As filed with the Securities and Exchange Commission
on April 29, 1997
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. 45
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
Amendment No. 46 [X]
SMITH BARNEY INCOME FUNDS
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
(212) 723-9218
(Registrant's telephone number, including Area Code)
Christina T. Sydor
Secretary
Smith Barney Income Funds
388 Greenwich Street
New York, New York 10013, 22nd Floor
(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)
[X] on April 30, 1997 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)
[ ] on ______________ pursuant to Rule 485(a)
The Registrant has previously filed a declaration of indefinite
registration of its shares pursuant to Rule 24f-2 under the
Investment Company Act of 1940.
Registrant's Rule 24f-2 Notice for the fiscal year ended
December 31, 1996 was filed on February 25, 1997 as Accession
Number 0000091155-97-000095
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 amended
Part A
Item No. and Caption Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Prospectus Summary
3. Condensed Financial Information Financial Highlights;
4. General Description of Registrant Cover Page; Prospectus Summary;
Investment Objective and Policies;
Distributor; Additional
Information
5. Management of the Fund Prospectus Summary; Management
of the Trust and the Fund;
Distributor;
Additional Information
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;
Purchase, Exchange and
Redemption of
Shares; Minimum Account Size;
Distributor
8. Redemption or Repurchase of Shares Purchase of Shares; Redemption of
Shares;
Exchange Privilege; Purchase,
Exchange and
Redemption of Shares
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 Distributor; Additional
Information
History
13. Investment Objectives and Investment Objectives ad
Management
Policies 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
Holders of Securities Funds
16. Investment Advisory and Management of the Trust and the
Other Services Funds; Distributor
17. Brokerage Allocation Investment Objectives and
Management
Policies; Distributor
18. Capital Stock and Other Investment Objectives and
Securities Management Policies; Purchase of
Shares; Redemption of Shares;
Taxes
19. Purchase, Redemption and Purchase of Shares; Redemption
Pricing of Securities Being Offered of Shares; 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
PART A
Prospectus of Smith Barney Premium Total Return Fund dated November
28, 1996 included in Post-Effective Amendment No. 43 to the
Registrant's Statement on Form N-1A as Accession No. 0000091155-96-
000486
is incorporated by reference.
SMITH BARNEY PREMIUM
TOTAL RETURN FUND (THE "FUND")
A SERIES OF SMITH BARNEY INCOME FUNDS (THE "TRUST")
Amendment dated April 30, 1997 to
Prospectus dated November 28, 1996
The following information amends the information contained in the Fund's
Prospectus.
------------------------
THE FUND'S EXPENSES The following expense table lists the costs and
expenses an
investor will incur either directly or indirectly as a shareholder of the Fund,
based on the maximum sales charge or maximum CDSC that may be incurred
at the
time of purchase or redemption and the Fund's operating expenses for its most
recent fiscal year:
<TABLE>
<CAPTION>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND 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 0.12 0.13 0.10 0.05
- --------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES+ 1.12% 1.63%++
1.55% 0.80%
- --------------------------------------------------------------------------------
</TABLE>
* Purchase of Class A shares of $500,000 or more 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 of purchase.
** 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.
+ Annualized.
++ Amount has been restated from the December 31, 1996 Annual Report.
Class A shares of the Fund purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly, in
lieu of the initial sales charge. The fee will vary to a maximum of 1.50%,
depending on the amount of assets held through the Program. For more
information, please call your Smith Barney Financial Consultant.
<PAGE>
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>
SMITH BARNEY
PREMIUM TOTAL RETURN FUND 1 YEAR 3 YEARS 5
YEARS 10 YEARS*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A................................... $61 $84 $109 $180
Class B................................... 67 81 99 179
Class C................................... 26 49 84 185
Class Y................................... 8 26 44 99
An investor would pay the following expenses
on the same investment, assuming the same
annual return and no redemption:
Class A................................... $61 $84 $109 $180
Class B................................... 17 51 89 179
Class C................................... 16 49 84 185
Class Y................................... 8 26 44 99
- --------------------------------------------------------------------------------
</TABLE>
* Ten-year figures assume conversion of Class B shares to Class A shares at the
end of the eighth year following the date of purchase.
The example also provides a means for the investor to compare expense
levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE SHOULD NOT BE
CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN.
2
<PAGE>
FINANCIAL HIGHLIGHTS
The following information for the period ended December 31, 1996 and the
two-year period ended July 31, 1996 has been audited by KPMG Peat Marwick
LLP,
independent auditors, whose report thereon appears in the Fund's Annual
Report
dated December 31, 1996. The following information for the fiscal years ended
July 31, 1987 through July 31, 1994 has been audited by other independent
auditors. The information set out below should be read in conjunction with the
financial statements and related notes that also appear in the Fund's Annual
Report, which is incorporated by reference into the Statement of Additional
Information.
FOR A CLASS A SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY PERIOD YEAR YEAR YEAR
PERIOD
PREMIUM TOTAL RETURN ENDED ENDED ENDED
ENDED ENDED
FUND 12/31/96(1)(2) 7/31/96 7/31/95 7/31/94 7/31/93(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $17.40 $16.33 $15.69 $15.65 $15.15
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.16 0.37 0.44 0.33 0.19
Net realized and
unrealized gain on
investments 2.21 1.98 1.48 0.99 1.33
- -------------------------------------------------------------------------------
Total Income From Opera-
tions 2.37 2.35 1.92 1.32 1.52
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.16) (0.37) (0.43) (0.55) (0.20)
Net realized gains (0.47) (0.91) (0.14) (0.52) (0.49)
Capital -- -- (0.71) (0.21) (0.33)
- -------------------------------------------------------------------------------
Total Distributions (0.63) (1.28) (1.28) (1.28) (1.02)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $19.14 $17.40 $16.33 $15.69 $15.65
- -------------------------------------------------------------------------------
TOTAL RETURN++ 13.80%++ 14.76% 12.92% 8.65%
10.31%++
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $608 $534 $472 $68 $40
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.12%+ 1.12% 1.16% 1.19% 1.20%+
Net investment income 2.05+ 2.16 2.81 2.05 1.64+
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 30% 58% 63% 34%
55%
- -------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
TRANSACTIONS(4) $0.06 $0.06 -- -- --
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 1, 1996 to December 31, 1996.
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(3) For the period from November 6, 1992 (inception date) to July 31, 1993.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
++ Total return represents the aggregate total return for the period
indicated and does not reflect any applicable sales charge.
3
<PAGE>
FOR A CLASS B SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
PERIOD YEAR YEAR YEAR YEAR
SMITH BARNEY ENDED ENDED ENDED ENDED
ENDED
PREMIUM TOTAL RETURN FUND 12/31/96(1)(2) 7/31/96 7/31/95
7/31/94 7/31/93
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF YEAR $17.40 $16.33 $15.69 $15.65 $15.21
- -------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.12 0.28 0.36 0.25 0.23
Net realized and unrealized
gain on investments 2.21 1.99 1.48 1.00 1.47
- -------------------------------------------------------------------------------
Total Income From Operations 2.33 2.27 1.84 1.25 1.70
- -------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.12) (0.29) (0.34) (0.49) (0.19)
Net realized gains (0.47) (0.91) (0.14) (0.52) (0.63)
Capital -- -- (0.72) (0.20) (0.44)
- -------------------------------------------------------------------------------
Total Distributions (0.59) (1.20) (1.20) (1.21) (1.26)
- -------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $19.14 $17.40 $16.33 $15.69
$15.65
- -------------------------------------------------------------------------------
TOTAL RETURN++ 13.57%++ 14.21% 12.36% 8.12%
11.68%
- -------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(MILLIONS) $2,355 $2,021 $1,655 $1,697 $1,231
- -------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.63+* 1.62% 1.66% 1.66% 1.69%
Net investment income 1.54+* 1.66 2.31 1.58 1.16
- -------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 30% 58% 63% 34%
55%
- -------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
TRANSACTIONS(3) $0.06 $0.06 -- -- --
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 1, 1996 to December 31, 1996.
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with re-
sults of operations.
(3) As of September 1995, the SEC instituted new guidelines requiring the dis-
closure of average commissions per share.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
++ Total return not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
* Amount has been restated from the December 31, 1996 Annual Report.
4
<PAGE>
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR
YEAR
ENDED ENDED ENDED ENDED ENDED
ENDED
7/31/92 7/31/91 7/31/90 7/31/89 7/31/88 7/31/87
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$14.26 $13.30 $13.98 $12.90 $14.47 $14.52
- ----------------------------------------------------------------------------------------
0.22 0.24 0.22 0.56 0.51 0.28
1.93 1.92 0.38 2.00 (0.62) 1.37
- ----------------------------------------------------------------------------------------
2.15 2.16 0.60 2.56 (0.11) 1.65
- ----------------------------------------------------------------------------------------
(0.22) (0.24) (0.22) (0.89) (0.18) (0.28)
-- -- -- (0.26) (1.28) (1.42)
(0.98) (0.96) (1.06) (0.33) -- --
- ----------------------------------------------------------------------------------------
(1.20) (1.20) (1.28) (1.48) (1.46) (1.70)
- ----------------------------------------------------------------------------------------
$15.21 $14.26 $13.30 $13.98 $12.90 $14.47
- ----------------------------------------------------------------------------------------
15.68% 17.53% 4.62% 21.49% 0.21% 12.07%
- ----------------------------------------------------------------------------------------
$ 585 $ 470 $ 508 $ 600 $ 586 $ 961
- ----------------------------------------------------------------------------------------
1.69% 1.75% 1.78% 1.75% 1.70% 1.74%
1.53 1.84 1.66 4.17 3.58 1.97
- ----------------------------------------------------------------------------------------
57% 43% 47% 41% 56% 294%
- ----------------------------------------------------------------------------------------
-- -- -- -- -- --
- ------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
FOR A CLASS C SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
SMITH BARNEY PERIOD YEAR YEAR YEAR
PERIOD
PREMIUM TOTAL RETURN ENDED ENDED ENDED
ENDED ENDED
FUND 12/31/96(1)(2) 7/31/96 7/31/95 7/31/94(3) 7/31/93(4)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $17.41 $16.33 $15.69 $15.65 $15.45
- ---------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.12 0.29 0.36 0.23 0.05
Net realized and
unrealized gain on
investments 2.21 1.99 1.48 1.02 0.35
- ---------------------------------------------------------------------------------
Total Income From
Operations 2.33 2.28 1.84 1.25 0.40
- ---------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (1.12) (0.29) (0.35) (0.49) (0.04)
Net realized gains (0.47) (0.91) (0.14) (0.52) (0.09)
Capital -- -- (0.71) (0.20) (0.07)
- ---------------------------------------------------------------------------------
Total Distributions (0.59) (1.20) (1.20) (1.21) (0.20)
- ---------------------------------------------------------------------------------
NET ASSET VALUE, END OF
YEAR $19.15 $17.41 $16.33 $15.69 $15.65
- ---------------------------------------------------------------------------------
TOTAL RETURN++ 13.58%++ 14.30% 12.36% 8.12%
2.60%++
- ---------------------------------------------------------------------------------
NET ASSETS, END OF YEAR
(000S) $42,637 $31,044 $12,937 $1,878 $ 357
- ---------------------------------------------------------------------------------
RATIOS TO AVERAGE NET
ASSETS:
Expenses 1.55%+ 1.59% 1.62% 1.60% 1.31%+
Net investment income 1.61+ 1.68 2.35 1.65 1.54+
- ---------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 30% 58% 63% 34%
55%
- ---------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
TRANSACTIONS(5) $0.06 $0.06 -- -- --
- ---------------------------------------------------------------------------------
</TABLE>
(1) For the period from August 1, 1996 to December 31, 1996.
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with re-
sults of operations.
(3) On November 7, 1994 the former Class D shares were renamed Class C
shares.
(4) For the period from June 1, 1993 (inception date) to July 31, 1993.
(5) As of September 1995, the SEC instituted new guidelines requiring the dis-
closure of average commissions per share.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charge.
6
<PAGE>
FOR A CLASS Y SHARE OF BENEFICIAL INTEREST OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
SMITH BARNEY PERIOD ENDED PERIOD ENDED
PREMIUM TOTAL RETURN FUND 12/31/96(1)(2) 7/31/96(3)
- -----------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.42 $17.57
- -----------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.17 0.19
Net realized and unrealized gain 2.23 0.33
- -----------------------------------------------------------------
Total Income From Operations 2.40 0.52
- -----------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.18) (0.21)
Net realized gains (0.47) (0.46)
- -----------------------------------------------------------------
Total Distributions (0.65) (0.67)
- -----------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $19.17 $17.42
- -----------------------------------------------------------------
TOTAL RETURN++ 13.95% 2.93%
- -----------------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $26,585 $13,192
- -----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses 0.80% 0.87%
Net investment income 2.36 2.24
- -----------------------------------------------------------------
PORTFOLIO TURNOVER RATE 30% 58%
- -----------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE
PAID ON EQUITY TRANSACTIONS(4) $0.06 $0.06
- -----------------------------------------------------------------
</TABLE>
(1) For the period from August 1, 1996 to December 31, 1996.
(2) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with re-
sults of operations.
(3)For the period from February 7, 1996 (inception date) to July 31, 1996.
(4) As of September 1995, the SEC instituted new guidelines requiring the dis-
closure of average commissions per share.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+Annualized.
7
<PAGE>
The following information supplements the information contained in the
"Dividends, Distributions and Taxes" section of the Fund's Prospectus.
In order to ensure the proper tax treatment for distributions made by the
Fund, the Trust, on behalf of the Fund, has applied to the Securities and
Exchange Commission for exemptive relief from certain sections of the
Investment Company Act of 1940, as amended, and the rules thereunder, to
enable
the Fund to make more than one capital gain distribution per year if necessary
and to report the source of the distributions, i.e., the portion attributable
to ordinary income and capital gains, annually in the Fund's Annual Report and
individually in each shareholder's IRS Form 1099-DIV. If granted, the relief
would permit the Fund to designate a portion of some or all of the monthly
distributions as being paid from long term capital gains and ensure that
information regarding the source of these distributions is reported accurately
to shareholders. There is no assurance that the relief described above will be
granted.
8
FD 01294 4/97
PART B
Smith Barney
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information November 28, 1996
amended April 30, 1997
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: Smith Barney Convertible Fund (the "Convertible Fund"), Smith
Barney Diversified Strategic Income Fund (the "Diversified Strategic Income
Fund"), Smith Barney Exchange Reserve Fund (the "Exchange Reserve Fund"),
Smith Barney High Income Fund (the "High Income Fund"), Smith Barney
Premium Total Return Fund (the "Premium Total Return Fund"), Smith Barney
Tax-Exempt Income Fund (the "Tax-Exempt Income Fund"), and Smith
Barney Utilities Fund (the "Utilities Fund") (each a "Fund" and together the
"Funds"), each dated November 28, 1996, as amended or supplemented from
time to time (the "Prospectuses"), and should be read in conjunction with the
Prospectuses. The Prospectuses may be obtained from any Smith Barney
Financial Consultant or by writing or calling the Trust at the address or
telephone number set forth above. This Statement of Additional Information,
although not in itself a prospectus, is incorporated by reference into the
Prospectuses in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the
Prospectuses and this Statement of Additional Information, except where
shown below:
Management of the Trust and the Funds 2
Investment Objectives and Management Policies. 8
Purchase of Shares 26
Redemption of Shares 27
Distributor 28
Valuation of Shares 30
Exchange Privilege 31
Performance Data (See in the Prospectuses "Performance" or
"Yield Information") 31
Taxes (See in the Prospectuses "Dividends, Distributions and Taxes")
36
Additional Information 40
Financial Statements 40
Appendix A-1
MANAGEMENT OF THE TRUST AND THE FUNDS
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
PFS Distributors ("PFS")
Distributor to Exchange Reserve Fund
Smith Barney Mutual Funds Management Inc. ("SBMFM")
Investment adviser to the Convertible
Fund, High Income Fund, Diversified Fund
Strategic Income Fund, Tax-Exempt
Income Fund, Utilities Fund and
Exchange Reserve Fund
Smith Barney Strategy Advisers Inc. ("Strategy Advisers")
Investment adviser to PremiumTotal Return Fund
Smith Barney Global Capital Management
Inc. ("Global Capital Management")
Sub-investment adviser to Diversified Strategic Income Fund
Boston Partners Asset Management, L.P. ("Boston Partners")
Sub-investment adviser to Premium Total Return Fund
SBMFM
Administrator
PNC Bank, National Association ("PNC Bank")
Custodian to Convertible Fund, High Income Fund,
Premium Total Return Fund,Tax-Exempt Income Fund,
Utilities Fund and Exchange Reserve Fund
Chase Manhattan Bank of New York* ("Chase")
Custodian to Diversified Strategic Income Fund
First Data Investors Services Group,
Inc. ("First Data"), a subsidiary of First Data Corporation
Transfer Agent
* Effective December 8, 1996; prior to that date, Morgan Guaranty Bank of
New York served as custodian to the Diversified Strategic Income Fund.
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 69). 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 Foster, Inc., an
insurance holding company. Her address is 24 Fowler Road, Far Hills, New
Jersey 07931.
Allan J. Bloostein, Trustee (Age 66). 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 55). Head of School, The New Atlanta
Jewish Community High School, Atlanta Georgia; 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 2865 Lenox Road, N.E., Apt. 507, Atlanta, GA 30324-2855.
*Heath B. McLendon, Chairman of the Board and Investment Officer (Age 63).
Managing Director of Smith Barney, Chairman of the Board of Strategy
Advisers and President of SBMFM; prior to July 1993, Senior Executive Vice
President of Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"),
Vice Chairman of Asset Management. His address is 388 Greenwich Street,
New York, New York 10013.
Madelon DeVoe Talley, Trustee (Age 64). Author; Governor at Large of the
National Association of Securities Dealers, Inc.; Commissioner of Port
Authority of New York and New Jersey as of 1996. Her address is 876 Park
Avenue, New York, New York 10021.
Jessica M. Bibliowicz, President (Age 37). Executive Vice President of Smith
Barney and Chairman of the Board of SBMFM and Director of 12 investment
companies associated with 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
serves as President of 42 Smith Barney Mutual Funds. Her address is 388
Greenwich Street, New York, New York 10013.
John C. Bianchi, Vice President and Investment Officer (Age 41). 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 45). 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.
Simon Hildreth, Investment Officer (Age 44). Managing Director of Smith
Barney and a member of the Investment Policy Committee of Global Capital
Management; prior to 1994, Director of Mercury Asset Management, a fund
manager located in the United Kingdom.
Jack S. Levande, Vice President and Investment Officer (Age 50). 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 48).
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 56). 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 40). Vice President of Smith Barney;
prior to 1995, Co-Portfolio Manager of Convertible Fund. His address is 388
Greenwich Street, New York, New York 10013.
Phyllis M. Zahorodny, Vice President and Investment Officer (Age 38).
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 (Age 39). Managing
Director and Chief Financial Officer of Smith Barney Mutual Funds; Director
and Senior Vice President of SBMFM. Mr. Daidone serves as Senior Vice
President and Treasurer of 42 Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 45). Managing Director of Smith Barney;
General Counsel and Secretary of SBMFM. Ms. Sydor serves as Secretary of 42
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 October 31, 1996, 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, 1996,
such travel and out-of-pocket expenses totalled $1,616.47.
For the fiscal year ended July 31, 1996 and the calendar year ended
December 31, 1996, the Trustees of the Trust were paid the following
compensation:
<TABLE>
<CAPTION>
Aggregate
Total Compensation
Aggregate Pension or from the Funds
Compensation Retirement and the Fund
from the Funds Benefits Complex for
for the Fiscal Accrued the Year ended
Year ended from the December
Trustee(*) July 31, 1996 the Funds 31, 1996
<S> <C> <C> <C>
Lee Abraham (9) $44,500 0 $44,550
Antoinette C. Bentley (9) 44,500 0 44,350
Allen J. Bloostein (15) 44,500 0 83,150
Richard E. Hanson, Jr. (9) 44,500 0 44,550
Heath B. McLendon (42) 0 0 0
Madelon DeVoe Talley (10)+ 33,250 0 45,342.90
- ----------------------------------------------------------------------
* Number of directorships/trusteeships held with other Smith Barney
Mutual Funds.
+ Pursuant to the Trust's deferred compensation plan Ms.Talley elected
to defer
payment of $15,000 of her compensation in the fiscal year ended July 31, 1996.
</TABLE>
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 7, 1996. 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 7, 1996. Boston Partners serves as sub-
investment adviser to Premium Total Return Fund, pursuant to a written
agreement dated August 15, 1995, which was most recently approved by the
Fund's Board of Trustees, including a majority of the Independent Trustees, on
August 7, 1996. 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 most recently approved by the Fund's Board
of Trustees, including a majority of the Independent Trustees, on August 7,
1996. 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 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 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 and Boston Partners bear all expenses in
connection with the performance of their services.
As compensation for investment advisory services, each Fund pays its
investment adviser a fee computed daily and paid monthly at the following
annual rates:
Fund
Investment Advisory Fee As a Percentage of Average Net Assets
Convertible Fund
0.50%
Diversified Strategic Income Fund
0.45%
Exchange Reserve Fund
0.30%
High Income Fund
0.50%
Premium Total Return Fund
0.55%
Tax-Exempt Income Fund
0.40%
Utilities Fund
0.45%
For the periods below, the Funds paid investment advisory fees to their
respective Advisers as follows:
<TABLE>
<CAPTION>
Period
From
August
For the 1, 1996
Fiscal through
Year ended Dec-
July 31: cember
1994 1995 1996 31, 1996
<S> <C> <C> <C> <C>
Convertible
Fund $425,505 $415,666 $417,942
Diversified Strategic
Income Fund 8,761,857 11,112,553 11,818,108
Exchange Reserve
Fund 622,203 547,990 448,925
High Income
Fund 3,771,643 3,706,659 4,506,352
Premium Total
Return Fund 8,506,930 10,627,086 13,381,076 6,454,801
Tax-Exempt
Income Fund 4,561,779 4,033,479 3,771,279
Utilities Fund 10,896,883 7,885,332 8,094,511
</TABLE>
As compensation for administrative services, each Fund pays SBMFM
a fee computed daily and paid monthly at the annual rate of 0.20% of the
Fund's average daily net assets. For the periods shown below, the Funds paid
administrative fees to The Boston Company Advisors, Inc. or SBMFM:
<TABLE>
<CAPTION>
The
Boston
Company
Advi-
sors SBMFMSBMFMSBMFMSBMFM
For the For the
For the For the Fiscal Fiscal For the
Period Period Year Year Period
from from from from from
8/1/93 5/4/94 8/1/94 8/1/95 8/1/96
through through through through through
Fund 5/3/94 7/31/94 7/31/95 7/31/96 12/31/96
<S> <C> <C> <C> <C> <C>
Convertible
Fund $145,717 $24,485 $166,266 $167,177
Diversified Strategic
Income Fund 4,289,630 717,145 4,938,912 5,252,493
Exchange Reserve
Fund 341,472 73,330 365,327 299,283
High Income
Fund 1,297,678 210,979 1,482,663 1,802,541
Premium Total Return
Fund 2,639,140 454,284 3,930,566 2,299,990 2,347,201
Tax-Exempt Income
Fund 1,971,064 309,826 2,016,740 1,885,640
Utilities Fund 4,256,098 586,961 3,542,538 3,597,560
</TABLE>
For the period ended March 20, 1994, Diversified Strategic Income
Fund paid LBGAM $1,562,892, in sub-investment advisory fees. For the period
from March 21, 1994 through July 31, 1994 and the fiscal years ended July 31,
1995 and 1996, Diversified Strategic Income Fund paid Global Capital
Management $940,496, $1,234,728 and $2,626,246, 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 the Fund. No such fee
reduction was required for the fiscal years ended July 31, 1994, 1995 and 1996.
The Trust bears expenses incurred in its operations, 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 LLP as their legal counsel.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York
10154 has been selected as the Trust's independent auditor to examine and
report on the Trust's financial statements and highlights for the fiscal year
ending July 31, 1997. Prior to October 20, 1994, Coopers & Lybrand L.L.P.,
independent accountants, served as auditors of the Trust.
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 First Data. First Data 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 equity and debt securities of any grade, provided such securities
have been determined by the adviser to be liquid and unencumbered pursuant to
guidelines established by the Trustees, equal to the amount of the when-issued
or delayed-delivery commitments will be established at PNC Bank, or Chase in
the case of Diversified Strategic Income Fund. 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% 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, Utilities,
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 canceled 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 a 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 New York Stock Exchange 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 and
Exchange Reserve Funds). 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 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
and High Income Fund). Among the foreign government securities in which
the 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
competitionfrom 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 Ratings Group ("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 (Diversified Strategic Income, 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 option.
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 United
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 those 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.
The Fund may also purchase American Depository Receipts ("ADRs"),
European Depository Receipts ("EDRs") and Global Depository Receipts
("GDRs") or other securities representing underlying shares of foreign
companies. ADRs are publicly traded on exchanges or over-the-counter in the
United States and are issued through "sponsored" or "unsponsored"
arrangements. In a sponsored ADR arrangement, the foreign issuer assumes
the obligation to pay some or all of the depository's transaction fees, whereas
under an unsponsored arrangement, the foreign issuer assumes no obligation
and the depository's transaction fees are paid by the ADR holders. In
addition, less information is available in the United States about an
unsponsored ADR than about a sponsored ADR, and the financial information
about a company may not be as reliable for an unsponsored ADR as it is for
a sponsored ADR. The Fund may invest in ADRs through both sponsored and
unsponsored arrangements.
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. With respect to all Funds except the Exchange Reserve Fund,
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 six months) 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. With respect to the Exchange Reserve Fund, (i) securities
subject to Rule 144A of the Securities Act of 1933, as amended (the "1933
Act"), provided at least two dealers make a market in such securities and
(ii) certain privately issued commercial papers eligible for resale without
registration pursuant to section 4(2) of the 1933 act will not be subject
to this restriction
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, 1995 and 1996, the portfolio
turnover rates were as follows:
<TABLE>
<CAPTION>
For the Period
For the Fiscal from August 1,
Year Ended 1996 through
July 31 December 31,
1995 1996 1996
<S> <C> <C> <C>
Convertible Fund 48% 59%
Diversified Strategic Income
Fund 83% 90%
High Income Fund 60% 72%
Premium Total Return Fund 63% 58% 30%
Tax-Exempt Income Fund 38% 44%
Utilities Fund 36% 58%
</TABLE>
For regulatory purposes, the turnover rate of Exchange Reserve Fund
is zero.
Portfolio Transactions
Most of the purchases and sales of securities for a Fund, whether 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 Board of 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:
<TABLE>
<CAPTION>
Premium Diversified
Total High Strategic
Fiscal Return Convertible Income Utilities Income
Year Fund Fund Fund Fund Fund
<S> <C> <C> <C> <C> <C> <C>
Total Brokerage
Commissions 1994 $1,767,577 $60,818 $96,670 $2,006,028 $106,421
1995 3,517,469 39,798 97,439 2,134,306 0
1996 3,935,585 16,920 32,621 2,446,072 50,196
1996* 1,179,425
Commissions paid
to Shearson 1994 280,686 0 174,858 0
Lehman or 1995 694,467 600 0 162,924 0
or Smith Barney 1996 628,778 0 0 91,818 0
1996* 209,905
% of Total Brokerage
Commissions 1995 19.75% 1.51% 0% 7.63% 0%
Paid to Smith 1996 15.98 0 0 3.75 0
Barney 1996* 17.80
% of Total 1995 20.02% 1.69% 0% 8.21% 0%
Transactions 1996 16.26 0 0 2.72 0
involving 1996* 13.62
Commissions
paid to Smith
Barney
</TABLE>
* For the period from August 1, 1996 through December 31, 1996.
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, as amended) 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 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 a 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 of a Fund to make a redemption payment wholly in cash, the
Trust may pay, in accordance with SEC rules, any portion of a redemption
in excess of the lesser of $250,000 or 1% of the Fund's net assets by
distribution in kind of portfolio securities in lieu of cash. Securities
issued as a distribution in kind may incur brokerage commissions when
shareholders subsequently sell those securities. Automatic Cash Withdrawal
Plan. An automatic cash withdrawal plan (the "Withdrawal Plan") is
available to shareholders who own shares of a Fund with a value of at
least $10,000 ($5,000 for retirement plan accounts) and who wish to
receive specific amounts of cash monthly or quarterly. Withdrawals of
at least $50 may be made under the Withdrawal Plan by redeeming as many
shares of the Fund as may be necessary to cover the stipulated withdrawal
payment. Any applicable CDSC will not be waived on amounts withdrawn by
shareholders that exceed 1.00% per month of the value of a shareholder's
shares at the time the Withdrawal Plan commences. (With respect to
Withdrawal Plans in effect prior to November 7, 1994, any applicable CDSC
will be waived on amounts withdrawn that do not exceed 2.00% per month of
the value of a shareholder's shares at the time the Withdrawal Plan
commences). To the extent that withdrawals exceed dividends, distributions
and appreciation of a shareholder's investment in the Fund, there will be a
reduction in the value of the shareholder's investment and continued
withdrawal payments may reduce the shareholder's investment and ultimately
exhaust it. Withdrawal payments should not be considered as income from
investment in a Fund. Furthermore, as it generally would not be advantageous
to a shareholder to make additional investments in a Fund at the same time he
or she is participating in the Withdrawal Plan with respect to that Fund,
purchases by such shareholders of additional shares in the Fund in amounts less
than $5,000 will not ordinarily be permitted.
Shareholders who wish to participate in the Withdrawal Plan and who
hold their shares in certificate form must deposit their share certificates of
the Fund from which withdrawals will be made with First Data, 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 First Data as Plan Agent no later than the
eighth day of each month to be eligible for participation beginning with that
month's withdrawal. For additional information regarding the Withdrawal
Plan, contact your Smith Barney Financial Consultant.
DISTRIBUTOR
Smith Barney serves as the Trust's distributor on a best efforts basis
pursuant to a distribution agreement (the "Distribution Agreement").
PFS serves as one of the Trust's distributors with respect to the
Exchange Reserve Fund pursuant to a Distribution Agreement dated November
20, 1995.
When payment is made by the investor before the settlement date,
unless otherwise directed by the investor, the funds will be held as a free
credit balance in the investor's brokerage account, and Smith Barney may
benefit from the temporary use of the funds. The investor may designate
another use for the funds prior to settlement date, such as an investment
in a money market fund (other than the 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.
For the fiscal year ended July 31, 1996, Smith Barney and/or PFS
incurred distribution expenses totaling approximately $62,460,648, consisting
of approximately $3,277,497 for advertising $897,058 for printing and mailing
prospectuses, $30,622,377 for support services and overhead expenses,
$27,032,487 to Smith Barney or PFS Financial Consultants and $631,227 for
accruals for interest on the excess of Smith Barney and/or PFS expenses
incurred in the distribution of the Fund's shares over the sum of the
distribution fees and CDSC received by Smith Barney and/or PFS. Distribution
Arrangements
Shares of the Trust are distributed on a best efforts basis by Smith
Barney as sales agent of the Trust pursuant to the Distribution Agreement. To
compensate Smith Barney for the services it provides and for the expense it
bears under the Distribution Agreement, the Trust has adopted a services and
distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act.
Under the Plan, each Fund, except Exchange Reserve Fund, pays Smith Barney
a service fee, accrued daily and paid monthly, calculated at the annual rate of
.25% (.15% in the case of Tax-Exempt Income Fund) of the value of the Fund's
average daily net assets attributable to its Class A, Class B and Class C
shares. In addition, each Fund except the Exchange Reserve Fund, pays Smith
Barney, with respect to the its Class B and Class C shares, a distribution
fee. The Exchange Reserve Fund pays PFS, with respect to its Class B shares,
a distribution fee. The distribution fee is primarily intended to compensate
Smith Barney and/or PFS for its initial expense of paying Financial
Consultants a commission upon sales of those shares. The Class B and Class C
shares' distribution fees, accrued daily and paid monthly, are calculated at
the annual rate of .50% for Class B shares and 0.45% for Class C shares
(0.50% for Class C shares in the case of Exchange Reserve Fund and 0.55% for
Class C shares in the case of Tax-Exempt Fund) of the value of a Fund's
average daily net assets attributable to the shares of the respective Class.
For the fiscal years ended July 31, 1994, 1995 and 1996, Smith Barney
received $61,281,027, $52,644,615 and $57,460,253, respectively, in the
aggregate from the Trust under the Plan.
The following expenses were incurred during the periods
indicated:Sales Charges (paid to Smith Barney).
Class A
<TABLE>
<CAPTION>
Period
Fiscal Fiscal Fiscal from
Year Year Year 8/1/96
Ended Ended Ended through
7/31/94 7/31/95 7/31/96 12/31/96
<S> <C> <C> <C> <C>
Convertible Fund $14,561 $ 8,900 $49,000
Diversified Strategic
Income Fund 818,088 471,500 792,000
High Income
Fund 507,890 457,100 593,000
Premium Total
Return Fund 546,635 594,400 968,000 435,000
Tax-Exempt Income
Fund 176,786 68,794 47,000
Utilities Fund 364,556 150,600 228,000
</TABLE>
CDSC (paid to Smith Barney).
Class B
<TABLE>
<CAPTION>
Period
Fiscal Fiscal Fiscal from
Year Year Year 8/1/96
Ended Ended Ended through
7/31/94 7/31/95 7/31/96 12/31/96
<S> <C> <C> <C> <C>
Convertible Fund $ 87,160 $ 126,500 $ 95,000
Diversified Strategic
Income Fund 5,301,256 6,000,000 4,015,000
Exchange Reserve
Fund 1,188,817 1,429,000 765,000
High Income
Fund 743,718 1,000,000 915,000
Premium Total
Return Fund 2,133,023 1,765,800 2,905,000 1,009,000
Tax-Exempt
Income Fund 1,570,424 1,649,382 929,000
Utilities Fund 8,429,876 4,738,800 3,393,000
</TABLE>
Service Fees and Distribution Fees
Fund Level
<TABLE>
<CAPTION>
Period
Fiscal Fiscal Fiscal from
Year Year Year 8/1/96
Ended Ended Ended through
7/31/94 7/31/95 7/31/96 12/31/96
<S> <C> <C> <C> <C>
Convertible Fund $ 627,147 $468,685 $433,951
Diversified Strategic
Income Fund 18,336,425 17,817,988 18,641,336
Exchange Reserve
Fund 1,036,758 913,444 748,208
High Income
Fund 4,307,795 4,029,911 4,893,170
Premium Total
Return Fund 11,322,934 12,565,954 5,646,147 7,545,851
Tax-Exempt
Income Fund 7,323,768 5,456,482 4,945,112
Utilities Fund 17,767,182 12,305,595 12,152,329
</TABLE>
Under its terms, the Plan continues from year to year, provided such
continuance is approved annually by vote of the Board of Trustees, including a
majority of the Independent Trustees who have no direct or indirect financial
interest in the operation of the Plan. The Plan may not be amended to increase
the amount to be spent for the services provided by Smith Barney or PFS
without shareholder approval, and all amendments of the Plan must be
approved by the Trustees in the manner described above. The Plan may be
terminated with respect to a Class at any time, without penalty, by vote of a
majority of the Independent Trustees or, with respect to any Fund, by vote of a
majority of the outstanding voting securities of the Class (as defined in the
1940 Act). Pursuant to the Plan, Smith Barney and PFS will provide the 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 of the Smith Barney Mutual Funds
may exchange all or part of their shares for shares of the same Class of other
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. 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.
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.
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 First Data 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
Trust may include comparative performance information in advertising or
marketing each 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 a Fund 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.YieldExchange 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 the 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, 1996, the annualized yield
was 4.44%, and the compound effective yield was 4.53%. As of July 31, 1996,
the Fund's average portfolio maturity was 37 days.
Other Funds. The 30-day yield figure of a Fund other than Exchange
Reserve Fund is calculated according to a formula prescribed by the SEC. The
formula can be expressed as follows:
YIELD =2 [ ( a-bcd+1)6--1]
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of waiver and
reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by a Fund at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest rates, a
Fund's yield will tend to be somewhat higher than prevailing market rates, and
in periods of rising interest rates the Fund's yield will tend to be somewhat
lower. In addition, when interest rates are falling, the inflow of net new
money to the Fund from the continuous sale of its shares will likely be
invested in portfolio instruments producing lower yields than the balance of
such Fund's investments, thereby reducing the current yield of the Fund. In
periods of rising interest rates, the opposite can be expected to occur.
Average Annual Total Return
The "average annual total return" figures for each Fund, other than Exchange
Reserve Fund, are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P (1+T)n = ERV
Where: P =a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of the 1-, 5- or 10-year period at the end of the
1-, 5- or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions.
The average annual total returns (with fees waived and without sales
charge) of the Fund's Class A shares were as follows for the periods indicated:
<TABLE>
<CAPTION>
Per Annum for
the Period From
Commencement of
Operations through
One Year most recent fiscal
Period+ year end+*
<S> <C> <C>
Convertible Fund 7.41% 8.63%
Diversified Strategic
Income Fund 8.39% 7.78%
High Income Fund 8.95% 10.24%
Premium Total Return
Fund 20.67% 14.69%
Tax-Exempt Income
Fund 6.29% 6.40%
Utilities Fund 9.21% 7.64%
</TABLE>
+ For the Premium Total Return Fund, figures are for the period ended
December 31, 1996. For all other Funds, figures are for the period ended July
31, 1996.
* 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:
<TABLE>
<CAPTION>
Per Per Annum for
Annum the Period From
for the Commencement of
Five Operations through
One Year Year most recent fiscal
Period+ Period+ year end+*
<S> <C> <C> <C>
Convertible Fund (1) 6.91% 9.45% 7.88%
Diversified Strategic
Income Fund (2) (6) 7.80% 8.44% 8.90%
High Income Fund (3) (6) 8.41% 12.17% 8.61%
Premium Total
Return Fund (4) 20.09% 13.52% 13.40%
Tax-Exempt Income
Fund (4) (6) 5.74% 6.72% 8.21%
Utilities Fund (5) 8.78% 8.51% 9.67%
</TABLE>
+ For the Premium Total Return Fund, figures are for the period ended
December 31, 1996. For all other Funds, figures are for the period ended July
31, 1996.
(1) Fund commenced operations on September 9, 1986.
(2) Fund commenced operations on December 28, 1989.
(3) Fund commenced operations on September 2, 1986.
(4) Fund commenced operations on September 16, 1985.
(5) Fund commenced operations on March 28, 1988.
(6) Prior to November 6, 1992 the maximum CDSC imposed on redemptions
was 5.00%.
The average annual total returns (with fees waived) of the Fund's Class
C shares were as follows for the periods indicated:
Class C Shares:
<TABLE>
<CAPTION>
Per Annum for
the Period From
Commencement of
Operations through
One Year most recent fiscal
Period+ year end+
<S> <C> <C>
Convertible Fund*** 6.82% 11.01%
Diversified Strategic
Income Fund***** 7.82% 6.37%
High Income Fund**** 8.56% 10.36%
Premium Total Return
Fund* 20.13% 14.73%
Tax-Exempt Income
Fund** 5.69% 11.24%
Utilities Fund****** 8.80% 5.32%
</TABLE>
+ For the Premium Total Return Fund, figures are for the period ended
December 31, 1996. For all other Funds, figures are for the period ended
July 31, 1996.
* The Fund commenced selling Class C shares (previously designated as
Class D shares) on June 1, 1993.
** The Fund commenced selling Class C shares (previously designated as
Class D shares) on November 17, 1994
*** The Fund commenced selling Class C shares (previously designated as
Class D shares) on November 7, 1994
**** The Fund commenced selling Class C shares (previously designated as
Class D shares) on August 24, 1994.
***** The Fund commenced selling Class C shares (previously designated as
Class D shares) on March 19, 1993.
****** The Fund commenced selling Class C shares (previously designated as
Class D shares) on February 4, 1993.
A Class' total return figures calculated in accordance with the above
formula assume that the maximum sales charge or maximum applicable CDSC,
as the case may be, has been deducted for the hypothetical $1,000 initial
investment at the time of purchase.
Aggregate Total Return
The aggregate total return figures for each Fund, other than Exchange Reserve
Fund, represent the cumulative change in the value of an investment in the
Class for the specified period and are computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the 1-, 5- or 10-year
period at the end of the 1-, 5- or 10-year period (or fractional
portion thereof), assuming reinvestment of all dividends and
distributions.
The aggregate total returns (with fees waived) of the Class B shares of
the Funds indicated were as follows for the periods indicated:
<TABLE>
<CAPTION>
No load Load
Period Period
From From
Commencement Commencement
Operations Operations
through through
most most
recent recent
One Five fiscal One Five fiscal
Year Year year Year Year year
Period+ Period+ end+ Period+ Period+ end+
<S> <C> <C> <C> <C> <C> <C>
Convertible(1) 6.91% % 112.09%1.91% 56.07% 112.09%
Diversified
Strategic Income
(2)(6) 7.80% 57.07% 75.51% 3.30% 48.96% 75.51%
High Income
(3)(6) 8.41% 49.96% 126.79%3.91% 76.54% 126.79%
Premium Total
Return(4) 20.09% 88.52% 314.70%15.09% 87.52% 314.16%
Tax-Exempt
Income(4)(6) 5.74% 79.25% 103.62%1.26% 37.44% 35.94%
Utilities(5) 8.78% 38.44% 116.04% 3.78% 49.43% 116.64%
</TABLE>
+ For the Premium Total Return Fund, figures are for the period ended
December 31, 1996. For all other Funds, figures are for the period ended July
31, 1996.
* 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 9, 1986.
(2) Fund commenced operations on December 28, 1989.
(3) Fund commenced operations on September 2, 1986.
(4) Fund commenced operations on September 16, 1985.
(5) Fund commenced operations on March 28, 1988.
(6) Prior to November 6, 1992 the maximum CDSC imposed on
redemptions was 5%.
The aggregate total returns (with fees waived) of the Class A and
Class C shares of the Funds indicated were as follows for the periods
indicated:
<TABLE>
<CAPTION>
No Load Load No Load Load
Period from Period from
inception inception
date through date through
most recent most recent
One year One year fiscal fiscal
Period+* Period+* end+* end+*
<S> <C> <C> <C> <C>
Convertible
Class A (1) 7.41% 2.06% 36.15% 29.32%
Class C (2) 6.82% 5.82% 19.83% 19.83%
Diversified Strategic Income
Class A (1) 8.39% 3.51% 32.25% 32.25%
Class C (3) 7.82% 6.82% 23.14% 28.96%
High Income
Class A (1) 8.95% 4.08% 43.90% 37.42%
Class C (4) 8.56% 7.56% 21.04% 21.04%
Premium Total Return
Class A (1) 20.67% 14.64% 76.73% 67.87%
Class C (5) 20.13% 19.13% 61.83% 61.83%
Tax-Exempt Income
Class A (1) 6.27% 2.01% 26.09% 21.02%
Class C (6) 5.69% 4.69% 19.90% 19.90%
Utilities
Class A (1) 9.21% % 31.66% 25.05%
Class C (7) 8.80% % 19.80% 19.80%
</TABLE>
+ For the Premium Total Return Fund, figures are for the period ended
December 31, 1996. For all other Funds, figures are for the period ended July
31, 1996.
* Figures do not include the effect of the maximum sales charge or
maximum applicable CDSC.
** Figures include the effect of the maximum sales charge or maximum
applicable CDSC.
(1) November 6, 1992.
(2) The Fund commenced selling Class C shares (previously designated as
Class D shares) on November 7, 1994.
(3) The Fund commenced selling Class C shares (previously designated as
Class D shares) on March 19, 1993.
(4) The Fund commenced selling Class C shares (previously designated as
Class D shares) on August 24, 1994.
(5) The Fund commenced selling Class C shares (previously designated as
Class D shares) on June 1, 1993.
(6) The Fund commenced selling Class C shares (previously designated as
Class D shares) on November 17, 1994.
(7) 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 the 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 the Tax-Exempt Income Fund will
distribute exempt-interest dividends, interest on indebtedness incurred by
shareholders, directly or indirectly, to purchase or carry shares of the Fund
will not be deductible for Federal income tax purposes. If a shareholder
redeems or exchanges shares of the Fund with respect to which he receives an
exempt-interest dividend before holding the shares for more than six months,
no loss will be allowed on the redemption or exchange to the extent of the
dividend received. Also, that portion of any dividend from the Fund which
represents income from private activity bonds other than those issued for
charitable, educational and certain other purposes held by the Fund may
not retain its tax-exempt status in the hands of a shareholder who is a
"substantial user" of a facility financed by such bonds or a person
"related" to a substantial user. Investors should consult their own
tax advisors to see whether they may be substantial users or related
persons with respect to a facility financed by bonds in which the Fund
may invest. Moreover, investors receiving social security or certain other
retirement benefits should be aware that tax-exempt interest received from
the Fund may under certain circumstances cause up to one-half of such
retirement benefits to be subject to tax. If the Fund receives taxable
investment income, it will designate as taxable the same percentage of each
dividend as the actual taxable income bears to the total investment income
earned during the period for which the dividend is paid. The percentage of each
dividend designated as taxable, if any, may, therefore, vary. Dividends derived
from interest from Municipal Securities which are exempt from Federal tax
also may be exempt from personal income taxes in the state where the issuer is
located, but in most cases will not be exempt under the tax laws of other
states or local authorities. Annual statements will set forth the amount of
interest from Municipal Securities earned by the Fund in each state or
possession in which issuers of portfolio securities are located.
ADDITIONAL INFORMATION
The Trust was organized as an unincorporated business trust under the laws of
the Commonwealth of Massachusetts pursuant to a Master Trust Agreement
dated March 12, 1985, as amended from time to time, and on November 5,
1992 the Trust filed an Amended and Restated Master Trust Agreement (the
"Trust Agreement"). The Trust commenced business as an investment company
on September 16, 1985, under the name Shearson Lehman Special Portfolios.
On February 21, 1986, December 6, 1988, August 27, 1990, November 5, 1992,
July 30, 1993 and October 14, 1994, the Trust changed its name to Shearson
Lehman Special Income Portfolios, SLH Income Portfolios, Shearson Lehman
Brothers Income Portfolios, Shearson Lehman Brothers Income Funds, Smith
Barney Shearson Income Funds and Smith Barney Income Funds, respectively.
PNC Bank is located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, and serves as the custodian for each of the Funds, except
Diversified Strategic Income Fund. Chase, located at Chase Metrotech Center,
Brooklyn, NY 11245 serves as the custodian for Diversified Strategic Income
Fund. Under their respective custodian agreements with the respective Funds,
each custodian is authorized to establish separate accounts for foreign
securities owned by the appropriate Fund to be held with foreign branches
of other U.S. banks as well as with certain foreign banks and securities
depositories. For its custody services to the Trust, each custodian
receives monthly fees based upon the month-end aggregate net asset
value of the appropriate Fund, plus certain charges for securities
transactions including out-of-pocket expenses, and costs of any foreign
and domestic sub-custodians. The assets of the Trust are held under bank
custodianship in compliance with the 1940 Act.
First Data is located at Exchange Place, Boston, Massachusetts 02109,
and serves as the Trust's transfer agent. Under the transfer agency agreement,
First Data 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 First Data
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, 1996 (except
for the Premium Total Return Fund, whose Annual Report is for the fiscal year
ended December 31, 1996), 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.
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.
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.
BBB
Medium Grade -- Of the investment grade ratings, this is the lowest.
Bonds in this group are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
General Obligation Bonds -- Under certain adverse conditions, several
of the above factors could contribute to a lesser capacity for payment of debt
service. The difference between A and BBB ratings is that the latter shows
more than one fundamental weakness, or one very substantial fundamental
weakness, whereas the former shows only one deficiency among the factors
considered.
Revenue Bonds -- Debt coverage is only fair. Stability of the pledged
revenues could show substantial variations, with the revenue flow possibly
being subject to erosion over time. Basic security provisions are no more than
adequate. Management performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB includes the
lowest degree of speculation and CC the highest degree of speculation.
While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
C
The rating C is reserved for income bonds on which no interest is
being paid.
D
Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a
minus sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
Description of S&P Municipal Note Ratings
Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, -2 or -3) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong
or strong capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics are given the designation
of SP-1+. Notes rated SP-2 have satisfactory capacity to pay principal
and interest.
Description of Moody's Municipal Bond Ratings
Aaa
Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge". Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities, or
fluctuation of protective elements may be of greater amplitude, or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa
Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba
Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterize bonds in this class.
B
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa
Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca
Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
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 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 issuer; 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 indicates 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+ indicates 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.
Smith Barney
INCOME FUNDS
Statement of
Additional Information
November 28, 1996
amended April 30, 1997
Convertible Fund
Diversified Strategic Income Fund
Exchange Reserve Fund
High Income Fund
Premium Total Return Fund
Tax-Exempt Income Fund
Utilities Fund
Smith Barney
Income Funds
388 Greenwich Street
New York, New York 10013 SMITH
BARNEY
A Member of Travelers Groups
FD 01217 4/97
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Annual Report of Smith Barney Premium Total Return Fund for
the fiscal year ended December 31, 1996 and the Report of
Independent Auditors dated February 7, 1997 areincorporated by reference to
the Definitive 30b2-1 filed on March 10, 1997 as
Accession #0000091155-97-000141.
Included in Part C:
Consent of Auditors is filed herein.
(b) Exhibits
All references are to the Registrant's registration statement on Form
N-1A (the "Registration Statement") as filed with the Securities and Exchange
Commission (the "SEC") on March 13, 1985 (File Nos. 2-96408 and 811-
4254).
(1) Registrant's First Amended and Restated Master Trust
Agreement dated November 5, 1993 and Amendment No. 1 to the Master Trust
Agreement dated July 30, 1993 are incorporated by reference
to
Post-Effective Amendment No. 36.
(2) Registrant's By-Laws are incorporated by reference to the
Registration Statement.
(3) Not Applicable.
(4) Registrant's form of stock certificates for Class A, Class B,
Class C and Class Y shares of beneficial interest in each of its
sub-trusts are incorporated by reference to Post-Effective
Amendment No. 34 to the Registration Statement.
(5)(a) Transfer of Investment Advisory Agreements between the
Registrant and Smith Barney Mutual Funds Management
with respect to Smith Barney Diversified Strategic Income
Fund, Smith Barney Utilities Fund, Smith Barney Convertible
Securities Fund, Smith Barney High Income Fund, Smith
Barney Tax-Exempt Income Fund and Smith Barney Exchange
Reserve Fund are incorporated by reference
to Post-Effective Amendment No. 40.
(b) Investment Advisory Agreement between Registrant and
Smith Barney Strategy Advisers Inc. with respect to
Smith Barney Premium Total Return Fund is incorporated
by reference to Post-Effective Amendment No. 41 to the
Registration Statement.
(c) Sub-Investment Advisory Agreement among the Registrant,
Smith Barney Strategy Advisers, Inc. and Boston Partners Asset
Management, L.P with respect to Smith Barney Premium
(7) Not Applicable.
(8)(a) Custodian Agreement between the Registrant and PNC Bank,
National Association ("PNC Bank") is incorporated by
reference to Post-Effective Amendment No. 41 to the
Registration Statement.
(b) A form of Custodian Agreement between the Registrant and
Chase Manhattan Bank is incorporated by reference to Post-
Effective Amendment No. 43 to the Registration Statement.
(9)(a) Administration Agreement between the Registrant and
SBMFM is incorporated by reference to Post-Effective
Amendment No. 40.
(b) Transfer Agency and Registrar Agreement between the
Registrant and First Data Investor Services Group, Inc.,
(formerly The Shareholder Services Group, Inc.) is
incorporated by reference to Post-Effective Amendment
No. 40 to the Registration Statement.
(10) Opinion of Counsel was filed with Registrant's 24f-2 Notice
on February 25, 1997 as accession number
000009155-97-000095.
(11) Consent of KPMG Peat Marwick LLP is filed
herein.
(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) Financial Data Schedule is filed herein .
(18) Plan pursuant to Rule 18f-3 is incorporated by reference to
Post- Effective Amendment No. 41 to the Registration Statement.
Item 25 Persons Controlled by or Under Common Control with
Registrant
None.
Item 26 Number of Holders of Securities
(1) (2)
Number of Record Holders
Title of Class by Class as of April 25,
1997
Beneficial Interest par value
$.001 per share
Fund
Class A Class B Class C Class Y
Premium Total Return Fund 41,973 138,2346 3,930 5
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).
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-Shearson Strategy Advisers Inc. to its
current name. Strategy Advisers is a wholly owned subsidiary of SBMFM.
Strategy Advisers is registered as an investment adviser under the
Investment Advisers Act of 1940 (the "Advisers Act"). Strategy Advisers
is also registered with the Commodity Futures Trading Commission (the
"CFTC") as a commodity pool operator under the Commodity Exchange Act
(the "CEA"), and is a member of the National Futures Association (the
"NFA").
The list required by this Item 28 of officers and directors of SBMFM and
Strategy Advisers, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by
such officers and directors during the past two years, in incorporated 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).
Item 28(b) Business and Other Connections of Sub-Investment Adviser
Sub-Investment Adviser - Boston Partners Asset Management, L.P. ("Boston
Partners")
Boston Partners was organized in April, 1995 under the laws of the State
of Delaware as a Limited Partnership and provides a comprehensive range
of financial products and services in domestic and selected
International markets. Boston Partners is an investment adviser
registered under the Investment Advisers Act of 1940 (the "Advisers
Act") and provides investment advice to endowment plans, Taft Hartley
Health and Welfare Plans, VEBAS and institutional clients. It also
serves as investment adviser and sub-investment adviser to other
investment companies.
The list required by this Item 28 of officers and directors of Boston
Partners, together with information as to any other business profession,
vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by
reference to Schedules A and D of FORM ADV filed by Boston Partners
pursuant to the Advisers Act (SEC File No. 801-49059).
Item 28(b) Business and Other Connections of Sub-Investment Adviser
Sub-Investment Adviser - Smith Barney Global Capital Management Inc.
("SBGCM")
SBGCM was incorporated on January 22, 1988 under the laws of the State of
Delaware. SBGCM is an indirect wholly owned subsidiary of Holdings.
SBGCM is
an investment adviser registered with the Securities and Exchange Commission
in the United States and with the Investment Management Regulatory
Organization Limited in the United Kingdom. SBGCM conducts its operations
primarily in the United Kingdom.
The list required by this Item 28 of officers and directors of SBGCM,
together with information as to any other business, profession, vocation
or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated by reference to
Schedules A and D of FORM ADV filed by SBGCM pursuant to the Advisers
Act (SEC File No. 801-31824).
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as distributor for Smith
Barney Managed 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 Concert Allocation Series 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 Natural Resources 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 Investment
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 Holdings. 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) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
(8) The Chase Manhattan Bank
Chase MetroTech Center
Brooklyn, New York 11245
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 29th
day
of April, 1996.
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 4/29/97
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone Senior Vice President and 4/29/97
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
/s/ Lee Abraham* Trustee 4/29/97
Lee Abraham
/s/ Allan J. Bloostein* Trustee 4/29/97
Allan J. Bloostein
/s/ Madelon Devoe-Talley*Trustee 4/29/97
Madelon Devoe-Talley
/s/ Richard E. Hanson* Trustee 4/29/97
Richard E. Hanson
* Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power of attorney dated September 4, 1996.
/s/ Heath B. McLendon
Heath B. McLendon
EXHIBITS
Exhibit No. Description of Exhibits
11 Consent of KPMG Peat Marwick LLP
17 Financial Data Schedule
Cover Letter to SEC
g:\funds\slip\1997\secdocs\pea45.doc
Independent Auditors' Consent
To the Shareholders and Board of Trustees of
Smith Barney Income Funds:
We consent to the use of our report dated February 7, 1997 with respect to
Smith Barney Premium Total Return Fund of Smith Barney Income Funds
incorporated herein by reference and to the references to our Firm under the
headings "Financial Highlights" in the amended Prospectus and "Counsel and
Auditors" in the Statement of Additional Information.
KPMG Peat Marwick LLP
New York, New York
April 25, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<INTEREST-INCOME> 10,237,354
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<NET-INVESTMENT-INCOME> 19,358,358
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<NUMBER-OF-SHARES-REDEEMED> 1,636,594
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<GROSS-ADVISORY-FEES> 6,454,801
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<GROSS-EXPENSE> 17,886,712
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<PER-SHARE-GAIN-APPREC> 02.21
<PER-SHARE-DIVIDEND> 0
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> SMITH BARNEY PREMIUM TOTAL RETURN CLASS B
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<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 2,357,782,081
<INVESTMENTS-AT-VALUE> 3,082,773,681
<RECEIVABLES> 17,003,113
<ASSETS-OTHER> 577
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,099,777,371
<PAYABLE-FOR-SECURITIES> 299,790
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 66,541,729
<TOTAL-LIABILITIES> 66,841,519
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,304,811,734
<SHARES-COMMON-STOCK> 123,077,239
<SHARES-COMMON-PRIOR> 116,123,502
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (58,520,333)
<ACCUMULATED-NET-GAINS> 67,207,114
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 719,437,307
<NET-ASSETS> 3,032,935,852
<DIVIDEND-INCOME> 27,007,716
<INTEREST-INCOME> 10,237,354
<OTHER-INCOME> 0
<EXPENSES-NET> 17,886,712
<NET-INVESTMENT-INCOME> 19,358,358
<REALIZED-GAINS-CURRENT> 26,435,044
<APPREC-INCREASE-CURRENT> 313,273,170
<NET-CHANGE-FROM-OPS> 339,708,214
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 14,573,415
<DISTRIBUTIONS-OF-GAINS> 57,171,375
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 10,374,378
<NUMBER-OF-SHARES-REDEEMED> 6,245,730
<SHARES-REINVESTED> 2,825,089
<NET-CHANGE-IN-ASSETS> 359,066,572
<ACCUMULATED-NII-PRIOR> 252,227
<ACCUMULATED-GAINS-PRIOR> 54,879,768
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<GROSS-ADVISORY-FEES> 6,454,801
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PERIOD-END> DEC-31-1996
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<INVESTMENTS-AT-VALUE> 3,082,773,681
<RECEIVABLES> 17,003,113
<ASSETS-OTHER> 577
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<OTHER-ITEMS-LIABILITIES> 66,541,729
<TOTAL-LIABILITIES> 66,841,519
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,304,811,734
<SHARES-COMMON-STOCK> 2,226,473
<SHARES-COMMON-PRIOR> 1,783,030
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