As filed with the Securities and Exchange Commission
on September 29, 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. 41
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
Amendment No. 44 [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:
_____ Immediately upon filing pursuant to Rule 485(b)
_____ on [ ], 1995 pursuant to Rule 485(b)
X 60 days after filing pursuant to Rule 485(a)
_____ on -------------- pursuant to Rule 485(a)
The Registrant has previously filed a declaration of
indefinite
registration of its shares pursuant to Rule 24f-2 under
the
Investment
Company Act of 1940, as amended. Registrant's Rule 24f-2
Notice
for
the fiscal year ended July 31, 1995 will be filed on
September
30, 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(a) Under the Securities Act of 1933, as
ame
nded
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
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; A
9. Pending Legal Proceedings Not Applicable
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
<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 call-
ing 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 sup-
plemented 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 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 OBJECTIVE 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, The Shareholder Services
Group, Inc.
("TSSG"), a subsidiary of First Data Corporation. See
"Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A, Class B and Class
C shares may open
an account by making an initial investment of at least
$1,000 for each account,
or $250 for an individual retirement account ("IRA") or a
Self-Employed 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*** 0.19%
0.16% 0.10% 0.19
- ------------------------------------------------------------
- ------------------
TOTAL FUND OPERATING EXPENSES 1.19%
1.66% 1.55% 0.94%
- ------------------------------------------------------------
- ------------------
</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................................. $62 $86
$112 $187
Class B................................. 67 82
100 184
Class C................................. 26 49
84 185
Class Y................................. 10 30
52 115
An investor would pay the following
expenses on the same investment, assuming
the same annual return and no redemption:
Class A................................. $62 $86
$112 $187
Class B................................. 17 52
90 184
Class C................................. 16 49
84 185
Class Y................................. 10 30
52 115
- ------------------------------------------------------------
- ------------------
</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
Except where otherwise noted, the following information 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
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 refer-
ence into the Statement of Additional Information.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR
YEAR PERIOD
ENDED
ENDED ENDED
7/31/95
7/31/94#+++ 7/31/93*+++
<S> <C> <C>
<C>
Net Asset Value, beginning of period $
15.65 $ 15.15
- ------------------------------------------------------------
- -------------------
Income from investment operations:
Net investment income
0.33 0.19
Net realized and unrealized gain on
investments
0.99 1.33
- ------------------------------------------------------------
- -------------------
Total from investment operations
1.32 1.52
Distributions to shareholders:
Distributions from net investment income
(0.31) (0.17)
Distributions in excess of net investment
income
(0.24) (0.03)
Distributions from net realized capital gains
(0.52) (0.44)
Distributions in excess of net realized
capital gains
- -- (0.05)
Distributions from capital++
(0.21) (0.33)
- ------------------------------------------------------------
- -------------------
Total distributions
(1.28) (1.02)
- ------------------------------------------------------------
- -------------------
Net Asset Value, end of period $
15.69 $ 15.65
- ------------------------------------------------------------
- -------------------
Total return+
8.65% 10.31%
- ------------------------------------------------------------
- -------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of period (in 000's)
$67,699 $39,677
Ratio of operating expenses to average net
assets
1.19% 1.20%**
Ratio of net investment income to average net
assets
2.05% 1.64%**
Portfolio turnover rate
34% 55%
- ------------------------------------------------------------
- -------------------
</TABLE>
* The Fund commenced selling Class A shares on November 6,
1992.
** Annualized.
+ Total return represents aggregate total return for the
period indicated and
does not reflect any applicable sales charges.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly
average share
method, which more appropriately presents the per share
data for the period
since the use of the undistributed method does not
accord with results of
operations.
# As of July 15, 1994, the Fund changed its investment
adviser from Boston
Advisors to its current investment adviser, Strategy
Advisers.
10
<PAGE>
SMITH BARNEY
Premium Total Return Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR YEAR
ENDED ENDED ENDED
ENDED ENDED
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 $ 15.65 $ 15.21
$ 14.26 $ 13.30
- ------------------------------------------------------------
- --------------------
Income from investment
operations:
Net investment income 0.25 0.23
0.22 0.24
Net realized and
unrealized gain/(loss)
on investments 1.00 1.47
1.93 1.92
- ------------------------------------------------------------
- --------------------
Total from investment
operations 1.25 1.70
2.15 2.16
Less distributions:
Distributions from net
investment income (0.27) (0.16)
(0.22) (0.24)
Distributions in excess
of net investment income (0.22) (0.03)
- -- --
Distributions from net
realized capital gains (0.52) (0.57)
- -- --
Distributions in excess
of net realized
capital gains -- (0.06)
- -- --
Distributions from
capital++ (book basis) -- --
(0.98) (0.96)
Distributions from
capital++ (tax basis) (0.20) (0.44)
- -- --
- ------------------------------------------------------------
- --------------------
Total distributions (1.21) (1.26)
(1.20) (1.20)
- ------------------------------------------------------------
- --------------------
Net Asset Value, end of
year $ 15.69 $ 15.65
$ 15.21 $ 14.26
- ------------------------------------------------------------
- --------------------
Total return+ 8.12% 11.68%
15.68% 17.53%
- ------------------------------------------------------------
- --------------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year
(in 000's) $1,697,394 $1,230,737
$585,049 $470,381
Ratio of operating
expenses to average
net assets 1.66% 1.69%
1.69% 1.75%
Ratio of net investment
income to average
net assets 1.58% 1.16%
1.53% 1.84%
Portfolio turnover rate 34% 55%
57% 43%
- ------------------------------------------------------------
- --------------------
</TABLE>
* The Fund commenced operations on September 16, 1985. On
November 6, 1992,
the Fund commenced selling Class A shares. Those shares
in existence prior
to November 6, 1992 were designated as Class B shares.
** Annualized.
+ Total return represents aggregate total return for the
periods indicated and
does not reflect any applicable CDSC.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly
average share
method, which more appropriately presents the per share
data for the period
since the use of the undistributed method does not
accord with results of
operations.
# As of July 15, 1994, the Fund changed its investment
adviser from Boston
Advisors to its current investment adviser, Strategy
Advisers.
11
<PAGE>
SMITH BARNEY
Premium Total Return Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR YEAR YEAR
YEAR PERIOD
ENDED ENDED ENDED
ENDED ENDED
7/31/90+++ 7/31/89 7/31/88
7/31/87 7/31/86*
<S> <C> <C> <C>
<C> <C>
Net Asset Value,
beginning of year $ 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:
Distributions from net
investment income (0.22) (0.89) (0.18)
(0.28) (0.42)
Distributions in excess
of net investment income -- -- --
- -- --
Distributions from net
realized capital gains -- (0.26) (1.28)
(1.42) (0.76)
Distributions in excess
of net realized
capital gains -- -- --
- -- --
Distributions from
capital++ (book basis) (1.06) (0.33) --
- -- --
Distributions from
capital++ (tax basis) -- -- --
- -- --
- ------------------------------------------------------------
- -------------------
Total distributions (1.28) (1.48) (1.46)
(1.70) (1.18)
- ------------------------------------------------------------
- -------------------
Net Asset Value, end of
year $ 13.30 $ 13.98 $ 12.90 $
14.47 $ 14.52
- ------------------------------------------------------------
- -------------------
Total return+ 4.62% 21.49% 0.21%
12.07% 21.28%
- ------------------------------------------------------------
- -------------------
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTAL DATA:
Net assets, end of year
(in 000's) $507,762 $599,849 $585,634
$960,898 $533,487
Ratio of operating
expenses to average
net assets 1.78% 1.75% 1.70%
1.74% 1.87%**
Ratio of net investment
income to average
net assets 1.66% 4.17% 3.58%
1.97% 2.99%**
Portfolio turnover rate 47% 41% 56%
294% 212%
- ------------------------------------------------------------
- -------------------
</TABLE>
* The Fund commenced operations on September 16, 1985. On
November 6, 1992,
the Fund commenced selling Class A shares. Those shares
in existence prior
to November 6, 1992 were designated as Class B shares.
** Annualized.
+ Total return represents aggregate total return for the
periods indicated and
does not reflect any applicable CDSC.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly
average share
method, which more appropriately presents the per share
data for the period
since the use of the undistributed method does not
accord with results of
operations.
12
<PAGE>
SMITH BARNEY
Premium Total Return Fund
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
YEAR
YEAR PERIOD
ENDED
ENDED ENDED
7/31/95
7/31/94#+++ 7/31/93*++
<S> <C> <C>
<C>
Net Asset Value, beginning of period
$15.65 $15.45
- ------------------------------------------------------------
- ------------------
Income from investment operations:
Net investment income
0.23 0.05
Net realized and unrealized gain on
investments
1.02 0.35
- ------------------------------------------------------------
- ------------------
Total from investment operations
1.25 0.40
Less distributions:
Distributions from net investment income
(0.27) (0.03)
Distributions in excess of net investment
income
(0.22) (0.01)
Distributions from net realized capital gains
(0.52) (0.08)
Distributions in excess of net realized
capital gains
- -- (0.01)
Distributions from capital++
(0.20) (0.07)
- ------------------------------------------------------------
- ------------------
Total distributions
(1.21) (0.20)
- ------------------------------------------------------------
- ------------------
Net Asset Value, end of period
$15.69 $15.65
- ------------------------------------------------------------
- ------------------
Total return+
8.12% 2.60%
- ------------------------------------------------------------
- ------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL
DATA:
Net assets, end of period (in 000's)
$1,878 $ 357
Ratio of net investment income to average net
assets
1.60% 1.31%**
Ratio of operating expenses to average net
assets
1.65% 1.54%**
Portfolio turnover rate
34% 55%
- ------------------------------------------------------------
- ------------------
</TABLE>
* The Fund commenced selling Class C shares (previously
designated as Class D
shares) on June 1, 1993.
** Annualized.
+ Total return represents aggregate total return for the
periods indicated.
++ Results from the Fund's level distribution policy.
+++ Per share amounts have been calculated using the monthly
average share
method, which more appropriately presents the per share
data for the period
since use of the undistributed method does not accord
with results of
operations.
# As of July 15, 1994, the Fund changed its investment
adviser from Boston
Advisors to its current investment adviser, Strategy
Advisers.
Prior to November 7, 1994, the Fund did not offer Class Y
shares and as of
July 31, 1995, no Class Y shares were outstanding and
accordingly, no com-
parable financial information is available at this time for
that Class.
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 day of the Smith Barney statement month.
The Fund's final
distribution for each calendar year will include any
remaining net investment
income and net realized long- and short-term capital gains
realized during the
year and deemed undistributed during the year for Federal
income tax purposes.
In order to avoid the application of a 4% nondeductible
excise tax on certain
undistributed amounts of ordinary income and capital gains,
the Fund may make
an additional distribution shortly before December 31 in
each year of any
undistributed ordinary income or capital gains and expects
to pay any other
dividends and distributions necessary to avoid the
application of this tax.
The per share dividends on Class B and Class C shares of
the Fund may be
lower than the per share dividends on Class A and Class Y
shares principally
as a result of the distribution fee applicable with respect
to Class B and
Class C shares. The per share dividends on Class A shares of
the Fund may be
lower than the per share dividends on Class Y shares
principally as a result
of the
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 TSSG. When
purchasing shares of
the Fund, investors must specify whether the purchase is for
Class A, Class B,
Class C or Class Y shares. No maintenance fee will be
charged by the Fund in
connection with a brokerage account through which an
investor purchases or
holds shares.
Investors in Class A, Class B and Class C shares may open
an account by 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, TSSG. Share certificates are issued only
upon a shareholder's
written request to TSSG.
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 TSSG 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 TSSG. The
Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the
shareholder's Smith
Barney brokerage account or redeem the shareholder's shares
of a Smith Barney
money market fund to make additions to the account.
Additional information is
available from the Fund or a Smith Barney Financial
Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A
shares of the Fund are
as follows:
<TABLE>
<CAPTION>
SALES 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
and employees of
members of the National Association of Securities Dealers,
Inc., or the
spouses and children of such persons (including the
surviving spouse of a
deceased Trustee or employee, and retired Trustees or
employees), or sales to
any trust, pension, profit-sharing or other benefit plan for
such persons pro-
vided such sales are made upon the assurance of the
purchaser that the pur-
chase 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 com-
pany with the Fund by merger, acquisition of assets or
otherwise; (c) pur-
chases of Class A shares by any client of a newly employed
Smith Barney Finan-
cial Consultant (for a period up to 90 days from the
commencement of the
Financial Consultant's employment with Smith Barney), on the
condition the
purchase of Class A shares is made with the proceeds of the
redemption of
shares of a mutual fund which (i) was sponsored by the
Financial Consultant's
prior employer, (ii) was sold to the client by the Financial
Consultant and
(iii) was subject to a sales charge; (d) shareholders who
have redeemed Class
A shares in the Fund (or Class A shares of another of the
Smith Barney Mutual
Funds that are offered with a sales charge equal to or
greater than the maxi-
mum sales charge of the Fund) and who wish to reinvest their
redemption pro-
ceeds in the Fund, provided the reinvestment is made within
60 calendar days
of the redemption; and (e) accounts managed by registered
investment advisory
subsidiaries of Travelers. In order to obtain such
discounts, the purchaser
must provide sufficient information at the time of purchase
to permit verifi-
cation 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 TSSG 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 TSSG 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
TSSG in the case
of all other shareholders) of the shareholder's status or
holdings, as the case
may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith
Barney 401(k) Program,
which is generally designed to assist plan sponsors in the
creation and 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 TSSG. For
further information regarding the Smith Barney 401(k)
Program, investors should
contact a Smith Barney Financial Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may
be exchanged at the
net asset value next determined for shares of the same Class
in the following
funds of the Smith Barney Mutual Funds, to the extent shares
are offered for
sale in the shareholder's state of residence. Exchanges of
Class A, Class B and
Class C shares are subject to minimum investment
requirements and all shares
are subject to the other requirements of the fund into which
exchanges are made
and a sales charge differential may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney 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 C and Class Y
shares of the
Fund.
** Available for exchange with Class A, Class B and Class Y
shares of the
Fund. In addition, shareholders who own Class C shares
of the Fund through
the Smith Barney 401(k) Program may exchange those
shares for Class C
shares of this fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares
of the Fund.
++ Available for exchange with Class A and Class Y shares
of the Fund. In
addition, shareholders who own Class C shares of the
Fund through the
Smith Barney 401(k) Program may exchange those shares
for Class C shares
of this fund.
+++ Available for exchange with Class A and Class Y shares
of the Fund.
Class A Exchanges. Class A shares of Smith Barney Mutual
Funds sold without
a sales charge or with a maximum sales charge of less than
the maximum charged
by other Smith Barney Mutual Funds will be subject to the
appropriate "sales
charge differential" upon the exchange of such shares for
Class A shares of a
fund sold with a higher sales charge. The "sales charge
differential" is 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 The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request must (a) state the Class and
number or dollar
amount of shares to be redeemed, (b) identify the
shareholder's account number
and (c) be signed by each registered owner exactly as the
shares are 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 TSSG together with the
redemption
request. Any signature appearing on a redemption request,
share certificate or
stock power must be guaranteed by an eligible guarantor
institution such as a
domestic bank, savings and loan institution, domestic credit
union, member
bank of the Federal Reserve System or member firm of a
national securities
exchange. TSSG may
39
<PAGE>
SMITH BARNEY
Premium Total Return Fund
REDEMPTION OF SHARES (CONTINUED)
require additional supporting documents for redemptions made
by corporations,
executors, administrators, trustees or guardians. A
redemption request will not
be deemed properly received until TSSG receives all required
documents in
proper form.
Any signature appearing on a written redemption request of
$2,000 or greater
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. Written redemp-
tion 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.
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 TSSG at 1-
800-451-2010. Once eligibility is confirmed, the shareholder
must complete and
return a Telephone Authorization Form that will be provided
by TSSG upon
request. (Alternatively, an investor may authorize telephone
redemptions on the
new account application when making his/her initial
investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 may be
made by eligible
shareholders by calling TSSG at 1-800-451-2010. Such
requests may be
40
<PAGE>
SMITH BARNEY
Premium Total Return Fund
REDEMPTION OF SHARES (CONTINUED)
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 cer-
tificates 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 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 TSSG 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. The Fund will not be liable for following
instructions communicated by
telephone that it reasonably believes to be genuine. The
Fund will employ pro-
cedures designed to verify the identity of the caller and
legitimacy of
instructions (for example, the Fund will require the
shareholder's name and
account number and may record calls). 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.
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 September 30, 1994 in excess
of $3 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 [August 31], 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 ASSET MANAGEMENT,
L.P.
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
[August 31], 1995, in
excess of $1.6 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 are not tied exclusively to the
distribution and
shareholder service expenses with respect to Class B and
Class C shares actu-
ally 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 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.
TSSG is located at Exchange Place, Boston, Massachusetts
02109, and serves
as the Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and
an audited annual
report, each of which includes a listing of the investment
securities held by
the Fund at the end of the reporting period. In an effort to
reduce the 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 TSSG.
----------------------
Shareholders may seek information regarding the Funds from
their
Smith Barney Financial Consultant.
No person has been authorized to give any information or
to make any 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
SMITH BARNEY
PREMIUM TOTAL
RETURN FUND
388 Greenwich Street
New
York, New York 10013
FUND 17,178,247
FD XXXX XX
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.......................................................
.....
..........
Investment Objectives and
Management
Policies....................................................
.....
...
Purchase
of
Shares......................................................
.....
......................................
Redemption
of
Shares......................................................
.....
.................................
Distributor.................................................
.....
....................................................
Valuation
of
Shares......................................................
.....
......................................
Exchange
Privilege...................................................
.....
.......................................
Performance Data (See in the
Prospectuses
"Performance")..............................................
...
Taxes (See in the Prospectuses "Dividends, Distributions
and
Taxes")....................................
Additional
Information.................................................
.....
.......................................
Financial
Statement...................................................
.....
.........................................
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.
("Smith Barney") Distributor
Smith Barney Mutual Funds Management Inc.
("SBMFM")
Investment adviser
to Convertible, High
Income, Diversified
Strategic Income,
Tax-Exempt Income,
Utilities and
Exchange Reserve
Funds
Smith Barney Strategy Advisers Inc.
("Strategy Advisers")
Investment adviser
to Premium Total
Return Fund
Smith Barney Global Capital Management Inc.
("Global Capital Management") Sub-investment
adviser to Diversified
Strategic Income Fund
SBMFM
Administrator
Boston Partners Asset Management, L.P.
("Boston Partners")
Sub-investment
adviser to Premium
Total Return Fund
PNC Bank, National Association
("PNC Bank")
Custodian
The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data
Corporation
Transfer Agent
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 Smith Barney Strategy Advisers Inc.; prior to July
1993,
Senior Executive Vice President of Shearson Lehman Brothers
Inc.
("Shearson Lehman Brothers"), Vice Chairman of Shearson
Asset
Management; a Director of PanAgora Asset Management, Inc.
and
PanAgora Asset Management Limited. His address is 388
Greenwich
Street, New York, New York 10013.
Madelon DeVoe Talley, Trustee (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 SBMFM.
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
$[
].
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
$--------
Tax-Exempt Income Fund 3,978,637 4,561,779
- ----
- ----
Convertible Fund 329,323 425,505
- ----
- ----
High Income Fund 2,659,448 3,771,643
- ----
- ----
Diversified Strategic Income Fund 6,226,342
8,761,857
- --------
Utilities Fund 10,317,792 10,896,883
- ----
- ----
Exchange Reserve Fund 612,812 622,203
- ----
- ----
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 $--------
Tax-Exempt Income Fund 1,989,319 1,971,064
309,826
- --------
Convertible Fund 131,729 145,717
24,485
- --------
High Income Fund 1,063,779 1,297,678
210,979
- --------
Diversified Strategic Income Fund 3,557,910
4,289,630
717,145 --------
Utilities Fund 4,584,796 4,256,098
586,961
- --------
Exchange Reserve Fund 408,842 341,472
73,330
- --------
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
$[ ], 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 TSSG.
TSSG
maintains a record of each shareholder's ownership of
Trust
shares. Shares do not have cumulative voting rights, which
means
that holders of more than 50% of the shares voting for
the
election of Trustees can elect all of the Trustees. Shares
are
transferable but have no preemptive or subscription
rights.
Shareholders generally vote by Fund, except with respect to
the
election of Trustees and the selection of independent
public
accountants.
Massachusetts law provides that, under
certain
circumstances, shareholders could be held personally liable
for
the obligations of the Trust. However, the Trust
Agreement
disclaims shareholder liability for acts or obligations of
the
Trust and requires that notice of such disclaimer be
given in
each agreement, obligation or instrument entered into or
executed
by the Trust or a Trustee. The Trust Agreement provides
for
indemnification from the Trust's property for all losses
and
expenses of any shareholder held personally liable for
the
obligations of the Trust. Thus, the risk of a
shareholder's
incurring financial loss on account of shareholder
liability is
limited to circumstances in which the Trust would be
unable to
meet its obligations, a possibility that the Trust's
management
believes is remote. Upon payment of any liability incurred
by the
Trust, the shareholder paying the liability will be
entitled to
reimbursement from the general assets of the Trust. The
Trustees
intend to conduct the operations of the Trust in such a way
so as
to avoid, as far as possible, ultimate liability of
the
shareholders for liabilities of the Trust.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectuses discuss the investment objectives of the
Funds
and the policies to be employed to achieve those objectives.
This
section contains supplemental information concerning the
types of
securities and other instruments in which the Funds may
invest,
the investment policies and portfolio strategies that the
Funds
may utilize and certain risks attendant to such
investments,
policies and strategies.
U.S. Government Securities (All Funds). United
States
government securities include debt obligations of
varying
maturities issued or guaranteed by the United States
government
or its agencies or instrumentalities ("U.S.
government
securities"). U.S. government securities include not only
direct
obligations of the United States Treasury, but also
securities
issued or guaranteed by the Federal Housing
Administration,
Farmers Home Administration, Export-Import Bank of the
United
States, Small Business Administration, Government
National
Mortgage Association ("GNMA"), General Services
Administration,
Central Bank for Cooperatives, Federal Intermediate Credit
Banks,
Federal Land Banks, Federal National Mortgage
Association
("FNMA"), Maritime Administration, Tennessee Valley
Authority,
District of Columbia Armory Board, Student Loan
Marketing
Association, International Bank for Reconstruction
and
Development and Resolution Trust Corporation. Certain
U.S.
government securities, such as those issued or
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% --%
Tax-Exempt Income Fund 39% --%
Convertible Fund 54% --%
High Income Fund 98% --%
Diversified Strategic Income Fund 93% --%
Utilities Fund 28% --%
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 Commissions 1992 $ 762,101
$51,993 $11,296
$ 562,710 --
1992* -- --
- -- $
774,306 --
1993 $1,933,587 $75,836 $17,225
$1,810,481
$ 19,446
1994 $1,767,577 $60,818 $96,670
$2,006,028
$106,421
Commissions paid to 1992 $ 283,190 $ 2,700
$22,419 $
28,848 --
Shearson Lehman Brothers 1992* -- --
- --
$ 51,828 --
or Smith Barney 1993 $ 355,027 --
- --
$ 97,740 --
1994 $ 280,686 -- --
$ 174,858
- --
% of Total Brokerage 1994 15.88% --
- --
8.70% --
Commissions paid to
Smith Barney
% of Total Transactions 1994 14.92% --
- --
8.10% --
involving Commissions paid
to Smith Barney
% of Total Brokerage 1995 ----% --
- --
- ----% --
Commissions paid to
Smith Barney
% of Total Transactions 1995 ----% __
__
- ----% --
involving Commissions paid
to Smith Barney
* Periods disclosed for Utilities Fund are for fiscal
year
ended February 29, 1992 and the period from March 1,
1992
through July 31, 1992.
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
$100 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 TSSG, as agent for Withdrawal Plan members.
All
dividends and distributions on shares in the Withdrawal Plan
are
reinvested automatically at net asset value in additional
shares
of the Fund involved. All applications for participation in
the
Withdrawal Plan must be received by TSSG as Plan Agent no
later
than the eighth day of each month to be eligible
for
participation beginning with that month's withdrawal.
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").
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 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 a distribution fee with respect to the Class B
and
Class C shares primarily intended to compensate Smith Barney
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% 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
$48,427,224 in the aggregate from the Trust under the Plan.
For
the fiscal year ended July 31, 1994 and July 31, 1995,
Smith
Barney received $61,280,961 and $[ ],
respectively, in
the aggregate from the Trust under the Plan. For the same
period,
Smith Barney incurred distribution expenses
totaling
approximately $105,372,000 and $[ ],
consisting of
approximately: $732,000 and $[ ] for
advertising;
$814,000 and $[ ] for printing and mailing
of
Prospectuses; $44,025,000 and $[ ] for
support
services; $45,777,000 and $[ ] to Smith
Barney
Financial Consultants; and $14,024,000 and $[
] in
accruals for interest on the excess of Smith Barney
expenses
incurred in distributing the Trust's shares over the sum of
the
distribution fees and CDSC received by Smith Barney from
the
Trust, respectively.
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
$----
- ---
Tax-Exempt Income Fund 103,757 176,786
- -------
Convertible Fund 13,105 14,561
- -------
High Income Fund 324,552 507,890
- -------
Diversified Strategic Income Fund 629,705 818,088
- ----
- ---
Utilities Fund 572,895 364,556
- -------
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
$-------
Tax-Exempt Income Fund 713,191
1,570,424
- -------
Convertible Fund 107,519
87,160
- -------
High Income Fund 562,214
743,718
- -------
Diversified Strategic Income Fund 4,531,241
5,301,256
- -------
Utilities Fund 2,489,562
8,429,876
- -------
Service Fees
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 $ 32,902 $138,713
$----
- ---
Tax-Exempt Income Fund 5,963 26,737
- -------
Convertible Fund 1,212 5,556
- -------
High Income Fund 401,688 593,011
- -------
Diversified Strategic Income Fund 38,096 169,673
- ----
- ---
Utilities Fund 46,507 125,227
- -------
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 $1,760,462
$3,725,474
$-------
Tax-Exempt Income Fund 1,125,371
1,683,930
- -------
Convertible Fund 124,907
207,197
- -------
High Income Fund 673,903
1,238,239
- -------
Diversified Strategic Income Fund 2,303,022
6,054,604
- -------
Utilities Fund 4,480,226
5,877,824
- -------
Class C
(formerly designated as Class D)
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 $137 $2,600
$----
- -
Tax-Exempt Income Fund ---
- ---
- -----
Convertible Fund ---
- ---
- -----
High Income Fund ---
- ---
- -----
Diversified Strategic Income Fund 4
980
- -----
Utilities Fund 112 2,828
- -----
Distribution Fees
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 $ 4,691,152 $
7,450,948
$-------
Tax-Exempt Income Fund 5,554,513
5,613,101
- -------
Convertible Fund 365,443
414,394
- -------
High Income Fund 1,998,175
2,476,479
- -------
Diversified Strategic Income Fund 10,875,236
12,109,208
- -------
Utilities Fund 12,484,195
11,755,647
- -------
Class C
(formerly designated as Class D)
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 $274 $5,199
$----
- -
Tax-Exempt Income Fund ---
- ---
- -----
Convertible Fund ---
- ---
- -----
High Income Fund ---
- ---
- -----
Diversified Strategic Income Fund 8
1,960
- -----
Utilities Fund 225 5,656
- -----
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 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 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 TSSG 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 ---%, and the compound effective yield was ---%.
As of
July 31, 1995, the Fund's average portfolio maturity was
- ---
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.
The Class A yields for the 30-day period ended July 31,
1995
for the High Income, Diversified Strategic Income and
Utilities
Funds were ---%, ---% and ---%, respectively.
The Class B yields for the 30-day period ended July 31,
1995
for the High Income, Diversified Strategic Income and
Utilities
Funds were ---%, ---% and ---%, respectively.
The Class C yields for the 30-day period ended July 31,
1995
for the High Income, Diversified Strategic Income and
Utilities
Funds were ---%, ---% and ---%, respectively.
The Class A and Class B yield for Tax-Exempt Income
Fund for
the 30-day period ended July 31, 1995, was ---% and
- ---%,
respectively, and the equivalent taxable yield for that
period
was ---%, and ---%, respectively, assuming payment of
Federal
income taxes at a rate of 28%.
Investors should recognize that, in periods of
declining
interest rates, a Fund's yield will tend to be somewhat
higher
than prevailing market rates, and in periods of rising
interest
rates the Fund's yield will tend to be somewhat
lower. In
addition, when interest rates are falling, the inflow of net
new
money to the Fund from the continuous sale of its shares
will
likely be invested in portfolio instruments producing
lower
yields than the balance of such Fund's investments,
thereby
reducing the current yield of the Fund. In periods of
rising
interest rates, the opposite can be 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 ---% -
- --%
Tax-Exempt Income Fund ---% ---%
Convertible Fund ---% ---%
High Income Fund ---% ---%
Diversified Strategic Income Fund ---% -
- --%
Utilities Fund ---% ----%
* 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) ---%
- ---%
- ---%
Tax-Exempt Income Fund (1) (5) ---%
- ---%
- ---%
Convertible Fund (2) ---%
- ---%
- ---%
High Income Fund (2) (5) ---%
- ---%
- ---%
Diversified Strategic Income Fund (3) (5) ---%
- ---%
- ---%
Utilities Fund (4) ---%
- ---%
- ---%
(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) 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* ---% -
- --%
Tax-Exempt Income Fund ---% ---%
Convertible Fund ---% ---%
High Income Fund ---% ---%
Diversified Strategic Income Fund** ---%
- -
- --%
Utilities Fund*** ---% ----%
* The Fund commenced selling Class C shares
(previously
designated as Class D shares) on November 6, 1992.
** The Fund commenced selling Class C shares
(previously
designated as Class D shares) on March 19, 1993.
*** The Fund commenced selling Class C shares
(previously
designated as Class D shares) on February 4, 1993.
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) ---% ---% --
- -% ---%
- ---% ---%
Tax-Exempt Income(1)(5) ---% ---% --
- -% ---%
- ---% ---%
Convertible(2) ---% ---% --
- -% ---%
- ---% ---%
High Income(2)(5) ---% ---% --
- -% ---%
- ---% ---%
Diversified Strategic Income (3)(5) ---% ---%
- ---% ---
% ---% ---%
Utilities(5) ---% ---% --
- -% ---%
- ---% ---%
* 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) 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 ---% ---% ---%
- ---%
Class C ---% ---% ---%
- ---%
Tax-Exempt Income
Class A ---% ---% ---%
- ---%
Class C ---% ---% ---%
- ---%
Convertible
Class A ---% ---% ---%
- ---%
Class C ---% ---% ---%
- ---%
High Income
Class A ---% ---% ---%
- ---%
Class C ---% ---% ---%
- ---%
Diversified Strategic Income
Class A ---% ---% ---%
- ---%
Class C ---% ---% ---%
- ---%
Utilities
Class A ---% ---% ---%
- ---%
Class C ---% ---% ---%
- ---%
* 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.
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.
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 of
the Trust. Under its custodian agreement with the Trust, PNC
Bank
is authorized to establish separate accounts for
foreign
securities owned by the Trust to be held with foreign
branches of
other U.S. banks as well as with certain foreign banks
and
securities depositaries. For its custody services to the
Trust,
PNC Bank receives monthly fees based upon the month-end
aggregate
net asset value of the Trust, plus certain charges for
securities
transactions including out-of-pocket expenses, and costs of
any
foreign and domestic sub-custodians. The assets of the Trust
are
held under bank custodianship in compliance with the 1940
Act.
TSSG is located at Exchange Place, Boston,
Massachusetts
02109, and serves as the Trust's transfer agent. Under
the
transfer agency agreement, TSSG maintains the shareholder
account
records for the Trust, handles certain communications
between
shareholders and the Trust and distributes dividends
and
distributions payable by each Fund. For these services
TSSG
receives from each Fund a monthly fee computed on the
basis of
the number of shareholder accounts maintained during the
year for
each Fund and is reimbursed for certain out-of-pocket
expenses.
FINANCIAL STATEMENTS
The Funds' Annual Reports for the fiscal year ended July
31,
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 will be
filed by
amendment
Included in Part C:
Consent of Auditors to be filed by amendment
(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) (a) 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 filed herewith.
(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
Fund is filed herewith.
(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) (a) Custodian Agreement between
the
Registrant and PNC Bank, National
Association
("PNC Bank") is filed herewith.
(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 The
Shareholder
Services Group, Inc. ("TSSG") is
incorporated by
reference to Post-Effective Amendment No.
40 as
filed on November 7, 1994.
(10) Not Applicable.
(11) Not Applicable.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15) (a) 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) Not Applicable.
(18) Plan pursuant to Rule 18f-3 is filed
herewith.
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. 801-14437).
Prior to the close of business on November 7, 1994,
Greenwich
Street Advisors served as investment adviser. Greenwich
Street
Advisors, through its predecessors, has been in the
investment
counseling business since 1934 and is a division of
Mutual
Management Corp. ("MMC"). MMC was incorporated in 1978 and
is a
wholly owned subsidiary of Holdings, which is in turn a
wholly
owned subsidiary of Travelers. The list required by this
Item 28
of officers and directors of MMC and Greenwich Street
Advisors,
together with information as to any other business,
profession,
vocation or employment of a substantial nature engaged in by
such
officers and directors during the past two fiscal
years, is
incorporated by reference to Schedules A and D of FORM ADV
filed
by MMC on behalf of Greenwich Street Advisors pursuant to
the
Advisers Act (SEC File No. 801-14437).
Prior to the close of business on July 30, 1993 (the
"Closing"),
Shearson Lehman Advisors, a member of the Asset Management
Group
of Shearson Lehman Brothers Inc. ("Shearson Lehman
Brothers"),
served as the Registrant's investment adviser. On the
Closing,
Travelers and Smith Barney Inc. (formerly known as Smith
Barney
Shearson Inc.) acquired the domestic retail brokerage and
asset
management business of Shearson Lehman Brothers, which
included
the business of the Registrant's prior investment
adviser.
Shearson Lehman Brothers was a wholly owned
subsidiary of
Shearson Lehman Brothers Holdings Inc. ("Shearson
Holdings"). All
of the issued and outstanding common stock of Shearson
Holdings
(representing 92% of the voting stock) was held by
American
Express Company. Information as to any past business
vocation or
employment of a substantial nature engaged in by officers
and
directors of Shearson Lehman Advisors can be located in
Schedules
A and D of FORM ADV filed by Shearson Lehman Brothers on
behalf
of Shearson Lehman Advisors prior to July 30, 1993. (SEC
FILE
NO. 801-3701)
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
Smith Barney Mutual Funds Mutual Funds Management Inc.
(formerly
known as Smith, Barney Advisers, Inc.) ("SBMFM"), which
was
incorporated under the laws of the State of Delaware in
1968.
SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc.
(formerly known as Smith Barney Shearson Holdings Inc.),
which in
turn is a wholly owned subsidiary of Travelers Group,
Inc.
(formerly known as Primerica Corporation) ("Travelers").
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 b
reference to
Schedules A and D of FORM ADV filed by SBMFM on
behalf of
Strategy Advisers pursuant to the Advisers Act (SEC File No.
801-
8314).
Prior to the Close of business on July 30, 1993 (the
"Closing"),
Shearson Lehman Investment Strategy Advisors Inc.
("Shearson
Lehman Strategy Advisors"), was a wholly owned
subsidiary of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"),
and
served as the Registrant's investment adviser. On the
Closing,
Travelers and Smith Barney Inc. (formerly known as Smith
Barney
Shearson Inc.) acquired the domestic retail brokerage and
asset
management business of Shearson Lehman Brothers which
included
the business of the Registrant's prior investment
adviser.
Shearson Lehman Brothers was a wholly owned
subsidiary of
Shearson Lehman Brothers Holdings Inc. ("Shearson
Holdings"). All
of the issued and outstanding common stock of Shearson
Holdings
(representing 92% of the voting stock) was held by
American
Express Company. Information as to any past business
vocation or
employment of a substantial nature engaged in by officers
and
directors of Shearson Lehman Investment Strategy Advisors
can be
located in Schedules A and D of FORM ADV filed by Shearson
Lehman
Investment Strategy Advisors prior to July 30, 1993 (SEC
File No.
801-28715).
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 Smith Barney Holdings Inc. (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"). 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") currently acts as
distributor
for Smith Barney Managed Municipals Fund Inc., Smith Barney
New
York Municipals Fund Inc., Smith Barney California
Municipals
Fund Inc., Smith Barney Massachusetts Municipals Fund,
Smith
Barney Aggressive Growth Fund Inc., Smith Barney
Appreciation
Fund Inc., Smith Barney Principal Return Fund, Smith
Barney
Managed Governments Fund Inc., Smith Barney Income Funds,
Smith
Barney Equity Funds, Smith Barney Investment Funds Inc.,
Smith
Barney Precious Metals and Minerals Fund Inc., Smith
Barney
Telecommunications Trust, Smith Barney Arizona Municipals
Fund
Inc., Smith Barney New Jersey Municipals Fund Inc., The USA
High
Yield Fund N.V., Garzarelli Sector Analysis Portfolio N.V.,
Smith
Barney Fundamental Value Fund Inc., Smith Barney Series
Fund,
Consulting Group Capital Markets Funds, Smith Barney
Income
Trust, Smith Barney Adjustable Rate Government Income Fund,
Smith
Barney Florida Municipals Fund, Smith Barney Oregon
Municipals
Fund, Smith Barney Funds, Inc., Smith Barney Muni Funds,
Smith
Barney World Funds, Inc., Smith Barney Money Funds, Inc.,
Smith
Barney Tax Free Money Fund, Inc., Smith Barney Variable
Account
Funds, Smith Barney U.S. Dollar Reserve Fund (Cayman),
Worldwide
Special Fund, N.V., Worldwide Securities Limited,
(Bermuda),
Smith Barney International Fund (Luxembourg) and various
series
of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Smith
Barney
Holdings Inc. (formerly known as Smith Barney Holdings
Inc.),
which in turn is a wholly owned subsidiary of Travelers
Group
Inc. (formerly known as Primerica Corporation)
("Travelers"). On
June 1, 1994, Smith Barney changed its name from Smith
Barney
Shearson Inc. to its current name. The information
required by
this Item 29 with respect to each director, officer and
partner
of Smith Barney is incorporated by reference to Schedule
A of
FORM BD filed by Smith Barney pursuant to the Securities
Exchange
Act of 1934 (SEC File No. 812-8510).
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.
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
September,
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
9/28/95
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone* Senior Vice President
and
9/28/95
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
/s/ Lee Abraham* Trustee 9/28/95
Lee Abraham
/s/ Antoinette C. Bentley* Trustee
9/28/95
Antoinette C. Bentley
/s/ Allan J. Bloostein* Trustee
9/28/95
Allan J. Bloostein
/s/ Madelon Devoe-Talley* Trustee
9/28/95
Madelon Devoe-Talley
/s/ Richard E. Hanson* Trustee 9/28/95
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
5(b) Form of Investment
Advisory
Agreement among the Registrant
and Smith Barney Strategy Advisers
Inc. with respect to Smith Barney
Premium Total Return Fund.
5(c) Form of 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 Fund.
8(a) Form of Custodial Agreement between
the Registrant and each of Smith
Barney Premium Total Return Fund,
Smith Barney Convertible Securities
Fund, Smith Barney Diversified
Strategic Income Fund, Smith Barney
High Income Fund, Smith Barney Tax-
Exempt Income Fund, Smith Barney
Utilities Fund and Smith Barney
Exchange Reserve Fund.
18 Plan pursuant to Rule 18f-
3
Cover Letter to SEC
Rule 18f-3 (d) Multiple Class Plan
for Smith Barney Mutual Funds
Introduction
This plan (the "Plan") is adopted pursuant to Rule 18f-3 (d)
of
the Investment Company Act of 1940, as amended (the "1940
Act").
The purpose of the Plan is to restate the existing
arrangements
previously approved by the Boards of Directors and Trustees
of
certain of the open-end investment companies set forth on
Schedule A (the "Funds" and each a "Fund") distributed by
Smith
Barney Inc. ("Smith Barney") under the Funds' existing order
of
exemption (Investment Company Act Release Nos. 20042
(January 28,
1994) (notice) and 20090 (February 23, 1994)). Shares of
the
Funds are distributed pursuant to a system (the "Multiple
Class
System") in which each class of shares (a "Class") of a Fund
represents a pro rata interest in the same portfolio of
investments of the Fund and differs only to the extent
outlined
below.
I. Distribution Arrangements and Service Fees
One or more Classes of shares of the Funds are offered for
purchase by investors with the following sales load
structure.
In addition, pursuant to Rule 12b-1 under the 1940 Act (the
"Rule"), the Funds have each adopted a plan (the "Services
and
Distribution Plan") under which shares of the Classes are
subject
to the services and distribution fees described below.
1. Class A Shares
Class A shares are offered with a front-end sales load and
under
the Services and Distribution Plan are subject to a service
fee
of up to 0.25% of average daily net assets. In addition,
the
Funds are permitted to asses a contingent deferred sales
charge
("CDSC") on certain redemptions of Class A shares sold
pursuant
to a complete waiver of front-end sales loads applicable to
large
purchases, if the shares are redeemed within one year of the
date
of purchase. This waiver applies to sales of Class A shares
where the amount of purchase is equal to or exceeds $500,000
although this amount may be changed in the future.
2. Class B Shares
Class B shares are offered without a front-end sales load,
but
are subject to a five-year declining CDSC and under the
Services
and Distribution Plan are subject to a service fee at an
annual
rate of up to 0.25% of average daily net assets and a
distribution fee at an annual rate of up to 0.75% of average
daily net assets.
3. Class C Shares
Class C shares are offered without a front-end load, but are
subject to a one-year CDSC and under the Services and
Distribution Plan are subject to a service fee at an annual
rate
of up to 0.25% of average daily net assets and a
distribution fee
at an annual rate of up to 0.75% of average daily net
assets.
Unlike Class B shares, Class C shares do not have the
conversion
feature as discussed below and accordingly, these shares are
subject to a distribution fee for an indefinite period of
time.
The Funds reserve the right to impose these fees at such
higher
rates as may be determined.
4. Class Y Shares
Class Y shares are offered without impositions of either a
sales
charge or a service or distribution fee for investments
where the
amount of purchase is equal to or exceeds $5 million.
5. Class Z Shares
Class Z shares are offered without imposition of either a
sales
charge or a service or distribution fee for purchase (i) by
employee benefit and retirement plans of Smith Barney and
its
affiliates, (ii) by certain unit investment trusts sponsored
by
Smith Barney and its affiliates, and (iii) although not
currently
authorized by the governing boards of the Funds, when and if
authorized, (x) by employees of Smith Barney and its
affiliates
and (y) by directors, general partners or trustees of any
investment company for which Smith Barney serves as a
distributor
and, for each of (x) and (y), their spouses and minor
children.
6. Additional Classes of Shares
The Boards of Directors and Trustees of the Funds have the
authority to create additional classes, or change existing
Classes, from time to time, in accordance with Rule 18f-3 of
the
1940 Act.
II. Expense Allocations
Under the Multiple Class System, all expenses incurred by a
Fund
are allocated among the various Classes of shares based on
the
net assets of the Fund attributable to each Class, except
that
each Class's net assets value and expenses reflect the
expenses
associated with that Class under the Fund's Services and
Distribution Plan, including any costs associated with
obtaining
shareholder approval of the Services and Distribution Plan
(or an
amendment thereto) and any expenses specific to that Class.
Such
expenses are limited to the following:
(I) transfer agency fees as identified by the transfer
agent as being attributable to a specific Class;
(ii) printing and postage expenses related to
preparing and
distributing materials such as shareholder reports,
prospectuses and proxies to current shareholders;
(iii) Blue Sky registration fees incurred by a Class
of
shares;
(iv) Securities and Exchange Commission registration
fees
incurred by a Class of shares;
(v) the expense of administrative personnel and
services as
required to support the shareholders of a specific Class;
(vi) litigation or other legal expenses relating
solely to
one Class of shares; and
(vii) fees of members of the governing boards of the
funds
incurred as a result of issues relating to one Class of
shares.
Pursuant to the Multiple Class System, expenses of a Fund
allocated to a particular Class of shares of that Fund are
borne
on a pro rata basis by each outstanding share of that Class.
III. Conversion Rights of Class B Shares
All Class B shares of each Fund will automatically convert
to
Class A shares after a certain holding period, expected to
be, in
most cases, approximately eight years but may be shorter.
Upon
the expiration of the holding period, Class B shares (except
those purchases through the reinvestment of dividends and
other
distributions paid in respect of Class B shares) will
automatically convert to Class A shares of the Fund at the
relative net asset value of each of the Classes, and will,
as a
result, thereafter be subject to the lower fee under the
Services
and Distribution Plan. For purposes of calculating the
holding
period required for conversion, newly created Class B shares
issued after the date of implementation of the Multiple
Class
System are deemed to have been issued on (i) the date on
which
the issuance of the Class B shares occurred or (ii) for
Class B
shares obtained through an exchange, or a series of
exchanges,
the date on which the issuance of the original Class B
shares
occurred.
Shares purchased through the reinvestment of dividends and
other
distributions paid in respect of Class B shares are also
Class B
shares. However, for purposes of conversion to Class A, all
Class B shares in a shareholder's Fund account that were
purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares (and that
have
not converted to Class A shares as provided in the following
sentence) are considered to be held in a separate sub
account.
Each time any Class B shares in the shareholder's Fund
account
(other than those in the sub-account referred to in the
preceding
sentence) convert to Class A, a pro rata portion of the
Class B
shares then in the sub-account also converts to Class A. The
portion is determined by the ratio that the shareholder's
Class B
shares converting to Class A bears to the shareholder's
total
Class B shares not acquired through dividends and
distributions.
The conversion of Class B shares to Class A shares is
subject to
the continuing availability of a ruling of the Internal
Revenue
Service that payment of different dividends on Class A and
Class
B shares does not result in the Fund's dividends or
distributions
constituting "preferential dividends" under the Internal
Revenue
Code of 1986, as amended (the "Code"), and the continuing
availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event
under
the Code. The conversion of Class B shares to Class A
shares may
be suspended if this opinion is no longer available, In the
event that conversion of Class B shares of not occur, Class
B
shares would continue to be subject to the distribution fee
and
any incrementally higher transfer agency costs attending the
Class B shares for an indefinite period.
IV. Exchange Privileges
Shareholders of a Fund may exchange their shares at net
asset
value for shares of the same Class in certain other of the
Smith
Barney Mutual Funds as set forth in the prospectus for such
Fund.
Class A shareholders who wish to exchange all or part of
their
shares for Class A shares of a Fund sold subject to a sales
charge equal to or lower that that assessed with respect to
the
shares of the Fund being exchanged may do so without paying
a
sales charge. Class A shareholders of a Fund who wish to
exchange all or part of their shares for Class A shares of a
Fund
sold subject to a sales charge higher than that assessed
with
respect to the shares of the Fund being exchanged are
charged the
appropriate "sales charge differential." Funds only permit
exchanges into shares of money market funds having a plan
under
the Rule if, as permitted by paragraph (b) (5) of Rule 11a-3
under the 1940 Act, either (i) the time period during which
the
shares of the money market funds are held is included in the
calculations of the CDSC or (ii) the time period is not
included
but the amount of the CDSC is reduced by the amount of any
payments made under a plan adopted pursuant to the Rule by
the
money market funds with respects to those shares. Currently,
the
Funds include the time period during which shares of the
money
market fund are held in the CDSC period. The exchange
privileges
applicable to all Classes of shares must comply with Rule
11a-3
under the 1940 Act.
Smith Barney Sponsored Investment Companies
Operating under Rule 18f-3 - Schedule A
(as of August 25, 1995)
Smith Barney Adjustable Rate Government Income
Fund Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc. Smith
Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Smith
Barney Equity Funds -
Smith Barney Strategic Investors Fund
Smith Barney Growth and Income Fund
Smith Barney Florida Municipals Fund Smith
Barney Fundamental Value Fund Inc. Smith
Barney Funds, Inc. -
Income and Growth Portfolio Utilities
Portfolio
Income Return Account Portfolio Monthly
Payment Government Portfolio
Short-Term U.S. Treasury Securities
Portfolio U.S. Government Securities
Portfolio
Smith Barney Income Funds -
Smith Barney Premium Total Return Fund
Smith Barney Convertible Fund
Smith Barney Diversified Strategic
Income Fund Smith Barney High Income
Fund Smith Barney Tax-Exempt Income
Fund Smith Barney Exchange Reserve Fund
Smith Barney Utilities Fund
Smith Barney Income Trust -
Smith Barney Limited Maturity Municipals
Fund Smith Barney Limited Maturity
Treasury Fund Smith Barney Intermediate
Maturity
California Municipals
Fund
Smith Barney Intermediate Maturity
New York Municipals
Fund Smith Barney Investment Funds Inc. -
Smith Barney Special Equities Fund
Smith Barney Government Securities Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Growth Opportunity Fund Smith
Barney Managed Growth Fund
Smith Barney Institutional Cash Management Fund
Inc. Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc. -
Cash Portfolio
Government Portfolio
Retirement Portfolio
Smith Barney Municipal Money Market Fund,
Inc.
Smith Barney Muni Funds -
California Portfolio
California Limited Portfolio California
Money Market Portfolio Florida
Portfolio
Florida Limited Portfolio
Georgia Portfolio
Limited Term Portfolio
National Portfolio
New Jersey Portfolio
New York Portfolio
New York Money Market Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Precious Metals and Minerals
Fund
Inc. Smith Barney Telecommunications Trust
Smith Barney Telecommunications Growth
Fund
Smith Barney Telecommunications Income
Fund Smith Barney World Funds, Inc.
International Equity Portfolio
International Balanced Portfolio
European Portfolio
Pacific Portfolio
Global Government Bond Portfolio
u:\legal\data\18f3plan.txt 08/25/95 1:55
PM
CUSTODIAN SERVICES AGREEMENT
This Agreement is made as of ,
1995 by
and between SMITH BARNEY INCOME FUNDS, a Massachusetts
business
trust (the "Fund") and PNC BANK, NATIONAL ASSOCIATION, a national
banking association ("PNC Bank").
The Fund is registered as an open-end investment
company
under the Investment Company Act of 1940, as amended (the
"1940
Act"). The Fund wishes to retain PNC Bank to provide
custodian
services and PNC Bank wishes to furnish such services,
either
directly or through an affiliate or affiliates, as more
fully
described herein. In consideration of the premises and
mutual
covenants herein contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term
"Authorized
Person" shall mean any officer of the Fund and any other
person,
who is duly authorized by the Fund's Governing Board, to
give
Oral and Written Instructions on behalf of the Fund.
Such
persons are listed in the Certificate attached hereto as
the
Authorized Persons Appendix, as such Appendix may be
amended in
writing by the Fund's Governing Board from time to time.
(b) "Book-Entry System". The term "Book-Entry
System"
means Federal Reserve Treasury book-entry system for
United
States and federal agency securities, its successor
or
successors, and its nominee or nominees and any book-entry
system
maintained by an exchange registered with the SEC under the
1934
Act.
(c) "CFTC". The term "CFTC" shall mean
the
Commodities Futures Trading Commission.
(d) "Governing Board". The term "Governing
Board"
shall mean the Fund's Board of Directors if the Fund
is a
corporation or the Fund's Board of Trustees if the Fund
is a
trust, or, where duly authorized, a competent committee
thereof.
(e) "Oral Instructions". The term "Oral
Instructions"
shall mean oral instructions received by PNC Bank
from an
Authorized Person or from a person reasonably believed by
PNC
Bank to be an Authorized Person.
(f) "SEC". The term "SEC" shall mean the
Securities
and Exchange Commission.
(g) "Securities and Commodities Laws". The
term
"Securities and Commodities Laws" shall mean the "1933 Act"
which
shall mean the Securities Act of 1933, the "1934 Act" which
shall
mean the Securities Exchange Act of 1934, the 1940 Act, and
the
"CEA" which shall mean the Commodities Exchange Act, as
amended.
(h) "Shares". The term "Shares" shall mean the
shares
of stock of any series or class of the Fund, or,
where
appropriate, units of beneficial interest in a trust where
the
Fund is organized as a Trust.
(i) "Property". The term "Property" shall mean:
(i) any and all securities
and
other investment items which the Fund
may
from time to time deposit, or cause
to be
deposited, with PNC Bank or which PNC
Bank
may from time to time hold for the Fund;
(ii) all income in respect of
any of
such securities or other investment items;
(iii) all proceeds of the sale of
any of
such securities or investment items; and
(iv) all proceeds of the
sale of
securities issued by the Fund, which are
received
by PNC Bank from time to time, from or on
behalf
of the Fund.
(j) "Written Instructions". The term
"Written
Instructions" shall mean written instructions signed by
one
Authorized Person and received by PNC Bank. The
instructions may
be delivered by hand, mail, tested telegram, cable,
telex or
facsimile sending device.
2. Appointment. The Fund hereby appoints PNC
Bank to
provide custodian services to the Fund, and PNC Bank accepts
such
appointment and agrees to furnish such services.
3. Delivery of Documents. The Fund has provided or,
where
applicable, will provide PNC Bank with the following:
(a) certified or authenticated copies of
the
resolutions of the Fund's Governing Board, approving
the
appointment of PNC Bank or its affiliates to provide
services;
(b) a copy of the Fund's most recent
effective
registration statement;
(c) a copy of the Fund's advisory
agreement or
agreements;
(d) a copy of the Fund's distribution
agreement or
agreements;
(e) a copy of the Fund's administration
agreements if
PNC Bank is not providing the Fund with such services;
(f) copies of any shareholder servicing
agreements
made in respect of the Fund; and
(g) certified or authenticated copies of any and
all
amendments or supplements to the foregoing.
4. Compliance with Government Rules and
Regulations.
PNC Bank undertakes to comply with all applicable
requirements of
the Securities and Commodities Laws and any laws, rules
and
regulations of governmental authorities having jurisdiction
with
respect to all duties to be performed by PNC Bank
hereunder.
Except as specifically set forth herein, PNC Bank
assumes no
responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in
this
Agreement, PNC Bank shall act only upon Oral and
Written
Instructions. PNC Bank shall be entitled to rely upon any
Oral
and Written Instructions it receives from an Authorized
Person
(or from a person reasonably believed by PNC Bank to
be an
Authorized Person) pursuant to this Agreement. PNC Bank
may
assume that any Oral or Written Instructions received
hereunder
are not in any way inconsistent with the provisions
of
organizational documents or this Agreement or of any
vote,
resolution or proceeding of the Fund's Governing Board or of
the
Fund's shareholders.
The Fund agrees to forward to PNC Bank Written
Instructions
confirming Oral Instructions so that PNC Bank receives
the
Written Instructions by the close of business on the same
day
that such Oral Instructions are received. The fact that
such
confirming Written Instructions are not received by PNC
Bank
shall in no way invalidate the transactions or
enforceability of
the transactions authorized by the Oral Instructions.
The Fund further agrees that PNC Bank shall
incur no
liability to the Fund in acting upon Oral or Written
Instructions
provided such instructions reasonably appear to have
been
received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PNC Bank is in doubt
as to
any action it should or should not take, PNC Bank may
request
directions or advice, including Oral or Written
Instructions,
from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in
doubt
as to any questions of law pertaining to any action it
should or
should not take, PNC Bank may request advice at its own cost
from
such counsel of its own choosing (who may be counsel for
the
Fund, the Fund's advisor or PNC Bank, at the option of PNC
Bank).
(c) Conflicting Advice. In the event of a
conflict
between directions, advice or Oral or Written Instructions
PNC
Bank receives from the Fund, and the advice it receives
from
counsel, PNC Bank shall be entitled to rely upon and follow
the
advice of counsel.
(d) Protection of PNC Bank. PNC Bank
shall be
protected in any action it takes or does not take in
reliance
upon directions, advice or Oral or Written
Instructions it
receives from the Fund or from counsel and which PNC
Bank
believes, in good faith, to be consistent with those
directions,
advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so
as to
impose an obligation upon PNC Bank (i) to seek such
directions,
advice or Oral or Written Instructions, or (ii) to
act in
accordance with such directions, advice or Oral or
Written
Instructions unless, under the terms of other provisions of
this
Agreement, the same is a condition of PNC Bank's properly
taking
or not taking such action.
7. Records. The books and records pertaining to the
Fund
which are in the possession of PNC Bank, shall be the
property of
the Fund. Such books and records shall be prepared
and
maintained as required by the 1940 Act and other
applicable
securities laws, rules and regulations. The Fund, or the
Fund's
Authorized Persons, shall have access to such books and
records
at all time during PNC Bank's normal business hours. Upon
the
reasonable request of the Fund, copies of any such books
and
records shall be provided by PNC Bank to the Fund or
to an
Authorized Person of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep
confidential
all records of the Fund and information relative to the
Fund and
its shareholders (past, present and potential), unless
the
release of such records or information is otherwise
consented to,
in writing, by the Fund. The Fund agrees that such consent
shall
not be unreasonably withheld and may not be withheld where
PNC
Bank may be exposed to civil or criminal contempt
proceedings or
when required to divulge. The Fund further agrees that,
should
PNC Bank be required to provide such information or
records to
duly constituted authorities (who may institute civil or
criminal
contempt proceedings for failure to comply), PNC Bank shall
not
be required to seek the Fund's consent prior to disclosing
such
information.
9. Cooperation with Accountants. PNC Bank shall
cooperate
with the Fund's independent public accountants and shall
take all
reasonable action in the performance of its obligations
under
this Agreement to ensure that the necessary information is
made
available to such accountants for the expression of
their
opinion, as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and
shall
maintain in effect with appropriate parties one or
more
agreements making reasonable provision for emergency
use of
electronic data processing equipment to the extent
appropriate
equipment is available. In the event of equipment failures,
PNC
Bank shall, at no additional expense to the Fund, take
reasonable
steps to minimize service interruptions but shall
have no
liability with respect thereto.
11. Compensation. As compensation for custody
services
rendered by PNC Bank during the term of this Agreement, the
Fund
will pay to PNC Bank a fee or fees as may be agreed to in
writing
from time to time by the Fund and PNC Bank.
12. Indemnification. The Fund agrees to indemnify and
hold
harmless PNC Bank and its nominees from all taxes,
charges,
expenses, assessment, claims and liabilities (including,
without
limitation, liabilities arising under the Securities
and
Commodities Laws and any state and foreign securities and
blue
sky laws, and amendments thereto, and expenses,
including
(without limitation) attorneys' fees and disbursements,
arising
directly or indirectly from any action which PNC Bank
takes or
does not take (i) at the request or on the direction of
or in
reliance on the advice of the Fund or (ii) upon Oral or
Written
Instructions. Neither PNC Bank, nor any of its nominees,
shall
be indemnified against any liability to the Fund or to
its
shareholders (or any expenses incident to such liability)
arising
out of PNC Bank's own willful misfeasance, bad faith,
negligence
or reckless disregard of its duties and obligations under
this
Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be
under no
duty to take any action on behalf of the Fund
except as
specifically set forth herein or as may be specifically
agreed to
by PNC Bank, in writing. PNC Bank shall be obligated to
exercise
care and diligence in the performance of its duties
hereunder, to
act in good faith and to use its best effort, within
reasonable
limits, in performing services provided for under this
Agreement.
PNC Bank shall be responsible for its own negligent
failure to
perform its duties under this Agreement. Notwithstanding
the
foregoing, PNC Bank shall not be responsible for losses
beyond
its control, provided that PNC Bank has acted in accordance
with
the standard of care set forth above; and provided further
that
PNC Bank shall only be responsible for that portion of
losses or
damages suffered by the Fund that are attributable to
the
negligence of PNC Bank.
Without limiting the generality of the foregoing or of
any
other provision of this Agreement, PNC Bank, in connection
with
its duties under this Agreement, shall not be under any
duty or
obligation to inquire into and shall not be liable for (a)
the
validity or invalidity or authority or lack thereof of any
Oral
or Written Instruction, notice or other instrument which
conforms
to the applicable requirements of this Agreement, and which
PNC
Bank reasonably believes to be genuine; or (b) delays or
errors
or loss of data occurring by reason of circumstances beyond
PNC
Bank's control, including acts of civil or military
authority,
national emergencies, labor difficulties, fire, flood
or
catastrophe, acts of God, insurrection, war, riots or
failure of
the mails, transportation, communication or power supply.
Notwithstanding anything in this Agreement to the
contrary,
PNC Bank shall have no liability to the Fund for
any
consequential, special or indirect losses or damages which
the
Fund may incur or suffer by or as a consequence of PNC
Bank's
performance of the services provided hereunder, whether or
not
the likelihood of such losses or damages was known by PNC
Bank.
14. Description of Services.
(a) Delivery of the Property. The Fund will
deliver
or arrange for delivery to PNC Bank, all the property
owned by
the Fund, including cash received as a result of the
distribution
of its Shares, during the period that is set forth in
this
Agreement. PNC Bank will not be responsible for such
property
until actual receipt.
(b) Receipt and Disbursement of Money. PNC
Bank,
acting upon Written Instructions, shall open and
maintain
separate account(s) in the Fund's name using all cash
received
from or for the account of the Fund, subject to the terms of
this
Agreement. In addition, upon Written Instructions, PNC
Bank
shall open separate custodial accounts for each separate
series,
class or portfolio of the Fund and shall hold in such
account(s)
all cash received from or for the accounts of the
Fund
specifically designated to each separate series, class
or
portfolio. PNC Bank shall make cash payments from or for
the
account of the Fund only for:
(i) purchases of securities
in the
name of the Fund or PNC Bank or PNC
Bank's
nominee as provided in sub-paragraph j
and
for which PNC Bank has received a copy
of the
broker's or dealer's confirmation or
payee's
invoice, as appropriate;
(ii) purchase or redemption of
Shares of
the Fund delivered to PNC Bank;
(iii) payment of, subject to
Written
Instructions, interest, taxes,
administration,
accounting, distribution, advisory,
management
fees or similar expenses which are to be
borne by
the Fund;
(iv) payment to, subject to
receipt of
Written Instructions, the Fund's transfer
agent,
as agent for the shareholders, an amount
equal to
the amount of dividends and distributions
stated
in the Written Instructions to be
distributed in
cash by the transfer agent to shareholders,
or, in
lieu of paying the Fund's transfer agent, PNC
Bank
may arrange for the direct payment of
cash
dividends and distributions to
shareholders in
accordance with procedures mutually agreed
upon
from time to time by and among the Fund, PNC
Bank
and the Fund's transfer agent;
(v) payments, upon
receipt of
Written Instructions, in connection with
the
conversion, exchange or surrender
of
securities owned or subscribed to by the
Fund
and held by or delivered to PNC Bank;
(vi) payments of the amounts
of
dividends received with respect to
securities
sold short; payments made to a sub-
custodian
pursuant to provisions in sub-paragraph c of
this
Paragraph; and
(viii) payments, upon Written
Instructions
made for other proper Fund purposes. PNC
Bank is
hereby authorized to endorse and collect
all
checks, drafts or other orders for the
payment of
money received as custodian for the account
of the
Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold
all
securities received by it for the
account of
the Fund in a separate account
that
physically segregates such securities
from
those of any other persons, firms
or
corporations, except for securities held
in a
Book-Entry System. All such
securities
shall be held or disposed of only
upon
Written Instructions of the Fund
pursuant to
the terms of this Agreement. PNC Bank
shall
have no power or authority to
assign,
hypothecate, pledge or otherwise
dispose of
any such securities or investment,
except
upon the express terms of this Agreement
and
upon Written Instructions, accompanied
by a
certified resolution of the Fund's
Governing
Board, authorizing the transaction.
In no
case may any member of the Fund's
Governing
Board, or any officer, employee or
agent of
the Fund withdraw any securities. At
PNC
Bank's own expense and for its
own
convenience, PNC Bank may enter
into
sub-custodian agreements with other
banks or
trust companies to perform duties
described
in this sub-paragraph c. Such bank or
trust
company shall have an aggregate
capital,
surplus and undivided profits,
according to
its last published report, of at least
one
million dollars ($1,000,000), if it
is a
subsidiary or affiliate of PNC Bank,
or at
least twenty million dollars
($20,000,000) if
such bank or trust company is
not a
subsidiary or affiliate of PNC Bank.
In
addition, such bank or trust company
must
agree to comply with the relevant
provisions
of the 1940 Act and other applicable
rules
and regulations. PNC Bank shall
remain
responsible for the performance of all
of its
duties as described in this Agreement
and
shall hold the Fund harmless from PNC
Bank's
own (or any sub-custodian chosen by PNC
Bank
under the terms of this sub-paragraph c)
acts
or omissions, under the standards of
care
provided for herein.
(d) Transactions Requiring Instructions. Upon
receipt
of Oral or Written Instructions and not otherwise, PNC
Bank,
directly or through the use of the Book-Entry System, shall:
(i) deliver any securities
held
for the Fund against the receipt of
payment
for the sale of such securities;
(ii) execute and deliver to such
persons
as may be designated in such Oral or
Written
Instructions, proxies, consents,
authorizations,
and any other instruments whereby the
authority of
the Fund as owner of any securities
may be
exercised;
(iii) deliver any securities to
the
issuer thereof, or its agent, when
such
securities are called, redeemed, retired
or
otherwise become payable; provided that, in
any
such case, the cash or other consideration
is to
be delivered to PNC Bank;
(iv) deliver any securities held
for the
Fund against receipt of other securities or
cash
issued or paid in connection with the
liquidation,
reorganization, refinancing, tender offer,
merger,
consolidation or recapitalization of
any
corporation, or the exercise of any
conversion
privilege;
(v) deliver any securities
held
for the Fund to any protective
committee,
reorganization committee or other
person in
connection with the
reorganization,
refinancing, merger,
consolidation,
recapitalization or sale of assets of
any
corporation, and receive and hold under
the
terms of this Agreement such
certificates of
deposit, interim receipts or
other
instruments or documents as may be
issued to
it to evidence such delivery;
(vi) make such transfer or
exchanges of
the assets of the Fund and take such other
steps
as shall be stated in said Oral or
Written
Instructions to be for the purpose of
effectuating
a duly authorized plan of
liquidation,
reorganization, merger, consolidation
or
recapitalization of the Fund;
(vii) release securities belonging
to the
Fund to any bank or trust company for the
purpose
of a pledge or hypothecation to secure any
loan
incurred by the Fund; provided, however,
that
securities shall be released only upon
payment to
PNC Bank of the monies borrowed, except
that in
cases where additional collateral is
required to
secure a borrowing already made subject to
proper
prior authorization, further securities
may be
released for that purpose; and repay such
loan
upon redelivery to it of the securities
pledged or
hypothecated therefor and upon surrender of
the
note or notes evidencing the loan;
(viii) release and deliver
securities
owned by the Fund in connection with
any
repurchase agreement entered into on behalf
of the
Fund, but only on receipt of payment
therefor; and
pay out moneys of the Fund in connection with
such
repurchase agreements, but only upon the
delivery
of the securities;
(ix) release and deliver or
exchange
securities owned by the Fund in connection
with
any conversion of such securities,
pursuant to
their terms, into other securities;
(x) release and deliver
securities
owned by the Fund for the purpose
of
redeeming in kind shares of the Fund
upon
delivery thereof to PNC Bank; and
(xi) release and deliver or
exchange
securities owned by the Fund for other
corporate
purposes. PNC Bank must also receive a
certified
resolution describing the nature of the
corporate
purpose and the name and address of the
person(s)
to whom delivery shall be made when such
action is
pursuant to sub-paragraph d above.
(e) Use of Book-Entry System. The Fund shall
deliver to
PNC Bank certified resolutions of the Fund's Governing
Board
approving, authorizing and instructing PNC Bank on a
continuous
and on-going basis, to deposit in the Book-Entry System
all
securities belonging to the Fund eligible for deposit
therein and
to utilize the Book-Entry System to the extent
possible in
connection with settlements of purchases and sales of
securities
by the Fund, and deliveries and returns of securities
loaned,
subject to repurchase agreements or used as
collateral in
connection with borrowings. PNC Bank shall continue to
perform
such duties until it receives Written or Oral
Instructions
authorizing contrary actions(s).
To administer the Book-Entry System properly, the
following
provisions shall apply:
(i) With respect to
securities of
the Fund which are maintained in
the
Book-Entry system, established
pursuant to
this sub-paragraph e hereof, the
records of
PNC Bank shall identify by Book-
Entry or
otherwise those securities belonging to
the
Fund. PNC Bank shall furnish the
Fund a
detailed statement of the Property held
for
the Fund under this Agreement at
least
monthly and from time to time and
upon
written request.
(ii) Securities and any cash of the
Fund
deposited in the Book-Entry System will at
all
times be segregated from any assets and
cash
controlled by PNC Bank in other than a
fiduciary
or custodian capacity but may be commingled
with
other assets held in such capacities. PNC
Bank
and its sub-custodian, if any, will pay out
money
only upon receipt of securities and will
deliver
securities only upon the receipt of money.
(iii) All books and records
maintained by
PNC Bank which relate to the Fund's
participation
in the Book-Entry System will at all times
during
PNC Bank's regular business hours be open to
the
inspection of the Fund's duly authorized
employees
or agents, and the Fund will be furnished
with all
information in respect of the services
rendered to
it as it may require.
(iv) PNC Bank will provide the Fund
with
copies of any report obtained by PNC Bank on
the
system of internal accounting control of
the
Book-Entry System promptly after receipt of
such a
report by PNC Bank. PNC Bank will also
provide
the Fund with such reports on its own
system of
internal control as the Fund may
reasonably
request from time to time.
(f) Registration of Securities. All Securities
held
for the Fund which are issued or issuable only in bearer
form,
except such securities held in the Book-Entry System,
shall be
held by PNC Bank in bearer form; all other securities held
for
the Fund may be registered in the name of the Fund; PNC
Bank; the
Book-Entry System; a sub-custodian; or any duly
appointed
nominee(s) of the Fund, PNC Bank, Book-Entry system
or
sub-custodian. The Fund reserves the right to instruct PNC
Bank
as to the method of registration and safekeeping of
the
securities of the Fund. The Fund agrees to furnish to PNC
Bank
appropriate instruments to enable PNC Bank to hold or
deliver in
proper form for transfer, or to register its registered
nominee
or in the name of the Book-Entry System, any securities
which it
may hold for the account of the Fund and which may from
time to
time be registered in the name of the Fund. PNC Bank shall
hold
all such securities which are not held in the Book-Entry
System
in a separate account for the Fund in the name of the
Fund
physically segregated at all times from those of any other
person
or persons.
(g) Voting and Other Action. Neither PNC Bank
nor its
nominee shall vote any of the securities held pursuant to
this
Agreement by or for the account of the Fund, except in
accordance
with Written Instructions. PNC Bank, directly or through
the use
of the Book-Entry System, shall execute in blank and
promptly
deliver all notice, proxies, and proxy soliciting
materials to
the registered holder of such securities. If the
registered
holder is not the Fund then Written or Oral Instructions
must
designate the person(s) who owns such securities.
(h) Transactions Not Requiring Instructions. In
the
absence of contrary Written Instructions, PNC Bank is
authorized
to take the following actions:
(i) Collection of Income and
Other
Payments.
(A) collect and
receive
for the account of the Fund, all
income,
dividends, distributions,
coupons,
option premiums, other payments
and
similar items, included or to
be
included in the Property, and,
in
addition, promptly advise the
Fund of
such receipt and credit such
income, as
collected, to the Fund's
custodian
account;
(B) endorse and
deposit
for collection, in the name of the
Fund,
checks, drafts, or other orders for
the
payment of money;
(C) receive and
hold for
the account of the Fund all
securities
received as a distribution on
the
Fund's portfolio securities as a
result
of a stock dividend, share split-
up or
reorganization,
recapitalization,
readjustment or other
rearrangement or
distribution of rights or
similar
securities issued with respect to
any
portfolio securities belonging to
the
Fund held by PNC Bank hereunder;
(D) present for
payment
and collect the amount payable
upon all
securities which may mature or
be
called, redeemed, or retired,
or
otherwise become payable on the
date
such securities become payable; and
(E) take any
action
which may be necessary and
proper in
connection with the collection
and
receipt of such income and
other
payments and the endorsement
for
collection of checks, drafts, and
other
negotiable instruments.
(ii) Miscellaneous Transactions.
(A) PNC Bank
is
authorized to deliver or cause
to be
delivered Property against
payment or
other consideration or written
receipt
therefor in the following cases:
(1)
for
examination by a broker or
dealer
selling for the account of the
Fund
in accordance with street
delivery
custom;
(2) for
the
exchange of interim
receipts or
temporary securities for
definitive
securities; and
(3)
for
transfer of securities into
the
name of the Fund or PNC
Bank or
nominee of either, or for
exchange
of securities for a
different
number of
bonds,certificates, or
other evidence, representing
the
same aggregate face amount
or
number of units bearing the
same
interest rate, maturity date
and
call provisions, if any;
provided
that, in any such case, the
new
securities are to be
delivered to
PNC Bank.
(B) Unless and
until PNC
Bank receives Oral or
Written
Instructions to the contrary, PNC
Bank
shall:
(1) pay
all
income items held by it which
call
for payment upon presentation
and
hold the cash received by it
upon
such payment for the account
of the
Fund;
(2)
collect
interest and cash
dividends
received, with notice to the
Fund,
to the Fund's account;
(3) hold
for
the account of the Fund all
stock
dividends, rights and
similar
securities issued with
respect to
any securities held by PNC
Bank;
and
(4)
execute as
agent on behalf of the
Fund
all necessary
ownership
certificates required by
the
Internal Revenue Code or the
Income
Tax Regulations of the
United
States Treasury Department or
under
the laws of any State now
or
hereafter in effect, inserting
the
Fund's name, on such
certificate as
the owner of the securities
covered
thereby, to the extent it
may
lawfully do so.
(i) Segregated Accounts.
(i) PNC Bank shall upon
receipt of
Written or Oral Instructions establish
and
maintain segregated account(s) on its
records
for and on behalf of the Fund.
Such
account(s) may be used to transfer cash
and
securities, including securities in
the
Book-Entry System:
(A) for the
purposes of
compliance by the Fund with
the
procedures required by a
securities or
option exchange, providing
such
procedures comply with the 1940 Act
and
any releases of the SEC relating
to the
maintenance of segregated
accounts by
registered investment companies;
and
(B) Upon
receipt of
Written Instructions, for other
proper
corporate purposes.
(ii) PNC Bank may enter into
separate
custodial agreements with various
futures
commission merchants ("FCMs") that the Fund
uses
("FCM Agreement"). Pursuant to an FCM
Agreement,
the Fund's margin deposits in any
transactions
involving futures contracts and options on
futures
contracts will be held by PNC Bank in
accounts
("FCM Account") subject to the disposition by
the
FCM involved in such contracts and in
accordance
with the customer contract between FCM and
the
Fund ("FCM Contract"), SEC rules and the
rules of
the applicable commodities exchange. Such
FCM
Agreements shall only be entered into
upon
receipt of Written Instructions from the
Fund
which state that:
(A) a customer
agreement
between the FCM and the Fund has
been
entered into; and
(B) the Fund
is in
compliance with all the rules
and
regulations of the CFTC.
Transfers of
initial margin shall be made into a
FCM
Account only upon Written
Instructions;
transfers of premium and
variation
margin may be made into a FCM
Account
pursuant to Oral Instructions.
Transfers of
funds
from a FCM Account to the FCM for
which
PNC Bank holds such an account may
only
occur upon certification by the
FCM to
PNC Bank that pursuant to the
FCM
Agreement and the FCM Contract,
all
conditions precedent to its
right to
give PNC Bank such instructions
have
been satisfied.
(iii) PNC Bank shall arrange for
the
establishment of IRA custodian accounts for
such
share- holders holding Shares through
IRA
accounts, in accordance with the
Fund's
prospectuses, the Internal Revenue Code
(including
regulations), and with such other
procedures as
are mutually agreed upon from time to time
by and
among the Fund, PNC Bank and the Fund's
transfer
agent.
(j) Purchases of Securities. PNC Bank shall
settle
purchased securities upon receipt of Oral or Written
Instructions
from the Fund or its investment advisor(s) that specify:
(i) the name of the issuer
and the
title of the securities, including
CUSIP
number if applicable;
(ii) the number of shares or
the
principal amount purchased and accrued
interest,
if any;
(iii) the date of purchase
and
settlement;
(iv) the purchase price per unit;
(v) the total amount payable
upon
such purchase; and
(vi) the name of the person from
whom or
the broker through whom the purchase was
made. PNC
Bank shall upon receipt of securities
purchased by
or for the Fund pay out of the moneys held
for the
account of the Fund the total amount
payable to
the person from whom or the broker through
whom
the purchase was made, provided that the
same
conforms to the total amount payable as set
forth
in such Oral or Written Instructions.
(k) Sales of Securities. PNC Bank shall settle
sold
securities upon receipt of Oral or Written Instructions from
the
Fund that specify:
(i) the name of the issuer and
the
title of the security, including CUSIP
number
if applicable;
(ii) the number of shares or
principal
amount sold, and accrued interest, if any;
(iii) the date of trade, settlement
and
sale;
(iv) the sale price per unit;
(v) the total amount
payable to
the Fund upon such sale;
(vi) the name of the broker through
whom
or the person to whom the sale was made; and
(vii) the location to which the
security
must be delivered and delivery deadline, if
any.
PNC Bank shall deliver the securities upon
receipt
of the total amount payable to the Fund upon
such
sale, provided that the total amount
payable is
the same as was set forth in the Oral or
Written
Instructions. Subject to the foregoing, PNC
Bank
may accept payment in such form as
shall be
satisfactory to it, and may deliver
securities and
arrange for payment in accordance with the
customs
prevailing among dealers in securities.
(l) Reports.
(i) PNC Bank shall furnish
the
Fund the following reports:
(A) such periodic
and
special reports as the Fund
may
reasonably request;
(B) a monthly
statement
summarizing all transactions and
entries
for the account of the Fund,
listing the
portfolio securities belonging to
the
Fund with the adjusted average
cost of
each issue and the market value at
the
end of such month, and stating the
cash
account of the Fund
including
disbursement;
(C) the reports
to be
furnished to the Fund pursuant to
Rule
17f-4; and
(D) such
other
information as may be agreed upon
from
time to time between the Fund and
PNC
Bank.
(ii) PNC Bank shall transmit
promptly to
the Fund any proxy statement, proxy
material,
notice of a call or conversion or
similar
communication received by it as custodian of
the
Property. PNC Bank shall be under no
other
obligation to inform the Fund as to such
actions
or events.
(m) Collections. All collections of monies or
other
property, in respect, or which are to become part of the
Property
(but not the safekeeping thereof upon receipt by PNC Bank)
shall
be at the sole risk of the Fund. If payment is not
received by
PNC Bank within a reasonable time after proper demands have
been
made, PNC Bank shall notify the Fund in writing, including
copies
of all demand letters, any written responses, memoranda of
all
oral responses and telephonic demands thereto, and
await
instructions from the Fund. PNC Bank shall not be
obliged to
take legal action for collection unless and until
reasonably
indemnified to its satisfaction. PNC Bank shall also notify
the
Fund as soon as reasonably practicable whenever income
due on
securities is not collected in due course.
15. Duration and Termination. This Agreement
shall
continue until terminated by the Fund or by PNC Bank on
sixty
(60) days' prior written notice to the other party. In the
event
this Agreement is terminated (pending appointment of a
successor
to PNC Bank or vote of the shareholders of the Fund to
dissolve
or to function without a custodian of its cash,
securities or
other property), PNC Bank shall not deliver cash,
securities or
other property of the Fund to the Fund. It may deliver them
to a
bank or trust company of PNC Bank's choice, having an
aggregate
capital, surplus and undivided profits, as shown by its
last
published report, of not less than twenty million
dollars
($20,000,000), as a custodian for the Fund to be held under
terms
similar to those of this Agreement. PNC Bank shall
not be
required to make any such delivery or payment until full
payment
shall have been made to PNC Bank of all of its
fees,
compensation, costs and expenses. PNC Bank shall have a
security
interest in and shall have a right of setoff against
Property in
the Fund's possession as security for the payment of such
fees,
compensation, costs and expenses.
16. Notices. All notices and other
communications,
including Written Instructions, shall be in writing
or by
confirming telegram, cable, telex or facsimile sending
device.
Notice shall be addressed (a) if to PNC Bank at PNC
Bank's
address: Airport Business Center, International Court 2,
200
Stevens Drive, Lester, Pennsylvania 19113, marked for
the
attention of the Custodian Services Department (or its
successor)
(b) if to the Fund, at the address of the Fund; or (c)
if to
neither of the foregoing, at such other address as shall
have
been notified to the sender of any such notice or
other
communication. If notice is sent by confirming telegram,
cable,
telex or facsimile sending device, it shall be deemed to
have
been given immediately. If notice is sent by first-class
mail,
it shall be deemed to have been given five days after it has
been
mailed. If notice is sent by messenger, it shall be
deemed to
have been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof,
may be
changed or waived only by a written amendment, signed by
the
party against whom enforcement of such change or
waiver is
sought. 18. Delegation. PNC Bank may assign its
rights
and delegate its duties hereunder to any wholly-owned
direct or
indirect subsidiary of PNC Bank, National Association or PNC
Bank
Corp., provided that (i) PNC Bank gives the Fund thirty (30)
days
prior written notice; (ii) the delegate agrees with PNC
Bank to
comply with all relevant provisions of the 1940 Act; and
(iii)
PNC Bank and such delegate promptly provide such
information as
the Fund may request, and respond to such questions as the
Fund
may ask, relative to the assignment, including
(without
limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in
two or
more counterparts, each of which shall be deemed an
original, but
all of which together shall constitute one and the
same
instrument.
20. Further Actions. Each party agrees to perform
such
further acts and execute such further documents as are
necessary
to effectuate the purposes hereof.
21. Miscellaneous. This Agreement embodies the
entire
agreement and understanding between the parties and
supersedes
all prior agreements and understandings relating to the
subject
matter hereof, provided that the parties may embody in
one or
more separate documents their agreement, if any, with
respect to
delegated duties and/or Oral Instructions. The captions in
this
Agreement are included for convenience of reference only
and in
no way define or delimit any of the provisions
hereof or
otherwise affect their construction or effect.
This Agreement shall be deemed to be a contract
made in
Pennsylvania and governed by Pennsylvania law, without
regard to
principles of conflicts of law. If any provision of
this
Agreement shall be held or made invalid by a court
decision,
statute, rule or otherwise, the remainder of this Agreement
shall
not be affected thereby. This Agreement shall be binding
upon
and shall inure to the benefit of the parties hereto and
their
respective successors and permitted assigns.
IN WITNESS WHEREOF, the parties hereto have caused
this
Agreement to be executed by their officers designated
below on
the day and year first above written.
PNC BANK, NATIONAL ASSOCIATION
By:
Title:
SMITH BARNEY INCOME FUNDS
By:
Title:
SUBINVAG.PTR
SUB-INVESTMENT ADVISORY AGREEMENT
SMITH BARNEY INCOME FUNDS
(Smith Barney Premium Total Return Fund)
Boston Partners Asset Management, L.P.
One Financial Center
43rd Floor
Boston, Massachusetts 02111
Dear Sirs:
Smith Barney Income Funds (the "Company"), a trust
organized
under the laws of the Commonwealth of Massachusetts, on
behalf of
Smith Barney Premium Total Return Fund (the "Fund"), and
Smith
Barney Strategy Advisers Inc. (the "Adviser"), each confirms
its
agreement with Boston Partners Asset Management, L.P. (the
"Sub-
Adviser"), as follows:
1. Investment Description; Appointment
The Company desires to employ its capital relating to
the
Fund by investing and reinvesting in investments of the kind
and
in accordance with the investment objective(s), policies
and
limitations specified in its Master Trust Agreement, as
amended,
from time to time (the "Master Trust Agreement"), in
the
prospectus relating to the Fund (the "Prospectus") and
the
Statement of Additional Information relating to the Company
(the
"Statement") filed with the Securities and Exchange
Commission as
part of the Company's Registration Statement on Form N-
lA, as
amended from time to time, and in the manner and to the
extent as
may from time to time be approved by the Board of Trustees
of the
Company (the "Board"). Copies of the Prospectus, the
Statement
and the Master Trust Agreement have been or will be
submitted to
the Sub-Adviser. The Company agrees to provide copies of
all
amendments to the Prospectus, the Statement and the Master
Trust
Agreement to the Sub-Adviser on an ongoing basis. The
Company
employs the Adviser as the investment adviser to the Fund,
and
the Company and the Adviser desire to employ and hereby
appoint
the Sub-Adviser to act as its sub-investment adviser. The
Sub-
Adviser accepts the appointment and agrees to furnish
the
services for the compensation set forth below.
2. Services as Investment Sub-Adviser
Subject to the supervision, direction and approval of
the
Board of the Company and the Adviser, the Sub-Adviser will:
(a)
manage the Fund's portfolio in accordance with the
Fund's
investment objective(s) and policies as stated in the
Master
Trust Agreement, the Prospectus and the Statement; (b)
make
investment decisions for the Fund; (c) place purchase and
sale
orders for portfolio transactions for the Fund; and (d)
employ
professional portfolio managers and securities analysts
who
provide research services to the Fund. In providing
those
services, the Sub-Adviser will conduct a continual
program of
investment, evaluation and, if appropriate, sale and
reinvestment
of the Fund's assets.
3. Brokerage
In selecting brokers or dealers to execute
transactions on
behalf of the Fund, the Sub-Adviser will seek the best
overall
terms available. In assessing the best overall terms
available
for any transaction, the Sub-Adviser will consider
factors it
deems relevant, including, but not limited to, the breadth
of the
market in the security, the price of the security, the
financial
condition and execution capability of the broker or dealer
and
the reasonableness of the commission, if any, for the
specific
transaction and on a continuing basis. In selecting
brokers
or dealers to execute a particular transaction, and in
evaluating
the best overall terms available, the Sub-Adviser is
authorized
to consider the brokerage and research services (as those
terms
are defined in Section 28(e) of the Securities Exchange
Act of
1934, as amended) provided to the Fund and/or other accounts
over
which the Sub-Adviser or its affiliates exercise
investment
discretion.
4. Information Provided to the Company
The Sub-Adviser will keep the Adviser and the
Company
informed of developments materially affecting the Fund, and
will,
on its own initiative, furnish the Adviser and the Company
from
time to time with whatever information the Sub-Adviser
believes
is appropriate for this purpose.
5. Standard of Care
The Sub-Adviser shall exercise its best
judgment in
rendering the services listed in paragraph 2 above. The
Sub-
Adviser shall not be liable for any error of judgment or
mistake
of law or for any loss suffered by the Fund and the
Adviser in
connection with the matters to which this Agreement
relates,
provided that nothing in this Agreement shall be
deemed to
protect or purport to protect the Sub-Adviser against
any
liability to the Adviser, the Company or to its
shareholders of
the Fund to which the Sub-Adviser would otherwise be
subject by
reason of willful misfeasance, bad faith or gross
negligence on
its part in the performance of its duties or by reason of
the Sub-
Adviser's reckless disregard of its obligations and duties
under
this Agreement.
6. Compensation
In consideration of the services rendered pursuant to
this
Agreement, the Adviser will pay the Sub-Adviser on the
first
business day of each month a fee for the previous month at
the
annual rate of 0.10 of 1.00% of the Fund's average daily
net
assets. The fee for the period from the Effective Date
(defined
below) of the Agreement to the end of the month during which
the
Effective Date occurs shall be prorated according to
the
proportion that such period bears to the full monthly
period.
Upon any termination of this Agreement before the end of a
month,
the fee for such part of that month shall be prorated
according
to the proportion that such period bears to the full
monthly
period and shall be payable upon the date of termination of
this
Agreement. For the purpose of determining fees payable to
the Sub-
Adviser, the value of the Fund's net assets shall be
computed at
the times and in the manner specified in the Prospectus
and/or
the Statement.
7. Expenses
The Sub-Adviser will bear all expenses in connection
with
the performance of its services under this Agreement. The
Fund
will bear certain other expenses to be incurred in its
operation,
including, but not limited to, investment advisory
and
administration fees; fees for necessary professional
and
brokerage services; fees for any pricing service; the
costs of
regulatory compliance; and costs associated with maintaining
the
Company's legal existence and shareholder relations.
8. Reduction of Fee
If in any fiscal year the aggregate expenses of the
Fund
(including fees pursuant to this Agreement and the
Fund's
investment advisory agreement, but excluding interest,
taxes,
brokerage and extraordinary expenses) exceed the
expense
limitation of any state having jurisdiction over the Fund,
the
Sub-Adviser will reduce its fee by the proportion of such
excess
expense equal to the proportion that its fee thereunder
bears to
the aggregate of fees paid by the Fund for investment
advice and
administration in that year, to the extent required by state
law.
A fee reduction pursuant to this paragraph 8, if any,
will be
estimated, reconciled and paid on a monthly basis.
9. Services to Other Companies or Accounts
The Company understands that the Sub-Adviser now acts,
will
continue to act and may act in the future as investment
adviser
to fiduciary and other managed accounts, and as
investment
adviser to other investment companies, and the Company
has no
objection to the Sub-Adviser's so acting, provided that
whenever
the Fund and one or more other investment companies
advised by
the Sub-Adviser have available funds for investment,
investments
suitable and appropriate for each will be allocated in
accordance
with a formula believed to be equitable to each company.
The
Company recognizes that in some cases this procedure
may
adversely affect the size of the position obtainable for
the
Fund. In addition, the Company understands that the
persons
employed by the Sub-Adviser to assist in the performance of
the
Sub-Adviser's duties under this Agreement will not devote
their
full time to such service and nothing contained in this
Agreement
shall be deemed to limit or restrict the right of the Sub-
Adviser
or any affiliate of the Sub-Adviser to engage in and devote
time
and attention to other businesses or to render
services of
whatever kind or nature.
l0. Term of Agreement
This Agreement shall become effective as of August 15,
1995
(the "Effective Date") and shall continue for an initial two-
year
term and shall continue thereafter so long as such
continuance is
specifically approved at least annually by (i) the Board of
the
Company or (ii) a vote of a "majority" (as that term is
defined
in the Investment Company Act of 1940, as amended (the
"1940
Act") of the Fund's outstanding voting securities, provided
that
in either event the continuance is also approved by a
majority of
the Board who are not "interested persons" (as defined in
the
1940 Act) of any party to this Agreement, by vote cast in
person
at a meeting called for the purpose of voting on such
approval.
This Agreement is terminable, without penalty, on 60
days'
written notice, by the Board of the Company or by vote of
holders
of a majority of the Fund's shares, or upon 90 days'
written
notice, by the Sub-Adviser. This Agreement will also
terminate
automatically in the event of its assignment (as defined in
the
1940 Act).
11. Representation by the Company
The Company represents that a copy of the Master
Trust
Agreement is on file with the Secretary of the
Commonwealth of
Massachusetts and with the Boston City Clerk.
12. Limitation of Liability
The Company, the Adviser and the Sub-Adviser agree
that the
obligations of the Company under this Agreement shall
not be
binding upon any of the members of the Board,
shareholders,
nominees, officers, employees or agents, whether past,
present or
future, of the Company, individually, but are binding only
upon
the assets and property of the Fund and not upon the assets
and
property of any other portfolio of the Company. The
execution and
delivery of this Agreement have been authorized by the Board
and
a majority of the holders of the Fund's outstanding
voting
securities, and signed by an authorized officer of the
Company,
acting as such, and neither such authorization by such
members of
the Board and shareholders nor such execution and
delivery by
such officer shall be deemed to have been made by any of
them
individually or to impose any liability on any of
them
personally, but shall bind only the assets and property of
the
Fund as provided in the Master Trust Agreement.
If the foregoing is in accordance with your
understanding,
kindly indicate your acceptance of this Agreement by signing
and
returning the enclosed copy of this Agreement.
Very truly yours,
SMITH BARNEY INCOME
FUNDS
on behalf of
SMITH
BARNEY
PREMIUM TOTAL
RETURN
FUND
By:
Name:
Title:
SMITH BARNEY
STRATEGY
ADVISERS INC.
By:
Name:
Title:
Accepted:
BOSTON PARTNERS ASSET
MANAGEMENT, L.P.
By: BOSTON PARTNERS, INC.
General Partner
By:
Name:
Title:
FORM OF INVESTMENT ADVISORY AGREEMENT *
[Date]
[Name and Address of Investment Adviser]
Dear Sirs:
[Name of Fund] (the "Fund"), a business trust
organized under the laws of the Commonwealth of
Massachusetts, confirms its agreement with [Name of
Investment Adviser] (the "Adviser") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing
and reinvesting in investments of the kind and in accordance
with the limitations specified in its Master Trust
Agreement, as amended, from time to time, in its
prospectus (the "Prospectus") and Statement of Additional
Information (the "Statement") filed with the Securities
and Exchange Commission as part of the Fund's
Registration Statement on Form N-lA, as amended from
time to time, and in the manner and to the extent as may
from time to time be approved by the Board of Trustees of
the Fund. Copies of the Fund's Prospectus, the
Statement and the Master Trust Agreement have been or
will be submitted to the Adviser. The
Fund desires to employ and hereby appoints the Adviser to
act as its investment adviser. The Adviser accepts the
appointment and agrees to furnish the services for the
compensation set forth below.
2. Services as Investment Adviser
Subject to the supervision and direction of the
Board of Trustees of the Fund, the Adviser will (a)
manage the Fund's portfolio in accordance with the Fund's
investment objective and policies as stated in the
Prospectus and the Statement, (b) make investment
decisions for the Fund; and (c) place purchase and sale
orders for portfolio transactions for the Fund; and (d)
employ professional portfolio managers and securities
analysts who provide research services to the Fund. In
providing those services, the Adviser will conduct a
continual program of investment, evaluation and, if
appropriate, sale and reinvestment of the Fund's assets.
*See Appendix A for variable information
3. Brokerage
In selecting brokers or dealers to execute
transactions on behalf of the Fund, the Adviser will seek
the best overall terms available. In assessing the best
overall terms available for any transaction, the Adviser
will consider factors it deems relevant, including, but not
limited to, the breadth of the market in the security, the
price of the security, the financial condition and
execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In
selecting brokers or dealers to execute a particular
transaction, and in evaluating the best overall terms
available, the Adviser is authorized to consider the
brokerage and research services (as those terms are defined
in Section 28(e) of the Securities Exchange Act of 1934,
as amended) provided to the Fund and/or other accounts over
which the Adviser or its affiliates exercise investment
discretion. 4.
Information Provided to the Fund
The Adviser will keep the Fund informed of
developments materially affecting the Fund's portfolio, and
will, on its own initiative, furnish the Fund from time
to time with whatever information the Adviser believes is
appropriate for this purpose.
5. Standard of Care
The Adviser shall exercise its best judgment in
rendering the services listed in paragraph 2 above. The
Adviser shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Fund in
connection with the matters to which this Agreement
relates, provided that nothing in this Agreement shall be
deemed to protect or purport to protect the Adviser
against any liability to the Fund or to its shareholders to
which the Adviser would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on
its part in the performance of its duties or by reason of
the Adviser's reckless disregard of its obligations and
duties under this Agreement.
6. Compensation
In consideration of the services rendered pursuant to
this Agreement, the Fund will pay the Adviser on the first
business day of each month a fee for the previous month at
the annual rate of [percent (%)] of the Fund's average daily
net assets. The fee for the period from the date the Fund
commences its investment operations to the end of the
month during which the Fund commences its investment
operations shall be prorated according to the proportion
that such period bears to the full monthly period. Upon
any termination of this Agreement before the end of a
month, the fee for such part of that month shall be
prorated according to the proportion that such period bears
to the full monthly period and shall be payable upon the
date of termination of this Agreement. For the purpose of
determining fees payable to the Adviser, the value of the
Fund's net assets shall be computed at the times and in
the manner specified in the Fund's Prospectus and/or the
Statement.
7. Expenses
The Adviser will bear all expenses in connection with
the performance of its services under this Agreement. The
Fund will bear certain other expenses to be incurred in
its operation, including, but not limited to,
investment advisory, subinvestment advisory and
administration fees; fees for necessary professional and
brokerage services; fees for any pricing service; the
costs of regulatory compliance; and costs associated with
maintaining the Fund's legal existence and shareholder
relations.
8. Reduction of Fee
If in any fiscal year of the Fund the aggregate
expenses of the Fund (including fees pursuant to this
Agreement and the Fund's sub-investment advisory and
administration agreement, but excluding interest, taxes,
brokerage and extraordinary expenses) exceed the expense
limitation of any state having jurisdiction over the
Fund, the Adviser will reduce its fee to the Fund by
[percent (%)] of the excess expense to the extent
required by state law. A fee reduction pursuant to this
paragraph 8, if any, will be estimated, reconciled and paid
on a monthly basis.
9. Services to Other Companies or Accounts
The Fund understands that the Adviser now acts,
will continue to act and may act in the future as
investment adviser to fiduciary and other managed
accounts, and as investment adviser to other
investment companies, and the Fund has no objection to
the Adviser's so acting, provided that whenever the Fund
and one or more other investment companies advised by the
Adviser have available funds for investment, investments
suitable and appropriate for each will be allocated in
accordance with a formula believed to be equitable to
each company. The Fund recognizes that in some cases
this procedure may adversely affect the size of the
position obtainable for the Fund. In addition, the Fund
understands that the persons employed by the Adviser to
assist in the performance of the Adviser's duties under
this Agreement will not devote their full time to such
service and nothing contained in this Agreement shall be
deemed to limit or restrict the right of the Adviser or any
affiliate of the Adviser to engage in and devote time and
attention to other businesses or to render services of
whatever kind or nature.
l0. Term of Agreement
This Agreement shall become effective as of the date
the Fund commences its investment operations and continue
for an initial two-year term and shall continue thereafter
so long as such continuance is specifically approved at
least annually by (i) the Board of Trustees of the
Fund or (ii) a vote of a "majority" (as defined in the
Investment Company Act of 1940, as amended (the "1940
Act") of the Fund's outstanding voting securities,
provided that in either event the continuance is also
approved by a majority of the Board of Trustees who are
not "interested persons" (as defined in the 1940 Act) of any
party to this Agreement, by vote cast in person at a
meeting called for the purpose of voting on such
approval. This Agreement is terminable, without penalty,
on 60 days' written notice, by the Board of Trustees of
the Fund or by vote of holders of a majority of the Fund's
shares, or upon 90 days' written notice, by the Adviser.
This Agreement will also terminate automatically in the
event of its assignment (as defined in the 1940 Act).
11. Representation by the Fund
The Fund represents that a copy of the Master
Trust Agreement is on file with the Secretary of the
Commonwealth of Massachusetts and with the City of Boston.
12. Limitation of Liability
The Fund and the Adviser agree that the obligations of
the Fund under this Agreement shall not be binding upon any
of the Trustees, shareholders, nominees, officers,
employees or agents, whether past, present or future, of
the Fund, individually, but are binding only upon the
assets and property of the Fund, as provided in the
Master Trust Agreement. The execution and delivery of
this Agreement have been authorized by the Trustees, and the
sole shareholder of the Fund, and signed by an authorized
officer of the Fund, acting as such, and neither
such
authorization by such Trustees and shareholder nor such
execution and delivery by such officer shall be deemed to
have been made by any of them individually or to impose
any liability on any of them personally, but shall bind
only the assets and property of the Fund as provided in the
Master Trust Agreement.
If the foregoing is in accordance with your
understanding, kindly indicate your acceptance of this
Agreement by signing and returning the enclosed copy of
this Agreement.
Very truly yours,
[Name of Fund]
By:
President
Accepted:
[Name of Investment Adviser]
By:
Authorized Officer
