount
Invested" as referred to in the preceding sales charge table
includes purchases
of all Class A shares of the Fund and other funds of the
Smith Barney Mutual
Funds offered with a sales charge over the 13 month period
based on the total
amount of intended purchases plus the value of all Class A
shares previously
31
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
purchased and still owned. An alternative is to compute the
13 month period
starting up to 90 days before the date of execution of a
Letter of Intent. Each
investment made during the period receives the reduced sales
charge applicable
to the total amount of the investment goal. If the goal is
not achieved within
the period, the investor must pay the difference between the
sale charges
applicable to the purchases made and the charges previously
paid, or an
appropriate number of escrowed shares will be
redeemed.Please contact a Smith
Barney Financial Consultant or FDISG to obtain a Letter of
Intent application.
Class Y Shares. A Letter of Intent may also be used as
a way for investors
to meet the minimum investment requirement for Class Y
Shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class
Yshares of the Fund
and agree to purchase a total of $5,000,000 of Class Yshares
of the same Fund
within six months from the date of the Letter. If a total
investment of
$5,000,000 is not made within the six-month period, all
Class Y shares purchased
to date will be transferred to Class A shares, where they
will be subject to all
fees (including a service fee of 0.25%)and expenses
applicable to the Fund's
Class A shares, which may include a CDSC of 1.00%. The Fund
expects that such
transfer will not be subject to Federal income taxes. Please
contact a Smith
Barney Financial Consultant or FDISG for further
information.
Deferred Sales Charge Alternatives
"CDSC Shares" are sold at net asset value next
determined without an
initial sales charge so that the full amount of an
investor's purchase payment
may be immediately invested in the Fund. A CDSC, however,
may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a)
Class B shares; (b)
Class C shares; and (c) Class A shares which when combined
with Class A shares
offered with a sales charge currently held by an investor
equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal
to the lesser of
the original cost of the shares being redeemed or their net
asset value at the
time of redemption. CDSC Shares that are redeemed will not
be subject to a CDSC
to the extent that the value of such shares represents: (a)
capital appreciation
of Fund assets; (b) reinvestment of dividends or capital
gain distributions; (c)
with respect to Class B shares, shares redeemed more than
five years after their
purchase; or (d) with respect to Class C shares and Class A
shares that are CDSC
Shares, shares redeemed more than 12 months after their
purchase.
Class C shares and Class A shares that are CDSC Shares
are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In
circumstances in which
32
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
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."
Year Since Purchase
Payment was Made
CDSC
============================================================
====================
First
5.00%
Second
4.00%
Third
3.00%
Fourth
2.00%
Fifth
1.00%
Sixth
0.00%
Seventh
0.00%
Eighth
0.00%
============================================================
====================
Class B shares will convert automatically to Class A
shares eight years
after the date on which they were purchased and thereafter
will no longer be
subject to any distribution fees. There also will be
converted at that time such
proportion of Class B Dividend Shares owned by the
shareholder as the total
number of his or her Class B shares converting at the time
bears to the total
number of outstanding Class B shares (other than Class B
Dividend Shares) owned
by the shareholder. Shareholders who held Class B shares of
Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World
Income Fund") on
July 15, 1994 and who subsequently exchange those shares for
Class B shares of
the Fund will be offered the opportunity to exchange all
such Class B shares for
Class A shares of the Fund four years after the date on
which those shares were
deemed to have been purchased. Holders of such Class B
shares will be notified
of the pending exchange in writing approximately 30 days
before the fourth
anniversary of the purchase date and, unless the exchange
has been rejected in
writing, the exchange will occur on or about the fourth
anniversary date. See
"Prospectus Summary -- Alternative Purchase Arrangements --
Class B Shares
Conversion Feature."
The length of time that CDSC Shares acquired through an
exchange have been
held will be calculated from the date that the shares
exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and
Fund shares being
33
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
redeemed will be considered to represent, as applicable,
capital appreciation or
dividend and capital gain distribution reinvestments in such
other funds. For
Federal income tax purposes, the amount of the CDSC will
reduce the gain or
increase the loss, as the case may be, on the amount
realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100
Class B shares at
$10 per share for a cost of $1,000. Subsequently, the
investor acquired 5
additional shares through dividend reinvestment. During the
fifteenth month
after the purchase, the investor decided to redeem $500 of
his or her
investment. Assuming at the time of the redemption the net
asset value had
appreciated to $12 per share, the value of the investor's
shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied
to the amount which
represents appreciation ($200) and the value of the
reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class
B shares) for a
total deferred sales charge of $9.60.
Waivers of CDSC
The CDSC will be waived on: (a) exchanges (see
"Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than
1.00% per month of
the value of the shareholder's shares at the time the
withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however,
that automatic cash
withdrawals in amounts equal to or less than 2.00% per month
of the value of the
shareholder's shares will be permitted for withdrawal plans
that were
established prior to November 7, 1994); (c) redemptions of
shares within 12
months following the death or disability of the shareholder;
(d) redemption of
shares made in connection with qualified distributions from
retirement plans or
IRAs upon the attainment of age 591/2; (e) involuntary
redemptions; and (f)
redemptions of shares in connection with a combination of
the Fund with any
investment company by merger, acquisition of assets or
otherwise. In addition, a
shareholder who has redeemed shares from other funds of the
Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part
of the redemption
proceeds within 60 days and receive pro rata credit for any
CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation
(by Smith Barney in
the case of shareholders who are also Smith Barney clients
or by FDISG in the
case of all other shareholders) of the shareholder's status
or holdings, as the
case may be.
34
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
Smith Barney 401(k)
Program Investors may be eligible to participate in the
Smith Barney 401(k)
Program, which is generally designed to assist plan sponsors
in the creation and
operation of retirement plans under Section 401(a) of the
Code. To the extent
applicable, the same terms and conditions are offered to all
Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class
B, Class C and Class
Y shares as investment alternatives under the Smith Barney
401(k) Program. Class
A, Class B and Class C shares acquired through the Smith
Barney 401(k) Program
are subject to the same service and/or distribution fees as,
but different sales
charge and CDSC schedules than, the Class A, Class B and
Class C shares acquired
by other investors. Similar to those available to other
investors, Class Y
shares acquired through the Smith Barney 401(k) Program are
not subject to any
initial sales charge, CDSC or service or distribution fee.
Once a Participating
Plan has made an initial investment in the Fund, all of its
subsequent
investments in the Fund must be in the same Class of shares,
except as otherwise
described below.
Class A Shares. Class A shares of the Fund are offered
without any initial
sales charge to any Participating Plan that purchases from
$500,000 to
$4,999,999 of Class A shares of one or more funds of the
Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney
401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of
redemption proceeds, if the
Participating Plan terminates within four years of the date
the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Class B Shares. Class B shares of the Fund are offered
to any Participating
Plan that purchases less than $250,000 of one or more funds
of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith
Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if
the Participating Plan
terminates within eight years of the date the Participating
Plan first enrolled
in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan
enrolled in the Smith
Barney 401(k) Program, it will be offered the opportunity to
exchange all of its
Class B shares for Class A shares of the Fund. Such Plans
will be notified of
the pending exchange in writing approximately 60 days before
the eighth
anniversary of the enrollment date and, unless the exchange
has been rejected in
writing, the exchange will occur on or about the eighth
anniversary date. Once
the exchange has occurred, a Participating Plan will not be
eligible to 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
35
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
shares at that time, each Class B share held by the
Participating Plan will have
the same conversion feature as Class B shares held by other
investors. See
"Purchase of Shares Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of the Fund are offered
to any Participating
Plan that purchases from $250,000 to $499,999 of one or more
funds of the Smith
Barney Mutual Funds. Class C shares acquired through the
Smith Barney 401(k)
Program after November 7, 1994 are subject to a CDSC of
1.00% of redemption
proceeds, if the Participating Plan terminates within four
years of the date the
Participating Plan first enrolled in the Smith Barney 401(k)
Program. In any
year after the date a Participating Plan enrolled in the
Smith Barney 401(k)
Program, if its total Class C holdings equal at least
$500,000 as of the
calendar year-end, the Participating Plan will be offered
the opportunity to
exchange all of its Class C shares for Class A shares of the
Fund. Such Plans
will be notified in writing within 30 days after the last
business day of the
calendar year, and unless the exchange offer has been
rejected in writing, the
exchange will occur on or about the last business day of the
following March.
Once the exchange has occurred, a Participating Plan will
not be eligible to
acquire Class C shares of the Fund but instead may acquire
Class A shares of the
Fund. Class C shares not converted will continue to be
subject to the
distribution fee.
Class Y Shares. Class Y shares of the Fund are offered
without any service
or distribution fees, sales charge or CDSC to any
Participating Plan that
purchases $5,000,000 or more of Class Y shares of one or
more funds of the Smith
Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the
extent that the net
asset value of the shares redeemed does not exceed the
current net asset value
of the shares purchased through reinvestment of dividends or
capital gain
distributions, plus (a) with respect to Class A and Class C
shares, the current
net asset value of such shares purchased more than one year
prior to redemption
and, with respect to Class B shares, the current net asset
value of Class B
shares purchased more than eight years prior to the
redemption, plus (b) with
respect to Class A and Class C shares, increases in the net
asset value of the
shareholder's Class A or Class C shares above the purchase
payments made during
the preceding year and, with respect to Class B shares,
increases in the net
asset value of the shareholder's Class B shares above the
purchase payments made
during the preceding eight years. Whether or not the CDSC
applies to a
Participating Plan depends on the number of years since the
Participating Plan
first became enrolled in the Smith Barney 401(k) Program,
unlike the
applicability of the CDSC to other shareholders, which
depends on the number of
years since those shareholders made the purchase payment
from which the amount
is being redeemed.
36
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
The CDSC will be waived on redemptions of CDSC Shares
in connection with
lump-sum or other distributions made by a Participating Plan
as a result of: (a)
the retirement of an employee in the Participating Plan; (b)
the termination of
employment of an employee in the Participating Plan; (c) the
death or disability
of an employee in the Participating Plan; (d) the attainment
of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an
employee in the
Participating Plan to the extent permitted under Section
401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by
the Participating
Plan to an employee.
Participating Plans wishing to acquire shares of the
Fund through the Smith
Barney 401(k) Program must purchase such shares directly
from FDISG. For further
information regarding the Smith Barney 401(k) Program,
investors should contact
a Smith Barney Financial Consultant.
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege
- - ------------------------------------------------------------
- - --------------------
Except as otherwise noted below, shares of each Class
may be exchanged at
the net asset value next determined for shares of the same
Class in the
following funds of the Smith Barney Mutual Funds, to the
extent shares are
offered for sale in the shareholder's state of residence.
Exchanges of Class A,
Class B and Class C shares are subject to minimum investment
requirements and
all shares are subject to the other requirements of the Fund
into which
exchanges are made, and a sales charge differential may
apply.
Fund Name
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Funds, Inc. -- Income and Growth
Portfolio
Smith Barney Growth and Income Fund
37
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
* Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
** Smith Barney Funds, Inc. -- Income Return Account
Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government
Portfolio
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury
Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities
Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
** Smith Barney Intermediate Maturity California
Municipals Fund
** Smith Barney Intermediate Maturity New York Municipals
Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
** Smith Barney Muni Funds -- California Limited Term
Portfolio
** Smith Barney Muni Funds -- Florida Limited Term
Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
** Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- Emerging Markets
Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
38
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
Smith Barney World Funds, Inc. -- Global Government
Bond Portfolio
Smith Barney World Funds, Inc. -- International
Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity
Portfolio
Smith Barney World Funds, inc. -- Pacific 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 Market 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 B and Class
Y shares of the
Fund. In addition, shareholders who own Class C shares
of the Fund through
the Smith Barney 401(k) Program may exchange those
shares for Class C
shares of this Fund.
** Available for exchange with Class A, Class C and Class
Y shares of the
Fund.
*** Available for exchange with Class A of the Fund
+ Available for exchange with Class B and Class C shares
of the Fund.
++ Available for exchange with Class A and Class Y shares
of the Fund. In
addition, shareholders who own Class C shares of the
Fund through the Smith
Barney 401(k) Program may exchange those shares for
Class C shares of this
Fund.
+++ Available for exchange with Class A and Class Y shares
of the Fund.
Class A Exchanges. Class A shares of Smith Barney
Mutual Funds sold without
a sales charge or with a maximum sales charge of less than
the maximum charged
by other Smith Barney Mutual Funds will be subject to the
appropriate "sales
charge differential" upon the exchange of such shares for
Class A shares of a
Fund sold with a higher sales charge. The "sales charge
differential" is limited
to a percentage rate no greater than the excess of the sales
charge rate
applicable to purchases of shares of the mutual fund being
acquired in the
exchange over the sales charge rate(s) actually paid on the
mutual fund shares
relinquished in the exchange and on any predecessor of those
shares. For
purposes of the exchange privilege, shares obtained through
automatic
reinvestment of dividends and capital gain distributions are
treated as having
paid the same sales charges applicable to the shares on
which the dividends or
distributions were paid; however, except in the case of the
Smith Barney 401(k)
Program, if no sales charge was imposed upon the initial
purchase of the shares,
any shares obtained through automatic reinvestment will be
subject to a sales
charge differential upon exchange.
39
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
Class B Exchanges. In the event a Class B shareholder
(unless such
shareholder was a Class B shareholder of the Short-Term
World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or
her shares in any
of the funds imposing a higher CDSC than that imposed by the
Fund, the exchanged
Class B shares will be subject to the higher applicable
CDSC. Upon an exchange,
the new Class B shares will be deemed to have been purchased
on the same date as
the Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C
shares will be deemed
to have been purchased on the same date as the Class C
shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who
wish to exchange
all or a portion of their Class Y shares for Class Y shares
in any of the funds
identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange
Privilege. Although the
exchange privilege is an important benefit, excessive
exchange transactions can
be detrimental to the Fund's performance and its
shareholders. SBMFM may
determine that a pattern of frequent exchanges is excessive
and contrary to the
best interests of the Fund's other shareholders. In this
event, SBMFM will
notify Smith Barney that the Fund may, at its discretion,
decide to limit
additional purchases and/or exchanges by a shareholder. Upon
such a
determination, the Fund will provide notice in writing or by
telephone to the
shareholder at least 15 days prior to suspending the
exchange privilege and
during the 15 day period the shareholder will be required to
(a) redeem his or
her shares in the Fund or (b) remain invested in the Fund or
exchange into any
of the funds of the Smith Barney Mutual Funds listed above,
which position the
shareholder would be expected to maintain for a significant
period of time. All
relevant factors will be considered in determining what
constitutes an abusive
pattern of exchanges.
Certain shareholders may be able to exchange shares by
telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange
Program". Exchanges
will be processed at the net asset value next determined,
plus any applicable
sales charge differential. Redemption procedures discussed
below are also
applicable for exchanging shares, and exchanges will be made
upon receipt of all
supporting documents in proper form. If the account
registration of the shares
of the fund being acquired is identical to the registration
of the shares of the
fund exchanged, no signature guarantee is required. A
capital gain or loss for
tax purposes will be realized upon the exchange, depending
upon the cost or
other basis of shares redeemed. Before exchanging shares,
investors should read
40
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
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 third day following
receipt of proper
tender, except on any days on which the NYSE is closed or as
permitted under the
Investment Company Act of 1940, as amended ("1940 Act"), in
extraordinary
circumstances. Generally, if the redemption proceeds are
remitted to a Smith
Barney brokerage account, these funds will not be invested
for the shareholder's
benefit without specific instruction and Smith Barney will
benefit from the use
of temporarily uninvested funds. Redemption proceeds for
shares purchased by
check, other than a certified or official bank check, will
be remitted upon
clearance of the check, which may take up to ten days or
more.
Shares held by Smith Barney as custodian must be
redeemed by submitting a
written request to a Smith Barney Financial Consultant.
Shares other than those
held by Smith Barney as custodian may be redeemed through an
investor's
Financial Consultant, Introducing Broker or dealer in the
selling group or by
submitting a written request for redemption to:
Smith Barney Convertible Fund
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
41
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Redemption of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
A written redemption request must (a) state the Class
and number or dollar
amount of shares to be redeemed, (b) identify the
shareholder's account number
and (c) be signed by each registered owner exactly as the
shares are registered.
If the shares to be redeemed were issued in certificate
form, the certificates
must be endorsed for transfer (or be accompanied by an
endorsed stock power) and
must be submitted to FDISG together with the redemption
request. Any signature
appearing on a written redemption request in excess of
$2,000, 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. Written redemption requests of $2,000 or less do
not require a
signature guarantee unless more than one such redemption
request is made in any
10-day period. Redemption proceeds will be mailed to an
investor's address of
record. FDISG 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 FDISG
receives all required
documents in proper form.
Automatic Cash Withdrawal Plan
The Fund offers shareholders an automatic cash
withdrawal plan, under which
shareholders who own shares with a value of at least $10,000
may elect to
receive cash payments of at least $50 monthly or quarterly.
Retirement plan
accounts are eligible for automatic cash withdrawal plans
only where the
shareholder is eligible to receive qualified distributions
and has an account
value of at least $5,000. The withdrawal plan will be
carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC
will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per
month of the value of
the shareholder's shares subject to the CDSC at the time the
withdrawal plan
commences. For further information regarding the automatic
cash withdrawal plan,
shareholders should contact a Smith Barney Financial
Consultant.
Telephone Redemption And Exchange Program
Shareholders who do not have a Smith Barney brokerage
account may be
eligible to redeem and exchange Fund shares by telephone. To
determine if a
shareholder is entitled to participate in this program, he
or she should contact
FDISG at 1-800-451-2010. Once eligibility is confirmed, the
shareholder must
complete and return a Telephone/Wire Authorization Form,
including a signature
guarantee that will be provided by FDISG upon request.
(Alternatively, an
investor may authorize telephone redemptions on the new
account application with
a signature guarantee when making his/her initial investment
in the Fund.)
42
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Redemption of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
Redemptions. Redemption requests of up to $10,000 of
any class or classes
of the Fund's shares may be made by eligible shareholders by
calling FDISG at
1-800-451-2010. Such requests may be made between 9:00 a.m.
and 4:00 p.m. (New
York City time) on any day the NYSE is open. Redemptions of
shares (i) by
retirement plans or (ii) for which certificates have been
issued are not
permitted under this program.
A shareholder will have the option of having the
redemption proceeds mailed
to his/her address of record or wired to a bank account
predesignated by the
shareholder. Generally, redemption proceeds will be mailed
or wired, as the case
may be, on the next business day following the redemption
request. In order to
use the wire procedures, the bank receiving the proceeds
must be a member of the
Federal Reserve System or have a correspondent with a member
bank. The Fund
reserves the right to charge shareholders a nominal fee for
each wire
redemption. Such charges, if any, will be assessed against
the shareholder's
account from which shares were redeemed. In order to change
the bank account
designated to receive redemption proceeds, a shareholder
must complete a new
Telephone/Wire Authorization Form and, for the protection of
the shareholder's
assets, will be required to provide a signature guarantee
and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by
telephone if the
account registration of the shares of the fund being
acquired is identical to
the registration of the shares of the fund exchanged. Such
exchange requests may
be made by calling FDISG at 1-800-451-2010 between 9:00 a.m.
and 4:00 p.m. (New
York City time) any day on which the NYSE is open.
Additional Information regarding Telephone Redemption
and Exchange Program.
Neither the Fund nor its agents will be liable for following
instructions
communicated by telephone that are reasonably believed to be
genuine. The Fund
and its agents will employ procedures designed to verify the
identity of the
caller and legitimacy of instructions (for example, a
shareholder's name and
account number will be required and phone calls may be
recorded). The Fund
reserves the right to suspend, modify or discontinue the
telephone redemption
and exchange program or to impose a charge for this service
at any time
following at least seven (7) days prior notice to
shareholders.
- - ------------------------------------------------------------
- - --------------------
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,
43
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Minimum Account Size (continued)
- - ------------------------------------------------------------
- - --------------------
however, will not redeem shares based solely on market
reductions in net asset
value. Before the Fund exercises such right, shareholders
will receive written
notice and will be permitted 60 days to bring accounts up to
the minimum to
avoid automatic redemption.
- - ------------------------------------------------------------
- - --------------------
Performance
- - ------------------------------------------------------------
- - --------------------
Yield
From time to time, the Fund advertises the 30 day
"yield" of each Class of
shares. The Fund's yield refers to the income generated by
an investment in
those shares over the 30 day period identified in the
advertisement and is
computed by dividing the net investment income per share
earned by the Class
during the period by the maximum public offering price per
share on the last day
of the period. This income is "annualized" by assuming that
the amount of income
is generated each month over a one-year period and is
compounded semi-annually.
The annualized income is then shown as a percentage of the
net asset value.
Total Return
From time to time the Fund may include its total
return, average annual
total return and current dividend return in advertisements
and/or other types of
sales literature. These figures are computed separately for
Class A, Class B,
Class C and Class Y shares of the Fund. These figures are
based on historical
earnings and are not intended to indicate future
performance. Total return is
computed for a specified period of time assuming deduction
of the maximum sales
charge, if any, from the initial amount invested and
reinvestment of all income
dividends and capital gain distributions on the reinvestment
dates at prices
calculated as stated in this Prospectus, then dividing the
value of the
investment at the end of the period so calculated by the
initial amount invested
and subtracting 100%. The standard average annual total
return, as prescribed by
the SEC, is derived from this total return, which provides
the ending redeemable
value. Such standard total return information may also be
accompanied with
nonstandard total return information for differing periods
computed in the same
manner but without annualizing the total return or taking
sales charges into
account. The Fund calculates current dividend return for
each Class by
annualizing the most recent monthly distribution and
dividing by the net asset
value or the maximum public offering price (including sales
charge) on the last
day of the period for which current dividend return is
presented. The current
dividend return for each Class may vary from time to time
depending on market
44
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Performance (continued)
- - ------------------------------------------------------------
- - --------------------
conditions, the composition of its investment portfolio and
operating expenses.
These factors and possible differences in the methods used
in calculating
current dividend return should be considered when comparing
a Class' current
return to yields published for other investment companies
and other investment
vehicles. The Fund may also include comparative performance
information in
advertising or marketing its shares. Such performance
information may include
data from Lipper Analytical Services, Inc. and other
financial publications.
Management of the Trust and the Fund
- - ------------------------------------------------------------
- - --------------------
Management of the Trust and the Fund
- - ------------------------------------------------------------
- - --------------------
Board of Trustees
Overall responsibility for management and supervision
of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all
significant
agreements between the Trust and the companies that furnish
services to the
Trust and the Fund, including agreements with the Fund's
distributor, investment
adviser, administrator, custodian and transfer agent. The
day-to-day operations
of the Fund are delegated to the Fund's investment adviser
and administrator.
The Statement of Additional Information contains background
information
regarding each Trustee and executive officer of the Trust.
Investment Adviser -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New
York 10013, serves as
the Fund's investment adviser. SBMFM is a wholly owned
subsidiary of Smith
Barney Holdings Inc. ("Holdings"). SBMFM (through its
predecessor entities) has
been in the investment counseling business since 1934 and is
a registered
investment adviser. SBMFM renders investment advice to
investment companies that
had aggregate assets under management as of September 30,
1995 in excess of $60
billion.
Subject to the supervision and direction of the Fund's
Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the
Fund's stated
investment objective and policies, makes investment
decisions for the Fund,
places orders to purchase and sell securities and employs
professional portfolio
managers and securities analysts who provide research
services to the Fund. For
advisory services rendered to the Fund, the Fund pays SBMFM
a fee at the annual
rate of 0.50% of the value of the Fund's average daily net
assets.
45
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Management of the Trust and the Fund (continued)
- - ------------------------------------------------------------
- - --------------------
Portfolio Management
Robert Swab, Vice President of Smith Barney has managed
the day-to-day
operations of the Fund since 1995, including making all
investment decisions.
Mr. Swab's management discussions and analysis, and
additional performance
information regarding the Fund during the fiscal year ended
July 31, 1995 are
included in the Annual Report dated July 31, 1995. A copy of
the Annual Report
may be obtained upon request and without charge from a Smith
Barney Financial
Consultant or by writing or calling the Fund at the address
or phone number
listed on page one of this Prospectus.
Administrator -- SBMFM
SBMFM also serves as the Fund's administrator and
oversees all aspects of
the Fund's administration. For administration services
rendered to the Fund, the
Fund pays SBMFM a fee at the annual rate of .20% of the
value of the Fund's
average daily net assets.
- - ------------------------------------------------------------
- - --------------------
Distributor
- - ------------------------------------------------------------
- - --------------------
Smith Barney is located at 388 Greenwich Street, New
York, New York, 10013.
Smith Barney distributes shares of the Fund as principal
underwriter and as such
conducts a continuous offering pursuant to a "best efforts"
arrangement
requiring Smith Barney to take and pay for only such
securities as may be sold
to the public. Pursuant to a plan of distribution adopted by
the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
an annual service
fee with respect to Class A, Class B and Class C shares of
the Fund at the
annual rate of 0.25% of the average daily net assets of the
respective Class.
Smith Barney is also paid an annual distribution fee with
respect to Class B and
Class C shares at the annual rate of 0.50% and 0.45%,
respectively, of the
average daily net assets attributable to those Classes.
Class B shares which
automatically convert to Class A shares eight years after
the date of original
purchase will no longer be subject to distribution fees. The
fees are used by
Smith Barney to pay its Financial Consultants for servicing
shareholder accounts
and, in the case of Class B and Class C shares, to cover
expenses primarily
intended to result in the sale of those shares. These
expenses include:
advertising expenses; the cost of printing and mailing
prospectuses to potential
investors; payments to and expenses of Smith Barney
Financial Consultants and
other persons who provide support services in connection
with the distribution
46
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Distributor (continued)
- - ------------------------------------------------------------
- - --------------------
of shares; interest and/or carrying charges; and indirect
and overhead costs of
Smith Barney associated with the sale of Fund shares,
including lease, utility,
communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for
selling shares of a
Class include a commission or fee paid by the investor or
Smith Barney at the
time of sale and, with respect to Class A, Class B and Class
C shares, a
continuing fee for servicing shareholder accounts for as
long as a shareholder
remains a holder of that Class. Smith Barney Financial
Consultants may receive
different levels of compensation for selling different
Classes of shares.
Payments under the Plan with respect to Class B and
Class C shares are not
tied exclusively to the distribution and shareholder service
expenses actually
incurred by Smith Barney and the payments may exceed
distribution expenses
actually incurred. The Trust's Board of Trustees will
evaluate the
appropriateness of the Plan and its payment terms on a
continuing basis and in
so doing will consider all relevant factors, including
expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the
CDSC.
- - ------------------------------------------------------------
- - --------------------
Additional Information
- - ------------------------------------------------------------
- - --------------------
The Trust was organized on March 12, 1985, under the
laws of the
Commonwealth of Massachusetts and is an entity commonly
known as a
"Massachusetts business trust." The Trust offers shares of
beneficial interest
of separate series having a $.001 per share par value. When
matters are
submitted for shareholder vote, shareholders of each Class
of each Fund will
have one vote for each full share owned and a proportionate,
fractional vote for
any fractional share held of that Class. Generally, shares
of the Trust vote by
individual fund on all matters except (a) matters affecting
only the interest of
one or more of the funds, in which case only shares of the
affected Fund or
funds would be entitled to vote, or (b) when the 1940 Act
requires that shares
of the funds be voted in the aggregate. Similarly, shares of
the Fund will be
voted generally on a Fund-wide basis except matters
affecting the interests of
one Class of shares.
Each Class represents identical interests in the Fund's
investment
portfolio. As a result, the Classes have the same rights,
privileges and
preferences, except with respect to: (a) the designation of
each Class; (b) the
effect of the respective sales charges for each Class; (c)
the distribution
and/or service fees borne by each Class; (d) the expenses
allocable exclusively
to each Class; (e) voting rights on matters exclusively
affecting a single
47
<PAGE>
Smith Barney Convertible Fund
- - ------------------------------------------------------------
- - --------------------
Additional Information (continued)
- - ------------------------------------------------------------
- - --------------------
Class; (f) the exchange privilege of each Class; and (g) the
conversion feature
of the Class B shares. The Board of Trustees does not
anticipate that there will
be any conflicts among the interests of the holders of the
different Classes of
shares of the Fund. The Trustees, on an ongoing basis, will
consider whether any
such conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings.
There normally will be
no meetings of shareholders for the purpose of electing
Trustees unless and
until such time as less than a majority of the Trustees
holding office have been
elected by shareholders. The Trustees will call a meeting
for any purpose for
voting on the written request of shareholders holding at
least 10% of the
Trust's outstanding shares and the Fund will assist
shareholders in calling such
a meeting as required by the 1940 Act.
PNC Bank, located at 17th and Chestnut Streets,
Philadelphia, PA 19103,
serves as custodian of the Trust's investments.
FDISG is located at Exchange Place, Boston,
Massachusetts 02109, and serves
as the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report
and an audited annual
report, which include listings of the investment securities
held by the Fund at
the end of the period covered. In an effort to reduce the
Fund's printing and
mailing costs, the Trust plans to consolidate the mailing of
the Fund's
semi-annual and annual reports by household. This
consolidation means that a
household having multiple accounts with the identical
address of record will
receive a single copy of each report. In addition, the Trust
also plans to
consolidate the mailing of the Fund's Prospectus so that a
shareholder having
multiple accounts (e.g., individual, IRA and/or Self-
Employed Retirement Plan
accounts) will receive a single Prospectus annually.
Shareholders who do not
want this consolidation to apply to their accounts should
contact their Smith
Barney Financial Consultants or FDISG.
48
<PAGE>
SMITH BARNEY
- - ------------
A Member of
Travelers Group [LOGO]
Smith Barney
Convertible
Fund
388 Greenwich Street
New
York, New York 10013
FD0213 11/95
<PAGE>
PROSPECTUS
SMITH BARNEY
Tax-Exempt
Income
Fund
November 28,1995
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus
November 28, 1995
- - ------------------------------------------------------------
- - --------------------
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney Tax-Exempt Income Fund (the "Fund") is a
diversified fund that
seeks to maximize current income exempt from Federal income
taxes by investing
primarily in municipal bonds and notes. The Fund is one of a
number of funds,
each having distinct investment objectives and policies,
making up Smith Barney
Income Funds (the "Trust"). The Trust is an open-end
management investment
company commonly referred to as a mutual fund.
This Prospectus sets forth concisely certain
information about the Fund and
the Trust, including sales charges, distribution and service
fees and expenses,
that prospective investors will find helpful in making an
investment decision.
Investors are encouraged to read this Prospectus carefully
and retain it for
future reference. Shares of other funds offered by the Trust
are described in
separate prospectuses that may be obtained by calling the
Trust at the telephone
number set forth above or by contacting a Smith Barney
Financial Consultant.
Additional information about the Fund and the Trust is
contained in a
Statement of Additional Information dated November 28, 1995,
as amended or
supplemented from time to time, that is available upon
request and without
charge by calling or writing the Trust at the telephone
number or address set
forth above or by contacting a Smith Barney Financial
Consultant. The Statement
of Additional Information has been filed with the Securities
and Exchange
Commission (the "SEC") and is incorporated by reference into
this Prospectus in
its entirety.
Smith Barney Inc.
Distributor
Smith Barney Mutual Funds Management Inc.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Table of Contents
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary
3
---------------------------------------------------------
- - --------------------
Financial Highlights
10
---------------------------------------------------------
- - --------------------
Investment Objective and Management Policies
14
---------------------------------------------------------
- - --------------------
Municipal Securities
24
---------------------------------------------------------
- - --------------------
Valuation of Shares
25
---------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes
26
---------------------------------------------------------
- - --------------------
Purchase of Shares
28
---------------------------------------------------------
- - --------------------
Exchange Privilege
36
---------------------------------------------------------
- - --------------------
Redemption of Shares
39
---------------------------------------------------------
- - --------------------
Minimum Account Size
42
---------------------------------------------------------
- - --------------------
Performance
42
---------------------------------------------------------
- - --------------------
Management of the Trust and the Fund
43
---------------------------------------------------------
- - --------------------
Distributor
44
---------------------------------------------------------
- - --------------------
Additional Information
45
---------------------------------------------------------
- - --------------------
2
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary
- - ------------------------------------------------------------
- - --------------------
The following summary is qualified in its entirety by
detailed information
appearing elsewhere in this Prospectus and in the Statement
of Additional
Information. Cross references in this summary are to
headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified
management investment
company that seeks maximum current income exempt from
Federal income taxes by
investing primarily in intermediate- and long-term municipal
bonds and notes
rated A, Baa or Ba by Moody's Investors Service, Inc.
("Moody's") or A, BBB or B
by Standard & Poor's Corporation ("S&P"). Intermediate- and
long-term bonds have
remaining maturities at the time of purchase of between
three and twenty years.
See "Investment Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several
classes of shares
("Classes") to investors designed to provide them with the
flexibility of
selecting an investment best suited to their needs. The
general public is
offered three classes of shares: Class A shares, Class B
shares and Class C
shares, which differ principally in terms of sales charges
and rate of expenses
to which they are subject. A fourth Class of shares, Class Y
shares, is offered
only to investors meeting an initial investment minimum of
$5,000,000. See
"Purchase of Shares" and "Redemption of Shares."
Class A Shares. Class A shares are sold at net asset
value plus an initial
sales charge of up to 4.00% and are subject to an annual
service fee of 0.15% of
the average daily net assets of the Class. The initial sales
charge may be
reduced or waived for certain purchases. Purchases of Class
A shares, which when
combined with current holdings of Class A shares offered
with a sales charge
equal or exceed $500,000 in the aggregate, will be made at
net asset value with
no initial sales charge, but will be subject to a contingent
deferred sales
charge ("CDSC") of 1.00% on redemptions made within 12
months of purchase. See
"Prospectus Summary -- Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset
value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by
0.50% the first year
after the date of purchase and by 1.00% each year thereafter
to zero. This CDSC
may be waived for certain redemptions. Class B shares are
subject to an annual
service fee of 0.15% and an annual distribution fee of 0.50%
of the average
daily net assets of the Class. The Class B shares'
distribution fee may cause
that Class to have higher expenses and pay lower dividends
than Class A shares.
Class B Shares Conversion Feature. Class B shares will
convert
automatically to Class A shares, based on relative net asset
value, eight years
3
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
after the date of the original purchase. Upon conversion,
these shares will no
longer be subject to an annual distribution fee. In
addition, a certain portion
of Class B shares that have been acquired through the
reinvestment of dividends
and distributions ("Class B Dividend Shares") will be
converted at that time.
See "Purchase of Shares -- Deferred Sales Charge
Alternatives."
Class C Shares. Class C shares are sold at net asset
value with no initial
sales charge. They are subject to an annual service fee of
0.15% and an annual
distribution fee of 0.55% of the average daily net assets of
the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares
within 12 months of
purchase. The CDSC may be waived for certain redemptions.
The Class C shares'
distribution fee may cause that Class to have higher
expenses and pay lower
dividends than Class A shares. Purchases of Fund shares,
which when combined
with current holdings of Class C shares of the Fund equal or
exceed $500,000 in
the aggregate, should be made in Class A shares at net asset
value with no sales
charge, and will be subject to a CDSC of 1.00% on
redemptions made within 12
months of purchase.
Class Y Shares. Class Y shares are available only to
investors meeting an
initial investment minimum of $5,000,000. Class Y shares are
sold at net asset
value with no initial sales charge or CDSC. They are not
subject to any service
or distribution fees.
In deciding which Class of Fund shares to purchase,
investors should
consider the following factors, as well as any other
relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class
of shares is more
beneficial to an investor depends on the amount and intended
length of his or
her investment. Shareholders who are planning to establish a
program of regular
investment may wish to consider Class A shares; as the
investment accumulates
shareholders may qualify for reduced sales charge and the
shares are subject to
lower ongoing expenses over the term of the investment. As
an alternative, Class
B and Class C shares are sold without any initial sales
charge so the entire
purchase price is immediately invested in the Fund. Any
investment return on
these additional invested amounts may partially or wholly
offset the higher
annual expenses of these Classes. Because the Fund's future
return cannot be
predicted, however, there can be no assurance that this
would be the case.
Finally, investors should consider the effect of the
CDSC period and any
conversion rights of the Classes in the context of their own
investment time
frame. For example, while Class C shares have a shorter CDSC
period than Class B
shares, they do not have a conversion feature, and
therefore, are subject to an
4
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
ongoing distribution fee. Thus, Class B shares may be more
attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must
purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or
service or
distribution fee. The maximum purchase amount for Class A
shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999.
There is no maximum
purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales
charge on Class A
shares may be waived for certain eligible purchasers, and
the entire purchase
price will be immediately invested in the Fund. In addition,
Class A share
purchases, which when combined with current holdings of
Class A shares offered
with a sales charge equal or exceed $500,000 in the
aggregate, will be made at
net asset value with no initial sales charge, but will be
subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The
$500,000 aggregate
investment may be met by adding the purchase to the net
asset value of all Class
A shares held in funds sponsored by Smith Barney Inc.
("Smith Barney") listed
under "Exchange Privilege." Class A share purchases may also
be eligible for a
reduced initial sales charge. See "Purchase of Shares."
Because the ongoing
expenses of Class A shares may be lower than those for Class
B and Class C
shares, purchasers eligible to purchase Class A shares at
net asset value or at
a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive
different compensation for
selling each Class of shares. Investors should understand
that the purpose of
the CDSC on the Class B and Class C shares is the same as
that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust
and the Fund" for a
complete description of the sales charges and service and
distribution fees for
each Class of shares and "Valuation of Shares," "Dividends,
Distributions and
Taxes" and "Exchange Privilege" for other differences
between the Classes of
shares.
PURCHASE OF SHARES Shares may be purchased through the
Fund's distributor, Smith
Barney, a broker that clears securities transactions through
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, First Data Investor Services
Group, Inc. ("FDISG").
See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class
C shares may open an
account by makingan initial investment of at least $1,000
for each account, or
5
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
$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. The minimum initial investment requirement for
Class A, Class B and
Class C shares and the subsequent investment requirement for
all Classes through
the Systematic Investment Plan described below is $50. There
is no minimum
investment requirement in Class A for unitholders who invest
distributions from
a unit investment trust ("UIT") sponsored by Smith Barney.
See "Purchase of
Shares."
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 $50. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the
New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase
of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND Smith Barney Mutual
Funds Management Inc.
("SBMFM") serves as the Fund's investment adviser and
administrator. SBMFM
provides investment advisory and management services to
investment companies
affiliated with Smith Barney. SBMFM is a wholly owned
subsidiary of Smith Barney
Holdings Inc. ("Holdings"), which is in turn a wholly owned
subsidiary of
Travelers Group Inc. ("Travelers"), a diversified financial
services holding
company engaged, through its subsidiaries, principally in
four business
segments: Investment Services, Consumer Finance Services,
Life Insurance
Services and Property & Casualty Insurance Services. See
"Management of the
Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for
shares of the same
Class of certain other funds of the Smith Barney Mutual
Funds at the respective
net asset values, next determined, plus any applicable sales
charge
differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the
prior day generally is
quoted daily in the financial section of most newspapers and
is also available
from Smith Barney Financial Consultants. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly from
net investment
income and distributions of net realized capital gains, if
any, are declared and
paid annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid
on shares of a Class
will be reinvested automatically, unless otherwise specified
by an investor, in
6
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
additional shares of the same Class at current net asset
value. Shares acquired
by dividend and distribution reinvestments will not be
subject to any sales
charge or CDSC. Class B shares acquired through dividend and
distribution
reinvestments will become eligible for conversion to Class A
shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no
assurance that the Fund
will achieve its investment objective. General changes in
interest rates will
result in increases or decreases in the market value of the
obligations held by
the Fund. The Fund may invest up to 35% of its assets in
obligations rated Ba or
below by Moody's or BB or below by S&P or in nonrated
securities deemed by SBMFM
to be of comparable quality, commonly known as "junk bonds."
In addition, the
Fund may invest in obligations rated as low as Caa by
Moody's or CCC by S&P.
Securities that are rated B generally lack characteristics
of the desirable
investment and assurance of interest and principal payments
over any long period
of time may be small. Securities that are rated Caa or CCC
are of poor standing.
These issues may be in default or present elements of danger
may exist with
respect to principal or interest. Although medium- or low-
rated securities of
the type in which the Fund may invest offer a higher current
yield than the
yield offered by higher rated securities, they involve
greater volatility of
price and risk of loss of income and principal, including
the probability of
price and risk of loss of income and principal, including
the probability of
default by or bankruptcy of the issuers of such securities.
Medium- and
low-rated and comparable unrated securities (a) will likely
have some quality
and protective characteristics that, in the judgment of the
rating
organizations, are outweighed by large uncertainties of
major risk exposures to
adverse conditions and (b) are predominantly speculative
with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the
terms of the obligation. The Fund has the right to invest up
to 20% of its net
assets in state and local obligations that are "private
activity bonds," the
income for which may be taxable as a specific preference
item for purposes of
the Federal alternative minimum tax. Certain of the
investments held by the Fund
and certain of the investment strategies that the Fund may
employ might expose
it to certain risks. See "Investment Objective and
Management Policies --
Certain Portfolio Strategies."
7
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
The Fund's Expenses The following expense table lists
the costs and
expenses an investor will incur either directly or
indirectly as a shareholder
of the Fund, based on the maximum sales charge or maximum
CDSC that may be
incurred at the time of purchase or redemption and, unless
otherwise noted, the
Fund's operating expenses for its most recent fiscal year:
Class A
Class B Class C Class Y
- - ------------------------------------------------------------
- - --------------------
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 4.00%
None None None
Maximum CDSC
(as a percentage of original cost or
redemption proceeds whichever is lower) None*
4.50% 1.00% None
- - ------------------------------------------------------------
- - --------------------
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees 0.60%
0.60% 0.60% 0.60%
12b-1 fees** 0.15%
0.65% 0.70% None
Other expenses*** 0.09%
0.10% 0.09% 0.09%
- - ------------------------------------------------------------
- - --------------------
TOTAL FUND OPERATING EXPENSES 0.84%
1.35% 1.39% 0.69%
============================================================
====================
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge, equal or
exceed $500,000 in the
aggregate, will be made at net asset value with no
sales charge, but will
be subject to a CDSC of 1.00% on redemptions made
within 12 months.
** Upon conversion of Class B shares to Class A shares,
such shares will no
longer be subject to a distribution fee. Class C shares
do not have a
conversion feature and, therefore, are subject to an
ongoing distribution
fee. As a result, long-term shareholders of Class C
shares may pay more
than the economic equivalent of the maximum front-end
sales charge
permitted by the National Association of Securities
Dealers, Inc.
*** For Class Y shares, "other expenses" have been
estimated based on expenses
incurred by Class A shares because as of July 31, 1995,
no Class Y shares
were outstanding.
The sales charge and CDSC set forth in the above table
are the maximum
charges imposed on purchases or redemptions of Fund shares
and investors may
actually pay lower or no charges, depending on the amount
purchased and, in the
case of Class B, Class C and certain Class A shares, the
length of time the
shares are held and whether the shares are held through the
Smith Barney 401(k)
Program. See "Purchase of Shares" and "Redemption of
Shares." Smith Barney
receives an annual 12b-1 service fee of 0.15% of the value
of average daily net
assets of Class A shares. Smith Barney also receives, with
respect to Class B
shares, an annual 12b-1 fee of 0.65% of the value of average
daily net assets of
that Class, consisting of a 0.50% distribution fee and a
0.15% service fee. For
8
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
Class C shares, Smith Barney receives an annual 12b-1 fee of
0.70% of the value
of average daily net assets, consisting of a 0.55%
distribution fee and a 0.15%
service fee. "Other expenses" in the above table include
fees for shareholder
services, custodial fees, legal and accounting fees,
printing costs and
registration fees.
Example The following example is intended to assist an
investor in understanding
the various costs that an investor in the Fund will bear
directly or indirectly.
The example assumes payment by the Fund of operating
expenses at the levels set
forth in the table above. See "Purchase of Shares,"
"Redemption of Shares" and
"Management of the Trust and the Fund."
1 Year 3
Years 5 Years10 Years*
============================================================
====================
An Investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual returnand (2) redemption at the end
of each time period:
Class A $48
$66 $85 $140
Class B 54
73 84 148
Class C 24
44 76 167
Class Y 7
22 38 86
An investor would pay the following expenses
on the same investment, assuming the same annual
return and no redemption:
Class A $48
$66 $85 $140
Class B 14
43 74 148
Class C 14
44 76 167
Class Y 7
22 38 86
============================================================
====================
* Ten-year figures assume conversion of Class B shares to
Class A shares at
the end of the eighth year following the date of
purchase.
The example also provides a means for the investor to
compare expense
levels of funds with different fee structures over varying
investment periods.
To facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. This example should not be
considered a
representation of past or future expenses and actual
expenses may be greater or
less than those shown.
9
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights
- - ------------------------------------------------------------
- - --------------------
The following information for the fiscal year ended July 31,
1995 has been
audited by KPMG Peat Marwick LLP, independent accountants,
whose report thereon
appears in the Fund's Annual Report dated July 31, 1995. The
following
information for the fiscal years ended July 31, 1986 through
July 31, 1994 has
been audited by Coopers & Lybrand L.L.P. The information set
out below should be
read in conjunction with the financial statements and
related notes that also
appear in the Fund's Annual Report, which is incorporated by
reference into the
Statement of Additional Information. No information is
presented for Class Y
shares, because no Class Y shares were outstanding for the
periods shown.
For a Class A share of beneficial interest outstanding
throughout each period:
Year
Year Period
Ended
Ended Ended
7/31/95
7/31/94 7/31/93(1)
============================================================
====================
Net Asset Value, Beginning of Period $17.26
$18.24 $17.45
- - ------------------------------------------------------------
- - --------------------
Income From Operations:
Net investment income 1.04
1.06 0.78
Net realized and unrealized gain
(loss)on investments (2) 0.01
(0.85) 1.00
- - ------------------------------------------------------------
- - --------------------
Total Income From Operations 1.05
0.21 1.78
- - ------------------------------------------------------------
- - --------------------
Less Distributions From:
Net investment income (1.00)
(1.02) (0.80)
Overdistribution of net investment income --
(0.04) (0.03)
Net realized gains --
(0.13) (0.16)
Overdistribution of net realized gains (0.02)
- - -- --
Capital (0.04)
- - -- --
- - ------------------------------------------------------------
- - --------------------
Total Distributions (1.06)
(1.19) (0.99)
- - ------------------------------------------------------------
- - --------------------
Net Asset Value, End of Period $17.25
$17.26 $18.24
- - ------------------------------------------------------------
- - --------------------
Total Return++ 6.42%
1.14% 10.24%+++
- - ------------------------------------------------------------
- - --------------------
Net Assets, End of Period (000s) $237,656
$17,792 $13,508
- - ------------------------------------------------------------
- - --------------------
Ratios to Average Net Assets:
Expenses 0.84%
0.84% 0.86%+
Net investment income 6.04
5.83 6.03+
- - ------------------------------------------------------------
- - --------------------
Portfolio Turnover Rate 38%
39% 34%
============================================================
====================
(1) For the period from November 6, 1992 (inception date)
to July 31, 1993.
(2) Includes the net per share effect of shareholder sales
and redemption
activity during the period, most of which occurred at
net asset values less
than the beginning of the period.
+++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charge.
10
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights (continued)
- - ------------------------------------------------------------
- - --------------------
<TABLE>
<CAPTION>
For a Class B share of beneficial interest outstanding
throughout each period:
Year
Year Year Year Year
Ended
Ended Ended Ended Ended
7/31/95
7/31/94 7/31/93 7/31/92 7/31/91
============================================================
==================
======================================================
<S>
<C>
<C> <C> <C> <C>
Net Asset Value, Beginning of Period
$17.26
$18.24 $18.00 $16.97 $16.98
- - ------------------------------------------------------------
- - -------------------
- - -----------------------------------------------------
Income From Operations:
Net investment income
0.95
0.96 0.98 1.04 1.10
Net realized and unrealized
gain (loss) on investments(1)
0.02
(0.85) 0.45 1.17 0.10
- - ------------------------------------------------------------
- - -------------------
- - -----------------------------------------------------
Total Income From Operations
0.97
0.11 1.43 2.21 1.20
- - ------------------------------------------------------------
- - ---------------
- - ---------------------------------------------------------
Less Distributions From:
Net investment income
(0.91)
(0.92) (0.98) (1.04) (1.10)
Overdistribution of net investment
income
- - --
(0.04) (0.04) -- --
Net realized gains
(0.02)
(0.13) (0.17) (0.14) (0.11)
Capital
(0.04)
-- -- -- --
- - ------------------------------------------------------------
- - ------------------
- - ------------------------------------------------------
Total Distributions
(0.97)
(1.09) (1.19) (1.18) (1.21)
- - ------------------------------------------------------------
- - --------------
- - ----------------------------------------------------------
Net Asset Value, End of Period
$17.26
$17.26 $18.24 $18.00 $16.97
- - ------------------------------------------------------------
- - -----------------
- - -------------------------------------------------------
Total Return++
5.91%
0.60% 8.28% 13.50% 7.40%
- - ------------------------------------------------------------
- - ---------------
- - ---------------------------------------------------------
Net Assets, End of Period (millions)
$737
$1,069 $1,108 $871 $639
- - ------------------------------------------------------------
- - ----------------
- - -------------------------------------------------------
Ratios to Average Net Assets:
Expenses
1.35%
1.33% 1.38% 1.45%# 1.45%
Net investment income
5.61
5.34 5.52 5.96 6.48
- - ------------------------------------------------------------
- - -------------------
- - -----------------------------------------------------
Portfolio Turnover Rate
38%
39% 34% 61% 44%
============================================================
===================
=====================================================
</TABLE>
(1) Includes the net per share effect of shareholder sales
and redemption
activity during the period, most of which occurred at
net asset values less
than the beginning of the period.
# The annualized operating expense ratio excludes
interest expense. The
annualized ratio including interest expense was 1.48%
for the year ended
July 31, 1992.
++ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charge.
11
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights (continued)
- - ------------------------------------------------------------
- - --------------------
For a Class B share of beneficial interest outstanding
throughout each period:
<TABLE>
<CAPTION>
Year
Year Year Year
Ended
Ended Ended Ended
7/31/89
7/31/88 7/31/87 7/31/86*
============================================================
====================================
<S> <C>
<C> <C> <C>
Net Asset Value, Beginning of Period $16.44
$16.48 $16.30 $15.00
- - ------------------------------------------------------------
- - ------------------------------------
Income From Operations:
Net investment income 1.13
1.13 1.10 1.04
Net realized and unrealized
gain on investments 0.88
0.02 0.18 1.30
- - ------------------------------------------------------------
- - ------------------------------------
Total Income From Operations 2.01
1.15 1.28 2.34
- - ------------------------------------------------------------
- - ------------------------------------
Less Distributions From:
Net investment income (1.13)
(1.13) (1.10) (1.04)
Overdistribution of net investment income --
- - -- -- --
Net realized gains (0.01)
(0.06) -- --
- - ------------------------------------------------------------
- - ------------------------------------
Total Distributions (1.14)
(1.19) (1.10) (1.04)
- - ------------------------------------------------------------
- - ------------------------------------
Net Asset Value, End of Period $17.31
$16.44 $16.48 $16.30
- - ------------------------------------------------------------
- - ------------------------------------
Total Return++ 12.68%
7.32% 7.90% 15.89%
- - ------------------------------------------------------------
- - ------------------------------------
Net Assets, End of Period (millions) $558
$451 $453 $350
- - ------------------------------------------------------------
- - ------------------------------------
Ratios to Average Net Assets:
Expenses 1.44%
1.43% 1.57% 1.53%##
Net investment income 6.70
6.99 6.43 6.88+
- - ------------------------------------------------------------
- - ------------------------------------
Portfolio Turnover Rate 21%
12% 16% 6%
============================================================
====================================
</TABLE>
* The Fund commenced operations on September 16, 1985.
Those shares in
existence prior to November 6, 1992 were designated as
Class B shares.
## Annualized expense ratio before waiver of fees by
investment adviser,
sub-investment adviser and administrator and
distributor was 1.58%.
+ Annualized.
++ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable CDSC.
12
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights (continued)
- - ------------------------------------------------------------
- - --------------------
For a Class C share of beneficial interest outstanding
throughout each period:
Period
Ended
7/31/95(1)
============================================================
====================
Net Asset Value, Beginning of Period
$15.83
- - ------------------------------------------------------------
- - ----------------
Income From Operations:
Net investment income
0.60
Net realized and unrealized
gain (loss) on investments(2)
1.50
- - ------------------------------------------------------------
- - ----------------
Total Income From Operations
2.10
- - ------------------------------------------------------------
- - ----------------
Less Distributions:
Net investment income
(0.62)
Net realized gains
(0.02)
Capital
(0.04)
- - ------------------------------------------------------------
- - ----------------
Total Distributions
(0.68)
- - ------------------------------------------------------------
- - ----------------
Net Asset Value, End of Period
$17.25
- - ------------------------------------------------------------
- - ----------------
Total Return
13.45%++
- - ------------------------------------------------------------
- - ----------------
Net Assets, End of Period (000s)
$211
- - ------------------------------------------------------------
- - ----------------
Ratios to Average Net Assets:
Expenses
1.18%+
Net investment income
5.56+
- - ------------------------------------------------------------
- - ----------------
Portfolio Turnover Rate
38%
============================================================
====================
(1) For the period from November 17, 1994 (inception date)
to July 31, 1995.
(2) Includes the net per share effect of shareholder sales
and redemption
activity during the period, most of which occurred at
net asset values less
than the beginning of the period.
++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
13
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies
- - ------------------------------------------------------------
- - --------------------
The Fund's investment objective is the maximization of
current income
exempt from Federal income taxes. Under normal market
conditions, the Fund will
invest at least 80% of its net assets in (a) "Municipal
Bonds," which generally
are intermediate- and long-term debt obligations issued by
or on behalf of
states, territories and possessions of the United States and
the District of
Columbia and their political subdivisions, agencies and
instrumentalities, or
multistate agencies or authorities and (b) Municipal Leases,
which generally are
participations in intermediate- and short-term debt
obligations issued by
municipalities consisting of leases or installment purchase
contracts for
property or equipment. Under normal market conditions, the
Fund's assets will be
invested primarily in Municipal Bonds and municipal leases
(collectively,
"Municipal Securities") rated A, Baa or Ba by Moody's, or A,
BBB or BB by S&P,
or in unrated Municipal Securities that are deemed to be of
comparable quality
by SBMFM. Up to 35% of the Fund's assets may be invested in
Municipal Securities
rated Ba or below by Moody's or BB or below by S&P or, if
unrated, judged by
SBMFM, to be of comparable quality. The Fund's investment
objective may be
changed only with the approval of the holders of a majority
of the Fund's
outstanding shares. There can be no assurance that the Fund
will achieve its
investment objective.
The Fund may invest without limit in "municipal
leases," which generally
are participations in intermediate- and short-term debt
obligations issued by
municipalities consisting of leases or installment purchase
contracts for
property or equipment. Municipal leases may take the form of
a lease or an
installment purchase contract issued by state and local
government authorities
to obtain funds to acquire a wide variety of equipment and
facilities such as
fire and sanitation vehicles, computer equipment and other
capital assets.
Although lease obligations do not constitute general
obligations of the
municipality for which the municipality's taxing power is
pledged, a lease
obligation is ordinarily backed by the municipality's
covenant to budget for,
appropriate and make the payments due under the lease
obligation. However,
certain lease obligations contain "non-appropriation"
clauses which provide that
the municipality has no obligation to make lease or
installment purchase
payments in future years unless money is appropriated for
such purpose on a
yearly basis. In addition to the "non-appropriation" risk,
these securities
represent a relatively new type of financing that has not
yet developed the
depth of marketability associated with more conventional
bonds. Although
"non-appropriation" lease obligations are often secured by
the underlying
property, disposition of the property in the event of
foreclosure might prove
difficult. There is no limitation on the percentage of the
Fund's assets that
may be invested in municipal lease obligations. In
evaluating municipal lease
14
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
obligations, SBMFM will consider such factors as it deems
appropriate, which may
include: (a) whether the lease can be canceled; (b) the
ability of the lease
obligee to direct the sale of the underlying assets; (c) the
general
creditworthiness of the lease obligor; (d) the likelihood
that the municipality
will discontinue appropriating funding for the leased
property in the event such
property is no longer considered essential by the
municipality; (e) the legal
recourse of the lease obligee in the event of such a failure
to appropriate
funding; (f) whether the security is backed by a credit
enhancement such as
insurance; and (g) any limitations which are imposed on the
lease obligor's
ability to utilize substitute property or services rather
than those covered by
the lease obligation.
Under normal circumstances, the Fund may invest up to
20% of its net assets
in "private activity bonds." Interest income on certain
types of private
activity bonds issued after August 7, 1986 to finance
nongovernmental activities
is a specific tax preference item for purposes of Federal
individual and
corporate alternative minimum taxes. Individual and
corporate shareholders may
be subject to a Federal alternative minimum tax to the
extent that the Fund's
dividends are derived from interest on these bonds. These
private activity bonds
are included in the term "Municipal Securities" for purposes
of determining
compliance with the 80% test described above. Dividends
derived from interest
income on all Municipal Securities are a component of the
"adjusted current
earnings" item for purposes of the Federal corporate
alternative minimum tax.
The Fund may invest in short-term obligations
("Temporary Investments"),
some of which may not be tax-exempt. Included among the
Temporary Investments
are tax-exempt notes rated within the four highest grades by
Moody's or S&P;
tax-exempt commercial paper rated no lower than A-2 by S&P
or Prime-2 by
Moody's; and taxable money market instruments. At no time
will more than 20% of
the Fund's assets be invested in Temporary Investments
unless SBMFM temporarily
has adopted a defensive investment posture. In addition, the
Fund may enter into
municipal bond index futures contracts and options on
interest rate futures
contracts for hedging purposes. The Fund also may acquire
variable rate demand
notes, purchase securities on a when-issued basis and enter
into stand-by
commitments with respect to portfolio securities.
Additional Investments
Money Market Instruments. Under normal conditions, the
Fund may invest up
to 20% of its assets in Temporary Investments, including
taxable money market
instruments. In addition, when SBMFM believes that market
conditions warrant,
the Fund may invest in Temporary Investments without
limitation for defensive
15
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
purposes. Short-term instruments in which the Fund may
invest include
obligations issued or guaranteed as to principal and
interest by the United
States government ("U.S. government securities"), certain
bank obligations
including certificates of deposit, time deposits and
bankers' acceptances of
domestic or foreign banks, domestic savings and loan
associations and similar
institutions); commercial paper rated no lower than Prime-2
by Moody's or A-2 by
S&P or the equivalent from another major national rating
service or, if unrated,
of an issuer having an outstanding, unsecured debt issue
then rated within the
three highest rating categories; and repurchase agreements
with respect to the
securities in which the Fund may invest. The Fund will
invest in obligations of
a foreign bank or foreign branch of a domestic bank only if
SBMFM determines
that the obligations present minimum credit risks. These
obligations may be
traded in the United States or outside the United States,
but will be
denominated in U.S. dollars.
U.S. Government Securities. The U.S. government
securities in which the
Fund may invest include direct obligations of the United
States Treasury (such
as Treasury Bills, Treasury Notes and Treasury Bonds), and
obligations issued by
U.S. government agencies and instrumentalities, including
securities that are
supported by the full faith and credit of the United States;
securities that are
supported by the right of the issuer to borrow from the
United States Treasury;
and securities that are supported by the credit of the
instrumentality. Treasury
Bills have maturities of less than one year, Treasury Notes
have maturities of
one to 10 years and Treasury Bonds generally have maturities
of greater than 10
years at the date of issuance. U.S. government securities
generally do not
involve the credit risks associated with other types of
interest-bearing
securities, although, as a result, the yields available from
U.S. government
securities are generally lower than the yields available
from interest-bearing
corporate securities.
Certain Investment Strategies
In attempting to achieve its investment objective, the
Fund may employ,
among others, one or more of the strategies set forth below.
More detailed
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
16
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
the Fund to resell, the obligation at an agreed-upon price
and time, thereby
determining the yield during the Fund's holding period. This
arrangement results
in a fixed rate of return that is not subject to market
fluctuations during the
Fund's holding period. The value of the underlying
securities will be at least
equal at all times to the total amount of the repurchase
obligation, including
interest. Repurchase agreements could involve certain risks
in the event of
default or insolvency of the other party, including possible
delays or
restrictions upon the Fund's ability to dispose of the
underlying securities,
the risk of a possible decline in the value of the
underlying securities during
the period in which the Fund seeks to assert its rights to
them, the risk of
incurring expenses associated with asserting those rights
and the risk of losing
all or part of the income from the agreement. SBMFM, acting
under the
supervision of the Trust's Board of Trustees, reviews on an
ongoing basis the
value of the collateral and the creditworthiness of those
banks and dealers with
which the Fund may enter into repurchase agreements to
evaluate potential risks.
Investments by the Fund in repurchase agreements, if any,
may be limited by the
restrictions on the Fund's investment in taxable
investments.
When-Issued Securities. New issues of Municipal
Securities are frequently
offered on a when-issued basis, which means that delivery
and payment for such
securities normally take place within 45 days after the date
of commitment to
purchase. The payment obligation and the interest rate that
will be received on
when-issued securities are fixed at the time the buyer
enters into the
commitment. Municipal Securities, like other investments
made by the Fund, may
decline or appreciate in value before their actual delivery
to the Fund. Due to
the fluctuations in the value of securities purchased and
sold on a when-issued
basis, the yields obtained on these securities may be higher
or lower than the
yields available in the market on the date when the
investments actually are
delivered to the buyers. The Fund will not accrue income
with respect to a
when-issued security prior to its stated delivery date. The
Fund will establish
a segregated account with the Trust's custodian, PNC Bank,
National Association
("PNC Bank") consisting of cash, U.S. government securities
or other high grade
debt obligations in an amount equal to the amount of the
purchase price of the
when-issued securities. Placing securities rather than cash
in the segregated
account may have a leveraging effect on the Fund's net
assets. The Fund
generally will make commitments to purchase Municipal
Securities on a
when-issued basis only with the intention of actually
acquiring the securities,
but the Fund may sell these securities before the delivery
date if it is deemed
advisable.
Futures Contracts and Options on Futures Contracts. A
municipal bond index
futures contract of the type in which the Fund may trade is
based on an index of
17
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
long-term, tax-exempt municipal bonds. The contract is an
agreement under which
two parties agree to take or make delivery of an amount of
cash equal to the
difference between the value of the index at the close of
the last trading day
of the contract and the price at which the index contract
was originally
written. An option on an interest rate futures contract, as
contrasted with the
direct investment in a futures contract, gives the purchaser
the right, in
return for the premium paid, to assume a position in an
interest rate futures
contract at a specified exercise price at any time prior to
the expiration date
of the option. A call option gives the purchaser of the
option the right to
enter into a futures contract to buy and obliges the writer
to enter into a
futures contract to sell the underlying debt securities. A
put option gives the
purchaser the right to sell and obliges the writer to buy
the underlying
contract. The Fund may purchase put options on interest rate
futures contracts
to hedge its portfolio securities against the risk of rising
interest rates, and
may purchase call options on interest rate futures contracts
to hedge against a
decline in interest rates. The Fund may write put and call
options on interest
rate futures contracts in entering into closing sale
transactions and to
increase ability to hedge against changes in interest rates.
The Fund will write
put and call options only on interest rate future contracts
that are traded on a
domestic exchange or board of trade.
Variable Rate Demand Notes. Municipal Securities
purchased by the Fund may
include variable rate demand notes issued by industrial
development authorities
and other governmental entities. Although variable rate
demand notes are
frequently not rated by credit rating agencies, unrated
notes purchased by the
Fund will be determined by SBMFM to be of comparable quality
at the time of
purchase to instruments rated "high quality" (that is,
within the two highest
ratings) by any major rating service. In addition, while no
active secondary
market may exist with respect to a particular variable rate
demand note
purchased by the Fund, the Fund may, upon the notice
specified in the note,
demand payment of the principal of and accrued interest on
the note at any time
and may resell the note at any time to a third party. The
absence of such an
active secondary market, however, could make it difficult
for the Fund to
dispose of the variable rate demand note involved in the
event that the issuer
of the note defaulted on its payment obligations, and the
Fund could, for this
or other reasons, suffer a loss to the extent of the
default.
Stand-by Commitments. The Fund may acquire "stand-by
commitments" with
respect to Municipal Securities held in its portfolio. Under
a stand-by
commitment, a dealer agrees to purchase, at the Fund's
option, specified
Municipal Securities at a specified price. The Fund may pay
for stand-by
commitments either separately in cash or by paying a higher
price for the
securities acquired with the commitment, thus increasing the
cost of the
18
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
securities and reducing the yield otherwise available for
them. The Fund intends
to enter into stand-by commitments only with brokers,
dealers and banks that, in
the view of SBMFM, present minimal credit risks. In
evaluating the
creditworthiness of the issuer of a stand-by commitment,
SBMFM will periodically
review relevant financial information concerning the
issuer's assets,
liabilities and contingent claims. The Fund will acquire
stand-by commitments
solely to facilitate portfolio liquidity and does not intend
to exercise its
rights thereunder for trading purposes.
Certain Investment Guidelines
The Fund may be invested up to 10% of its total assets
in securities with
contractual or other restrictions on resale and other
instruments that are not
readily marketable, including (a) repurchase agreements with
maturities greater
than seven days, (b) time deposits maturing from two
business days through seven
calendar days and (c) futures contracts and options on them
and certain variable
rate demand notes, to the extent that a liquid secondary
market does not exist
for these instruments. 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.
Except for the
limitations on borrowing, the investment guidelines set
forth in this paragraph
may be changed at any time without shareholder consent by
vote of the Trust's
Board of Trustees. A complete list of investment
restrictions that identifies
additional restrictions that cannot be changed without the
approval of the
majority of the Fund's outstanding shares is contained in
the Statement of
Additional Information.
Risk Factors and Special Considerations
Investment in the Fund involves risk factors and
special considerations,
such as those described below:
Municipal Securities. Even though Municipal Securities
are interest-bearing
investments that promise a stable stream of income, their
prices are inversely
affected by changes in interest rates and, therefore, are
subject to the risk of
market price fluctuations. The values of Municipal
Securities with longer
remaining maturities typically fluctuate more than those of
similarly rated
Municipal Securities with shorter remaining maturities. The
values of
fixed-income securities also may be affected by
19
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
changes in the credit rating or financial condition of the
issuing entities.
Opinions relating to the validity of Municipal
Securities and to the
exemption of interest on them from Federal income taxes are
rendered by bond
counsel to the respective issuers at the time of issuance.
Neither the Fund nor
SBMFM will review the proceedings relating to the issuance
of Municipal
Securities or the basis for opinions of counsel. The Fund
may invest without
limit in debt obligations that are repayable out of revenues
generated from
economically related projects or facilities or debt
obligations whose issuers
are located in the same state. Sizable investments in these
obligations could
involve an increased risk to the Fund should any of such
related projects or
facilities experience financial difficulties.
Municipal Leases. Municipal leases, like other
municipal debt obligations,
are subject to the risk of non-payment. The ability of
issuers of municipal
leases to make timely lease payments may be adversely
impacted in general
economic downturns and as relative governmental cost burdens
are allocated and
reallocated among Federal, state and local governmental
units. Such non-payment
would result in a reduction of income to the Fund, and could
result in a
reduction in the value of the municipal lease experiencing
non-payment and a
potential decrease in the net asset value of the Fund.
Issuers of municipal
leases might seek protection under the bankruptcy laws. In
the event of
bankruptcy of such an issuer, the Fund could experience
delays and limitations
with respect to the collection of principal and interest on
such municipal
leases and the Fund may not, in all circumstances, be able
to collect all
principal and interest to which it is entitled. To enforce
its right in the
event of a default in lease payments, the Fund may take
possession of and manage
the assets securing the issuer's obligations on such
securities, which may
increase the Fund's operating expenses and adversely affect
the net asset value
of the Fund. Any income derived from the Fund's ownership or
operation of such
assets may not be tax-exempt.
Potential Legislation. In past years, the United States
government has
enacted various laws that have restricted or diminished the
income tax exemption
on various types of Municipal Securities and may enact other
similar laws in the
future. If any such laws are enacted that would reduce the
availability of
Municipal Securities for investment by the Fund so as to
affect the Fund's
shareholders adversely, the Trustees will reevaluate the
Fund's investment
objective and policies and might submit possible changes in
the Fund's structure
to Fund shareholders for their consideration. If legislation
were enacted that
would treat a type of Municipal Securities as taxable for
Federal income tax
purposes, the Fund would treat the security as a permissible
taxable Temporary
Investment within the applicable limits set forth in this
Prospectus.
20
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
Medium-, Low- and Unrated Securities. The Fund may
invest in medium-or
low-rated securities commonly known as "junk bonds," and
unrated securities of
comparable quality. Generally, these securities offer a
higher current yield
than the yield offered by higher-rated securities, but
involve greater
volatility of price and risk of loss of income and
principal, including the
probability of default by or bankruptcy of the issuers of
such securities.
Medium- and low-rated and comparable unrated securities (a)
will likely have
some quality and protective characteristics that, in the
judgment of the rating
organization, are outweighed by large uncertainties or major
risk exposures to
adverse conditions and (b) are predominantly speculative
with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the
terms of the obligation. These types of factors could, in
certain instances,
reduce the value of securities held by the Fund with a
commensurate effect on
the value of the Fund's shares. Therefore, an investment in
the Fund should not
be considered as a complete investment program and may not
be appropriate for
all investors.
While the market values of medium- and low-rated and
comparable unrated
securities tend to react less to fluctuations in interest
rate levels than do
those of higher-rated securities, the market values of
certain of these
securities also tend to be more sensitive to individual
corporate developments
and changes in economic conditions than higher-rated
securities. In addition,
medium- and low-rated and comparable unrated securities
generally present a
higher degree of credit risk. Issuers of medium- and low-
rated and comparable
unrated securities are often highly leveraged and may not
have more traditional
methods of financing available to them so that their ability
to service their
debt obligations during an economic downturn or during
sustained periods of
rising interest rates may be impaired. The risk of loss due
to default by such
issuers is significantly greater because medium- and low-
rated and comparable
unrated securities generally are unsecured and frequently
are subordinated to
the prior payment of senior indebtedness. The Fund may incur
additional expenses
to the extent that it is required to seek recovery upon a
default in the payment
of principal or interest on its portfolio holdings. In
addition, the markets in
which medium- and low-rated securities are traded are
generally more limited
than those in which higher-rated securities are traded. The
existence of limited
markets for these securities may restrict the availability
of securities for the
Fund to purchase and also may have the effect of limiting
the ability of the
Fund (a) to obtain accurate market quotations for purposes
of valuing securities
and calculating net asset value and (b) to sell securities
at their fair value
either to meet redemption requests or to respond to changes
in the economy or
the financial markets. The market for medium- and low-rated
and comparable
unrated securities is relatively new and has not fully
weathered a major
economic recession. Any such recession, however, could
likely disrupt severely
21
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
the market for such securities, adversely affect the value
of such securities
and also could adversely affect the ability of the issuers
of such securities to
repay principal and pay interest thereon.
Fixed-income securities, including medium- and low-
rated and comparable
unrated securities, frequently have call or buy-back
features that permit their
issuers to call or repurchase the securities from their
holders, such as the
Fund. If an issuer exercises these rights during periods of
declining interest
rates, the Fund may have to replace the security with a
lower yielding security,
resulting in a decreased return to the Fund.
Securities that are rated Ba by Moody's or BB by S&P
have speculative
characteristics with respect to caow-rated securities are
traded are generally
more limited than those in which higher-rated securities are
traded. The
existence of limited markets for these securities may
restrict the availability
of securities for the Fund to purchase and also may have the
effect of limiting
the ability of the Fund (a) to obtain accurate market
quotations for purposes of
valuing securities and calculating net asset value and (b)
to sell securities at
their fair value either to meet redemption requests or to
respond to changes in
the economy or the financial markets. The market for medium-
and low-rated and
comparable unrated securities is relatively new and has not
fully weathered a
major economic recession. Any such recession, however, could
likely disrupt
severely the market for such securities, adversely affect
the value of such
securities and also could adversely affect the ability of
the issuers of such
securities to repay principal and pay interest thereon.
Fixed-income securities, including medium- and low-
rated and comparable
unrated securities, frequently have call or buy-back
features that permit their
issuers to call or repurchase the securities from their
holders, such as the
Fund. If an issuer exercises these rights during periods of
declining interest
rates, the Fund may have to replace the security with a
lower yielding security,
resulting in a decreased return to the Fund.
Securities that are rated Ba by Moody's or BB by S&P
have speculative
characteristics with respect to capacity to pay interest and
repay principal.
Securities that are rated B generally lack characteristics
of the desirable
investment, and assurance of interest and principal payments
over any long
period of time may be small. Securities that are rated Caa
by Moody's or CCC by
S&P are of poor standing. These issues may be in default or
present elements of
danger may exist with respect to principal or interest.
In light of these risks described above, SBMFM, in
evaluating the
creditworthiness of an issue, whether rated or unrated, will
take various
22
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
factors into consideration. Those factors may include, as
applicable, the
issuer's financial resources, its sensitivity to economic
conditions and trends,
the operating history of and the community support for the
facility financed by
the issue, the ability of the issuer's management and
regulatory matters.
The Fund's holdings in fixed-income securities (as
rated by Moody's) for
the fiscal year ended July 31, 1995 were composed as
follows: 40.2% rated Aaa;
8.5% rated Aa; 19.5% rated A; 19.8% rated Baa; 4.5% rated
Ba; 0.8% rated B; and
6.7% in non-rated securities. The percentages were
calculated on dollar weighted
average basis by determining monthly the percentage of the
Fund's net assets
invested in each rating category and do not necessarily
indicate what the
composition of the Fund's holdings will be in subsequent
years.
Securities of Unseasoned Issuers. Securities in which
the Fund may invest
may have limited marketability and, therefore, may be
subject to wide
fluctuations in market value. In addition, certain
securities may lack a
significant operating history and be dependent on products
or services without
an established market share.
Non-Publicly Traded and Illiquid Securities. The Fund's
sale of securities
that are not publicly traded is typically restricted under
the Federal
securities laws. As a result, the Fund may be forced to sell
these securities at
less than fair market value or may not be able to sell them
when SBMFM believes
it desirable to do so. The Fund's investments in illiquid
securities are subject
to the risk that should the Fund desire to sell any of these
securities when a
ready buyer is not available at a price that the Fund deems
representative of
their value, the value of the Fund's net assets could be
adversely affected.
Futures and Options on Futures. When deemed advisable
by SBMFM, the Fund
may enter into futures contracts or related options that are
traded on a
domestic exchange or board of trade. Such investments, if
any, by the Fund will
be made solely for the purpose of hedging against the
effects of changes in the
value of its portfolio securities due to anticipated changes
in interest rates
and market conditions and when the transactions are
economically appropriate to
the reduction of risks inherent in the management of the
Fund. The Fund may not
enter into futures and options contracts for which aggregate
initial margin
deposits and premiums paid for unexpired options exceed 5%
of the fair market
value of the Fund's assets, after taking into account
unrealized profits and
unrealized losses on futures contracts into which the Fund
has entered.
The use of futures contracts and options on those
contracts as a hedging
device involves several risks. No assurance can be given
that a correlation will
exist between price movements in the underlying securities
or index, on the one
23
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies (continued)
- - ------------------------------------------------------------
- - --------------------
hand, and price movements in the securities that are the
subject of the hedge,
on the other hand. Positions in futures contracts and
options on those contracts
may be closed out only on the exchange or board of trade on
which they were
entered into, and no assurance can be given that an active
market will exist for
a particular contract or option at any particular time.
Losses incurred in
hedging transactions and the costs of these transactions
will affect the Fund's
performance. Furthermore, because any interest earned from
transactions in
municipal bond index futures contracts and options on
interest rate futures
contracts will be taxable, it is anticipated that the Fund
will invest in these
instruments only in unusual circumstances, such as when
SBMFM anticipates an
extreme change in interest rates or market conditions.
Portfolio Transactions
The Fund's portfolio securities ordinarily are
purchased from and sold to
parties acting as either principal or agent. Newly issued
securities ordinarily
are purchased directly from the issuer or from an
underwriter; other purchases
and sales usually are placed with those dealers from which
it appears that the
best price or execution will be maintained.
Usually no brokerage commissions, as such, are paid by
the Fund for
purchases and sales undertaken through principal
transactions, although the
price paid usually includes an undisclosed compensation to
the dealer acting as
agent. The prices paid to underwriters of newly issued
securities usually
include a concession paid by the issuer to the underwriter,
and purchases of
after-market securities from dealers ordinarily are executed
at a price between
the bid and asked price.
Transactions on behalf of the Fund are allocated to
various dealers,
including Smith Barney and other affiliated brokers, by
SBMFM in its best
judgment. The primary consideration is prompt and effective
execution of orders
at the most favorable price. Subject to that primary
consideration, dealers may
be selected for research, statistical or other services to
enable SBMFM to
supplement its own research and analysis with the views and
information of other
securities firms.
- - ------------------------------------------------------------
- - --------------------
Municipal Securities
- - ------------------------------------------------------------
- - --------------------
The term "Municipal Securities" generally is understood
to include debt
obligations issued to obtain funds for various public
purposes, the interest on
which qualifies, in the opinion of bond counsel to the
issuer, as excluded from
gross income for Federal income tax purposes. In addition,
Municipal Securities
24
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Municipal Securities (continued)
- - ------------------------------------------------------------
- - --------------------
may include "private activity bonds" if the proceeds from
such bonds are used
for the construction, equipment, repair or improvement of
privately operated
industrial or commercial facilities, and the interest paid
on such bonds may be
excluded from gross income for Federal income tax purposes.
Current Federal tax
laws place substantial limitations on the aggregate amount
of such bonds that
any given state may issue.
Classifications
The two principal classifications of Municipal
Securities are "general
obligation" and "revenue" bonds. General obligation bonds
are secured by the
issuer's pledge of its full faith, credit and taxing power
for the payment of
principal and interest. Revenue bonds are payable from the
revenues derived from
a particular facility or class of facilities or, in some
cases, from the
proceeds of a special excise or other specific revenue
source, but not from the
general taxing power. Sizeable investments in such
obligations could involve an
increased risk to the Fund should any of such related
facilities experience
financial difficulties. Private activity bonds are in most
cases revenue bonds
and generally do not carry the pledge of the credit of the
issuing municipality.
There are, of course, variations in the security of
Municipal Securities, both
within a particular classification and between
classifications.
- - ------------------------------------------------------------
- - --------------------
Valuation of Shares
- - ------------------------------------------------------------
- - --------------------
The Fund's net asset value per share is determined as
of the close of
regular trading on the NYSE, on each day that the NYSE is
open, by dividing the
value of the Fund's net assets attributable to each Class by
the total number of
shares of that Class outstanding.
Generally, the Fund's investments are valued at market
value or, in the
absence of a market value with respect to any securities, at
fair value as
determined by or under the direction of the Trust's Board of
Trustees.
Short-term investments that mature in 60 days or less are
valued at amortized
cost whenever the Trust's Board of Trustees determine that
amortized cost
reflects fair value of those investments. Amortized cost
valuation involves
valuing an instrument at its cost initially and, thereafter,
assuming a constant
amortization to maturity of any discount or premium,
regardless of the impact of
fluctuating interest rates on the market value of the
instrument. Further
information regarding the Fund's valuation policies is
contained in the
Statement of Additional Information.
25
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes
- - ------------------------------------------------------------
- - --------------------
Dividends and Distributions
The Fund will be treated separately from the Trust's
other funds in
determining the amounts of dividends from investment income
and distributions of
capital gains payable to shareholders.
The Fund declares dividends from its net investment
income (that is, income
other than its net realized long- and short-term capital
gains) monthly and pays
dividends on the last Friday of the month. Distributions of
net realized long-
and short-term capital gains, if any, are declared and paid
annually after the
end of the fiscal year in which they have been earned.
If a shareholder does not otherwise instruct, dividends
and capital gains
distributions will be reinvested automatically in additional
shares of the same
Class at net asset value, subject to no sales charge or
CDSC. In addition, in
order to avoid the application of a 4% nondeductible excise
tax on certain
undistributed amounts of ordinary income and capital gains,
the Fund may make an
additional distribution shortly before December 31 of each
year of any
undistributed ordinary income or capital gains and expects
to make any other
distributions as are necessary to avoid the application of
this tax.
If, for any full fiscal year, the Fund's total
distributions exceed net
investment income and net realized capital gains, the excess
distributions
generally will be treated as a tax-free return of capital
(up to the amount of
the shareholder's tax basis in his or her shares). The
amount treated as a
tax-free return of capital will reduce a shareholder's
adjusted basis in his or
her shares. Pursuant to the requirements of the Investment
Company Act of 1940,
as amended ("1940 Act") and other applicable laws, a notice
will accompany any
distribution paid from sources other than net investment
income. In the event
the Fund distributes amounts in excess of its net investment
income and net
realized capital gains, such distributions may have the
effect of decreasing the
Fund's total assets, which may increase the Fund's expense
ratio.
The per share dividends on Class B shares and Class C
shares may be lower
than the per share dividends on Class A and Y shares
principally as a result of
the distribution fee applicable with respect to Class B and
Class C shares. The
per share dividends on Class A shares of the Fund may be
lower than the per
share dividends on Class Y principally as a result of the
service fee applicable
to Class A shares. Distributions of capital gains, if any,
will be in the same
amount for Classes A, B, C and Y.
26
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes (continued)
- - ------------------------------------------------------------
- - --------------------
Taxes
The Fund will be treated as a separate taxpayer with
the result that, for
Federal income tax purposes, the amount of investment income
and capital gains
earned by the Fund will be determined without regard to the
earnings of the
other funds of the Trust. The Fund has qualified and intends
to continue to
qualify each year as a "regulated investment company" under
the Internal Revenue
Code of 1986, as amended. Dividends paid from the Fund's net
investment income
(other than dividends derived from interest earned on
qualifying tax-exempt
obligations as described below) and distributions of the
Fund's net realized
short-term capital gains are taxable to shareholders as
ordinary income,
regardless of how long shareholders in the Fund have held
their shares and
whether the dividends or distributions are received in cash
or reinvested in
additional shares of the Fund. Distributions of the Fund's
net realized
long-term capital gains will be taxable to shareholders as
long-term capital
gains, regardless of how long shareholders have held their
shares of the Fund
and whether the distributions are received in cash or are
reinvested in
additional Fund shares. In addition, as a general rule, a
shareholder's gain or
loss on a sale or redemption of shares of the Fund will be a
long-term capital
gain or loss if the shareholder has held the shares for more
than one year and
will be a short-term capital gain or loss if the shareholder
has held the shares
for one year or less. The per share dividends and
distributions on Class A
shares will be higher than the per share dividends and
distributions on Class B
shares as a result of lower distribution and transfer agency
fees applicable to
Class A shares.
Dividends paid by the Fund that are derived from
interest earned on
qualifying tax-exempt obligations are expected to be "exempt-
interest" dividends
that shareholders may exclude from their gross incomes for
Federal income tax
purposes if the Fund satisfies certain asset percentage
requirements. Any
exempt-interest dividends of a Fund derived from interest on
Municipal
Securities, the interest on which is a specific tax
preference item for Federal
income tax purposes, will be a specific tax preference item
for purposes of the
Federal individual and corporate alternative minimum taxes.
In addition, all
exempt-interest dividends will be a component of the
"current earnings"
adjustment item for purposes of the Federal corporate
alternative minimum income
tax and corporate shareholders may incur a larger Federal
environmental tax
liability through the receipt of dividends and distributions
from the Fund.
Statements as to the tax status of the dividends and
distributions received
by shareholders of the Fund are mailed annually. These
statements set forth the
dollar amount of income excluded from Federal income taxes
and the dollar
amount, if any, subject to Federal income taxes. These
statements will also
27
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes (continued)
- - ------------------------------------------------------------
- - --------------------
designate the amount of exempt-interest dividends that are a
specific preference
item for purposes of the Federal individual and corporate
alternative minimum
taxes and will indicate the shareholder's share of the
investment expenses of
the Fund. The Fund notifies its shareholders annually as to
the interest
excluded from Federal income taxes earned by the Fund with
respect to those
states and possessions in which the Fund has or had
investments.
Shareholders should consult their tax advisors with
specific reference to
their own tax situations. Shareholders of the Fund should in
particular consult
their tax advisors about the status of the Fund's dividends
and distributions
for state and local tax purposes in order to assess the
consequences of
investing in the Fund under state and local laws generally
and to determine
whether dividends paid by the Fund are exempt from any
otherwise applicable
state or local income taxes.
Tax-Exempt vs. Taxable Income
The table below shows individual taxpayers how to
translate the tax savings
from investments such as the Fund into an equivalent return
from a taxable
investment. The yields used below are for illustration only
and are not intended
to represent current or future yields for the Fund, which
may be higher or lower
than those shown.
<TABLE>
<CAPTION>
Federal
Marginal
Tax-Exempt Yield
Taxable Income Tax Rate* 2.00% 3.00%
4.00% 5.00% 6.00% 7.00%
============================================================
============================
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Single Joint
Equivalent Taxable Yield
$ 22,750 $ 38,000 15.00% 2.67% 4.01%
5.35% 6.68% 8.02% 9.36%
22,751-55,100 38,001-91,850 28.00 3.16 4.73
6.31 7.89 9.47 11.05
55,101-115,000 91,851-140,000 31.00 3.29 4.94
6.59 8.23 9.88 11.5
115,001-250,000 140,001-250,000 36.00 3.55 5.33
7.10 8.88 10.651 2.43
250,000 over 250,000 39.60 3.76 5.54
7.53 9.41 11.29 13.17
============================================================
============================
</TABLE>
* The Federal tax rates shown are those currently in
effect for 1995. The
calculations assume that no income will be subject to
the Federal
alternative minimum tax.
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares
- - ------------------------------------------------------------
- - --------------------
General
The Fund offers four Classes of shares. Class A shares
are sold to
investors with an initial sales charge and Class B and Class
C shares are sold
without an initial sales charge but are subject to a CDSC
payable upon certain
28
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
redemptions. Class Y shares are sold without an initial
sales charge or a CDSC,
and are available only to investors investing a minimum of
$5,000,000. See
"Prospectus Summary -- Alternative Purchase Arrangements"
for a discussion of
factors to consider in selecting which Class of shares to
purchase.
Purchases of Fund shares must be made through a
brokerage account
maintained with Smith Barney, an Introducing Broker or an
investment dealer in
the selling group. When purchasing shares of the Fund,
investors must specify
whether the purchase is for Class A, Class B, Class C or
Class Y shares. No
maintenance fee will be charged by the Fund in connection
with a brokerage
account through which an investor purchases or holds shares.
Investors in Class A, Class B and Class C shares may
open an account by
making an initial investment of at least $1,000 for each
account in the Fund.
Investors in Class Y shares may open an account by making an
initial investment
of $5,000,000. Subsequent investments of at least $50 may be
made for all
Classes. For the Fund's Systematic Investment Plan, the
minimum initial
investment requirement for Class A, Class B and Class C
shares and the
subsequent investment requirement for all Classes is $50.
There are no minimum
investment requirements for Class A shares for employees of
Travelers and its
subsidiaries, including Smith Barney, unit holders who
invest distributions from
a UIT sponsored by Smith Barney and Trustees of the Trust
and their spouses and
children. The Fund reserves the right to waive or change
minimums, to decline
any order to purchase its shares and to suspend the offering
of shares from time
to time. Shares purchased will be held in the shareholder's
account by the
Fund's transfer agent, FDISG. Share certificates are issued
only upon a
shareholder's written request to FDISG.
Purchase orders received by the Fund or Smith Barney
prior to the close of
regular trading on the NYSE, on any day the Fund calculates
its net asset value,
are priced according to the net asset value determined on
that day. Orders
received by dealers or Introducing Brokers prior to the
close of regular trading
on the NYSE on any day the Fund calculates its net asset
value, are priced
according to the net asset value determined on that day,
provided the order is
received by the Fund or Smith Barney prior to Smith Barney's
close of business
(the "trade date"). Payment for Fund shares is due on the
third business day
after the trade date.
Systematic Investment Plan
Shareholders may make additions to their accounts at
any time by purchasing
shares through a service known as the Systematic Investment
Plan. Under the
Systematic Investment Plan, Smith Barney or FDISG is
authorized through
preauthorized transfers of $50 or more to charge the regular
bank account or
29
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
other financial institution indicated by the shareholder on
a monthly or
quarterly basis to provide systematic additions to the
shareholder's Fund
account. A shareholder who has insufficient funds to
complete the transfer will
be charged a fee of up to $25 by Smith Barney or FDISG. The
Systematic
Investment Plan also authorizes Smith Barney to apply cash
held in the
shareholder's Smith Barney brokerage account or redeem the
shareholder's shares
of a Smith Barney money market fund to make additions to the
account. Additional
information is available from the Fund or a Smith Barney
Financial Consultant.
Initial Sales Charge Alternative -- Class A Shares
The sales charges applicable to purchases of Class A
shares of the Fund are
as follows:
Dealers
Sales Charge Sales Charge
Reallowance
as % of as % of
as % of
Amount of Investment Offering Price Amount
Invested Offering Price
============================================================
====================
Less than $25,000 4.00% 4.17%
3.60%
$25,000-$49,999 3.50% 3.63%
3.15%
$50,000-$99,999 3.00% 3.09%
2.70%
$100,000-$249,999 2.50% 2.56%
2.25%
$250,000-$499,999 1.50% 1.52%
1.35%
$500,000 and over * *
*
============================================================
====================
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge equal or
exceed $500,000 in the
aggregate, will be made at net asset value without any
initial sales
charge, but will be subject to a CDSC of 1.00% on
redemptions made within
12 months of purchase. The CDSC on Class A shares is
payable to Smith
Barney, which compensates Smith Barney Financial
Consultants and other
dealers whose clients make purchases of $500,000 or
more. The CDSC is
waived in the same circumstances in which the CDSC
applicable to Class B
and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and
"Waivers of CDSC."
Members of the selling group may receive up to 90% of
the sales charge and
may be deemed to be underwriters of the Fund as defined in
the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the
aggregate of purchases
of Class A shares of the Fund made at one time by "any
person," which includes
an individual, his or her spouse and children, or a trustee
or other fiduciary
of a single trust estate or single fiduciary account. The
reduced sales charge
minimums may also be met by aggregating the purchase with
the net asset value of
all Class A shares held in funds sponsored by Smith Barney
that are offered with
a sales charge listed under "Exchange Privilege."
30
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
Initial Sales Charge Waivers
Purchases of Class A shares may be made at net asset
value without a sales
charge in the following circumstances: (a) sales of Class A
shares to Trustees
of the Trust, employees of Travelers and its subsidiaries,
or to the spouses and
children of such persons (including the surviving spouse of
a deceased Trustee
or employee, and retired Trustees or employees), employees
of members of the
National Association of Securities Dealers, Inc., or sales
to any trust,
pension, profit-sharing or other benefit plans 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
resold except through
redemption or repurchase; (b) offers of Class A shares to
any other investment
company in connection with the combination of such company
with the Fund by
merger, acquisition of assets or otherwise; (c) purchases of
Class A shares by
any client of a newly employed Smith Barney Financial
Consultant (for a period
up to 90 days from the commencement of the Financial
Consultant's employment
with Smith Barney), on the condition the purchase of Class A
shares is made with
the proceeds of the redemption of shares of a mutual fund
which (i) was
sponsored by the Financial Consultant's prior employer, (ii)
was sold to the
client by the Financial Consultant and (iii) was subject to
a sales charge; (d)
shareholders who have redeemed Class A shares in the Fund
(or Class A shares of
another fund of the Smith Barney Mutual Funds that are
offered with a sales
charge equal to or greater than the maximum sales charge of
the Fund) and who
wish to reinvest their redemption proceeds in the Fund,
provided the
reinvestment is made within 60 calendar days of the
redemption; (e) accounts
managed by registered investment advisory subsidiaries of
Travelers; and (f)
investments of distributions from a UIT sponsored by Smith
Barney. In order to
obtain such discounts, the purchaser must provide sufficient
information at the
time of purchase to permit verification that the purchase
would qualify for the
elimination of the sales charge.
Right of Accumulation
Class A shares of the Fund may be purchased by "any
person" (as defined
above) at a reduced sales charge or at net asset value
determined by aggregating
the dollar amount of the new purchase and the total asset
value of all Class A
shares of the Fund and of funds sponsored by Smith Barney
which are offered with
a sales charge listed under "Exchange Privilege" then held
by such person and
applying the sales charge applicable to such aggregate. In
order to obtain such
discount, the purchaser must provide sufficient information
at the time of
purchase to permit verification that the purchase qualifies
for the reduced
31
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
sales charge. The right of accumulation is subject to
modification or
discontinuance at any time with respect to all shares
purchased thereafter.
Group Purchases
Upon completion of certain automated systems, a reduced
sales charge or
purchase at net asset value will also be available to
employees (and partners)
of the same employer purchasing as a group, provided each
participant makes the
minimum initial investment required. The sales charge
applicable to purchases by
each member of such a group will be determined by the table
set forth above
under "Initial Sales Charge Alternatives -- Class A Shares,"
and will be based
upon the aggregate sales of Class A shares of Smith Barney
Mutual Funds offered
with a sales charge to, and share holdings of, all members
of the group. To be
eligible for such reduced sales charges or to purchase at
net asset value, all
purchases must be pursuant to an employer or partnership-
sanctioned plan meeting
certain requirements. One such requirement is that the plan
must be open to
specified partners or employees of the employer and its
subsidiaries, if any.
Such plan may, but is not required to, provide for payroll
deductions. Smith
Barney may also offer a reduced sales charge or net asset
value purchase for
aggregating related fiduciary accounts under such conditions
that Smith Barney
will realize economies of sales efforts and sales related
expenses. An
individual who is a member of a qualified group may also
purchase Class A shares
at the reduced sales charge applicable to the group as a
whole. The sales charge
is based upon the aggregate dollar value of Class A shares
offered with a sales
charge that have been previously purchased and are still
owned by the group,
plus the amount of the current purchase. A "qualified group"
is one which (a)
has been in existence for more than six months, (b) has a
purpose other than
acquiring Fund shares at a discount and (c) satisfies
uniform criteria which
enable Smith Barney to realize economies of scale in its
costs of distributing
shares. A qualified group must have more than 10 members,
must be available to
arrange for group meetings between representatives of the
Fund and the members,
and must agree to include sales and other materials related
to the Fund in its
publications and mailings to members at no cost to Smith
Barney. In order to
obtain such reduced sales charge or to purchase at net asset
value, the
purchaser must provide sufficient information at the time of
purchase to permit
verification that the purchase qualifies for the reduced
sales charge. Approval
of group purchase reduced sales charge plans is subject to
the discretion of
Smith Barney.
Letter of Intent
Class A Shares. 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
32
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
investments over a 13 month period, provided that the
investor refers to such
Letter when placing orders. For purposes of a Letter of
Intent, the "Amount
Invested" as referred to in the preceding sales charge table
includes purchases
of all Class A shares of the Fund and other funds of the
Smith Barney Mutual
Funds offered with a sales charge over a 13 month period
based on the total
amount of intended purchases plus the value of all Class A
shares previously
purchased and still owned. An alternative is to compute the
13 month period
starting up to 90 days before the date of execution of a
Letter of Intent. Each
investment made during the period receives the reduced sales
charge applicable
to the total amount of the investment goal. If the goal is
not achieved within
the period, the investor must pay the difference between the
sales charges
applicable to the purchases made and the charges previously
paid, or an
appropriate number of escrowed shares will be redeemed.
Please contact a Smith
Barney Financial Consultant or FDISG to obtain a Letter of
Intent application.
Class Y Shares. A Letter of Intent may also be used as
a way for investors
to meet the minimum investment requirement for Class Y
Shares. Such investors
must make an initial minimum purchase of $1,000,000 in Class
Yshares of the Fund
and agree to purchase a total of $5,000,000 of Class Yshares
of the same Fund
within six months from the date of the Letter. If a total
investment of
$5,000,000 is not made within the six-month period, all
Class Y shares purchased
to date will be transferred to Class A shares, where they
will be subject to all
fees (including a service fee of 0.15%) and expenses
applicable to the Fund's
Class A shares, which may include a CDSC of 1.00%. The Fund
expects that such
transfer will not be subject to Federal income taxes. Please
contact a Smith
Barney Financial Consultant or FDISGfor further information.
Deferred Sales Charge Alternatives
"CDSC Shares" are sold at net asset value next
determined without an
initial sales charge so that the full amount of an
investor's purchase payment
may be immediately invested in the Fund. A CDSC, however,
may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a)
Class B shares; (b)
Class C shares; and (c) Class A shares which when combined
with Class A shares
offered with a sales charge currently held by an investor
equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal
to the lesser of
the original cost of the shares being redeemed or their net
asset value at the
time of redemption. CDSC Shares that are redeemed will not
be subject to a CDSC
to the extent that the value of such shares represents: (a)
capital appreciation
of Fund assets; (b) reinvestment of dividends or capital
gain distributions; (c)
33
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
with respect to Class B shares, shares redeemed more than
five years after their
purchase; or (d) with respect to Class C shares and Class A
shares, that are
CDSC Shares, shares redeemed more than 12 months after their
purchase.
Class C and Class A shares that are CDSC Shares are
subject to a 1.00% CDSC
if redeemed within 12 months of purchase. In circumstances
in which the CDSC is
imposed on Class B shares, the amount of the charge will
depend on the number of
years since the shareholder made the purchase payment from
which the amount is
being redeemed. Solely for purposes of determining the
number of years since a
purchase payment, all purchase payments made during a month
will be aggregated
and deemed to have been made on the last day of the
preceding Smith Barney
statement month. The following table sets forth the rates of
the charge for
redemptions of Class B shares by shareholders.
Year Since Purchase
Payment was Made
CDSC
============================================================
====================
First
4.50%
Second
4.00%
Third
3.00%
Fourth
2.00%
Fifth
1.00%
Sixth
0.00%
Seventh
0.00%
Eighth
0.00%
============================================================
====================
Class B shares will convert automatically to Class A
shares eight years
after the date on which they were purchased and thereafter
will no longer be
subject to any distribution fees. There will also be
converted at that time such
proportion of Class B Dividend Shares owned by the
shareholder as the total
number of his or her Class B shares converting at the time
bears to the total
number of outstanding Class B shares (other than Class B
Dividend Shares) owned
by the shareholder. Shareholders who held Class B shares of
Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World
Income Fund") on
July 15, 1994 and who subsequently exchange those shares for
Class B shares of
the Fund will be offered the opportunity to exchange all
such Class B shares for
Class A shares of the Fund four years after the date on
which those shares were
deemed to have been purchased. Holders of such Class B
shares will be notified
of the pending exchange in writing approximately 30 days
before the fourth
anniversary of the purchase date and, unless the exchange
has been rejected in
writing, the exchange will occur on or about the fourth
anniversary date. See
"Prospectus Summary -- Alternative Purchase Arrangements --
Class B Shares
Conversion Feature."
34
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
The length of time that CDSC Shares acquired through an
exchange have been
held will be calculated from the date that the shares
exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and
Fund shares being
redeemed will be considered to represent, as applicable,
capital appreciation or
dividend and capital gain distribution reinvestments in such
other funds. For
Federal income tax purposes, the amount of the CDSC will
reduce the gain or
increase the loss, as the case may be, on the amount
realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100
Class B shares at
$10 per share for a cost of $1,000. Subsequently, the
investor acquired 5
additional shares through dividend reinvestment. During the
fifteenth month
after the purchase, the investor decided to redeem $500 of
his or her
investment. Assuming at the time of the redemption the net
asset value had
appreciated to $12 per share, the value of the investor's
shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied
to the amount which
represents appreciation ($200) and the value of the
reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class
B shares) for a
total deferred sales charge of $9.60.
Waivers of CDSC
The CDSC will be waived on: (a) exchanges (see
"Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than
1.00% per month of
the value of the shareholders's shares at the time the
withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") (provided, however,
that automatic cash
withdrawals in amounts equal to or less than 2.00% per month
of the value of the
shareholder's shares will be permitted for withdrawal plans
that were
established prior to November 7, 1994); (c) redemptions of
shares within 12
months following the death or disability of the shareholder;
(d) involuntary
redemptions; and (e) redemptions of shares in connection
with a combination of
the Fund with any investment company by merger, acquisition
of assets or
otherwise. In addition, a shareholder who has redeemed
shares from other funds
of the Smith Barney Mutual Funds may, under certain
circumstances, reinvest all
or part of the redemption proceeds within 60 days and
receive pro rata credit
for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation
(by Smith Barney in
the case of shareholders who are also Smith Barney clients
or by FDISG in the
case of all other shareholders) of the shareholder's status
or holdings, as the
case may be.
35
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege
- - ------------------------------------------------------------
- - --------------------
Except as otherwise noted below, shares of each Class
may be exchanged at
the net asset value next determined for shares of the same
Class in the
following funds of the Smith Barney Mutual Funds, to the
extent shares are
offered for sale in the shareholder's state of residence.
Exchanges of Class A,
Class B and Class C shares are subject to minimum investment
requirements and
all shares are subject to the other requirements of the Fund
into which
exchanges are made, and a sales charge differential may
apply.
Fund Name
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth
Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
* Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
** Smith Barney Funds, Inc. -- Income Return Account
Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government
Portfolio
++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury
Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities
Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
36
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
** Smith Barney Intermediate Maturity California
Municipals Fund
** Smith Barney Intermediate Maturity New York Municipals
Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
** Smith Barney Muni Funds -- California Limited Term
Portfolio
** Smith Barney Muni Funds -- Florida Limited Term
Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
** Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- Emerging Markets
Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government
Bond Portfolio
Smith Barney World Funds, Inc. -- International
Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity
Portfolio
Smith Barney World Funds, Inc. -- Pacific 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 Market 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 B and
Class Y shares of the
Fund.
** Available for exchange with Class A, Class C and Class
Y shares of the
Fund.
*** Available for exchange with Class A shares of the
Fund.
+ Available for exchange with Class B and Class C shares
of the Fund.
++ Available for exchange with Class A and Class Y shares
of the Fund.
37
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
Class A Exchanges. Class A shares of Smith Barney
Mutual Funds sold without
a sales charge or with a maximum sales charge of less than
the maximum charged
by other Smith Barney Mutual Funds will be subject to the
appropriate "sales
charge differential" upon the exchange of such shares for
Class A shares of a
fund sold with a higher sales charge. The "sales charge
differential" is limited
to a percentage rate no greater than the excess of the sales
charge rate
applicable to purchases of shares of the mutual fund being
acquired in the
exchange over the sales charge rate(s) actually paid on the
mutual fund shares
relinquished in the exchange and on any predecessor of those
shares. For
purposes of the exchange privilege, shares obtained through
automatic
reinvestment of dividends and capital gains distributions
are treated as having
paid the same sales charges applicable to the shares on
which the dividends or
distributions were paid; however, if no sales charge was
imposed upon the
initial purchase of the shares, any shares obtained through
automatic
reinvestment will be subject to a sales charge differential
upon exchange.
Class B Exchanges. In the event a Class B shareholder
(unless such
shareholder was a Class B shareholder of the Short-Term
World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or
her shares in any
of the funds imposing a higher CDSC than that imposed by the
Fund, the exchanged
Class B shares will be subject to the higher applicable
CDSC. Upon an exchange,
the new Class B shares will be deemed to have been purchased
on the same date as
the Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C
shares will be deemed
to have been purchased on the same date as the Class C
shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who
wish to exchange
all or a portion of their Class Y shares for Class Y shares
in any of the funds
identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange
Privilege. Although the
exchange privilege is an important benefit, excessive
exchange transactions can
be detrimental to the Fund's performance and its
shareholders. SBMFM may
determine that a pattern of frequent exchanges is excessive
and contrary to the
best interests of the Fund's other shareholders. In this
event, SBMFM will
notify Smith Barney that the Fund may, at its discretion,
decide to limit
additional purchases and/or exchanges by a shareholder. Upon
such a
determination, the Fund will provide notice in writing or by
telephone to the
shareholder at least 15 days prior to suspending the
exchange privilege and
during the 15 day period the shareholder will be required to
(a) redeem his or
her shares in the Fund or (b) remain invested in the Fund or
exchange into any
38
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
of the funds of the Smith Barney Mutual Funds ordinarily
available, which
position the shareholder would be expected to maintain for a
significant period
of time. All relevant factors will be considered in
determining what constitutes
an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by
telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange
Program." Exchanges
will be processed at the net asset value next determined,
plus any applicable
sales charge differential. Redemption procedures discussed
below are also
applicable for exchanging shares, and exchanges will be made
upon receipt of all
supporting documents in proper form. If the account
registration of the shares
of the fund being acquired is identical to the registration
of the shares of the
fund exchanged, no signature guarantee is required. A
capital gain or loss for
tax purposes will be realized upon the exchange, depending
upon the cost or
other basis of shares redeemed. Before exchanging shares,
investors should read
the current prospectus describing the shares to be acquired.
The Fund reserves
the right to modify or discontinue exchange privileges upon
60 days' prior
notice to shareholders.
- - ------------------------------------------------------------
- - --------------------
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 third day
following receipt of proper
tender, except on any days on which the NYSE is closed or as
permitted under the
1940 Act in extraordinary circumstances. Generally, if the
redemption proceeds
are remitted to a 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
39
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Redemption of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
proceeds for shares purchased by check, other than a
certified or official bank
check, will be remitted upon clearance of the check, which
may take up to ten
days or more.
Shares held by Smith Barney as custodian must be
redeemed by submitting a
written request to a Smith Barney Financial Consultant.
Shares other than those
held by Smith Barney as custodian may be redeemed through an
investor's
Financial Consultant, Introducing Broker or a dealer in a
selling group or by
submitting a written request for redemption to:
Smith Barney Tax-Exempt Income Fund
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134 Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class
and number or dollar
amount of shares to be redeemed, (b) identify the
shareholder's account number
and (c) be signed by each registered owner exactly as the
shares are registered.
If the shares to be redeemed were issued in certificate
form, the certificates
must be endorsed for transfer (or be accompanied by an
endorsed stock power) and
must be submitted to FDISG together with the redemption
request. Any signature
appearing on a written redemption request in excess of
$2,000, 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. Written redemption requests of $2,000 or less do
not require a
signature guarantee unless more than one such redemption
request is made in any
10-day period. Redemption proceeds will be mailed to an
investor's address of
record. FDISG 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 FDISG
receives all required
documents in proper form.
Automatic Cash Withdrawal Plan
The Fund offers shareholders an automatic cash
withdrawal plan, under which
shareholders who own shares with a value of at least $10,000
may elect to
receive cash payments of at least $50 monthly or quarterly.
The withdrawal plan
will be carried over on exchanges between funds or Classes
of the Fund. Any
applicable CDSC will not be waived on amounts withdrawn by a
shareholder that
exceed 1.00% per month of the value of the shareholder's
shares subject to the
CDSC at the time the withdrawal plan commences. For further
information
regarding the automatic cash withdrawal plan, shareholders
should contact a
Smith Barney Financial Consultant.
40
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Redemption of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
Telephone Redemption and Exchange Program
Shareholders who do not have a Smith Barney brokerage
account may be
eligible to redeem and exchange Fund shares by telephone. To
determine if a
shareholder is entitled to participate in this program, he
or she should contact
FDISG at 1-800-451-2010. Once eligibility is confirmed, the
shareholder must
complete and return a Telephone/Wire Authorization Form,
including a signature
guarantee that will be provided by FDISG upon request.
(Alternatively, an
investor may authorize telephone redemptions on the new
account application with
a signature guarantee when making his/her initial investment
in the Fund.)
Redemptions. Redemption requests of up to $10,000 of
any class or classes
of the Fund's shares may be made by eligible shareholders by
calling FDISG at
1-800-451-2010. Such requests may be made between 9:00 a.m.
and 4:00 p.m. (New
York City time) on any day the NYSE is open. Redemptions of
shares (i) by
retirement plans or (ii) for which certificates have been
issued are not
permitted under this program.
A shareholder will have the option of having the
redemption proceeds mailed
to his/her address of record or wired to a bank account
predesignated by the
shareholder. Generally, redemption proceeds will be mailed
or wired, as the case
may be, on the next business day following the redemption
request. In order to
use the wire procedures, the bank receiving the proceeds
must be a member of the
Federal Reserve System or have a correspondent with a member
bank. The Fund
reserves the right to charge shareholders a nominal fee for
each wire
redemption. Such charges, if any, will be assessed against
the shareholder's
account from which shares were redeemed. In order to change
the bank account
designated to receive redemption proceeds, a shareholder
must complete a new
Telephone/Wire Authorization Form and, for the protection of
the shareholder's
assets, will be required to provide a signature guarantee
and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by
telephone if the
account registration of the shares of the fund being
acquired is identical to
the registration of the shares of the fund exchanged. Such
exchange requests may
be made by calling FDISG at 1-800-451-2010 between 9:00 a.m.
and 4:00 p.m. (New
York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption
and Exchange Program.
Neither the Fund nor its agents will be liable for following
instructions
communicated by telephone that are reasonably believed to be
genuine. The Fund
and its agents will employ procedures designed to verify the
identity of the
caller and legitimacy of instructions (for example, a
shareholder's name and
account number will be required and phone calls may be
recorded). The Fund
41
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Redemption of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
reserves the right to suspend, modify or discontinue the
telephone redemption
and exchange program or to impose a charge for this service
at any time
following at least seven (7) days prior notice to
shareholders.
- - ------------------------------------------------------------
- - --------------------
Minimum Account Size
- - ------------------------------------------------------------
- - --------------------
The Fund reserves the right to involuntarily liquidate
any shareholder's
account in the Fund if the aggregate net asset value of the
shares held in the
Fund account is less than $500. (If a shareholder has more
than one account in
this Fund, each account must satisfy the minimum account
size.) The Fund,
however, will not redeem shares based solely on market
reductions in net asset
value. Before the Fund exercises such right, shareholders
will receive written
notice and will be permitted 60 days to bring accounts up to
the minimum to
avoid automatic redemption.
- - ------------------------------------------------------------
- - --------------------
Performance
- - ------------------------------------------------------------
- - --------------------
Yield
From time to time, the Fund may advertise the 30-day
"yield" and
"equivalent taxable yield" of each Class of shares. The
yield refers to the
income generated by an investment in those shares over the
30-day period
identified in the advertisement and is computed by dividing
the net investment
income per share earned by the Class during the period by
the maximum offering
price per share on the last day of the period. This income
is "annualized" by
assuming that the amount of income is generated each month
over a one-year
period and is compounded semi-annually. The annualized
income is then shown as a
percentage of the net asset value.
The equivalent taxable yield demonstrates the yield on
a taxable investment
necessary to produce an after-tax yield equal to the Fund's
tax-exempt yield for
each Class. It is calculated by increasing the yield shown
to the extent
necessary to reflect the payment of taxes at specified tax
rates. Thus, the
equivalent taxable yield always will exceed the Fund's
yield. For more
information on equivalent taxable yields, refer to the table
under "Dividends,
Distributions and Taxes."
Total Return
From time to time the Fund may include the Fund's total
return, average
annual total return and current dividend return in
advertisements and/or other
42
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Performance (continued)
- - ------------------------------------------------------------
- - --------------------
types of sales literature. These figures are computed
separately for Class A,
Class B, Class C and Class Y shares of the Fund. These
figures are based on
historical earnings and are not intended to indicate future
performance. Total
return is computed for a specified period of time assuming
deduction of the
maximum sales charge, if any, from the initial amount
invested and reinvestment
of all income dividends and capital gains distributions on
the reinvestment
dates at prices calculated as stated in this Prospectus,
then dividing the value
of the investment at the end of the period so calculated by
the initial amount
invested and subtracting 100%. The standard average annual
total return, as
prescribed by the SEC, is derived from this total return,
which provides the
ending redeemable value. Such standard total return
information may also be
accompanied with nonstandard total return information for
differing periods
computed in the same manner but without annualizing the
total return or taking
sales charges into account. The Fund calculates current
dividend return for each
Class by annualizing the most recent monthly distribution
and dividing by the
net asset value or the maximum public offering price
(including sales charge) on
the last day of the period for which current dividend return
is presented. The
current dividend return for each Class may vary from time to
time depending on
market conditions, the composition of its investment
portfolio and operating
expenses. These factors and possible differences in the
methods used in
calculating current dividend return should be considered
when comparing a Class'
current return to yields published for other investment
companies and other
investment vehicles. The Fund may also include comparative
performance
information in advertising or marketing its shares. Such
performance information
may include data from Lipper Analytical Services, Inc. or
similar independent
services that monitor the performance of mutual funds or
other industry
publications.
- - ------------------------------------------------------------
- - --------------------
Management of the Trust and the Fund
- - ------------------------------------------------------------
- - --------------------
Board of Trustees
Overall responsibility for management and supervision
of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all
significant
agreements between the Trust and companies that furnish
services to the Trust
and the Fund, including agreements with the Fund's
distributor, investment
adviser, administrator, custodian and transfer agent. The
day-to-day operations
of the Fund are delegated to the Fund's investment adviser
and administrator.
The Statement of Additional Information contains background
information
regarding each Trustee and executive officer of the Fund.
43
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Management of the Trust and the Fund (continued)
- - ------------------------------------------------------------
- - --------------------
Investment Adviser -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New
York 10013, serves as
the Fund's investment adviser. SBMFM is a wholly owned
subsidiary of Holdings.
SBMFM (through predecessor entities) has been in the
investment counseling
business since 1934 and is a registered investment adviser.
SBMFM renders
investment advice to investment companies that had aggregate
assets under
management as of September 30, 1995 in excess of $ 60
billion.
Subject to the supervision and direction of the Fund's
Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the
Fund's stated
investment objective and policies, makes investment
decisions for the Fund,
places orders to purchase and sell securities and employs
professional portfolio
managers and securities analysts who provide research
services to the Fund. For
investment advisory services rendered, the Fund pays SBMFM a
monthly fee at the
annual rate of 0.40% of the value of its average daily net
assets.
Portfolio Management
Lawrence T. McDermott, a Managing Director of Smith
Barney, has served as
Vice President and Investment Officer of the Fund since it
commenced operations
and manages the day to day operations of the Fund, including
making all
investment decisions.
Management's discussion and analysis, and additional
performance
information regarding the Fund during the fiscal year ended
July 31, 1995 is
included in the Annual Report dated July 31, 1995. A copy of
the Annual Report
may be obtained upon request and without charge from a Smith
Barney Financial
Consultant or by writing or calling the Fund at the address
or phone number
listed on page one of this Prospectus.
Administrator -- SBMFM
SBMFM also serves as the Fund's administrator and
oversees all aspects of
the Fund's administration. For administration services
rendered, the Fund pays
SBMFM a fee at the annual rate of 0.20% of the value of its
average daily net
assets.
- - ------------------------------------------------------------
- - --------------------
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
44
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Distributor (continued)
- - ------------------------------------------------------------
- - --------------------
requiring Smith Barney to take and pay for only such
securities as may be sold
to the public. Pursuant to a plan of distribution adopted by
the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
a service fee with
respect to Class A, Class B and Class C shares of the Fund
at the annual rate of
0.15% of the average daily net assets of the respective
Class. Smith Barney is
also paid a distribution fee with respect to Class B and
Class C shares at the
annual rate of 0.50% and 0.55%, respectively, of the average
daily net assets
attributable to those Classes. Class B shares which
automatically convert to
Class A shares eight years after the date of original
purchase will no longer be
subject to a distribution fee. The fees are used by Smith
Barney to pay its
Financial Consultants for servicing shareholder accounts
and, in the case of
Class B and Class C shares, to cover expenses primarily
intended to result in
the sale of those shares. These expenses include:
advertising expenses; the cost
of printing and mailing prospectuses to potential investors;
payments to and
expenses of Smith Barney Financial Consultants and other
persons who provide
support services in connection with the distribution of
shares; interest and/or
carrying charges; and indirect and overhead costs of Smith
Barney associated
with the sale of Fund shares, including lease, utility,
communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for
selling shares of a
Class include a commission or fee paid by the investor or
Smith Barney at the
time of sale and, with respect to Class A, Class B and Class
C shares, a
continuing fee for servicing shareholder accounts for as
long as a shareholder
remains a holder of that Class. Smith Barney Financial
Consultants may receive
different levels of compensation for selling different
Classes of shares.
Payments under the Plan with respect to Class B and
Class Cshares are not
tied exclusively to the distribution and shareholder service
expenses actually
incurred by Smith Barney and the payments may exceed
distribution expenses
actually incurred. The Fund's Board of Trustees will
evaluate the
appropriateness of the Plan and its payment terms on a
continuing basis and in
so doing will consider all relevant factors, including
expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the
CDSC.
- - ------------------------------------------------------------
- - --------------------
Additional Information
- - ------------------------------------------------------------
- - --------------------
The Trust was organized on March 12, 1985 under the
laws of the
Commonwealth of Massachusetts and is a business entity
commonly known as a
"Massachusetts Business Trust." Each Class of the Fund
represents identical
45
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Additional Information (continued)
- - ------------------------------------------------------------
- - --------------------
interests in the Fund's investment portfolio. As a result,
the Classes have the
same rights, privileges and preferences, except with respect
to: (a) the
designation of each Class; (b) the impact of the respective
sales charges, if
any, for each Class; (c) the distribution and/or service
fees, if any, borne by
each Class pursuant to the Plan; (d) the expenses allocable
exclusively to each
Class; (e) voting rights on matters exclusively affecting a
single Class; (f)
the exchange privileges of each Class; and (g) the
conversion feature of the
Class B shares.
The Trust's Board of Trustees does not anticipate that
there will be any
conflicts among the interests of the holders of the
different Classes of shares
of the Fund. The Trustees, on an ongoing basis, will
consider whether any such
conflict exists and, if so, take appropriate action.
When matters are submitted for shareholder vote,
shareholders of each Class
of each Fund will have one vote for each full share owned
and a proportionate,
fractional vote for any fractional share held of that Class.
Generally, shares
of the Trust vote by individual fund on all matters except
(a) matters affecting
only the interests of one or more of the funds, in which
case only shares of the
affected fund or funds would be entitled to vote or (b) when
the 1940 Act
requires that shares of the funds be voted in the aggregate.
Similarly, shares
of the Fund will be voted generally on a Fund-wide basis
except on matters
affecting the interests of one Class of shares.
The Trust does not hold annual shareholder meetings.
There normally will be
no meetings of shareholders for the purpose of electing
Trustees unless and
until such time as less than a majority of the Trustees
holding office have been
elected by shareholders. The Trustees will call a meeting
for any purpose upon
the written request of holders of at least 10% of the Fund's
outstanding shares
and the Fund will assist shareholders in calling such a
meeting as required by
the 1940 Act.
PNCBank, located at 17th and Chestnut Streets,
Philadelphia, PA 19103
serves as custodian of the Trust's investments.
FDISG, is located at Exchange Place, Boston,
Massachusetts 02109, and
serves as the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report
and an audited annual
report, which includes a listing of the investment
securities held by the Fund
at the end of the reporting period. In an effort to reduce
the Fund's printing
and mailing costs, the Trust plans to consolidate the
mailing of the Fund's
semi-annual and annual reports by household. This
consolidation means that a
household having multiple accounts with the identical
address of record will
receive a single copy of each report. Shareholders who do
not want this
46
<PAGE>
Smith Barney Tax-Exempt Income Fund
- - ------------------------------------------------------------
- - --------------------
Additional Information (continued)
- - ------------------------------------------------------------
- - --------------------
consolidation to apply to their account should contact their
Smith Barney
Financial Consultant or the Trust's transfer agent.
----------
No person has been authorized to give any information or to
make any
representations in connection with this offering other than
those contained in
this Prospectus and, if given or made, such other
information or representations
must not be relied upon as having been authorized by the
Trust or the
distributor. This Prospectus does not constitute an offer by
the Fund or the
distributor to sell or a solicitation of an offer to buy any
of the securities
offered hereby in any jurisdiction to any person to whom it
is unlawful to make
such an offer or solicitation in any such jurisdiction.
47
<PAGE>
SMITH BARNEY
- - ------------
A Member of
Traverlers Group [LOGO]
Tax-Exempt
Income
Fund
388 Greenwich Street
New
York, New York 10013
FD0214 11/95
<PAGE>
PROSPECTUS
SMITH BARNEY
High
Income
Fund
November 28, 1995
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus
November 28, 1995
- - ------------------------------------------------------------
- - --------------------
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney High Income Fund (the "Fund") seeks to
provide shareholders
with high current income by investing in a diversified
portfolio of
high-yielding corporate bonds, debentures and notes.
The Fund is one of a number of funds, each having
distinct investment
objectives and policies, making up the Smith Barney Income
Funds (the "Trust").
The Trust is an open-end management investment company
commonly referred to as a
mutual fund.
The Fund invests primarily in lower-rated bonds,
commonly known as "junk
bonds". Bonds of this type are subject to a greater risk of
loss of principal
and interest. Purchasers should carefully assess the risks
associated with an
investment in the Fund. See "Risk Factors and Special
Considerations."
This Prospectus sets forth concisely certain
information about the Fund and
the Trust, including sales charges, distribution and service
fees and expenses,
that prospective investors will find helpful in making an
investment decision.
Investors are encouraged to read this Prospectus carefully
and retain it for
future reference. Shares of other investment funds offered
by the Trust are
described in separate prospectuses that may be obtained by
calling the Trust at
the telephone number set forth above or by contacting a
Smith Barney Financial
Consultant.
Additional information about the Fund and the Trust is
contained in a
Statement of Additional Information dated November 28, 1995,
as amended or
supplemented from time to time, that is available upon
request and without
charge by calling or writing the Trust at the telephone
number or address set
forth above or by contacting a Smith Barney Financial
Consultant. The Statement
of Additional Information has been filed with the Securities
and Exchange
Commission (the "SEC") and is incorporated by reference into
this Prospectus in
its entirety.
Smith Barney Inc.
Distributor
Smith Barney Mutual Funds Management Inc.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Table of Contents
- - ------------------------------------------------------------
- - --------------------
Prospectus Summuary
3
- - ------------------------------------------------------------
- - --------------------
Financial Highlights
4
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies
5
- - ------------------------------------------------------------
- - --------------------
Valuation of Shares
10
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes
10
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares
11
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege
10
- - ------------------------------------------------------------
- - --------------------
Redemption of Shares
12
- - ------------------------------------------------------------
- - --------------------
Minimum Account Size
18
- - ------------------------------------------------------------
- - --------------------
Performance
19
- - ------------------------------------------------------------
- - --------------------
Management of the Trust and Fund
19
- - ------------------------------------------------------------
- - --------------------
Distributor
20
- - ------------------------------------------------------------
- - --------------------
Additional Information
21
- - ------------------------------------------------------------
- - --------------------
============================================================
====================
No person has been authorized to give any information
or to make any
representations in connection with this offering other than
those contained in
this Prospectus and, if given or made, such other
information and
representations must not be relied upon as having been
authorized by the Fund or
the Distributor. This Prospectus does not constitute an
offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any
of the securities
offered hereby in any jurisdiction to any person to whom it
is unlawful to make
such offer or solicitation in such jurisdiction.
============================================================
====================
2
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary
- - ------------------------------------------------------------
- - --------------------
The following summary is qualified in its entirety by
detailed information
appearing elsewhere in this Prospectus and in the Statement
of Additional
Information. Cross references in this summary are to
headings in the Prospectus.
See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified
management investment
company that seeks high current income by investing
primarily in a diversified
portfolio of high-yielding corporate bonds, debentures and
notes denominated in
U.S. dollars and foreign currencies. Although growth of
capital is not an
investment objective of the Fund, Smith Barney Mutual Funds
Management Inc.
("SBMFM") may consider potential for growth as one factor,
among others, in
selecting investments for the Fund. Up to 40% of the Fund's
assets may be
invested in fixed-income obligations of foreign issuers, and
up to 20% of its
assets may be invested in common stock or other equity or
equity-related
securities, including convertible securities, preferred
stock, warrants and
rights. Securities purchased by the Fund generally will be
rated in the lower
rating categories of recognized rating agencies, as low as
Caa by Moody's
Investors Service, Inc. ("Moody's") or D by Standard &
Poor's Corporation
("S&P"), or in unrated securities of comparable quality. See
"Investment
Objective and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several
classes of shares
("Classes") to investors designed to provide them with the
flexibility of
selecting an investment best suited to their needs. The
general public is
offered three Classes of shares: Class A shares, Class B
shares and Class C
shares, which differ principally in terms of sales charges
and rate of expenses
to which they are subject. A fourth Class of shares, Class Y
shares, is offered
only to investors meeting an initial investment minimum of
$5,000,000. In
addition, a fifth Class, Class Z shares, which is offered
pursuant to a separate
prospectus, is offered exclusively to (a) tax-exempt
employee benefit and
retirement plans of Smith Barney Inc. ("Smith Barney") and
its affiliates and
(b) unit investment trusts ("UITs") sponsored by Smith
Barney and its
affiliates. See "Purchase of Shares" and "Redemption of
Shares."
Class A Shares. Class A shares are sold at net asset
value plus an initial
sales charge of up to 4.50% and are subject to an annual
service fee of 0.25% of
the average daily net assets of the Class. The initial sales
charge may be
reduced or waived for certain purchases. Purchases of Class
A shares, which when
combined with current holdings of Class A shares offered
with a sales charge
equal or exceed $500,000 in the aggregate, will be made at
net asset value with
no initial sales charge, but will be subject to a contingent
deferred sales
3
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
charge ("CDSC") of 1.00% on redemptions made within 12
months of purchase. See
"Prospectus Summary -- Reduced or No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset
value subject to a
maximum CDSC of 4.50% of redemption proceeds, declining by
0.50% the first year
after purchase and 1.00% each year thereafter to zero. This
CDSC may be waived
for certain redemptions. Class B shares are subject to an
annual service fee of
0.25% and an annual distribution fee of 0.50% of the average
daily net assets of
the Class. The Class B shares' distribution fee may cause
that Class to have
higher expenses and pay lower dividends than Class A shares.
Class B Shares. Conversion Feature. Class B shares will
convert
automatically to Class A shares, based on relative net asset
value, eight years
after the date of the original purchase. Upon conversion,
these shares will no
longer be subject to an annual distribution fee. In
addition, a certain portion
of Class B shares that have been acquired through the
reinvestment of dividends
and distributions ("Class B Dividend Shares") will be
converted at that time.
See "Purchase of Shares -- Deferred Sales Charge
Alternatives."
Class C Shares. Class C shares are sold at net asset
value with no initial
sales charge. They are subject to an annual service fee of
0.25% and an annual
distribution fee of 0.45% of the average daily net assets of
the Class, and
investors pay a CDSC of 1.00% if they redeem Class C shares
within 12 months of
purchase. The CDSC may be waived for certain redemptions.
The Class C shares'
distribution fee may cause that Class to have higher
expenses and pay lower
dividends than Class A shares. Purchases of Fund shares,
which when combined
with current holdings of Class C shares of the Fund equal or
exceed $500,000 in
the aggregate, should be made in Class A shares at net asset
value with no sales
charge, and will be subject to a CDSC of 1.00% on
redemptions made within 12
months of purchase.
Class Y Shares. Class Y shares are available only to
investors meeting an
initial investment minimum of $5,000,000. Class Y shares are
sold at net asset
value with no initial sales charge or CDSC. They are not
subject to any service
or distribution fee.
In deciding which Class of Fund shares to purchase,
investors should
consider the following factors, as well as any other
relevant facts and
circumstances:
Intended Holding Period. The decision as to which Class
of shares is more
beneficial to an investor depends on the amount and intended
length of his or
her investment. Shareholders who are planning to establish a
program of regular
4
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
investment may wish to consider Class A shares; as the
investment accumulates
shareholders may qualify for reduced sales charges and the
shares are subject to
lower ongoing expenses over the term of the investment. As
an investment
alternative, Class B and Class C shares are sold without any
initial sales
charge so the entire purchase price is immediately invested
in the Fund. Any
investment return on these additional invested amounts may
partially or wholly
offset the higher annual expenses of these Classes. Because
the Fund's future
return cannot be predicted, however, there can be no
assurance that this would
be the case.
Finally, investors should consider the effect of the
CDSC period and any
conversion rights of the Classes in the context of their own
investment time
frame. For example, while Class C shares have a shorter CDSC
period than Class B
shares, they do not have a conversion feature, and
therefore, are subject to an
ongoing distribution fee. Thus, Class B shares may be more
attractive than Class
C shares to investors with longer term investment outlooks.
Investors investing a minimum of $5,000,000 must
purchase Class Y shares,
which are not subject to an initial sales charge, CDSC or
service or
distribution fee. The maximum purchase amount for Class A
shares is $4,999,999,
Class B shares is $249,999 and Class C shares is $499,999.
There is no maximum
purchase amount for Class Y shares.
Reduced or No Initial Sales Charge. The initial sales
charge on Class A
shares may be waived for certain eligible purchasers, and
the entire purchase
price will be immediately invested in the Fund. In addition,
Class A share
purchases, which when combined with current holdings of
Class A shares offered
with a sales charge equal or exceed $500,000 in the
aggregate, may be made at
net asset value with no initial sales charge, but will be
subject to a CDSC of
1.00% on redemptions made within 12 months of purchase. The
$500,000 aggregate
investment may be met by adding the purchase to the net
asset value of all Class
A shares held in funds sponsored by Smith Barney listed
under "Exchange
Privilege." Class A share purchases may also be eligible for
a reduced initial
sales charge. See "Purchase of Shares." Because the ongoing
expenses of Class A
shares may be lower than those for Class B and Class C
shares, purchasers
eligible to purchase Class A shares at net asset value or at
a reduced sales
charge should consider doing so.
Smith Barney Financial Consultants may receive
different compensation for
selling each Class of shares. Investors should understand
that the purpose of
the CDSC on the Class B and Class C shares is the same as
that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust
and the Fund" for a
complete description of the sales charges and service and
distribution fees for
each Class of shares and "Valuation of Shares," "Dividends,
Distributions and
5
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
Taxes" and "Exchange Privilege" for other differences
between the Classes of
shares.
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to
participate in the
Smith Barney 401(k) Program, which is generally designed to
assist plan sponsors
in the creation and operation of retirement plans under
Section 401(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), as
well as other types
of participant directed, tax-qualified employee benefit
plans (collectively,
"Participating Plans"). Class A, Class B, Class C and Class
Y shares are
available as investment alternatives for Participating
Plans. See "Purchase of
Shares - Smith Barney 401(k) Program."
PURCHASE OF SHARES Shares may be purchased through the
Fund's
distributor,
Smith Barney, a broker that clears securities transactions
through Smith
Barney
on a fully disclosed basis (an "Introducing Broker") or an
investment
dealer in
the selling group. Direct purchases by certain retirement
plans may be made
through the Fund's transfer agent, First Data Investor
Services Group,
Inc.
("FDISG"). See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class
C shares
may open
an account by making an initial investment of at least
$1,000 for each
account,
or $250 for an individual retirement account ("IRA") or a
Self-Employed
Retirement Plan. Investors in Class Y shares may open an
account for an
initial
investment of $5,000,000. Subsequent investments of at least
$50 may be
made for
all Classes. For participants in retirement plans qualified
under Section
403(b)(7) or Section 401(a) of the Code, the minimum initial
investment
requirement for Class A, Class B and Class C shares and the
subsequent
investment requirement for all Classes is $25. The minimum
initial
investment
requirement for Class A, Class B and Class C shares and the
subsequent
investment requirement for all Classes through the
Systematic Investment Plan
described below is $50. There is no minimum investment
requirement for Class A
for unitholders who invest distributions from a UIT
sponsored by Smith Barney.
See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a
Systematic Investment
Plan under which they may authorize the automatic placement
of a purchase order
each month or quarter for Fund shares in an amount of at
least $50. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the
New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase
of Shares" and
"Redemption of Shares."
6
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
MANAGEMENT OF THE FUND SBMFM serves as the Fund's
investment adviser and
administrator. SBMFM provides investment advisory and
management services to
investment companies affiliated with Smith Barney. SBMFM is
a wholly owned
subsidiary of Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly
owned subsidiary of Travelers Group Inc. ("Travelers"), a
diversified financial
services holding company engaged, through its subsidiaries,
principally in four
business segments: Investment Services, Consumer Finance
Services, Life
Insurance Services and Property & Casualty Insurance
Services.
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for
shares of the same
Class of certain other funds of the Smith Barney Mutual
Funds at the respective
net asset values next determined, plus any applicable sales
charge differential.
See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the
prior day generally is
quoted daily in the financial section of most newspapers and
is also available
from Smith Barney Financial Consultants. See "Valuation of
Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment
income are paid
monthly and distributions of net realized capital gains are
paid annually. See
"Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid
on shares of a Class
will be reinvested automatically, unless otherwise specified
by an investor, in
additional shares of the same Class at current net asset
value. Shares acquired
by dividend and distribution reinvestments will not be
subject to any sales
charge or CDSC. Class B shares acquired through dividend and
distribution
reinvestments will become eligible for conversion to Class A
shares on a pro
rata basis. See "Dividends, Distributions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no
assurance that the
Fund's investment objective will be achieved. The market
value of fixed-income
securities, which constitute a major part of the investments
of the Fund, may
vary inversely in response to changes in prevailing interest
rates. The foreign
securities in which the Fund may invest may be subject to
certain risks in
addition to those inherent in domestic investments. The
medium- or lower-rated
securities in which the Fund may invest, some of which have
speculative
characteristics, may be subject to greater market
fluctuations and greater risk
of loss of income or principal than higher-rated securities.
The Fund may employ
investment techniques which involve certain other risks,
including entering into
repurchase agreements, engaging in when-issued and delayed-
delivery
transactions, lending portfolio securities and entering into
options on futures
contracts and currencies. See "Investment Objective and
Management Policies."
7
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
THE FUND'S EXPENSES The following expense table lists the
costs and expenses
that an investor will incur either directly or indirectly as
a shareholder of
the Fund, based on the maximum sales charge or maximum CDSC
that may be incurred
at the time of purchase or redemption and, unless otherwise
noted, the Fund's
operating expenses for its most recent fiscal year:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
============================================================
============================================================
===
<S>
<C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price)
4.50% None None None
Maximum CDSC
(as a percentage of original cost or redemption
proceeds, whichever is lower)
None* 4.50% 1.00% None
============================================================
============================================================
===
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees
0.70% 0.70% 0.70% 0.70%
12b-1 fees**
0.25 0.75 0.70 None
Other expenses
0.16 0.16 0.16 0.16
============================================================
============================================================
===
TOTAL FUND OPERATING EXPENSES
1.11% 1.61% 1.56% 0.86%
============================================================
============================================================
===
</TABLE>
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge, equal or
exceed $500,000 in the
aggregate, will be made at net asset value with no
sales charge, but will
be subject to a CDSC of 1.00% on redemptions made
within 12 months.
** Upon conversion of Class B shares to Class A shares,
such shares will no
longer be subject to a distribution fee. Class C shares
do not have a
conversion feature and, therefore, are subject to an
ongoing distribution
fee. As a result, long-term shareholders of Class C
shares may pay more
than the economic equivalent of the maximum front-end
sales charge
permitted by the National Association of Securities
Dealers, Inc. (the
"NASD").
The sales charge and CDSC set forth in the above table
are the maximum
charges imposed on purchases or redemptions of Fund shares
and investors may
actually pay lower or no charges depending on the amount
purchased and, in the
case of Class B, Class C and certain Class A shares, the
length of time the
shares are held and whether the shares are held through the
Smith Barney 401(k)
Program. See "Purchase of Shares" and "Redemption of
Shares." Smith Barney
receives an annual 12b-1 service fee of 0.25% of the value
of average daily net
assets of Class A shares. Smith Barney also receives, with
respect to Class B
shares, an annual 12b-1 fee of 0.75% of the value of average
daily net assets of
that Class, consisting of a 0.50% distribution fee and a
0.25% service fee. For
Class C shares, Smith Barney receives an annual 12b-1 fee of
0.70% of the value
of average daily net assets of this Class, consisting of a
0.45% distribution
fee and a 0.25% service fee. "Other expenses" in the above
table include fees
for shareholder services, custodial fees, legal and
accounting fees, printing
costs and registration fees.
8
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Prospectus Summary (continued)
- - ------------------------------------------------------------
- - --------------------
EXAMPLE The following example is intended to assist an
investor in
understanding the various costs that an investor in the Fund
will bear directly
or indirectly. The example assumes payment by the Fund of
operating expenses at
the levels set forth in the table above. See "Purchase of
Shares," "Redemption
of Shares" and "Management of the Trust and the Fund."
1 year 3 years
5 years 10 years*
============================================================
====================
An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return
and (2) redemption at the end of
each time period:
Class A 56 79
103 174
Class B 66 81
98 177
Class C 26 49
85 186
Class Y 9 27
48 106
An investor would pay the following
expenses on the same investment,
assuming the same annual return and
no redemption:
Class A 56 79
103 174
Class B 16 51
88 177
Class C 16 49
85 186
Class Y 9 27
48 106
============================================================
====================
* Ten-year figures assume conversion of Class B shares to
Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to
compare expense
levels of funds with different fee structures over varying
investment periods.
To facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. This example should not be
considered a
representation of past or future expenses and actual
expenses may be greater or
less than those shown.
9
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights
- - ------------------------------------------------------------
- - --------------------
The following information for the fiscal year ended July 31,
1995 has been
audited by KPMG Peat Marwick, LLP, independent accountants,
whose report thereon
appears in the Fund's Annual Report dated July 31, 1995. The
following
information for the fiscal years ended July 31, 1987 through
July 31, 1994 has
been audited by Coopers & Lybrand L.L.P. The information set
out below should be
read in conjunction with the financial statements and
related notes that also
appear in the Fund's Annual Report, which is incorporated by
reference into the
Statement of Additional Information.
For a Class A share of beneficial interest outstanding
throughout each period:
<TABLE>
<CAPTION>
Year
Year Period
Ended
Ended Ended
7/31/95 7/31/94 7/31/93(1)
============================================================
====================================
<S> <C>
<C> <C>
Net Asset Value, Beginning of Period $11.16
$12.01 $11.03
- - ------------------------------------------------------------
- - ------------------------------------
Income From Operations:
Net investment income 1.08
1.08 0.75
Net realized and unrealized gain (loss)
on investments
(0.02) (0.81) 1.09
- - ------------------------------------------------------------
- - ------------------------------------
Total Income From Operations 1.06
0.27 1.84
- - ------------------------------------------------------------
- - ------------------------------------
Less Distributions From:
Net investment income
(1.05) (1.06) (0.82)
Overdistribution of net investment income --
(0.06) (0.04)
Capital
(0.07) -- --
- - ------------------------------------------------------------
- - ------------------------------------
Total Distributions
(1.12) (1.12) (0.86)
- - ------------------------------------------------------------
- - ------------------------------------
Net Asset Value, End of Period $11.10
$11.16 $12.01
- - ------------------------------------------------------------
- - ------------------------------------
Total Return++
10.28% 2.11% 17.29%+++
- - ------------------------------------------------------------
- - ------------------------------------
Net Assets, End of Period (000s) $316,716
$233,678 $242,371
- - ------------------------------------------------------------
- - ------------------------------------
Ratios to Average Net Assets:
Expenses
1.11% 1.11% 1.16%+
Net investment income 10.03
9.27 9.52+
- - ------------------------------------------------------------
- - ------------------------------------
Portfolio Turnover Rate 60%
98% 95%
============================================================
====================================
</TABLE>
(1) For the period from November 6, 1992 (inception date)
to July 31, 1993.
+++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charge.
10
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights (continued)
- - ------------------------------------------------------------
- - --------------------
For a Class B share of beneficial interest outstanding
throughout each period:
<TABLE>
<CAPTION>
Year
Year Year Year Year
Ended
Ended Ended Ended Ended
7/31/95
7/31/94 7/31/93 7/31/92
7/31/91
============================================================
============================================================
============
<S> <C>
<C> <C> <C> <C>
Net Asset Value,
Beginning of Period $11.16
$12.01 $11.15 $10.05 $10.59
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Income From Operations:
Net investment income 1.03
1.02 1.08 1.11 1.27
Net realized and unrealized
gain (loss) on investments (0.02)
(0.81) 0.88 1.16 (0.52)
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Total Income From Operations 1.01
0.21 1.96 2.27 0.75
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Less Distributions From:
Net investment income (0.99)
(1.00) (1.05) (1.11) (1.27)
Overdistribution of net
investment income --
(0.06) (0.05) -- --
Capital (0.07)
- - -- -- (0.06) (0.02)
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Total Distributions (1.06)
(1.06) (1.10) (1.17) (1.29)
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Net Asset Value, End of Period $11.11
$11.16 $12.01 $11.15 $10.05
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Total Return++ 9.77%
1.60% 18.55% 23.86% 8.82%
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Net Assets, End of Period (000s) $478,499
$509,608 $448,639 $304,035
$238,588
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Ratios to Average Net Assets:
Expenses 1.61%
1.60% 1.66% 1.65%# 1.75%
Net investment income 9.52
8.77 9.02 10.52 13.30
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Portfolio Turnover Rate 60%
98% 95% 137% 112%
============================================================
============================================================
============
</TABLE>
++ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charge.
# The annualized operating expense ratio excludes
interest expense. The
annualized ratio including interest expense was 1.66%
for the year ended
July 31, 1992.
11
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights (continued)
- - ------------------------------------------------------------
- - --------------------
For a Class B share of beneficial interest outstanding
throughout each period:
<TABLE>
<CAPTION>
Year Year Year
Period
Ended Ended Ended
Ended
7/31/90 7/31/89 7/31/88
7/31/87**
============================================================
============================================================
============
<S> <C>
<C> <C> <C>
Net Asset Value, Beginning of Period
$13.36 $14.01 $14.26
$14.00
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Income From Operations
Net investment income
1.53 1.61 1.53
1.03
Net realized and unrealized
gain (loss) on investments
(2.68) (0.73) (0.20)
0.29
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Total Income From Operations
(1.15) 0.88 1.33
1.32
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Less Distributions From:
Net investment income
(1.61) (1.53) (1.54)
(1.03)
Overdistribution of net
investment income
- - -- -- (0.04)
(0.03)
Capital
(0.01) -- --
- - --
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Total Distributions
(1.62) (1.53) (1.58)
(1.06)
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Net Asset Value, End of Period
$10.59 $13.36 $14.01
$14.26
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Total Return++
(8.66)% 6.60% 10.06%
9.55%
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Net Assets, End of Period (000s)
$323,139 $609,862 $434,272
$221,683
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Ratios to Average Net Assets:
Expenses
1.68% 1.63% 1.64%
1.74%+
Net investment income
12.93 11.93 11.12
9.49+
- - ------------------------------------------------------------
- - ------------------------------------------------------------
- - ------------
Portfolio Turnover Rate
43% 74% 5%
19%
============================================================
============================================================
============
</TABLE>
+ Annualized.
** The Fund commenced operations on September 2, 1986. On
November 6, 1992,
the Fund commenced selling Class A shares. Those shares
in existence prior
to November 6, 1992 were designated as Class B shares.
++ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charge.
12
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Financial Highlights (continued)
- - ------------------------------------------------------------
- - --------------------
For a Class C share(1) of beneficial interest and Class Y
share of beneficial
interest outstanding throughout each period:
Class C
Shares Class Y Share
Period
Ended Period Ended
7/31/95(2) 7/31/95(3)
============================================================
====================
Net Asset Value, Beginning of Period $10.90
$10.88
- - ------------------------------------------------------------
- - --------------------
Income From Operations:
Net investment income 0.95
0.09
Net realized and unrealized gain on investments 0.23
0.23
- - ------------------------------------------------------------
- - --------------------
Total Income From Operations 1.18
0.32
- - ------------------------------------------------------------
- - --------------------
Less Distributions From:
Net investment income (0.90)
(0.03)
Overdistribution of net investment income --
- - --
Capital (0.07)
(0.07)
- - ------------------------------------------------------------
- - --------------------
Total Distributions (0.97)
(0.10)
- - ------------------------------------------------------------
- - --------------------
Net Asset Value, End of Period $11.11
$11.10
- - ------------------------------------------------------------
- - --------------------
Total Return++
11.50%+++ 2.91%+
- - ------------------------------------------------------------
- - --------------------
Net Assets, End of Period (000s) $6,011
$10,306
- - ------------------------------------------------------------
- - --------------------
Ratios to Average Net Assets:
Expenses
1.56%+ 0.86%+
Net investment income 9.58+
10.28+
- - ------------------------------------------------------------
- - --------------------
Portfolio Turnover Rate 60%
60%
============================================================
====================
(1) On November 7, 1994 the former Class D shares were
renamed Class C shares.
(2) For the period from August 24, 1994 (inception date) to
July 31, 1995.
(3) For the period from April 28, 1995 (inception date) to
July 31, 1995.
+++ Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charge.
13
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Management Policies
- - ------------------------------------------------------------
- - --------------------
The Fund's investment objective is high current income.
The Fund's
investment objective may be changed only with the approval
of the holders of a
majority of the Fund's outstanding shares. There can be no
assurance that the
Fund will achieve its objective. Although growth of capital
is not an investment
objective of the Fund, SBMFM may consider potential for
growth as one factor,
among others, in selecting investments for the Fund. The
Fund will seek high
current income by investing, under normal circumstances, at
least 65% of its
assets in high-yielding corporate bonds, debentures and
notes denominated in
U.S. dollars or foreign currencies. Up to 40% of the Fund's
assets may be
invested in fixed-income obligations of foreign issuers, and
up to 20% of its
assets may be invested in common stock or other equity or
equity-related
securities, including convertible securities, preferred
stock, warrants and
rights. Securities purchased by the Fund generally will be
rated in the lower
rating categories of recognized rating agencies, as low as
Caa by Moody's or D
by S&P, or in unrated securities that SBMFM deems of
comparable quality.
However, the Fund will not purchase securities rated lower
than B by both
Moody's and S&P unless, immediately after such purchase, no
more than 10% of its
total assets are invested in such securities. The Fund may
hold securities with
higher ratings when the yield differential between low-rated
and higher-rated
securities narrows and the risk of loss may be reduced
substantially with only a
relatively small reduction in yield. The Fund also may
invest in higher-rated
securities when SBMFM believes that a more defensive
investment strategy is
appropriate in light of market or economic conditions. The
Fund also may lend
its portfolio securities, purchase or sell securities on a
when-issued or
delayed-delivery basis and write covered call options on
securities. In order to
mitigate the effects of uncertainty in future exchange
rates, the Fund may
engage in currency exchange transactions and purchase
options on foreign
currencies. The Fund also may hedge against the effects of
changes in the value
of its investments by purchasing put and call options on
interest rate futures
contracts. Special considerations associated with the Fund's
investments are
described below.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the
Fund may employ,
among others, one or more of the strategies set forth below.
More detailed
information concerning these strategies and their related
risks is contained in
the Statement of Additional Information.
Covered Option Writing. The Fund may write call options
on securities. The
Fund realizes fees (referred to as "premiums") for granting
the rights evidenced
by the options. A call option embodies the right of its
purchaser to compel the
writer of the option to sell to the option holder an
underlying security at a
14
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
specified price at any time during the option period. Thus,
the purchaser of a
call option written by the Fund has the right to purchase
from the Fund the
underlying security owned by the Fund at the agreed-upon
price for a specified
time period.
Upon the exercise of a call option written by the Fund,
the Fund may suffer
a loss equal to the excess of the security's market value at
the time of the
option exercise over the Fund's acquisition cost of the
security, less the
premium received for writing the option.
The Fund will write only covered options. Accordingly,
whenever the Fund
writes a call option, it will continue to own or have the
present right to
acquire the underlying security for as long as it remains
obligated as the
writer of the option.
The Fund may engage in a closing purchase transaction
to realize a profit
or to unfreeze an underlying security (thereby permitting
its sale or the
writing of a new option on the security prior to the
outstanding option's
expiration). To effect a closing purchase transaction, the
Fund would purchase,
prior to the holder's exercise of an option the Fund has
written, an option of
the same series as that on which the Fund desires to
terminate its obligation.
The obligation of the Fund under an option it has written
would be terminated by
a closing purchase transaction, but the Fund would not be
deemed to own an
option as the result of the transaction. There can be no
assurance the Fund will
be able to effect closing purchase transactions at a time
when it wishes to do
so. To facilitate closing purchase transactions, however,
the Fund ordinarily
will write options only if a secondary market for the
options exists on a
domestic securities exchange or in the over-the-counter
market.
Convertible Securities and Synthetic Convertible
Securities. Convertible
securities are fixed-income securities that may be converted
at either a stated
price or stated rate into underlying shares of common stock.
Convertible
securities have general characteristics similar to both
fixed-income and equity
securities. Although to a lesser extent than with fixed-
income securities
generally, the market value of convertible securities tends
to decline as
interest rates increase and, conversely, tends to increase
as interest rates
decline. In addition, because of the conversion feature, the
market value of
convertible securities tends to vary with fluctuations in
the market value of
the underlying common stocks and, therefore, also will react
to variations in
the general market for equity securities. A unique feature
of convertible
securities is that as the market price of the underlying
common stock declines,
convertible securities tend to trade increasingly on a yield
basis, and so may
not experience market value declines to the same extent as
the underlying common
stock. When the market price of the underlying common stock
increases, the
15
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
prices of the convertible securities tend to rise as a
reflection of the value
of the underlying common stock. While no securities
investments are without
risk, investments in convertible securities generally entail
less risk than
investments in common stock of the same issuer.
As fixed-income securities, convertible securities are
investments which
provide for a stable stream of income with generally higher
yields than common
stocks. Of course, like all fixed-income securities, there
can be no assurance
of current income because the issuers of the convertible
securities may default
on their obligations. Convertible securities, however,
generally offer lower
interest or dividend yields than non-convertible securities
of similar quality
because of the potential for capital appreciation. A
convertible security, in
addition to providing fixed income, offers the potential for
capital
appreciation through the conversion feature, which enables
the holder to benefit
from increases in the market price of the underlying common
stock. However,
there can be no assurance of capital appreciation because
securities prices
fluctuate.
Convertible securities generally are subordinated to
other similar but
non-convertible securities of the same issuer, although
convertible bonds, as
corporate debt obligations, enjoy seniority in right of
payment to all equity
securities, and convertible preferred stock is senior to
common stock of the
same issuer. Because of the subordination feature, however,
convertible
securities typically have lower ratings than similar non-
convertible securities.
Unlike a convertible security which is a single
security, a synthetic
convertible security is comprised of two distinct securities
that together
resemble convertible securities in certain respects.
Synthetic convertible
securities are created by combining non-convertible bonds or
preferred stocks
with warrants or stock call options. The options that will
form elements of
synthetic convertible securities will be listed on a
securities exchange or on
the National Association of Securities Dealers Automated
Quotation Systems. The
two components of a synthetic convertible security, which
will be issued with
respect to the same entity, generally are not offered as a
unit, and may be
purchased and sold by the Fund at different times. Synthetic
convertible
securities differ from convertible securities in certain
respects, including
that each component of a synthetic convertible security has
a separate market
value and responds differently to market fluctuations.
Investing in synthetic
convertible securities involves the risk normally involved
in holding the
securities comprising the synthetic convertible security.
16
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
ADDITIONAL INVESTMENTS
Money Market Instruments. When SBMFM believes that
market conditions
warrant, the Fund may adopt a temporary defensive posture
and may invest in
short-term instruments without limitation. Short-term
instruments in which the
Fund may invest include: U.S. government securities; certain
bank obligations
(including certificates of deposit, time deposits and
bankers' acceptances of
domestic or foreign banks, domestic savings and loan
associations and similar
institutions); commercial paper rated no lower than A-2 by
S&P or Prime-2 by
Moody's or the equivalent from another major rating service
or, if unrated, of
an issuer having an outstanding, unsecured debt issue then
rated within the
three highest rating categories; and repurchase agreements
as described below.
United States Government Securities. U.S. government
securities are
obligations of, or guaranteed by, the United States
government, its agencies or
instrumentalities. The U.S. government securities in which
the Fund may invest
include: direct obligations of the United States Treasury
(such as Treasury
Bills, Treasury Notes and Treasury Bonds) and obligations
issued by U.S.
government agencies and instrumentalities, including
securities that are
supported by the full faith and credit of the United States
(such as Government
National Mortgage Association ("GNMA") certificates);
securities that are
supported by the right of the issuer to borrow from the
United States Treasury
(such as securities of Federal Home Loan Banks); and
securities that are
supported by the credit of the instrumentality (such as
Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation
("FHLMC") bonds). Treasury Bills have maturities of less
than 1 year, Treasury
Notes have maturities of 1 to 10 years and Treasury Bonds
generally have
maturities of greater than 10 years at the date of issuance.
Certain U.S.
government securities, such as those issued or guaranteed by
GNMA, FNMA and
FHLMC, are mortgage-related securities. U.S. government
securities generally do
not involve the credit risks associated with other types of
interest-bearing
securities, although, as a result, the yields available from
U.S. government
securities are generally lower than the yields available
from interest-bearing
corporate securities.
Repurchase Agreements. The Fund may engage in
repurchase agreement
transactions with banks which are the issuers of instruments
acceptable for
purchase by the Fund and with certain dealers on the Federal
Reserve Bank of New
York's list of reporting dealers. Under the terms of a
typical repurchase
agreement, the Fund would acquire an underlying debt
obligation for a relatively
short period (usually not more than one week), subject to an
obligation of the
seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon
price and time, thereby determining the yield during the
Fund's holding period.
17
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
This arrangement results in a fixed rate of return that is
not subject to market
fluctuations during the Fund's holding period. The value of
the underlying
securities will be at least equal at all times to the total
amount of the
repurchase obligation, including interest. Repurchase
agreements could involve
certain risks in the event of default or insolvency of the
other party,
including possible delays in or restrictions upon the Fund's
ability to dispose
of the underlying securities, the risk of a possible decline
in the value of the
underlying securities during the period in which the Fund
seeks to assert its
rights to them, the risk of incurring expenses associated
with asserting those
rights and the risk of losing all or part of the income from
the agreement.
SBMFM, acting under the supervision of the Trust's Board of
Trustees, reviews on
an ongoing basis the value of the collateral and the
creditworthiness of those
banks and dealers with which the Fund may enter into
repurchase agreements to
evaluate potential risks.
Futures Contracts and Options on Futures Contracts.
When deemed advisable
by SBMFM, the Fund may enter into futures contracts or
related options that are
traded on a domestic exchange or board of trade. Such
investments, if any, by
the Fund will be made solely for the purpose of hedging
against the effects of
changes in the value of the portfolio securities due to
anticipated changes in
interest rates, currency values and market conditions and
when the transactions
are economically appropriate to the reduction of risks
inherent in the
management of the Fund. The Fund may not enter into futures
and options
contracts for which aggregate initial margin deposits and
premium paid for
unexpired options to establish such positions that are not
bona fide hedging
positions (as defined by the Commodity Futures Trading
Commission), exceed 5% of
the fair market value of the Fund's assets after taking into
account unrealized
profits and unrealized losses on futures contracts into
which it has entered.
With respect to each long position in a futures contract or
option thereon, the
underlying commodity value of such contract always will be
covered by cash and
cash equivalents set aside plus accrued profits held in a
segregated account.
The use of futures contracts and options on futures
contracts as a hedging
device involves several risks. There can be no assurance
that there will be a
correlation between price movements in the underlying
securities on the one
hand, and price movements in the securities which are the
subject of the hedge,
on the other hand. Positions in futures contracts and
options on futures
contracts may be closed out only on the exchange or board of
trade on which they
were entered into, and there can be no assurance that an
active market will
18
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
exist for a particular contract or option at any particular
time. Losses
incurred in hedging transactions and the costs of these
transactions will affect
the Fund's performance.
Foreign Securities. There are certain risks involved in
investing in
securities of companies and governments of foreign nations
which are in addition
to the usual risks inherent in domestic investments. These
risks include those
resulting from revaluation of currencies, future adverse
political and economic
developments and the possible imposition of currency
exchange blockages or other
foreign governmental laws or restrictions, reduced
availability of public
information concerning issuers and the lack of uniform
accounting, auditing and
financial reporting standards or of other regulatory
practices and requirements
comparable to those applicable to domestic companies. The
yield of the Fund may
be adversely affected by fluctuations in value of one or
more foreign currencies
relative to the U.S. dollar. Moreover, securities of many
foreign companies and
their markets may be less liquid and their prices more
volatile than those of
securities of comparable domestic companies. In addition,
with respect to
certain foreign countries, there is the possibility of
expropriation,
nationalization, confiscatory taxation and limitations on
the use or removal of
funds or other assets of the Fund, including the withholding
of dividends.
Foreign securities may be subject to foreign government
taxes that could reduce
the yield on such securities. Because the Fund will invest
in securities
denominated or quoted in currencies other than the U.S.
dollar, changes in
foreign currency exchange rates may adversely affect the
value of portfolio
securities and the appreciation or depreciation of
investments. Investments in
foreign securities also may result in higher expenses due to
the cost of
converting foreign currency to U.S. dollars, the payment of
fixed brokerage
commissions on foreign exchanges, which generally are higher
than commissions on
domestic exchanges, and the expense of maintaining
securities with foreign
custodians, and the imposition of transfer taxes or
transaction charges
associated with foreign exchanges.
Corporate securities in which the Fund may invest
include corporate
fixed-income securities of both domestic and foreign
issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment
trust certificates,
and preferred stock.
Certain of the corporate fixed-income securities in
which the Fund may
invest may involve equity characteristics. The Fund may, for
example, invest in
warrants for the acquisition of stock of the same or of a
different issuer or in
corporate fixed-income securities that have conversion or
exchange rights
permitting the holder to convert or exchange the securities
at a stated price
within a specified period of time into a specified number of
shares of common
stock. In addition, the Fund may invest in participations
that are based on
19
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
revenues, sales or profits of an issuer or in common stock
offered as a unit
with corporate fixed-income securities.
Currency Exchange Transactions and Options on Foreign
Currencies. In order
to protect against uncertainty in the level of future
exchange rates, the Fund
may engage in currency exchange transactions and purchase
exchange-traded put
and call options on foreign currencies. The Fund will
conduct its currency
exchange transactions either on a spot (i.e., cash) basis at
the rate prevailing
in the currency exchange market or through entering into
forward contracts to
purchase or sell currencies. The Fund's dealings in forward
currency exchange
and options on foreign currencies are limited to hedging
involving either
specific transactions or portfolio positions.
A forward currency contract involves an obligation to
purchase or sell a
specific currency for an agreed-upon price at an agreed-upon
date which may be
any fixed number of days from the date of the contract
agreed upon by the
parties. These contracts are entered into in the interbank
market conducted
directly between currency traders (usually large commercial
banks) and their
customers. Although these contracts are intended to minimize
the risk of loss
due to a decline in the value of the hedged currency, at the
same time they tend
to limit any potential gain that might result should the
value of the currency
increase.
The Fund may purchase put options on a foreign currency
in which securities
held by the Fund are denominated to protect against a
decline in the value of
the currency in relation to the currency in which the
exercise price is
denominated. The Fund may purchase a call option on a
foreign currency to hedge
against an adverse exchange rate of the currency in which a
security that it
anticipates purchasing is denominated in relation to the
currency in which the
exercise price is denominated. An option on a foreign
currency gives the
purchaser, in return for a premium, the right to sell, in
the case of a put, and
buy, in the case of a call, the underlying currency at a
specified price during
the term of the option. Although the purchase of an option
on a foreign currency
may constitute an effective hedge by the Fund against
fluctuations in the
exchange rates, in the event of rate movements adverse to
the Fund's position,
the Fund may forfeit the entire amount of the premium plus
related transaction
costs. Options on foreign currencies purchased by the Fund
may be traded on
domestic and foreign exchanges or traded over-the-counter.
Although the foreign currency market may not
necessarily be more volatile
than the market in other commodities, the foreign currency
market offers less
protection against defaults in the forward trading of
currencies than is
available when trading in currencies occurs on an exchange.
Because a forward
currency contract is not guaranteed by an exchange or
clearinghouse, a default
20
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
on the contract would deprive the Fund of unrealized profits
or force the Fund
to cover its commitments for purchase or resale, if any, at
the current market
price.
When-Issued Securities and Delayed-Delivery
Transactions. In order to
secure yields or prices deemed advantageous at the time, the
Fund may purchase
or sell any portfolio securities on a when-issued or delayed-
delivery basis. The
Fund will enter into a when-issued transaction for the
purpose of acquiring
portfolio securities and not for the purpose of leverage. In
such transactions,
delivery of the securities occurs beyond the normal
settlement periods, but no
payment or delivery is made by the Fund prior to the actual
delivery or payment
by the other party to the transaction. Due to fluctuations
in the value of
securities purchased or sold on a when-issued or delayed-
delivery basis, the
yields obtained on such securities may be higher or lower
than the yields
available in the market on the dates when the investments
are actually delivered
to the buyers. The Fund will establish a segregated account
consisting of cash,
U.S. government securities or other high grade debt
obligations in an amount
equal to the amount of its when-issued and delayed-delivery
commitments. Placing
securities rather than cash in the segregated account may
have a leveraging
effect on the Fund's net assets. The Fund will not accrue
income with respect to
a when-issued security prior to its stated delivery date.
Lending of Portfolio Securities. The Fund has the
ability to lend portfolio
securities to brokers, dealers and other financial
organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets
taken at value. Loans
of portfolio securities will be collateralized by cash,
letters of credit or
U.S. government securities that are maintained at all times
in an amount at
least equal to the current market value of the loaned
securities.
Non-Publicly Traded and Illiquid Securities. The sale
of securities that
are not publicly traded is typically restricted under the
Federal securities
laws. As a result, the Fund may be forced to sell these
securities at less than
fair market value or may not be able to sell them when SBMFM
believes it
desirable to do so. The Fund's investments in illiquid
securities are subject to
the risk that should the Fund desire to sell any of these
securities when a
ready buyer is not available at a price that the Fund deems
representative of
its value, the value of the Fund's net assets could be
adversely affected.
Securities of Developing Countries. A developing
country generally is
considered to be a country that is in the initial stages of
its
industrialization cycle. Investing in the equity and fixed-
income markets of
developing countries involves exposure to economic
structures that are generally
less diverse and mature, and to political systems that can
be expected to have
21
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
less stability, than those of developed countries.
Historical experience
indicates that the markets of developing countries have been
more volatile than
the markets of the more mature economies of developed
countries; however, such
markets often have provided higher rates of return to
investors.
CERTAIN INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in
securities with
contractual or other restrictions on resale and other
instruments that are not
readily marketable, including (a) repurchase agreements with
maturities greater
than seven days, (b) time deposits maturing from two
business days through seven
calendar days, and (c) to the extent that a liquid secondary
market does not
exist for the instruments, futures contracts and options
thereon.
Notwithstanding the foregoing, the Fund shall not invest
more than 10% of its
net assets in securities (excluding those subject to Rule
144A under the
Securities Act of 1933, as amended) that are restricted. In
addition, the Fund
may invest up to 5% of its assets in the securities of
issuers which have been
in continuous operation for less than three years. The Fund
also may borrow from
banks for temporary or emergency purposes, but not for
investment purposes, in
an amount up to 10% of its total assets, and may pledge its
assets to the same
extent in connection with such borrowings. Whenever these
borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not
make any additional
investments. Except for the limitations on borrowing, the
investment guidelines
set forth in this paragraph may be changed at any time
without shareholder
consent by vote of the Trust's Board of Trustees. A complete
list of investment
restrictions that identifies additional restrictions that
cannot be changed
without the approval of the majority of the Fund's
outstanding shares is
contained in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Options. The Fund may enter into options transactions
primarily as hedges
to reduce investment risk, generally by making an investment
expected to move in
the opposite direction of a portfolio position. A hedge is
designed to offset a
loss on a portfolio position with a gain on the hedge
position; at the same
time, however, a properly correlated hedge will result in a
gain on the
portfolio position being offset by a loss on the hedge
position. The Fund bears
the risk that the prices of the securities being hedged will
not move in the
same amount as the hedge. The Fund will engage in hedging
transactions only when
deemed advisable by SBMFM. Successful use by the Fund of
options will depend on
SBMFM's ability to correctly predict movements in the
direction of the stock
22
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
underlying the option used as a hedge. Losses incurred in
hedging transactions
and the costs of these transactions will affect the Fund's
performance.
The ability of the Fund to engage in closing
transactions with respect to
options depends on the existence of a liquid secondary
market. While the Fund
generally will purchase options only if there appears to be
a liquid secondary
market for the options purchased or sold, for some options
no such secondary
market may exist or the market may cease to exist.
Medium-, Low- and Unrated Securities. The Fund may
invest up to 10% of its
assets in medium- or low-rated securities and unrated
securities of comparable
quality. Generally, these securities offer a higher return
potential than
higher-rated securities but involve greater volatility of
price and risk of loss
of income and principal. Generally, these securities offer a
higher current
yield than the yield offered by higher-rated securities, but
involve greater
volatility of price and risk of loss of income and
principal, including the
probability of default or bankruptcy of the issuers of such
securities. Medium-
and low-rated and comparable unrated securities will likely
have large
uncertainties or major risk exposures to adverse conditions
and are
predominantly speculative with respect to the issuer's
capacity to pay interest
and repay principal in accordance with the terms of the
obligation. Accordingly,
it is possible that these types of factors could, in certain
instances, reduce
the value of securities held by the Fund, with a
commensurate effect on the
value of the Fund's shares.
The markets in which medium- and low-rated or
comparable unrated securities
are traded generally are more limited than those in which
higher-rated
securities are traded. The existence of limited markets for
these securities may
restrict the availability of securities for the Fund to
purchase and also may
have the effect of limiting the ability of the Fund to (a)
obtain accurate
market quotations for purposes of valuing securities and
calculating net asset
value and (b) sell securities at their fair value either to
meet redemption
requests or to respond to changes in the economy or the
financial markets. The
market for medium- and low-rated and comparable unrated
securities has not fully
weathered a major economic recession. Any such economic
downturn could adversely
affect the value of such securities and the ability of the
issuers of these
securities to repay principal and pay interest thereon.
While the market values of medium- and low-rated and
comparable unrated
securities tend to react less to fluctuations in interest
rate levels than do
those of higher-rated securities, the market values of
certain of these
securities also tend to be more sensitive to individual
corporate developments
and changes in economic conditions than higher-rated
securities. In addition,
medium- and low-rated and comparable unrated securities
generally present a
23
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
higher degree of credit risk. Issuers of medium- and low-
rated and comparable
unrated securities are often highly leveraged and may not
have more traditional
methods of financing available to them so that their ability
to service their
debt obligations during an economic downturn or during
sustained periods of
rising interest rates may be impaired. The risk of loss due
to default by such
issuers is significantly greater because medium- and low-
rated and comparable
unrated securities generally are unsecured and frequently
are subordinated to
the prior payment of senior indebtedness. The Fund may incur
additional expenses
to the extent that it is required to seek recovery upon a
default in the payment
of principal or interest on its portfolio holdings.
Fixed-income securities, including medium- and low-
rated and comparable
unrated securities, frequently have call or buy-back
features that permit their
issuers to call or repurchase the securities from their
holders, such as the
Fund. If an issuer exercises these rights during periods of
declining interest
rates, the Fund may have to replace the security with a
lower yielding security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P
have speculative
characteristics with respect to capacity to pay interest and
repay principal.
Securities which are rated B generally lack characteristics
of a desirable
investment and assurance of interest and principal payments
over any long period
of time may be small. Securities which are rated Caa or CCC
or below are of poor
standing. Those issues may be in default or present elements
of danger with
respect to principal or interest. Securities rated C by
Moody's and D by S&P are
in the lowest rating class and indicate that payments are in
default or that a
bankruptcy petition has been filed with respect to the
issuer or that the issuer
is regarded as having extremely poor prospects. See the
Appendix in the Trust's
Statement of Additional Information on bond ratings by
Moody's and S&P.
In light of these risks, SBMFM, in evaluating the
creditworthiness of an
issue, whether rated or unrated, will take various factors
into consideration,
which may include, as applicable, the issuer's financial
resources, its
sensitivity to economic conditions and trends, the operating
history of and the
community support for the facility financed by the issue,
the ability of the
issuer's management and regulatory matters.
The Fund's holdings in fixed-income securities (as
rated by Moody's) for
the fiscal year ended July 31, 1995 were composed as
follows: 0.54% rated Baa;
20.15% rated Ba; 56.53% rated B; 2.80% rated Caa; and 4.53%
in non-rated
securities. The percentages were calculated on a dollar
weighted average basis
by determining monthly the percentage of the Fund's net
assets invested in each
rating category and do not necessarily indicate what the
composition of the
24
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
Fund's holdings will be in subsequent years.
Securities of Unseasoned Issuers. Securities in which
the Fund may invest
may have limited marketability and, therefore, may be
subject to wide
fluctuations in market value. In addition, certain
securities may lack a
significant operating history and be dependent on products
or services without
an established market share.
PORTFOLIO TRANSACTIONS
All orders for transactions in securities and options
on behalf of the Fund
are placed by SBMFM with brokers and dealers (including
Smith Barney) that SBMFM
selects. The Fund may utilize Smith Barney or a Smith Barney-
affiliated broker
in connection with a purchase or sale of securities when
SBMFM believes that the
broker's charge for the transactions does not exceed usual
and customary levels.
The same standard applies to the use of Smith Barney as a
commodities broker in
connection with entering into options and futures contracts.
- - ------------------------------------------------------------
- - --------------------
Valuation of Shares
- - ------------------------------------------------------------
- - --------------------
The Fund's net asset value per share is determined as
of the close of
regular trading on the NYSE on each day that the NYSE is
open, by dividing the
value of the Fund's net assets attributable to each Class by
the total number of
shares of the Class outstanding. Net asset value is
calculated separately for
Class A, B, C and Y shares.
Generally, the Fund's investments are valued at market
value or, in the
absence of a market value with respect to any securities, at
fair value as
determined by or under the direction of the Trust's Board of
Trustees. Portfolio
securities which are traded primarily on foreign exchanges
are generally valued
at the preceding closing values of such securities on their
respective
exchanges, except that when an occurrence subsequent to the
time a value was so
established is likely to have changed such value, then the
fair market value of
those securities will be determined by consideration of
other factors by or
under the direction of the Trust's Board of Trustees or
delegates. A security
that is traded primarily on an exchange is valued at the
last sale price of that
exchange or, if there were no sales during the day, at the
current quoted bid
price. Over-the-counter securities are valued on the basis
of the bid price at
the close of business on each day. Investments in U.S.
government securities
(other than short-term securities) are valued at the average
of the quoted bid
25
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Valuation of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
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.
If a shareholder does not otherwise instruct, dividends
and distributions
will be reinvested automatically in additional shares of the
same Class at net
asset value, subject to no sales charge or CDSC. Dividends
from net investment
income, if any, of the Fund will be declared monthly and
paid on the last day of
the Smith Barney statement month. The Fund's final
distribution for each
calendar year will include any remaining net investment
income and net realized
long- and short-term capital gains realized during the year
and deemed
undistributed during the year for Federal income tax
purposes. In order to avoid
the application of a 4% nondeductible excise tax measured
with respect to
certain undistributed amounts of ordinary income and capital
gains, the Fund may
make any additional distributions as may be necessary to
avoid the application
of this tax.
If, for any full fiscal year, the Fund's total
distributions exceed net
investment income and net realized capital gains, the excess
distributions
generally will be treated as a tax-free return of capital
(up to the amount of
the shareholder's tax basis in his or her shares). The
amount treated as a
tax-free return of capital will reduce a shareholder's
adjusted basis in his or
her shares. Pursuant to the requirements of the Investment
Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a
notice will accompany
any distribution paid from sources other than net investment
income. In the
event the Fund distributes amounts in excess of its net
investment income and
net realized capital gains, such distributions may have the
effect of decreasing
the Fund's total assets, which may increase the Fund's
expense ratio.
The per share dividends on Class B and Class C shares
of the Fund may be
lower than the per share dividends on Class A and Y shares
principally as a
result of the distribution fee applicable with respect to
Class B and Class C
26
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes (continued)
- - ------------------------------------------------------------
- - --------------------
shares. The per share dividends on Class A shares of the
Fund may be lower than
the per share dividends on Class Y shares principally as a
result of the service
fee applicable to Class A shares. Distributions of capital
gains, if any, will
be in the same amount for Class A, Class B, Class C and
Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with
the result that, for
Federal income tax purposes, the amount of investment income
and capital gains
earned by the Fund will be determined without regard to the
earnings of the
other funds of the Trust. The Fund has qualified and intends
to continue to
qualify each year as a "regulated investment company" under
the Code. To meet
those requirements, the Fund may need to restrict the degree
to which it engages
in short-term trading and transactions in options. If the
Fund qualifies as a
regulated investment company and meets certain distribution
requirements, the
Fund will not be subject to Federal income tax on its net
investment income and
net capital gains that it distributes to its shareholders.
Dividends paid by the Fund from investment income and
distributions of
short-term capital gain will be taxable to shareholders as
ordinary income for
Federal income tax purposes, whether received in cash or
reinvested in
additional shares. Furthermore, as a general rule,
distributions of long-term
capital gain will be taxable to shareholders as long-term
capital gain, whether
paid in cash or reinvested in additional shares, and
regardless of the length of
time that the investor has held his or her shares of the
Fund.
Distributions of capital gains or dividends received
from foreign
corporations will not qualify for the Federal dividends-
received deduction for
corporate shareholders (the "Corporate Deduction"). The Fund
anticipates that
most of its dividends will not qualify for the Corporate
Deduction. Each
shareholder will receive a statement annually from the
Trust, which will set
forth separately the aggregate dollar amount of dividends
and capital gains
distributed to the shareholder by the Fund with respect to
the prior calendar
year.
Dividends and interest received by the Fund may give
rise to withholding
and other taxes imposed by foreign countries. Tax
conventions between certain
countries and the United States may reduce or eliminate such
taxes.
Shareholders are urged to consult their tax advisors
regarding the
application of Federal, state and local tax laws to their
specific situation
before investing in the Fund.
27
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares
- - ------------------------------------------------------------
- - --------------------
GENERAL
The Fund offers five Classes of shares. Class A shares
are sold to
investors with an initial sales charge and Class B and Class
C shares are sold
without an initial sales charge but are subject to a CDSC
payable upon certain
redemptions. Class Y shares are sold without an initial
sales charge or a CDSC
and are available only to investors investing a minimum of
$5,000,000. Class Z
shares are offered without a sales charge, CDSC, or service
or distribution fee,
exclusively to: (a) tax-exempt employee benefit and
retirement plans of Smith
Barney and its affiliates and (b) certain UITs sponsored by
Smith Barney and its
affiliates. Investors meeting either of these criteria who
are interested in
acquiring Class Z shares should contact a Smith Barney
Financial Consultant for
a Class Z Prospectus. See "Prospectus Summary - Alternative
Purchase
Arrangements" for a discussion of factors to consider in
selecting which Class
of shares to purchase.
Purchases of Fund shares must be made through a
brokerage account
maintained with Smith Barney, with an Introducing Broker or
with an investment
dealer in the selling group, except for investors purchasing
shares of the Fund
through a qualified retirement plan who may do so directly
through FDISG. When
purchasing shares of the Fund, investors must specify
whether the purchase is
for Class A, Class B, Class C or Class Y shares. No
maintenance fee will be
charged by the Fund in connection with a brokerage account
through which an
investor purchases or holds shares.
Investors in Class A, Class B and Class C shares may
open an account by
making an initial investment of at least $1,000 for each
account, or $250 for an
IRA or a Self-Employed Retirement Plan in the Fund.
Investors in Class Y shares
may open an account by making an initial investment of
$5,000,000. Subsequent
investments of at least $50 may be made for all Classes. For
participants in
retirement plans qualified under Section 403(b)(7) or
Section 401(a) of the
Code, the minimum initial investment requirement for Class
A, Class B and Class
C shares and the subsequent investment requirement for all
Classes in the Fund
is $25. For the Fund's Systematic Investment Plan, the
minimum initial
investment requirement for Class A, Class B and Class C
shares and the
subsequent investment requirement for all Classes is $50.
There are no minimum
investment requirements for Class A shares for employees of
Travelers and its
subsidiaries, including Smith Barney, unitholders who invest
distributions from
a UIT sponsored by Smith Barney and Trustees of the Trust
and their spouses and
children. The Fund reserves the right to waive or change
minimums, to decline
any order to purchase its shares and to suspend the offering
of shares from time
28
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
to time. Shares purchased will be held in the shareholder's
account by the
Trust's transfer agent, FDISG. Share certificates are issued
only upon a
shareholder's written request to FDISG.
Purchase orders received by the Fund or Smith Barney
prior to the close of
regular trading on the NYSE, on any day the Fund calculates
its net asset value,
are priced according to the net asset value determined on
that day. Orders
received by dealers or Introducing Brokers prior to the
close of regular trading
on the NYSE on any day the Fund calculates its net asset
value, are priced
according to the net asset value determined on that day,
provided the order is
received by the Fund or Smith Barney prior to Smith Barney's
close of business
(the "trade date"). Payment for Fund shares is due on the
third business day
after the trade date.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at
any time by purchasing
shares through a service known as the Systematic Investment
Plan. Under the
Systematic Investment Plan, Smith Barney or FDISG is
authorized through
preauthorized transfers of $50 or more to charge the regular
bank account or
other financial institution indicated by the shareholder on
a monthly or
quarterly basis to provide systematic additions to the
shareholder's Fund
account. A shareholder who has insufficient funds to
complete the transfer will
be charged a fee of up to $25 by Smith Barney or FDISG. The
Systematic
Investment Plan also authorizes Smith Barney to apply cash
held in the
shareholder's Smith Barney brokerage account or redeem the
shareholder's shares
of a Smith Barney money market fund to make additions to the
account. Additional
information is available from the Fund or a Smith Barney
Financial Consultant.
29
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES
The sales charges applicable to purchases of Class A
shares of the Fund are
as follows:
Sales
Charge as Sales
Dealers
% of Charge as
Reallowance
Offering % of
as % of
Amount of Investment Price Amount
Invested Offering Price
============================================================
====================
Less than $25,000 4.50% 4.71%
4.05%
$25,000 - $49,999 4.00% 4.17%
3.60%
$50,000 - $99,999 3.50% 3.63%
3.15%
$100,000 - $249,999 2.50% 2.56%
2.25%
$250,000 - $499,999 1.50% 1.52%
1.35%
$500,000 and over * *
*
============================================================
====================
* Purchases of Class A shares, which when combined with
current holdings of
Class A shares offered with a sales charge equal or
exceed $500,000 in the
aggregate, will be made at net asset value without any
initial sales
charge, but will be subject to a CDSC of 1.00% on
redemptions made within
12 months of purchase. The CDSC on Class A shares is
payable to Smith
Barney, which compensates Smith Barney Financial
Consultants and other
dealers whose clients make purchases of $500,000 or
more. The CDSC is
waived in the same circumstances in which the CDSC
applicable to Class B
and Class C shares is waived. See "Deferred Sales
Charge Alternatives" and
"Waivers of CDSC."
Members of the selling group may receive up to 90% of
the sales charge and
may be deemed to be underwriters of the Fund as defined in
the Securities Act of
1933, as amended.
The reduced sales charges shown above apply to the
aggregate of purchases
of Class A shares of the Fund made at one time by "any
person," which includes
an individual, his or her spouse and children, or a trustee
or other fiduciary
of a single trust estate or single fiduciary account. The
reduced sales charge
minimums may also be met by aggregating the purchase with
the net asset value of
all Class A shares held in funds sponsored by Smith Barney
that are offered with
a sales charge listed under "Exchange Privilege."
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset
value without a sales
charge in the following circumstances: (a) sales of Class A
shares to Trustees
of the Trust, employees of Travelers and its subsidiaries,
or the spouses and
children of such persons (including the surviving spouse of
a deceased Trustee
or employee, and retired Trustees or employees), employees
of members of the
NASD, or sales to any trust, person, profit-sharing or other
benefit plan for
such persons, provided such sales are made upon the
assurance of the purchaser
30
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
that the purchase is made for investment purposes and that
the securities will
not be re-sold except through redemption or repurchase; (b)
offers of Class A
shares to any other investment company in connection with
the combination of
such company with the Fund by merger, acquisition of assets
or otherwise; (c)
purchases of Class A shares by any client of a newly
employed Smith Barney
Financial Consultant (for a period up to 90 days from the
commencement of the
Financial Consultant's employment with Smith Barney), on the
condition the
purchase of Class A shares is made with the proceeds of the
redemption of shares
of a mutual fund which (i) was sponsored by the Financial
Consultant's prior
employer, (ii) was sold to the client by the Financial
Consultant and (iii) was
subject to a sales charge; (d) shareholders who have
redeemed Class A shares in
the Fund (or Class A shares of another fund of the Smith
Barney Mutual Funds
that are offered with a sales charge equal to or greater
than the maximum sales
charge of the Fund) and who wish to reinvest their
redemption proceeds in the
Fund, provided the reinvestment is made within 60 calendar
days of the
redemption; (e) accounts managed by registered investment
advisory subsidiaries
of Travelers; and (f) investments of distributions from a
UIT sponsored by Smith
Barney. In order to obtain such discounts, the purchaser
must provide sufficient
information at the time of purchase to permit verification
that the purchase
would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any
person" (as defined
above) at a reduced sales charge or at net asset value
determined by aggregating
the dollar amount of the new purchase and the total net
asset value of all Class
A shares of the Fund and of funds sponsored by Smith Barney
which are offered
with a sales charge listed under "Exchange Privilege" then
held by such person
and applying the sales charge applicable to such aggregate.
In order to obtain
such discount, the purchaser must provide sufficient
information at the time of
purchase to permit verification that the purchase qualifies
for the reduced
sales charge. The right of accumulation is subject to
modification or
discontinuance at any time with respect to all shares
purchased thereafter.
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
31
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
each member of such a group will be determined by the table
set forth above
under "Initial Sales Charge Alternative - Class A Shares,"
and will be based
upon the aggregate sales of Class A shares of Smith Barney
Mutual Funds offered
with a sales charge to, and share holdings of, all members
of the group. To be
eligible for such reduced sales charges or to purchase at
net asset value, all
purchases must be pursuant to an employer- or partnership-
sanctioned plan
meeting certain requirements. One such requirement is that
the plan must be open
to specified partners or employees of the employer and its
subsidiaries, if any.
Such plan may, but is not required to, provide for payroll
deductions, IRAs or
investments pursuant to retirement plans under Sections 401
or 408 of the Code.
Smith Barney may also offer a reduced sales charge or net
asset value purchase
for aggregating related fiduciary accounts under such
conditions that Smith
Barney will realize economies of sales efforts and sales
related expenses. An
individual who is a member of a qualified group may also
purchase Class A shares
at the reduced sales charge applicable to the group as a
whole. The sales charge
is based upon the aggregate dollar value of Class A shares
offered with a sales
charge that have been previously purchased and are still
owned by the group,
plus the amount of the current purchase. A "qualified group"
is one which (a)
has been in existence for more than six months, (b) has a
purpose other than
acquiring Fund shares at a discount and (c) satisfies
uniform criteria which
enable Smith Barney to realize economies of scale in its
costs of distributing
shares. A qualified group must have more than 10 members,
must be available to
arrange for group meetings between representatives of the
Fund and the members,
and must agree to include sales and other materials related
to the Fund in its
publications and mailings to members at no cost to Smith
Barney. In order to
obtain such reduced sales charge or to purchase at net asset
value, the
purchaser must provide sufficient information at the time of
purchase to permit
verification that the purchase qualifies for the reduced
sales charge. Approval
of group purchase reduced sales charge plans is subject to
the discretion of
Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of
$50,000 or more provides
an opportunity for an investor to obtain a reduced sales
charge by aggregating
investments over a 13 month period, provided that the
investor refers to such
Letter when placing orders. For purposes of a Letter of
Intent, the "Amount of
Investment" as referred to in the preceding sales charge
table includes
purchases of all Class A shares of the Fund and other funds
of the Smith Barney
Mutual Funds offered with a sales charge over a 13 month
period based on the
total amount of intended purchases plus the value of all
Class A shares
previously purchased and still owned. An alternative is to
compute the 13 month
32
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
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. Please contact a
Smith Barney Financial Consultant or FDISG to obtain a
Letter of Intent
application.
Class Y Shares. A Letter of Intent may also be used as a
way for investors to
meet the minimum investment requirement for Class Y shares.
Such investors must
make an initial minimum purchase of $1,000,000 in Class Y
shares of the Fund and
agree to purchase a total of $5,000,000 of Class Y shares of
the same Fund
within six months from the date of the Letter. If a total
investment of
$5,000,000 is not made within the six-month period, all
Class Y shares purchased
to date will be transferred to Class A shares, where they
will be subject to all
fees (including a service fee of 0.25%) and expenses
applicable to the Fund's
Class A shares, which may include a CDSC of 1.00%. The Fund
expects that such
transfer will not be subject to Federal income taxes. Please
contact a Smith
Barney Financial Consultant or FDISG for further
information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next
determined without an
initial sales charge so that the full amount of an
investor's purchase payment
may be immediately invested in the Fund. A CDSC, however,
may be imposed on
certain redemptions of these shares. "CDSC Shares" are: (a)
Class B shares; (b)
Class C shares; and (c) Class A shares which when combined
with Class A shares
offered with a sales charge currently held by an investor
equal or exceed
$500,000 in the aggregate.
Any applicable CDSC will be assessed on an amount equal
to the lesser of
the original cost of the shares being redeemed or their net
asset value at the
time of redemption. CDSC Shares that are redeemed will not
be subject to a CDSC
to the extent that the value of such shares represents: (a)
capital appreciation
of Fund assets; (b) reinvestment of dividends or capital
gain distributions; (c)
with respect to Class B shares, shares redeemed more than
five years after their
purchase; or (d) with respect to Class C shares and Class A
shares that are CDSC
Shares, shares redeemed more than 12 months after their
purchase.
Class C shares and Class A shares that are CDSC Shares
are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In
circumstances in which
the CDSC is imposed on Class B shares, the amount of the
charge will depend on
33
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
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."
Year Since Purchase
Payment Was Made
CDSC
============================================================
====================
First
4.50%
Second
4.00%
Third
3.00%
Fourth
2.00%
Fifth
1.00%
Sixth
0.00%
Seventh
0.00%
Eighth
0.00%
============================================================
====================
Class B shares will convert automatically to Class A
shares eight years
after the date on which they were purchased and thereafter
will no longer be
subject to any distribution fees. There also will be
converted at that time such
proportion of Class B Dividend Shares owned by the
shareholder as the total
number of his or her Class B shares converting at the time
bears to the total
number of outstanding Class B shares (other than Class B
Dividend Shares) owned
by the shareholder. Shareholders who held Class B shares of
Smith Barney
Shearson Short-Term World Income Fund (the "Short-Term World
Income Fund") on
July 15, 1994 and who subsequently exchange those shares for
Class B shares of
the Fund will be offered the opportunity to exchange all
such Class B shares for
Class A shares of the Fund four years after the date on
which those shares were
deemed to have been purchased. Holders of such Class B
shares will be notified
of the pending exchange in writing approximately 30 days
before the fourth
anniversary of the purchase date and, unless the exchange
has been rejected in
writing, the exchange will occur on or about the fourth
anniversary date. See
"Prospectus Summary - Alternative Purchase Arrangements -
Class B Shares
Conversion Feature."
The length of time that CDSC Shares acquired through an
exchange have been
34
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
held will be calculated from the date that the shares
exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and
Fund shares being
redeemed will be considered to represent, as applicable,
capital appreciation or
dividend and capital gain distribution reinvestments in such
other funds. For
Federal income tax purposes, the amount of the CDSC will
reduce the gain or
increase the loss, as the case may be, on the amount
realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
To provide an example, assume an investor purchased 100
Class B shares at
$10 per share for a cost of $1,000. Subsequently, the
investor acquired 5
additional shares through dividend reinvestment. During the
fifteenth month
after the purchase, the investor decided to redeem $500 of
his or her
investment. Assuming at the time of the redemption the net
asset value had
appreciated to $12 per share, the value of the investor's
shares would be $1,260
(105 shares at $12 per share). The CDSC would not be applied
to the amount which
represents appreciation ($200) and the value of the
reinvested dividend shares
($60). Therefore, $240 of the $500 redemption proceeds ($500
minus $260) would
be charged at a rate of 4.00% (the applicable rate for Class
B shares) for a
total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see
"Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than
1.00% per month of
the value of the shareholder's shares at the time the
withdrawal plan commences
(see "Automatic Cash Withdrawal Plan") provided, however,
that automatic cash
withdrawals in amounts equal to or less than 2.00% per month
of the value of the
shareholder's shares will be permitted for withdrawal plans
that were
established prior to November 7, 1994; (c) redemptions of
shares within 12
months following the death or disability of the shareholder;
(d) redemption of
shares made in connection with qualified distributions from
retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary
redemptions; and (f)
redemptions of shares in connection with a combination of
the Fund with any
investment company by merger, acquisition of assets or
otherwise. In addition, a
shareholder who has redeemed shares from other funds of the
Smith Barney Mutual
Funds may, under certain circumstances, reinvest all or part
of the redemption
proceeds within 60 days and receive pro rata credit for any
CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation
(by Smith Barney in
the case of shareholders who are also Smith Barney clients
or by FDISG in the
case of all other shareholders) of the shareholder's status
or holdings, as the
case may be.
35
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith
Barney 401(k)
Program, which is generally designed to assist plan sponsors
in the creation and
operation of retirement plans under Section 401(a) of the
Code. To the extent
applicable, the same terms and conditions are offered to all
Participating Plans
in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class
B, Class C and Class
Y shares as investment alternatives under the Smith Barney
401(k) Program. Class
A, Class B and Class C shares acquired through the Smith
Barney 401(k) Program
are subject to the same service and/or distribution fees as,
but different sales
charge and CDSC schedules than, the Class A, Class B and
Class C shares acquired
by other investors. Similar to those available to other
investors, Class Y
shares acquired through the Smith Barney 401(k) Program are
not subject to any
initial sales charge, CDSC or service or distribution fee.
Once a Participating
Plan has made an initial investment in the Fund, all of its
subsequent
investments in the Fund must be in the same Class of shares,
except as otherwise
described below.
Class A Shares. Class A shares of the Fund are offered
without any initial
sales charge to any Participating Plan that purchases from
$500,000 to
$4,999,999 of Class A shares of one or more funds of the
Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney
401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of
redemption proceeds, if the
Participating Plan terminates within four years of the date
the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Class B Shares. Class B shares of the Fund are offered
to any Participating
Plan that purchases less than $250,000 of one or more funds
of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith
Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if
the Participating Plan
terminates within eight years of the date the Participating
Plan first enrolled
in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan
enrolled in the Smith
Barney 401(k) Program, it will be offered the opportunity to
exchange all of its
Class B shares for Class A shares of the Fund. Such Plans
will be notified of
the pending exchange in writing approximately 60 days before
the eighth
anniversary of the enrollment date and, unless the exchange
has been rejected in
writing, the exchange will occur on or about the eighth
anniversary date. Once
the exchange has occurred, a Participating Plan will not be
eligible to 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
36
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
shares at that time each Class B share held by the
Participating Plan will have
the same conversion feature as Class B shares held by other
investors. See
"Purchase of Shares -- Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of the Fund are offered
to any Participating
Plan that purchases from $250,000 to $499,999 of one or more
funds of the Smith
Barney Mutual Funds. Class C shares acquired through the
Smith Barney 401(k)
Program after November 7, 1994 are subject to a CDSC of
1.00% of redemption
proceeds, if the Participating Plan terminates within four
years of the date the
Participating Plan first enrolled in the Smith Barney 401(k)
Program. In any
year after the date a Participating Plan enrolled in the
Smith Barney 401(k)
Program, if its total Class C holdings equal at least
$500,000 as of the
calendar year-end, the Participating Plan will be offered
the opportunity to
exchange all of its Class C shares for Class A shares of the
Fund. Such Plans
will be notified in writing within 30 days after the last
business day of the
calendar year, and unless the exchange offer has been
rejected in writing, the
exchange will occur on or about the last business day of the
following March.
Once the exchange has occurred, a Participating Plan will
not be eligible to
acquire Class C shares of the Fund but instead may acquire
Class A shares of the
Fund. Class C shares not converted will continue to be
subject to the
distribution fee.
Class Y Shares. Class Y shares of the Fund are offered
without any service
or distribution fee, sales charge or CDSC to any
Participating Plan that
purchases $5,000,000 or more of Class Y shares of one or
more funds of the Smith
Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the
extent that the net
asset value of the shares redeemed does not exceed the
current net asset value
of the shares purchased through reinvestment of dividends or
capital gain
distributions, plus (a) with respect to Class A and Class C
shares, the current
net asset value of such shares purchased more than one year
prior to redemption
and, with respect to Class B shares, the current net asset
value of Class B
shares purchased more than eight years prior to the
redemption, plus (b) with
respect to Class A and Class C shares, increases in the net
asset value of the
shareholder's Class A or Class C shares above the purchase
payments made during
the preceding year and, with respect to Class B shares,
increases in the net
asset value of the shareholder's Class B shares above the
purchase payments made
during the preceding eight years. Whether or not the CDSC
applies to a
Participating Plan depends on the number of years since the
Participating Plan
first became enrolled in the Smith Barney 401(k) Program,
unlike the
applicability of the CDSC to other shareholders, which
depends on the number of
37
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Purchase of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
years since those shareholders made the purchase payment
from which the amount
is being redeemed.
The CDSC will be waived on redemptions of CDSC Shares
in connection with
lump-sum or other distributions made by a Participating Plan
as a result of: (a)
the retirement of an employee in the Participating Plan; (b)
the termination of
employment of an employee in the Participating Plan; (c) the
death or disability
of an employee in the Participating Plan; (d) the attainment
of age 59 1/2 by an
employee in the Participating Plan; (e) hardship of an
employee in the
Participating Plan to the extent permitted under Section
401(k) of the Code; or
(f) redemptions of shares in connection with a loan made by
the Participating
Plan to an employee.
Participating Plans wishing to acquire shares of the
Fund through the Smith
Barney 401(k) Program must purchase such shares directly
from FDISG. For further
information regarding the Smith Barney 401(k) Program,
investors should contact
a Smith Barney Financial Consultant.
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege
- - ------------------------------------------------------------
- - --------------------
Except as otherwise noted below, shares of each Class
may be exchanged at
the net asset value next determined for shares of the same
Class in the
following funds of the Smith Barney Mutual Funds, to the
extent shares are
offered for sale in the shareholder's state of residence.
Exchanges of Class A,
Class B and Class C shares are subject to minimum investment
requirements and
all shares are subject to the other requirements of the fund
into which
exchanges are made, and a sales charge differential may
apply.
FUND NAME
- - ------------------------------------------------------------
- - --------------------
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
38
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Income and Growth
Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed --Income Funds
* Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
** Smith Barney Funds, Inc. -- Income Return Account
Portfolio
Smith Barney Funds, Inc. -- Monthly Payment Government
Portfolio
+++ Smith Barney Funds, Inc. -- Short-Term U.S. Treasury
Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities
Portfolio
Smith Barney Government Securities Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
** Smith Barney Intermediate Maturity California
Municipals Fund
** Smith Barney Intermediate Maturity New York Municipals
Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
** Smith Barney Muni Funds -- California Limited Term
Portfolio
** Smith Barney Muni Funds -- Florida Limited Term
Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
** Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc. -- Emerging Markets
Portfolio
39
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government
Bond Portfolio
Smith Barney World Funds, Inc. -- International
Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity
Portfolio
Smith Barney World Funds, Inc. -- Pacific 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 Market 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 B and Class
Y shares of the
Fund. In addition, shareholders who own Class C shares
of the Fund through
the Smith Barney 401(k) Program may exchange those
shares for Class C
shares of this fund.
** Available for exchange with Class A, Class C and Class
Y shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares
of the Fund.
++ Available for exchange with Class A and Class Y shares
of the Fund. In
addition, shareholders who own Class C shares of the
Fund through the Smith
Barney 401(k) Program may exchange those shares for
Class C shares of this
fund.
+++ Available for exchange with Class A and Class Y shares
of the Fund.
Class A Exchanges. Class A shares of Smith Barney
Mutual Funds sold without
a sales charge or with a maximum sales charge of less than
the maximum charged
by other Smith Barney Mutual Funds will be subject to the
appropriate "sales
charge differential" upon the exchange of such shares for
Class A shares of a
fund sold with a higher sales charge. The "sales charge
differential" is limited
to a percentage rate no greater than the excess of the sales
charge rate
applicable to purchases of shares of the mutual fund being
acquired in the
exchange over the sales charge rate(s) actually paid on the
mutual fund shares
relinquished in the exchange and on any predecessor of those
shares. For
purposes of the exchange privilege, shares obtained through
automatic
reinvestment of dividends and capital gain distributions are
treated as having
paid the same sales charges applicable to the shares on
which the dividends or
distributions were paid; however, except in the case of the
Smith Barney 401(k)
Program, if no sales charge was imposed upon the initial
purchase of the shares,
any shares obtained through automatic reinvestment will be
subject to a sales
charge differential upon exchange.
40
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
Class B Exchanges. In the event a Class B shareholder
(unless such
shareholder was a Class B shareholder of the Short-Term
World Income Fund on
July 15, 1994) wishes to exchange all or a portion of his or
her shares in any
of the funds imposing a higher CDSC than that imposed by the
Fund, the exchanged
Class B shares will be subject to the higher applicable
CDSC. Upon an exchange,
the new Class B shares will be deemed to have been purchased
on the same date as
the Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C
shares will be deemed
to have been purchased on the same date as the Class C
shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who
wish to exchange
all or a portion of their Class Y shares for Class Y shares
in any of the funds
identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange
Privilege. Although the
exchange privilege is an important benefit, excessive
exchange transactions can
be detrimental to the Fund's performance and its
shareholders. SBMFM may
determine that a pattern of frequent exchanges is excessive
and contrary to the
best interests of the Fund's other shareholders. In this
event, SBMFM will
notify Smith Barney that the Fund may, at its discretion,
decide to limit
additional purchases and/or exchanges by a shareholder. Upon
such a
determination, the Fund will provide notice in writing or by
telephone to the
shareholder at least 15 days prior to suspending the
exchange privilege and
during the 15 day period the shareholder will be required to
(a) redeem his or
her shares in the Fund or (b) remain invested in the Fund or
exchange into any
of the funds of the Smith Barney Mutual Funds ordinarily
available, which
position the shareholder would be expected to maintain for a
significant period
of time. All relevant factors will be considered in
determining what constitutes
an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by
telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange
Program." Exchanges
will be processed at the net asset value next determined,
plus any applicable
sales charge differential. Redemption procedures discussed
below are also
applicable for exchanging shares, and exchanges will be made
upon receipt of all
supporting documents in proper form. If the account
registration of the shares
of the fund being acquired is identical to the registration
of the shares of the
fund exchanged, no signature guarantee is required. A
capital gain or loss for
tax purposes will be realized upon the exchange, depending
upon the cost or
other basis of shares redeemed. Before exchanging shares,
investors should read
the current prospectus describing the shares to be acquired.
The Fund reserves
41
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
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 third day
following receipt of proper
tender, except on any days on which the NYSE is closed or as
permitted under the
1940 Act in extraordinary circumstances. Generally, if the
redemption proceeds
are remitted to a Smith Barney brokerage account, these
funds will not be
invested for the shareholder's benefit without specific
instruction and Smith
Barney will benefit from the use of temporarily uninvested
funds. Redemption
proceeds for shares purchased by check, other than a
certified or official bank
check, will be remitted upon clearance of the check, which
may take up to ten
days or more.
Shares held by Smith Barney as custodian must be
redeemed by submitting a
written request to a Smith Barney Financial Consultant.
Shares other than those
held by Smith Barney as custodian may be redeemed through an
investor's
Financial Consultant, Introducing Broker or dealer in the
selling group or by
submitting a written request for redemption to:
Smith Barney High Income Fund
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class
and number or dollar
amount of shares to be redeemed, (b) identify the
shareholder's account number
and (c) be signed by each registered owner exactly as the
shares are registered.
If the shares to be redeemed were issued in certificate
form, the certificates
42
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Redemption of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
must be endorsed for transfer (or be accompanied by an
endorsed stock power) and
must be submitted to FDISG together with the redemption
request. Any signature
appearing on a written redemption request in excess of $2,
000, 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. Written redemption requests of
$2,000 or less do
not require a signature guarantee unless more than one such
redemption request
is made in any 10-day period. Redemption proceeds will be
mailed to an
investor's address of record. FDISG 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 FDISG
receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash
withdrawal plan, under which
shareholders who own shares with a value of at least $10,000
may elect to
receive cash payments of at least $50 monthly or quarterly.
Retirement plan
accounts are eligible for automatic cash withdrawal plans
only where the
shareholder is eligible to receive qualified distributions
and has an account
value of at least $5,000. The withdrawal plan will be
carried over on exchanges
between funds or Classes of the Fund. Any applicable CDSC
will not be waived on
amounts withdrawn by a shareholder that exceed 1.00% per
month of the value of
the shareholder's shares subject to the CDSC at the time the
withdrawal plan
commences. For further information regarding the automatic
cash withdrawal plan,
shareholders should contact a Smith Barney Financial
Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage
account may be eligible
to redeem and exchange Fund shares by telephone. To
determine if a shareholder
is entitled to participate in this program, he or she should
contact FDISG at
1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete and
return a Telephone/Wire Authorization Form, including a
signature guarantee,
that will be provided by FDISG upon request. (Alternatively,
an investor may
authorize telephone redemptions on the new account
application with a signature
guarantee when making his/her initial investment in the
Fund.)
Redemptions. Redemption requests of up to $10,000 of any
class or classes of
the Fund's shares, may be made by eligible shareholders by
calling FDISG at
1-800-451-2010. Such requests may be made between 9:00 a.m.
and 4:00 p.m. (New
York City time) on any day the NYSE is open. Redemptions of
shares (i) by
43
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Redemption of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
retirement plans or (ii) for which certificates have been
issued are not
permitted under this program.
A shareholder will have the option of having the
redemption proceeds mailed
to his/her address of record or wired to a bank account
predesignated by the
shareholder. Generally, redemption proceeds will be mailed
or wired, as the case
may be, on the next business day following the redemption
request. In order to
use the wire procedures, the bank receiving the proceeds
must be a member of the
Federal Reserve System or have a correspondent with a member
bank. The Fund
reserves the right to charge shareholders a nominal fee for
each wire
redemption. Such charges, if any, will be assessed against
the shareholder's
account from which shares were redeemed. In order to change
the bank account
designated to receive redemption proceeds, a shareholder
must complete a new
Telephone/Wire Authorization Form and, for the protection of
the shareholder's
assets, will be required to provide a signature guarantee
and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by
telephone if the
account registration of the shares of the fund being
acquired is identical to
the registration of the shares of the fund exchanged. Such
exchange requests may
be made by calling FDISG at 1-800-451-2010 between 9:00 a.m.
and 4:00 p.m. (New
York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and
Exchange Program.
Neither the Fund nor its agents will be liable for following
instructions
communicated by telephone that are reasonably believed to be
genuine. The Fund
and its agents will employ procedures designed to verify the
identity of the
caller and legitimacy of instructions (for example, a
shareholder's name and
account number will be required and phone calls may be
recorded). The Fund
reserves the right to suspend, modify or discontinue the
telephone redemption
and exchange program or to impose a charge for this service
at any time
following at least seven (7) days prior notice to
shareholders.
- - ------------------------------------------------------------
- - --------------------
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 High Income Fund
- - ------------------------------------------------------------
- - --------------------
Performance
- - ------------------------------------------------------------
- - --------------------
YIELD
From time to time, the Fund advertises the 30-day
"yield" of each Class of
shares. The Fund's yield refers to the income generated by
an investment in
those shares over the 30-day period identified in the
advertisement and is
computed by dividing the net investment income per share
earned by the Class
during the period by the maximum public offering price per
share on the last day
of the period. This income is "annualized" by assuming the
amount of income is
generated each month over a one-year period and is
compounded semi-annually. The
annualized income is then shown as a percentage of the net
asset value.
TOTAL RETURN
From time to time the Fund may include its total
return, average annual
total return and current dividend return in advertisements
and/or other types of
sales literature. These figures are computed separately for
Class A, Class B,
Class C and Class Y shares of the Fund. These figures are
based on historical
earnings and are not intended to indicate future
performance. Total return is
computed for a specified period of time assuming deduction
of the maximum sales
charge, if any, from the initial amount invested and
reinvestment of all income
dividends and capital gain distributions on the reinvestment
dates at prices
calculated as stated in this Prospectus, then dividing the
value of the
investment at the end of the period so calculated by the
initial amount invested
and subtracting 100%. The standard average annual total
return, as prescribed by
the SEC, is derived from this total return, which provides
the ending redeemable
value. Such standard total return information may also be
accompanied with
nonstandard total return information for differing periods
computed in the same
manner but without annualizing the total return or taking
sales charges into
account. The Fund calculates current dividend return for
each Class by
annualizing the most recent monthly distribution and
dividing by the net asset
value or the maximum public offering price (including sales
charge) on the last
day of the period for which current dividend return is
presented. The current
dividend return for each Class may vary from time to time
depending on market
conditions, the composition of its investment portfolio and
operating expenses.
These factors and possible differences in the methods used
in calculating
current dividend return should be considered when comparing
a Class' current
return to yields published for other investment companies
and other investment
vehicles. The Fund may also include comparative performance
information in
advertising or marketing its shares. Such performance
information may include
data from Lipper Analytical Services, Inc. and other
financial publications.
45
<PAGE>
Smith Barney High 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 the companies that furnish
services to the
Trust and the Fund, including agreements with the Fund's
distributor, investment
adviser and administrator, custodian and transfer agent. The
day-to-day
operations of the Fund are delegated to the Fund's
investment adviser and
administrator. The Statement of Additional Information
contains background
information regarding each Trustee and executive officer of
the Trust.
INVESTMENT ADVISER -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New
York 10013, serves as
the Fund's investment adviser. SBMFM is a wholly owned
subsidiary of Holdings.
SBMFM (through its predecessor entities) has been in the
investment counseling
business since 1934 and is a registered investment adviser.
SBMFM renders
investment advice to investment companies that had aggregate
assets under
management as of September 30, 1995 in excess of $60
billion.
Subject to the supervision and direction of the Trust's
Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the
Fund's investment
objective and policies, makes investment decisions for the
Fund, places orders
to purchase and sell securities and employs professional
portfolio managers and
securities analysts who provide research services to the
Fund. Under an
investment advisory agreement, the Fund pays SBMFM a monthly
fee at the annual
rate of 0.50% of the value of the Fund's average daily net
assets. For the
fiscal year ended July 31, 1995, the Fund paid investment
advisory fees to SBMFM
in an amount equal to 0.50% of the value of its average
daily net assets.
PORTFOLIO MANAGEMENT
John C. Bianchi, a Managing Director of Smith Barney,
has served as
Investment Officer of the Fund since 1988 and is responsible
for managing its
day-to-day operations, including the making of investment
decisions.
Management's discussion and analysis and additional
performance information
regarding the Fund during the fiscal year ended July 31,
1995 is included in the
Annual Report dated July 31, 1995. A copy of the Annual
Report may be obtained
upon request without charge from a Smith Barney Financial
Consultant or by
writing or calling the Fund at the address or phone number
listed on page one of
this Prospectus.
46
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Management of the Trust and the Fund (continued)
- - ------------------------------------------------------------
- - --------------------
ADMINISTRATOR -- SBMFM
SBMFM also serves as the Fund's administrator and
oversees all aspects of
the Fund's administration. Pursuant to an administration
agreement with the
Fund, SBMFM is paid a fee at the annual rate of 0.20% of the
Fund's average
daily net assets.
- - ------------------------------------------------------------
- - --------------------
Distributor
- - ------------------------------------------------------------
- - --------------------
Smith Barney is located at 388 Greenwich Street, New
York, New York, 10013.
Smith Barney distributes shares of the Fund as principal
underwriter and as such
conducts a continuous offering pursuant to a "best efforts"
arrangement
requiring Smith Barney to take and pay for only such
securities as may be sold
to the public. Pursuant to a plan of distribution adopted by
the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid
an annual service
fee with respect to Class A, Class B and Class C shares of
the Fund at the
annual rate of 0.25% of the average daily net assets of the
respective Class.
Smith Barney is also paid an annual distribution fee with
respect to Class B and
Class C shares at the annual rate of 0.50% and 0.45%,
respectively, of the
average daily net assets attributable to those Classes.
Class B shares which
automatically convert to Class A shares eight years after
the date of original
purchase will no longer be subject to distribution fees. The
fees are used by
Smith Barney to pay its Financial Consultants for servicing
shareholder accounts
and, in the case of Class B and Class C shares, to cover
expenses primarily
intended to result in the sale of those shares. These
expenses include:
advertising expenses; the cost of printing and mailing
prospectuses to potential
investors; payments to and expenses of Smith Barney
Financial Consultants and
other persons who provide support services in connection
with the distribution
of shares; interest and/or carrying charges; and indirect
and overhead costs of
Smith Barney associated with the sale of Fund shares,
including lease, utility,
communications and sales promotion expenses.
The payments to Smith Barney Financial Consultants for
selling shares of a
Class include a commission or fee paid by the investor or
Smith Barney at the
time of sale and, with respect to Class A, Class B and Class
C shares, a
continuing fee for servicing shareholder accounts for as
long as a shareholder
remains a holder of that Class. Smith Barney Financial
Consultants may receive
different levels of compensation for selling different
Classes of shares.
Payments under the Plan with respect to Class B and
Class C shares are not
tied exclusively to the distribution and shareholder service
expenses actually
47
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Distributor (continued)
- - ------------------------------------------------------------
- - --------------------
incurred by Smith Barney and the payments may exceed
distribution expenses
actually incurred. The Trust's Board of Trustee's will
evaluate the
appropriateness of the Plan and its payment terms on a
continuing basis and in
so doing will consider all relevant factors, including
expenses borne by Smith
Barney, amounts received under the Plan and proceeds of the
CDSC.
- - ------------------------------------------------------------
- - --------------------
Additional Information
- - ------------------------------------------------------------
- - --------------------
The Trust was organized on March 12, 1985, under the
laws of the
Commonwealth of Massachusetts and is an entity commonly
known as a
"Massachusetts business trust." The Trust offers shares of
beneficial interest
of separate series having a $.001 per share par value. When
matters are
submitted for shareholder vote, shareholders of each Class
will have one vote
for each full share owned and a proportionate, fractional
vote for any
fractional share held of that Class. Generally, shares of
the Trust vote by
individual fund on all matters except (a) matters affecting
only the interest of
one or more of the funds, in which case only shares of the
affected fund or
funds would be entitled to vote, or (b) when the 1940 Act
requires that shares
of the funds be voted in the aggregate. Similarly, shares of
the Fund will be
voted generally on a Fund-wide basis except on matters
affecting the interests
of one Class of shares.
Each Class of Fund shares represents identical
interests in the Fund's
investment portfolio. As such, they have the same rights,
privileges and
preferences, except with respect to: (a) the designation of
each Class; (b) the
effect of the respective sales charges for each Class; (c)
the distribution
and/or service fees, if any, borne by each Class; (d) the
expenses allocable
exclusively to each Class; (e) voting rights on matters
exclusively affecting a
single Class; (f) the exchange privilege of each Class; and
(g) the conversion
feature of the Class B shares. The Trust's Board of Trustees
does not anticipate
that there will be any conflicts among the interests of the
holders of the
different Classes. The Trustees, on an ongoing basis, will
consider whether any
such conflict exists and, if so, take appropriate action.
The Trust does not hold annual shareholder meetings.
There normally will be
no meetings of shareholders for the purpose of electing
Trustees unless and
until such time as less than a majority of the Trustees
holding office have been
elected by shareholders. The Trustees will call a meeting
for any purpose upon
written request of shareholders holding at least 10% of the
Trust's outstanding
shares and the Trust will assist shareholders in calling
such a meeting as
required by the 1940 Act.
48
<PAGE>
Smith Barney High Income Fund
- - ------------------------------------------------------------
- - --------------------
Additional Information (continued)
- - ------------------------------------------------------------
- - --------------------
PNC Bank, National Association, located at 17th and
Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of the Trust's
investments.
FDISG is located at Exchange Place, Boston,
Massachusetts 02109, and serves
as the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report
and an audited annual
report, each of which includes a list of the investment
securities held by the
Fund at the end of the reporting period. In an effort to
reduce the Fund's
printing and mailing costs, the Trust plans to consolidate
the mailing of the
Fund's semi-annual and annual reports by household. This
consolidation means
that a household having multiple accounts with the identical
address of record
will receive a single copy of each report. Shareholders who
do not want this
consolidation to apply to their accounts should contact
their Smith Barney
Financial Consultants or the Fund's transfer agent.
49
<PAGE>
SMITH BARNEY
- - ------------
A Member of the
Travelers Group [LOGO]
Smith Barney
High
Income
Fund
388 Greenwich Street
New
York, New York 10013
FDO220 11/95
<PAGE>
PROSPECTUS
SMITH BARNEY
High
Income
Fund
Class Z Shares Only
November 28, 1995
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Prospectus
November 28, 1995
- - ------------------------------------------------------------
- - --------------------
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Smith Barney High Income Fund (the "Fund") is a
diversified fund that seeks
to provide shareholders with high current income by
investing in high-yielding
corporate bonds, debentures and notes. The Fund also
purchases put and call
options and writes covered put and call options on
securities it holds and on
stock indexes primarily as a hedge to reduce investment
risk.
The Fund is one of a number of funds, each having
distinct investment
objectives and policies, making up the Smith Barney Income
Funds (the "Trust").
The Trust is an open-end management investment company
commonly referred to as a
mutual fund.
The Funds invests primarily in lower-rated bonds,
commonly known as "junk
bonds". Bonds of this type are subject to a greater risk of
loss of principal
and interest. Purchasers should carefully assess the risks
associated with an
investment in the Fund. See "Risk Factors and Special
Considerations."
This Prospectus sets forth concisely certain
information about the Fund and
the Trust, including expenses, that prospective investors
will find helpful in
making an investment decision. Investors are encouraged to
read this Prospectus
carefully and retain it for future reference.
The Class Z shares described in this Prospectus
(previously designated as
Class C shares) are currently offered exclusively for sale
to tax-exempt
employee benefit and retirement plans of Smith Barney Inc.
("Smith Barney") or
any of its affiliates ("Qualified Plans") and to certain
unit investment trusts
sponsored by Smith Barney or any of its affiliates ("Smith
Barney UITs").
Additional information about the Fund and the Trust is
contained in a
Statement of Additional Information dated November 28, 1995,
as amended or
supplemented from time to time, that is available upon
request and without
charge by calling or writing the Trust at the telephone
number or address set
forth above or by contacting a Smith Barney Financial
Consultant. The Statement
of Additional Information has been filed with the Securities
and Exchange
Commission (the "SEC") and is incorporated by reference into
this Prospectus in
its entirety.
Smith Barney Inc.
Distributor
Smith Barney Mutual Funds Management Inc.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
1
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Table of Contents
- - ------------------------------------------------------------
- - --------------------
The Fund's Expenses
3
- - ------------------------------------------------------------
- - --------------------
Financial Highlights
4
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies
5
- - ------------------------------------------------------------
- - --------------------
Valuation of Shares
16
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes
17
- - ------------------------------------------------------------
- - --------------------
Purchase and Redemption of Shares
18
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege
19
- - ------------------------------------------------------------
- - --------------------
Performance
21
- - ------------------------------------------------------------
- - --------------------
Management of the Trust and Fund
22
- - ------------------------------------------------------------
- - --------------------
Additional Information
24
- - ------------------------------------------------------------
- - --------------------
============================================================
====================
No person has been authorized to give any information
or to make any
representations in connection with this offering other than
those contained in
this Prospectus and, if given or made, such other
information and
representations must not be relied upon as having been
authorized by the Fund or
the Distributor. This Prospectus does not constitute an
offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any
of the securities
offered hereby in any jurisdiction to any person to whom it
is unlawful to make
such offer or solicitation in such jurisdiction.
============================================================
====================
2
<PAGE>
Smith Barney High Income Fund -- Class Z 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
Class Z shares of
the Fund, based upon the Fund's operating expenses for its
most recent fiscal
year:
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees
0.70%
Other expenses
0.16%
- - ------------------------------------------------------------
- - --------------------
TOTAL FUND OPERATING EXPENSES
0.86%
============================================================
====================
The nature of the services for which the Fund pays
management fees is
described under "Management of the Trust and the Fund."
"Other expenses" in the
above table include fees for shareholder services, custodial
fees, legal and
accounting fees, printing costs and registration fees.
EXAMPLE The following example is intended to assist an
investor in
understanding the various costs that an investor in the Fund
will bear directly
or indirectly. The example assumes payment by the Fund of
operating expenses at
the levels set forth in the table above. See "Purchase and
Redemption of Shares"
and "Management of the Trust and the Fund."
<TABLE>
<CAPTION>
1
year 3 years 5 years 10 years
============================================================
============================
<S> <C>
<C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment in Class Z shares of the Fund,
assuming (1) 5.00% annual return and (2) redemption
at the end of each time period: $9
$27 $48 $106
============================================================
============================
</TABLE>
The example also provides a means for the investor to
compare expense
levels of funds with different fee structures over varying
investment periods.
To facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. This example should not be
considered a
representation of past or future expenses and actual
expenses may be greater or
less than those shown.
3
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Financial Highlights
- - ------------------------------------------------------------
- - --------------------
The following information for the fiscal year ended
July 31, 1995 has been
audited by KPMGPeat Marwick LLP, independent accountants and
appears in the
Fund's Annual Report dated July, 31 1995. The following
information for the
fiscal years ended July 31, 1993, through July 31, 1994 has
been audited by
Coopers & Lybrand L.L.P. The information set forth below
should be read in
conjunction with the financial statements and related notes
that also appear in
the Fund's 1995 Annual Report, which is incorporated by
reference into the
Statement of Additional Information.
For a Class Z share(1) of beneficial interest outstanding
throughout each
period:
Year Year
Period
Ended
Ended Ended
7/31/95
7/31/94 7/31/93(2)
============================================================
====================
Net Asset Value, Beginning of Period $11.16
$12.01 $11.03
- - ------------------------------------------------------------
- - --------------------
Income From Operations:
Net investment income 1.11
1.10 0.79
Net realized and unrealized
gain (loss) on investments (0.03)
(0.80) 1.07
- - ------------------------------------------------------------
- - --------------------
Total Income from Operations 1.08
0.30 1.86
- - ------------------------------------------------------------
- - --------------------
Less Distributions From:
Net investment income (1.08)
(1.09) (0.84)
Overdistribution of net income --
(0.06) (0.04)
Capital (0.07) --
- - --
- - ------------------------------------------------------------
- - --------------------
Total Distributions (1.15)
(1.15) (0.88)
- - ------------------------------------------------------------
- - --------------------
Net Asset Value, End of Period $11.09
$11.16 $12.01
- - ------------------------------------------------------------
- - --------------------
Total Return++ 10.55%
2.37% 17.47%+++
- - ------------------------------------------------------------
- - --------------------
Ratios to Average Net Assets
Expenses 0.86%
0.77% 0.81%+
Net investment income 10.28
9.61% 9.88%+
- - ------------------------------------------------------------
- - --------------------
Portfolio Turnover Rate 60%
98% 95%
============================================================
====================
(1) On November 7, 1994, the former Class C shares were
renamed Class Z shares.
(2) The Fund commenced selling Class Z shares (previously
designated as Class C
shares) on November 6, 1992.
+ Annualized.
++ Total return represents aggregate total return for the
period indicated and
does noit reflect any applicable sales charge.
+++ Total return is not annualized as it may not be
representative of the total
return for the year.
4
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies
- - ------------------------------------------------------------
- - --------------------
The Fund's investment objective is high current income.
The Fund's
investment objective may be changed only with the approval
of the holders of a
majority of the Fund's outstanding shares. There can be no
assurance that the
Fund will achieve its investment objective. Although growth
of capital is not an
investment objective of the Fund, Smith Barney Mutual Funds
Management Inc.
("SBMFM") may consider potential for growth as one factor,
among others, in
selecting investments for the Fund. The Fund will seek high
current income by
investing, under normal circumstances, at least 65% of its
assets in
high-yielding corporate bonds, debentures and notes
denominated in U.S. dollars
or foreign currencies. Up to 40% of the Fund's assets may be
invested in
fixed-income obligations of foreign issuers, and up to 20%
of its assets may be
invested in common stock or other equity or equity-related
securities, including
convertible securities, preferred stock, warrants and
rights. Securities
purchased by the Fund generally will be rated in the lower
rating categories of
recognized rating agencies, as low as Caa by Moody's
Investors Service, Inc.
("Moody's") or D by Standard & Poor's Corporation ("S&P"),
or unrated securities
that SBMFM deems of comparable quality. The Fund may invest
up to 10% of its
assets in low-rated securities or unrated securities of
comparable quality.
Low-rated securities are securities rated less than
investment grade by Moody's
or S&P. See "Special ConsiderationsMedium-, Low- and Unrated
Securities" below.
The Fund may hold securities with higher ratings when the
yield differential
between low-rated and higher-rated securities narrows and
the risk of loss may
be reduced substantially with only a relatively small
reduction in yield. The
Fund also may invest in higher-rated securities when SBMFM
believes that a more
defensive investment strategy is appropriate in light of
market or economic
conditions. The Fund also may lend its portfolio securities,
purchase or sell
securities on a when-issued or delayed-delivery basis and
write covered call
options on securities. In order to mitigate the effects of
uncertainty in future
exchange rates, the Fund may engage in currency exchange
transactions and
purchase options on foreign currencies. The Fund also may
hedge against the
effects of changes in the value of its investments by
purchasing put and call
options on interest rate futures contracts. Special
considerations associated
with the Fund's investments are described below.
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.
5
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
Covered Option Writing. The Fund may write call options
on securities. The
Fund realizes fees (referred to as "premiums") for granting
the rights evidenced
by the options. A call option embodies the right of its
purchaser to compel the
writer of the option to sell to the option holder an
underlying security at a
specified price at any time during the option period. Thus,
the purchaser of a
call option written by the Fund has the right to purchase
from the Fund the
underlying security owned by the Fund at the agreed-upon
price for a specified
time period.
Upon the exercise of a call option written by the Fund,
the Fund may suffer
a loss equal to the excess of the security's market value at
the time of the
option exercise over the Fund's acquisition cost of the
security, less the
premium received for writing the option.
The Fund will write only covered options. Accordingly,
whenever the Fund
writes a call option, it will continue to own or have the
present right to
acquire the underlying security for as long as it remains
obligated as the
writer of the option.
The Fund may engage in a closing purchase transaction
to realize a profit
or to unfreeze an underlying security (thereby permitting
its sale or the
writing of a new option on the security prior to the
outstanding option's
expiration). To effect a closing purchase transaction, the
Fund would purchase,
prior to the holder's exercise of an option the Fund has
written, an option of
the same series as that on which the Fund desires to
terminate its obligation.
The obligation of the Fund under an option it has written
would be terminated by
a closing purchase transaction, but the Fund would not be
deemed to own an
option as the result of the transaction. There can be no
assurance the Fund will
be able to effect closing purchase transactions at a time
when it wishes to do
so. To facilitate closing purchase transactions, however,
the Fund ordinarily
will write options only if a secondary market for the
options exists on a
domestic securities exchange or in the over-the-counter
market.
Convertible Securities and Synthetic Convertible
Securities. Convertible
securities are fixed-income securities that may be converted
at either a stated
price or stated rate into underlying shares of common stock.
Convertible
securities have general characteristics similar to both
fixed-income and equity
securities. Although to a lesser extent than with fixed-
income securities
generally, the market value of convertible securities tends
to decline as
interest rates increase and, conversely, tends to increase
as interest rates
decline. In addition, because of the conversion feature, the
market value of
convertible securities tends to vary with fluctuations in
the market value of
the underlying common stocks and, therefore, also will react
to variations in
the general market for equity securities. A unique feature
of convertible
6
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
securities is that as the market price of the underlying
common stock declines,
convertible securities tend to trade increasingly on a yield
basis, and so may
not experience market value declines to the same extent as
the underlying common
stock. When the market price of the underlying common stock
increases, the
prices of the convertible securities tend to rise as a
reflection of the value
of the underlying common stock. While no securities
investments are without
risk, investments in convertible securities generally entail
less risk than
investments in common stock of the same issuer.
As fixed-income securities, convertible securities
generally provide a
steady dividend which is higher than dividends paid by
common stocks but at
lower interest rates or dividend yields than non-convertible
fixed-income
securities. Like all fixed-income securities, there can be
no assurance of
current income because issuers may default on their
obligations. Similarly,
although the conversion feature of a convertible security
enables the holder to
benefit from increases in the market price of the underlying
common stock (to a
lesser extent than a direct holder of the common stock)
there can be no
assurance of capital appreciation because of market
fluctuations.
Convertible securities generally are subordinated to
other similar but
non-convertible securities of the same issuer, although
convertible bonds, as
corporate debt obligations, enjoy seniority in right of
payment to all equity
securities, and convertible preferred stock is senior to
common stock of the
same issuer. Because of the subordination feature, however,
convertible
securities typically have lower ratings than similar non-
convertible securities.
Unlike a convertible security which is a single
security, a synthetic
convertible security is comprised of two distinct securities
that together
resemble convertible securities in certain respects.
Synthetic convertible
securities are created by combining non-convertible bonds or
preferred stocks
with warrants or stock call options. The options that will
form elements of
synthetic convertible securities will be listed on a
securities exchange or on
the National Association of Securities Dealers Automated
Quotation System. The
two components of a synthetic convertible security, which
will be issued with
respect to the same entity, generally are not offered as a
unit, and may be
purchased and sold by the Fund at different times. Synthetic
convertible
securities differ from convertible securities in certain
respects, including
that each component of a synthetic convertible security has
a separate market
value and responds differently to market fluctuations.
Investing in synthetic
convertible securities involves the risk normally involved
in holding the
securities comprising the synthetic convertible security.
7
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
Additional Investments
Money Market Instruments. When SBMFM believes that
market conditions
warrant, the Fund may adopt a temporary defensive posture
and may invest in
short-term instruments without limitation. Short-term
instruments in which the
Fund may invest include: United States government
securities; certain bank
obligations (including certificates of deposit, time
deposits and bankers'
acceptances of domestic or foreign banks, domestic savings
and loan associations
and similar institutions); commercial paper rated no lower
than A2 by S&P or
Prime2 by Moody's or the equivalent from another major
rating service or, if
unrated, of an issuer having an outstanding unsecured debt
issue then rated
within the three highest rating categories; and repurchase
agreements as
described below.
United States Government Securities. United States
government securities
are obligations of, or guaranteed by, the United States
government, its agencies
or instrumentalities ("U.S. government securities"). The
U.S. government
securities in which the Fund may invest include: direct
obligations of the
United States Treasury (such as Treasury Bills, Treasury
Notes and Treasury
Bonds) and obligations issued by U.S. government agencies
and instrumentalities,
including securities that are supported by the full faith
and credit of the
United States (such as Government National Mortgage
Association ("GNMA")
certificates); securities that are supported by the right of
the issuer to
borrow from the United States Treasury (such as securities
of Federal Home Loan
Banks); and securities that are supported by the credit of
the instrumentality
(such as Federal National Mortgage Association ("FNMA") and
Federal Home Loan
Mortgage Corporation ("FHLMC") bonds). Treasury Bills have
maturities of less
than 1 year, Treasury Notes have maturities of 1 to 10 years
and Treasury Bonds
generally have maturities of greater than 10 years at the
date of issuance.
Certain U.S. government securities, such as those issued or
guaranteed by GNMA,
FNMA and FHLMC, are mortgage-related securities. U.S.
government securities
generally do not involve the credit risks associated with
other types of
interest-bearing securities, although, as a result, the
yields available from
U.S. government securities are generally lower than the
yields available from
interest-bearing corporate securities.
Repurchase Agreements. The Fund may engage in
repurchase agreement
transactions with banks which are the issuers of instruments
acceptable for
purchase by the Fund and with certain dealers on the Federal
Reserve Bank of New
York's list of reporting dealers. Under the terms of a
typical repurchase
agreement, the Fund would acquire an underlying debt
obligation for a relatively
short period (usually not more than one week) subject to an
obligation of the
seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon
price and time, thereby determining the yield during the
Fund's holding period.
8
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
This arrangement results in a fixed rate of return that is
not subject to market
fluctuations during the Fund's holding period. The value of
the underlying
securities will be at least equal at all times to the total
amount of the
repurchase obligation, including interest. Repurchase
agreements could involve
certain risks in the event of default or insolvency of the
other party,
including possible delays in or restrictions upon the Fund's
ability to dispose
of the underlying securities, the risk of a possible decline
in the value of the
underlying securities during the period in which the Fund
seeks to assert its
rights to them, the risk of incurring expenses associated
with asserting those
rights and the risk of losing all or part of the income from
the agreement.
SBMFM, acting under the supervision of the Trust's Board of
Trustees, reviews on
an ongoing basis the value of the collateral and the
creditworthiness of those
banks and dealers with which the Fund may enter into
repurchase agreements to
evaluate potential risks.
Futures Contracts and Options on Futures Contracts.
When deemed advisable
by SBMFM, the Fund may enter into futures contracts or
related options that are
traded on a domestic exchange or board of trade. Such
investments, if any, by
the Fund will be made solely for the purpose of hedging
against the effects of
changes in the value of the portfolio securities due to
anticipated changes in
interest rates, currency values and market conditions and
when the transactions
are economically appropriate to the reduction of risks
inherent in the
management of the Fund. The Fund may not enter into futures
and options
contracts for which aggregate initial margin deposits and
premium paid for
unexpired options to establish such positions that are not
bona fide hedging
positions (as defined by the Commodity Futures Trading
Commission), exceed 5% of
the fair market value of the Fund's assets after taking into
account unrealized
profits and unrealized losses on futures contracts into
which it has entered.
With respect to each long position in a futures contract or
option thereon, the
underlying commodity value of such contract always will be
covered by cash and
cash equivalents set aside plus accrued profits held in a
segregated account.
The use of futures contracts and options on futures
contracts as a hedging
device involves several risks. There can be no assurance
that there will be a
correlation between price movements in the underlying
securities on the one
hand, and price movements in the securities which are the
subject of the hedge,
on the other hand. Positions in futures contracts and
options on futures
contracts may be closed out only on the exchange or board of
trade on which they
were entered into, and there can be no assurance that an
active market will
exist for a particular contract or option at any particular
time. Losses
incurred in hedging transactions and the costs of these
transactions will affect
the Fund's performance.
9
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
Foreign Securities. There are certain risks involved in
investing in
securities of companies and governments of foreign nations
which are in addition
to the usual risks inherent in domestic investments. These
risks include those
resulting from revaluation of currencies, future adverse
political and economic
developments and the possible imposition of currency
exchange blockages or other
foreign governmental laws or restrictions, reduced
availability of public
information concerning issuers and the lack of uniform
accounting, auditing and
financial reporting standards or of other regulatory
practices and requirements
comparable to those applicable to domestic companies. The
yield of the Fund may
be adversely affected by fluctuations in value of one or
more foreign currencies
relative to the U.S. dollar. Moreover, securities of many
foreign companies and
their markets may be less liquid and their prices more
volatile than those of
securities of comparable domestic companies. In addition,
with respect to
certain foreign countries, there is the possibility of
expropriation,
nationalization, confiscatory taxation and limitations on
the use or removal of
funds or other assets of the Fund, including the withholding
of dividends.
Foreign securities may be subject to foreign government
taxes that could reduce
the yield on such securities. Because the Fund will invest
in securities
denominated or quoted in currencies other than the U.S.
dollar, changes in
foreign currency exchange rates may adversely affect the
value of portfolio
securities and the appreciation or depreciation of
investments. Investments in
foreign securities also may result in higher expenses due to
the cost of
converting foreign currency to U.S. dollars, the payment of
fixed brokerage
commissions on foreign exchanges, which generally are higher
than commissions on
domestic exchanges, and the expense of maintaining
securities with foreign
custodians, and the imposition of transfer taxes or
transaction charges
associated with foreign exchanges.
Corporate securities in which the Fund may invest
include corporate
fixed-income securities of both domestic and foreign
issuers, such as bonds,
debentures, notes, equipment lease certificates, equipment
trust certificates,
and preferred stock.
Certain of the corporate fixed-income securities in
which the Fund may
invest may involve equity characteristics. The Fund may, for
example, invest in
warrants for the acquisition of stock of the same or of a
different issuer or in
corporate fixed-income securities that have conversion or
exchange rights
permitting the holder to convert or exchange the securities
at a stated price
within a specified period of time into a specified number of
shares of common
stock. In addition, the Fund may invest in participations
that are based on
revenues, sales or profits of an issuer or in common stock
offered as a unit
with corporate fixed-income securities.
10
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
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 put options on a foreign currency
in which securities
held by the Fund are denominated to protect against a
decline in the value of
the currency in relation to the currency in which the
exercise price is
denominated. The Fund may purchase a call option on a
foreign currency to hedge
against an adverse exchange rate of the currency in which a
security that it
anticipates purchasing is denominated in relation to the
currency in which the
exercise price is denominated. An option on a foreign
currency gives the
purchaser, in return for a premium, the right to sell, in
the case of a put, and
buy, in the case of a call, the underlying currency at a
specified price during
the term of the option. Although the purchase of an option
on a foreign currency
may constitute an effective hedge by the Fund against
fluctuations in the
exchange rates, in the event of rate movements adverse to
the Fund's position,
the Fund may forfeit the entire amount of the premium plus
related transaction
costs. Options on foreign currencies purchased by the Fund
may be traded on
domestic and foreign exchanges or traded over-the-counter.
Although the foreign currency market may not
necessarily be more volatile
than the market in other commodities, the foreign currency
market offers less
protection against defaults in the forward trading of
currencies than is
available when trading in currencies occurs on an exchange.
Because a forward
currency contract is not guaranteed by an exchange or
clearinghouse, a default
on the contract would deprive the Fund of unrealized profits
or force the Fund
to cover its commitments for purchase or resale, if any, at
the current market
price.
11
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
When-Issued Securities and Delayed-Delivery
Transactions. In order to
secure yields or prices deemed advantageous at the time, the
Fund may purchase
or sell any portfolio securities on a when-issued or delayed-
delivery basis. The
Fund will enter into a when-issued transaction for the
purpose of acquiring
portfolio securities and not for the purpose of leverage. In
such transactions
delivery of the securities occurs beyond the normal
settlement periods, but no
payment or delivery is made by the Fund prior to the actual
delivery or payment
by the other party to the transaction. Due to fluctuations
in the value of
securities purchased or sold on a when-issued or delayed-
delivery basis, the
yields obtained on such securities may be higher or lower
than the yields
available in the market on the dates when the investments
are actually delivered
to the buyers. The Fund will establish a segregated account
consisting of cash,
U.S. government securities or other high grade debt
obligations in an amount
equal to the amount of its when-issued and delayed-delivery
commitments. Placing
securities rather than cash in the segregated account may
have a leveraging
effect on the Fund's net assets. The Fund will not accrue
income with respect to
a when-issued security prior to its stated delivery date.
Lending of Portfolio Securities. The Fund has the
ability to lend portfolio
securities to brokers, dealers and other financial
organizations. These loans,
if and when made, may not exceed 20% of the Fund's assets
taken at value. Loans
of portfolio securities will be collateralized by cash,
letters of credit or
U.S. government securities that are maintained at all times
in an amount at
least equal to the current market value of the loaned
securities.
Non-Publicly Traded and Illiquid Securities. The sale
of securities that
are not publicly traded is typically restricted under the
Federal securities
laws. As a result, the Fund may be forced to sell these
securities at less than
fair market value or may not be able to sell them when SBMFM
believes it
desirable to do so. The Fund's investments in illiquid
securities are subject to
the risk that should the Fund desire to sell any of these
securities when a
ready buyer is not available at a price that the Fund deems
representative of
its value, the value of the Fund's net assets could be
adversely affected.
Securities of Developing Countries. A developing
country generally is
considered to be a country that is in the initial stages of
its
industrialization cycle. Investing in the equity and fixed-
income markets of
developing countries involves exposure to economic
structures that are generally
less diverse and mature, and to political systems that can
be expected to have
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.
12
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and 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, including (a) repurchase agreements with
maturities greater
than seven days, (b) time deposits maturing from two
business days through seven
calendar days, and (c) to the extent that a liquid secondary
market does not
exist for the instruments, futures contracts and options
thereon.
Notwithstanding the foregoing, the Fund shall not invest
more than 10% of its
net assets in securities (excluding those subject to Rule
144A under the
Securities Act of 1933, as amended) that are restricted. In
addition, the Fund
may invest up to 5% of its assets in the securities of
issuers which have been
in continuous operation for less than three years. The Fund
also may borrow from
banks for temporary or emergency purposes, but not for
investment purposes, in
an amount up to 10% of its total assets, and may pledge its
assets to the same
extent in connection with such borrowings. Whenever these
borrowings exceed 5%
of the value of the Fund's total assets, the Fund will not
make any additional
investments. Except for the limitations on borrowing, the
investment guidelines
set forth in this paragraph may be changed at any time
without shareholder
consent by vote of the Trust's Board of Trustees. A complete
list of investment
restrictions that identifies additional restrictions that
cannot be changed
without the approval of the majority of the Fund's
outstanding shares is
contained in the Statement of Additional Information.
Risk Factors and Special Considerations
Options. The Fund may enter into options transactions
primarily as hedges
to reduce investment risk, generally by making an investment
expected to move in
the opposite direction of a portfolio position. A hedge is
designed to offset a
loss on a portfolio position with a gain on the hedge
position; at the same
time, however, a properly correlated hedge will result in a
gain on the
portfolio position being offset by a loss on the hedge
position. The Fund bears
the risk that the prices of the securities being hedged will
not move in the
same amount as the hedge. The Fund will engage in hedging
transactions only when
deemed advisable by SBMFM. Successful use by the Fund of
options will depend on
SBMFM's ability to correctly predict movements in the
direction of the stock
underlying the option used as a hedge. Losses incurred in
hedging transactions
and the costs of these transactions will affect the Fund's
performance.
The ability of the Fund to engage in closing
transactions with respect to
options depends on the existence of a liquid secondary
market. While the Fund
generally will purchase options only if there appears to be
a liquid secondary
13
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
market for the options purchased or sold, for some options
no such secondary
market may exist or the market may cease to exist.
Medium-, Low- and Unrated Securities. The Fund may
invest up to 10% of its
assets in medium- or low-rated securities and unrated
securities of comparable
quality. Generally, these securities offer a higher return
potential than
higher-rated securities but involve greater volatility of
price and risk of loss
of income and principal Generally, these securities offer a
higher current yield
than the yield offered by higher-rated securities, but
involve greater
volatility of price and risk of loss of income and
principal, including the
probability of future default or bankruptcy of the issuers
of such securities.
Medium- and low-rated and comparable unrated securities will
likely have large
uncertainties or major risk exposures to adverse conditions
and are
predominantly speculative with respect to the issuer's
capacity to pay interest
and repay principal in accordance with the terms of the
obligation. Accordingly,
it is possible that these types of factors could, in certain
instances, reduce
the value of securities held by the Fund, with a
commensurate effect on the
value of the Fund's shares.
The markets in which medium- and low-rated or
comparable unrated securities
are traded generally are more limited than those in which
higher-rated
securities are traded. The existence of limited markets for
these securities may
restrict the availability of securities for the Fund to
purchase and also may
have the effect of limiting the ability of the Fund to (a)
obtain accurate
market quotations for purposes of valuing securities and
calculating net asset
value and (b) sell securities at their fair value either to
meet redemption
requests or to respond to changes in the economy or the
financial markets. The
market for certain medium- and low-rated and comparable
unrated securities has
not fully weathered a major economic recession. Any such
economic downturn could
adversely affect the value of such securities and the
ability of the issuers of
these securities to repay principal and pay interest
thereon.
While the market values of medium- and low-rated and
comparable unrated
securities tend to react less to fluctuations in interest
rate levels than do
those of higher-rated securities, the market values of
certain of these
securities also tend to be more sensitive to individual
corporate developments
and changes in economic conditions than higher-rated
securities. In addition,
medium- and low-rated and comparable unrated securities
generally present a
higher degree of credit risk. Issuers of medium- and low-
rated and comparable
unrated securities are often highly leveraged and may not
have more traditional
methods of financing available to them so that their ability
to service their
debt obligations during an economic downturn or during
sustained periods of
rising interest rates may be impaired. The risk of loss due
to default by such
14
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
issuers is significantly greater because medium- and low-
rated and comparable
unrated securities generally are unsecured and frequently
are subordinated to
the prior payment of senior indebtedness. The Fund may incur
additional expenses
to the extent it is required to seek recovery upon a default
in the payment of
principal or interest on its portfolio holdings.
Fixed-income securities, including medium- and low-
rated and comparable
unrated securities, frequently have call or buy-back
features that permit their
issuers to call or repurchase the securities from their
holders, such as the
Fund. If an issuer exercises these rights during periods of
declining interest
rates, the Fund may have to replace the security with a
lower yielding security,
resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's or BB by S&P
have speculative
characteristics with respect to capacity to pay interest and
repay principal.
Securities which are rated B generally lack characteristics
of the desirable
investment and assurance of interest and principal payments
over any long period
of time may be small. Securities which are rated Caa or CCC
or below are of poor
standing. Those issues may be in default or present elements
of danger with
respect to principal or interest. Securities rated C by
Moody's and D by S&P are
in the lowest rating class and indicate that payments are in
default or that a
bankruptcy petition has been filed with respect to the
issuer or that the issuer
is regarded as having extremely poor prospects. See the
Appendix in the Trust's
Statement of Additional Information on bond ratings by
Moody's and S&P.
In light of these risks, SBMFM, in evaluating the
creditworthiness of an
issue, whether rated or unrated, will take various factors
into consideration,
which may include, as applicable, the issuer's financial
resources, its
sensitivity to economic conditions and trends, the operating
history of and the
community support for the facility financed by the issue,
the ability of the
issuer's management and regulatory matters.
The Fund's holdings in fixed-income securities (as
rated by Moody's) for
the fiscal year ended July 31, 1995 were composed as
follows: 0.54% rated Baa;
20.15% rated Ba; 56.53% rated B; 2.80% rated Caa; and 4.53%
in non-rated
securities. The percentages were calculated on a dollar
weighted average basis
by determining monthly the percentage of the Fund's net
assets invested in each
rating category and do not necessarily indicate what the
composition of the
Fund's holdings will be in subsequent years.
Securities of Unseasoned Issuers. Securities in which
the Fund may invest
may have limited marketability and, therefore, may be
subject to wide
fluctuations in market value. In addition, certain
securities may lack a
15
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Investment Objective and Policies (continued)
- - ------------------------------------------------------------
- - --------------------
significant operating history and be dependent on products
or services without
an established market share.
Portfolio Transactions
All orders for transactions in securities and options
on behalf of the Fund
are placed by SBMFM with broker-dealers that SBMFM selects,
including Smith
Barney. The Fund may utilize Smith Barney or a Smith Barney-
affiliated broker in
connection with a purchase or sale of securities when SBMFM
believes that the
broker's charge for the transactions does not exceed usual
and customary levels.
The same standard applies to the use of Smith Barney as a
commodities broker in
connection with entering into options and futures contracts.
- - ------------------------------------------------------------
- - --------------------
Valuation of Shares
- - ------------------------------------------------------------
- - --------------------
The net asset value per share of Class Z shares is
determined as of the
close of regular trading on the New York Stock Exchange,
Inc. (the "NYSE"), on
each day that the NYSE is open by dividing the value of the
Fund's net assets
attributable to Class Z by the number of shares of the Class
outstanding. The
per share net asset value of the Class Z shares may be
higher than those of
other Classes because of the lower expenses attributable to
Class Z shares.
Generally, the Fund's investments are valued at market
value or, in the
absence of a market value with respect to any securities, at
fair value as
determined by or under the direction of the Trust's Board of
Trustees. Portfolio
securities which are traded primarily on foreign exchanges
are generally valued
at the preceding closing values of such securities on their
respective
exchanges, except that when an occurrence subsequent to the
time a value was so
established is likely to have changed such value, then the
fair market value of
those securities will be determined by consideration of
other factors by or
under the direction of the Trust's Board of Trustees or
delegates. A security
that is traded primarily on an exchange is valued at the
last sale price on that
exchange or, if there were no sales during the day, at the
current quoted bid
price. Over-the-counter securities are valued on the basis
of the bid price at
the close of business on each day. Investments in U.S.
government securities
(other than short-term securities) are valued at the average
of the quoted bid
and asked prices in the over-the-counter market. Short-term
investments that
mature in 60 days or less are valued at amortized cost
whenever the Trust's
Board of Trustees determines that amortized cost reflects
fair value of those
16
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Valuation of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
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.
If a shareholder does not otherwise instruct, dividends
and distributions
will be reinvested automatically in additional shares of the
same Class at net
asset value, subject to no sales charge or CDSC. Dividends
from net investment
income, if any, of the Fund will be declared monthly and
paid on the last Friday
of the month. The Fund's final distribution for each
calendar year will include
any remaining net investment income and net realized long-
and short-term
capital gains realized during the year and deemed
undistributed during the year
for Federal income tax purposes. In order to avoid the
application of a 4%
nondeductible excise tax measured with respect to certain
undistributed amounts
of ordinary income and capital gains, the Fund may make any
additional
distributions shortly before December 31 in each year as may
be necessary to
avoid the application of this tax.
If, for any full fiscal year, the Fund's total
distributions exceed net
investment income and net realized capital gains, the excess
distributions
generally will be treated as a tax-free return of capital
(up to the amount of
the shareholder's tax basis in his or her shares). The
amount treated as a
tax-free return of capital will reduce a shareholder's
adjusted basis in his or
her shares. Pursuant to the requirements of the Investment
Company Act of 1940,
as amended (the "1940 Act") and other applicable laws, a
notice will accompany
any distribution paid from sources other than net investment
income. In the
event the Fund distributes amounts in excess of its net
investment income and
net realized capital gains, such distributions may have the
effect of decreasing
the Fund's total assets, which may increase the Fund's
expense ratio.
17
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Dividends, Distributions and Taxes (continued)
- - ------------------------------------------------------------
- - --------------------
Taxes
The Fund will be treated as a separate taxpayer with
the result that, for
Federal income tax purposes, the amount of investment income
and capital gains
earned by the Fund will be determined without regard to the
earnings of the
other funds of the Trust. The Fund has qualified and intends
to continue to
qualify each year as a "regulated investment company" under
Subchapter M of the
Internal Revenue Code of 1986, as amended. To meet those
requirements, the Fund
may need to restrict the degree to which it engages in short-
term trading and
transactions in options. If the Fund qualifies as a
regulated investment company
and meets certain distribution requirements, the Fund will
not be subject to
Federal income tax on its net investment income and net
capital gains that it
distributes to its shareholders.
Dividends paid by the Fund from investment income and
distributions of
short-term capital gain will be taxable to shareholders as
ordinary income for
Federal income tax purposes, whether received in cash or
reinvested in
additional shares. Furthermore, as a general rule,
distributions of long-term
capital gain will be taxable to shareholders as long-term
capital gain, whether
paid in cash or reinvested in additional shares, and
regardless of the length of
time that the investor has held his or her shares of the
Fund.
Distributions of capital gains or dividends received
from foreign
corporations will not qualify for the Federal dividends-
received deduction for
corporate shareholders (the "Corporate Deduction"). The Fund
anticipates that
most of its dividends will not qualify for the Corporate
Deduction. Each
shareholder will receive a statement annually from the
Trust, which will set
forth separately the aggregate dollar amount of dividends
and capital gains
distributed to the shareholder by the Fund with respect to
the prior calendar
year.
Dividends and interest received by the Fund may give
rise to withholding
and other taxes imposed by foreign countries. Tax
conventions between certain
countries and the United States may reduce or eliminate such
taxes.
Shareholders are urged to consult their tax advisors
regarding the
application of Federal, state and local tax laws to their
specific situation
before investing in the Fund.
- - ------------------------------------------------------------
- - --------------------
Purchase and Redemption of Shares
- - ------------------------------------------------------------
- - --------------------
Purchases of the Fund's Class Z shares must be made in
accordance with the
terms of a Qualified Plan or Smith Barney UIT. Purchases are
effected at the net
asset value next determined after a purchase order is
received by Smith Barney
(the "trade date"). Payment is due to Smith Barney on the
third business day
18
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Purchase and Redemption of Shares (continued)
- - ------------------------------------------------------------
- - --------------------
(the "settlement date") after the trade date. Investors who
make payment prior
to the settlement date may designate a temporary investment
(such as a money
market fund of the Smith Barney Mutual Funds) for such
payment until settlement
date. The Fund reserves the right to reject any purchase
order and to suspend
the offering of shares for a period of time. There are no
minimum investment
requirements for Class Z shares; however, the Fund reserves
the right to vary
this policy at any time.
Purchase orders received by the Fund or Smith Barney
prior to the close of
regular trading on the NYSE, currently 4:00 p.m., New York
time, on any day that
the Fund's net asset value is calculated, are priced
according to the net asset
value determined on that day. See "Valuation of Shares."
Certificates for Fund
shares are issued upon request to the Trust's transfer
agent.
Shareholders may redeem their shares on any day the
Fund calculates its net
asset value. See "Valuation of Shares." Redemption requests
received in proper
form prior to the close of regular trading on the NYSE are
priced at the net
asset value per share determined on that day. Redemption
requests received after
the close of regular trading on the NYSE are priced at the
net asset value as
next determined. Shareholders acquiring Class Z shares
through a Qualified Plan
or a Smith Barney UIT should consult the terms of their
respective plans for
redemption provisions.
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege
- - ------------------------------------------------------------
- - --------------------
Holders of Class Z shares in the Fund may exchange
their shares at the net
asset value next determined for shares of the same Class in
the following funds
of the Smith Barney Mutual Funds to the extent shares are
offered for sale in
the shareholder's state of residence. Exchanges of shares
may be made at any
time without payment of any exchange fee.
Fund Name
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc. -- Income and Growth Portfolio
Smith Barney Funds, Inc. -- Income Return Account Portfolio
19
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Exchange Privilege (continued)
- - ------------------------------------------------------------
- - --------------------
Smith Barney Funds, Inc. -- U.S. Government Securities
Portfolio
Smith Barney High Income Fund
Smith Barney Managed Growth Fund
Smith Barney Money Funds, Inc. -- Cash Portfolio
Smith Barney Money Funds, Inc. -- Government Portfolio
Smith Barney Special Equities Fund
Smith Barney Utilities Fund
Smith Barney World Funds, Inc. -- International Equity
Portfolio
The exchange of shares of one fund for shares of
another fund is generally
treated for Federal income tax purposes as a sale of the
shares given in
exchange by the shareholder. Therefore, an exchanging
shareholder may realize a
taxable gain or loss in connection with the exchange.
Shareholders should
consult their plan prospectus and/or other governing
documents regarding
exchanges. Generally, exchanges within such a plan are not
treated as a taxable
event.
Shareholders exercising the exchange privilege with any
of the other funds
of the Smith Barney Mutual Funds should review the
prospectus of that fund
carefully prior to making an exchange. Smith Barney reserves
the right to reject
any exchange request. The exchange privilege may be modified
or terminated at
any time after written notice to shareholders.
Although the exchange privilege is an important
benefit, excessive exchange
transactions can be detrimental to the Fund's performance
and its shareholders.
SBMFM may determine that a pattern of frequent exchanges is
excessive and
contrary to the best interests of the Fund's other
shareholders. In this event,
SBMFM will notify Smith Barney, and Smith Barney may, at its
discretion, decide
to limit additional purchases and/or exchanges by the
shareholder. Upon such a
determination, Smith Barney will provide notice in writing
or by telephone to
the shareholder at least 15 days prior to suspending the
exchange privilege and
during the 15-day period the shareholder will be required to
(a) redeem his or
her shares in the Fund or (b) remain invested in the Fund or
exchange into any
of the funds of the Smith Barney Mutual Funds ordinarily
available, which
position the shareholder would be expected to maintain for a
significant period
of time. All relevant factors will be considered in
determining what constitutes
an abusive pattern of exchanges. The Fund reserves the right
to modify or
discontinue exchange privileges upon 60 days' prior notice
to shareholders.
20
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Performance
- - ------------------------------------------------------------
- - --------------------
Yield
From time to time, the Fund advertises the 30-day
"yield" of its Class Z
shares. The yield refers to the income generated by an
investment in Class Z
shares over the 30-day period identified in the
advertisement and is computed by
dividing the net investment income per share earned by the
Class Z shares during
the period by the maximum public offering price per share on
the last day of the
period. This income is "annualized" by assuming the amount
of income is
generated each month over a one-year period and is
compounded semi-annually. The
annualized income is then shown as a percentage of the net
asset value.
Total Return
From time to time the Fund may include its total
return, average annual
total return and current dividend return for Class Z shares
in advertisements.
These figures are based on historical earnings and are not
intended to indicate
future performance. Total return is computed for a specified
period of time
assuming deduction of the maximum sales charge, if any, from
the initial amount
invested and reinvestment of all income dividends and
capital gain distributions
on the reinvestment dates at prices calculated as stated in
this Prospectus,
then dividing the value of the investment at the end of the
period so calculated
by the initial amount invested and subtracting 100%. The
standard average annual
total return, as prescribed by the SEC, is derived from this
total return, which
provides the ending redeemable value. Such standard total
return information may
also be accompanied with nonstandard total return
information for differing
periods computed in the same manner but without annualizing
the total return or
taking sales charges into account. The Fund calculates
current dividend return
by annualizing the most recent monthly distribution and
dividing by the net
asset value on the last day of the period for which current
dividend return is
presented. The current dividend return for Class Z shares
may vary from time to
time depending on market conditions, the composition of its
investment portfolio
and operating expenses. These factors and possible
differences in the methods
used in calculating current dividend return should be
considered when comparing
the Class Z share's current return to yields published for
other investment
companies and other investment vehicles. The Fund may also
include comparative
performance information in advertising or marketing the
Class Z shares. Such
performance information may include data from Lipper
Analytical Services, Inc.
and other financial publications.
21
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Performance (continued)
- - ------------------------------------------------------------
- - --------------------
Class Z's average annual total return was as follows
for the periods
indicated:
10.55% for the one-year period beginning August 1,
1994 through July
31, 1995.
10.99% per annum for the period from commencement
of operations
(November 6, 1992) through July 31, 1995.
Class Z's aggregate total return was as follows for the
periods indicated:
10.55% for the one-year period beginning August 1,
1994 through July
31, 1995.
32.94% for the period from commencement of
operations (November 6,
1992) through July 31, 1995.
- - ------------------------------------------------------------
- - --------------------
Management of the Trust and the Fund
- - ------------------------------------------------------------
- - --------------------
Board of Trustees
Overall responsibility for management and supervision
of the Fund rests
with the Trust's Board of Trustees. The Trustees approve all
significant
agreements between the Trust and the persons and companies
that furnish services
to the Trust and the Fund, including agreements with its
distributor, investment
adviser and administrator, custodian and transfer agent. The
day-to-day
operations of the Fund are delegated to the Fund's
investment adviser and
administrator. The Statement of Additional Information
contains background
information regarding the Trustees and executive officers of
the Trust.
Investment Adviser, SBMFM
SBMFM, located at 388 Greenwich Street, New York, New
York 10013, and
serves as the Fund's investment adviser. SBMFM is a wholly
owned subsidiary of
Smith Barney Holdings Inc. ("Holdings"). Holdings is a
wholly owned subsidiary
of Travelers Group Inc. ("Travelers"), a diversified
financial services holding
company engaged, through its subsidiaries, principally in
four business
segments: Investment Services, Consumer Finance Services,
Life Insurance
Services and Property & Casualty Insurance Services. SBMFM
(through its
predecessor entities) has been in the investment counseling
business since 1934
and is a registered investment adviser. SBMFM renders
investment advice to
investment companies that had aggregate assets under
management as of September
30, 1995 in excess of $60 billion.
22
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Management of the Trust and the Fund (continued)
- - ------------------------------------------------------------
- - --------------------
Subject to the supervision and direction of the Trust's
Board of Trustees,
SBMFM manages the Fund's portfolio in accordance with the
Fund's investment
objective and policies, makes investment decisions for the
Fund, places orders
to purchase and sell securities and employs professional
portfolio managers and
securities analysts who provide research services to the
Fund. For investment
advisory services rendered to the Fund, the Fund pays SBMFM
a fee at the annual
rate of 0.50% of the value of the Fund's average daily net
assets.
Portfolio Management
John C. Bianchi, a Managing Director of Smith Barney,
has served as Vice
President and Investment Officer of the Fund since 1988 and
is responsible for
managing its day-to-day operations, including the making of
investment
decisions.
Management's discussion and analysis, and additional
performance
information regarding the Fund during the fiscal year ended
July 31, 1995, is
included in the Annual Report dated July 31, 1995. A copy of
the Annual Report
may be obtained upon request without charge from a Smith
Barney Financial
Consultant or by writing or calling the Fund at the address
or phone number
listed on page one of this Prospectus.
Administrator -- SBMFM
SBMFM also serves as the Fund's administrator and
oversees all aspects of
the Fund's administration. Pursuant to an administration
agreement with the
Fund, SBMFM is paid a fee at the annual rate of 0.20% of the
value of the Fund's
average daily net assets.
Distributor -- Smith Barney
Smith Barney is located at 388 Greenwich Street, New
York, New York 10013,
and serves as the Fund's distributor. Smith Barney is a
wholly owned subsidiary
of Travelers.
- - ------------------------------------------------------------
- - --------------------
Additional Information
- - ------------------------------------------------------------
- - --------------------
The Trust was organized on March 12, 1985, in the
Commonwealth of
Massachusetts and is an entity commonly known as a
"Massachusetts business
trust." The Trust offers shares of beneficial interest of
separate series having
a $.001 per share par value. Shares of beneficial interest
of the Fund are
currently classified into five Classes: A, B, C, Y and Z.
When matters are
23
<PAGE>
Smith Barney High Income Fund -- Class Z Shares
- - ------------------------------------------------------------
- - --------------------
Additional Information (continued)
- - ------------------------------------------------------------
- - --------------------
submitted for shareholder vote, shareholders of each Class
of the Fund will have
one vote for each full share owned and a proportionate,
fractional vote for any
fractional share held of that Class. Generally, shares of
the Trust vote by
individual fund on all matters except (a) matters affecting
only the interest of
one or more of the funds, in which case only shares of the
affected fund or
funds would be entitled to vote, or (b) when the 1940 Act
requires that shares
of the funds be voted in the aggregate. Similarly, shares of
the Fund will be
voted generally on a Fund-wide basis except on matters
affecting the interests
of one Class of shares.
Each Class of Fund shares represents an identical pro
rata interest in the
Fund's investment portfolio. As such, they have the same
rights, privileges and
preferences, except with respect to: (a) the designation of
each Class; (b) the
effect of the respective sales charges, if any, for each
Class; (c) the
distribution and/or service fees, if any, borne by each
Class; (d) the expenses
allocable exclusively to each Class; (e) voting rights on
matters exclusively
affecting a single Class; (f) the exchange privileges of
each Class; and (g) the
conversion feature of a Class of shares. The Trust's Board
of Trustees does not
anticipate that there will be any conflicts among the
interests of the holders
of the different Classes of shares of the Fund. The
Trustees, on an ongoing
basis, will consider whether any such conflict exists and,
if so, take
appropriate action.
The Trust does not hold annual shareholder meetings.
There normally will be
no meeting of shareholders for the purpose of electing
Trustees unless and until
such time as less than a majority of the Trustees holding
office have been
elected by shareholders. The Trustees will call a meeting
for any purpose upon
the written request of shareholders holding at least 10% of
the Fund's
outstanding shares and the Trust will assist shareholders in
calling such a
meeting as required by the 1940 Act.
PNCBank, National Association, located at 17th and
Chestnut Streets,
Philadelphia, PA 19103, serves as custodian of the Trust's
investments.
First Data Investor Services Group, Inc. is located at
Exchange Place,
Boston, Massachusetts 02109, and serves as the Trust's
transfer agent.
The Fund sends its shareholders a semi-annual report
and an audited annual
report, each of which includes a listing of the investment
securities held by
the Fund at the end of the reporting period. Shareholders
may seek information
regarding the Fund from their Smith Barney Financial
Consultant.
24
<PAGE>
SMITH BARNEY
- - ------------
A Member of
Travelers Group[LOGO]
Smith Barney
High
Income
Fund
388 Greenwich Street
New
York, New York 10013
FD
<PAGE>
SMITH BARNEY
Exchange
Reserve
Fund
November 28, 1995
PROSPECTUS BEGINS ON PAGE ONE
P R O S P E C T U S
[LOGO] Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PROSPECTUS
NOVEMBER 28, 1995
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 capi-
tal and the maintenance of liquidity by investing in a
diversified portfolio of
high quality money market instruments.
SHARES OF THE FUND ARE NOT INSURED OR GUARANTEED BY THE
U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
The Fund is one of a number of funds, each having distinct
investment objec-
tives and policies making up the Smith Barney Income Funds
(the "Trust"). The
Trust is an open-end management investment company commonly
referred to as a
mutual fund. Shares of other funds offered by the Trust are
described in sepa-
rate prospectuses that may be obtained by calling the Trust
at the telephone
number set forth above or by contacting your Smith Barney
Financial Consultant.
This Prospectus sets forth concisely certain information
about the Fund and
the Trust, including distribution fees and expenses, which
prospective invest-
ors will find helpful in making an investment decision.
Investors are encour-
aged to read this Prospectus carefully and retain it for
future reference.
Additional information about the Fund is contained in a
Statement of Addi-
tional Information dated November 28, 1995, as amended or
supplemented from
time to time, that is available upon request and without
charge by calling or
writing the Trust at the telephone number or address set
forth above, or by
contacting your Smith Barney Financial Consultant. The
Statement of Additional
Information has been filed with the Securities and Exchange
Commission (the
"SEC") and is incorporated by reference into this Prospectus
in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS
A CRIMINAL OFFENSE.
1
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 3
- - -------------------------------------------------
FINANCIAL HIGHLIGHTS 7
- - -------------------------------------------------
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES 9
- - -------------------------------------------------
VALUATION OF SHARES 13
- - -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 14
- - -------------------------------------------------
PURCHASE OF SHARES 15
- - -------------------------------------------------
EXCHANGE PRIVILEGE 20
- - -------------------------------------------------
REDEMPTION OF SHARES 22
- - -------------------------------------------------
MINIMUM ACCOUNT SIZE 25
- - -------------------------------------------------
YIELD INFORMATION 25
- - -------------------------------------------------
MANAGEMENT OF THE FUND AND THE TRUST 25
- - -------------------------------------------------
DISTRIBUTOR 26
- - -------------------------------------------------
ADDITIONAL INFORMATION 27
- - -------------------------------------------------
</TABLE>
No person has been authorized to give any information or
to make any repre-
sentations in connection with this offering other than those
contained in this
Prospectus and, if given or made, such other information or
representations
must not be relied upon as having been authorized by the
Fund or the Distribu-
tor. This Prospectus does not constitute an offer by the
Fund or the Distribu-
tor to sell or a solicitation of an offer to buy any of the
securities offered
hereby in any jurisdiction to any person to whom it is
unlawful to make such
offer or solicitation in such jurisdiction.
2
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by
detailed information
appearing elsewhere in this Prospectus and in the Statement
of Additional
Information. Cross references in this summary are to
headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end diversified
management investment
company that seeks to maximize current income to the extent
consistent with
the preservation of capital and the maintenance of liquidity
by investing in
high quality short-term money market instruments. See
"Investment Objective
and Management Policies."
PURCHASE OF SHARES Shares of the Fund may be acquired by the
general public
only through the exchange of Class B or Class C shares of
other funds of the
Smith Barney Mutual Funds. Class B or Class C shares of the
Fund acquired
through exchange are subject to the CDSC, if any, of the
shares with which the
exchange is made. All Class B and Class C shares are subject
to an annual dis-
tribution fee of .50% of the value of average daily net
assets of the Fund.
Eight years after the date of their original purchase, Class
B shares will be
automatically redeemed at net asset value and the redemption
proceeds will be
reinvested, at net asset value, in Class A shares of Smith
Barney Money Funds
Inc.--Cash Portfolio ("Cash Portfolio"). Upon this
conversion, the shares will
no longer be subject to the annual distribution fee.
Shares may be purchased through the Fund's distributor,
Smith Barney Inc.
("Smith Barney"), a broker that clears securities through
Smith Barney on a
fully disclosed basis (an "Introducing Broker") or an
investment dealer in the
selling group. Direct purchases by certain retirement plans
may be made
through the Fund's transfer agent, First Data Investor
Services Group, Inc.
("FDISG"). See "Purchase of Shares."
SMITH BARNEY 401(K) PROGRAM Investors may be eligible to
participate in the
Smith Barney 401(k) Program (the "401(k) Program") which is
generally designed
to assist plan sponsors in the creation and operation of
retirement plans
under Section 401(a) of the Internal Revenue Code of 1986,
as amended (the
"Code"), as well as other types of participant directed, tax-
qualified
employee benefit plans (collectively, "Participating
Plans"). See "Purchase of
Shares--Smith Barney 401(k) Program."
INVESTMENT MINIMUMS Investors may open an account by making
an initial invest-
ment of at least $1,000 for each account, or $250 for an
individual retirement
account ("IRA") or a Self-Employed Retirement Plan.
Subsequent invest-
3
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PROSPECTUS SUMMARY (CONTINUED)
ments of at least $50 may be made for both Classes. For
participants in retire-
ment plans qualified under Section 403(b)(7) or Section
401(a) of the Code, the
minimum initial and subsequent investment requirement is
$25. See "Purchase of
Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day that
the New York Stock
Exchange, Inc. ("NYSE") is open for business. See
"Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management
Inc. (the "Manag-
er") serves as the Fund's investment adviser and
administrator. The Manager is
a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"). Holdings
is a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversi-
fied financial services holding company engaged, through its
subsidiaries prin-
cipally in four business segments: Investment Services,
Consumer Finance Serv-
ices, Life Insurance Services and Property & Casualty
Insurance Services. See
"Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for
shares of the same
Class of other funds of the Smith Barney Mutual Funds at the
respective net
asset values next determined, plus any applicable sales
charge differential.
See "Exchange Privilege."
DIVIDENDS AND DISTRIBUTIONS Dividends are declared daily and
paid monthly from
net investment income. See "Dividends, Distributions and
Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid
on shares of the
Fund will be reinvested automatically in additional shares
at current net asset
value unless otherwise specified by an investor. Shares
acquired by dividend
and distribution reinvestment will not be subject to any
CDSC. Class B shares
acquired through dividend and distribution reinvestments
will become eligible
for conversion to Class A shares of Cash Portfolio. See
"Dividends, Distribu-
tions and Taxes."
SPECIAL CONSIDERATIONS AND RISK FACTORS There is no
assurance that the Fund
will achieve its investment objective. In light of the fees
and CDSC imposed on
Class B and Class C shares, an investment in the Fund should
be viewed as part
of a long-term investment in the Smith Barney Mutual Funds.
Investors seeking
only to invest in a money market fund and who do not expect
to re-exchange Fund
shares for Class B shares of other of the Smith Barney
4
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PROSPECTUS SUMMARY (CONTINUED)
Mutual Funds should consider more suitable investments,
including other money
market funds offered to the public by Smith Barney. See
"Investment Objective
and Management Policies" and "Purchase of Shares."
THE FUND'S EXPENSES The following expense table lists the
costs and expenses
that an investor will incur, either directly or indirectly,
as a shareholder
of the Fund, based on the maximum CDSC that may be incurred
at the time of
redemption and, unless otherwise noted, the Fund's operating
expenses for its
most recent year:
<TABLE>
<CAPTION>
CLASS B CLASS C
- - ------------------------------------------------------------
- - -------------------
<S>
<C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum CDSC
(as a percentage of original cost or redemption
proceeds,
whichever is lower)
3.00%* None*
- - ------------------------------------------------------------
- - -------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees
.50% .50%
12b-1 fee**
.50 .50
Other expenses
.24 .21
- - ------------------------------------------------------------
- - -------------------
TOTAL FUND OPERATING EXPENSES
1.24% 1.21%
- - ------------------------------------------------------------
- - -------------------
</TABLE>
* Class B or Class C shares of the Fund acquired through
exchanges with
shares of other funds of the Smith Barney Mutual Funds
are subject to the
CDSC, if any, of the shares with which the exchange is
made, which may be
more or less than 3.00%, in the case of Class B shares or
may be 1.00%, in
the case of Class C shares depending on the date such
shares were
purchased. Class B shares purchased by retirement plans
other than
Participating Plans are subject to a CDSC of 4.50%. See
"Purchase of
Shares--Deferred Sales Charge."
** 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.
The CDSC set forth in the above table is the maximum CDSC
imposed by the
Fund on Class B shares purchased pursuant to the 401(k)
Program. Investors may
pay actual charges of less than 3% depending on the CDSC of
the acquiring
shares of the Fund through the exchange program or certain
Benefit Plans who
are not participating in The 401(k) Plan purchasing shares
of the Fund with
which the exchange was made, the length of time the shares
are held. See "Re-
demption of Shares." Smith Barney receives an annual 12b-1
distribution fee of
.50% of the Fund's average daily net assets. "Other
expenses" in the above
table include fees for shareholder services, custodial fees,
legal and
accounting fees, printing costs and registration fees.
5
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PROSPECTUS SUMMARY (CONTINUED)
EXAMPLE
The following example is intended to assist an investor in
understanding the
various costs that an investor in the Fund will bear
directly or indirectly.
The example assumes payment by the Fund of operating
expenses at the levels
set forth in the above table. See "Purchase of Shares," and
"Management of the
Fund and the Trust."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
5 YEARS 10 YEARS*
- - ------------------------------------------------------------
- - ------------------
<S> <C> <C>
<C> <C>
Assumes complete redemption at maximum
applicable CDSC at end of each time period
Class B $43 $69
$98 $133
Class C 12 38
66 147
Assumes no redemption
Class B $13 $39
$68 $133
Class C 12 38
66 147
- - ------------------------------------------------------------
- - ------------------
</TABLE>
* Ten year figures assume exchange of Class B shares for
Class A shares of
Smith Barney Money Funds, Inc.--Cash Portfolio at the end
of the eighth
year following the date of original purchase of such
Class B shares.
Accordingly, the expenses reflected above utilize the
expenses of a Class A
share of Cash Portfolio.
The example also provides a means for the investor to
compare expense levels
of funds with different fee structures over varying
investment periods. To
facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR LESS
THAN THOSE SHOWN.
6
<PAGE>
(This page intentionally left blank)
7
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended July 31,
1995 has been
audited by KPMG Peat Marwick, LLP, independent accountants,
whose report
thereon appears in the Fund's Annual Report dated July 31,
1995. The following
information for the fiscal years ended July 31, 1986 through
July 31, 1994 has
been audited by Coopers & Lybrand L.L.P. This information
should be read in
conjunction with the financial statements and related notes
that also appear in
the Fund's Annual Report, which is incorporated by reference
into the Statement
of Additional Information.
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR YEAR
YEAR
ENDED ENDED
ENDED
7/31/95 7/31/94
7/31/93
- - ------------------------------------------------------------
- - -------
<S> <C> <C>
<C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $
1.00
- - ------------------------------------------------------------
- - -------
Net investment income 0.044 0.022
0.021
Dividends from net investment income (0.044) (0.022)
(0.021)
- - ------------------------------------------------------------
- - -------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $
1.00
- - ------------------------------------------------------------
- - -------
TOTAL RETURN++ 4.49% 2.18%
2.15%
- - ------------------------------------------------------------
- - -------
NET ASSETS, END OF PERIOD (000'S) $160,432 $252,246
$166,262
- - ------------------------------------------------------------
- - -------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.24% 1.26%
1.25%
Net investment income 4.35 2.24
2.16
- - ------------------------------------------------------------
- - -------
</TABLE>
8
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
ENDED
7/31/92 7/31/91 7/31/90 7/31/89 7/31/88 7/31/87
7/31/86(1)
- - ------------------------------------------------------------
- - ------------
<S> <C> <C> <C> <C> <C>
<C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
$ 1.00
- - ------------------------------------------------------------
- - ------------
0.040 0.062 0.0740 0.0802 0.0566 0.0460
0.0032
(0.040) (0.062) (0.0740) (0.0802) (0.0566) (0.0460)
(0.0032)
- - ------------------------------------------------------------
- - ------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
$ 1.00
- - ------------------------------------------------------------
- - ------------
4.06% 6.36% 7.62% 8.32% 5.85% 4.69%
0.32%(3)
- - ------------------------------------------------------------
- - ------------
$225,476 $426,862 $686,756 $829,743 $215,731 $83,366
$ 2,778
- - ------------------------------------------------------------
- - ------------
1.22% 1.17% 1.15% 1.22% 1.46% 1.61%
1.50%+
4.13 6.27 7.42% 8.36% 5.69% 4.96%
4.78%+
- - ------------------------------------------------------------
- - ------------
</TABLE>
FOR A CLASS C SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
PERIOD
ENDED
7/31/95(2)
- - -------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
- - -------------------------------------------------
Net investment income 0.035
Dividends from net investment income (0.035)
- - -------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 1.00
- - -------------------------------------------------
TOTAL RETURN++ 3.52%(3)
- - -------------------------------------------------
NET ASSETS, END OF PERIOD (000'S) $2,850
- - -------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.21%+
Net investment income 4.76+
- - -------------------------------------------------
</TABLE>
(1) For the period from July 8, 1986 (commencement of
operations) to July 31,
1987.
(2) For the period from November 7, 1994 (inception date) to
July 31, 1995.
(3) Total return is not annualized as it may not be
representative of the total
return for the year.
+ Annualized.
++ Total return represents aggregate total return for the
period indicated
and does not reflect any applicable sales charge.
9
<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. gov-
ernment 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 Associa-
tion 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 spon-
sors, 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 institu-
tions having total assets in excess of $1 billion.
Certificates of deposit
("CDs") are short-term negotiable obligations of commercial
banks; time depos-
its ("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-denomi-
nated bank obligations, such as CDs, bankers' 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.
10
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund generally will invest at least 25% of its assets in
these securities.
The Fund will invest in an obligation of a foreign bank or
foreign branch of a
domestic bank only if the Fund's investment adviser deems
the obligation to
present minimal credit risks. Nevertheless, this kind of
obligation entails
risks that are different from those of investments in
domestic obligations of
domestic banks due to differences in political, regulatory
and economic sys-
tems 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 obliga-
tions 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) compara-
ble 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 vari-
able amounts of principal indebtedness and periodic
adjustments in the inter-
est 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 addi-
tion, while demand notes generally are not rated, their
issuers must satisfy
the same criteria as those set forth above for issuers of
commercial paper.
The Manager will consider the earning power, cash flow and
other liquidity
ratios of issuers of demand notes and continually will
monitor their financial
ability to meet payment on demand.
CERTAIN INVESTMENT POLICIES
Price and Portfolio Maturity. The Fund invests only in
securities which are
purchased with and payable in U.S. dollars and which have
(or, pursuant to
regulations adopted by the SEC, will be deemed to have)
remaining maturities
of thirteen months or less at the date of purchase by the
Fund. For this pur-
pose, variable rate master demand notes (as described above
under "Commercial
Paper"), which are payable on demand or, under certain
conditions, at speci-
fied 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 portfo-
lio
11
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 "Req-
uisite NRSROs" in one of the two highest short-term rating
categories, securi-
ties 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 Informa-
tion.
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 addi-
tion, 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 secu-
rities are rated by the Requisite NRSROs in the highest
short-term rating cat-
egory, 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 transac-
tions. 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
deter-
12
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
mining 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 collat-
eral 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 dur-
ing 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 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 secu-
rities 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. When-
ever 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
13
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
Fund has adopted and which cannot be changed without the
approval of the hold-
ers of a majority of the Fund's outstanding shares, is
contained in the State-
ment 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 pro-
ducing 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, revalu-
ation of currencies, future political and economic
developments and the possi-
ble imposition of currency exchange blockages or other
foreign 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 applica-
ble to domestic issuers. In addition, there may be less
publicly available
information about a foreign bank than about a domestic bank.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of
the close of regular
trading on the NYSE, and is computed by dividing the value
of the Fund's net
assets attributable to each Class by the total number of
shares of the Class
outstanding. The Fund employs the amortized cost method of
valuing portfolio
securities and intends to use its best efforts to continue
to maintain a con-
stant net asset value of $1.00 per share.
14
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other
funds in deter-
mining the amount of dividends from net investment income
and distributions of
capital gains payable to shareholders.
The Fund declares dividends daily consisting of
substantially all of its net
investment income, and pays dividends monthly. Any net
realized gains will be
distributed at least annually. If a shareholder does not
otherwise instruct,
dividends and capital gains will be reinvested automatically
in additional
shares of the same Class at net asset value subject to no
CDSC. Dividends and
distributions are treated the same for tax purposes whether
taken in cash or
reinvested in additional shares.
TAXES
The Fund will be treated as a separate taxpayer with the
result that, for
federal tax purposes, the amount of investment income and
capital gains earned
will be determined on a fund-by-fund basis, rather than on a
Trust-wide basis.
The Fund intends to continue to qualify as a regulated
investment company
under Subchapter M of the Code. In any taxable year in which
the Fund so qual-
ifies and distributes at least 90% of its investment company
taxable income
(which includes, among other items, dividends, interest and
the excess of any
net short-term capital gains over net long-term capital
losses), the Fund (but
not its shareholders) generally will be relieved of federal
income tax on the
investment company taxable income and net realized capital
gains (the excess
of net long-term capital gains over net short-term capital
losses), if any,
distributed to shareholders. In order to qualify as a
regulated investment
company, the Fund will be required to meet various Code
requirements.
Amounts not distributed on a timely basis in accordance
with a calendar year
distribution requirement are subject to a nondeductible 4%
excise tax. In
order to avoid application of the excise tax, the Fund
intends to make its
distributions in accordance with this requirement.
Distributions of any investment company taxable income are
taxable to share-
holders as ordinary income. Distributions of any net capital
gains designated
by the Fund as capital gain dividends are taxable to
shareholders as long-term
capital gain regardless of the length of time a shareholder
may have held
shares of the Fund.
15
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Dividends (including capital gain dividends) declared by
the Fund in October,
November or December of any calendar year to shareholders of
record on a date
in such a month will be deemed to have been received by
shareholders on Decem-
ber 31 of that calendar year, provided that the dividend is
actually paid by
the Fund during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by
redemption, sale or
exchange), a shareholder generally will realize a taxable
gain or loss. Such
gain or loss generally will be a capital gain or loss if the
shares are capital
assets in the shareholder's hands, and generally will be
long-term or short-
term depending upon the shareholder's holding period for the
shares. Any loss
realized by a shareholder on disposition of Fund shares held
by the shareholder
for six months or less will be treated as long-term capital
loss to the extent
of any distributions of capital gain dividends received by
the shareholder with
respect to such shares.
Shareholders will be notified annually about the amounts
of dividends and
distributions, including the amounts (if any) for that year
which have been
designated as capital gain dividends. Dividends and
distributions and gains
realized upon a disposition of Fund shares may also be
subject to state, local
or foreign taxes depending on each shareholder's particular
situation. Divi-
dends consisting of interest from obligations of the United
States government
and certain of its agencies and instrumentalities may be
exempt from all state
and local income taxes. Shareholders should consult their
tax advisors for spe-
cific information on the tax consequences of particular
types of distributions.
PURCHASE OF SHARES
Fund shares may be acquired only through exchanges with
Class B and Class C
shares of other funds of the Smith Barney Mutual Funds,
except that Class B
shares may be acquired directly by participants in the
401(k) Program ("Partic-
ipating Plans") and certain qualified and non-qualified
retirement programs
(collectively with Participating Plans, "Benefit Plans").
Investors purchasing
Class B shares of the Fund through a Benefit Plan may do so
directly through
the Trust's transfer agent, FDISG. Class B shares or Class C
shares acquired
through exchange are subject to the CDSC, if any, of the
shares with which the
exchange is made. Class B shares purchased directly by
Participating Plans are
subject to a CDSC of 3%. See "Purchase of Shares--Smith
Barney 401(k) Program."
Class B shares acquired directly by a Benefit Plan other
than a Participating
Plan will be subject to the CDSC as set forth below.
16
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PURCHASE OF SHARES (CONTINUED)
In light of the distribution fee imposed on Class B shares
and Class C
shares, an investment in the Fund should be viewed as part
of a long-term
investment in the Smith Barney Mutual Funds. Investors
seeking only to invest
in a money market fund and who do not expect to exchange
Fund shares for shares
of other funds of the Smith Barney Mutual Funds should
consider more suitable
investments, including other money market funds offered by
Smith Barney.
The Fund employs a distribution method which differs from
that of certain
other mutual funds that invest in money market instruments.
Before investing in
the Fund, among other things, investors should consider that
certain other
funds with an investment objective and policies similar to
those of the Fund do
not pay distribution expenses or impose any sales charge.
Purchase orders received by the Fund or Smith Barney prior
to the close of
regular trading on the NYSE, on any day the Fund calculates
its net asset val-
ue, 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 trad-
ing on the NYSE on any day the Fund calculates its net asset
value, are priced
according to the net asset value determined on that day,
provided the order is
received by the Fund or Smith Barney prior to Smith Barney's
close of business
(the "trade date"). Payment for Fund shares is due on the
third business day
after the trade date.
DEFERRED SALES CHARGE
Class B shares sold directly to Benefit Plans other than a
Participating Plan
will be assessed a CDSC on an amount equal to the lesser of
the cost of the
shares being redeemed or their net asset value at the time
of redemption. Such
shares that are redeemed will not be subject to a CDSC to
the extent that the
value of such shares represents: (a) capital appreciation of
Fund assets; (b)
reinvestment of dividends or capital gain distributions; and
(c) shares
redeemed more than five years after their purchase. The
amount of the CDSC will
depend on the number of years since the shareholder made the
purchase payment
from which the amount is being redeemed. Solely for the
purpose of determining
the number of years since a purchase payment, all purchase
payments made during
a month will be aggregated and deemed 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
Benefit Plans other
than Participating Plans.
17
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PURCHASE OF SHARES (CONTINUED)
<TABLE>
<CAPTION>
YEAR SINCE PURCHASE
PAYMENT WAS MADE CDSC
- - ---------------------------------
<S> <C>
First 4.50%
Second 4.00%
Third 3.00%
Fourth 2.00%
Fifth 1.00%
Sixth 0.00%
Seventh 0.00%
Eighth 0.00%
- - ---------------------------------
</TABLE>
Class B shares will convert automatically to Class A
shares of Cash Portfolio
eight years after the date on which they were purchased and
will thereafter no
longer be subject to any distribution fees. There will also
be converted at
that time such proportion of Class B Dividend Shares owned
by the shareholder
as the total number of his or her Class B shares converting
at the time bears
to the total number of outstanding Class B shares (other
than Class B Dividend
Shares) owned by the shareholder. Shareholders who held
Class B shares of Smith
Barney Shearson Short-Term World Income Fund (the "Short-
Term World Income
Fund") on July 15, 1994 and who subsequently exchange those
shares for Class B
shares of the Fund will be offered the opportunity to
exchange all such Class B
shares for Class A shares of the Cash Portfolio four years
after the date on
which those shares were deemed to have been purchased.
Holders of such Class B
shares will be notified of the pending exchange in writing
approximately 30
days before the fourth anniversary of the purchase date and,
unless the
exchange has been rejected in writing, the exchange will
occur on or about the
fourth anniversary date.
The length of time that Class B or Class C shares subject
to a CDSC have been
held will be calculated from the date that the shares were
initially acquired
in the Fund or one of the other Smith Barney Mutual Funds,
and Fund shares
being redeemed will be considered to represent, as
applicable, capital appreci-
ation 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.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) au-
tomatic cash withdrawals in amounts equal to or less than
1.00% per
18
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PURCHASE OF SHARES (CONTINUED)
month of the value of the shareholder's shares at the time
the withdrawal plan
commences (see "Automatic Cash Withdrawal Plan") provided,
however, that auto-
matic cash withdrawals in amounts equal to or less than
2.00% per month of the
value of the shareholder's shares will be permitted for
withdrawal plans that
were established prior to November 7, 1994; (c) redemptions
of shares within
12 months following the death or disability of the
shareholder; (d) involun-
tary redemptions; and (e) redemptions of shares in
connection with a combina-
tion of the Fund with any investment company by merger,
acquisition of assets
or otherwise. In addition, a shareholder who has redeemed
proceeds within 60
days and receive pro rata credit for any CDSC imposed on the
prior redemption.
CDSC waivers will be granted subject to confirmation (by
Smith Barney in
case of shareholders who are also Smith Barney clients or by
FDISG in the case
of all shareholders) of the shareholder's status or
holdings, as the case may
be.
SMITH BARNEY 401(k) PROGRAM
Shareholders investing in the Fund may be eligible to
participate in the
Smith Barney 401(k) Program, which is generally designed to
assist plan spon-
sors in the creation and operation of retirement plans
qualified under Section
401(a) of the Code. It is anticipated that Participating
Plans will purchase
Class B shares of the Fund as part of a multi-fund
investment program. Partic-
ipating Plans may acquire shares of the Fund only through an
exchange from
Class B shares of another fund in the Smith Barney Mutual
Funds or through
direct investment only if they hold Class B shares of
another of the Smith
Barney Mutual Funds.
The Fund offers to Participating Plans Class B shares as
investment alterna-
tives under the Smith Barney 401(k) Program. Class B shares
acquired through
the Smith Barney 401(k) Program are subject to the same
service and/or distri-
bution fees as, but different sales charge and CDSC
schedules than, the Class
B shares acquired by other investors. Once a Participating
Plan has made an
initial investment in the Fund, all of its subsequent
investments in the Fund
must be in the same Class of shares, except as otherwise
described below.
Class B Shares. Class B shares of the Fund are offered to
any Participating
Plan that purchases less than $250,000 of one or more funds
of the Smith Bar-
ney Mutual Funds. Class B shares acquired through the Smith
Barney 401(k) Pro-
gram are subject to a CDSC of 3.00% of redemption proceeds,
if the Partici-
19
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PURCHASE OF SHARES (CONTINUED)
pating 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 Bar-
ney 401(k) Program, the Participating Plan will be offered
the opportunity to
exchange all of its Class B shares for Class A shares of
Cash Portfolio. Such
Plan will be notified of the pending exchange in writing
approximately 60 days
before the eighth anniversary of the enrollment date and,
unless the exchange
has been rejected in writing, the exchange will occur on or
about the eighth
anniversary date. Once the exchange has occurred, a
Participating Plan will not
be eligible to acquire additional Class B shares of the Fund
but instead may
acquire Class A shares of Cash Portfolio. If the
Participating Plan elects not
to exchange all of its Class B shares at that time, each
Class B share held by
the Participating Plan will have the same conversion feature
as Class B shares
held by other investors. See "Purchase of Shares--Deferred
Sales Charge
Alternatives."
No CDSC is imposed on redemptions of CDSC Shares to the
extent that the net
asset value of the shares redeemed does not exceed the
current net asset value
of the shares purchased through reinvestment of dividends or
capital gain dis-
tributions. Whether or not the CDSC applies to a
Participating Plan depends on
the number of years since the Participating Plan first
became enrolled in the
Smith Barney 401(k) Program, unlike the applicability of the
CDSC to other
shareholders, which depends on the number of years since
those shareholders
made the purchase payment from which the amount is being
redeemed.
The CDSC will be waived on redemptions of CDSC Shares in
connection with
lump-sum or other distributions made by a Participating Plan
as a result of:
(a) the retirement of an employee in the Participating Plan;
(b) the termina-
tion 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 Par-
ticipating 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 FDISG. For fur-
ther information regarding the Smith Barney 401(k) Program,
investors should
contact a Smith Barney Financial Consultant.
20
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may
be exchanged for
shares of the same Class in the following funds of the Smith
Barney Mutual
Funds, to the extent shares are offered for sale in the
shareholder's state of
residence. Exchanges are subject to minimum investment
requirements and other
requirements of the fund into which exchanges are made and a
sales charge dif-
ferential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
*Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
**Smith Barney Funds, Inc.--Income Return Account
Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government
Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities
Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
**Smith Barney Intermediate Maturity California Municipals
Fund
**Smith Barney Intermediate Maturity New York Municipals
Fund
21
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
**Smith Barney Muni Funds--California Limited Term
Portfolio
**Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
**Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney World Funds, Inc.--Emerging Markets
Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond
Portfolio
Smith Barney World Funds, Inc.--International Balanced
Portfolio
Smith Barney World Funds, Inc.--International Equity
Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
- - ------------------------------------------------------------
- - -------------------
* 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.
Class B Exchanges. In the event a Class B shareholder
unless such share-
holder 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.
Certain shareholders may be able to exchange shares by
telephone. See "Re-
demption of Shares--Telephone Redemption and Exchange
Program".
22
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
EXCHANGE PRIVILEGE (CONTINUED)
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 privi-
leges 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 redemp-
tion must specify the Class being redeemed. In the event of
a failure to spec-
ify which Class, or if the investor owns fewer shares of the
Class than speci-
fied, 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 third day
following receipt of
proper tender, except on a day on which the NYSE is closed
or as permitted
under the 1940 Act in extraordinary circumstances.
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. Redemp-
tion 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.
23
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
REDEMPTION OF SHARES (CONTINUED)
Shares held by Smith Barney as custodian must be redeemed
by submitting a
written request to a Smith Barney Financial Consultant.
Shares other than
those held by Smith Barney as custodian may be redeemed
through an investor's
Financial Consultant, Introducing Broker or dealer in the
selling group or by
submitting a written request for redemption to:
Smith Barney Exchange Reserve Fund
Class B or Class C (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and
number or dollar
amount of shares to be redeemed, (b) identify the
shareholder's account number
and (c) be signed by each registered owner exactly as the
shares are regis-
tered. If the shares to be redeemed were issued in
certificate form, the cer-
tificates must be endorsed for transfer (or be accompanied
by an endorsed
stock power) and must be submitted to FDISG together with
the redemption
request. Any signature appearing on a written redemption
request in excess of
$2,000, 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. Written redemption
requests of $2,000
or less do not require a signature guarantee unless more
than one such redemp-
tion request is made in any 10-day period or the redemption
proceeds are to be
sent to an address other than the address of record. Unless
otherwise direct-
ed, redemption proceeds will be mailed to an investor's
address of record.
FDISG may require additional supporting documents for
redemptions made by cor-
porations, executors, administrators, trustees or guardians.
A redemption
request will not be deemed properly received until FDISG
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 $50 monthly or
quarterly. Retire-
ment plan accounts are eligible for automatic cash
withdrawal plans only where
the shareholder is eligible to receive qualified
distributions and has an
account value of at least $5,000. The withdrawal plan will
be carried over on
exchanges between funds. Any applicable CDSC will not be
waived on amounts
withdrawn by a shareholder that exceed 1.00% per month of
the value of the
shareholder's shares subject to the CDSC at the time the
withdrawal plan com-
24
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
REDEMPTION OF SHARES (CONTINUED)
mences. For further information regarding the automatic cash
withdrawal plan,
shareholders should contact a Smith Barney Financial
Consultant.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage
account may be eligible
to redeem and exchange Fund shares by telephone. To
determine if a shareholder
is entitled to participate in this program, he or she should
contact FDISG at
1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete
and return a Telephone/Wire Authorization Form, along with a
signature guaran-
tee that will be provided by FDISG upon request.
(Alternatively, an investor
may authorize telephone redemptions on the new account
application with the
applicant's signature guarantee when making his/her initial
investment in the
Fund.)
Redemptions. Redemption requests of up to $10,000 of any
class or classes of
the Fund's shares may be made by eligible shareholders by
calling FDISG at 1-
800-451-2010. Such requests may be made between 9:00 a.m.
and 5:00 p.m. (New
York City time) on any day the NYSE is open. Redemption
requests received after
the close of regular trading on the NYSE are priced at the
net asset value next
determined. Redemptions of shares (i) by retirement plans or
(ii) for which
certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the
redemption proceeds mailed
to his/her address of record or wired to a bank account
predesignated by the
shareholder. Generally, redemption proceeds will be mailed
or wired, as the
case may be, on the next business day following the
redemption request. In
order to use the wire procedures, the bank receiving the
proceeds must be a
member of the Federal Reserve System or have a correspondent
with a member
bank. The Fund reserves the right to charge shareholders a
nominal fee for each
wire redemption. Such charges, if any, will be assessed
against the sharehold-
er's account from which shares were redeemed. In order to
change the bank
account designated to receive redemption proceeds, a
shareholder must complete
a new Telephone/Wire Authorization Form and, for the
protection of the share-
holder's assets, will be required to provide a signature
guarantee and certain
other documentation.
Exchanges. Eligible shareholders may make exchanges by
telephone if the
account registration of the shares of the fund being
acquired is identical to
the registration of the shares of the fund exchanged. Such
exchange requests
may be made by calling FDISG at 1-800-451-2010 between 9:00
a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open.
Exchange requests
received after the close of regular trading on the NYSE are
processed at the
net assets value next determined.
25
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
REDEMPTION OF SHARES (CONTINUED)
Additional Information regarding Telephone Redemption and
Exchange Program.
Neither the Fund nor its agents will be liable for following
instructions com-
municated by telephone that are reasonably believed to be
genuine. The Fund and
its agents will employ procedures designed to verify the
identity of the caller
and legitimacy of instructions (for example, a shareholder's
name and account
number will be required and phone calls may be recorded).
The Fund reserves the
right to suspend, modify or discontinue the telephone
redemption and exchange
program or to impose a charge for this service at any time
following at least
seven (7) days prior notice to shareholders.
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, how-
ever, will not redeem shares based solely on market
reductions in net asset
value. Before the Fund exercises such right, shareholders
will receive written
notice and will be permitted 60 days to bring accounts up to
the minimum to
avoid automatic redemption.
YIELD INFORMATION
From time to time the Fund may advertise its yield and
effective yield of
Class B and Class C shares. These yield figures are based on
historical earn-
ings and are not intended to indicate future performance.
The yield of a Class
refers to the net investment income generated by an
investment in the Class
over a specific seven-day period (which will be stated in
the advertisement).
This net investment income is then annualized. The effective
yield is calcu-
lated similarly but, when annualized, the income earned by
an investment in the
Class is assumed to be reinvested. The effective yield will
be slightly higher
than the yield because of the compounding effect of the
assumed reinvestment.
MANAGEMENT OF THE FUND AND THE TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of
the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees
approve all signif-
icant agreements between the Trust and the companies that
furnish services to
the Fund, including agreements with its investment adviser,
administrator, cus-
todian and transfer agent. The day-to-day operations of the
Fund are delegated
to its investment adviser and administrator. The Statement
of Additional
Informa-
26
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
MANAGEMENT OF THE FUND AND THE TRUST (CONTINUED)
tion contains general background information regarding each
Trustee and execu-
tive officer of the Fund.
INVESTMENT ADVISER
The Manager is located at 388 Greenwich Street, New York,
New York 10013,
and serves as the Fund's investment adviser pursuant to an
advisory agreement
dated August 31, 1995 and is a wholly owned subsidiary of
Holdings. The Man-
ager (through its predecessors) has been in the investment
counseling business
since 1934 and is a registered investment adviser. The
Manager renders invest-
ment advice to investment companies that had aggregate
assets under management
as of September 30, 1995 in excess of $60 billion.
Subject to the supervision and direction of the Trust's
Board of Trustees,
the Manager manages the Fund in accordance with the Fund's
stated investment
objective and policies, makes investment decisions for the
Fund, places orders
to purchase and sell securities on behalf of the Fund and
employs professional
portfolio managers and securities analysts who provide
research services to
the Fund. For investment services rendered, the Fund pays
the Manager a fee at
the annual rate of 0.30% of the Fund's average daily net
assets.
ADMINISTRATOR
The Manager also serves as the Fund's administrator and
oversees all aspects
of the Fund's administration and operation. For
administration services ren-
dered, the Fund pays the Manager a fee at the annual rate of
.20% of the
Fund's average daily net assets.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York,
New York 10013.
Smith Barney distributes shares of the Fund as principal
underwriter and as
such conducts a continuous offering pursuant to a "best
efforts" arrangement
requiring Smith Barney to take and pay for only such
securities as may be sold
to the public. Pursuant to a plan of distribution adopted by
the Fund under
Rule 12b-1 under the Act (the "Plan"), Smith Barney is paid
a distribution fee
with respect to Class B and Class C shares of the Fund at
the annual rate of
0.50% of the average daily net assets of each respective
Class' shares. Class
B shares that automatically convert to Class A shares of
Cash Portfolio eight
years after the date of original purchase will no longer be
subject to distri-
27
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
DISTRIBUTOR (CONTINUED)
bution fees. The fees are used by Smith Barney to pay its
Financial Consul-
tants to cover expenses primarily intended to result in the
sale of shares.
These expenses include: advertising expenses; the cost of
printing and mailing
prospectuses to potential investors; payments to and
expenses of Smith Barney
Financial Consultants and other persons who provide support
services in con-
nection with the distribution of shares; interest and/or
carrying charges; and
indirect and overhead costs of Smith Barney associated with
the sale of Fund
shares, including lease, utility, communications and sales
promotion expenses.
Payments under the Plan with respect to Class B and Class
C shares are not
tied exclusively to the distribution expenses actually
incurred by Smith Bar-
ney, 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 rel-
evant factors, including expenses borne by Smith Barney and
amounts received
under the Plan and the proceeds of CDSC.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, under the laws
of the Common-
wealth of Massachusetts and is an entity commonly known as a
"Massachusetts
business trust." The Trust offers shares of beneficial
interest of separate
series having a $.001 per share par value. When matters are
submitted for
shareholder vote, shareholders of each fund of the Trust
will have one vote
for each full share owned and a proportionate, fractional
vote for any frac-
tional 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 and the Fund will
assist shareholders in
calling such a meeting as required by the 1940 Act.
PNC Bank, National Association, located at 17th and
Chestnut Streets, Phila-
delphia, PA 19103, serves as custodian of the Trust's
investments.
28
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
ADDITIONAL INFORMATION (CONTINUED)
FDISG 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 securi-
ties held by the Trust. In an effort to reduce the Fund's
printing and mailing
costs, the Fund plans to consolidate the mailing of its semi-
annual and annual
reports by household. This consolidation means that a
household having multiple
accounts with the identical address of record will receive a
single copy of
each report. In addition, the Fund also plans to consolidate
the mailing of its
Prospectus so that a shareholder having multiple accounts
will receive a single
Prospectus annually. Any shareholder who does not want this
consolidation to
apply to his or her account should contact his or her
Financial Consultant or
the Trust's transfer agent. Shareholders may seek
information regarding the
Trust, including the current performance of the Fund, from
their Smith Barney
Financial Consultants.
29
<PAGE>
SmithBarney
- - -----------
A Member of
TravelersGroup [LOGO]
SMITH BARNEY
EXCHANGE
RESERVE
FUND
388 Greenwich Street
New
York, New York 10013
FD 0218 11/95
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PROSPECTUS
NOVEMBER 28, 1995
- - ------------------------------------------------------------
- - --------------------
3100 Breckenridge Blvd., Bldg. 200
Duluth, Georgia 30199-0062
(800) 544-5445
Smith Barney Exchange Reserve Fund (the "Fund"), a
diversified fund, seeks to
maximize current income to the extent consistent with the
preservation of capi-
tal and the maintenance of liquidity by investing in a
diversified portfolio of
high quality money market instruments.
SHARES OF THE FUND ARE NOT INSURED OR GUARANTEED BY THE
U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
The Fund is one of a number of funds, each having distinct
investment objec-
tives 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 distribution fees and expenses, which
prospective invest-
ors will find helpful in making an investment decision.
Investors are encour-
aged to read this Prospectus carefully and retain it for
future reference.
Additional information about the Fund is contained in a
Statement of Addi-
tional Information dated November 28, 1995, 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 an Investments Representative of PFS Investments
Inc. ("PFS Invest-
ments"). The Statement of Additional Information has been
filed with the Secu-
rities and Exchange Commission (the "SEC") and is
incorporated by reference
into this Prospectus in its entirety.
PFS DISTRIBUTORS INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<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 13
- - -------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 14
- - -------------------------------------------------
PURCHASE OF SHARES 15
- - -------------------------------------------------
EXCHANGE PRIVILEGE 16
- - -------------------------------------------------
REDEMPTION OF SHARES 17
- - -------------------------------------------------
MINIMUM ACCOUNT SIZE 19
- - -------------------------------------------------
YIELD INFORMATION 19
- - -------------------------------------------------
MANAGEMENT OF THE FUND AND THE TRUST 20
- - -------------------------------------------------
DISTRIBUTOR 21
- - -------------------------------------------------
ADDITIONAL INFORMATION 22
- - -------------------------------------------------
</TABLE>
- - ------------------------------------------------------------
- - --------------------
No person has been authorized to give any information or
to make any
representations in connection with this offering other than
those contained in
this Prospectus and, if given or made, such other
information or
representations must not be relied upon as having been
authorized by the Fund
or the Distributor. This Prospectus does not constitute an
offer by the Fund or
the Distributor to sell or a solicitation of an offer to buy
any of the
securities offered hereby in any jurisdiction to any person
to whom it is
unlawful to make such offer or solicitation in such
jurisdiction.
- - ------------------------------------------------------------
- - --------------------
2
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by
detailed information
appearing elsewhere in this Prospectus and in the Statement
of Additional
Information. Cross references in this summary are to
headings in the Prospec-
tus. See "Table of Contents."
INVESTMENT OBJECTIVE The Fund is an open-end diversified
management investment
company that seeks to maximize current income to the extent
consistent with
the preservation of capital and the maintenance of liquidity
by investing in
high quality short-term money market instruments. See
"Investment Objective
and Management Policies."
PURCHASE OF SHARES Shares of the Fund may be acquired by the
general public
only through the exchange of Class B shares of other of the
Smith Barney
Mutual Funds. Class B 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 shares are subject to an annual distribution fee of .50%
of the value of
average daily net assets of the Fund. Eight years after the
date of their
original purchase, Class B shares will be automatically
redeemed at net asset
value and the redemption proceeds will be reinvested, at net
asset value, in
Class A shares of Smith Barney Money Funds Inc. -- Cash
Portfolio ("Cash Port-
folio"). Upon this conversion, the shares will no longer be
subject to the
annual distribution fee. In addition to Class B shares, the
Fund offers Class
C shares to investors exchanging Class C shares of another
of the Smith Barney
Funds purchased through Smith Barney Inc. ("Smith Barney"),
a distributor of
the Fund.
Shares may be purchased through the Fund's distributor,
PFS Distributors
("PFS") See "Purchase of Shares."
INVESTMENT MINIMUMS Investors may open an account by making
an initial invest-
ment 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 Class B shares. For
participants in retirement
plans qualified under Section 403(b)(7) or Section 401(a) of
the Code, the
minimum initial and subsequent investment requirement is
$25. See "Purchase of
Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day that
the New York
Stock Exchange, Inc. ("NYSE") is open for business. See
"Redemption of
Shares."
MANAGEMENT OF THE FUND Smith Barney Mutual Funds Management
Inc. (the "Manag-
er") serves as the Fund's investment adviser and
administrator. The
3
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PROSPECTUS SUMMARY (CONTINUED)
Manager is a wholly owned subsidiary of Smith Barney
Holdings Inc. ("Hold-
ings"). Holdings is a wholly owned subsidiary of Travelers
Group Inc. ("Travel-
ers"), a diversified financial services holding company
engaged, through its
subsidiaries principally in four business segments:
Investment Services, Con-
sumer Finance Services, Life Insurance Services and Property
& Casualty Insur-
ance Services. See "Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares may be exchanged for Class B
shares of certain other
funds of the Smith Barney Mutual Funds at the net asset
value next determined,
plus any applicable sales charge differential. See "Exchange
Privilege."
DIVIDENDS AND DISTRIBUTIONS Dividends are declared daily and
paid monthly from
net investment income. See "Dividends, Distributions and
Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid
on shares of the
Fund will be reinvested automatically in additional shares
at current net asset
value unless otherwise specified by an investor. Shares
acquired by dividend
and distribution reinvestment will not be subject to any
CDSC. Class B shares
acquired through dividend and distribution reinvestments
will become eligible
for conversion to Class A shares of Cash Portfolio. See
"Dividends, Distribu-
tions and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There is no
assurance that the Fund
will achieve its investment objective. In light of the fees
and CDSC imposed on
Class B shares, an investment in the Fund should be viewed
as part of a long-
term investment in the Smith Barney Mutual Funds. Investors
seeking only to
invest in a money market fund and who do not expect to re-
exchange Fund shares
for Class B shares of other of the Smith Barney Mutual Funds
should consider
more suitable investments, including other money market
funds offered to the
public by Smith Barney. See "Investment Objective and
Management Policies" and
"Purchase of Shares."
4
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PROSPECTUS SUMMARY (CONTINUED)
THE FUND'S EXPENSES The following expense table lists the
costs and expenses
that an investor will incur, either directly or indirectly,
as a shareholder of
the Fund, based on the maximum CDSC that may be incurred at
the time of redemp-
tion and, unless otherwise noted, the Fund's operating
expenses for its most
recent year:
<TABLE>
<CAPTION>
- - ------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<S> <C>
Maximum CDSC
(as a percentage of original
cost or redemption proceeds,
whichever is lower) 5.00%
- - ------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management fees .50%
12b-1 fee* .50
Other expenses [ ]
- - ------------------------------------------
Total Fund Operating Expenses 1.26%
- - ------------------------------------------
</TABLE>
* Upon conversion, Class B shares will no longer be
subject to a distribution
fee.
The CDSC set forth in the above table is the maximum CDSC
imposed by any of
the funds of the Smith Barney Mutual Funds participating in
the exchange pro-
gram. Investors may pay actual charges of less than 5%
depending on the CDSC of
the Class B shares with which the exchange was made and the
length of time the
Class B shares are held. See "Redemption of Shares." Smith
Barney receives an
annual 12b-1 distribution fee of .50% of the Fund's average
daily net assets.
"Other expenses" in the above table include fees for
shareholder services, cus-
todial fees, legal and accounting fees, printing costs and
registration fees.
5
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PROSPECTUS SUMMARY (CONTINUED)
EXAMPLE
The following example is intended to assist an investor in
understanding the
various costs that an investor in the Fund will bear
directly or indirectly.
The example assumes payment by the Fund of operating
expenses at the levels
set forth in the above table. See "Purchase of Shares," and
"Management of the
Fund and the Trust."
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5
YEARS 10 YEARS*
- - ------------------------------------------------------------
- - ----------------
<S> <C> <C>
<C> <C>
Assumes complete redemption at maximum
applicable CDSC at end of each time period $63 $70
$79 $135
Assumes no redemption $13 $40
$69 $135
</TABLE>
- - ------------------------------------------------------------
- - -------------------
* Ten year figures assume exchange of Class B shares for
Class A shares of
Smith Barney Money Funds, Inc.--Cash Portfolio at the
end of the eighth
year following the date of original purchase of such
Class B shares.
Accordingly, the expenses reflected above utilize the
expenses of a Class
A share of Cash Portfolio.
The example also provides a means for the investor to
compare expense levels
of funds with different fee structures over varying
investment periods. To
facilitate such comparison, all funds are required to
utilize a 5.00% annual
return assumption. However, the Fund's actual return will
vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A REPRESEN-
TATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE
GREATER OR LESS
THAN THOSE SHOWN.
6
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat
Marwick LLP indepen-
dent accountants, whose report thereon appears in the Fund's
Annual Report
dated July 31, 1995. This information should be read in
conjunction with the
financial statements and related notes that also appear in
the Fund's Annual
Report, which is incorporated by reference into the
Statement of Additional
Information.
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR YEAR
ENDED ENDED ENDED
ENDED ENDED
7/31/95 7/31/94 7/31/93
7/31/92 7/31/91
- - ------------------------------------------------------------
- - -------------------
<S> <C> <C> <C>
<C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $ 1.00 $ 1.00
$ 1.00 $ 1.00
- - ------------------------------------------------------------
- - -------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income 0.0216 0.0212
0.0400 0.0618
- - ------------------------------------------------------------
- - -------------------
LESS DISTRIBUTIONS:
Distributions from net
investment income (0.0216) (0.0212)
(0.0400) (0.0618)
- - ------------------------------------------------------------
- - -------------------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS 0.0002 0.0000
0.0000 0.0000
- - ------------------------------------------------------------
- - -------------------
NET ASSET VALUE, END OF YEAR $ 1.00 $ 1.00
$ 1.00 $ 1.00
- - ------------------------------------------------------------
- - -------------------
TOTAL RETURN 2.18% 2.15%
4.06% 6.36%
- - ------------------------------------------------------------
- - -------------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year (in
000's) $252,246 $166,262
$225,476 $426,862
Ratio of net investment income
to average net assets 2.24% 2.16%
4.13% 6.27%
Ratio of operating expenses to
average net assets 1.26% 1.25%
1.22% 1.17%
</TABLE>
- - ------------------------------------------------------------
- - -------------------
+ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charge.
7
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B 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%**
</TABLE>
- - ------------------------------------------------------------
- - -------------------
* The Fund commenced operations on July 8, 1986.
** Annualized.
+ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charge.
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. gov-
ernment 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 Associa-
tion 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 spon-
sors, 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 institu-
tions having total assets in excess of $1 billion.
Certificates of deposit
("CDs") are short-term negotiable obligations of commercial
banks; time depos-
its ("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-denomi-
nated bank obligations, such as CDs, bankers' 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.
9
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
The Fund generally will invest at least 25% of its assets in
these securities.
The Fund will invest in an obligation of a foreign bank or
foreign branch of a
domestic bank only if the Fund's investment adviser deems
the obligation to
present minimal credit risks. Nevertheless, this kind of
obligation entails
risks that are different from those of investments in
domestic obligations of
domestic banks due to differences in political, regulatory
and economic sys-
tems 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 obliga-
tions 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) compara-
ble 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 vari-
able amounts of principal indebtedness and periodic
adjustments in the inter-
est 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 addi-
tion, while demand notes generally are not rated, their
issuers must satisfy
the same criteria as those set forth above for issuers of
commercial paper.
The Manager will consider the earning power, cash flow and
other liquidity
ratios of issuers of demand notes and continually will
monitor their financial
ability to meet payment on demand.
CERTAIN INVESTMENT POLICIES
Price and Portfolio Maturity. The Fund invests only in
securities which are
purchased with and payable in U.S. dollars and which have
(or, pursuant to
regulations adopted by the SEC, will be deemed to have)
remaining maturities
of thirteen months or less at the date of purchase by the
Fund. For this pur-
pose, variable rate master demand notes (as described above
under "Commercial
Paper"), which are payable on demand or, under certain
conditions, at speci-
fied 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 portfo-
lio
10
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 "Req-
uisite NRSROs" in one of the two highest short-term rating
categories, securi-
ties 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 Informa-
tion.
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 addi-
tion, 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 secu-
rities are rated by the Requisite NRSROs in the highest
short-term rating cat-
egory, 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 transac-
tions. 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,
11
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
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 arrange-
ment results in a fixed rate of return that is not subject
to market fluctua-
tions during the Fund's holding period. The Fund will enter
into repurchase
agreements with banks which are the issuers of instruments
acceptable for pur-
chase 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 institu-
tion will be required to maintain the value of the
securities subject to the
repurchase agreement at not less than their repurchase
price. Repurchase agree-
ments 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 dur-
ing 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 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 secu-
rities 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. When-
ever 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,
12
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES (CONTINUED)
together with an enumeration of additional investment
restrictions which the
Fund has adopted and which cannot be changed without the
approval of the hold-
ers of a majority of the Fund's outstanding shares, is
contained in the State-
ment 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 pro-
ducing 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, revalu-
ation of currencies, future political and economic
developments and the possi-
ble imposition of currency exchange blockages or other
foreign 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 applica-
ble to domestic issuers. In addition, there may be less
publicly available
information about a foreign bank than about a domestic bank.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of
the close of regular
trading on the NYSE, and is computed by dividing the value
of the Fund's net
assets attributable to each Class B share by the total
number of shares of
Class B outstanding. The Fund employs the amortized cost
method of valuing
portfolio securities and intends to use its best efforts to
continue to main-
tain a constant net asset value of $1.00 per share.
13
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other
funds in deter-
mining the amount of dividends from net investment income
and distributions of
capital gains payable to shareholders.
The Fund declares dividends daily consisting of
substantially all of its net
investment income, and pays dividends monthly. Any net
realized gains will be
distributed at least annually. If a shareholder does not
otherwise instruct,
dividends and capital gains will be reinvested automatically
in additional
shares of Class B at net asset value subject to no CDSC.
Dividends and distri-
butions are treated the same for tax purposes whether taken
in cash or rein-
vested in additional shares.
TAXES
The Fund will be treated as a separate taxpayer with the
result that, for
federal tax purposes, the amount of investment income and
capital gains earned
will be determined on a fund-by-fund basis, rather than on a
Trust-wide basis.
The Fund intends to continue to qualify as a regulated
investment company
under Subchapter M of the Code. In any taxable year in which
the Fund so qual-
ifies and distributes at least 90% of its investment company
taxable income
(which includes, among other items, dividends, interest and
the excess of any
net short-term capital gains over net long-term capital
losses), the Fund (but
not its shareholders) generally will be relieved of federal
income tax on the
investment company taxable income and net realized capital
gains (the excess
of net long-term capital gains over net short-term capital
losses), if any,
distributed to shareholders. In order to qualify as a
regulated investment
company, the Fund will be required to meet various Code
requirements.
Amounts not distributed on a timely basis in accordance
with a calendar year
distribution requirement are subject to a nondeductible 4%
excise tax. In
order to avoid application of the excise tax, the Fund
intends to make its
distributions in accordance with this requirement.
Distributions of any investment company taxable income are
taxable to share-
holders as ordinary income. Distributions of any net capital
gains designated
by the Fund as capital gain dividends are taxable to
shareholders as long-term
capital gain regardless of the length of time a shareholder
may have held
shares of the Fund.
14
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
Dividends (including capital gain dividends) declared by
the Fund in October,
November or December of any calendar year to shareholders of
record on a date
in such a month will be deemed to have been received by
shareholders on Decem-
ber 31 of that calendar year, provided that the dividend is
actually paid by
the Fund during January of the following calendar year.
Upon the disposition of shares of the Fund (whether by
redemption, sale or
exchange), a shareholder generally will realize a taxable
gain or loss. Such
gain or loss generally will be a capital gain or loss if the
shares are capital
assets in the shareholder's hands, and generally will be
long-term or short-
term depending upon the shareholder's holding period for the
shares. Any loss
realized by a shareholder on disposition of Fund shares held
by the shareholder
for six months or less will be treated as long-term capital
loss to the extent
of any distributions of capital gain dividends received by
the shareholder with
respect to such shares.
Shareholders will be notified annually about the amounts
of dividends and
distributions, including the amounts (if any) for that year
which have been
designated as capital gain dividends. Dividends and
distributions and gains
realized upon a disposition of Fund shares may also be
subject to state, local
or foreign taxes depending on each shareholder's particular
situation. Divi-
dends consisting of interest from obligations of the United
States government
and certain of its agencies and instrumentalities may be
exempt from all state
and local income taxes. Shareholders should consult their
tax advisors for spe-
cific information on the tax consequences of particular
types of distributions.
PURCHASE OF SHARES
Fund shares may be acquired only through exchanges with
Class B shares of
other funds of the Smith Barney Mutual Funds. Class B shares
acquired through
exchange are subject to the CDSC, if any, of the shares with
which the exchange
is made.
In light of the distribution fee imposed on Class B
shares, an investment in
the Fund should be viewed as part of a long-term investment
in the Smith Barney
Mutual Funds. Investors seeking only to invest in a money
market fund and who
do not expect to exchange Fund shares for shares of other
funds of the Smith
Barney Mutual Funds should consider more suitable, including
other money market
funds offered by PFS.
The Fund employs a distribution method which differs from
that of certain
other mutual funds that invest in money market instruments.
Before investing in
15
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
PURCHASE OF SHARES (CONTINUED)
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.
Class B shares will convert automatically to Class A
shares of Cash Portfolio
eight years after the date on which they were purchased and
will thereafter no
longer be subject to any distribution fees. There will also
be converted at
that time such proportion of Class B Dividend Shares owned
by the shareholder
as the total number of his or her Class B shares converting
at the time bears
to the total number of outstanding Class B shares (other
than Class B Dividend
Shares) owned by the shareholder.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than
1.00% per month of
the value of the shareholder's shares at the time the
withdrawal plan commences
(see "Automatic Cash Withdrawal Plan"); (c) redemptions of
shares within 12
months following the death or disability of the shareholder;
(d) involuntary
redemptions; and (e) redemptions of shares in connection
with a combination of
the Fund with any investment company by merger, acquisition
of assets or other-
wise. In addition, a shareholder who has redeemed proceeds
within 60 days and
receive pro rata credit for any CDSC imposed on the prior
redemption.
CDSC waivers will be granted subject to confirmation by
PFS of the sharehold-
er's status or holdings, as the case may be.
EXCHANGE PRIVILEGE
Except as otherwise noted below, Class B shares may be
exchanged for Class B
shares in the following funds of the Smith Barney Mutual
Funds, to the extent
shares are offered for sale in the shareholder's state of
residence. Exchanges
are subject to minimum investment requirements and other
requirements of the
fund into which exchanges are made and a sales charge
differential may apply.
FUND NAME
. Smith Barney Appreciation Fund Inc.
. Smith Barney Growth Opportunity Fund
. Smith Barney Investment Grade Bond Fund
16
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
EXCHANGE PRIVILEGE (CONTINUED)
In the event a Class B shareholder 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 appli-
cable 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.
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 privi-
leges upon 60 days' prior notice to shareholders.
REDEMPTION OF SHARES
Shareholders may redeem for cash some or all of their
shares of the Fund at
any time by sending a written request in proper form
directly to PFS Share-
holder Services, the Fund's Sub-Transfer Agent (the "Sub-
Transfer Agent"), at
3100 Breckinridge Blvd., Bldg. 200, Duluth, Georgia 30199-
0062. If you should
have any questions concerning how to redeem your account
after reviewing the
information below, please contact the Sub-Transfer Agent at
(800)
544-5445, Spanish-speaking representatives (800) 544-7278 or
TDD Line for the
Hearing Impaired (800) 824-1721.
As described under "Purchase of Shares," redemptions of
Class B shares are
subject to a contingent deferred sales charge.
The request for redemption must be signed by all persons
in whose names the
shares are registered. Signatures must conform exactly to
the account regis-
tration. If the proceeds of the redemption exceed $50,000,
or if the proceeds
are not to be paid to the record owner(s) at the record
address, if the share-
holder(s) has had an address change in the past 45 days, or
it the sharehold-
er(s) is a corporation, sole proprietor, partnership, trust
or fiduciary, sig-
nature(s) must be guaranteed by one of the following: a bank
or trust company;
a broker-dealer;
17
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
REDEMPTION OF SHARES (CONTINUED)
a credit union; a national securities exchange, registered
securities associa-
tion or clearing agency; a savings and loan association; or
a federal savings
bank.
Generally, a properly completed Redemption Form with any
required signature
guarantee is all that is required for a redemption. In some
cases, however,
other documents may be necessary. For example, in the case
of shareholders
holding certificates, the certificates for the shares being
redeemed must
accompany the redemption request. Additional documentary
evidence of authority
is also required by the Sub-Transfer Agent in the event
redemption is
requested by a corporation, partnership, trust, fiduciary,
executor or admin-
istrator. Additionally, if a shareholder requests a
redemption from a Retire-
ment Plan account (IRA, SEP or 403(b)(7)), such request must
state whether or
not federal income tax is to be withheld from the proceeds
of the redemption
check.
A shareholder may utilize the Sub-Transfer Agent's FAX to
redeem their
account as long as a signature guarantee or other
documentary evidence is not
required. Redemption requests should be properly signed by
all owners of the
account and faxed to the Sub-Transfer Agent at (800) 554-
2374. Facsimile
redemptions may not be available if the shareholder cannot
reach the Sub-
Transfer Agent by FAX, whether because all telephone lines
are busy or for any
other reason; in such case, a shareholder would have to use
the Fund's regular
redemption procedure described above. Facsimile redemptions
received by the
Sub-Transfer Agent prior to 4:00 p.m. Eastern time on a
regular business day
will be processed at the net asset value per share
determined that day.
In all cases, the redemption price is the net asset value
per share of the
Fund next determined after the request for redemption is
received in proper
form by the Sub-Transfer Agent. Payment for shares redeemed
will be made by
check mailed within three days after acceptance by the Sub-
Transfer Agent of
the request and any other necessary documents in proper
order. Such payment
may be postponed or the right of redemption suspended as
provided by the rules
of the SEC. If the shares to be redeemed have been recently
purchased by check
or draft, the Sub-Transfer Agent may hold the payment of the
proceeds until
the purchase check or draft has cleared, usually a period of
up to 15 days.
Any taxable gain or loss will be recognized by the
shareholder upon redemption
of shares.
After following the above-stated redemption guidelines, a
shareholder(s) may
elect to have the redemption proceeds wire-transferred
directly to the share-
holder's bank account of record (defined as a currently
established pre-autho-
rized draft on the shareholder's account with no changes
within the previous
45
18
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
REDEMPTION OF SHARES (CONTINUED)
days), as long as the bank account is registered in the same
name(s) as the
account with the Fund. If the proceeds are not to be wired
to the bank account
of record, or mailed to the registered owner(s), a signature
guarantee will be
required from all shareholder(s). A $25 service fee will be
charged by the Sub-
Transfer Agent to help defray the administrative expense of
executing a wire
redemption. Redemption proceeds will normally be wired to
the designated bank
account on the next business day following the redemption,
and should ordinar-
ily be credited to your bank account by your bank within 48
to 72 hours.
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 $50 monthly or
quarterly. Retirement
plan accounts are eligible for automatic cash withdrawal
plans only where the
shareholder is eligible to receive qualified distributions
and has an account
value of at least $5,000. The withdrawal plan will be
carried over on exchanges
between funds. Any applicable CDSC will not be waived on
amounts withdrawn by a
shareholder that exceed 1.00% per month of the value of the
shareholder's
shares subject to the CDSC at the time the withdrawal plan
commences. For fur-
ther information regarding the automatic cash withdrawal
plan, shareholders
should contact the Sub-Transfer Agent.
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, how-
ever, will not redeem shares based solely on market
reductions in net asset
value. Before the Fund exercises such right, shareholders
will receive written
notice and will be permitted 60 days to bring accounts up to
the minimum to
avoid automatic redemption.
YIELD INFORMATION
From time to time the Fund may advertise its yield and
effective yield of
Class B shares. These yield figures are based on historical
earnings and are
not intended to indicate future performance. The yield of a
Class B share
refers to
19
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
YIELD INFORMATION (CONTINUED)
the net investment income generated by an investment in that
Class over a spe-
cific seven-day period (which will be stated in the
advertisement). This net
investment income is then annualized. The effective yield is
calculated simi-
larly but, when annualized, the income earned by an
investment in the Class is
assumed to be reinvested. The effective yield will be
slightly higher than the
yield because of the compounding effect of the assumed
reinvestment.
MANAGEMENT OF THE FUND AND THE TRUST
BOARD OF TRUSTEES
Overall responsibility for management and supervision of
the Trust and the
Fund rests with the Trust's Board of Trustees. The Trustees
approve all sig-
nificant agreements between the Trust and the companies that
furnish services
to the Fund, including agreements with its investment
adviser, administrator,
custodian and transfer agent. The day-to-day operations of
the Fund are dele-
gated to its investment adviser and administrator. The
Statement of Additional
Information contains general background information
regarding each Trustee and
executive officer of the Fund.
INVESTMENT ADVISER
The Manager is located at 388 Greenwich Street, New York,
New York 10013,
and serves as the Fund's investment adviser. The Manager is
a wholly owned
subsidiary of Holdings.) The Manager (through its
predecessors) has been in
the investment counseling business since 1934 and is a
registered investment
adviser. The Manager renders investment advice to investment
companies that
had aggregate assets under management as of September 30,
1995 in excess of
$60 billion.
Subject to the supervision and direction of the Trust's
Board of Trustees,
the Manager manages the Fund in accordance with the Fund's
stated investment
objective and policies, makes investment decisions for the
Fund, places orders
to purchase and sell securities on behalf of the Fund and
employs professional
portfolio managers and securities analysts who provide
research services to
the Fund. For investment services rendered, the Fund pays
the Manager a fee at
the annual rate of 0.30% of the Fund's average daily net
assets.
20
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
MANAGEMENT OF THE FUND AND THE TRUST (CONTINUED)
ADMINISTRATOR
The Manager also serves as the Fund's administrator and
oversees all aspects
of the Fund's administration and operation. For
administration services ren-
dered, the Fund pays the Manager a fee at the annual rate of
.20% of the Fund's
average daily net assets.
DISTRIBUTOR
PFS is located at 3100 Breckenridge Boulevard, Duluth,
Georgia 30199-0001.
PFS distributes shares of the Fund as principal underwriter
and as such con-
ducts a continuous offering pursuant to a "best efforts"
arrangement requiring
PFS to take and pay for only such securities as may be sold
to the public. Pur-
suant to a plan of distribution adopted by the Fund under
Rule 12b-1 under the
1940 Act (the "Plan"), PFS is paid an annual distribution
fee with respect to
Class B shares at the annual rate of 0.50% of the average
daily net assets
attributable to that Class. Class B shares that
automatically convert to Class
A shares of Cash Portfolio eight years after the date of
original purchase will
no longer be subject to distribution fees. The fees are paid
to PFS which, in
turn pays PFS Investments to pay its Investments
Representatives to cover
expenses primarily intended to result in the sale of those
shares. These
expenses include: advertising expenses; the cost of printing
and mailing pro-
spectuses to potential investors; payments to and expenses
of PFS Investment
Representatives 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 PFS Investments associated with the
sale of Fund shares,
including lease, utility, communications and sales promotion
expenses.
PFS Investments may be deemed to be an underwriter for
purposes of the Secu-
rities Act of 1933. From time to time, PFS or its affiliates
may also pay for
certain non-cash sales incentives provided to PFS
Investments Representatives.
Such incentives do not have any effect on the net amount
invested. In addition
to the reallowances from the applicable public offering
price described above,
PFS may, from time to time, pay or allow additional
reallowances or promotional
incentives, in the form of cash or other compensation to PFS
Investments Repre-
sentatives that sell shares of the Fund.
Payments under the Plan are not tied exclusively to the
distribution expenses
actually incurred by PFS and the payments may exceed
distribution expenses
actually incurred. The Board of Trustees will evaluate the
appropriateness of
21
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
DISTRIBUTOR CONTINUED)
the Plan and its payment terms on a continuing basis and in
so doing will con-
sider all relevant factors, including expenses borne by PFS,
amounts received
under the Plan and proceeds of the CDSC.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, under the laws
of the Commonwealth
of Massachusetts and is an entity commonly known as a
"Massachusetts business
trust." The Trust offers shares of beneficial interest of
separate series hav-
ing 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 aggre-
gate.
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 and the Fund will
assist shareholders in
calling such a meeting as required by the 1940 Act.
PNC Bank, National Association, is located at 17th and
Chestnut Streets,
Philadelphia, PA 19103, and serves as custodian of the
Trust's investments.
First Data Investor Services Group, Inc. is located at
Exchange Place, Bos-
ton, Massachusetts 02109, and serves as the Trust's transfer
agent.
PFS Shareholder Services is located at 3100 Breckenridge
Blvd., Bldg. 200,
Duluth, Georgia 30199-0002 and serves as the Fund's Sub-
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 securi-
ties held by the Trust. In an effort to reduce the Fund's
printing and mailing
costs, the Fund plans to consolidate the mailing of its semi-
annual and annual
reports by household. This consolidation means that a
household having multiple
accounts with the identical address of record will receive a
single copy of
22
<PAGE>
SMITH BARNEY
Exchange Reserve Fund
ADDITIONAL INFORMATION (CONTINUED)
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 the Sub-Transfer
Agent.
23
<PAGE>
SMITH BARNEY
- - ------------
A Member
of Travelers Group
SMITH BARNEY
EXCHANGE
RESERVE
FUND
388 Greenwich Street
New
York, New York 10013
FUND 26
FD [ ]
Part B Statement of
Additional
Item No. and Caption 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 Management of
the Trust and the Funds
Holders of 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
Investment Objectives and Management
Policies; Purchase of
Shares; Redemption of
Shares; Taxes
19. Purchase, Redemption and Pricing Purchase
of Shares; Redemption of Shares;
Securities Being Offered Valuation
of Shares; Distributor; Exchange
Privilege
20. Tax Status Taxes
21. Underwriters Distributor
22. Calculation of Performance Data
Performance Data
23. Financial Statements Financial
Statements
Smith Barney
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information
November 28, 1995
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 seven investment funds offered by the Trust (the
"Funds"), each dated November 28, 1995, as amended or
supplemented from time to time, and should be read in
conjunction with the Prospectuses. The Prospectuses may be
obtained from any Smith Barney Financial Consultant or by
writing or calling the Trust at the address or telephone
number set forth above. This Statement of Additional
Information, although not in itself a prospectus, is
incorporated by reference into the Prospectuses in its
entirety.
CONTENTS
For ease of reference, the same section headings are used in
both the Prospectuses and this Statement of Additional
Information, except where shown below:
Management of the Trust and the
Funds.......................................................
..................... 2
Investment Objectives and Management
Policies....................................................
............ 8
Purchase of
Shares......................................................
......................................................
29
Redemption of
Shares......................................................
................................................. 30
Distributor.................................................
............................................................
........... 31
Valuation of
Shares......................................................
.....................................................
33
Exchange
Privilege...................................................
.........................................................
34
Performance Data (See in the Prospectuses
"Performance")..............................................
.. 35
Taxes (See in the Prospectuses "Dividends, Distributions and
Taxes")................................ 41
Additional
Information.................................................
.....................................................
45
Financial
Statement...................................................
........................................................
46
Appendix....................................................
............................................................
.......... A-1
MANAGEMENT OF THE TRUST AND THE FUND
The executive officers of the Trust are employees of certain
of the organizations that provide services to the Trust.
These organizations are the following:
Name Service
Smith Barney Inc. Distributor
("Smith Barney")
Smith Barney Mutual Funds Management Inc. Investment
adviser to Convertible,
("SBMFM") High Income,
Diversified
Strategic Income,
Tax-Exempt
Income, Utilities and
Exchange
Reserve Funds
PFS Distributors Distributor to
Exchange Reserve Fund
("PFS")
Smith Barney Strategy Advisers Inc. Investment
adviser to Premium
("Strategy Advisers")
Total Return
Fund
Smith Barney Global Capital Management Inc. Sub-
investment adviser to Diversified
("Global Capital Management") Strategic
Income Fund
SBMFM
Administrator
Boston Partners Asset Management, L.P. Sub-investment
adviser to
("Boston Partners")
Premium Total
Return Fund
PNC Bank, National Association Custodian to
Convertible, High
("PNC Bank")
Income, Tax-Exempt Income
Utilities and Exchange
Reserve Funds
Morgan Guaranty Bank of New York Custodian to
Diversified Strategic
("Morgan") Income Fund
First Data Investors Services Group, Inc.
Transfer Agent
("FDISG"), a subsidiary of First Data
Corporation
These organizations and the functions they perform for
the Trust are discussed in the Prospectuses and in this
Statement of Additional Information.
Trustees and Executive Officers of the Trust
The Trustees and executive officers of the Trust, together
with information as to their principal business occupations
during the past five years, are shown below. The executive
officers of the Trust are employees of organizations that
provide services to the Funds. Each Trustee who is an
"interested person" of the Trust, as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"),
is indicated by an asterisk.
Lee Abraham, Trustee (Age 67). Retired; formerly Chairman
and Chief Executive Officer of Associated Merchandising
Corporation, a major retail merchandising and sourcing
organization. His address is 35 Old Forge Road, Wilton,
Connecticut 06897.
Antoinette C. Bentley, Trustee (Age 57). 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 (Age 65). 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 27 West
67th Street, New York, New York 10023.
Richard E. Hanson, Jr., Trustee (Age 53). Headmaster, The
Peck School, Morristown, NJ; prior to July 1, 1994,
Headmaster, Lawrence Country Day School-Woodmere Academy,
Woodmere, New York; prior to July 1, 1990, Headmaster of
Woodmere Academy. His address is 247 South Street,
Morristown, New Jersey 07960.
*Heath B. McLendon, Chairman of the Board and Investment
Officer (Age 61). Managing Director of Smith Barney and
Chairman of the Board of Strategy Advisers; prior to July
1993, Senior Executive Vice President of Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers"), Vice Chairman of
Shearson Asset Management; a Director of PanAgora Asset
Management, Inc. and PanAgora Asset Management Limited. His
address is 388 Greenwich Street, New York, New York 10013.
Madelon DeVoe Talley, Trustee (Age 62). Author; Governor at
Large of the National Association of Securities Dealers,
Inc. Her address is 876 Park Avenue, New York, New York
10021.
Jessica Bibliowicz, President (Age 35). Executive Vice
President of Smith Barney; Prior to 1994, Director of Sales
and Marketing for Prudential Mutual Funds; prior to 1990,
First Vice President, Asset Management Division of Shearson
Lehman Brothers. Ms. Bibliowicz also serves as President of
26 other mutual funds of the Smith Barney Mutual Funds. Her
address is 388 Greenwich Street, New York, New York 10013.
John C. Bianchi, Vice President and Investment Officer (Age
- - --). Managing Director of Smith Barney; prior to July 1993,
Managing Director of Shearson Lehman Advisors. His address
is 388 Greenwich Street, New York, New York 10013.
James E. Conroy, Vice President and Investment Officer (Age
- - --). Managing Director of Smith Barney; prior to July 1993,
Managing Director of Shearson Lehman Advisors. His address
is 388 Greenwich Street, New York, New York 10013.
Victor S. Filatov, Investment Officer (Age --).
International Strategist and President of Global Capital
Management; prior to November 1993, Business Coordinator and
Head of European Fixed Income Research of J.P. Morgan
Securities Inc. His address is 10 Piccadilly, London, W1V
9LA, England.
Jack S. Levande, Vice President and Investment Officer (Age
- - --). Managing Director of Smith Barney; prior to July 1993,
Managing Director of Shearson Lehman Advisors. His address
is 388 Greenwich Street, New York, New York 10013.
Lawrence T. McDermott, Vice President and Investment Officer
(Age --). Managing Director of Smith Barney; prior to July
1993, Managing Director of Shearson Lehman Advisors. His
address is 388 Greenwich Street, New York, New York 10013.
George E. Mueller, Jr., Investment Officer (Age 54).
Managing Director of Smith Barney; prior to July 1993,
Managing Director of Shearson Lehman Advisors. His address
is 388 Greenwich Street, New York, New York 10013.
Harry Rosenbluth, Investment Officer (Age 40). Principal of
Boston Partners; prior to 1995, Vice President of The Boston
Company Advisors; Senior Vice President of The Boston
Company Institutional Investors, Inc. His address is 300
Drake's Landing Road, Greenbrae, California 94904.
Robert E. Swab, Investment Officer (Age 39). Vice President
of Smith Barney; prior to 1995, Co-Portfolio Manager of
Convertible Fund. His address is 388 Greenwich Street, New
York, New York 10013.
Phyllis M. Zahorodny, Vice President and Investment Officer
(Age --). Managing Director of Smith Barney; prior to July
1993, Managing Director of Shearson Lehman Advisors. Her
address is 388 Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer
(Age37). Managing Director and Chief Financial Officer of
Smith Barney; Director and Senior Vice President of SBMFM.
Mr. Daidone also serves as Senior Vice President and
Treasurer of 41 other funds of the Smith Barney Mutual
Funds. His address is 388 Greenwich Street, New York, New
York 10013.
Christina T. Sydor, Secretary (Age 44). Managing Director of
Smith Barney; General Counsel and Secretary of SBMFM. Ms.
Sydor also serves as Secretary of 41 other funds of the
Smith Barney Mutual Funds. Her address is 388 Greenwich
Street, New York, New York 10013.
Each Trustee also serves as a director, trustee and/or
general partner of certain other mutual funds for which
Smith Barney serves as distributor. Global Capital
Management, SBMFM and Strategy Advisers (the "Advisers") are
"affiliated persons" of the Trust as defined in the 1940 Act
by virtue of their positions as investment advisers to the
Funds. As of August 31, 1995, the Trustees and officers of
the Funds, as a group, owned less than 1% of the outstanding
shares of beneficial interest of each Fund.
No officer, director or employee of Smith Barney or any
Smith Barney parent or subsidiary receives any compensation
from the Trust for serving as an officer or Trustee of the
Trust. The Trust pays each Trustee who is not an officer,
director or employee of Smith Barney or any of their
affiliates a fee of $17,000 per annum plus $3,250 per
meeting attended and reimburses them for travel and
out-of-pocket expenses. For the fiscal year ended July 31,
1995, such fees and expenses totalled $142,756.
Investment Advisers, Sub-Investment Adviser and
Administrator
Each Adviser serves as investment adviser to one or more
Funds pursuant to a separate written agreement with the
relevant Fund (an "Advisory Agreement"). SBMFM serves as
investment adviser to its relevant Funds pursuant to a
transfer of the investment advisory agreement, effective
November 7, 1994, from its affiliate, Mutual Management
Corp. (Mutual Management Corp. and SBMFM are both wholly
owned subsidiaries of Smith Barney Holdings Inc.
("Holdings")). Strategy Advisers is a wholly owned
subsidiary of SBMFM and Global Capital Management is an
indirect wholly owned subsidiary of Holdings. Holdings is a
wholly owned subsidiary of Travelers Group Inc. The Advisory
Agreements were most recently approved by the Board of
Trustees, including a majority of the Trustees who are not
"interested persons" of the Trust or the Advisers
("Independent Trustees"), on August 9, 1995, with the
exception of Premium Total Return Fund, which was approved
on July 10, 1995 by the Board of Trustees and August 10,
1995 by the shareholders of the Premium Total Return Fund.
SBMFM also serves as administrator to each Fund pursuant to
a separate written agreement dated May 4, 1994 (the
"Administration Agreement") which was most recently approved
by the Board of Trustees, including a majority of the
Independent Trustees, on August 9, 1995. Boston Partners
serves as sub-investment adviser to Premium Total Return
Fund, pursuant to a written agreement dated August 15, 1995,
which was approved by the Fund's Board of Trustees,
including a majority of the Independent Trustees on June 15,
1995 and by the Fund's Shareholders on August 10, 1995.
Global Capital Management also serves as sub-investment
adviser to Diversified Strategic Income Fund, pursuant to a
written agreement dated March 21, 1994 which was approved by
the Fund's Board of Trustees, including a majority of the
Independent Trustees, on August 9, 1995. Prior to March 21,
1994, Lehman Brothers Global Asset Management Limited
("LBGAM") acted in the capacity as the Fund's sub-investment
adviser.
Certain of the services provided to the Trust by the
Advisers, Global Capital Management, SBMFM and Boston
Partners are described in the Prospectuses under "Management
of the Trust and the Fund." Each Adviser, SBMFM, as
administrator, and Boston Partners, as sub-adviser, 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, SBMFM pays the
salaries of all officers and employees who are employed by
both it and the Trust, maintains office facilities for the
Trust, furnishes the Trust with statistical and research
data, clerical help and accounting, data processing,
bookkeeping, internal auditing and legal services and
certain other services required by the Trust, prepares
reports to the Funds' shareholders and prepares tax returns,
reports to and filings with the Securities and Exchange
Commission (the "SEC") and state Blue Sky authorities. The
Advisers, Global Capital Management, SBMFM and Boston
Partners bear all expenses in connection with the
performance of their services.
For the fiscal years ended July 31, 1993, 1994 and
1995, the Funds paid investment advisory fees to their
respective Advisers as follows:
Fund 1993 1994 1995
Premium Total Return Fund $4,803,717 $8,506,930
$10,627,086
Tax-Exempt Income Fund 3,978,637 4,561,779
4,033,479
Convertible Fund 329,323 425,505
415,666
High Income Fund 2,659,448 3,771,643
3,706,659
Diversified Strategic Income Fund 6,226,342
8,761,857 11,112,553
Utilities Fund 10,317,792 10,896,883
7,885,332
Exchange Reserve Fund 612,812
622,203 547,990
For the fiscal years ended July 31, 1993, 1994 and
1995, the Funds paid administrative fees to The Boston
Company Advisors, Inc., SBMFM or Boston Partners as follows:
The Boston Company
Advisors, Inc.
SBMFM
SBMFM
For the Fiscal For the
Fiscal
For the Fiscal
Period from Period
from
Period from
8/1/93 through 5/4/94
through
8/1/94 through
Fund 1993 5/3/94
7/31/94
7/31/95
Premium Total Return Fund $1,746,806
$2,639,140
$454,284 $3,930,566
Tax-Exempt Income Fund 1,989,319
1,971,064
309,826 2,016,740
Convertible Fund 131,729
145,717
24,485 166,266
High Income Fund 1,063,779
1,297,678
210,979 1,482,663
Diversified Strategic Income Fund 3,557,910
4,289,630
717,145 4,938,912
Utilities Fund 4,584,796
4,256,098
586,961 3,542,538
Exchange Reserve Fund 408,842
341,472
73,330 365,327
For the fiscal years ended July 31, 1993 and the period
ended March 20, 1994, Diversified Strategic Income Fund paid
LBGAM $1,778,955 and $1,562,892, respectively, in
sub-investment advisory fees. For the period from March 21,
1994 through July 31, 1994 and the fiscal year ended July
31, 1995, Diversified Strategic Income Fund paid Global
Capital Management $940,496 and $1,234,728, respectively, in
sub-investment advisory fees.
Each Adviser and SBMFM, as administrator have agreed
that if in any fiscal year the aggregate expenses of the
Fund that it serves (including fees payable pursuant to its
Advisory Agreement and Administration Agreement, but
excluding interest, taxes, brokerage, distribution and
service fees and, if permitted by the relevant state
securities commission, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the
Fund, the Adviser and SBMFM will, to the extent required by
state law, reduce their fees by the amount of such excess
expenses, such amount to be allocated between them in the
proportion that their respective fees bear to the aggregate
of the fees paid by the Fund. Such fee reduction, if any,
will be estimated and reconciled on a monthly basis. The
most restrictive state expense limitation applicable to any
Fund is 2.5% of the first $30 million of the Fund's average
daily net assets, 2% of the next $70 million of the average
daily net assets and 1.5% of the remaining average daily net
assets of each Fund. No such fee reduction was required for
the fiscal years ended July 31, 1993, 1994 and 1995.
The Fund bears expenses incurred in its operation,
including: taxes, interest, brokerage fees and commissions,
if any; fees of Trustees who are not officers, directors,
shareholders or employees of Smith Barney or SBMFM; SEC fees
and state Blue Sky qualification fees; charges of
custodians; transfer and dividend disbursing agent fees;
certain insurance premiums; outside auditing and legal
expenses; costs of maintaining corporate existence; costs of
investor services (including allocated telephone and
personnel expenses); costs of preparing and printing of
prospectuses for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and
shareholder meetings; and meetings of the officers or Board
of Trustees of the Trust.
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the
Trust. The Trustees who are not "interested persons" of the
Fund have selected Stroock & Stroock & Lavan as their legal
counsel.
KPMG Peat Marwick LLP, independent accountants, 345
Park Avenue, New York, New York 10154 serve as auditors of
the Trust and will render an opinion on the Trust's
financial statements annually. Prior to October 20, 1994,
Coopers & Lybrand L.L.P., independent accountants, served as
auditors of the Trust and rendered an opinion on the Trust's
financial statements for the fiscal year ended July 31,
1994.
In the interest of economy and convenience,
certificates representing shares in the Trust are not
physically issued except upon specific request made by a
shareholder to FDISG. FDISG maintains a record of each
shareholder's ownership of Trust shares. Shares do not have
cumulative voting rights, which means that holders of more
than 50% of the shares voting for the election of Trustees
can elect all of the Trustees. Shares are transferable but
have no preemptive or subscription rights. Shareholders
generally vote by Fund, except with respect to the election
of Trustees and the selection of independent public
accountants.
Massachusetts law provides that, under certain
circumstances, shareholders could be held personally liable
for the obligations of the Trust. However, the Trust
Agreement disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such
disclaimer be given in each agreement, obligation or
instrument entered into or executed by the Trust or a
Trustee. The Trust Agreement provides for indemnification
from the Trust's property for all losses and expenses of any
shareholder held personally liable for the obligations of
the Trust. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is
limited to circumstances in which the Trust would be unable
to meet its obligations, a possibility that the Trust's
management believes is remote. Upon payment of any liability
incurred by the Trust, the shareholder paying the liability
will be entitled to reimbursement from the general assets of
the Trust. The Trustees intend to conduct the operations of
the Trust in such a way so as to avoid, as far as possible,
ultimate liability of the shareholders for liabilities of
the Trust.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectuses discuss the investment objectives of the
Funds and the policies to be employed to achieve those
objectives. This section contains supplemental information
concerning the types of securities and other instruments in
which the Funds may invest, the investment policies and
portfolio strategies that the Funds may utilize and certain
risks attendant to such investments, policies and
strategies.
U.S. Government Securities (All Funds). United States
government securities include debt obligations of varying
maturities issued or guaranteed by the United States
government or its agencies or instrumentalities ("U.S.
government securities"). U.S. government securities include
not only direct obligations of the United States Treasury,
but also securities issued or guaranteed by the Federal
Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association
("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Intermediate Credit Banks, Federal
Land Banks, Federal National Mortgage Association ("FNMA"),
Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board, Student Loan Marketing
Association, International Bank for Reconstruction and
Development and Resolution Trust Corporation. Certain U.S.
government securities, such as those issued or guaranteed by
GNMA, FNMA and Federal Home Loan Mortgage Corporation
("FHLMC"), are mortgage-related securities. Because the
United States government is not obligated by law to provide
support to an instrumentality that it sponsors, a Fund will
invest in obligations issued by such an instrumentality only
if its Adviser determines that the credit risk with respect
to the instrumentality does not make its securities
unsuitable for investment by the Fund.
Bank Obligations (All Funds). Domestic commercial banks
organized under Federal law are supervised and examined by
the Comptroller of the Currency and are required to be
members of the Federal Reserve System and to be insured by
the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and
examined by state banking authorities but are members of the
Federal Reserve System only if they elect to join. Most
state banks are insured by the FDIC (although such insurance
may not be of material benefit to a Fund, depending upon the
principal amount of certificates of deposit ("CDs") of each
held by the Fund) and are subject to Federal examination and
to a substantial body of Federal law and regulation. As a
result of Federal and state laws and regulations, domestic
branches of domestic banks are, among other things,
generally required to maintain specified levels of reserves,
and are subject to other supervision and regulation designed
to promote financial soundness.
Obligations of foreign branches of U.S. banks, such as
CDs and time deposits ("TDs"), may be general obligations of
the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and
governmental regulation. Obligations of foreign branches of
U.S. banks and foreign banks are subject to different risks
than are those of U.S. banks or U.S. branches of foreign
banks. These risks include foreign economic and political
developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign
withholding and other taxes on interest income. Foreign
branches of U.S. banks are not necessarily subject to the
same or similar regulatory requirements that apply to U.S.
banks, such as mandatory reserve requirements, loan
limitations and accounting, auditing and financial
recordkeeping requirements. In addition, less information
may be publicly available about a foreign branch of a U.S.
bank than about a U.S. bank. CDs issued by wholly owned
Canadian subsidiaries of U.S. banks are guaranteed as to
repayment of principal and interest, but not as to sovereign
risk, by the U.S. parent bank.
Obligations of U.S. branches of foreign banks may be
general obligations of the parent bank in addition to the
issuing branch, or may be limited by the terms of a specific
obligation and by Federal and state regulation as well as
governmental action in the country in which the foreign bank
has its head office. A U.S. branch of a foreign bank with
assets in excess of $1 billion may or may not be subject to
reserve requirements imposed by the Federal Reserve System
or by the state in which the branch is located if the branch
is licensed in that state. In addition, branches licensed by
the Comptroller of the Currency and branches licensed by
certain states ("State Branches") may or may not be required
to: (a) pledge to the regulator by depositing assets with a
designated bank within the state, an amount of its assets
equal to 5% of its total liabilities; and (b) maintain
assets within the state in an amount equal to a specified
percentage of the aggregate amount of liabilities of the
foreign bank payable at or through all of its agencies or
branches within the state. The deposits of State Branches
may not necessarily be insured by the FDIC. In addition,
there may be less publicly available information about a
U.S. branch of a foreign bank than about a U.S. bank.
In view of the foregoing factors associated with the
purchase of CDs and TDs issued by foreign banks and foreign
branches of U.S. banks, a Fund's Adviser will carefully
evaluate such investments on a case-by-case basis.
Exchange Reserve Fund may purchase a CD issued by a
bank, savings and loan association or other banking
institution with less than $1 billion in assets (a "Small
Issuer CD") so long as the issuer is a member of the FDIC or
Office of Thrift Supervision and is insured by the Savings
Association Insurance Fund ("SAIF") and so long as the
principal amount of the Small Issuer CD is fully insured and
is no more than $100,000. Exchange Reserve Fund will at any
one time hold only one Small Issuer CD from any one issuer.
Savings and loan associations whose CDs may be purchased by
the Funds are members of the Federal Home Loan Bank and are
insured by the SAIF. As a result, such savings and loan
associations are subject to regulation and examination.
When-Issued Securities and Delayed-Delivery
Transactions (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 transaction and
may be disadvantaged if the other party fails to do so.
U.S. government securities and Municipal Securities (as
defined below) normally are subject to changes in value
based upon changes, real or anticipated, in the level of
interest rates and, although to a lesser extent in the case
of U.S. government securities, the public's perception of
the creditworthiness of the issuers. In general, U.S.
government securities and Municipal Securities tend to
appreciate when interest rates decline and depreciate when
interest rates rise. Purchasing these securities on a
when-issued or delayed-delivery basis, therefore, can
involve the risk that the yields available in the market
when the delivery takes place may actually be higher than
those obtained in the transaction itself. Similarly, the
sale of U.S. government securities for delayed delivery can
involve the risk that the prices available in the market
when the delivery is made may actually be higher than those
obtained in the transaction itself.
In the case of the purchase by a Fund of securities on
a when-issued or delayed-delivery basis, a segregated
account in the name of the Fund consisting of cash or liquid
debt securities equal to the amount of the when-issued or
delayed-delivery commitments will be established at PNC
Bank. For the purpose of determining the adequacy of the
securities in the accounts, the deposited securities will be
valued at market or fair value. If the market or fair value
of the securities declines, additional cash or securities
will be placed in the account daily so that the value of the
account will equal the amount of such commitments by the
Fund involved. On the settlement date, a Fund will meet its
obligations from then-available cash flow, the sale of
securities held in the segregated account, the sale of other
securities or, although it would not normally expect to do
so, from the sale of the securities purchased on a
when-issued or delayed-delivery basis (which may have a
value greater or less than the Fund's payment obligations).
Lending of Portfolio Securities (Premium Total Return,
Utilities, Convertible, High Income and Diversified
Strategic Income Funds). These Funds have the ability to
lend portfolio securities to brokers, dealers and other
financial organizations. Such loans, if and when made, may
not exceed 20% (33 1/3% in the case of Diversified Strategic
Income Fund) of a Fund's total assets taken at value. A Fund
will not lend portfolio securities to Smith Barney unless it
has applied for and received specific authority to do so
from the SEC. Loans of portfolio securities will be
collateralized by cash, letters of credit or U.S. government
securities which are maintained at all times in an amount at
least equal to the current market value of the loaned
securities. From time to time, a Fund may pay a part of the
interest earned from the investment of collateral received
for securities loaned to the borrower and/or a third party
which is unaffiliated with the Fund and is acting as a
"finder".
By lending its securities, a Fund can increase its
income by continuing to receive interest on the loaned
securities as well as by either investing the cash
collateral in short-term instruments or obtaining yield in
the form of interest paid by the borrower when U.S.
government securities are used as collateral. A Fund will
comply with the following conditions whenever 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
receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned
securities, and any increase in market value; (e) the Fund
may pay only reasonable custodian fees in connection with
the loan; and (f) voting rights on the loaned securities may
pass to the borrower; provided, however, that if a material
event adversely affecting the investment in the loaned
securities occurs, the Trust's Board of Trustees must
terminate the loan and regain the right to vote the
securities. The risks in lending portfolio securities, as
with other extensions of secured credit, consist of a
possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Loans will
be made to firms deemed by each Fund's Adviser to be of good
standing and will not be made unless, in the judgment of the
Adviser, the consideration to be earned from such loans
would justify the risk.
Options on Securities (Premium Total Return,
Convertible, Diversified Strategic Income and High Income
Funds). These Funds may engage in transactions in options on
securities, which, depending on the Fund, may include the
writing of covered put options and covered call options, the
purchase of put and call options and the entry into closing
transactions.
The principal reason for writing covered call options
on securities is to attempt to realize, through the receipt
of premiums, a greater return than would be realized on the
securities alone. Diversified Strategic Income Fund,
however, may engage in option transactions only to hedge
against adverse price movements in the securities that it
holds or may wish to purchase and the currencies in which
certain portfolio securities may be denominated. In return
for a premium, the writer of a covered call option forfeits
the right to any appreciation in the value of the underlying
security above the strike price for the life of the option
(or until a closing purchase transaction can be effected).
Nevertheless, the call writer retains the risk of a decline
in the price of the underlying security. Similarly, the
principal reason for writing covered put options is to
realize income in the form of premiums. The writer of a
covered put option accepts the risk of a decline in the
price of the underlying security. The size of the premiums
that a Fund may receive may be adversely affected as new or
existing institutions, including other investment companies,
engage in or increase their option-writing activities.
Options written by a Fund normally will have expiration
dates between one and nine months from the date written. The
exercise price of the options may be below, equal to or
above the market values of the underlying securities at the
times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money,"
"at-the-money" and "out-of-the-money," respectively. A Fund
with option-writing authority may write (a) in-the-money
call options when its Adviser expects that the price of the
underlying security will remain flat or decline moderately
during the option period, (b) at-the-money call options when
its Adviser expects that the price of the underlying
security will remain flat or advance moderately during the
option period and (c) out-of-the-money call options when its
Adviser expects that the price of the underlying security
may increase but not above a price equal to the sum of the
exercise price plus the premiums received from writing the
call option. In any of the preceding situations, if the
market price of the underlying security declines and the
security is sold at this lower price, the amount of any
realized loss will be offset wholly or in part by the
premium received. Out-of-the-money, at-the-money and
in-the-money put options (the reverse of call options as to
the relation of exercise price to market price) may be
utilized in the same market environments that such call
options are used in equivalent transactions.
So long as the obligation of a Fund as the writer of an
option continues, the Fund may be assigned an exercise
notice by the broker-dealer through which the option was
sold, requiring the Fund to deliver, in the case of a call,
or take delivery of, in the case of a put, the underlying
security against payment of the exercise price. This
obligation terminates when the option expires or the Fund
effects a closing purchase transaction. A Fund can no longer
effect a closing purchase transaction with respect to an
option once it has been assigned an exercise notice. To
secure its obligation to deliver the underlying security
when it writes a call option, or to pay for the underlying
security when it writes a put option, a Fund will be
required to deposit in escrow the underlying security or
other assets in accordance with the rules of the Options
Clearing Corporation (the "Clearing Corporation") or similar
foreign clearing corporation and of the securities exchange
on which the option is written.
The Diversified Strategic Income 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.
"Spread" options are dependent upon the difference
between the price of two securities or futures contracts,
"Knock-out" options are cancelled if the price of the
underlying asset reaches a trigger level prior to
expiration, "Knock-in" options only have value if the price
of the underlying asset reaches a trigger level and,
"average rate" or "look-back" options are options where at
expiration, the option's strike price is set based on either
the average, maximum or minimum price of the asset over the
period of the option.
The Diversified Strategic Income 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 options on
securities, the Fund will trade only with counterparties of
high status in terms of credit quality and commitment to the
market.
An option position may be closed out only where there
exists a secondary market for an option of the same series
on a recognized securities exchange or in the
over-the-counter market. In light of this fact and current
trading conditions, the Fund expects to purchase only call
or put options issued by the Clearing Corporation. The Funds
with option-writing authority expect to write options only
on U.S. securities exchanges, except that the Diversified
Strategic Income Fund also may write options on foreign
exchanges and in the over-the-counter market.
A Fund may realize a profit or loss upon entering into
a closing transaction. In cases in which a Fund has written
an option, it will realize a profit if the cost of the
closing purchase transaction is less than the premium
received upon writing the original option and will incur a
loss if the cost of the closing purchase transaction exceeds
the premium received upon writing the original option.
Similarly, when a Fund has purchased an option and engages
in a closing sale transaction, whether the Fund realizes a
profit or loss will depend upon whether the amount received
in the closing sale transaction is more or less than the
premium that the Fund initially paid for the original option
plus the related transaction costs.
Although a Fund generally will purchase or write only
those options for which its Adviser believes there is an
active secondary market so as to facilitate closing
transactions, there is no assurance that sufficient trading
interest to create a liquid secondary market on a securities
exchange will exist for any particular option or at any
particular time, and for some options no such secondary
market may exist. A liquid secondary market in an option may
cease to exist for a variety of reasons. In the past, for
example, higher than anticipated trading activity or order
flow, or other unforeseen events, have at times rendered
inadequate certain of the facilities of the Clearing
Corporation and U.S. and foreign securities exchanges and
resulted in the institution of special procedures, such as
trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options.
There can be no assurance that similar events, or events
that may otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular
options. If as a covered call option writer a Fund is unable
to effect closing purchase transaction in a secondary
market, it will not be able to sell the underlying security
until the option expires or it delivers the underlying
security upon exercise.
Securities exchanges generally have established
limitations governing the maximum number of calls and puts
of each class which may be held or written, or exercised
within certain time periods, by an investor or group of
investors acting in concert (regardless of whether the
options are written on the same or different securities
exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible
that the Funds with authority to engage in options
transactions and other clients of their respective Advisers
and certain of their affiliates may be considered to be such
a group. A securities exchange may order the liquidation of
positions found to be in violation of these limits and it
may impose certain other sanctions.
In the case of options written by a Fund that are
deemed covered by virtue of the Fund's holding convertible
or exchangeable preferred stock or debt securities, the time
required to convert or exchange and obtain physical delivery
of the underlying common stocks with respect to which the
Fund has written options may exceed the time within which
the Fund must make delivery in accordance with an exercise
notice. In these instances, a Fund may purchase or borrow
temporarily the underlying securities for purposes of
physical delivery. By so doing, the Fund will not bear any
market risk because the Fund will have the absolute right to
receive from the issuer of the underlying security an equal
number of shares to replace the borrowed stock, but the Fund
may incur additional transaction costs or interest expenses
in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the
U.S. government securities for which a Fund may write
covered call options. If a Fund writes covered call options
on mortgage-backed securities, the securities that it holds
as cover may, because of scheduled amortization or
unscheduled prepayments, cease to be sufficient cover. The
Fund will compensate for the decline in the value of the
cover by purchasing an appropriate additional amount of
those securities.
Stock Index Options (Premium Total Return and Utilities
Funds). The Premium Total Return and Utilities Funds may
purchase and write put and call options on U.S. stock
indexes listed on U.S. exchanges for the purpose of hedging
its portfolio. A stock index fluctuates with changes in the
market values of the stocks included in the index. Some
stock index options are based on a broad market index such
as the NYSE Composite Index or a narrower market index such
as the Standard & Poor's 100. Indexes also are based on an
industry or market segment such as the AMEX Oil and Gas
Index or the Computer and Business Equipment Index.
Options on stock indexes are similar to options on
stock except that (a) the expiration cycles of stock index
options are monthly, while those of stock options currently
are quarterly, and (b) the delivery requirements are
different. Instead of giving the right to take or make
delivery of stock at a specified price, an option on a stock
index gives the holder the right to receive a cash "exercise
settlement amount" equal to (a) the amount, if any, by which
the fixed exercise price of the option exceeds (in the case
of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of
exercise, multiplied by (b) a fixed "index multiplier".
Receipt of this cash amount will depend upon the closing
level of the stock index upon which the option is based
being greater than, in the case of a call, or less than, in
the case of a put, the exercise price of the option. The
amount of cash received will be equal to such difference
between the closing price of the index and the exercise
price of the option expressed in dollars times a specified
multiple. The writer of the option is obligated, in return
for the premium received, to make delivery of this amount.
The writer may offset its position in stock index options
prior to expiration by entering into a closing transaction
on an exchange or it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index
options as a hedging technique will depend upon the extent
to which price movements in the portion of a securities
portfolio being hedged correlate with price movements of the
stock index selected. Because the value of an index option
depends upon movements in the level of the index rather than
the price of a particular stock, whether the Premium Total
Return and Utilities Funds will realize a gain or loss from
the purchase or writing of options on an index depends upon
movements in the level of stock prices in the stock market
generally or, in the case of certain indexes, in an industry
or market segment, rather than movements in the price of a
particular stock. Accordingly, successful use by a Fund of
options on stock indexes will be subject to its Adviser's
ability to predict correctly movements in the direction of
the stock market generally or of a particular industry. This
requires different skills and techniques than predicting
changes in the prices of individual stocks.
The Premium Total Return and Utilities Funds will
engage in stock index options transactions only when
determined by their respective Advisers to be consistent
with the Funds' efforts to control risk. There can be no
assurance that such judgment will be accurate or that the
use of these portfolio strategies will be successful. When a
Fund writes an option on a stock index, the Fund will
establish a segregated account with PNC Bank in an amount
equal to the market value of the option and will maintain
the account while the option is open.
Mortgage-Related Securities (Diversified Strategic
Income Fund). The average maturity of pass-
through pools of mortgage-related securities varies with the
maturities of the underlying mortgage instruments. In
addition, a pool's stated maturity may be shortened by
unscheduled payments on the underlying mortgages. Factors
affecting mortgage prepayments include the level of interest
rates, general economic and social conditions, the location
of the mortgaged property and age of the mortgage. Because
prepayment rates of individual pools vary widely, it is not
possible to accurately predict the average life of a
particular pool. Common practice is to assume that
prepayments will result in an average life ranging from 2 to
10 years for pools of fixed-rate 30-year mortgages. Pools of
mortgages with other maturities or different characteristics
will have varying average life assumptions.
Mortgage-related securities may be classified as
private, governmental or government-related, depending on
the issuer or guarantor. Private mortgage-related securities
represent pass-through pools consisting principally of
conventional residential mortgage loans created by
non-governmental issuers, such as commercial banks, savings
and loan associations and private mortgage insurance
companies. Governmental mortgage-related securities are
backed by the full faith and credit of the United States.
GNMA, the principal guarantor of such securities, is a
wholly owned United States government corporation within the
Department of Housing and Urban Development.
Government-related mortgage-related securities are not
backed by the full faith and credit of the United States
government. Issuers of such securities include FNMA and
FHLMC. FNMA is a government-sponsored corporation owned
entirely by private stockholders, which is subject to
general regulation by the Secretary of Housing and Urban
Development. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by
FNMA. FHLMC is a corporate instrumentality of the United
States, the stock of which is owned by the Federal Home Loan
Banks. Participation certificates representing interests in
mortgages from FHLMC's national portfolio are guaranteed as
to the timely payment of interest and ultimate collection of
principal by FHLMC.
Private, U.S. governmental or government-related
entities create mortgage loan pools offering pass-through
investments in addition to those described above. The
mortgages underlying these securities may be alternative
mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to
maturity may be shorter than previously customary. As new
types of mortgage-related securities are developed and
offered to investors, Diversified Strategic Income Fund,
consistent with its investment objective and policies, will
consider making investments in such new types of securities.
Currency Transactions (Diversified Strategic Income and
High Income Funds). The Funds' dealings in forward currency
exchange transactions will be limited to hedging involving
either specific transactions or portfolio positions.
Transaction hedging is the purchase or sale of forward
currency contracts with respect to specific receivables or
payables of the Fund generally arising in connection with
the purchase or sale of its securities. Position hedging,
generally, is the sale of forward currency contracts with
respect to portfolio security positions denominated or
quoted in the currency. A Fund may not position hedge with
respect to a particular currency to an extent greater than
the aggregate market value at any time of the security or
securities held in its portfolio denominated or quoted in or
currently convertible (such as through exercise of an option
or consummation of a forward currency contract) into that
particular currency. If a Fund enters into a transaction
hedging or position hedging transaction, it will cover the
transaction through one or more of the following methods:
(a) ownership of the underlying currency or an option to
purchase such currency; (b) ownership of an option to enter
into an offsetting forward currency contract; (c) entering
into a forward contract to purchase currency being sold or
to sell currency being purchased, provided that such
covering contract is itself covered by any one of these
methods unless the covering contract closes out the first
contract; or (d) depositing into a segregated account with
the custodian or a sub-custodian of the Fund cash or readily
marketable securities in an amount equal to the value of the
Fund's total assets committed to the consummation of the
forward currency contract and not otherwise covered. In the
case of transaction hedging, any securities placed in the
account must be liquid debt securities. In any case, if the
value of the securities placed in the segregated account
declines, additional cash or securities will be placed in
the account so that the value of the account will equal the
above amount. Hedging transactions may be made from any
foreign currency into dollars or into other appropriate
currencies.
At or before the maturity of a forward contract, a Fund
either may sell a portfolio security and make delivery of
the currency, or retain the security and offset its
contractual obligation to deliver the currency by purchasing
a second contract pursuant to which the relevant Fund will
obtain, on the same maturity date, the same amount of the
currency which it is obligated to deliver. If a Fund retains
the portfolio security and engages in an offsetting
transaction, the Fund, at the time of execution of the
offsetting transaction, will incur a gain or loss to the
extent movement has occurred in forward contract prices.
Should forward prices decline during the period between a
Fund's entering into a forward contract for the sale of a
currency and the date that it enters into an offsetting
contract for the purchase of the currency, the Fund will
realize a gain to the extent that the price of the currency
it has agreed to sell exceeds the price of the currency it
has agreed to purchase. Should forward prices increase, the
Fund will suffer a loss to the extent the price of the
currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The cost to a Fund of engaging in currency transactions
varies with factors such as the currency involved, the
length of the contract period and the market conditions then
prevailing. Because transactions in currency exchange are
usually conducted on a principal basis, no fees or
commissions are involved. The use of forward currency
contracts does not eliminate fluctuations in the underlying
prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. In addition,
although forward currency contracts limit the risk of loss
due to a decline in the value of the hedged currency, at the
same time, they limit any potential gain that might result
should the value of the currency increase.
If a devaluation is generally anticipated, the
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 (Diversified Strategic Income
and High Income Funds) The High Income Fund may only
purchase put and call options on foreign currencies, whereas
the Diversified Strategic Income Fund may purchase or write
put and call options on foreign currencies for the purpose
of hedging against changes in future currency exchange
rates. Foreign currency options generally have three, six
and nine month expiration cycles. Put options convey the
right to sell the underlying currency at a price which is
anticipated to be higher than the spot price of the currency
at the time the option expires. Call options convey the
right to buy the underlying currency at a price which is
expected to be lower than the spot price of the currency at
the time that the option expires.
The Fund may use foreign currency options under the
same circumstances that it could use forward currency
exchange transactions. A decline in the dollar value of a
foreign currency in which a Fund's securities are
denominated, for example, will reduce the dollar value of
the securities, even if their value in the foreign currency
remains constant. In order to protect against such
diminutions in the value of securities that it holds, the
Fund may purchase put options on the foreign currency. If
the value of the currency does decline, the Fund will have
the right to sell the currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse
effect on its securities that otherwise would have resulted.
Conversely, if a rise in the dollar value of a currency in
which securities to be acquired are denominated is
projected, thereby potentially increasing the cost of the
securities, the Fund may purchase call options on the
particular currency. The purchase of these options could
offset, at least partially, the effects of the adverse
movements in exchange rates. The benefit to the Fund derived
from purchases of foreign currency options, like the benefit
derived from other types of options, will be reduced by the
amount of the premium and related transaction costs. In
addition, if currency exchange rates do not move in the
direction or to the extent anticipated, the Fund could
sustain losses on transactions in foreign currency options
that would require it to forego a portion or all of the
benefits of advantageous changes in the rates.
Foreign Government Securities (Diversified Strategic
Income Fund). Among the foreign government securities in
which this Fund may invest are those issued by countries
with developing economies, which are countries in the
initial stages of their industrialization cycles. Investing
in securities of countries with developing economies
involves exposure to economic structures that are generally
less diverse and less mature, and to political systems that
can be expected to have less stability, than those of
developed countries. The markets of countries with
developing economies historically have been more volatile
than markets of the more mature economies of developed
countries, but often have provided higher rates of return to
investors.
Municipal Securities (Tax-Exempt Income Fund).
Municipal securities generally are understood to include
debt obligations issued to obtain funds for various public
purposes, including the construction of a wide range of
public facilities, refunding of outstanding obligations,
payment of general operating expenses and extensions of
loans to public institutions and facilities ("Municipal
Securities"). Private activity bonds that are issued by or
on behalf of public authorities to finance privately
operated facilities are considered to be Municipal
Securities if the interest paid thereon qualifies as
excluded from gross income (but not necessarily from
alternative minimum taxable income) for Federal income tax
purposes in the opinion of bond counsel to the issuer.
Municipal bonds may be issued to finance life care
facilities. Life care facilities are an alternative form of
long-term housing for the elderly which offer residents the
independence of condominium life style and, if needed, the
comprehensive care of nursing home services. Bonds to
finance these facilities have been issued by various state
industrial development authorities. Because the bonds are
secured only by the revenues of each facility and not by
state or local government tax payments, they are subject to
a wide variety of risks, including a drop in occupancy
levels, the difficulty of maintaining adequate financial
reserves to secure estimated actuarial liabilities, the
possibility of regulatory cost restrictions applied to
health care delivery and competition from alternative health
care or conventional housing facilities.
Municipal leases are Municipal Securities that may take
the form of a lease or an installment purchase contract
issued by state and local governmental authorities to obtain
funds to acquire a wide variety of equipment and facilities
such as fire and sanitation vehicles, computer equipment and
other capital assets. These obligations have evolved to make
it possible for state and local government authorities to
acquire property and equipment without meeting
constitutional and statutory requirements for the issuance
of debt. Thus, municipal leases have special risks not
normally associated with municipal bonds. These obligations
frequently contain "non-appropriation" clauses providing
that the governmental issuer of the obligation has no
obligation to make future payments under the lease or
contract unless money is appropriated for such purposes by
the legislative body on a yearly or other periodic basis. In
addition to the "non-appropriation" risk, municipal leases
represent a type of financing that has not yet developed the
depth of marketability associated with municipal bonds;
moreover, although the obligations will be secured by the
leased equipment, the disposition of the equipment in the
event of foreclosure might prove to be difficult. In order
to limit the risks, Tax-Exempt Income Fund proposes to
purchase either (a) municipal leases rated in the four
highest categories by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") or (b)
unrated municipal 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 Income Fund is maintaining a defensive
position, the Fund may invest in short-term investments
("Temporary Investments") consisting of: (a) the following
tax-exempt securities: (i) tax-exempt notes of municipal
issuers having, at the time of purchase, a rating of MIG 1
through MIG 4 by Moody's or rated SP-1 or SP-2 by S&P or, if
not rated, of issuers having an issue of outstanding
Municipal Securities rated within the four highest grades by
Moody's or S&P; (ii) tax-exempt commercial paper having, at
the time of purchase, a rating not lower than A-2 by S&P or
Prime-2 by Moody's; and (iii) variable rate demand notes
rated at the time of purchase within the two highest ratings
by any major rating service or determined to be of
comparable quality to instruments with such rating; and (b)
the following taxable securities: (i) U.S. government
securities, including repurchase agreements with respect to
such securities; (ii) other debt securities rated within the
four highest grades by Moody's or S&P; (iii) commercial
paper rated in the highest grade by either of these rating
services; and (iv) certificates of deposit of domestic banks
with assets of $1 billion or more. Among the tax-exempt
notes in which the Fund may invest are Tax Anticipation
Notes, Bond Anticipation Notes and Revenue Anticipation
Notes which are issued in anticipation of receipt of tax
funds, proceeds of bond placements or other revenues,
respectively. At no time will more than 20% of the Fund's
total assets be invested in Temporary Investments unless the
Fund has adopted a defensive investment policy in
anticipation of a market decline. The Fund intends, however,
to purchase tax-exempt Temporary Investments pending the
investment of the proceeds of the sale of shares of the Fund
and of its portfolio securities, or in order to have highly
liquid securities available to meet anticipated redemptions.
Investing in Utilities (Utilities Fund). Each of the
risks referred to in Utilities Fund's Prospectus could
adversely affect the ability and inclination of public
utilities to declare or pay dividends and the ability of
holders of common stock to realize any value from the assets
of the issuer upon liquidation or bankruptcy. Moreover,
price disparities within selected utility groups and
discrepancies in relation to averages and indices have
occurred frequently for reasons not directly related to the
general movements or price trends of utility common stocks.
Causes of these discrepancies include changes in the overall
demand for and supply of various securities (including the
potentially depressing effect of new stock offerings), and
changes in investment objectives, market expectations or
cash requirements of other purchasers and sellers of
securities.
Ratings as Investment Criteria (All Funds). In general,
the ratings of nationally recognized statistical rating
organizations ("NRSROs") represent the opinions of these
agencies as to the quality of securities that they rate.
Such ratings, however, are relative and subjective, and are
not absolute standards of quality and do not evaluate the
market value risk of the securities. These ratings will be
used by the Funds as initial criteria for the selection of
portfolio securities, but the Funds also will rely upon the
independent advice of their respective Advisers to evaluate
potential investments. Among the factors that will be
considered are the long-term ability of the issuer to pay
principal and interest and general economic trends. The
Appendix to this Statement of Additional Information
contains further information concerning the rating
categories of NRSROs and their significance.
Subsequent to its purchase by a Fund, an issue of
securities may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund.
In addition, it is possible that an NRSRO might not change
its rating of a particular issue to reflect subsequent
events. None of these events will require sale of such
securities by a Fund, but the Fund's Adviser will consider
such events in its determination of whether the Fund should
continue to hold the securities. In addition, to the extent
that the ratings change as a result of changes in such
organizations or their rating systems, or due to a corporate
reorganization, a Fund will attempt to use comparable
ratings as standards for its investments in accordance with
its investment objective and policies.
Futures Activities (High Income, Utilities and
Tax-Exempt Income Funds). These Funds may enter into futures
contracts and/or options on futures contracts that are
traded on a United States exchange or board of trade. These
investments may be made by a Fund solely for the purpose of
hedging against the effects of changes in the value of its
portfolio securities due to anticipated changes in interest
rates, currency values and/or market conditions, and not for
purposes of speculation. In the case of Tax-Exempt Income
Fund, investments in futures contracts will be made only in
unusual circumstances, such as when the Fund's Adviser
anticipates an extreme change in interest rates or market
conditions. See "Taxes" below.
Futures Contracts. The purpose of the acquisition or
sale of a futures contract by a Fund is to mitigate the
effects of fluctuations in interest rates or currency or
market values, depending on the type of contract, on
securities or their values without actually buying or
selling the securities. For example, if Tax-Exempt Income
Fund owns long-term bonds and tax-exempt rates are expected
to increase, the Fund might enter into a short position in
municipal bond index futures contracts. Such a sale would
have much the same effect as the Fund's selling some of the
long-term bonds in its portfolio. If tax-exempt rates
increase as anticipated, the value of certain long-term
Municipal Securities in the Fund would decline, but the
value of the Fund's futures contracts would increase at
approximately the same rate, thereby keeping the net asset
value of the Fund from declining as much as it otherwise
would have. Of course, because the value of portfolio
securities will far exceed the value of the futures
contracts sold by a Fund, an increase in the value of the
futures contracts could only mitigate -- but not totally
offset -- the decline in the value of the Fund.
The Diversified Strategic Income Fund may enter into
futures contracts or related options on futures contracts
that are traded on a domestic or foreign exchange or in the
over-the-counter market. These investments may be made
solely for the purpose of hedging against changes in the
value of its portfolio securities due to anticipated changes
in interest rates, currency values and/or market conditions
when the transactions are economically appropriate to the
reduction of risks inherent in the management of the Fund
and not for purposes of speculation. The ability of the Fund
to trade in futures contracts may be limited by the
requirements of the Internal Revenue Code of 1986 as amended
(the "Code"), applicable to a regulated investment company.
No consideration is paid or received by a Fund upon
entering into a futures contract. Initially, a Fund will be
required to deposit with its custodian an amount of cash or
cash equivalents equal to approximately 1% to 10% of the
contract amount (this amount is subject to change by the
board of trade on which the contract is traded and members
of such board of trade may charge a higher amount). This
amount, known as initial margin, is in the nature of a
performance bond or good faith deposit on the contract and
is returned to a Fund upon termination of the futures
contract, assuming that all contractual obligations have
been satisfied. Subsequent payments, known as variation
margin, to and from the broker, will be made daily as the
price of the securities, currency or index underlying the
futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a
process known as "marking-to-market". At any time prior to
expiration of a futures contract, a Fund may elect to close
the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the
contract.
Several risks are associated with the use of futures
contracts as a hedging device. Successful use of futures
contracts by a Fund is subject to the ability of its Adviser
to predict correctly movements in interest rates, stock or
bond indices or foreign currency values. These predictions
involve skills and techniques that may be different from
those involved in the management of the portfolio being
hedged. In addition, there can be no assurance that there
will be a correlation between movements in the price of the
underlying securities, currency or index and movements in
the price of the securities which are the subject of the
hedge. A decision of whether, when and how to hedge involves
the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected trends in interest
rates or currency values.
Although the Funds with authority to engage in futures
activity intend to enter into futures contracts only if
there is an active market for such contracts, there is no
assurance that an active market will exist for the contracts
at any particular time. Most futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades
may be made that day at a price beyond that limit. It is
possible that futures contract prices could move to the
daily limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to
substantial losses. In such event, and in the event of
adverse price movements, a Fund would be required to make
daily cash payments of variation margin, and an increase in
the value of the portion of the portfolio being hedged, if
any, may partially or completely offset losses on the
futures contract. As described above, however, there is no
guarantee that the price of the securities being hedged
will, in fact, correlate with the price movements in a
futures contract and thus provide an offset to losses on the
futures contract.
If a Fund has hedged against the possibility of a
change in interest rates or currency or market values
adversely affecting the value of securities held in its
portfolio and rates or currency or market values move in a
direction opposite to that which the Fund has anticipated,
the Fund will lose part or all of the benefit of the
increased value of securities which it has hedged because it
will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient
cash, it may have to sell securities to meet daily variation
margin requirements at a time when it may be disadvantageous
to do so. These sales of securities may, but will not
necessarily, be at increased prices which reflect the change
in interest rates or currency values, as the case may be.
Options on Futures Contracts. An option on an interest
rate futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the
right, in return for the premium paid, to assume a position
in the underlying interest rate futures contract at a
specified exercise price at any time prior to the expiration
date of the option. An option on a foreign currency futures
contract, as contrasted with the direct investment in such a
contract, gives the purchaser the right, but not the
obligation, to assume a long or short position in the
relevant underlying future currency at a predetermined
exercise price at a time in the future. Upon exercise of an
option, the delivery of the futures position by the writer
of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount
by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a
put, the exercise price of the option on the futures
contract. The potential for loss related to the purchase of
an option on futures contracts is limited to the premium
paid for the option (plus transaction costs). Because the
value of the option is fixed at the point of sale, there are
no daily cash payments to reflect changes in the value of
the underlying contract; however, the value of the option
does change daily and that change would be reflected in the
net asset value of a Fund investing in the options.
Several risks are associated with options on futures
contracts. The ability to establish and close out positions
on such options will be subject to the existence of a liquid
market. In addition, the purchase of put or call options on
interest rate and foreign currency futures will be based
upon predictions by a Fund's Adviser as to anticipated
trends in interest rates and currency values, as the case
may be, which could prove to be incorrect. Even if the
expectations of an Adviser are correct, there may be an
imperfect correlation between the change in the value of the
options and of the portfolio securities or the currencies
being hedged.
Foreign Investments. Investors should recognize that
investing in foreign companies involves certain
considerations which are not typically associated with
investing in U.S. issuers. Since the Fund will be investing
in securities denominated in currencies other than the U.S.
dollar, and since the Fund may temporarily hold funds in
bank deposits or other money market investments denominated
in foreign currencies, the Fund may be affected favorably or
unfavorably by exchange control regulations or changes in
the exchange rate between such currencies and the dollar. A
change in the value of a foreign currency relative to the
U.S. dollar will result in a corresponding change in the
dollar value of the Fund's assets denominated in that
foreign currency. Changes in foreign currency exchange rates
may also affect the value of dividends and interest earned,
gains and losses realized on the sale of securities and net
investment income and gain, if any, to be distributed to
shareholders by the Fund.
The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand
in the foreign exchange markets. Changes in the exchange
rate may result over time from the interaction of many
factors directly or indirectly affecting economic conditions
and political developments in other countries. Of particular
importance are rates of inflation, interest rate levels, the
balance of payments and the extent of government surpluses
or deficits in the Unites States and the particular foreign
country, all of which are in turn sensitive to the monetary,
fiscal and trade policies pursued by the governments of the
United States and other foreign countries important to
international trade and finance. Governmental intervention
may also play a significant role. National governments
rarely voluntarily allow their currencies to float freely in
response to economic forces. Sovereign governments use a
variety of techniques, such as intervention by a country's
central bank or imposition of regulatory controls or taxes,
to affect the exchange rates of their currencies.
Many of the securities held by the Fund will not be
registered with, nor the issuers thereof be subject to
reporting requirements of, the SEC. Accordingly, there may
be less publicly available information about the securities
and about the foreign company or government issuing them
than is available about a domestic company or government
entity. Foreign issuers are generally not subject to uniform
financial reporting standards, practices and requirements
comparable to those applicable to U.S. issuers. In addition,
with respect to some foreign countries, there is the
possibility of expropriation or confiscatory taxation,
limitations on the removal of funds or other assets of the
Fund, political or social instability, or domestic
developments which could affect U.S. investments in those
countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency
and balance of payments positions. The Fund may invest in
securities of foreign governments (or agencies or
instrumentalities thereof), and many, if not all, of the
foregoing considerations apply to such investments as well.
Securities of some foreign companies are less liquid
and their prices are more volatile than securities of
comparable domestic companies. Certain foreign countries are
known to experience long delays between the trade and
settlement dates of securities purchased or sold. Due to the
increased exposure to the Fund of market and foreign
exchange fluctuations brought about by such delays, and due
to the corresponding negative impact on Fund liquidity, the
Fund will avoid investing in countries which are known to
experience settlement delays which may expose the Fund to
unreasonable risk of loss.
The interest payable on the Fund's foreign securities
may be subject to foreign withholding taxes, and while
investors may be able to claim some credit or deductions for
such taxes with respect to their allocated shares of such
foreign tax payments, the general effect of these taxes will
be to reduce the Fund's income. Additionally, the operating
expenses of the Fund can be expected to be higher than that
of an investment company investing exclusively in U.S.
securities, since the expenses of the Fund, such as
custodial costs, valuation costs and communication costs, as
well as the rate of the investment advisory fees, though
similar to such expenses of some other international funds,
are higher than those costs incurred by other investment
companies.
Short Sales (Utilities Fund). Utilities Fund may from
time to time sell securities short, but the value of
securities sold short will not exceed 5% of the value of the
Fund's assets. In addition, the Fund may not (a) sell short
the securities of a single issuer to the extent of more than
2% of the value of the Fund's net assets and (b) sell short
the securities of any class of an issuer to the extent of
more than 2% of the outstanding securities of the class at
the time of the transaction. A short sale is a transaction
in which the Fund sells securities that it does not own (but
has borrowed) in anticipation of a decline in the market
price of the securities.
When the Fund makes a short sale, the proceeds it
receives from the sale are retained by a broker until the
Fund replaces the borrowed securities. To deliver the
securities to the buyer, the Fund must arrange through a
broker to borrow the securities and, in so doing, the Fund
becomes obligated to replace the securities borrowed at
their market price at the time of replacement, whatever that
price may be. The Fund may have to pay a premium to borrow
the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Fund's obligation to replace the securities
borrowed in connection with a short sale will be secured by
collateral deposited with the broker that consists of cash
or U.S. government securities. In addition, the Fund will
place in a segregated account with its custodian an amount
of cash or U.S. government securities equal to the
difference, if any, between (a) the market value of the
securities sold at the time they were sold short and (b) any
cash or U.S. government securities deposited as collateral
with the broker in connection with the short sale (not
including the proceeds of the short sale). Until it replaces
the borrowed securities, the Fund will maintain the
segregated account daily at a level so that the amount
deposited in the account plus the amount deposited with the
broker (not including the proceeds from the short sale) (a)
will equal the current market value of the securities sold
short and (b) will not be less than the market value of the
securities at the time they were sold short.
Short Sales Against the Box (Premium Total Return,
Convertible and Utilities Funds). These Funds may enter into
a short sale of common stock such that when the short
position is open the Fund involved owns an equal amount of
preferred stocks or debt securities, convertible or
exchangeable, without payment of further consideration, into
an equal number of shares of the common stock sold short.
This kind of short sale, which is described as "against the
box", will be entered into by a Fund for the purpose of
receiving a portion of the interest earned by the executing
broker from the proceeds of the sale. The proceeds of the
sale will be held by the broker until the settlement date
when the Fund delivers the convertible securities to close
out its short position. Although prior to delivery a Fund
will have to pay an amount equal to any dividends paid on
the common stock sold short, the Fund will receive the
dividends from the preferred stock or interest from the debt
securities convertible into the stock sold short, plus a
portion of the interest earned from the proceeds of the
short sale. The Funds will deposit, in a segregated account
with their custodian, convertible preferred stock or
convertible debt securities in connection with short sales
against the box.
Investment Restrictions
The investment restrictions numbered 1 through 14 below
(other than restriction number 10 as applied to Utilities
Fund) have been adopted by the Trust with respect to the
Funds as fundamental policies. Under the 1940 Act, a
fundamental policy may not be changed without the vote of a
majority of the outstanding voting securities of a Fund, as
defined in the 1940 Act. Majority is defined in the 1940 Act
as the lesser of (a) 67% or more of the shares present at a
shareholder meeting, if the holders of more than 50% of the
outstanding shares of the Trust are present or represented
by proxy, or (b) more than 50% of the outstanding shares.
Investment restrictions 15 through 20, and number 10 as
applied to Utilities Fund, may be changed by vote of a
majority of the Board of Trustees at any time.
The investment policies adopted by the Trust prohibit a
Fund from:
1. Purchasing the securities of any issuer
(other than U.S. government securities) if as a
result more than 5% of the value of the Fund's
total assets would be invested in the securities
of the issuer, except that up to 25% of the value
of the Fund's total assets may be invested without
regard to this 5% limitation.
2. Purchasing (a) more than 10% of the voting
securities of any one issuer, (b) more than 10% of
the securities of any class of any one issuer or
(c) more than 10% of the outstanding debt
securities of any one issuer, except that
limitation (c) does not apply to the Exchange
Reserve and Diversified Strategic Income Funds and
limitations (b) and (c) do not apply to the
Utilities Fund; provided that this limitation
shall not apply to investment in U.S. government
securities.
3. Purchasing securities on margin, except that
the Fund may obtain any short-term credits
necessary for the clearance of purchases and sales
of securities. For purposes of this restriction,
the deposit or payment of initial or variation
margin in connection with futures contracts or
related options will not be deemed to be a
purchase of securities on margin by any Fund
permitted to engage in transactions in futures
contracts or related options.
4. Making short sales of securities or
maintaining a short position except that (a) the
Premium Total Return, Utilities and Convertible
Funds may engage in such activities if, at all
times when a short position is open, the relevant
Fund owns an equal amount of the securities
convertible into or exchangeable, without payment
of any further consideration, for securities of
the same issuer as, and at least equal in amount
to, the securities sold short, and if, with
respect to the Premium Total Return and
Convertible Funds, not more than 10% of the
relevant Fund's net assets (taken at current
value) is held as collateral for such sales at any
one time and (b) 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 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) 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 Diversified
Strategic Income Fund, whenever borrowings
described in (a) exceed 5% of the value of a
Fund's total assets, the Fund will not make any
additional investments. Immediately after any
borrowing (including reverse repurchase agreements
and forward roll transactions), Diversified
Strategic Income Fund will maintain an asset
coverage of at least 300% with respect to all its
borrowings.
6. Pledging, hypothecating, mortgaging or
otherwise encumbering more than 10% of the value
of the Fund's total assets. For purposes of this
restriction, (a) the deposit of assets in escrow
in connection with the writing of covered put or
call options and the purchase of securities on a
when-issued or delayed-delivery basis and (b)
collateral arrangements with respect to (i) the
purchase and sale of stock options, options on
foreign currencies and options on stock indexes
and (ii) initial or variation margin for futures
contracts, will not be deemed to be pledges of a
Fund's 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
High Income, Diversified Strategic Income,
Utilities and Tax-Exempt Income Funds may invest
in futures contracts and options on futures
contracts as described in their Prospectuses and
(b) upon 60 days' notice given to its
shareholders, the Premium Total Return and
Convertible Funds may engage in hedging
transactions involving futures contracts and
related options, including stock index futures
contracts and financial futures contracts.
10. Investing in oil, gas or other mineral
exploration or development programs, except that
the Premium Total Return, Convertible, Diversified
Strategic Income, 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 acquired
as part of a merger, consolidation,
reorganization, acquisition of assets or an offer
of exchange.
13. Purchasing any securities which would cause
more than 25% of the value of the Fund's total
assets at the time of purchase to be invested in
the securities of issuers conducting their
principal business activities in the same
industry, except that Exchange Reserve Fund and
Utilities Fund will invest in excess of 25% of
their respective assets in the securities of
companies within the banking industry and utility
industry, 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 Reserve and Utilities Funds, Municipal
Securities issued by governments or political
subdivisions of governments.
14. Writing or selling puts, calls, straddles,
spreads or combinations thereof, except, with
respect to Funds other than Exchange Reserve Fund,
as permitted under the Fund's investment objective
and policies.
15. Purchasing restricted securities, illiquid
securities (such as repurchase agreements with
maturities in excess of seven days and, in the
case of Exchange Reserve Fund, time deposits
maturing from two business days through seven
calendar days) or other securities that are not
readily marketable if more than 10% or, in the
case of the High Income and Diversified Strategic
Income Funds, 15% of the total assets of the Fund
would be invested in such securities.
16. Purchasing any security if as a result the
Fund would then have more than 5% of its total
assets invested in securities of companies
(including predecessors) that have been in
continuous operation for fewer than three years;
provided that in the case of private activity
bonds purchased for Tax-Exempt Income Fund, this
restriction shall apply to the entity supplying
the revenues from which the issue is to be paid.
17. Making investments for the purpose of
exercising control or management.
18. Purchasing or retaining securities of any
company if, to the knowledge of the Trust, any of
the Trust's officers or Trustees or any officer or
director of an Adviser individually owns more than
1/2 of 1% of the outstanding securities of such
company and together they own beneficially more
than 5% of the securities.
19. Investing in warrants (except as permitted
under a Fund's investment objective and policies
or other than warrants acquired by the Fund as
part of a unit or attached to securities at the
time of purchase) if, as a result, the investments
(valued at the lower of cost or market) would
exceed 5% of the value of the Fund's net assets of
which not more than 2% of the Fund's net assets
may be invested in warrants not listed on a
recognized United States or foreign stock exchange
to the extent permitted by applicable state
securities laws.
20. With respect to 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 Exchange Reserve Fund, the first
of which is a fundamental policy, which prohibit Exchange
Reserve Fund from:
1. Investing in common stocks, preferred stocks,
warrants, other equity securities, corporate bonds
or debentures, state bonds, municipal bonds or
industrial revenue bonds.
2. Investing more than 10% of its assets in
variable rate master demand notes providing for
settlement upon more than seven days' notice by
the Fund.
For purposes of the investment restrictions described
above, the issuer of a Municipal Security is deemed to be
the entity (public or private) ultimately responsible for
the payment of the principal of and interest on the
security. For purposes of investment restriction number 13,
private activity bonds (other than those issued for
charitable, educational and certain other purposes), the
payment of principal and interest on which is the ultimate
responsibility of companies within the same industry, are
grouped together as an industry. The Trust may make
commitments more restrictive than the restrictions listed
above with respect to a Fund so as to permit the sale of
shares of the Fund in certain states. Should the Trust
determine that any such commitment is no longer in the best
interests of the Fund and its shareholders, the Trust will
revoke the commitment by terminating the sale of shares of
the Fund in the state involved. The percentage limitations
contained in the restrictions listed above apply at the time
of purchases of securities.
Portfolio Turnover
The Funds do not intend to seek profits through short-term
trading. Nevertheless, the Funds will not consider portfolio
turnover rate a limiting factor in making investment
decisions.
Under certain market conditions, a Fund authorized to
engage in transactions in options may experience increased
portfolio turnover as a result of its investment strategies.
For instance, the exercise of a substantial number of
options written by a Fund (due to appreciation of the
underlying security in the case of call options on
securities or depreciation of the underlying security in the
case of put options on securities) could result in a
turnover rate in excess of 100%. A portfolio turnover rate
of 100% also would occur, for example, if all of a Fund's
securities that are included in the computation of turnover
were replaced once during a period of one year. A Fund's
turnover rate is calculated by dividing the lesser of
purchases or sales of its portfolio securities for the year
by the monthly average value of the portfolio securities.
Securities or options with remaining maturities of one year
or less on the date of acquisition are excluded from the
calculation.
Certain other practices which may be employed by a Fund
also could result in high portfolio turnover. For example,
portfolio securities may be sold in anticipation of a rise
in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise)
and later sold. In addition, a security may be sold and
another of comparable quality purchased at approximately the
same time to take advantage of what a Fund's Adviser
believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield
disparities may occur for reasons not directly related to
the investment quality of particular issues or the general
movement of interest rates, such as changes in the overall
demand for, or supply of, various types of securities.
For the fiscal years ended July 31, 1994 and 1995, the
portfolio turnover rates were as follows:
Fund 1994 1995
Premium Total Return Fund 34% 63%
Tax-Exempt Income Fund 39% 38%
Convertible Fund 54% 48%
High Income Fund 98% 60%
Diversified Strategic Income Fund 93% 83%
Utilities Fund 28% 36%
For regulatory purposes the turnover rate of Exchange
Reserve Fund is zero.
Portfolio Transactions
Most of the purchases and sales of securities for a Fund,
whether transacted on a securities exchange or
over-the-counter, will be effected in the primary trading
market for the securities, except for Eurobonds which are
principally traded over-the-counter. The primary trading
market for a given security is generally located in the
country in which the issuer has its principal office.
Decisions to buy and sell securities for a Fund are made by
its Adviser, which also is responsible for placing these
transactions, subject to the overall review of the Trust's
Trustees. With respect to Diversified Strategic Income Fund,
decisions to buy and sell domestic securities for the Fund
are made by SBMFM, 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 investment decisions for each Fund are made
independently from those of the other accounts managed by
its Adviser, investments of the type that the Fund may make
also may be made by those other accounts. When a Fund and
one or more other accounts managed by its Adviser are
prepared to invest in, or desire to dispose of, the same
security, available investments or opportunities for sales
will be allocated in a manner believed by the Adviser to be
equitable to each. In some cases, this procedure may
adversely affect the price paid or received by a Fund or the
size of the position obtained or disposed of by the Fund.
Transactions on domestic stock exchanges and some
foreign stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among
different brokers. Commissions generally are fixed on most
foreign exchanges. There is generally no stated commission
in the case of securities traded in U.S. or foreign
over-the-counter markets, but the prices of those securities
include undisclosed commissions or mark-ups. The cost of
securities purchased from underwriters includes an
underwriting commission or concession, and the prices at
which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down. U.S. government
securities generally are purchased from underwriters or
dealers, although certain newly issued U.S. government
securities may be purchased directly from the United States
Treasury or from the issuing agency or instrumentality. The
following table sets forth certain information regarding
each Fund's payment of brokerage commissions:
Premium
Diversified
Total
High
Strategic
Fiscal Return Convertible
Income
Utilities Income
Year Fund Fund
Fund
Fund Fund
Total Brokerage 1993 $1,933,587 $75,836
$17,225
$1,810,481 $19,446
Commissions 1994 1,767,577 60,818
96,670
2,006,028 106,421
1995 3,517,469 39,798 97,439
2,134,306
0
Commissions paid to 1993 $ 355,027 0
0
$ 97,740 0
Shearson Lehman 1994 280,686 0
0
174,858 0
or Smith Barney 1995 694,467 600
0
162,924 0
% of Total Brokerage 1995 19.75% 1.51%
0%
7.63% 0%
Commissions paid to
Smith Barney
% of Total 1995 20.02% 1.69%
0%
8.21% 0%-
Transactions involving
Commissions paid to
Smith Barney
In selecting brokers or dealers to execute securities
transactions on behalf of a Fund, the Fund's Adviser seeks
the best overall terms available. In assessing the best
overall terms available for any transaction, each Adviser
will consider the factors that it deems relevant, including
the breadth of the market in the security, the price of the
security, the financial condition and execution capability
of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a
continuing basis. In addition, each Advisory Agreement
between the Trust and an Adviser authorizes the Adviser, in
selecting brokers or dealers to execute a particular
transaction and in evaluating the best overall terms
available, to consider the brokerage and research services
(as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) provided to the Trust, the
other Funds and/or other accounts over which the Adviser or
its affiliates exercise investment discretion. The fees
under the Advisory Agreements and the Sub-Advisory and/or
Administration Agreements are not reduced by reason of their
receiving such brokerage and research services. Further,
Smith Barney will not participate in commissions brokerage
given by the Fund to other brokers or dealers and will not
receive any reciprocal brokerage business resulting
therefrom. The Trust's Board of Trustees periodically will
review the commissions paid by the Funds to determine if the
commissions paid over representative periods of time were
reasonable in relation to the benefits inuring to the Trust.
To the extent consistent with applicable provisions of
the 1940 Act and the rules and exemptions adopted by the SEC
thereunder, the Trust's Board of Trustees has determined
that transactions for a Fund may be executed through Smith
Barney and other affiliated broker-dealers if, in the
judgment of the Fund's Adviser, the use of such
broker-dealer is likely to result in price and execution at
least as favorable as those of other qualified
broker-dealers, and if, in the transaction, such
broker-dealer charges the Fund a rate consistent with that
charged to comparable unaffiliated customers in similar
transactions. In addition, under rules recently adopted by
the SEC, Smith Barney may directly execute such transactions
for the Funds on the floor of any national securities
exchange, provided (a) the Trust's Board of Trustees has
expressly authorized Smith Barney to effect such
transactions, and (b) Smith Barney annually advises the
Trust of the aggregate compensation it earned on such
transactions. Over-the-counter purchases and sales are
transacted directly with 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 securities or Municipal
Securities, during the existence of any underwriting or
selling group relating thereto of which Smith Barney is a
member, except 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 comparable
to those charged by Smith Barney to its most favored clients
for comparable trades in comparable accounts.
PURCHASE OF SHARES
Volume Discounts
The schedule of sales charges on Class A shares described in
the Prospectuses applies to purchases made by any
"purchaser", which is defined to include the following: (a)
an individual; (b) an individual's spouse and his or her
children purchasing shares for his or her own account; (c) a
trustee or other fiduciary purchasing shares for a single
trust estate or single fiduciary account; (d) a pension,
profit-sharing or other employee benefit plan qualified
under Section 401(a) of the Code and qualified employee
benefit plans of employers who are "affiliated persons" of
each other within the meaning of the 1940 Act; (e)
tax-exempt organizations enumerated in Section 501(c)(3) or
(13) of the Code; (f) any other organized group of persons,
provided that the organization has been in existence for at
least six months and was organized for a purpose other than
the purchase of investment company securities at a discount;
or (g) a trustee or other professional fiduciary (including
a bank, or an investment adviser registered with the SEC
under the Investment Advisers Act of 1940) purchasing shares
of the Fund for one or more trust estates or fiduciary
accounts. Purchasers who wish to combine purchase orders to
take advantage of volume discounts on Class A shares should
contact a Smith Barney Financial Consultant.
Combined Right of Accumulation
Reduced sales charges, in accordance with the schedules in
the Prospectuses, apply to any purchase of Class A shares if
the aggregate investment in Class A shares of the relevant
Fund and in Class A shares of other funds of the Smith
Barney Mutual Funds that are offered with a sales charge,
including the purchase being made, of any "purchaser" (as
defined above) is $25,000 or more. The reduced sales charge
is subject to confirmation of the shareholder's holdings
through a check of appropriate records. The Trust reserves
the right to terminate or amend the combined right of
accumulation at any time after written notice to
shareholders. For further information regarding the rights
of accumulation, shareholders should contact a Smith Barney
Financial Consultant.
Determination of Public Offering Prices
The Trust offers shares of the Funds to the public on a
continuous basis. The public offering price for a Class A,
Class Y and Class Z share of the Fund is equal to the net
asset value per share at the time of purchase, plus for
Class A shares an initial sales charge based on the
aggregate amount of the investment. The public offering
price for a Class B and Class C share (and Class A share
purchases, including applicable rights of accumulation,
equaling or exceeding $500,000), is equal to the net asset
value per share at the time of purchase and no sales charge
is imposed at the time of purchase. A 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 exceeding $500,000. The
method of computation of the public offering price is shown
in the Funds' financial statements incorporated by reference
in their entirety into this Statement of Additional
Information.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of a Fund is
included in its Prospectus. The right of redemption of
shares of a Fund may be suspended or the date of payment
postponed (a) for any periods during which the New York
Stock Exchange, Inc. (the "NYSE") is closed (other than for
customary weekend and holiday closings), (b) when trading in
the markets the Fund normally utilizes is restricted, or an
emergency exists, as determined by the SEC, so that disposal
of the Fund's investments or determination of its net asset
value is not reasonably practicable or (c) for such other
periods as the SEC by order may permit for the protection of
the Fund's shareholders.
Distributions in Kind. If the Board of Trustees of the
Trust determines that it would be detrimental to the best
interests of the remaining shareholders 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. Securities issued as a distribution in kind may incur
brokerage commissions when shareholders subsequently sell
those securities.
Automatic Cash Withdrawal Plan. An automatic cash
withdrawal plan (the "Withdrawal Plan") is available to
shareholders who own shares of a Fund with a value of at
least $10,000 ($5,000 for retirement plan accounts) and who
wish to receive specific amounts of cash monthly or
quarterly. Withdrawals of at least $50 may be made under the
Withdrawal Plan by redeeming as many shares of the Fund as
may be necessary to cover the stipulated withdrawal payment.
Any applicable CDSC will not be waived on amounts withdrawn
by shareholders that exceed 1.00% per month of the value of
a shareholder's shares at the time the Withdrawal Plan
commences. [(With respect to Withdrawal Plans in effect
prior to November 7, 1994, any applicable CDSC will be
waived on amounts withdrawn that do not exceed 2.00% per
month of the value of a shareholder's shares at the time the
Withdrawal Plan commences)]. To the extent that withdrawals
exceed dividends, distributions and appreciation of a
shareholder's investment in the Fund, there will be a
reduction in the value of the shareholder's investment and
continued withdrawal payments may reduce the shareholder's
investment and ultimately exhaust it. Withdrawal payments
should not be considered as income from investment in a
Fund. Furthermore, as it generally would not be advantageous
to a shareholder to make additional investments in a Fund at
the same time 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 FDISG, as agent for Withdrawal
Plan members. All dividends and distributions on shares in
the Withdrawal Plan are reinvested automatically at net
asset value in additional shares of the Fund involved. All
applications for participation in the Withdrawal Plan must
be received by FDISG 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").
PFS serves as one of the Trust's distributor with
respect to the Exchange Reserve Fund pursuant to a
Distribution Agreement dated November 20, 1995.
When payment is made by the investor before the
settlement date, unless otherwise directed by the investor,
the funds will be held as a free credit balance in the
investor's brokerage account, and Smith Barney may benefit
from the temporary use of the funds. The investor may
designate another use for the funds prior to settlement
date, such as an investment in a money market fund (other
than Smith Barney Exchange Reserve Fund) of the Smith Barney
Mutual Funds. If the investor instructs Smith Barney to
invest the funds in a Smith Barney money market fund, the
amount of the investment will be included as part of the
average daily net assets of both the relevant Fund and the
Smith Barney money market fund, and affiliates of Smith
Barney that serve the funds in an investment advisory or
administrative capacity will benefit from the fact they are
receiving fees from both such investment companies 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 these
settlement procedures and will take such benefits into
consideration when reviewing the Advisory, Administration
and Distribution Agreements for continuance.
Distribution Arrangements
Shares of the Trust are distributed on a best efforts
basis by Smith Barney 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, except Exchange Reserve Fund, pays Smith Barney
a
service fee, accrued daily and paid monthly, calculated at
the annual rate of .25% (.15% in the case of Tax-Exempt
Income Fund) of the value of the Fund's average daily net
assets attributable to the Class A, Class B and Class C
shares. In addition, the Fund pays Smith Barney, with
respect to the Class B and Class C shares, and, with
respect
to Class B shares of Exchange Reserve Fund, PFS, a
distribution fee primarily intended to compensate Smith
Barney and/or PFS for its initial expense of paying
Financial Consultants a commission upon sales of those
shares. The Class B and Class C distribution fees, accrued
daily and paid monthly, are calculated at the annual rate
of
.50% for Class B shares and 0.45% for Class C shares
(0.50%
for Class C shares in the case of Exchange Reserve Fund
and
0.55% for Class C shares in the case of Tax-Exempt Fund)
of
the value of a Fund's average daily net assets
attributable
to the shares of the respective Class.
During the fiscal year ended July 31, 1993, Shearson
Lehman Brothers, the Funds' distributor prior to Smith
Barney, received $48,473,854 in the aggregate from the Trust
under the Plan. For the fiscal year ended July 31, 1994 and
July 31, 1995, Smith Barney received $61,281,027 and
$52,644,615, respectively, in the aggregate from the Trust
under the Plan.
The following expenses were incurred during the periods
indicated:
Sales Charges (paid to Smith Barney or Shearson Lehman
Brothers, its predecessor).
Class A
For Period
From 11/6/92 Fiscal
Year
Fiscal Year
Through 7/31/93 Ended 7/31/94
Ended
7/31/95
Name of Fund
Premium Total Return Fund $399,065
$546,635
$594,400
Tax-Exempt Income Fund 103,757
176,786
68,794
Convertible Fund 13,105
14,561
8,900
High Income Fund 324,552
507,890
457,100
Diversified Strategic Income Fund 629,705
818,088
471,500
Utilities Fund 572,895
364,556
150,600
CDSC (paid to Smith Barney or Shearson Lehman Brothers,
its
predecessor).
Class B
Fiscal Year Fiscal
Year
Fiscal Year
Ended 7/31/93 Ended 7/31/94
Ended
7/31/95
Name of Fund
Premium Total Return Fund $ 492,148
$2,133,023
$1,765,800
Tax-Exempt Income Fund 713,191
1,570,424
1,649,382
Convertible Fund 107,519
87,160
126,500
High Income Fund 562,214
743,718
1,000,000
Diversified Strategic Income Fund 4,531,241
5,301,256
6,000,000
Utilities Fund 2,489,562
8,429,876
4,738,800
Exchange Reserve Fund 550,484
1,188,817
1,429,000
Service Fees and Distribution Fees
Fund Level
For Period
From 11/6/92 Fiscal
Year
Fiscal Year
Through 7/31/93 Ended 7/31/94
Ended
7/31/95
Name of Fund
Premium Total Return Fund
$6,484,927
$11,322,934 $12,565,954
Tax-Exempt Income Fund 6,685,847
7,323,768
5,456,482
Convertible Fund 491,562
627,147
468,685
High Income Fund 3,073,766
4,307,795
4,029,911
Diversified Strategic Income Fund
13,216,366
18,336,425 17,817,988
Utilities Fund 17,011,265
17,767,182
12,305,595
Exchange Reserve Fund 1,022,105
1,036,758
913,444
Under its terms, the Plan continues from year to year,
provided such continuance is approved annually by vote of
the Trust's Board of Trustees, including a majority of the
Independent Trustees who have no direct or indirect
financial interest in the operation of the Plan. The Plan
may not be amended to increase the amount to be spent for
the services provided by Smith Barney or PFS without
shareholder approval, and all amendments of the Plan also
must be approved by the Trustees in the manner described
above. The Plan may be terminated with respect to a Class at
any time, without penalty, by vote of a majority of the
Independent Trustees or, with respect to any Fund, by vote
of a majority of the outstanding voting securities of the
Class (as defined in the 1940 Act). Pursuant to the Plan,
Smith Barney and PFS will provide the Trust's 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 currently is scheduled to be closed on New
Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and
on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively.
Because of the differences in distribution fees and
Class-specific expenses, the per share net asset value of
each Class may differ. The following is a description of
procedures used by a Fund in valuing its assets.
Because of the need to obtain prices as of the close of
trading on various exchanges throughout the world, the
calculation of the net asset value of Funds investing in
foreign securities may not take place contemporaneously with
the determination of the prices of many of their respective
portfolio securities used in such calculation. A security
which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the
primary market for such security. All assets and liabilities
initially expressed in foreign currency values will be
converted into U.S. dollar values at the mean between the
bid and offered quotations of such currencies against U.S.
dollars as last quoted by any recognized dealer. If such
quotations are not available, the rate of exchange will be
determined in good faith by the Trust's Board of Trustees.
In carrying out the Board's valuation policies, SBMFM, as
administrator, may consult with an independent pricing
service (the "Pricing Service") retained by the Trust.
Debt securities of United States issuers (other than
U.S. government securities and short-term investments),
including Municipal Securities held by Tax-Exempt Income
Fund, are valued by SBMFM, as administrator, after
consultation with the Pricing Service approved by the
Trust's Board of Trustees. When, in the judgment of the
Pricing Service, quoted bid prices for investments are
readily available and are representative of the bid side of
the market, these investments are valued at the mean between
the quoted bid prices and asked prices. Investments for
which, in the judgment of the Pricing Service, there are no
readily obtainable market quotations are carried at fair
value as determined by the Pricing Service. The procedures
of the Pricing Service are reviewed periodically by the
officers of the Trust under the general supervision and
responsibility of the Board of Trustees.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund of the Smith
Barney Mutual Funds may exchange all or part of their shares
for shares of the same Class of other funds of the Smith
Barney Mutual Funds, to the extent such shares are offered
for sale in the shareholder's state of residence, on the
basis of relative net asset value per share at the time of
exchange as follows:
A. Class A shares of any fund purchased with a
sales charge may be exchanged for Class A shares
of any of the other funds, and the sales charge
differential, if any, will be applied. Class A
shares of any fund may be exchanged without a
sales charge for shares of the funds that are
offered without a sales charge. Class A shares of
any fund purchased without a sales charge may be
exchanged for shares sold with a sales charge, and
the appropriate sales charge differential will be
applied.
B. Class A shares of any fund acquired by a
previous exchange of shares purchased with a sales
charge may be exchanged for Class A shares of any
of the other funds, and the sales charge
differential, if any, will be applied.
C. Class B shares of any fund may be exchanged
without a sales charge. Class B shares of a Fund
exchanged for Class B shares of another fund will
be subject to the higher applicable CDSC of the
two funds and, for purposes of calculating CDSC
rates and conversion periods, will be deemed to
have been held since the date the shares being
exchanged were deemed to be purchased.
Dealers other than Smith Barney must notify FDISG of
the investor's prior ownership of Class A shares of Smith
Barney High Income Fund and the account 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 residing in any state in which the
fund shares being acquired may legally be sold. Prior to any
exchange, the shareholder should obtain and review a copy of
the current prospectus of each fund into which an exchange
is being considered. Prospectuses may be obtained from a
Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are
redeemed at the then-current net asset value and, subject to
any applicable CDSC, the proceeds are immediately invested,
at a price as described above, in shares of the fund being
acquired. Smith Barney reserves the right to reject any
exchange request. The exchange privilege may be modified or
terminated at any time after written notice to shareholders.
PERFORMANCE DATA
From time to time, the Trust may quote yield or total return
of the Funds in advertisements or in reports and other
communications to shareholders. The Fund may include
comparative performance information in advertising or
marketing the Fund's shares. Such performance information
may include the following industry and financial
publications: Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune,
Institutional Investor, Investors Daily, Money, Morningstar
Mutual Fund Values, The New York Times, USA Today and The
Wall Street Journal. To the extent any advertisement or
sales literature of the 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 account in the Fund having a
balance of one share at the beginning of a
seven-calendar-day period for which yield is to be quoted,
(b) dividing the net change by the value of the account at
the beginning of period to obtain the base period return and
(c) annualizing the results (i.e., multiplying the base
period return by 365/7). The net change in the value of the
account reflects the value of additional shares purchased
with dividends declared on the original share and any such
additional shares, but does not include realized gains and
losses or unrealized appreciation and depreciation. In
addition, the Fund may calculate a compound effective
annualized yield by adding 1 to the base period return
(calculated as described above), raising the sum to a power
equal to 365/7 and subtracting 1.
For the seven-day period ended July 31, 1995, the
annualized yield was 5.25%, and the compound effective yield
was 5.39%. As of July 31, 1995, the Fund's average portfolio
maturity was 65.15 days.
Other Funds. The 30-day yield figure of a Fund other
than Exchange Reserve Fund is calculated according to a
formula prescribed by the SEC. The formula can be expressed
as follows:
YIELD =2 [ ( a-bcd+1)6--1]
Where: a =dividends and interest earned
during the period.
b =expenses accrued for the period
(net of waiver and reimbursement).
c =the average daily number of
shares outstanding during the period that
were entitled to receive dividends.
d =the maximum offering price per
share on the last day of the period.
For the purpose of determining the interest earned
(variable "a" in the formula) on debt obligations that were
purchased by a Fund at a discount or premium, the formula
generally calls for amortization of the discount or premium;
the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt
obligations.
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 expected to occur.
Average Annual Total Return
The "average annual total return" figures for each Fund,
other than Exchange Reserve Fund, are
computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P (1+T)n = ERV
Where: P =a hypothetical initial payment of $1,000.
T =average annual total return.
n =number of years.
ERV =Ending Redeemable Value of a
hypothetical $1,000 investment made at the
beginning of the 1-, 5- or 10-year period at the
end of the 1-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of all
dividends and distributions.
The average annual total returns (with fees waived and
without sales charge) of the Fund's Class A shares were as
follows for the periods indicated:
Class A Shares:
Per Annum For
the Period From
One Year Commencement of
Period Ended Operations*
Through
Name of Fund 7/31/95 7/31/95
Premium Total Return Fund 12.92%
11.72%
Tax-Exempt Income Fund 6.42% 6.46%
Convertible Fund 10.35% 9.07%
High Income Fund 10.28% 10.72%
Diversified Strategic Income Fund 10.35%
7.56%
Utilities Fund 13.24% 7.09%
* The Fund commenced selling Class A shares on November 6,
1992.
The average annual total returns (with fees waived and
without CDSC) of the Fund's Class B shares were as follows
for the periods indicated:
Class B Shares:
Per Annum Per Annum
For
For the the Period
From
One Year Five Year
Commencement
Period Ended Period Ended
of Operations
7/31/95 7/31/95 Through
7/31/95
Name of Fund
Premium Total Return Fund (1) 12.36% 13.03%
12.47%
Tax-Exempt Income Fund (1) (6) 5.91%
7.05% 8.47%
Convertible Fund (5) 9.80%
9.85% 7.99%
High Income Fund (2) (6) 9.77% 12.25%
8.63%
Diversified Strategic Income Fund (3) (6) 10.00%
8.96% 9.11%
Utilities Fund (4) 12.62% 9.21%
9.79%
(1) Fund commenced operations on September 16, 1985.
(2) Fund commenced operations on September 2, 1986.
(3) Fund commenced operations on December 28, 1989.
(4) Fund commenced operations on March 28, 1988.
(5) Fund commenced operations on September 9, 1986.
(6) Prior to November 6, 1992 the maximum CDSC imposed on
redemptions was 5.00%.
The average annual total returns (with fees waived) of
the Fund's Class C shares were as follows for the periods
indicated:
Class C Shares:
Per Annum For
the Period From
One Year Commencement of
Period Ended Operations
Through
Name of Fund 7/31/95
7/31/95
Premium Total Return Fund* 12.36%
10.77%
Tax-Exempt Income Fund** ---%
13.45%
Convertible Fund*** ---%
12.17%
High Income Fund**** ---%
11.50%
Diversified Strategic Income Fund***** 9.73%
5.77%
Utilities Fund****** 12.62%
3.95%
* The Fund commenced selling Class C shares
(previously designated as Class D shares) on June 1,
1993.
** The Fund commenced selling Class C shares
(previously designated as Class D shares) on November
17, 1994
*** The Fund commenced selling Class C shares
(previously designated as Class D shares) on November
7, 1994
**** The Fund commenced selling Class C shares
(previously designated as Class D shares) on August 24,
1994.
***** The Fund commenced selling Class C shares
(previously designated as Class D shares) on March 19,
1993.
****** The Fund commenced selling Class C shares
(previously designated as Class D shares) on February
4, 1993.
A Class' total return figures calculated in accordance
with the above formula assume that the maximum sales charge
or maximum applicable CDSC, as the case may be, has been
deducted for the hypothetical $1,000 initial investment at
the time of purchase.
Aggregate Total Return
The aggregate total return figures for each Fund, other than
Exchange Reserve Fund, represent the cumulative change in
the value of an investment in the Class for the specified
period and are computed by the following formula:
ERV-P
P
Where: P =a hypothetical initial payment
of $10,000.
ERV =Ending Redeemable Value of a
hypothetical $10,000 investment made at the
beginning of the 1-, 5- or 10-year period at
the end of the 1-, 5- or 10-year period (or
fractional portion thereof), assuming
reinvestment of all dividends and
distributions.
The aggregate total returns (with fees waived) of the
Class B shares of the Funds indicated were as follows for
the periods indicated:
No Load
Load
One Year Five Year Period from One Year
Five Year
Period from
Period Period Commencement
Period
Period Commencement
Ended Ended of Operations
Ended
Ended of Operations
July 31, July 31, through July 31, July
31, through
1995 1995 July 31, 1995
1995
1995 July 31, 1995
Premium Total Return(1) 12.36% 84.46%
219.30% 7.36%
83.46% 219.30%
Tax-Exempt Income(1)(6) 5.91% 40.61%
123.18% 1.41%
39.61% 123.18%
Convertible(5) 9.80% 59.94% 98.39%
4.80%
58.94% 98.39%
High Income(2)(6) 9.77% 78.21%
109.20% 5.29%
77.21% 109.20%
Diversified Strategic
Income (3)(6) 10.00% 53.60% 62.81%
5.50%
52.60% 62.81%
Utilities(4) 12.62% 55.34%
98.62% 7.62%
54.34% 98.62%
* Figures do not include the effect of the maximum sales
charge or
maximum applicable CDSC. If they had been included, it
would have
the effect of lowering the returns shown.
** Figures include the effect of the maximum sales charge
or maximum
applicable CDSC.
(1) Fund commenced operations on September 16, 1985.
(2) Fund commenced operations on September 2, 1986.
(3) Fund commenced operations on December 28, 1989.
(4) Fund commenced operations on March 28, 1988.
(5) Fund commenced operations on September 9, 1986.
(6) Prior to November 6, 1992 the maximum CDSC imposed on
redemptions was
5%.
The aggregate total returns (with fees waived) of the Class
A and Class C
shares of the Funds indicated were as follows for the
periods
indicated:
No Load
Load
No Load Load
Period from
Period from
One Year One Year November 6, 1992
November 6, 1992
Period Ended Period Ended
through
through
July 31, 1995* July 31, 1995** July
31, 1995*
July 31, 1995**
Premium Total Return
Class A 12.92% 7.25% 35.33%#
28.57%
Class C (1) 12.36% 11.36% 24.65%
24.65%
Tax-Exempt Income
Class A 6.42% 2.16% 18.65%#
13.90%
Class C (2) ---% ---% 13.45%#
12.45%#
Convertible
Class A 10.35% 4.81% 26.76%#
20.42%
Class C (3) ---% ---% 12.17%#
11.17%#
High Income
Class A 10.28% 5.28% 32.08%#
26.14%
Class C (4) ---% ---% 11.50%#
10.50%#
Diversified Strategic Income
Class A 10.35% 5.34% 22.01%#
16.52%
Class C(5) 9.73% 8.73% 14.21%#
14.21%#
Utilities
Class A 13.24% 7.57% 20.57%#
14.54%
Class C(6) 12.62% 11.62% 10.11%#
10.11%#
* Figures do not include the effect of the maximum sales
charge or
maximum applicable CDSC.
** Figures include the effect of the maximum sales charge
or maximum
applicable CDSC.
(1) The Fund commenced selling Class C shares (previously
designated as
Class D shares) on June 1, 1993.
(2) The Fund commenced selling Class C shares (previously
designated as
Class D shares) on November 17, 1994.
(3) The Fund commenced selling Class C shares (previously
designated as
Class D shares) on November 7, 1994.
(4) The Fund commenced selling Class C shares (previously
designated as
Class D shares) on August 24, 1994.
(5) The Fund commenced selling Class C shares (previously
designated as
Class D shares) on March 19, 1993.
(6) The Fund commenced selling Class C shares (previously
designated as
Class D shares) on February 4, 1993.
# Since inception date.
It is important to note that the yield and total return
figures set forth above are based on historical earnings and
are not intended to indicate future performance.
A Class' performance will vary from time to time
depending upon market conditions, the composition of the
relevant Fund's portfolio and operating expenses and the
expenses exclusively attributable to that Class.
Consequently, any given performance quotation should not be
considered representative of the Class' performance for any
specified period in the future. Because performance will
vary, it may not provide a basis for comparing an investment
in the Class with certain bank deposits or other investments
that pay a fixed yield for a stated period of time.
Investors comparing a Class' performance with that of other
mutual funds should give consideration to the quality and
maturity of the respective investment company's portfolio
securities.
TAXES
The following is a summary of certain Federal income tax
considerations that may affect the Trust and its
shareholders. This summary is not intended as a substitute
for individual tax advice and investors are urged to consult
their own tax advisors as to the tax consequences of an
investment in any Fund of the Trust.
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 securities or foreign
currencies, or other income (including but not limited to
gains from options, futures, or forward contracts) derived
with respect to the Fund's investment in such stock,
securities, or currencies. The Trust does not expect any
Fund to have difficulty meeting this test.
To qualify as a regulated investment company, a Fund
also must earn less than 30% of its gross income from the
disposition of securities held for less than three months.
The 30% test will limit the extent to which a Fund may sell
securities held for less than three months; effect short
sales of securities held for less than three months; write
options which expire in less than three months; and effect
closing transactions with respect to call or put options
that have been written or purchased within the preceding
three months. (If a Fund purchases a put option for the
purpose of hedging an underlying portfolio security, the
acquisition of the option is treated as a short sale of the
underlying security unless the option and the security are
acquired on the same date.) Finally, as discussed below,
this requirement also may limit investments by certain Funds
in options on stock indexes, options on nonconvertible debt
securities, futures contracts and options on futures
contracts, and foreign currencies (or options, futures or
forward contracts on foreign currencies) but only to the
extent that such foreign currencies are not directly related
to the Trust's principal business of investing in
securities.
Taxation of Investment by the Funds
Gains or losses on sales of securities by a Fund generally
will be long-term capital gains or losses if the Fund has
held the securities for more than one year. Gains or losses
on sales of securities held for not more than one year
generally will be short-term. If a Fund acquires a debt
security at a substantial discount, a portion of any gain
upon sale or redemption will be taxed as ordinary income,
rather than capital gain, to the extent that it reflects
accrued market discount.
Options and Futures Transactions. The tax consequences
of options transactions entered into by a Fund will vary
depending on the nature of the underlying security, whether
the option is written or purchased, and whether the
"straddle" rules, discussed separately below, apply to the
transaction. When a Fund writes a call or put option on an
equity or convertible debt security, it will receive a
premium that will, subject to the straddle rules, be treated
as follows for tax purposes. If the option expires
unexercised, or if the Fund enters into a closing purchase
transaction, the Fund will realize a gain (or loss if the
cost of the closing purchase transaction exceeds the amount
of the premium) without regard to any unrealized gain or
loss on the underlying security. Any such gain or loss will
be a short-term capital gain or loss, except that any loss
on a "qualified" covered call stock option that is not
treated as a part of a straddle may be treated as long-term
capital loss. If a call option written by a Fund is
exercised, the Fund will recognize a capital gain or loss
from the sale of the underlying security, and will treat the
premium as additional sales proceeds. Whether the gain or
loss will be long-term or short-term will depend on the
holding period of the underlying security. If a put option
written by a Fund is exercised, the amount of the premium
will reduce the tax basis of the security that the Fund then
purchases.
If a put or call option that a Fund has purchased on an
equity or convertible debt security expires unexercised, the
Fund will realize capital loss equal to the cost of the
option. If the Fund enters into a closing sale transaction
with respect to the option, it will realize a capital gain
or loss (depending on whether the proceeds from the closing
transaction are greater or less than the cost of the
option). The gain or loss will be short-term or long-term,
depending on the Fund's holding period in the option. If the
Fund exercises such a put option, it will realize a
short-term capital gain or loss (long-term if the Fund holds
the underlying security for more than one year before it
purchases the put) from the sale of the underlying security
measured by the sales proceeds decreased by the premium
paid. If the Fund exercises such a call option, the premium
paid for the option will be added to the tax basis of the
security purchased.
One or more Funds may invest in section 1256 contracts,
and the Code imposes a special "mark-to-market" system for
taxing these contracts. These contracts generally include
options on nonconvertible debt securities (including United
States government securities), options on stock indexes,
futures contracts, options on futures contracts and certain
foreign currency contracts. Options on foreign currency,
futures contracts on foreign currency and options on foreign
currency futures will qualify as "section 1256" contracts if
the options or futures are traded on or subject to the rules
of a qualified board or exchange. Generally, most of the
foreign currency options and foreign currency futures and
related options in which certain Funds may invest will
qualify as section 1256 contracts. In general, gain or loss
on section 1256 contracts will be taken into account for tax
purposes when actually realized (by a closing transaction,
by exercise, by taking delivery or by other termination). In
addition, any section 1256 contracts held at the end of a
taxable year will be treated as sold at their year-end fair
market value (that is, marked to the market), and the
resulting gain or loss will be recognized for tax purposes.
Provided that section 1256 contracts are held as capital
assets and are not part of a straddle, both the realized and
the unrealized year-end gain or loss from these investment
positions (including premiums on options that expire
unexercised) will be treated as 60% long-term and 40%
short-term capital gain or loss, regardless of the period of
time particular positions actually are held by a Fund.
A portion of the mark-to-market gain on instruments
held for less than three months at the close of a Fund's
taxable year may represent a gain on securities held for
less than three months for purposes of the 30% test
discussed above. Accordingly, a Fund may have to restrict
its fourth-quarter transactions in section 1256 contracts.
Straddles. While the mark-to-market system is limited
to section 1256 contracts, the Code contains other rules
applicable to transactions which create positions which
offset positions in section 1256 or other investment
contracts. Those rules, applicable to "straddle"
transactions, are intended to eliminate any special tax
advantages for such transactions. "Straddles" are defined to
include "offsetting positions" in actively-traded personal
property. Under current law, it is not clear under what
circumstances one investment made by a Fund, such as an
option or futures contract, would be treated as "offsetting"
another investment also held by the Fund, such as the
underlying security (or vice versa) and, therefore, whether
the Fund would be treated as having entered into a straddle.
In general, investment positions may be "offsetting" if
there is a substantial diminution in the risk of loss from
holding one position by reason of holding one or more other
positions (although certain "qualified" covered call stock
options written by a Fund may be treated as not creating a
straddle). Also, the forward currency contracts entered into
by a Fund may result in the creation of "straddles" for
Federal income tax purposes.
If two (or more) positions constitute a straddle, a
realized loss from one position (including a mark-to-market
loss) must be deferred to the extent of unrecognized gain in
an offsetting position. Also, the holding period rules
described above may be modified to recharacterize long-term
gain as short-term gain, or to recharacterize short-term
loss as long-term loss, in connection with certain straddle
transactions. Furthermore, interest and other carrying
charges allocable to personal property that is part of a
straddle must be capitalized. In addition, "wash sale" rules
apply to straddle transactions to prevent the recognition of
loss from the sale of a position at a loss where a new
offsetting position is or has been acquired within a
prescribed period. To the extent that the straddle rules
apply to positions established by a Fund, losses realized by
the Fund may be either deferred or recharacterized as
long-term losses, and long-term gains realized by the Fund
may be converted to short-term gains.
If a Fund chooses to identify particular offsetting
positions as being components of a straddle, a realized loss
will be recognized, but only upon the liquidation of all of
the components of the identified straddle. Special rules
apply to the treatment of "mixed" straddles (that is,
straddles consisting of a section 1256 contract and an
offsetting position that is not a section 1256 contract). If
a Fund makes certain elections, the section 1256 contract
components of such straddles will not be subject to the
"60%/40%" mark-to-market rules. If any such election is
made, the amount, the nature (as long-or short-term) and the
timing of the recognition of the Fund's gains or losses from
the affected straddle positions will be determined under
rules that will vary according to the type of election made.
Section 988. Foreign currency gain or loss from
transactions in (a) bank forward contracts not traded in the
interbank market and (b) futures contracts traded on a
foreign exchange may be treated as ordinary income or loss
under Code section 988. A Fund may elect to have section 988
apply to section 1256 contracts. Pursuant to that election,
foreign currency gain or loss from these transactions would
be treated entirely as ordinary income or loss when
realized. A Fund will make the election necessary to gain
such treatment if the election is otherwise in the best
interests of the Fund.
Taxation of the Trust's Shareholders
Dividends paid by a Fund from investment income and
distributions of short-term capital gains will be taxable to
shareholders as ordinary income for Federal income tax
purposes, whether received in cash or reinvested in
additional shares. Distributions of long-term capital gains
will be taxable to shareholders as long-term capital gain,
whether paid in cash or reinvested in additional shares, and
regardless of the length of time that the shareholder has
held his or her shares of the Fund.
Dividends of investment income (but not capital gains)
from any Fund generally will qualify for the Federal
dividends-received deduction for domestic corporate
shareholders to the extent that such dividends do not exceed
the aggregate amount of dividends received by the Fund from
domestic corporations. If securities held by a Fund are
considered to be "debt-financed" (generally, acquired with
borrowed funds), are held by the Fund for less than 46 days
(91 days in the case of certain preferred stock), or are
subject to certain forms of hedges or short sales, the
portion of the dividends paid by the Fund which corresponds
to the dividends paid with respect to such securities will
not be eligible for the corporate dividends-received
deduction.
If a shareholder (a) incurs a sales charge in acquiring
or redeeming Fund shares and (b) disposes of those shares
and acquires within 90 days after the original acquisition,
or (c) acquires within 90 days of the redemption, shares in
a mutual fund for which the otherwise applicable sales
charge is reduced by reason of a reinvestment right (i.e.,
exchange privilege), the original sales charge increases the
shareholder's tax basis in the original shares only to the
extent the otherwise applicable sales charge for the second
acquisition is not reduced. The portion of the original
sales charge that does not increase the shareholder's tax
basis in the original shares would be treated as incurred
with respect to the second acquisition and, as a general
rule, would increase the shareholder's tax basis in the
newly acquired shares. Furthermore, the same rule also
applies to a disposition of the newly acquired or redeemed
shares made within 90 days of the second acquisition. This
provision prevents a shareholder from immediately deducting
the sales charge by shifting his or her investment in a
family of mutual funds.
Capital Gains Distribution. As a general rule, a
shareholder who redeems or exchanges his or her shares will
recognize long-term capital gain or loss if the shares have
been held for more than one year, and will recognize
short-term capital gain or loss if the shares have been held
for one year or less. However, if a shareholder receives a
distribution taxable as long-term capital gain with respect
to shares of a Fund and redeems or exchanges the shares
before he or she has held them for more than six months, any
loss on such redemption or exchange that is less than or
equal to the amount of the distribution will be treated as a
long-term capital loss.
Backup Withholding. If a shareholder fails to furnish a
correct taxpayer identification number, fails to fully
report dividend or interest income, or fails to certify that
he or she has provided a correct taxpayer identification
number and that he or she is not subject to such
withholding, then the shareholder may be subject to a 31%
"backup withholding tax" with respect to (a) any taxable
dividends and distributions and (b) any proceeds of any
redemption of Trust shares. An individual's taxpayer
identification number is his or her social security number.
The backup withholding tax is not an additional tax and may
be credited against a shareholder's regular Federal income
tax liability.
Tax-Exempt Income Fund. Because Tax-Exempt Income Fund
will distribute exempt-interest dividends, interest on
indebtedness incurred by shareholders, directly or
indirectly, to purchase or carry shares of the Fund will not
be deductible for Federal income tax purposes. If a
shareholder redeems or exchanges shares of the Fund with
respect to which he receives an exempt-interest dividend
before holding the shares for more than six months, no loss
will be allowed on the redemption or exchange to the extent
of the dividend received. Also, that portion of any dividend
from the Fund which represents income from private activity
bonds other than those issued for charitable, educational
and certain other purposes held by the Fund may not retain
its tax-exempt status in the hands of a shareholder who is a
"substantial user" of a facility financed by such bonds or a
person "related" to a substantial user. Investors should
consult their own tax advisors to see whether they may be
substantial users or related persons with respect to a
facility financed by bonds in which the Fund may invest.
Moreover, investors receiving social security or certain
other retirement benefits should be aware that tax-exempt
interest received from the Fund may under certain
circumstances cause up to one-half of such retirement
benefits to be subject to tax. If the Fund receives taxable
investment income, it will designate as taxable the same
percentage of each dividend as the actual taxable income
bears to the total investment income earned during the
period for which the dividend is paid. The percentage of
each dividend designated as taxable, if any, may, therefore,
vary. Dividends derived from interest from Municipal
Securities which are exempt from Federal tax also may be
exempt from personal income taxes in the state where the
issuer is located, but in most cases will not be exempt
under the tax laws of other states or local authorities.
Annual statements will set forth the amount of interest from
Municipal Securities earned by the Fund in each state or
possession in which issuers of portfolio securities are
located.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated business
trust under the laws of the Commonwealth of Massachusetts
pursuant to a Master Trust Agreement dated March 12, 1985,
as amended from time to time, and on November 5, 1992 the
Trust filed an Amended and Restated Master Trust Agreement
(the "Trust Agreement"). The Trust commenced business as an
investment company on September 16, 1985, under the name
Shearson Lehman Special Portfolios. On February 21, 1986,
December 6, 1988, August 27, 1990, November 5, 1992, July
30, 1993 and October 14, 1994, the Trust changed its name to
Shearson Lehman Special Income Portfolios, SLH Income
Portfolios, Shearson Lehman Brothers Income Portfolios,
Shearson Lehman Brothers Income Funds, Smith Barney Shearson
Income Funds and Smith Barney Income Funds, respectively.
PNC Bank is located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, and serves as the
custodian for each of the Funds, except Diversified
Strategic Income Fund. Morgan, located at 60 Wall Street,
New York New York 10260 serves as the custodian for the
Diversified Strategic Income Fund. Under their respective
custodian agreements with the respective Funds of the Trust,
each custodian is authorized to establish separate accounts
for foreign securities owned by the appropriate Fund of the
Trust to be held with foreign branches of other U.S. banks
as well as with certain foreign banks and securities
depositories. For its custody services to the Trust, each
custodian receives monthly fees based upon the month-end
aggregate net asset value of the appropriate Fund, 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.
FDISG is located at Exchange Place, Boston,
Massachusetts 02109, and serves as the Trust's transfer
agent. Under the transfer agency agreement, FDISG maintains
the shareholder account records for the Trust, handles
certain communications between shareholders and the Trust
and distributes dividends and distributions payable by each
Fund. For these services FDISG receives from each Fund a
monthly fee computed on the basis of the number of
shareholder accounts maintained during the year for each
Fund and is reimbursed for certain out-of-pocket expenses.
FINANCIAL STATEMENTS
The Funds' Annual Reports for the fiscal year ended July 31,
1995, accompany this Statement of Additional Information and
are incorporated herein by reference in their entirety.
APPENDIX
Description of Ratings
Description of S&P Corporate Bond Ratings
AAA
Bonds rated AAA have the highest rating assigned by S&P
to a
debt obligation. Capacity to pay interest and repay
principal is
extremely strong.
AA
Bonds rated AA have a very strong capacity to pay
interest
and repay principal and differ from the highest rated issues
only
in small degree.
A
Bonds rated A have a strong capacity to pay interest
and
repay principal although they are somewhat more
susceptible to
the adverse effects of changes in circumstances and
economic
conditions than bonds in higher rated categories.
BBB
Bonds rated BBB are regarded as having an adequate
capacity
to pay interest and repay principal. Whereas they
normally
exhibit adequate protection parameters, adverse
economic
conditions or changing circumstances are more likely to lead
to a
weakened capacity to pay interest and repay principal for
bonds
in this category than for bonds in higher rated categories.
BB, B and CCC
Bonds rated BB and B are regarded, on
balance, as
predominantly speculative with respect to capacity to
pay
interest and repay principal in accordance with the terms of
the
obligation. BB represents a lower degree of speculation
than B
and CCC, the highest degrees of speculation. While such
bonds
will likely have some quality and protective
characteristics,
these are outweighed by large uncertainties or major
risk
exposures to adverse conditions.
Description of Moody's Corporate Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be the best
quality.
They carry the smallest degree of investment risk and
are
generally referred to as "gilt-edge". Interest payments
are
protected by a large or exceptionally stable margin and
principal
is secure. While the various protective elements are
likely to
change, such changes as can be visualized are most
unlikely to
impair the fundamentally strong position of such issues.
A-1
Aa
Bonds which are rated Aa are judged to be of high
quality by
all standards. Together with the Aaa group they comprise
what are
generally known as high grade bonds. They are rated lower
than
the best bonds because margins of protection may not be as
large
as in Aaa securities, or fluctuation of protective elements
may
be of greater amplitude or there may be other elements
present
which make the long-term risks appear somewhat larger than
in Aaa
securities.
A
Bonds which are rated A possess favorable
investment
attributes and are to be considered as upper medium
grade
obligations. Factors giving security to principal and
interest
are considered adequate but elements may be present which
suggest
a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium
grade
obligations, i.e., they are neither highly protected nor
poorly
secured. Interest payments and principal security appear
adequate
for the present but certain protective elements may be
lacking or
may be characteristically unreliable over any great
length of
time. Such bonds lack outstanding investment characteristics
and
in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have
speculative
elements; their future cannot be considered as well
assured.
Often the protection of interest and principal payments
may be
very moderate and thereby not well safeguarded during both
good
and bad times over the future. Uncertainty of
position
characterizes bonds in this class.
B
Bonds which are rated B generally lack
characteristics of
desirable investments. Assurance of interest and
principal
payments or of maintenance of other terms of the contract
over
any long period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. These
issues
may be in default or present elements of danger may exist
with
respect to principal or interest.
Moody's applies the numerical modifier 1, 2 and 3 to each
generic
rating classification from Aa through B. The modifier 1
indicates
that the security ranks in the higher end of its generic
rating
category; the modifier 2 indicates a mid-range ranking; and
the
modifier 3 indicates that the issue ranks in the lower end
of its
generic rating category.
A-2
Description of S&P Municipal Bond Ratings
AAA
Prime -- These are obligations of the highest quality.
They
have the strongest capacity for timely payment of debt
service.
General Obligation Bonds -- In a period of economic
stress,
the issuers will suffer the smallest declines in income and
will
be least susceptible to autonomous decline. Debt
burden is
moderate. A strong revenue structure appears more than
adequate
to meet future expenditure requirements. Quality of
management
appears superior.
Revenue Bonds -- Debt service coverage has been,
and is
expected to remain, substantial. Stability of the
pledged
revenues is also exceptionally strong due to the
competitive
position of the municipal enterprise or to the nature of
the
revenues. Basic security provisions (including rate
covenant,
earnings test for issuance of additional bonds, debt
service
reserve requirements) are rigorous. There is evidence of
superior
management.
AA
High Grade -- The investment characteristics of
bonds in
this group are only slightly less marked than those of the
prime
quality issues. Bonds rated AA have the second strongest
capacity
for payment of debt service.
A
Good Grade -- Principal and interest payments on
bonds in
this category are regarded as safe although the bonds
are
somewhat more susceptible to the adverse affects of
changes in
circumstances and economic conditions than bonds in higher
rated
categories. This rating describes the third strongest
capacity
for payment of debt service. Regarding municipal bonds,
the
ratings differ from the two higher ratings because:
General Obligation Bonds -- There is some weakness,
either
in the local economic base, in debt burden, in the
balance
between revenues and expenditures, or in quality of
management.
Under certain adverse circumstances, any one such weakness
might
impair the ability of the issuer to meet debt obligations at
some
future date.
Revenue Bonds -- Debt service coverage is good, but
not
exceptional. Stability of the pledged revenues could show
some
variations because of increased competition or
economic
influences on revenues. Basic security provisions,
while
satisfactory, are less stringent. Management performance
appears
adequate.
A-3
BBB
Medium Grade -- Of the investment grade ratings, this
is the
lowest. Bonds in this group are regarded as having an
adequate
capacity to pay interest and repay principal. Whereas
they
normally exhibit adequate protection parameters, adverse
economic
conditions or changing circumstances are more likely to lead
to a
weakened capacity to pay interest and repay principal for
bonds
in this category than for bonds in higher rated categories.
General Obligation Bonds -- Under certain
adverse
conditions, several of the above factors could contribute
to a
lesser capacity for payment of debt service. The
difference
between A and BBB ratings is that the latter shows more than
one
fundamental weakness, or one very substantial
fundamental
weakness, whereas the former shows only one deficiency among
the
factors considered.
Revenue Bonds -- Debt coverage is only fair.
Stability of
the pledged revenues could show substantial variations,
with the
revenue flow possibly being subject to erosion over time.
Basic
security provisions are no more than adequate.
Management
performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on
balance, as
predominately speculative with respect to capacity to
pay
interest and repay principal in accordance with the terms of
the
obligation. BB includes the lowest degree of speculation
and CC
the highest degree of speculation. While such bonds will
likely
have some quality and protective characteristics, these
are
outweighed by large uncertainties or major risk
exposures to
adverse conditions.
C
The rating C is reserved for income bonds on
which no
interest is being paid.
D
Bonds rated D are in default, and payment of interest
and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition
of a
plus or a minus sign, which is used to show relative
standing
within the major rating categories, except in the AAA-Prime
Grade
category.
Description of S&P Municipal Note Ratings
Municipal notes with maturities of three years or less
are
usually given note ratings (designated SP-1, -2 or -
3) to
distinguish more clearly the credit quality of notes as
compared
to bonds. Notes rated SP-1 have a very strong or strong
capacity
to pay principal and interest. Those issues determined to
possess
overwhelming safety characteristics are given the
designation of
SP-1+. Notes rated SP-2 have satisfactory capacity to
pay
principal and interest.
A-4
Description of Moody's Municipal Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be the best
quality.
They carry the smallest degree of investment risk and
are
generally referred to as "gilt edge". Interest payments
are
protected by a large or by an exceptionally stable margin
and
principal is secure. While the various protective elements
are
likely to change, such changes as can be visualized are
most
unlikely to impair the fundamentally strong position of
such
issues.
Aa
Bonds which are rated Aa are judged to be of high
quality by
all standards. Together with the Aaa group they comprise
what are
generally known as high grade bonds. They are rated lower
than
the best bonds because margins of protection may not be as
large
as in Aaa securities, or fluctuation of protective elements
may
be of greater amplitude, or there may be other elements
present
which make the long-term risks appear somewhat larger than
in Aaa
securities.
A
Bonds which are rated A possess many favorable
investment
attributes and are to be considered as upper medium
grade
obligations. Factors giving security to principal and
interest
are considered adequate, but elements may be present
which
suggest a susceptibility to impairment sometime in the
future.
Baa
Bonds which are rated Baa are considered as medium
grade
obligations, i.e., they are neither highly protected nor
poorly
secured. Interest payments and principal security appear
adequate
for the present but certain protective elements may be
lacking or
may be characteristically unreliable over any great
length of
time. Such bonds lack outstanding investment characteristics
and
in fact have speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have
speculative
elements; their future cannot be considered as well
assured.
Often the protection of interest and principal payments
may be
very moderate and thereby not well safeguarded during both
good
and bad times over the future. Uncertainty of
position
characterize bonds in this class.
B
Bonds which are rated B generally lack
characteristics of
the desirable investment. Assurance of interest and
principal
payments or of maintenance of other terms of the contract
over
any long period of time may be small.
A-5
Caa
Bonds which are rated Caa are of poor standing. Such
issues
may be in default or there may be present elements of danger
with
respect to principal or interest.
Ca
Bonds which are rated Ca represent obligations which
are
speculative in a high degree. Such issues are often in
default or
have other marked shortcomings.
C
Bonds which are rated C are the lowest rated class of
bonds,
and issues so rated can be regarded as having extremely
poor
prospects of ever attaining any real investment standing.
Moody's applies the numerical modifiers 1, 2 and 3 in
each
generic rating classification from Aa through B. The
modifier 1
indicates that the security ranks in the higher end of
its
generic ratings category; the modifier 2 indicates a mid-
range
ranking; and the modifier 3 indicates that the issue ranks
in the
lower end of its generic ratings category.
Description of Moody's Municipal Note Ratings
Moody's ratings for state and municipal notes and
other
short-term loans are designated Moody's Investment Grade
(MIG)
and for variable rate demand obligations are designated
Variable
Moody's Investment Grade (VMIG). This distinction recognizes
the
differences between short- and long-term credit 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 market for refinancing, or both. Loans bearing
the
designation MIG 2/VMIG 2 are of high quality, with
margins of
protection ample, although not as large as the preceding
group.
Loans bearing the designation MIG 3/VMIG 3 are of
favorable
quality, with all security elements accounted for but
lacking the
undeniable strength of the preceding grades. Market access
for
refinancing, in particular, is likely to be less
well
established. Loans bearing the designation MIG 4/VMIG 4
are of
adequate quality. Protection commonly regarded as required
of an
investment security is present and although not
distinctly or
predominantly speculative, there is specific risk.
Description of Commercial Paper Ratings
The rating A-1+ is the highest, and A-1 the second
highest,
commercial paper rating assigned by S&P. Paper rated A-1+
must
have either the direct credit support of an issuer or
guarantor
that possesses excellent long-term operating and
financial
strength combined with strong liquidity
characteristics
(typically, such issuers or guarantors would display
credit
quality characteristics which would warrant a senior bond
rating
of A\- or higher) or the direct credit support of an
issuer or
guarantor that possesses above average long-term
fundamental
operating and financing capabilities combined with
ongoing
excellent liquidity characteristics. Paper rated A-1 must
have
the following characteristics: liquidity ratios are
adequate to
meet cash requirements; long-term senior debt is rated
A or
better; the issuer has access to at least two additional
channels
of borrowing; basic earnings and cash flow have an upward
trend
with
A-6
allowance made for unusual circumstances; typically, the
issuer's
industry is well established and the issuer has a strong
position
within the industry; and the reliability and quality
of
management are unquestioned.
The rating Prime-1 is the highest commercial paper
rating
assigned by Moody's. Among the factors considered by
Moody's in
assigning ratings are the following: (a) evaluation of
the
management of the issuer; (b) economic evaluation of the
issuer's
industry or industries and an appraisal of speculative-type
risks
which may be inherent in certain areas; (c) evaluation of
the
issuer's products in relation to competition and
customer
acceptance; (d) liquidity; (e) amount and quality of long-
term
debt; (f) trend of earnings over a period of ten years;
(g)
financial strength of parent company and the relationships
which
exist with the issue; and (h) recognition by the
management of
obligations which may be present or may arise as a
result of
public interest questions and preparations to meet
such
obligations.
Short-term obligations, including commercial paper,
rated
A-1+ by IBCA Limited or its affiliate IBCA Inc. are
obligations
supported by the highest capacity for timely
repayment.
Obligations rated A-1 have a very strong capacity for
timely
repayment. Obligations rated A-2 have a strong capacity
for
timely repayment, although such capacity may be
susceptible to
adverse changes in business, economic and financial
conditions.
Thomson BankWatch employs the rating "TBW-1" as its
highest
category, which indicates that the degree of safety
regarding
timely repayment of principal and interest is very
strong.
"TBW-2" is its second highest rating category. While the
degree
of safety regarding timely repayment of principal and
interest is
strong, the relative degree of safety is not as high as
for
issues rated "TBW-1".
Fitch Investors Services, Inc. employs the rating F-
1+ to
indicate issues regarded as having the strongest
degree of
assurance of timely payment. The rating F-1 reflects an
assurance
of timely payment only slightly less in degree than issues
rated
F-1+, while the rating F-2 indicated a satisfactory
degree of
assurance of timely payment although the margin of safety is
not
as great as indicated by the F-1+ and F-1 categories.
Duff & Phelps Inc. employs the designation of Duff 1
with
respect to top grade commercial paper and bank money
instruments.
Duff 1+ indicated the highest certainty of timely
payment:
short-term liquidity is clearly outstanding and safety is
just
below risk-free U.S. Treasury short-term obligations. Duff
1\-
indicates high certainty of timely payment. Duff 2 indicates
good
certainty of timely payment: liquidity factors and
company
fundamentals are sound.
Various NRSROs utilize rankings within ratings
categories
indicated by a + or \-. The Funds, in accordance with
industry
practice, recognize such ratings within categories as
gradations,
viewing for example S&P's rating of A-1+ and A-1 as
being in
S&P's highest rating category.
A-7
Smith Barney
INCOME FUNDS
Premium Total
Return
Fund
Convertible Fund
High Income Fund
Diversified
Strategic Income Fund
Tax-Exempt
Income
Fund
Utilities Fund
Exchange
Reserve
Fund
Statement of
Additional
Information
November 28, 1995
Smith Barney
Income Funds
388 Greenwich Street
New York, New York 10013
SMITH
BARNEY
SMITH BARNEY INCOME FUNDS
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Reports for the
fiscal year ended July 31, 1995 and the reports of
Independent Accountants are incorporated by reference to the
definitive 30b2-1 filed on November 28, 1995 as accession #
91155-95-000435.
(b) Exhibits
All references are to the Registrant's
registration statement on Form N-1A (the "Registration
Statement") as filed with the Securities and Exchange
Commission (the "SEC") on March
13, 1985 (File Nos. 2-96408 and 811-4254).
(1) Registrant's First Amended and Restated Master Trust
Agreement dated November 5, 1993 and Amendment No. 1 to the
Master Trust Agreement dated July 30, 1993 are
incorporated by reference to Post-Effective Amendment
No. 36.
(2) Registrant's By-Laws are incorporated by reference
to the Registration Statement.
(3) Not Applicable.
(4) Registrant's form of stock certificates for Class A,
Class B, Class C and Class Y shares of beneficial interest
in each of its sub-trusts are incorporated by reference to
Post-Effective Amendment No. 34 to the Registration
Statement.
(5) (a) Transfer of Investment Advisory Agreements
between the Registrant and Smith Barney Mutual Funds
Management with respect to Smith Barney Diversified
Strategic Income Fund, Smith Barney Utilities Fund, Smith
Barney Convertible Securities Fund, Smith Barney High
Income Fund, Smith Barney Tax-Exempt Income Fund and
Smith Barney Exchange Reserve Fund are incorporated by
reference to Post-Effective Amendment No. 40.
(b) Investment Advisory Agreement between Registrant
and Smith Barney Strategy Advisers Inc. with respect to
Smith Barney Premium Total Return Fund is incorporated by
reference to Post-Effective Amendment No. 41 to the
Registration Statement.
(c) Sub-Investment Advisory Agreement among the
Registrant, Smith Barney Strategy Advisers, Inc. and
Boston Partners Asset Management, L.P with respect to
Smith Barney Premium Total Return is incorporated by
reference to Post-Effective Amendment No. 41 to the
Registration Statement.
(d) Sub-Investment Advisory Agreement between the
Registrant and Smith Barney Global Capital Management
Inc. with respect to Smith Barney Diversified Strategic
Income Fund is incorporated by reference to Post-
Effective Amendment No. 40.
(6) (a) Distribution Agreement between the Registrant
and Smith Barney Inc. is incorporated by reference to the
Post-Effective Amendment No. 40.
(7) Not Applicable.
(8) Custodian Agreement between the Registrant and PNC
Bank, National Association ("PNC Bank") is incorporated by
reference to Post-Effective Amendment No. 41 to the
Registration Statement.
(9) (a) Administration Agreement between the Registrant
and SBMFM is incorporated by reference to Post-Effective
Amendment No. 40.
(b) Transfer Agency and Registrar Agreement between
the Registrant and First Data Investors Services
Group, Inc., (formerly The Shareholder Services Group,
Inc.), is incorporated by reference to Post-Effective
Amendment No. 40 to the Registration Statement.
(10) Opinion of counsel was filed with Registrant's 24f-
2 Notice on September 29, 1995.
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) Services and Distribution Plans pursuant to Rule 12b-
1 between the Registrant on behalf of Smith Barney
Diversified Strategic Income Fund, Smith Barney
Utilities Fund, Smith Barney Convertible Securities
Fund, Smith Barney High Income Fund, Smith Barney
Premium Total Return Fund, Smith Barney Tax-Exempt
Income Fund and Smith Barney Exchange Reserve Fund
are incorporated by reference to Post-Effective
Amendment No. 40.
(16) Performance Data for Registrant is incorporated by
reference to Post-Effective Amendments No. 14, 15 and 30 to
the Registration Statement filed on September 30, 1988,
December 30, 1988 and January 29, 1992, respectively.
(17) Financial Data Schedule pursuant to Rule 483 of the
Securities Act of 1933 is filed herewith.
(18) Plan pursuant to Rule 18f-3 is incorporated by
reference to Post-Effective Amendment No. 41 to the
Registration Statement.
Item 25 Persons Controlled by or Under Common Control with
Registrant
None.
Item 26 Number of Holders of Securities
(2) (1)
Number of Record Holders by Class
Title of Class as of August 31, 1995
Beneficial Interest par value
$.001 per share Class A Class B Class
C Class Y Class Z
Tax-Exempt Income 8,707 19,336 17
0 N/A
Convertible Securities 4,174 4,593
16 0 N/A
High Income 23,375 28,623 323
1 6
Premium Total Return 40,042 117,576 1,075
0 N/A
Utilities 23,465 121,334 302
0 N/A
Diversified Strategic 14,913 116,852 948
0 N/A
Exchange Reserve N/A 8,471 165
N/A N/A
Item 27 Indemnification
The response to this item is incorporated by reference
to Registrant's Post-Effective Amendment No. 2 to the
Registration Statement.
Item 28(a) Business and Other Connections of
Investment Adviser
Investment Adviser - - Smith Barney Mutual Funds Management
Inc. ("SBMFM")
SBMFM, formerly known as Smith, Barney Advisers, Inc. SBMFM
was incorporated in December 1968 under the laws of the
State of Delaware. SBMFM is a wholly owned subsidiary of
Smith Barney Holdings Inc. ("Holdings") (formerly known
as Smith Barney Shearson Holdings Inc.), which in turn
is a wholly owned subsidiary of Travelers Group Inc.
(formerly known as Primerica Corporation) ("Travelers").
SBMFM is registered as an investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act").
The list required by this Item 28 of officers and
directors of SBMFM together with information as to
any other business, profession, vocation or employment
of a substantial nature engaged in by such officers and
directors during the past two fiscal years, is incorporated
by reference to Schedules A and D of FORM ADV filed by
SBMFM pursuant to the Advisers Act (SEC File No. 801-8314).
Prior to the close of business on November 7, 1994,
Greenwich Street Advisors served as investment adviser.
Greenwich Street Advisors, through its predecessors, has
been in the investment counseling business since 1934 and
is a division of Mutual Management Corp. ("MMC"). MMC was
incorporated in 1978 and is a wholly owned subsidiary of
Holdings, which is in turn a wholly owned subsidiary of
Travelers.
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.
Item 28(a) Business and Other Connections of
Investment Adviser
Investment Adviser - Smith Barney Strategy Advisers
Inc. ("Strategy Advisers")
Strategy Advisers was incorporated on October 22, 1986 under
the laws of the State of Delaware. On June 1, 1994, Strategy
Advisers changed its name from Smith Barney Strategy
Advisers Inc. to its current name. Strategy Advisers is a
wholly owned subsidiary of SBMFM. Strategy Advisers is
registered as an investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act").
Strategy Advisers is also registered with the Commodity
Futures Trading Commission (the "CFTC") as a commodity pool
operator under the Commodity Exchange Act (the "CEA"),
and is a member of the National Futures Association (the
"NFA").
The list required by this Item 28 of officers and
directors of SBMFM and Strategy Advisers, together with
information as to any other business, profession,
vocation or employment of a substantial nature engaged
in by such officers and directors during the past two
years, in incorporated by reference to Schedules A and
D of FORM ADV filed by SBMFM on behalf of Strategy
Advisers pursuant to the Advisers Act (SEC File No. 801-
8314).
Prior to the Close of business on July 30, 1993 (the
"Closing"), Shearson Lehman Investment Strategy Advisors
Inc. ("Shearson Lehman Strategy Advisors"), was a wholly
owned subsidiary of Shearson Lehman Brothers and served
as the Registrant's investment adviser. On the Closing,
Travelers and Smith Barney 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. Information as to
any past business vocation or employment of a substantial
nature engaged in by officers and directors of Shearson
Lehman Investment Strategy Advisors can be located in
Schedules A and D of FORM ADV filed by Shearson Lehman
Investment Strategy Advisors prior to July 30, 1993 (SEC
File No. 801-28715).
Item 28(b) Business and Other Connections of Sub-
Investment Adviser
Sub-Investment Adviser - Boston Partners Asset Management,
L.P. ("Boston Partners")
Boston Partners was organized in April, 1995 under the laws
of the State of Delaware as a Limited Partnership and
provides a comprehensive range of financial products
and services in domestic and selected international
markets. Boston Partners is an investment adviser
registered under the Investment Advisers Act of 1940 (the
"Advisers Act") and provides investment advice to endowment
plans, Taft Hartley Health and Welfare Plans, VEBAS and
institutional clients. It also serves as investment adviser
and sub-investment adviser to other investment companies.
The list required by this Item 28 of officers and
directors of Boston Partners, 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 Partners pursuant to the Advisers Act (SEC
File No. 801-49059).
Item 28(b) Business and Other Connections of Sub-
Investment Adviser
Sub-Investment Adviser - Smith Barney Global Capital
Management Inc. ("SBGCM")
SBGCM was incorporated on January 22, 1988 under the laws of
the State of Delaware. SBGCM is an indirect wholly owned
subsidiary of Holdings 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).
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") also acts as principal
underwriter for Smith Barney Money Funds, Inc.; Smith Barney
Muni Funds; Smith Barney Funds, Inc., Smith Barney Variable
Account Funds; Smith Barney Intermediate Municipal Fund,
Inc., Smith Barney Municipal Fund, Inc., High Income
Opportunity Fund Inc., Smith Barney/Travelers Series Fund
Inc., Smith Barney World Funds, Inc., Greenwich Street
California Municipal Fund Inc., The Inefficient Fund, Inc.,
Smith Barney Adjustable Rate Government Income Fund, Smith
Barney Equity Funds, Smith Barney Income Funds, Smith Barney
Massachusetts Municipals Fund, Zenix Income Fund Inc., Smith
Barney Arizona Municipals Fund Inc., Smith Barney Principal
Return Fund, Municipal High Income Fund Inc., The Trust for
TRAK Investments, Smith Barney Series Fund, Smith Barney
Income Trust, Smith Barney Oregon Municipals Fund Inc.,
Smith Barney Municipal Money Market Fund, Inc., Smith Barney
Aggressive Growth Fund Inc., Smith Barney Appreciation Fund
Inc., Smith Barney California Municipals Fund Inc., Smith
Barney Fundamental Value Fund Inc., Smith Barney Managed
Governments Fund Inc., Smith Barney Managed Municipals Fund
Inc., Smith Barney New York Municipals Fund Inc., Smith
Barney New Jersey Municipals Fund Inc., Smith Barney
Precious Metals and Minerals Fund Inc., Smith Barney
Investment Funds Inc., Smith Barney FMA Trust, The Italy
Fund Inc., Smith Barney Telecommunications Trust, Managed
Municipals Portfolio Inc., Managed Municipals Portfolio II
Inc., Smith Barney Florida Municipal Fund, Managed High
Income Portfolio Inc. 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).
Item 30 Location of Accounts and Records
(1) Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Income Funds
388 Greenwich Street
New York, New York 10013
(3) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(4) Boston Partners Asset Management, L.P.
One Financial Center
43rd floor
Boston, Massachusetts 02111
(5) Smith Barney Global Capital Management Inc.
10 Piccadilly
London W1V 9LA
England
(6) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA 19103
(7) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31 Management Services
Not Applicable.
Item 32 Undertakings
(a) The 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) of
the 1940 Act relating to communications with the
shareholders of certain common-law trusts.
(b) The Registrant hereby undertakes to furnish each
person to whom a prospectus is delivered with a copy of the
Registrant's latest annual report to shareholders upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, as amended, and the Investment Company Act of 1940,
as amended, the Registrant, SMITH BARNEY INCOME FUNDS, has
duly caused this Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto
duly authorized, all in the City of New York, State of New
York on the 28th day of November, 1995.
SMITH BARNEY INCOME FUNDS
By: /s/ Heath B.
McLendon*
Heath B.
McLendon, Chairman of the Board
Pursuant to the requirements of the Securities Act of
1933, as amended, this Post-Effective Amendment to the
Registration Statement has been signed below by the
following persons in the capacities and on the dates
indicated.
Signature Title Date
/s/ Heath B. McLendon* Chairman of the
Board 11/28/95
Heath B. McLendon (Chief Executive
Officer)
/s/ Lewis E. Daidone* Senior Vice
President and 11/28/95
Lewis E. Daidone Treasurer (Chief
Financial
and Accounting
Officer)
/s/ Lee Abraham* Trustee
11/28/95
Lee Abraham
/s/ Antoinette C. Bentley* Trustee
11/28/95
Antoinette C. Bentley
/s/ Allan J. Bloostein* Trustee
11/28/95
Allan J. Bloostein
/s/ Madelon Devoe-Talley* Trustee
11/28/95
Madelon Devoe-Talley
/s/ Richard E. Hanson* Trustee
11/28/95
Richard E. Hanson
* Signed by Lee. D. Augsburger, their duly
authorized attorney-in-fact, pursuant to power of attorney
dated September 8, 1994.
/s/ Lee D. Augsburger
Lee D. Augsburger
EXHIBITS
Exhibit No. Description of Exhibits
Consent of Auditors
Financial Data Schedule
Cover Letter to SEC
Independent Auditors' Consent
To the Shareholders and Trustees of the
Smith Barney Income Funds:
We consent to the use of our reports with respect to the
Smith Barney Income Funds summarized below and
incorporated herein by reference, and to the reference to
our Firm under the headings "Financial Highlights" in the
Prospectus and "Counsel and Auditors" in the Statement of
Additional Information of the respective Funds.
Date of
Fund Auditors'
Report
Smith Barney Convertible Fund September 22,
1995
Smith Barney Diversified Strategic Income FundSept
ember 25, 1995
Smith Barney Exchange Reserve Fund September 22,
1995
Smith Barney High Income Fund September 22,
1995
Smith Barney Premium Total Return Fund September 20,
1995
Smith Barney Tax-Exempt Income Fund September 22,
1995
Smith Barney Utilities Fund September 22,
1995
KPMG PEAT MARWICK
LLP
New York, New York
November 28, 1995
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY CONVERTIBLE
FUND
<NUMBER>
<NAME> CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 78,394,026
<INVESTMENTS-AT VALUE> 80,817,475
<RECEIVABLES> 491,512
<ASSETS-OTHER> 776
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 81,309,763
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 465,072
<TOTAL-LIABILITIES> 465,072
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 83,535,146
<SHARES-COMMON-STOCK> 2,307,449
<SHARES-COMMON-PRIOR> 157,572
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5,113,904)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,423,449
<NET-ASSETS> 80,844,691
<DIVIDEND-INCOME> 2,687,447
<INTEREST-INCOME> 2,611,765
<OTHER-INCOME> 0
<EXPENSES-NET> (1,388,960)
<NET-INVESTMENT-INCOME> 3,910,252
<REALIZED-GAINS-CURRENT> 1,064,918
<APPREC-INCREASE-CURRENT> 2,491,224
<NET-CHANGE-FROM-OPS> 7,466,394
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,640,182)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,416,840
<NUMBER-OF-SHARES-REDEEMED> (361,719)
<SHARES-REINVESTED> 94,756
<NET-CHANGE-IN-ASSETS> (6,639,198)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (65,206)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> (415,666)
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> (1,388,960)
<AVERAGE-NET-ASSETS> 30,139,508
<PER-SHARE-NAV-BEGIN> 14.56
<PER-SHARE-NII> 0.74
<PER-SHARE-GAIN-APPREC> 0.70
<PER-SHARE-DIVIDEND> (0.73)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.27
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY CONVERTIBLE
FUND
[NUMBER]
<NAME> CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 78,394,026
<INVESTMENTS-AT VALUE> 80,817,475
[RECEIVABLES] 491,512
[ASSETS-OTHER] 776
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 81,309,763
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 465,072
[TOTAL-LIABILITIES] 465,072
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 83,535,146
[SHARES-COMMON-STOCK] 2,980,473
[SHARES-COMMON-PRIOR] 5,850,908
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (5,113,904)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 2,423,449
[NET-ASSETS] 80,844,691
[DIVIDEND-INCOME] 2,687,447
[INTEREST-INCOME] 2,611,765
[OTHER-INCOME] 0
[EXPENSES-NET] (1,388,960)
[NET-INVESTMENT-INCOME] 3,910,252
[REALIZED-GAINS-CURRENT] 1,064,918
[APPREC-INCREASE-CURRENT] 2,491,224
[NET-CHANGE-FROM-OPS] 7,466,394
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (2,237,554)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 260,183
[NUMBER-OF-SHARES-REDEEMED] 3,252,464
[SHARES-REINVESTED] 121,846
[NET-CHANGE-IN-ASSETS] (6,639,198)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (65,206)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (415,666)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (1,388,960)
[AVERAGE-NET-ASSETS] 51,020,560
[PER-SHARE-NAV-BEGIN] 14.56
[PER-SHARE-NII] 0.67
[PER-SHARE-GAIN-APPREC] 0.70
[PER-SHARE-DIVIDEND] (0.66)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 15.27
[EXPENSE-RATIO] 1.90
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY CONVERTIBLE
FUND
[NUMBER]
<NAME> CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 78,394,026
<INVESTMENTS-AT VALUE> 80,817,475
[RECEIVABLES] 491,512
[ASSETS-OTHER] 776
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 81,309,763
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 465,072
[TOTAL-LIABILITIES] 465,072
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 83,535,146
[SHARES-COMMON-STOCK] 5,401
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (5,113,904)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 2,423,449
[NET-ASSETS] 80,844,691
[DIVIDEND-INCOME] 2,687,447
[INTEREST-INCOME] 2,611,765
[OTHER-INCOME] 0
[EXPENSES-NET] (1,388,960)
[NET-INVESTMENT-INCOME] 3,910,252
[REALIZED-GAINS-CURRENT] 1,064,918
[APPREC-INCREASE-CURRENT] 2,491,224
[NET-CHANGE-FROM-OPS] 7,466,394
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (1,864)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 5,273
[NUMBER-OF-SHARES-REDEEMED] 0
[SHARES-REINVESTED] 128
[NET-CHANGE-IN-ASSETS] (6,639,198)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (65,206)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (415,666)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (1,388,960)
[AVERAGE-NET-ASSETS] 39,876
[PER-SHARE-NAV-BEGIN] 14.09
[PER-SHARE-NII] 0.50
[PER-SHARE-GAIN-APPREC] 1.17
[PER-SHARE-DIVIDEND] (0.49)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 15.27
[EXPENSE-RATIO] 1.87
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> DIVERSIFIED STRATEGIC
INCOME FUND
[NUMBER]
<NAME> CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 2,450,327,276
<INVESTMENTS-AT VALUE> 2,500,596,019
[RECEIVABLES] 66,580,069
[ASSETS-OTHER] 24,477,421
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2,591,653,509
[PAYABLE-FOR-SECURITIES] 2,301,909
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 18,244,543
[TOTAL-LIABILITIES] 20,546,452
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 2,638,238,337
[SHARES-COMMON-STOCK] 22,583,437
[SHARES-COMMON-PRIOR] 9,791,914
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (11,805,103)
[ACCUMULATED-NET-GAINS] (102,365,054)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 47,038,877
[NET-ASSETS] 2,571,107,057
[DIVIDEND-INCOME] 3,400,131
[INTEREST-INCOME] 229,128,830
[OTHER-INCOME] 0
[EXPENSES-NET] (38,186,894)
[NET-INVESTMENT-INCOME] 194,342,067
[REALIZED-GAINS-CURRENT] (120,060,362)
[APPREC-INCREASE-CURRENT] 158,509,479
[NET-CHANGE-FROM-OPS] 232,791,184
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (9,466,456)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (3,836,792)
[NUMBER-OF-SHARES-SOLD] 16,995,643
[NUMBER-OF-SHARES-REDEEMED] (5,260,464)
[SHARES-REINVESTED] 1,056,344
[NET-CHANGE-IN-ASSETS] (13,549,391)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (40,386,368)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (11,112,553)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (39,421,622)
[AVERAGE-NET-ASSETS] 152,436,339
[PER-SHARE-NAV-BEGIN] 7.76
[PER-SHARE-NII] 0.94
[PER-SHARE-GAIN-APPREC] (0.18)
[PER-SHARE-DIVIDEND] (0.48)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (0.19)
[PER-SHARE-NAV-END] 7.85
[EXPENSE-RATIO] 1.09
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> DIVERSIFIED STRATEGIC
INCOME FUND
[NUMBER]
<NAME> CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 2,450,327,276
<INVESTMENTS-AT VALUE> 2,500,596,019
[RECEIVABLES] 66,580,069
[ASSETS-OTHER] 24,477,421
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2,591,653,509
[PAYABLE-FOR-SECURITIES] 2,301,909
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 18,244,543
[TOTAL-LIABILITIES] 20,546,452
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 2,638,238,337
[SHARES-COMMON-STOCK] 301,043,025
[SHARES-COMMON-PRIOR] 318,021,578
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (11,805,103)
[ACCUMULATED-NET-GAINS] (102,365,054)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 47,038,877
[NET-ASSETS] 2,571,107,057
[DIVIDEND-INCOME] 3,400,131
[INTEREST-INCOME] 229,128,830
[OTHER-INCOME] 0
[EXPENSES-NET] (38,186,894)
[NET-INVESTMENT-INCOME] 194,342,067
[REALIZED-GAINS-CURRENT] (120,060,362)
[APPREC-INCREASE-CURRENT] 158,509,479
[NET-CHANGE-FROM-OPS] 232,791,184
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (133,448,941)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (54,087,385)
[NUMBER-OF-SHARES-SOLD] 37,672,470
[NUMBER-OF-SHARES-REDEEMED] (68,658,784)
[SHARES-REINVESTED] 14,007,761
[NET-CHANGE-IN-ASSETS] (13,549,391)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (40,386,368)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (11,112,553)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (39,421,622)
[AVERAGE-NET-ASSETS] 2,326,387,934
[PER-SHARE-NAV-BEGIN] 7.76
[PER-SHARE-NII] 0.70
[PER-SHARE-GAIN-APPREC] 0.02
[PER-SHARE-DIVIDEND] (0.44)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (0.18)
[PER-SHARE-NAV-END] 7.86
[EXPENSE-RATIO] 1.56
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME
FUNDS, INC.
<SERIES> DIVERSIFIED STRATEGIC
INCOME FUND
[NUMBER]
<NAME> CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 2,450,327,276
<INVESTMENTS-AT VALUE> 2,500,596,019
[RECEIVABLES] 66,580,069
[ASSETS-OTHER] 24,477,421
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2,591,653,509
[PAYABLE-FOR-SECURITIES] 2,301,909
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 18,244,543
[TOTAL-LIABILITIES] 20,546,452
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 2,638,238,337
[SHARES-COMMON-STOCK] 1,623,067
[SHARES-COMMON-PRIOR] 137,173
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (11,805,103)
[ACCUMULATED-NET-GAINS] (102,365,054)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 47,038,877
[NET-ASSETS] 2,571,107,057
[DIVIDEND-INCOME] 3,400,131
[INTEREST-INCOME] 229,128,830
[OTHER-INCOME] 0
[EXPENSES-NET] (38,186,894)
[NET-INVESTMENT-INCOME] 194,342,067
[REALIZED-GAINS-CURRENT] (120,060,362)
[APPREC-INCREASE-CURRENT] 158,509,479
[NET-CHANGE-FROM-OPS] 232,791,184
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (271,521)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (110,049)
[NUMBER-OF-SHARES-SOLD] 1,589,260
[NUMBER-OF-SHARES-REDEEMED] (143,121)
[SHARES-REINVESTED] 39,755
[NET-CHANGE-IN-ASSETS] (13,549,391)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (40,386,368)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (11,112,553)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (39,421,622)
[AVERAGE-NET-ASSETS] 4,829,687
[PER-SHARE-NAV-BEGIN] 7.76
[PER-SHARE-NII] 1.16
[PER-SHARE-GAIN-APPREC] (0.46)
[PER-SHARE-DIVIDEND] (0.44)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (0.18)
[PER-SHARE-NAV-END] 7.84
[EXPENSE-RATIO] 1.46
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> DIVERSIFIED STRATEGIC
INCOME FUND
[NUMBER]
<NAME> CLASS Z
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 2,450,327,276
<INVESTMENTS-AT VALUE> 2,500,596,019
[RECEIVABLES] 66,580,069
[ASSETS-OTHER] 24,477,421
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2,591,653,509
[PAYABLE-FOR-SECURITIES] 2,301,909
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 18,244,543
[TOTAL-LIABILITIES] 20,546,452
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 2,638,238,337
[SHARES-COMMON-STOCK] 1,829,176
[SHARES-COMMON-PRIOR] 1,488,000
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (11,805,103)
[ACCUMULATED-NET-GAINS] (102,365,054)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 47,038,877
[NET-ASSETS] 2,571,107,057
[DIVIDEND-INCOME] 3,400,131
[INTEREST-INCOME] 229,128,830
[OTHER-INCOME] 0
[EXPENSES-NET] (38,186,894)
[NET-INVESTMENT-INCOME] 194,342,067
[REALIZED-GAINS-CURRENT] (120,060,362)
[APPREC-INCREASE-CURRENT] 158,509,479
[NET-CHANGE-FROM-OPS] 232,791,184
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (821,080)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (332,787)
[NUMBER-OF-SHARES-SOLD] 489,667
[NUMBER-OF-SHARES-REDEEMED] (298,158)
[SHARES-REINVESTED] 149,667
[NET-CHANGE-IN-ASSETS] (13,549,391)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (40,386,368)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (11,112,553)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (39,421,622)
[AVERAGE-NET-ASSETS] 12,696,324
[PER-SHARE-NAV-BEGIN] 7.76
[PER-SHARE-NII] 0.84
[PER-SHARE-GAIN-APPREC] (0.06)
[PER-SHARE-DIVIDEND] (0.49)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (0.20)
[PER-SHARE-NAV-END] 7.85
[EXPENSE-RATIO] 0.75
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME
FUNDS, INC.
<SERIES> EXCHANGE RESERVE FUND
[NUMBER]
<NAME> CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 163,911,048
<INVESTMENTS-AT VALUE> 163,911,048
[RECEIVABLES] 201,767
[ASSETS-OTHER] 197
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 164,113,012
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 830,722
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 163,353,543
[SHARES-COMMON-STOCK] 163,353,543
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (71,253)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 163,282,290
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 10,224,829
[OTHER-INCOME] 0
[EXPENSES-NET] (2,271,647)
[NET-INVESTMENT-INCOME] 7,953,182
[REALIZED-GAINS-CURRENT] (36,423)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 7,989,605
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (7,953,182)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 394,980,881
[NUMBER-OF-SHARES-REDEEMED] (491,181,738)
[SHARES-REINVESTED] 7,200,684
[NET-CHANGE-IN-ASSETS] (88,963,750)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (547,990)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (2,271,647)
[AVERAGE-NET-ASSETS] 180,445,406
[PER-SHARE-NAV-BEGIN] 1.000
[PER-SHARE-NII] 0.044
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] (0.044)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.000
[EXPENSE-RATIO] 1.24
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME
FUNDS, INC.
<SERIES> EXCHANGE RESERVE FUND
[NUMBER]
<NAME> CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 163,911,048
<INVESTMENTS-AT VALUE> 163,911,048
[RECEIVABLES] 201,767
[ASSETS-OTHER] 197
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 164,113,012
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 0
[TOTAL-LIABILITIES] 830,722
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 163,353,543
[SHARES-COMMON-STOCK] 163,353,543
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (71,253)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 0
[NET-ASSETS] 163,282,290
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 10,224,829
[OTHER-INCOME] 0
[EXPENSES-NET] (2,271,647)
[NET-INVESTMENT-INCOME] 7,953,182
[REALIZED-GAINS-CURRENT] (36,423)
[APPREC-INCREASE-CURRENT] 0
[NET-CHANGE-FROM-OPS] 7,989,605
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (7,953,182)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 394,980,881
[NUMBER-OF-SHARES-REDEEMED] (491,181,738)
[SHARES-REINVESTED] 7,200,684
[NET-CHANGE-IN-ASSETS] (88,963,750)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (547,990)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (2,271,647)
[AVERAGE-NET-ASSETS] 2,948,889
[PER-SHARE-NAV-BEGIN] 1.000
[PER-SHARE-NII] 0.035
[PER-SHARE-GAIN-APPREC] 0
[PER-SHARE-DIVIDEND] (0.035)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 1.000
[EXPENSE-RATIO] 1.21
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY HIGH INCOME
FUND
[NUMBER]
<NAME> CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 795,578,556
<INVESTMENTS-AT VALUE> 807,266,462
[RECEIVABLES] 15,769,585
[ASSETS-OTHER] 1,340
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 829,320,952
[PAYABLE-FOR-SECURITIES] 5,255,014
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2,441,310
[TOTAL-LIABILITIES] 7,696,324
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,057,839,630
[SHARES-COMMON-STOCK] 28,531,134
[SHARES-COMMON-PRIOR] 20,045,330
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (61,531)
[ACCUMULATED-NET-GAINS] (247,843,285)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 11,689,814
[NET-ASSETS] 821,624,628
[DIVIDEND-INCOME] 3,236,607
[INTEREST-INCOME] 79,116,032
[OTHER-INCOME] 0
[EXPENSES-NET] (10,395,587)
[NET-INVESTMENT-INCOME] 71,957,052
[REALIZED-GAINS-CURRENT] (41,846,542)
[APPREC-INCREASE-CURRENT] 42,592,053
[NET-CHANGE-FROM-OPS] 72,702,563
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (28,301,269)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (2,049,680)
[NUMBER-OF-SHARES-SOLD] 12,886,749
[NUMBER-OF-SHARES-REDEEMED] (6,015,698)
[SHARES-REINVESTED] 1,614,753
[NET-CHANGE-IN-ASSETS] 76,967,757
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,710,484)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,706,659
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (10,395,587)
[AVERAGE-NET-ASSETS] 288,279,679
[PER-SHARE-NAV-BEGIN] 11.16
[PER-SHARE-NII] 1.08
[PER-SHARE-GAIN-APPREC] (0.02)
[PER-SHARE-DIVIDEND] (1.05)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (0.07)
[PER-SHARE-NAV-END] 11.10
[EXPENSE-RATIO] 1.11
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY HIGH INCOME
FUND
[NUMBER]
<NAME> CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 795,578,556
<INVESTMENTS-AT VALUE> 807,266,462
[RECEIVABLES] 15,769,585
[ASSETS-OTHER] 1,340
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 829,320,952
[PAYABLE-FOR-SECURITIES] 5,255,014
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2,441,310
[TOTAL-LIABILITIES] 7,696,324
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,057,839,630
[SHARES-COMMON-STOCK] 43,080,844
[SHARES-COMMON-PRIOR] 45,660,599
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (61,531)
[ACCUMULATED-NET-GAINS] (247,843,285)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 11,689,814
[NET-ASSETS] 821,624,628
[DIVIDEND-INCOME] 3,236,607
[INTEREST-INCOME] 79,116,032
[OTHER-INCOME] 0
[EXPENSES-NET] (10,395,587)
[NET-INVESTMENT-INCOME] 71,957,052
[REALIZED-GAINS-CURRENT] (41,846,542)
[APPREC-INCREASE-CURRENT] 42,592,053
[NET-CHANGE-FROM-OPS] 72,702,563
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (39,634,611)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (2,876,181)
[NUMBER-OF-SHARES-SOLD] 11,842,820
[NUMBER-OF-SHARES-REDEEMED] (16,367,117)
[SHARES-REINVESTED] 1,944,542
[NET-CHANGE-IN-ASSETS] 76,967,757
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,710,484)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,706,659
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (10,395,587)
[AVERAGE-NET-ASSETS] 438,204,667
[PER-SHARE-NAV-BEGIN] 11.16
[PER-SHARE-NII] 1.03
[PER-SHARE-GAIN-APPREC] (0.02)
[PER-SHARE-DIVIDEND] (0.99)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (0.07)
[PER-SHARE-NAV-END] 11.11
[EXPENSE-RATIO] 1.61
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY HIGH INCOME
FUND
[NUMBER]
<NAME> CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 795,578,556
<INVESTMENTS-AT VALUE> 807,266,462
[RECEIVABLES] 15,769,585
[ASSETS-OTHER] 1,340
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 829,320,952
[PAYABLE-FOR-SECURITIES] 5,255,014
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2,441,310
[TOTAL-LIABILITIES] 7,696,324
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,057,839,630
[SHARES-COMMON-STOCK] 541,014
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (61,531)
[ACCUMULATED-NET-GAINS] (247,843,285)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 11,689,814
[NET-ASSETS] 821,624,628
[DIVIDEND-INCOME] 3,236,607
[INTEREST-INCOME] 79,116,032
[OTHER-INCOME] 0
[EXPENSES-NET] (10,395,587)
[NET-INVESTMENT-INCOME] 71,957,052
[REALIZED-GAINS-CURRENT] (41,846,542)
[APPREC-INCREASE-CURRENT] 42,592,053
[NET-CHANGE-FROM-OPS] 72,702,563
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (168,488)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (6,733)
[NUMBER-OF-SHARES-SOLD] 619,375
[NUMBER-OF-SHARES-REDEEMED] (88,693)
[SHARES-REINVESTED] 10,332
[NET-CHANGE-IN-ASSETS] 76,967,757
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,710,484)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,706,659
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (10,395,587)
[AVERAGE-NET-ASSETS] 1,731,787
[PER-SHARE-NAV-BEGIN] 10.90
[PER-SHARE-NII] 0.95
[PER-SHARE-GAIN-APPREC] 0.23
[PER-SHARE-DIVIDEND] (0.90)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (0.07)
[PER-SHARE-NAV-END] 11.11
[EXPENSE-RATIO] 1.56
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY HIGH INCOME
FUND
[NUMBER]
<NAME> CLASS Y
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 795,578,556
<INVESTMENTS-AT VALUE> 807,266,462
[RECEIVABLES] 15,769,585
[ASSETS-OTHER] 1,340
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 829,320,952
[PAYABLE-FOR-SECURITIES] 5,255,014
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2,441,310
[TOTAL-LIABILITIES] 7,696,324
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,057,839,630
[SHARES-COMMON-STOCK] 928,254
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (61,531)
[ACCUMULATED-NET-GAINS] (247,843,285)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 11,689,814
[NET-ASSETS] 821,624,628
[DIVIDEND-INCOME] 3,236,607
[INTEREST-INCOME] 79,116,032
[OTHER-INCOME] 0
[EXPENSES-NET] (10,395,587)
[NET-INVESTMENT-INCOME] 71,957,052
[REALIZED-GAINS-CURRENT] (41,846,542)
[APPREC-INCREASE-CURRENT] 42,592,053
[NET-CHANGE-FROM-OPS] 72,702,563
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (132,628)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,388,740
[NUMBER-OF-SHARES-REDEEMED] (468,452)
[SHARES-REINVESTED] 7,966
[NET-CHANGE-IN-ASSETS] 76,967,757
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,710,484)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,706,659
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (10,395,587)
[AVERAGE-NET-ASSETS] 964,791
[PER-SHARE-NAV-BEGIN] 10.88
[PER-SHARE-NII] 0.09
[PER-SHARE-GAIN-APPREC] 0.23
[PER-SHARE-DIVIDEND] (0.03)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (0.07)
[PER-SHARE-NAV-END] 11.10
[EXPENSE-RATIO] 0.86
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY HIGH INCOME
FUND
[NUMBER]
<NAME> CLASS Z
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 795,578,556
<INVESTMENTS-AT VALUE> 807,266,462
[RECEIVABLES] 15,769,585
[ASSETS-OTHER] 1,340
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 829,320,952
[PAYABLE-FOR-SECURITIES] 5,255,014
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 2,441,310
[TOTAL-LIABILITIES] 7,696,324
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,057,839,630
[SHARES-COMMON-STOCK] 893,841
[SHARES-COMMON-PRIOR] 1,018,864
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (61,531)
[ACCUMULATED-NET-GAINS] (247,843,285)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 11,689,814
[NET-ASSETS] 821,624,628
[DIVIDEND-INCOME] 3,236,607
[INTEREST-INCOME] 79,116,032
[OTHER-INCOME] 0
[EXPENSES-NET] (10,395,587)
[NET-INVESTMENT-INCOME] 71,957,052
[REALIZED-GAINS-CURRENT] (41,846,542)
[APPREC-INCREASE-CURRENT] 42,592,053
[NET-CHANGE-FROM-OPS] 72,702,563
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (561,392)
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] (69,553)
[NUMBER-OF-SHARES-SOLD] 21,215
[NUMBER-OF-SHARES-REDEEMED] (247,365)
[SHARES-REINVESTED] 101,127
[NET-CHANGE-IN-ASSETS] 76,967,757
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,710,484)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,706,659
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (10,395,587)
[AVERAGE-NET-ASSETS] 10,220,848
[PER-SHARE-NAV-BEGIN] 11.16
[PER-SHARE-NII] 1.11
[PER-SHARE-GAIN-APPREC] (0.03)
[PER-SHARE-DIVIDEND] (1.08)
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] (0.03)
[PER-SHARE-NAV-END] 11.09
[EXPENSE-RATIO] 0.86
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> PREMIUM TOTAL RETURN FUND
[NUMBER]
<NAME> CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 1,841,977,803
<INVESTMENTS-AT VALUE> 2,190,098,795
[RECEIVABLES] 7,747,749
[ASSETS-OTHER] 564
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2,197,847,108
[PAYABLE-FOR-SECURITIES] 2,490,888
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 55,681,040
[TOTAL-LIABILITIES] 58,171,928
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,822,637,249
[SHARES-COMMON-STOCK] 28,881,893
[SHARES-COMMON-PRIOR] 4,314,437
[ACCUMULATED-NII-CURRENT] 319,650
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1,213,739)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 317,932,020
[NET-ASSETS] 2,139,675,180
[DIVIDEND-INCOME] 52,831,151
[INTEREST-INCOME] 23,654,202
[OTHER-INCOME] 0
[EXPENSES-NET] (30,046,737)
[NET-INVESTMENT-INCOME] 46,438,616
[REALIZED-GAINS-CURRENT] 32,038,891
[APPREC-INCREASE-CURRENT] 155,800,233
[NET-CHANGE-FROM-OPS] 234,277,740
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (9,907,329)
[DISTRIBUTIONS-OF-GAINS] (3,969,718)
[DISTRIBUTIONS-OTHER] (20,052,162)
[NUMBER-OF-SHARES-SOLD] 26,713,759
[NUMBER-OF-SHARES-REDEEMED] (3,846,700)
[SHARES-REINVESTED] 1,700,397
[NET-CHANGE-IN-ASSETS] 372,704,754
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,338,819)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 10,627,086
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (30,046,737)
[AVERAGE-NET-ASSETS] 394,157,418
[PER-SHARE-NAV-BEGIN] 15.69
[PER-SHARE-NII] 0.44
[PER-SHARE-GAIN-APPREC] 1.48
[PER-SHARE-DIVIDEND] (0.43)
[PER-SHARE-DISTRIBUTIONS] (0.14)
[RETURNS-OF-CAPITAL] (0.71)
[PER-SHARE-NAV-END] 16.33
[EXPENSE-RATIO] 1.16
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> PREMIUM TOTAL RETURN FUND
[NUMBER]
<NAME> CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 1,841,977,803
<INVESTMENTS-AT VALUE> 2,190,098,795
[RECEIVABLES] 7,747,749
[ASSETS-OTHER] 564
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2,197,847,108
[PAYABLE-FOR-SECURITIES] 2,490,888
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 55,681,040
[TOTAL-LIABILITIES] 58,171,928
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,822,637,249
[SHARES-COMMON-STOCK] 101,367,578
[SHARES-COMMON-PRIOR] 108,175,921
[ACCUMULATED-NII-CURRENT] 319,650
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1,213,739)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 317,932,020
[NET-ASSETS] 2,139,675,180
[DIVIDEND-INCOME] 52,831,151
[INTEREST-INCOME] 23,654,202
[OTHER-INCOME] 0
[EXPENSES-NET] (30,046,737)
[NET-INVESTMENT-INCOME] 46,438,616
[REALIZED-GAINS-CURRENT] 32,038,891
[APPREC-INCREASE-CURRENT] 155,800,233
[NET-CHANGE-FROM-OPS] 234,277,740
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (33,772,929)
[DISTRIBUTIONS-OF-GAINS] (13,532,304)
[DISTRIBUTIONS-OTHER] (68,355,484)
[NUMBER-OF-SHARES-SOLD] 24,240,345
[NUMBER-OF-SHARES-REDEEMED] (36,520,145)
[SHARES-REINVESTED] 5,471,457
[NET-CHANGE-IN-ASSETS] 372,704,754
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,338,819)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (10,627,086)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (30,046,737)
[AVERAGE-NET-ASSETS] 1,525,121,049
[PER-SHARE-NAV-BEGIN] 15.69
[PER-SHARE-NII] 0.36
[PER-SHARE-GAIN-APPREC] 1.48
[PER-SHARE-DIVIDEND] (0.34)
[PER-SHARE-DISTRIBUTIONS] (0.14)
[RETURNS-OF-CAPITAL] (0.72)
[PER-SHARE-NAV-END] 16.33
[EXPENSE-RATIO] 1.66
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> PREMIUM TOTAL RETURN FUND
[NUMBER]
<NAME> CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 1,841,977,803
<INVESTMENTS-AT VALUE> 2,190,098,795
[RECEIVABLES] 7,747,749
[ASSETS-OTHER] 564
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2,197,847,108
[PAYABLE-FOR-SECURITIES] 2,490,888
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 55,681,040
[TOTAL-LIABILITIES] 58,171,928
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,822,637,249
[SHARES-COMMON-STOCK] 792,180
[SHARES-COMMON-PRIOR] 119,667
[ACCUMULATED-NII-CURRENT] 319,650
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (1,213,739)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 317,932,020
[NET-ASSETS] 2,139,675,180
[DIVIDEND-INCOME] 52,831,151
[INTEREST-INCOME] 23,654,202
[OTHER-INCOME] 0
[EXPENSES-NET] (30,046,737)
[NET-INVESTMENT-INCOME] 46,438,616
[REALIZED-GAINS-CURRENT] 32,038,891
[APPREC-INCREASE-CURRENT] 155,800,233
[NET-CHANGE-FROM-OPS] 234,277,740
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (140,062)
[DISTRIBUTIONS-OF-GAINS] (56,121)
[DISTRIBUTIONS-OTHER] (283,482)
[NUMBER-OF-SHARES-SOLD] 817,749
[NUMBER-OF-SHARES-REDEEMED] (172,141)
[SHARES-REINVESTED] 26,905
[NET-CHANGE-IN-ASSETS] 372,704,754
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,338,819)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 10,627,086
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (30,046,737)
[AVERAGE-NET-ASSETS] 6,135,489
[PER-SHARE-NAV-BEGIN] 15.69
[PER-SHARE-NII] 0.36
[PER-SHARE-GAIN-APPREC] 1.48
[PER-SHARE-DIVIDEND] (0.35)
[PER-SHARE-DISTRIBUTIONS] (0.14)
[RETURNS-OF-CAPITAL] (0.71)
[PER-SHARE-NAV-END] 16.33
[EXPENSE-RATIO] 1.62
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY TAX-EXEMPT
INCOME
FUND
[NUMBER]
<NAME> CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 940,765,340
<INVESTMENTS-AT VALUE> 967,224,143
[RECEIVABLES] 22,434,517
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 989,658,660
[PAYABLE-FOR-SECURITIES] 2,437,450
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 12,729,834
[TOTAL-LIABILITIES] 15,167,284
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 955,831,180
[SHARES-COMMON-STOCK] 13,777,081
[SHARES-COMMON-PRIOR] 1,031,069
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (7,798,607)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 26,458,803
[NET-ASSETS] 974,491,376
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 69,997,436
[OTHER-INCOME] 0
[EXPENSES-NET] (12,479,882)
[NET-INVESTMENT-INCOME] 57,517,554
[REALIZED-GAINS-CURRENT] (7,798,607)
[APPREC-INCREASE-CURRENT] 5,121,672
[NET-CHANGE-FROM-OPS] 54,840,619
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (12,780,874)
[DISTRIBUTIONS-OF-GAINS] (287,506)
[DISTRIBUTIONS-OTHER] (534,498)
[NUMBER-OF-SHARES-SOLD] 15,203,943
[NUMBER-OF-SHARES-REDEEMED] (2,943,568)
[SHARES-REINVESTED] 485,637
[NET-CHANGE-IN-ASSETS] (112,767,485)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,372,244)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (4,033,479)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (12,479,882)
[AVERAGE-NET-ASSETS] 218,541,690
[PER-SHARE-NAV-BEGIN] 17.26
[PER-SHARE-NII] 1.04
[PER-SHARE-GAIN-APPREC] 0.01
[PER-SHARE-DIVIDEND] (1.00)
[PER-SHARE-DISTRIBUTIONS] (0.02)
[RETURNS-OF-CAPITAL] (0.04)
[PER-SHARE-NAV-END] 17.25
[EXPENSE-RATIO] 0.84
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY TAX-EXEMPT
INCOME
FUND
[NUMBER]
<NAME> CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 940,765,340
<INVESTMENTS-AT VALUE> 967,224,143
[RECEIVABLES] 22,434,517
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 989,658,660
[PAYABLE-FOR-SECURITIES] 2,437,450
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 12,729,834
[TOTAL-LIABILITIES] 15,167,284
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 955,831,180
[SHARES-COMMON-STOCK] 42,684,958
[SHARES-COMMON-PRIOR] 29,938,946
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (7,798,607)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 26,458,803
[NET-ASSETS] 974,491,376
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 69,997,436
[OTHER-INCOME] 0
[EXPENSES-NET] (12,479,882)
[NET-INVESTMENT-INCOME] 57,517,554
[REALIZED-GAINS-CURRENT] (7,798,607)
[APPREC-INCREASE-CURRENT] 5,121,672
[NET-CHANGE-FROM-OPS] 54,840,619
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (42,360,210)
[DISTRIBUTIONS-OF-GAINS] (891,880)
[DISTRIBUTIONS-OTHER] (1,634,513)
[NUMBER-OF-SHARES-SOLD] 2,897,328
[NUMBER-OF-SHARES-REDEEMED] (23,643,756)
[SHARES-REINVESTED] 1,470,435
[NET-CHANGE-IN-ASSETS] (112,767,485)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,372,244)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (4,033,479)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (12,479,882)
[AVERAGE-NET-ASSETS] 789,715,729
[PER-SHARE-NAV-BEGIN] 17.26
[PER-SHARE-NII] 0.95
[PER-SHARE-GAIN-APPREC] 0.02
[PER-SHARE-DIVIDEND] (0.91)
[PER-SHARE-DISTRIBUTIONS] (0.02)
[RETURNS-OF-CAPITAL] (0.04)
[PER-SHARE-NAV-END] 17.26
[EXPENSE-RATIO] 1.35
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME
FUNDS INC.
<SERIES> SMITH BARNEY TAX-
EXEMPT INCOME FUND
[NUMBER]
<NAME> CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 940,765,340
<INVESTMENTS-AT VALUE> 967,224,143
[RECEIVABLES] 22,434,517
[ASSETS-OTHER] 0
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 989,658,660
[PAYABLE-FOR-SECURITIES] 2,437,450
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 12,729,834
[TOTAL-LIABILITIES] 15,167,284
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 955,831,180
[SHARES-COMMON-STOCK] 12,232
[SHARES-COMMON-PRIOR] 0
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (7,798,607)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 26,458,803
[NET-ASSETS] 974,491,376
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 69,997,436
[OTHER-INCOME] 0
[EXPENSES-NET] (12,479,882)
[NET-INVESTMENT-INCOME] 57,517,554
[REALIZED-GAINS-CURRENT] (7,798,607)
[APPREC-INCREASE-CURRENT] 5,121,672
[NET-CHANGE-FROM-OPS] 54,840,619
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (4,226)
[DISTRIBUTIONS-OF-GAINS] (175)
[DISTRIBUTIONS-OTHER] (130)
[NUMBER-OF-SHARES-SOLD] 13,738
[NUMBER-OF-SHARES-REDEEMED] (1,712)
[SHARES-REINVESTED] 206
[NET-CHANGE-IN-ASSETS] (112,767,485)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,372,244)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (4,033,479)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (12,479,882)
[AVERAGE-NET-ASSETS] 112,348
[PER-SHARE-NAV-BEGIN] 15.83
[PER-SHARE-NII] 0.60
[PER-SHARE-GAIN-APPREC] 1.50
[PER-SHARE-DIVIDEND] (0.62)
[PER-SHARE-DISTRIBUTIONS] (0.02)
[RETURNS-OF-CAPITAL] (0.04)
[PER-SHARE-NAV-END] 17.25
[EXPENSE-RATIO] 1.18
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY UTILITIES
FUND
[NUMBER]
<NAME> CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 1,690,168,798
<INVESTMENTS-AT VALUE> 1,743,381,438
[RECEIVABLES] 22,845,497
[ASSETS-OTHER] 905
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,766,227,840
[PAYABLE-FOR-SECURITIES] 179,487
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 5,906,852
[TOTAL-LIABILITIES] 6,086,339
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,740,443,104
[SHARES-COMMON-STOCK] 12,046,494
[SHARES-COMMON-PRIOR] 3,122,956
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (33,514,243)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 53,212,640
[NET-ASSETS] 1,760,141,501
[DIVIDEND-INCOME] 66,683,372
[INTEREST-INCOME] 62,581,725
[OTHER-INCOME] 0
[EXPENSES-NET] (26,443,608)
[NET-INVESTMENT-INCOME] 102,821,489
[REALIZED-GAINS-CURRENT] (33,514,243)
[APPREC-INCREASE-CURRENT] 135,112,680
[NET-CHANGE-FROM-OPS] 204,419,926
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (8,999,698)
[DISTRIBUTIONS-OF-GAINS] (929,210)
[DISTRIBUTIONS-OTHER] (239,543)
[NUMBER-OF-SHARES-SOLD] 12,200,129
[NUMBER-OF-SHARES-REDEEMED] (3,912,440)
[SHARES-REINVESTED] 635,849
[NET-CHANGE-IN-ASSETS] (117,128,057)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,665,596)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (7,885,332)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (26,443,608)
[AVERAGE-NET-ASSETS] 148,777,968
[PER-SHARE-NAV-BEGIN] 13.28
[PER-SHARE-NII] 0.85
[PER-SHARE-GAIN-APPREC] 0.82
[PER-SHARE-DIVIDEND] (0.82)
[PER-SHARE-DISTRIBUTIONS] (0.08)
[RETURNS-OF-CAPITAL] (0.02)
[PER-SHARE-NAV-END] 14.03
[EXPENSE-RATIO] 1.07
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY UTILITIES
FUND
[NUMBER]
<NAME> CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 1,690,168,798
<INVESTMENTS-AT VALUE> 1,743,381,438
[RECEIVABLES] 22,845,497
[ASSETS-OTHER] 905
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,766,227,840
[PAYABLE-FOR-SECURITIES] 179,487
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 5,906,852
[TOTAL-LIABILITIES] 6,086,339
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,740,443,104
[SHARES-COMMON-STOCK] 112,179,525
[SHARES-COMMON-PRIOR] 137,282,791
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (33,514,243)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 53,212,640
[NET-ASSETS] 1,760,141,501
[DIVIDEND-INCOME] 66,683,372
[INTEREST-INCOME] 62,581,725
[OTHER-INCOME] 0
[EXPENSES-NET] (26,443,608)
[NET-INVESTMENT-INCOME] 102,821,489
[REALIZED-GAINS-CURRENT] (33,514,243)
[APPREC-INCREASE-CURRENT] 135,112,680
[NET-CHANGE-FROM-OPS] 204,419,926
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (90,214,072)
[DISTRIBUTIONS-OF-GAINS] (9,904,281)
[DISTRIBUTIONS-OTHER] (2,171,503)
[NUMBER-OF-SHARES-SOLD] 8,946,045
[NUMBER-OF-SHARES-REDEEMED] (40,024,691)
[SHARES-REINVESTED] 5,975,380
[NET-CHANGE-IN-ASSETS] (117,128,057)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,665,596)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (7,885,332)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (26,443,608)
[AVERAGE-NET-ASSETS] 1,588,492,588
[PER-SHARE-NAV-BEGIN] 13.28
[PER-SHARE-NII] 0.78
[PER-SHARE-GAIN-APPREC] 0.82
[PER-SHARE-DIVIDEND] (0.76)
[PER-SHARE-DISTRIBUTIONS] (0.08)
[RETURNS-OF-CAPITAL] (0.02)
[PER-SHARE-NAV-END] 14.02
[EXPENSE-RATIO] 1.56
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY UTILITIES
FUND
[NUMBER]
<NAME> CLASS C
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 1,690,168,798
<INVESTMENTS-AT VALUE> 1,743,381,438
[RECEIVABLES] 22,845,497
[ASSETS-OTHER] 905
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,766,227,840
[PAYABLE-FOR-SECURITIES] 179,487
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 5,906,852
[TOTAL-LIABILITIES] 6,086,339
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,740,443,104
[SHARES-COMMON-STOCK] 279,981
[SHARES-COMMON-PRIOR] 142,615
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (33,514,243)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 53,212,640
[NET-ASSETS] 1,760,141,501
[DIVIDEND-INCOME] 66,683,372
[INTEREST-INCOME] 62,581,725
[OTHER-INCOME] 0
[EXPENSES-NET] (26,443,608)
[NET-INVESTMENT-INCOME] 102,821,489
[REALIZED-GAINS-CURRENT] (33,514,243)
[APPREC-INCREASE-CURRENT] 135,112,680
[NET-CHANGE-FROM-OPS] 204,419,926
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (380,731)
[DISTRIBUTIONS-OF-GAINS] (21,864)
[DISTRIBUTIONS-OTHER] (3,446)
[NUMBER-OF-SHARES-SOLD] 304,315
[NUMBER-OF-SHARES-REDEEMED] (179,428)
[SHARES-REINVESTED] 12,479
[NET-CHANGE-IN-ASSETS] (117,128,057)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,665,596)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (7,885,332)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (26,443,608)
[AVERAGE-NET-ASSETS] 2,777,645
[PER-SHARE-NAV-BEGIN] 13.28
[PER-SHARE-NII] 0.78
[PER-SHARE-GAIN-APPREC] 0.82
[PER-SHARE-DIVIDEND] (0.76)
[PER-SHARE-DISTRIBUTIONS] (0.08)
[RETURNS-OF-CAPITAL] (0.02)
[PER-SHARE-NAV-END] 14.02
[EXPENSE-RATIO] 1.51
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<CIK>
<NAME> SMITH BARNEY INCOME FUNDS
INC.
<SERIES> SMITH BARNEY UTILITIES
FUND
[NUMBER]
<NAME> CLASS Z
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> ANNUAL
<FISCAL-YEAR-END> JULY 31, 1995
<PERIOD-START> AUGUST 1, 1994
<PERIOD-END> JULY 31, 1995
<INVESTMENTS-AT COST> 1,690,168,798
<INVESTMENTS-AT VALUE> 1,743,381,438
[RECEIVABLES] 22,845,497
[ASSETS-OTHER] 905
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 1,766,227,840
[PAYABLE-FOR-SECURITIES] 179,487
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 5,906,852
[TOTAL-LIABILITIES] 6,086,339
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,740,443,104
[SHARES-COMMON-STOCK] 1,043,265
[SHARES-COMMON-PRIOR] 856,646
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] (33,514,243)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 53,212,640
[NET-ASSETS] 1,760,141,501
[DIVIDEND-INCOME] 66,683,372
[INTEREST-INCOME] 62,581,725
[OTHER-INCOME] 0
[EXPENSES-NET] (26,443,608)
[NET-INVESTMENT-INCOME] 102,821,489
[REALIZED-GAINS-CURRENT] (33,514,243)
[APPREC-INCREASE-CURRENT] 135,112,680
[NET-CHANGE-FROM-OPS] 204,419,926
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] (561,392)
[DISTRIBUTIONS-OF-GAINS] (76,523)
[DISTRIBUTIONS-OTHER] (16,006)
[NUMBER-OF-SHARES-SOLD] 428,912
[NUMBER-OF-SHARES-REDEEMED] (309,629)
[SHARES-REINVESTED] 67,336
[NET-CHANGE-IN-ASSETS] (117,128,057)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (2,665,596)
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] (7,885,332)
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] (26,443,608)
[AVERAGE-NET-ASSETS] 12,239,533
[PER-SHARE-NAV-BEGIN] 13.28
[PER-SHARE-NII] 0.89
[PER-SHARE-GAIN-APPREC] 0.82
[PER-SHARE-DIVIDEND] (0.87)
[PER-SHARE-DISTRIBUTIONS] (0.08)
[RETURNS-OF-CAPITAL] (0.02)
[PER-SHARE-NAV-END] 14.02
[EXPENSE-RATIO] 0.81
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
