As filed with the Securities and Exchange Commission
on November 7, 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. 46
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
Amendment No. 47 [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)
[ ] On _______________ pursuant to Rule
485(b)
[X] 75 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 0000091155-97-95.
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.
Item No. and Caption Statement of Additional
Information Caption
10. Cover Page Cover page
11. Table of Contents Contents
12. General Information and History Distributor; Additional
Information
13. Investment Objectives and Policies Investment Objectives
and Management Policies
14. Management of the Fund Management of the Trust and
the Funds; Distributor
15. Control Persons and Principal Management of the Trust and
the Funds Holders of
Securities
16. Investment Advisory and Management
of the Trust and the Funds; Other Services Distributor
17. Brokerage Allocation Investment Objectives and
Management Policies;
Distributor
18. Capital Stock and Other Securities Investment Objectives
and Management Policies;
Purchase of Shares; Redemption
of Shares; Taxes
19. Purchase, Redemption and Pricing
of Securities Being Offered Purchase of Shares; Redemption
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
SMITH BARNEY INCOME FUNDS
PART A
Prospectus January 21, 1998
Smith Barney
Total Return Bond Fund
388 Greenwich Street New York, New York 10013
(800) 451-2010
Smith Barney Total Return Bond Fund (the "Fund") is a diversified
bond fund that seeks to maximize total return, consisting of
capital appreciation and income, by investing in a portfolio of
fixed income securities of varying maturities.
The Fund is one of a number of funds, each having distinct
investment objectives and policies, making up the Smith Barney
Income Funds (the "Trust"). The Trust is an open-end management
investment company commonly referred to as a mutual fund.
The initial subscription period for shares is scheduled to end on
March 6, 1998 (the "Subscription Period"). After the expiration
of the Subscription Period or a limited continuous offering
period, the Fund will suspend the offering of shares to the
public. A continuous offering of shares is expected to commence
on or about April 6, 1998. See "Purchase of Shares."
This Prospectus sets forth concisely certain information about the
Fund and the Trust, including sales charges, distribution and
service fees and expenses, that prospective investors will find
helpful in making an investment decision. Investors are
encouraged to read this Prospectus carefully and retain it for
future reference. Shares of other investment funds offered by the
Trust are described in separate prospectuses that may be obtained
by calling the Trust at the telephone number set forth above or by
contacting a Smith Barney Financial Consultant.
Additional information about the Fund and the Trust is contained
in a Statement of Additional Information dated January 21, 1998,
as amended or supplemented from time to time, that is available
upon request and without charge by calling or writing the Trust at
the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant. The Statement of Additional
Information has been filed with the Securities and Exchange
Commission (the "SEC") and is incorporated by reference into this
Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
TABLE OF CONTENTS
PROSPECTUS SUMMARY
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
VALUATION OF SHARES
DIVIDENDS, DISTRIBUTIONS AND TAXES
PURCHASE OF SHARES
EXCHANGE PRIVILEGE
REDEMPTION OF SHARES
MINIMUM ACCOUNT SIZE
PERFORMANCE
MANAGEMENT OF THE TRUST AND THE FUND
DISTRIBUTOR
ADDITIONAL INFORMATION
No person has been authorized to give any information or to make
any representations in connection with this offering other than
those contained in this Prospectus and, if given or made, such
other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This
Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to
whom it is unlawful to make such an offer or solicitation in any
such jurisdiction.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by
detailed information appearing elsewhere in this Prospectus and in
the Statement of Additional Information. Cross references in this
summary are to headings in the Prospectus. See "Table of
Contents."
INVESTMENT OBJECTIVE The Fund is an open-end, diversified, management
investment company whose investment objective is to maximize total
return. The Fund seeks to achieve its objective by investing in a
professionally managed portfolio consisting of fixed-income
securities of varying maturities. The Fund will invest primarily
in the following types of securities: U.S. government securities;
corporate debt securities; mortgage-related securities; and
taxable municipal securities. The allocation and reallocation of
the Fund's assets will be undertaken by Smith Barney Mutual Funds
Management Inc. ("SBMFM") on the basis of its analysis of economic
and market conditions and the relative risks and opportunities of
particular types of fixed-income securities.
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes of
shares ("Classes") to investors designed to provide them with the
flexibility of selecting an investment best suited to their needs.
The general public is offered three Classes of shares: Class A
shares, Class B shares and Class C shares, which differ
principally in terms of sales charges and rates of expenses to
which they are subject. A fourth Class of shares, Class Y shares,
is offered only to investors meeting an initial investment minimum
of $5,000,000. See "Purchase of Shares" and "Redemption of
Shares."
Class A Shares. Class A shares are sold at net asset value
plus an initial sales charge of up to 4.50% and are subject to an
annual service fee of 0.25% of the average daily net assets of the
Class. The initial sales charge may be reduced or waived for
certain purchases. Purchases of Class A shares of $500,000 or
more will be made at net asset value with no initial sales charge
but will be subject to a contingent deferred sales charge ("CDSC")
of 1.00% on redemptions made within 12 months of purchase. See
"Prospectus Summary--Alternative Purchase Arrangements--Reduced or
No Initial Sales Charge."
Class B Shares. Class B shares are offered at net asset
value subject to a maximum CDSC of 4.50% of redemption proceeds,
declining by 0.50% the first year after purchase and by 1.00% each
year thereafter to zero. This CDSC may be waived for certain
redemptions. Class B shares are subject to an annual service fee
of 0.25% and an annual distribution fee of 0.50% of the average
daily net assets of the Class. The Class B shares' distribution
fee may cause that Class to have higher expenses and pay lower
dividends than Class A shares.
Class B Shares Conversion Feature. Class B shares will
convert automatically to Class A shares, based on relative net
asset value, eight years after the date of the original purchase.
Upon conversion, these shares will no longer be subject to an
annual distribution fee. In addition, a certain portion of Class
B shares that have been acquired through the reinvestment of
dividends and distributions ("Class B Dividend Shares") will be
converted at that time. See "Purchase of Shares--Deferred Sales
Charge Alternatives."
Class C Shares. Class C shares are sold at net asset value
with no initial sales charge. They are subject to an annual
service fee of 0.25% and an annual distribution fee of 0.45% of
the average daily net assets of the Class, and investors pay a
CDSC of 1.00% if they redeem Class C shares within 12 months of
purchase. The CDSC may be waived for certain redemptions. The
Class C shares' distribution fee may cause that Class to have
higher expenses and pay lower dividends than Class A shares.
Purchases of Fund shares, which when combined with current
holdings of Class C shares of the Fund equal or exceed $500,000 in
the aggregate, should be made in Class A shares at net asset value
with no sales charge, and will be subject to a CDSC of 1.00% on
redemptions made within 12 months of purchase.
Class Y Shares. Class Y shares are available only to
investors meeting an initial investment minimum of $5,000,000.
Class Y shares are sold at net asset value with no initial sales
charge or CDSC. They are not subject to any service or
distribution fees.
In deciding which Class of Fund shares to purchase,
investors should consider the following factors, as well as any
other relevant facts and circumstances:
Intended Holding Period. The decision as to which Class of
shares is more beneficial to an investor depends on the amount and
intended duration of his or her investment. Shareholders who are
planning to establish a program of regular investment may wish to
consider Class A shares; as the investment accumulates
shareholders may qualify for reduced sales charges and the shares
are subject to lower ongoing expenses over the term of the
investment. As an alternative, Class B and Class C shares are
sold without any initial sales charge so the entire purchase price
is immediately invested in the Fund. Any investment return on
these additional invested amounts may partially or wholly offset
the higher annual expenses of these Classes. Because the Fund's
future return cannot be predicted, however, there can be no
assurance that this would be the case.
Finally, investors should consider the effect of the CDSC
period and any conversion rights of the Classes in the context of
their own investment time frame. For example, while Class C
shares have a shorter CDSC period than Class B shares, they do not
have a conversion feature and therefore are subject to an ongoing
distribution fee. Thus, Class B shares may be more attractive
than Class C shares to investors with longer-term investment
outlooks.
Reduced or No Initial Sales Charge. The initial sales
charge on Class A shares may be waived for certain eligible
purchasers and the entire purchase price would be immediately
invested in the Fund. In addition, Class A share purchases of
$500,000 or more will be made at net asset value with no initial
sales charge but will be subject to a CDSC of 1.00% on redemptions
made within 12 months of purchase. The $500,000 investment may be
met by adding the purchase to the net asset value of all Class A
shares held in certain funds sponsored by Smith Barney Inc.
("Smith Barney") listed under "Exchange Privilege." Class A share
purchases may also be eligible for a reduced initial sales charge.
See "Purchase of Shares." Because the ongoing expenses of Class A
shares may be lower than those for Class B and Class C shares,
purchasers eligible to purchase Class A shares at net asset value
or at a reduced sales charge should consider doing so.
Smith Barney Financial Consultants may receive different
compensation for selling the different Classes of shares.
Investors should understand that the purpose of the CDSC on the
Class B and Class C shares is the same as that of the initial
sales charge on the Class A shares.
See "Purchase of Shares" and "Management of the Trust and
the Fund" for a complete description of the sales charges and
service and distribution fees for each Class of shares and
"Valuation of Shares," "Dividends, Distributions and Taxes" and
"Exchange Privilege" for other differences between the Classes of
shares.
SMITH BARNEY 401(k) AND EXECCHOICE PROGRAMS Investors may be eligible
to participate in the Smith Barney 401(k) Program, which is
generally designed to assist plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the ''Code''), as well as other
types of participant-directed, tax-qualified employee benefit
plans. Other investors may be eligible to participate in the
Smith Barney ExecChoice Program. Class A and Class C shares are
available as investment alternatives under both of these programs.
See ''Purchase of Shares--Smith Barney 401(k) and ExecChoice
Programs.''
PURCHASE OF SHARES Shares may be purchased through the Fund's
distributor, Smith Barney, a broker that clears securities
transactions through Smith Barney on a fully disclosed basis (an
"Introducing Broker") or an investment dealer in the selling group
during the continuous offering period.
The initial subscription period for shares is scheduled to end on
March 6, 1998 (the "Subscription Period"). After the expiration
of the Subscription Period or a limited continuous offering
period, the Fund will suspend the offering of shares to the
public. A continuous offering of shares is expected to commence
on or about April 6, 1998. See ''Purchase of Shares.''
INVESTMENT MINIMUMS Investors in Class A, Class B and Class C shares
may open an account by making an initial investment of at least
$1,000 for each account. Investors in Class Y shares may open an
account for an initial investment of $5,000,000. Subsequent
investments of at least $50 may be made for all Classes. The
minimum initial investment requirement for Class A, Class B and
Class C shares and the subsequent investment requirement for all
Classes through the Systematic Investment Plan are described
below. There is no minimum investment requirement in Class A for
unitholders who invest distributions from a unit investment trust
("UIT") sponsored by Smith Barney. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic
Investment Plan under which they may authorize the automatic
placement of a purchase order each month or quarter for Fund
shares. The minimum initial investment requirement for Class A,
Class B and Class C shares and the subsequent investment
requirement for all Classes for shareholders purchasing shares
through the Systematic Investment Plan on a monthly basis is $25
and on a quarterly basis is $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York
Stock Exchange, Inc. ("NYSE") is open for business. See "Purchase
of Shares" and "Redemption of Shares."
MANAGEMENT OF THE TRUST AND THE FUND SBMFM serves as the Fund's
investment manager. SBMFM is a wholly owned subsidiary of Smith
Barney Holdings Inc. ("Holdings"), which, in turn, is a wholly
owned subsidiary of Travelers Group Inc. ("Travelers"), a
diversified financial services holding company engaged, through
its subsidiaries, principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. See
"Management of the Trust and the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of
the same class of certain other Smith Barney Mutual Funds at the
respective net asset values next determined. See "Exchange
Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day is
generally quoted daily in the financial section of most newspapers
and is also available from Smith Barney Financial Consultants.
See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment are paid
monthly and distributions of net realized capital gains, if any,
are paid annually. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares
of any Class will be reinvested automatically, unless otherwise
specified by an investor, in additional shares of the same Class
at current net asset value. Shares acquired by dividend and
distribution reinvestments will not be subject to any sales charge
or CDSC. Class B shares acquired through dividend and
distribution reinvestments will become eligible for conversion to
Class A shares on a pro rata basis. See "Dividends, Distributions
and Taxes."
RISK FACTORS AND SPECIAL CONSIDERATIONS There can be no assurance that
the Fund will achieve its investment objective. The market value
of fixed-income securities, which constitute a major part of the
investments of the Fund, may vary inversely in response to changes
in prevailing interest rates. The Fund may employ investment
techniques which involve certain risks, including entering in
repurchase agreements and reverse repurchase agreements, entering
into forward roll transactions, purchasing or selling securities
on a when-issued or delayed-delivery basis, lending portfolio
securities and entering into transactions involving options and
futures contracts. See "Investment Objective and Management
Policies--Certain Investment Strategies."
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 upon the maximum sales charge or
maximum CDSC that may be incurred at the time of purchase or
redemption and, unless otherwise noted, the Fund's operating
expenses for its most recent fiscal year:
Smith Barney
Total Return Bond Fund
Class
A
Class B
Class
C
Class
Y
Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases
(as a percentage of offering
price)
4.50%
None
None
None
Maximum CDSC (as a percentage of
original cost or redemption
proceeds, whichever is lower)
None*
4.50%
1.00%
None
Annual Fund Operating Expenses
(as a percentage of average net
assets)
Management fees
0.65%
0.65%
0.65%
0.65%
12b-1 fees**
0.25
0.75
0.70
None
Other expenses***
0.14
0.12
0.12
0.10
Total Operating Expenses
1.04%
1.52%
1.47%
0.75%
* Purchases 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.
*** For Class A, B, C and Y shares, "Other Expenses" have been
estimated because no Class A, B, C or Y shares were outstanding
during the fiscal year ended July 31, 1997.
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.
The sales charge and CDSC set forth in the above table are the
maximum charges imposed on purchases or redemptions of Fund shares
and investors may actually pay lower or no charges depending on
the amount purchased and, in the case of Class B, Class C and
certain Class A shares, the length of time the shares are held.
See "Purchase of Shares" and "Redemption of Shares." Smith Barney
receives an annual 12b-1 service fee of 0.25% of the value of
average daily net assets of Class A shares. Smith Barney also
receives, with respect to Class B shares, an annual 12b-1 fee of
0.75% of the value of average daily net assets of that Class,
consisting of a 0.50% distribution fee and a 0.25% service fee.
With respect to Class C shares, Smith Barney receives an annual
12b-1 fee of 0.70% of the value of average daily net assets of the
Class, consisting of a 0.45% distribution fee and a 0.25% service
fee. "Other expenses" in the above table include fees for
shareholder services, custodial fees, legal and accounting fees,
printing costs and registration fees.
EXAMPLE The following example is intended to assist an investor in
understanding the various costs that an investor in the Fund will
bear directly or indirectly. The example assumes payment by the
Fund of operating expenses at the levels set forth in the table
above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Trust and the Fund."
Smith Barney
Total Return Bond Fund
1 Year
3 Years
An investor would pay the
following expenses on a $1,000
investment, assuming (1) 5.00%
annual return and (2)
redemption at the end of each
time period
Class A
$55
$77
Class B
60
78
Class C
25
46
Class Y
8
24
An investor would pay the
following expenses on the same
investment, assuming the same
annual return and no
redemption:
Class A
$55
$77
Class B
15
48
Class C
15
46
Class Y
8
24
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.
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The Fund seeks to maximize total return, consisting of capital
appreciation and income, by investing in fixed-income securities.
In attempting to achieve its objective, the Fund allocates and
reallocates its assets primarily among various types of fixed-
income securities selected by SBMFM. The types of fixed-income
securities among which the Fund's assets will be primarily
allocated are: obligations issued or guaranteed as to principal
and interest by the United States government ("U.S. government
securities"); mortgage-related securities issued by various
governmental and non-governmental entities; domestic investment-
grade corporate debt securities and taxable municipal securities.
The allocation and reallocation of the Fund's assets will be
undertaken by SBMFM on the basis of its analysis of economic and
market conditions and the relative risks and opportunities of
particular types of fixed-income securities. The average
portfolio duration will vary based on SBMFM's forecast for
interest rates. At any given time, the Fund may be entirely or
partially invested in a particular type of fixed income security.
Under normal conditions, at least 65% of the Fund's assets will be
invested in fixed-income securities.
The "total return" sought by the Fund will consist of interest and
dividends from underlying securities, capital appreciation
reflected in unrealized increases in value of fund securities
(realized by the shareholder only upon selling shares), or
realized from the purchase and sale of securities and the use of
futures and options. The change in market value of fixed income
securities (and therefore their capital appreciation) is largely a
function of changes in the current level of interest rates.
CHARACTERISTICS AND RISKS OF SECURITIES AND INVESTMENT TECHNIQUES
The Fund will invest principally in the following securities:
U.S. Government Securities
The U.S. government securities in which the Fund may invest
include direct obligations of the United States Treasury (such as
Treasury Bills, Treasury Notes and Treasury Bonds) and obligations
issued by U.S. government agencies and instrumentalities,
including: securities supported by the full faith and credit of
the United States (such as Government National Mortgage
Association ("GNMA") certificates); securities supported by the
right of the issuer to borrow from the United States Treasury
(such as securities of Federal Home Loan Banks); and securities
supported by the credit of the instrumentality (such as Federal
National Mortgage Association ("FNMA") and Federal Home Loan
Mortgage Corporation ("FHLMC") bonds). Treasury Bills have
maturities of less than one year, Treasury Notes have maturities
of one to 10 years and Treasury Bonds generally have maturities of
greater than 10 years at the date of issuance. Certain U.S.
government securities, such as those issued or guaranteed by GNMA,
FNMA and FHLMC, are mortgage-related securities. U.S. government
securities generally do not involve the credit risks associated
with other types of interest bearing securities, although, as a
result, the yields available from U.S. government securities are
generally lower than the yields available from interest-bearing
corporate securities.
Corporate Debt Securities
Corporate debt securities include corporate bonds, debentures,
notes and other similar corporate debt securities. The Fund will
purchase a corporate debt security if SBMFM believes that the
yield and, to a lesser extent, the potential for capital
appreciation of the security are sufficiently attractive in light
of the risks of ownership of the security. In determining whether
the Fund should invest in a particular debt security, SBMFM will
consider factors such as the price, coupon and yield to maturity
of the security; the credit quality of the issuer; the issuer's
available cash flow and the related coverage ratios; the property,
if any, securing the obligation; and the terms of the debt
security, including the subordination, default, sinking fund and
early redemption provisions. SBMFM also will review the ratings,
if any, assigned to the security by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P") or other
nationally recognized statistical rating organizations ("NRSROs").
SBMFM's judgments as to credit quality of a debt security may
differ, however, from that suggested by the ratings published by a
NRSRO.
Mortgage-Related Securities
Mortgage-related securities in which the Fund may invest include
mortgage obligations collateralized by mortgage loans or mortgage
pass-through certificates. Under current market conditions, the
Fund's holdings of mortgage-related securities may be expected to
consist primarily of securities issued or guaranteed by GNMA, FNMA
and FHLMC. The composition of the Fund's investments in mortgage-
related securities, however, will vary from time to time based
upon a determination of SBMFM on how best to achieve the Fund's
investment objective, taking into account factors such as the
liquidity and yield of various mortgage-related securities.
Mortgage-related securities held by the Fund generally will be
rated no lower than Aa by Moody's or AA by S&P or, if not rated,
will be of equivalent investment quality as determined by SBMFM.
SBMFM may also consider the ratings, if any, assigned to mortgage-
related securities by NRSROs other than Moody's and S&P.
Mortgage-related securities provide a monthly payment consisting
of interest and principal payments. Additional payments may be
made out of unscheduled repayments of principal resulting from the
sale, refinancing or foreclosure of the underlying residential
property, net of fees or costs that may be incurred. Prepayments
of principal on mortgage-related securities may tend to increase
due to refinancing of mortgages as interest rates decline.
Mortgage pools created by private organizations generally offer a
higher rate of interest than government and government-related
pools because no direct or indirect guarantees of payment are
applicable with respect to the former pools. Timely payment of
interest and principal in these pools, however, may be supported
by various forms of private insurance or guarantees, including
individual loan, title, pool and hazard insurance. There can be
no assurance that the private insurers can meet their obligation
under the policies. Prompt payment of principal and interest on
GNMA mortgage pass-through certificates is backed by the full
faith and credit of the United States. FNMA-guaranteed mortgage
pass-through certificates and FHLMC participation certificates are
solely the obligations of those entities but are supported by the
discretionary authority of the United States government to
purchase the agencies' obligations. Collateralized mortgage
obligations are a type of bond secured by an underlying pool of
mortgages or mortgage pass-through certificates structured to
direct payments on underlying collateral to different series or
classes of the obligations.
To the extent that the Fund purchases mortgage-related securities
at a premium, mortgage foreclosures and prepayments of principal
by mortgagors (which may be made at any time without penalty) may
result in some loss of the Fund's principal investment to the
extent of the premium paid. The Fund's yield may be affected by
reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the
values of mortgage-related securities, including government and
government-related mortgage pools, generally will fluctuate in
response to market interest rates.
Taxable Municipal Securities
The Fund will also invest in a diversified portfolio of taxable
long-term investment-grade securities issued by or on behalf of
states and municipal governments, U.S. territories and possessions
of the United States and their authorities, agencies,
instrumentalities and political subdivisions ("Taxable Municipal
Obligations"). The Taxable Municipal Obligations in which the
Fund may invest are within the four highest ratings of Moody's
(Aaa, Aa, A, Baa) or S&P (AAA, AA, A, BBB). Although securities
rated in these categories are commonly referred to as investment
grade, they may have speculative characteristics. In addition,
changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity to make principal and
interest payments than is the case with higher-grade securities.
Furthermore, the market for Taxable Municipal Obligations is
relatively small, which may result in a lack of liquidity and in
price volatility of those securities. Interest on Taxable
Municipal Obligations is includable in gross income for Federal
income tax purposes and may be subject to personal income taxes
imposed by any state of the United States or any political
subdivision thereof, or by the District of Columbia.
Further information about the Fund's investment policies,
including a list of those restrictions on the Fund's investment
activities that cannot be changed without shareholder approval,
appears in the Statement of Additional Information.
ADDITIONAL INVESTMENTS
Zero Coupon Securities. The Fund may also invest in zero coupon
bonds. A zero coupon bond pays no interest in cash to its holder
during its life, although interest is accrued during that period.
Its value to an investor consists of the difference between its
face value at the time of maturity and the price for which it was
acquired, which is generally an amount significantly less than its
face value (sometimes referred to as a "deep discount" price).
Because such securities usually trade at a deep discount, they
will be subject to greater fluctuations of market value in
response to changing interest rates than debt obligation of
comparable maturities which make periodic distribution of
interest. On the other hand, because there are not periodic
interest payments to be reinvested prior to maturity, zero coupon
securities eliminate reinvestment risk and lock in a rate of
return to maturity.
Asset-Backed Securities. An asset-backed security represents an
interest in a pool of assets such as receivables from credit card
loans, automobile loans and other trade receivables. Changes in
the market's perception of the asset backing the security, the
creditworthiness of the servicing agent for the loan pool, the
originator of the loans, or the financial institution providing
any credit enhancement will all affect the value of an asset-
backed security, as will the exhaustion of any credit enhancement.
The risks of investing in asset-backed securities ultimately
depend upon the payment of the consumer loans by the individual
borrowers. In its capacity as purchaser of an asset-backed
security, the Fund would generally have no recourse to the entity
that originated the loans in the event of default by the borrower.
Additionally, in the same manner as described above under
"Mortgage-Related Securities" with respect to prepayment of a pool
of mortgage loans underlying mortgage-related securities, the
loans underlying asset-backed securities are subject to
prepayments, which may shorten the weighted average life of such
securities and may lower their return.
Medium-, Low- and Unrated Securities. The Fund may invest up to
10% of its assets in medium- or low- rated securities and unrated
securities of comparable quality. Generally, these securities
offer a higher current yield than the yield offered by higher-
rated securities but involve greater volatility of price and risk
of loss of income and principal, including the probability of
default by or bankruptcy of the issuers of such securities.
Medium- and low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in
the judgment of the rating organization, are outweighed by large
uncertainties or major risk exposures to adverse conditions and
(b) are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with
the terms of the obligation. Thus, it is possible that these types
of factors could, in certain instances, reduce the value of
securities held by the Fund with a commensurate effect on the
value of the Fund's shares. Therefore, an investment in the Fund
should not be considered as a complete investment program and may
not be appropriate for all investors. A more detailed discussion
of the risks associated with medium, low- and unrated securities
appears in the Statement of Additional Information.
CERTAIN INVESTMENT STRATEGIES
In attempting to achieve its investment objective, the Fund may
employ, among others, the following portfolio strategies:
When-Issued Securities and Delayed-Delivery Transactions. In
order to secure yields or prices deemed advantageous at the time,
the Fund may purchase or sell securities offered on a when-issued
or delayed-delivery basis. The Fund will enter into a when-issued
transaction for the purpose of acquiring securities and not for
the purpose of leverage. In such transactions, delivery of the
securities occurs beyond the normal settlement period but no
payment or delivery is made by the Fund prior to the actual
delivery or payment by the other party to the transaction. Due to
fluctuations in the value of securities purchased or sold on a
when-issued or delayed-delivery basis, the yields obtained on such
securities may be higher or lower than the yields available in the
market on the dates when the investments are actually delivered to
the buyers. The Fund will establish a segregated account with the
Fund's custodian consisting of cash, debt securities of any grade
or equity securities having a value equal to or greater than the
Fund's purchase commitments, provided such securities have been
determined by SBMFM to be liquid and unencumbered and are marked
to market daily pursuant to guidelines established by the
Trustees. Placing securities rather than cash in the segregated
account may have a leveraging effect on the Fund's net assets.
Forward Roll Transactions. In order to enhance current income,
the Fund may enter into forward roll transactions with respect to
mortgage-related securities issued by GNMA, FNMA and FHLMC. In a
forward roll transaction, the Fund sells a mortgage security to a
financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from the
institution at a later date at an agreed-upon price. The mortgage
securities repurchased will bear the same interest rate as those
sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold.
During the period between the sale and repurchase, the Fund will
not be entitled to receive interest and principal payments on the
securities sold. Proceeds of the sale will be invested in short-
term instruments, particularly repurchase agreements, and the
income from these investments, together with any additional fee
income received on the sale, will generate income for the Fund
exceeding the yield on the securities sold. Forward roll
transactions involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price
of those securities. At the time the Fund enters into forward
roll transactions, it will establish a segregated account with the
Fund's custodian consisting of cash, U.S. government securities,
equity securities or debt securities of any grade having a value
equal to or greater than the repurchase price, provided such
securities have been determined by SBMFM to be liquid and
unencumbered and are marked to market daily pursuant to guidelines
established by the Trustees.
Money Market Instruments. Under normal market conditions, the
Fund may hold up to 20% of its total assets in cash or money
market instruments, including taxable money market instruments.
In addition, when SBMFM believes that market conditions warrant,
the Fund may take a temporary defensive posture and invest without
limitation in short-term instruments. Securities eligible for
short-term investment by the Fund include: U.S. government
securities; certain bank obligations (including certificates of
deposit, time deposits and bankers' acceptances of domestic banks,
domestic savings and loan associations and similar institutions);
commercial paper rated no lower than A-2 by S&P or Prime-2 by
Moody's or the equivalent from another NRSRO or, if unrated, of an
issuer having an outstanding unsecured debt issue then rated
within the three highest rating categories; and repurchase
agreements as described below.
Repurchase Agreements. The Fund may engage repurchase agreement
transactions with certain member banks of the Federal Reserve
System and with certain dealers on the Federal Reserve Bank of New
York's list of reporting dealers. Under the terms of a typical
repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase,
and the Fund to resell, the obligation at an agreed-upon time and
price, thereby determining the yield during the Fund's holding
period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding
period. The value of the underlying securities will be at least
equal at all times to the total amount of the repurchase
obligation, including interest. Repurchase agreements could
involve certain risks in the event of default or insolvency of the
other party, including possible delays or restrictions upon the
Fund's ability to dispose of the underlying securities, the risk
of a possible decline in the value of the underlying securities
during the period in which the Fund seeks to assert its rights to
them, the risk of incurring expenses associated with asserting
those rights and the risk of losing all or part of the income from
the agreement. SBMFM, acting under the supervision of the Board
of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers
with which the Fund may enter into repurchase agreements to
evaluate potential risks.
Reverse Repurchase Agreements. The Fund may enter into reverse
repurchase agreement transactions with member banks of the Federal
Reserve Bank of New York's list of reporting dealers. A reverse
repurchase agreement, which is considered a borrowing by the Fund,
involves a sale by the Fund of securities that it holds
concurrently with an agreement by the Fund to repurchase the same
securities at an agreed-upon time and price. The Fund typically
will invest the proceeds of a reverse repurchase agreement in
money market instruments or repurchase agreements maturing not
later than the expiration of the reverse repurchase agreement.
This use of the proceeds is known as leverage. The Fund will
enter into a reverse repurchase agreement for leveraging purposes
only when the interest income to be earned from the investment of
the proceeds is greater than the interest expense of the
transaction. The Fund also may use the proceeds of reverse
repurchase agreements to provide liquidity to meet redemption
requests when the sale of the Fund's securities is considered to
be disadvantageous.
Financial Futures and Options Transactions. When deemed advisable
by SBMFM, the Fund may enter into futures contracts or related
options traded on a domestic exchange or board of trade. Such
investments, if any, by the Fund will be made solely for the
purpose of hedging against the effects of changes in the value of
the Fund's securities due to anticipated changes in interest rates
and market conditions, and when the transactions are economically
appropriate for the reduction of risks inherent in the management
of the Fund. The Fund may hedge up to 50% of its assets using
futures contracts or related options transactions.
In entering into a financial futures contract, the Fund will be
required to deposit with the broker through which it undertakes
the transaction an amount of cash or cash equivalents equal to
approximately 5% of the contract amount. This amount, which is
known as "initial margin," is subject to change by the exchange or
board of trade on which the contract is traded, and members of the
exchange or board of trade may charge a higher amount. Initial
margin is in the nature of a performance bond or good faith
deposit on the contract that is returned to the Fund upon
termination of the futures contract, assuming all contractual
obligations have been satisfied. In accordance with a process
known as "marking-to-market," subsequent payments called
"variation margin," will be made daily to and by the broker as the
price of the securities underlying the futures contract
fluctuates, making the long and short positions in the futures
contract more or less valuable. At any time prior to the
expiration of a futures contract, the Fund may elect to close the
position by taking an opposite position, which will terminate the
Fund's existing position in the contract.
A financial futures contract provides for the future sale by one
party and the purchase by the other party of a certain amount of
specified property at a specified price, date, time and place.
Unlike a direct investment in a futures contract, an option on a
financial futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in the financial
futures contract at a specified exercise price at any time prior
to the expiration date of the option. 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 loss related to the purchase of an option
on financial futures contracts is limited to the premium paid for
the option, plus transaction costs. The value of the option may
change daily and that change would be reflected in the net asset
value of the Fund.
Regulations of the Commodity Futures Trading Commission applicable
to the Fund require that its transactions in financial futures
contracts and options on financial futures contracts be engaged in
for bona fide hedging purposes, or if the Fund enters into futures
contracts for speculative purposes, that the aggregate initial
margin deposits and premiums paid by the Fund will not exceed 5%
of the market value of its assets. In addition, the Fund will,
with respect to its purchases of financial futures contracts,
establish a segregated account consisting of cash or cash
equivalents in an amount equal to the total market value of the
futures contracts, less the amount of initial margin on deposit
for the contracts.
Although the Fund intends to enter into financial futures
contracts and options on financial futures contracts traded on a
domestic exchange or board of trade only if an active market
exists for those instruments, no assurance can be given that an
active market will exist for them at any particular time. If
closing a futures position in anticipation of adverse price
movements is not possible, the Fund would be required to make
daily cash payments of variation margin. In those circumstances,
an increase in the value of the portion of the Fund's investments
being hedged, if any, may partially or completely offset losses on
the futures contract. No assurance can be given, however, that
the price of the securities being hedged will correlate with the
price movements in a futures contract, and thus provide an offset
to losses on the futures contract or option on the futures
contract. In addition, due to the risk of an imperfect
correlation between securities held by the Fund that are the
subject of a hedging transaction and the futures or options used
as a hedging device, the hedge may not be fully effective because,
for example, losses on the securities held by the Fund may be in
excess of gains on the futures contract or losses on the futures
contract may be in excess of gains on the securities held by the
Fund that were the subject of the hedge. In an effort to
compensate for the imperfect correlation of movements in the price
of the securities being hedged and movements in the price of
futures contracts, the Fund may enter into financial futures
contracts or options on financial futures contracts in a greater
or lesser dollar amount than the dollar amount of the securities
being hedged if the historical volatility of the futures contract
has been less or greater than that of the securities. This "over
hedging" or "under hedging" may adversely affect the Fund's net
investment results if market movements are not as anticipated when
the hedge is established.
If the Fund has hedged against the possibility of an increase in
interest rates adversely affecting the value of securities it
holds and rates decrease instead, the Fund will lose part or all
of the benefit of the increased value of securities that it has
hedged because it will have offsetting losses in its futures or
options positions. In addition, in those situations, if the Fund
has insufficient cash, it may have to sell securities to meet
daily variation margin requirements on the futures contracts at a
time when it may be disadvantageous to do so. These sales of
securities may, but will not necessarily, be at increased prices
that reflect the decline in interest rates.
Lending of Portfolio Securities. The Fund has the ability to lend
portfolio securities to brokers, dealers and other financial
organizations. These loans, if and when made, may not exceed 20%
of the Fund's assets taken at value. Loans of portfolio
securities will be collateralized by cash, letters of credit or
U.S. government securities maintained at all times in an amount
at least equal to the current market value of the loaned
securities. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan
would be for the account of the Fund. The Fund will segregate the
common stock or convertible or exchangeable preferred stock or
debt securities in a special account with its custodian.
CERTAIN ADDITIONAL INVESTMENT GUIDELINES
Up to 15% of the assets of the Fund may be invested in securities
with contractual or other restrictions on resale and other
instruments not readily marketable, including (a) repurchase
agreements with maturities greater than seven days and (b) time
deposits maturing from two business days through seven calendar
days. Not withstanding the foregoing, the Fund shall not invest
more that 10% of its net assets in securities that are restricted,
excluding those subject to Rule 144A under the Securities Act of
1933, as amended (the "1933 Act"). In addition, the Fund may
invest up to 5% of its assets in the securities of issuers which
have been in continuous operation for less than three years. The
Fund may also borrow from banks for temporary or emergency
purposes, but not for investment purposes, in an amount up to 10%
of its total assets, and may pledge its assets to the same extent
in connection with such borrowings. Whenever these borrowings
exceed 5% of the value of the Fund's total assets, the Fund will
not make any additional investments. Except for the limitation on
borrowing, the investment guidelines set forth in this paragraph
may be changed at any time without shareholder consent by vote of
the Trust's Board of Trustees. A complete list of investment
restrictions that identifies additional restrictions that cannot
be changed without the approval of the majority of the Fund's
outstanding shares is contained in the Statement of Additional
Information.
VALUATION OF SHARES
The Fund's net asset value per share is determined as of the close
of regular trading on the NYSE, on each day that the NYSE is open,
by dividing the value of the Fund's net assets attributable to
each Class by the total number of shares of that Class
outstanding.
The Fund's net asset value per share is determined as of the close
of regular trading on the NYSE on each day that the NYSE is open,
by dividing the value of the Fund's net assets attributable to
each Class by the total number of shares of the Class outstanding.
Generally, the Fund's investments are valued at market value or,
in the absence of a market value with respect to any securities,
at fair value as determined by or under the direction of the
Trust's Board of Trustees. A portfolio securities that is traded
primarily on a domestic stock exchange is valued at the last sale
price on that exchange or, if there were no sales during the day,
at the current quoted bid price. Over-the-counter securities are
valued on the basis of the bid price at the close of business on
each day. Investments in U.S. government securities (other than
short-term securities) are valued at the average of the quoted bid
and asked prices in the over-thecounter market. Short-term
investments that mature in 60 days or less are valued at amortized
cost whenever the Trustees determine that amortized cost reflects
fair value of those investments. An option generally is valued at
the last sale price or, in the absence of the last sale price, the
last offer price. The value of a futures contract equals the
unrealized gain or loss on the contract, which is determined by
marking the contract to the current settlement price for a like
contract acquired on the day on which the futures contract is
being valued. A settlement price may not be used if the market
makes a limit move with respect to a particular commodity or if
the underlying securities market experiences significant price
fluctuations after the determination of the settlement price. In
such event, the futures contract will be valued at a fair market
price to be determined by or under the direction of the Board of
Trustees. Further information regarding the Trust's valuation
policies with respect to the Fund is contained in the Statement of
Additional Information.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund will be treated separately from the Trust's other funds
in determining the amounts of dividends from investment income and
distributions of capital gains payable to shareholders.
If a shareholder does not otherwise instruct, dividends and
capital gains distributions will be reinvested automatically in
additional shares of the same Class at net asset value, subject to
no sales charge or CDSC. In addition, in order to avoid the
application of a 4.00% nondeductible excise tax on certain
undistributed amounts of ordinary income and capital gains, the
Fund may make an additional distribution shortly before December
31 of each year of any undistributed ordinary income or capital
gains, and expects to make any other distributions as are
necessary to avoid the application of this tax.
If, for any full fiscal year, the Fund's total distributions
exceed net investment income and net realized capital gains, the
excess distributions may be treated as a taxable dividend or as a
tax-free return of capital (up to the amount of the shareholder's
tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in
his or her shares. Pursuant to the requirements of the Investment
Company Act of 1940, as amended (the "1940 Act"), and other
applicable laws, a notice will accompany any distribution paid
from sources other than net investment income. In the event the
Fund distributes amounts in excess of its net investment income
and net realized capital gains, such distributions may have the
effect of decreasing the Fund's total assets, which may increase
the Fund's expense ratio.
The per share dividends on Class B shares and Class C shares may
be lower than the per share dividends on Class A and Class Y
shares, principally as a result of the distribution fee applicable
with respect to Class B and Class C shares. The per share
dividends on Class A shares of the Fund may be lower than the per
share dividends on Class Y shares, principally as a result of the
service fee applicable to Class A shares. Distributions of
capital gains, if any, will be in the same amount for Class A,
Class B, Class C and Class Y shares.
TAXES
The Fund will be treated as a separate taxpayer with the result
that, for Federal income tax purposes, the amount of investment
income and capital gains earned by the Fund will be determined
without regard to the earnings of the other funds of the Trust.
The Fund intends to qualify each year as a "regulated investment
company" under the Code. If the Fund qualifies as a regulated
investment company and meets certain distribution requirements,
the Fund will not be subject to Federal income tax on its net
investment income and net capital gains that it distributes to its
shareholders.
Dividends paid by the Fund from investment income and
distributions of short-term capital gain will be taxable to
shareholders as ordinary income for Federal income tax purposes,
whether received in cash or reinvested in additional shares.
Furthermore, as a general rule, distributions of long-term capital
gain will be taxable to shareholders as long-term capital gain,
whether paid in cash or reinvested in additional shares, and
regardless of the length of time that the investor has held his or
her shares of the Fund.
The Fund anticipates that most of its dividends will not qualify
for the Corporate Deduction. Each shareholder will receive a
statement annually from the Trust, which will set forth separately
the aggregate dollar amount of dividends and capital gains,
including the portion of capital gains eligible for a reduced
maximum 20% tax rate, distributed to the shareholder by the Fund
with respect to the prior calendar year.
Shareholders are urged to consult their tax advisers regarding the
application of Federal, state and local tax laws to their specific
situation before investing in the Fund.
PURCHASE OF SHARES
GENERAL
The Fund currently offers four Classes of shares. Class A shares
are sold to investors with an initial sales charge and Class B and
Class C shares are sold without an initial sales charge but are
subject to a CDSC payable upon certain redemptions. Class Y
shares are sold without an initial sales charge or a CDSC and are
available only to investors investing a minimum of $5,000,000
(except for purchases of Class Y shares by Smith Barney Concert
Allocation Series Inc., for which there is no minimum purchase
amount). See "Prospectus Summary--Alternative Purchase
Arrangements" for a discussion of factors to consider in selecting
which Class of shares to purchase.
INITIAL SUBSCRIPTION PERIOD
Smith Barney, the Fund's distributor, will solicit subscriptions
for shares of the Fund during the Subscription Period.
Subscriptions for shares must be made through a brokerage account
maintained with Smith Barney or an Introducing Broker. Shares of
the Fund subscribed for during the Subscription Period for which
Smith Barney accepts purchase orders will be issued and sold by
the Fund on the third business day after the end of the
Subscription Period (the "Purchase Date"). Also on the Purchase
Date, shareholders of other funds of the Smith Barney Mutual Funds
will be able to exchange shares of such funds for shares of the
Fund. On the Purchase Date, Smith Barney will notify the Fund of
the aggregate number of shares for which it has received and
accepted subscriptions, and the Fund will issue shares for such
subscriptions and commence operations.
The Fund is offering its Class A shares to the public at a maximum
purchase price per share of $12.00, which equals the Class A share
initial net asset value per share of $11.46 plus the maximum sales
charge set forth below under "Continuous Offerings". The Fund is
offering its Class B, Class C and Class Y shares to the public at
each Class' respective initial net asset value per share of
$11.46.
The Fund and Smith Barney may in their discretion determine to
withdraw the offering without notice for any reason before the end
of the Subscription Period. The Fund also reserves the right to
refuse any order in whole or in part.
CONTINUOUS OFFERINGS
Smith Barney will suspend the offering of shares to the public
immediately after the expiration of the Subscription Period or
within three weeks thereafter. During the three-week period,
Smith Barney will commence a limited continuous offering of shares
to the public. Once Smith Barney suspends the offering of shares
to the public (the "Closing Period"), it is expected to do so for
30 days. This period may be lengthened or shortened in the
absolute discretion of Smith Barney. During the Closing Period,
the Fund will invest the proceeds from its Subscription Period and
its continuous offering, if any, and existing shareholders may
request redemptions, purchase additional shares and exchange
shares of the Fund for shares of certain other funds of the Smith
Barney Mutual Funds. See "Exchange Privilege." Immediately after
the expiration of the Closing Period, Smith Barney expects to
commence a continuous offering of shares of the Fund.
During the continuous offering, shares may be purchased through a
brokerage account maintained with Smith Barney. Shares may also
be purchased through an Introducing Broker or an investment dealer
in the selling group. In addition, certain investors, including
qualified retirement plans and certain other institutional
investors, may purchase shares directly from the Fund through the
Fund's transfer agent, First Data Investor Services Group, Inc.
("First Data"). When purchasing shares of the Fund, investors
must specify whether the purchase is for Class A, Class B, Class C
or Class Y shares. Smith Barney and other broker-dealers may
charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data
are not subject to a maintenance fee.
Investors in Class A, Class B and Class C shares may open an
account in the Fund by making an initial investment of at least
$1,000. Investors in Class Y shares may open an account by making
an initial investment of $5,000,000. Subsequent investments of at
least $50 may be made for all Classes. For shareholders
purchasing shares of the Fund through the Systematic Investment
Plan on a monthly basis, the minimum initial investment
requirement for Class A, Class B and Class C shares and the
minimum subsequent investment requirement for all Classes is $25.
For shareholders purchasing shares of the Fund through the
Systematic Investment Plan on a quarterly basis, the minimum
initial investment requirement for Class A, Class B and Class C
shares and the subsequent investment requirement for all Classes
is $50. There are no minimum investment requirements for Class A
shares for employees of Travelers and its subsidiaries, including
Smith Barney, unitholders who invest distributions from a UIT
sponsored by Smith Barney and Directors or Trustees of any of the
Smith Barney Mutual Funds and their spouses and children. The
Fund reserves the right to waive or change minimums, to decline
any order to purchase its shares and to suspend the offering of
shares from time to time. Shares purchased will be held in the
shareholder's account by First Data. Share certificates are
issued only upon a shareholder's written request to the First
Data.
The minimum initial investment requirement in the Fund for an
account established under the Uniform Gift to Minors Act is $250
and the minimum subsequent investment requirement is $50.
Purchase orders received by the Fund or Smith Barney prior to the
close of regular trading on the NYSE, on any day the Fund
calculates its net asset value are priced according to the net
asset value determined on that day (the "trade date"). Orders
received by dealers or Introducing Brokers prior to the close of
regular trading on the NYSE on any day the Fund calculates its net
asset value are priced according to the net asset value determined
on that day, provided the order is received by the Fund or Smith
Barney prior to Smith Barney's close of business. For shares
purchased through Smith Barney or Introducing Brokers purchasing
through Smith Barney, payment for Fund shares is due on the third
business day after the trade date (the "settlement date"). In all
other cases, payment must be made with the purchase order.
SYSTEMATIC INVESTMENT PLAN
Shareholders may make additions to their accounts at any time by
purchasing shares through a service known as the Systematic
Investment Plan. Under the Systematic Investment Plan, Smith
Barney or First Data is authorized through pre-authorized
transfers of at least $25 on a monthly basis, or at least $50 on a
quarterly basis, to charge the shareholder's account held with a
bank or other financial institution as indicated by the
shareholder to provide systematic additions to the shareholder's
Fund account. A shareholder who has insufficient funds to
complete the transfer will be charged a fee of up to $25 by Smith
Barney or First Data. The Systematic Investment Plan also
authorizes Smith Barney to apply cash held in the shareholder's
Smith Barney brokerage account or redeem the shareholder's shares
of a Smith Barney money market fund to make additions to the
account. Additional information is available from the Fund or a
Smith Barney Financial Consultant.
INITIAL SALES CHARGE ALTERNATIVE--CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the
Fund are as follows:
Amount of
Investment
Sales Charge
as % of
Offering Price
Sales Charge as
% of Amount
Invested
Dealers
Reallowance as %
of
Offering Price
Less than $25,000
4.50%
4.71%
4.05%
$25,000--$49,999
4.00
4.17
3.60
$50,000--$99,999
3.50
3.63
3.15
$100,000--$249,999
2.50
2.56
2.25
$250,000--$499,999
1.50
1.52
1.35
$500,000 and over
*
*
*
* Purchases of Class A shares of $500,000 or more will be made at
net asset value without any initial sales charge, but will be
subject to a CDSC of 1.00% on redemptions made within 12 months
of purchase. The CDSC on Class A shares is payable to Smith
Barney, which compensates Smith Barney Financial Consultants
and other dealers whose clients make purchases of $500,000 or
more. The CDSC is waived in the same circumstances in which
the CDSC applicable to Class B and Class C shares is waived.
See "Deferred Sales Charge Alternatives" and "Waivers of CDSC."
Members of the selling group may receive up to 90% of the sales
charge and may be deemed to be underwriters of the Fund as defined
in the 1933 Act, as amended.
The reduced sales charges shown above apply to the aggregate of
purchases of Class A shares of the Fund made at one time by "any
person," which includes an individual and his or her immediate
family or a trustee or other fiduciary of a single trust estate or
single fiduciary account.
INITIAL SALES CHARGE WAIVERS
Purchases of Class A shares may be made at net asset value without
a sales charge in the following circumstances: (a) sales to (i)
Trustees or Directors of any Smith Barney Mutual Funds and
employees of Travelers and its subsidiaries and to the immediate
families of such persons and pension, profit-sharing or other
benefit plans for such persons and (ii) employees of members of
the National Association of Securities Dealers, Inc., provided
such sales are made upon the assurance of the purchaser that the
purchase is made for investment purposes and that the securities
will not be resold except through redemption or repurchase; (b)
offers of Class A shares to any other investment company to effect
the combination of such company with the Fund by merger,
acquisition of assets or otherwise; (c) purchases of Class A
shares by any client of a newly employed Smith Barney Financial
Consultant (for a period up to 90 days from the commencement of
the Financial Consultant's employment with Smith Barney), on the
condition the purchase of Class A shares is made with the proceeds
of the redemption of shares of a mutual fund which (i) was
sponsored by the Financial Consultant's prior employer, (ii) was
sold to the client by the Financial Consultant and (iii) was
subject to a sales charge; (d) purchases by shareholders who have
redeemed Class A shares in the Fund (or Class A shares of another
Smith Barney Mutual Fund offered with a sales charge) and who
wish to reinvest their redemption proceeds in the Fund, provided
the reinvestment is made within 60 calendar days of the
redemption; (e) purchases by accounts managed by registered
investment advisory subsidiaries of Travelers; (f) investments of
distributions from a UIT sponsored by Smith Barney; (g) purchases
by investors participating in a Smith Barney fee-based
arrangement; and (h) purchases by Travelers Insurance Company
agents, principals and licensed producers. In order to obtain
such discounts, the purchaser must provide sufficient information
at the time of purchase to permit verification that the purchase
would qualify for the elimination of the sales charge.
RIGHT OF ACCUMULATION
Class A shares of the Fund may be purchased by "any person" (as
defined above) at a reduced sales charge or at net asset value
determined by aggregating the dollar amount of the new purchase
and the total net asset value of all Class A shares of the Fund
and of funds sponsored by Smith Barney which are offered with a
sales charge listed under "Exchange Privilege" then held by such
person and applying the sales charge applicable to such aggregate.
In order to obtain such discount, the purchaser must provide
sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales
charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased
thereafter.
GROUP PURCHASES
Upon completion of certain automated systems, a reduced sales
charge or purchase at net asset value will also be available to
employees (and partners) of the same employer purchasing as a
group, provided each participant makes the minimum initial
investment required. The sales charge applicable to purchases by
each member of such a group will be determined by the table set
forth above under "Initial Sales Charge Alternative--Class A
Shares," and will be based upon the aggregate sales of Class A
shares of Smith Barney Mutual Funds offered with a sales charge
to, and share holdings of, all members of the group. To be
eligible for such reduced sales charges or to purchase at net
asset value, all purchases must be pursuant to an employer or
partnership-sanctioned plan meeting certain requirements. One
such requirement is that the plan must be open to specified
partners or employees of the employer and its subsidiaries, if
any. Such plan may, but is not required to, provide for payroll
deductions. Smith Barney may also offer a reduced sales charge or
net asset value purchase for aggregating related fiduciary
accounts under such conditions that Smith Barney will realize
economies of sales efforts and sales-related expenses. An
individual who is a member of a qualified group may also purchase
Class A shares at the reduced sales charge applicable to the group
as a whole. The sales charge is based upon the aggregate dollar
value of Class A shares offered with a sales charge that have been
previously purchased and are still owned by the group, plus the
amount of the current purchase. A "qualified group" is one which
(a) has been in existence for more than six months, (b) has a
purpose other than acquiring Fund shares at a discount and (c)
satisfies uniform criteria which enable Smith Barney to realize
economies of scale in its costs of distributing shares. A
qualified group must have more than 10 members, must be available
to arrange for group meetings between representatives of the Fund
and the members, and must agree to include sales and other
materials related to the Fund in its publications and mailings to
members at no cost to Smith Barney. In order to obtain such
reduced sales charge or to purchase at net asset value, the
purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for
the reduced sales charge. Approval of group purchase reduced
sales charge plans is subject to the discretion of Smith Barney.
LETTER OF INTENT
Class A Shares. A Letter of Intent for amounts of $50,000 or more
provides an opportunity for an investor to obtain a reduced sales
charge by aggregating investments over a 13-month period, provided
that the investor refers to such Letter when placing orders. For
purposes of a Letter of Intent, the "Amount of Investment" as
referred to in the preceding sales charge table includes purchases
of all Class A shares of the Fund and other funds of the Smith
Barney Mutual Funds offered with a sales charge over the 13-month
period based on the total amount of intended purchases plus the
value of all Class A shares previously purchased and still owned.
An alternative is to compute the 13-month period starting up to 90
days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If
the goal is not achieved within the period, the investor must pay
the difference between the sales charges applicable to the
purchases made and the charges previously paid, or an appropriate
number of escrowed shares will be redeemed. Please contact a Smith
Barney Financial Consultant or First Data to obtain a Letter of
Intent application.
Class Y Shares. A Letter of Intent may also be used as a way for
investors to meet the minimum investment requirement for Class Y
shares. Such investors must make an initial minimum purchase of
$1,000,000 in Class Y shares of the Fund and agree to purchase a
total of $5,000,000 of Class Y shares of the Fund within six
months from the date of the Letter. If a total investment of
$5,000,000 is not made within the six-month period, all Class Y
shares purchased to date will be transferred to Class A shares,
where they will be subject to all fees (including a service fee of
0.25%) and expenses applicable to the Fund's Class A shares, which
may include a CDSC of 1.00%. Please contact a Smith Barney
Financial Consultant or First Data for further information.
DEFERRED SALES CHARGE ALTERNATIVES
"CDSC Shares" are sold at net asset value next determined without
an initial sales charge so that the full amount of an investor's
purchase payment may be immediately invested in the Fund. A CDSC,
however, may be imposed on certain redemptions of these shares.
"CDSC Shares" are: (a) Class B shares; (b) Class C shares; and (c)
Class A shares that were purchased without an initial sales charge
but subject to a CDSC.
Any applicable CDSC will be assessed on an amount equal to the
lesser of the original cost of the shares being redeemed or their
net asset value at the time of redemption. CDSC Shares redeemed
will not be subject to a CDSC to the extent that the value of such
shares represents: (a) capital appreciation of Fund assets; (b)
reinvestment of dividends or capital gain distributions; (c) with
respect to Class B shares, shares redeemed more than five years
after their purchase; or (d) with respect to Class C shares and
Class A shares that are CDSC Shares, shares redeemed more than 12
months after their purchase.
Class C and Class A shares that are CDSC Shares are subject to a
1.00% CDSC if redeemed within 12 months of purchase. In
circumstances in which the CDSC is imposed on Class B shares, the
amount of the charge will depend on the number of years since the
shareholder made the purchase payment from which the amount is
being redeemed. Solely for purposes of determining the number of
years since a purchase payment, all purchase payments made during
a month will be aggregated and deemed to have been made on the
last day of the preceding Smith Barney statement month. The
following table sets forth the rates of the charge for redemptions
of Class B shares by shareholders.
Year Since Purchase
Payment Was Made
CDSC
First
4.50%
Second
4.00
Third
3.00
Fourth
2.00
Fifth
1.00
Sixth and thereafter
0.00
Class B shares will convert automatically to Class A shares eight
years after the date on which they were purchased and thereafter
will no longer be subject to any distribution fees. There will
also be converted at that time such proportion of Class B Dividend
Shares owned by the shareholder as the total number of his or her
Class B shares converting at the time bears to the total number of
outstanding Class B shares (other than Class B Dividend Shares)
owned by the shareholder. See "Prospectus Summary--Alternative
Purchase Arrangements--Class B Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange
have been held will be calculated from the date that the shares
exchanged were initially acquired in one of the other Smith Barney
Mutual Funds, and Fund shares being redeemed will be considered to
represent, as applicable, capital appreciation or dividend and
capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of the CDSC will reduce
the gain or increase the loss, as the case may be, on the amount
realized on redemption. The amount of any CDSC will be paid to
Smith Barney.
To provide an example, assume an investor purchased 100 Class B
shares at $10 per share for a cost of $1,000. Subsequently, the
investor acquired five additional shares through dividend
reinvestment. During the fifteenth month after the purchase, the
investor decided to redeem $500 of his or her investment.
Assuming at the time of the redemption the net asset value had
appreciated to $12 per share, the value of the investor's shares
would be $1,260 (105 shares at $12 per share). The CDSC would not
be applied to the amount which represents appreciation ($200) and
the value of the reinvested dividend shares ($60). Therefore,
$240 of the $500 redemption proceeds ($500 minus $260) would be
charged at a rate of 4.00% (the applicable rate for Class B
shares) for a total deferred sales charge of $9.60.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) automatic cash withdrawals in amounts equal to or
less than 1.00% per month of the value of the shareholder's shares
at the time the withdrawal plan commences (see "Automatic Cash
Withdrawal Plan"), provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of
the value of the shareholder's shares will be permitted for
withdrawal plans that were established prior to November 7, 1994;
(c) redemptions of shares within 12 months following the death or
disability of the shareholder; (d) involuntary redemptions; and
(e) redemptions of shares to effect a combination of the Fund with
any investment company by merger, acquisition of assets or
otherwise. In addition, a shareholder who has redeemed shares
from other Smith Barney Mutual Funds may, under certain
circumstances, reinvest all or part of the redemption proceeds
within 60 days and receive pro rata credit for any CDSC imposed on
the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith
Barney in the case of shareholders who are also Smith Barney
clients or by First Data in the case of all other shareholders) of
the shareholder's status or holdings, as the case may be.
SMITH BARNEY 401(k) PROGRAM AND EXECCHOICE PROGRAMS
During the continuous offering period investors may be eligible to
participate in the Smith Barney 401(k) Program or the Smith Barney
ExecChoice Program. To the extent applicable, the same terms and
conditions, which are outlined below, are offered to all plans
participating ("Participating Plans") in these programs.
Each Fund offers to Participating Plans Class A and Class C shares
as investment alternatives under the Smith Barney 401(k) and
ExecChoice Programs. Class A and Class C shares acquired through
the Participating Plans are subject to the same service and/or
distribution fees as the Class A and Class C shares acquired by
other investors; however, they are not subject to any initial
sales charge or CDSC. Once a Participating Plan has made an
initial investment in a Fund, all of its subsequent investments in
the Fund must be in the same Class of shares, except as otherwise
described below.
Class A Shares. Class A shares of a Fund are offered without any
sales charge or CDSC to any Participating Plan that purchases
$1,000,000 or more of Class A shares of one or more funds of the
Smith Barney Mutual Funds.
Class C Shares. Class C shares of a Fund are offered without any
sales charge or CDSC to any Participating Plan that purchases less
than $1,000,000 of Class C shares of one or more funds of the
Smith Barney Mutual Funds.
401(k) and ExecChoice Plans Opened On or After June 21, 1996. At
the end of the fifth year after the date the Participating Plan
enrolled in the Smith Barney 401(k) Program or the Smith Barney
ExecChoice Program, if its total Class C holdings in all non-money
market Smith Barney Mutual Funds equal at least $1,000,000, it
will be offered the opportunity to exchange all of its Class C
shares for Class A shares of a Fund. For Participating Plans
originally established through a Smith Barney retail brokerage
account, the five-year period will be calculated from the date the
retail brokerage account was opened. Such Participating Plans will
be notified of the pending exchange in writing within 30 days
after the fifth anniversary of the enrollment date and, unless the
exchange offer has been rejected in writing, the exchange will
occur on or about the 90th day after the fifth anniversary date.
If the Participating Plan does not qualify for the five-year
exchange to Class A shares, a review of the Participating Plan's
holdings will be performed each quarter until either the
Participating Plan qualifies or the end of the eighth year.
401(k) Plans Opened Prior to June 21, 1996. In any year after the
date a Participating Plan enrolled in the Smith Barney 401(k)
Program, if its total Class C holdings in all non-money market
Smith Barney Mutual Funds equal at least $500,000 as of the
calendar year-end, the Participating Plan will be offered the
opportunity to exchange all of its Class C shares for Class A
shares of a Fund. Such Plans will be notified in writing within
30 days after the last business day of the calendar year and,
unless the exchange offer has been rejected in writing, the
exchange will occur on or about the last business day of the
following March.
Any Participating Plan in the Smith Barney 401(k) or ExecChoice
Programs that has not previously qualified for an exchange into
Class A shares will be offered the opportunity to exchange all of
its Class C shares for Class A shares of a Fund, regardless of
asset size, at the end of the eighth year after the date the
Participating Plan enrolled in the Smith Barney 401(k) or
ExecChoice Programs. Such Plans will be notified of the pending
exchange in writing approximately 60 days before the eighth
anniversary of the enrollment date and, unless the exchange has
been rejected in writing, the exchange will occur on or about the
eighth anniversary date. Once an exchange has occurred, a
Participating Plan will not be eligible to acquire additional
Class C shares of the Fund but instead may acquire Class A shares
of the Fund. Any Class C shares not converted will continue to be
subject to the distribution fee.
Participating Plans wishing to acquire shares of a Fund through
the Smith Barney 401(k) Program or the Smith Barney ExecChoice
Program must purchase such shares directly from First Data. For
further information regarding these Programs, investors should
contact a Smith Barney Financial Consultant.
Existing 401(k) Plans Investing in Class B Shares. Class B shares
of the Smith Barney Mutual Funds are not available for purchase by
Participating Plans opened on or after June 21, 1996, but may
continue to be purchased by any Participating Plan in the Smith
Barney 401(k) Program opened prior to such date and originally
investing in such Class. Class B shares acquired are subject to a
CDSC of 3.00% of redemption proceeds, if the Participating Plan
terminates within eight years of the date the Participating Plan
first enrolled in the Smith Barney 401(k) Program.
At the end of the eighth year after the date the Participating
Plan enrolled in the Smith Barney 401(k) Program, the
participating plan will be offered the opportunity to exchange all
of its Class B shares for Class A shares of the Fund. Such
Participating Plan will be notified of the pending exchange in
writing approximately 60 days before the eighth anniversary of the
enrollment date and, unless the exchange has been rejected in
writing, the exchange will occur on or about the eighth
anniversary date. Once the exchange has occurred, a Participating
Plan will not be eligible to acquire additional Class B shares of
the Fund but instead may acquire Class A shares of the Fund. If
the Participating Plan elects not to exchange all of its Class B
shares at that time, each Class B share held by the Participating
Plan will have the same conversion feature as Class B shares held
by other investors. See "Purchase of Shares--Deferred Sales
Charge Alternatives.
No CDSC is imposed on redemptions of Class B shares to the extent
the net asset value of the shares redeemed does not exceed the
current net asset value of the shares purchased through
reinvestment of dividends or capital gain distributions, plus the
current net asset value of Class B shares purchased more than
eight years prior to the redemption, plus increases in the net
asset value of the shareholder's Class B shares above the purchase
payments made during the preceding eight years. Whether or not
the CDSC applies to the redemption by a Participating Plan depends
on the number of years since the Participating Plan first became
enrolled in the Smith Barney 401(k) Program, unlike the
applicability of the CDSC to redemptions by other shareholders,
which depends on the number of years since those shareholders made
the purchase payment from which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in
connection with lump-sum or other distributions made by a
Participating Plan as a result of: (a) the retirement of an
employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death
or disability of an employee in the Participating Plan; (d) the
attainment of age 59 1/2 by an employee in the Participating Plan;
(e) hardship of an employee in the Participating Plan to the
extent permitted under Section 401(k) of the Code; or (f)
redemptions of shares in connection with a loan made by the
Participating Plan to an employee.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be
exchanged at the net asset value next determined for shares of the
same Class in the following Smith Barney Mutual Funds, to the
extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A, Class B and Class C shares are
subject to minimum investment requirements and all shares are
subject to the other requirements of the fund into which exchanges
are made.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Disciplined Small Cap Fund, Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Large Capitalization Growth Fund
Smith Barney Growth Opportunity Fund Inc.
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
** Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
++ Smith Barney Funds, Inc.--Short-Term U.S. Treasury
Securities Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities
Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
* Smith Barney Intermediate Maturity California Municipals
Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
* Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond
Portfolio
Smith Barney World Funds, Inc.--International Balanced
Portfolio
Smith Barney World Funds, Inc.--International Equity
Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc.--Balanced
Portfolio
Smith Barney Concert Allocation Series Inc.--Conservative
Portfolio
Smith Barney Concert Allocation Series Inc.--Growth
Portfolio
Smith Barney Concert Allocation Series Inc.--High Growth
Portfolio
Smith Barney Concert Allocation Series Inc.--Income
Portfolio
Money Market Funds
Smith Barney Exchange Reserve Fund
++ Smith Barney Money Funds, Inc.--Cash Portfolio
++ Smith Barney Money Funds, Inc.--Government Portfolio
***Smith Barney Money Funds, Inc.--Retirement Portfolio
++ Smith Barney Municipal Money Market Fund, Inc.
++ Smith Barney Muni Funds--California Money Market Portfolio
++ Smith Barney Muni Funds--New York Money Market Portfolio
* Available for exchange with Class A, Class C and Class Y shares
of the Fund.
** Available for exchange with Class A and Class B shares of the
Fund.
*** Available for exchange with Class A shares of the Fund.
+ Available for exchange with Class B and Class C shares of the
Fund.
++ Available for exchange with Class A and Class Y shares of the
Fund. In addition, shareholders who own Class C shares of the
Fund through the Smith Barney 401(k) or ExecChoice Programs may
exchange those shares for Class C shares of this Fund.
Class B Exchanges. In the event a Class B shareholder wishes to
exchange all or a portion of his or her shares for shares of any
of the funds imposing a higher CDSC than that imposed by the Fund,
the exchanged Class B shares will be subject to the higher
applicable CDSC. Upon an exchange, the new Class B shares will be
deemed to have been purchased on the same date as the Class B
shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will
be deemed to have been purchased on the same date as the Class C
shares of the Fund that have been exchanged.
Class A and Class Y Exchanges. Class A and Class Y shareholders
of the Fund who wish to exchange all or a portion of their shares
for shares of the respective Class in any of the funds identified
above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although
the exchange privilege is an important benefit, excessive exchange
transactions can be detrimental to the Fund's performance and its
shareholders. The Fund may determine that a pattern of frequent
exchanges is excessive and contrary to the best interests of its
other shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases and/or exchanges
by a shareholder. Upon such a determination, the Fund will
provide notice in writing or by telephone to the shareholder at
least 15 days prior to suspending the exchange privilege and
during the 15-day period the shareholder will be required to (a)
redeem his or her shares in the Fund or (b) remain invested in the
Fund or exchange into any of the Smith Barney Mutual Funds
ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All
relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone.
See "Redemption of Shares--Telephone Redemption and Exchange
Program." Exchanges will be processed at the net asset value next
determined. Redemption procedures discussed below are also
applicable for exchanging shares, and exchanges will be made upon
receipt of all supporting documents in proper form. If the
account registration of the shares of the fund being acquired is
identical to the registration of the shares of the fund exchanged,
no signature guarantee is required. A capital gain or loss for
tax purposes will be realized upon the exchange, depending upon
the cost or other basis of shares redeemed. Before exchanging
shares, investors should read the current prospectus describing
the shares to be acquired. The Fund reserves the right to modify
or discontinue exchange privileges upon 60 days' prior notice to
shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund tendered to
it, as described below, at a redemption price equal to their net
asset value per share next determined after receipt of a written
request in proper form at no charge other than any applicable
CDSC. Redemption requests received after the close of regular
trading on the NYSE are priced at the net asset value next
determined.
If a shareholder holds shares in more than one Class, any request
for redemption must specify the Class being redeemed. In the
event of a failure to specify which Class, or if the investor owns
fewer shares of the Class than specified, the redemption request
will be delayed until First Data receives further instructions
from Smith Barney, or if the shareholder's account is not with
Smith Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third business day
following receipt of proper tender, except on any days on which
the NYSE is closed or as permitted under the 1940 Act in
extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, these
funds will not be invested for the shareholder's benefit without
specific instruction and Smith Barney will benefit from the use of
temporarily uninvested funds. Redemption proceeds for shares
purchased by check, other than a certified or official bank check,
will be remitted upon clearance of the check, which may take up to
ten days or more.
Shares held by Smith Barney as custodian must be redeemed by
submitting a written request to a Smith Barney Financial
Consultant. Shares other than those held by Smith Barney as
custodian may be redeemed through an investor's Financial
Consultant, Introducing Broker or a dealer in the selling group or
by submitting a written request for redemption to:
Smith Barney Total Return Bond Fund
Class A, B, C or Y (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
A written redemption request must (a) state the Class and number
or dollar amount of shares to be redeemed, (b) identify the
shareholder's account number and (c) be signed by each registered
owner exactly as the shares are registered. If the shares to be
redeemed were issued in certificate form, the certificates must be
endorsed for transfer (or be accompanied by an endorsed stock
power) and must be submitted to First Data together with the
redemption request. Any signature required in connection with a
written redemption request in excess of $2,000, share certificate
or stock power must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System
or member firm of a national securities exchange. Written
redemption requests of $2,000 or less do not require a signature
guarantee unless more than one such redemption request is made in
any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional
supporting documents for redemptions made by corporations,
executors, administrators, trustees or guardians. A redemption
request will not be deemed properly received until First Data
receives all required documents in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may
be eligible to redeem and exchange Fund shares by telephone. To
determine if a shareholder is entitled to participate in this
program, he or she should contact First Data at (800) 451-2010.
Once eligibility is confirmed, the shareholder must complete and
return a Telephone/Wire Authorization form, including a signature
guarantee, that will be provided by First Data upon request.
Alternatively, an investor may authorize telephone redemptions on
the new account application with a signature guarantee when making
his or her initial investment in the Fund.
Redemptions. Redemption requests of up to $10,000 of any class or
classes of the Fund's shares may be made by eligible shareholders
by calling First Data at (800) 451-2010. Such requests may be
made between 9:00 a.m. and 5:00 p.m. (New York City time) on any
day the NYSE is open. Redemptions of shares (i) by retirement
plans or (ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the redemption
proceeds mailed to his or her address of record or wired to a bank
account pre-designated by the shareholder. Generally, redemption
proceeds will be mailed or wired, as the case may be, on the next
business day following the redemption request. In order to use
the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent
relationship with a member bank. The Fund reserves the right to
charge shareholders a nominal fee for each wire redemption. Such
charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the
bank account designated to receive redemption proceeds, a
shareholder must complete a new Telephone/Wire Authorization Form
and, for the protection of the shareholder's assets, will be
required to provide a signature guarantee and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone
if the account registration of the fund being acquired is
identical to the registration of the shares of the fund exchanged.
Such exchange requests may be made by calling First Data at (800)
451-2010 between 9:00 a.m. and 5:00 p.m. (New York City time) on
any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for
following instructions communicated by telephone reasonably
believed to be genuine. The Fund and its agents will employ
procedures designed to verify the identity of the caller and
legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded).
The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge
for this service at any time following at least seven days' prior
notice to shareholders.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan,
under which shareholders who own shares with a value of at least
$10,000 may elect to receive cash payments of at least $50 monthly
or quarterly. The withdrawal plan will be carried over on
exchanges between funds or Classes of the Fund. Any applicable
CDSC will not be waived on amounts withdrawn by a shareholder that
exceed 1.00% per month of the value of the shareholder's shares
subject to the CDSC at the time the withdrawal plan commences.
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 shareholder's shares subject
to the CDSC. For further information regarding the automatic cash
withdrawal plan, shareholders should contact a Smith Barney
Financial Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any
shareholder's account in the Fund if the aggregate net asset value
of the shares held in the Fund account is less than $500. If a
shareholder has more than one account in this Fund, each account
must satisfy the minimum account size. The Fund, however, will
not redeem shares based solely on market reductions in net asset
value. Before the Fund exercises such right, shareholders will
receive written notice and will be permitted 60 days to bring
accounts up to the minimum to avoid involuntary liquidation.
PERFORMANCE
YIELD
From time to time, the Fund may advertise the 30-day "yield" and
"equivalent taxable yield" of each Class of shares. The yield
refers to the income generated by an investment in those shares
over the 30-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by
the Class during the period by the maximum public offering price
per share on the last day of the period. This income is
"annualized" by assuming the amount of income is generated each
month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset
value.
The equivalent taxable yield demonstrates the yield on a taxable
investment necessary to produce an after-tax yield equal to the
Fund's tax-exempt yield for each Class. It is calculated by
increasing the yield shown for the Class to the extent necessary
to reflect the payment of taxes at specified tax rates. Thus, the
equivalent taxable yield always will exceed the Fund's yield. For
more information on equivalent taxable yields, refer to the table
under "Dividends, Distributions and Taxes."
TOTAL RETURN
From time to time the Fund may include its total return, average
annual total return and current dividend return in advertisements
and/or other types of sales literature. These figures are
computed separately for Class A, Class B, Class C and Class Y
shares of the Fund. These figures are based on historical
earnings and are not intended to indicate future performance.
Total return is computed for a specified period of time assuming
deduction of the maximum sales charge, if any, from the initial
amount invested and reinvestment of all income dividends and
capital gain distributions on the reinvestment dates at prices
calculated as stated in this Prospectus, then dividing the value
of the investment at the end of the period so calculated by the
initial amount invested and subtracting 100%. The standard
average annual total return, as prescribed by the SEC, is derived
from this total return, which provides the ending redeemable
value. Such standard total return information may also be
accompanied with nonstandard total return information for
differing periods computed in the same manner but without
annualizing the total return or taking sales charges into account.
The Fund calculates current dividend return for each Class by
annualizing the most recent monthly distribution and dividing by
the net asset value or the maximum public offering price
(including sales charge) on the last day of the period for which
current dividend return is presented. The current dividend return
for each Class may vary from time to time depending on market
conditions, the composition of its investment portfolio and
operating expenses. These factors and possible differences in the
methods used in calculating current dividend return should be
considered when comparing a Class' current return to yields
published for other investment companies and other investment
vehicles. The Fund may also include comparative performance
information in advertising or marketing its shares. Such
performance information may include data from Lipper Analytical
Services, Inc. or similar independent services that monitor the
performance of mutual funds, or other financial publications.
MANAGEMENT OF THE TRUST AND THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund
rests with the Trust's Board of Trustees. The Trustees approve
all significant agreements between the Trust and the companies
that furnish services to the Trust and the Fund, including
agreements with the Fund's distributor, investment manager and
administrator, custodian and transfer agent. The day-to-day
operations of the Fund are delegated to the Fund's investment
manager and administrator. The Statement of Additional
Information contains background information regarding each Trustee
and executive officer of the Trust.
INVESTMENT MANAGER
SBMFM, located at 388 Greenwich Street, New York, New York 10013,
serves as the Fund's investment manager. SBMFM is a wholly owned
subsidiary of Holdings. SBMFM (through its predecessor entities)
has been in the investment counseling business since 1934 and is a
registered investment adviser. SBMFM renders investment advice to
investment companies that had aggregate assets under management as
of September 30, 1997 in excess of $81 billion.
Subject to the supervision and direction of the Trust's Board of
Trustees, SBMFM manages the Fund's portfolio in accordance with
the Fund's investment objective and policies, makes investment
decisions for the Fund, places orders to purchase and sell
securities and employs professional portfolio managers and
securities analysts who provide research services to the Fund.
For investment management services, the Fund pays SBMFM a monthly
fee at the annual rate of 0.65% of the value of the Fund's average
daily net assets.
PORTFOLIO MANAGEMENT
Joseph P. Deane, an Investment Officer of SBMFM and a Vice
President and Investment Officer of the Fund, is responsible for
managing the day-to-day operations of the Fund, including making
investment decisions.
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New
York 10013. Smith Barney distributes shares of the Fund as
principal underwriter and as such conducts a continuous offering
pursuant to a "best efforts" arrangement requiring Smith Barney to
take and pay for only such securities as may be sold to the
public. Pursuant to a plan of distribution adopted by the Fund
under Rule 12b-1 under the 1940 Act (the "Plan"), Smith Barney is
paid a service fee with respect to Class A, Class B and Class C
shares of the Fund at the annual rate of 0.25% of the average
daily net assets of the respective Class. Smith Barney is also
paid a distribution fee with respect to Class B and Class C shares
at the annual rate of 0.50% and 0.45%, respectively, of the
average daily net assets attributable to those Classes. Class B
shares which automatically convert to Class A shares eight years
after the date of original purchase will no longer be subject to a
distribution fee. The fees are used by Smith Barney to pay its
Financial Consultants for servicing shareholder accounts and, in
the case of Class B and Class C shares, to cover expenses
primarily intended to result in the sale of those shares. These
expenses include: advertising expenses; the cost of printing and
mailing prospectuses to potential investors; payments to and
expenses of Smith Barney Financial Consultants and other persons
who provide support services in connection with the distribution
of shares; interest and/or carrying charges; and indirect and
overhead costs of Smith Barney associated with the sale of Fund
shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for selling
shares of a Class include a commission or fee paid by the investor
or Smith Barney at the time of sale and, with respect to Class A,
Class B and Class C shares, a continuing fee for servicing
shareholder accounts for as long as a shareholder remains a holder
of that Class. Smith Barney Financial Consultants may receive
different levels of compensation for selling different Classes of
shares.
Payments under the Plan are not tied exclusively to the
distribution and shareholder service expenses actually incurred by
Smith Barney and the payments may exceed distribution expenses
actually incurred. The Fund's Board of Trustees will evaluate the
appropriateness of the Plan and its payment terms on a continuing
basis and in so doing will consider all relevant factors,
including expenses borne by Smith Barney, amounts received under
the Plan and proceeds of the CDSC.
ADDITIONAL INFORMATION
The Trust was organized on March 12, 1985, under the laws of the
Commonwealth of Massachusetts and is an entity commonly known as a
"Massachusetts business trust." The Trust offers shares of
beneficial interest of separate series having a $0.001 per share
par value. When matters are submitted for shareholder vote,
shareholders of each Class will have one vote for each full share
owned and a proportionate, fractional vote for any fractional
share held of that Class. Shares of the Trust will be voted
generally on a Trust-wide basis on all matters, except matters
affecting the interests of one Fund or one Class of shares.
Each Class of Fund shares represents identical interests in the
Fund's investment portfolio. As such, they have the same rights,
privileges and preferences, except with respect to: (a) the
designation of each Class; (b) the effect of the respective sales
charges for each Class; (c) the distribution and/or service fees,
if any, borne by each Class; (d) the expenses allocable
exclusively to each Class; (e) voting rights on matters
exclusively affecting a single Class; (f) the exchange privilege
of each Class; and (g) the conversion feature of the Class B
shares. The Trust's Board of Trustees does not anticipate that
there will be any conflicts among the interests of the holders of
the different Classes. The Trustees, on an ongoing basis, will
consider whether any such conflict exists and, if so, take
appropriate action.
The Trust does not hold annual shareholder meetings. There
normally will be no meetings of shareholders for the purpose of
electing Trustees unless and until such time as less than a
majority of the Trustees holding office have been elected by
shareholders. The Trustees will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the
Trust's outstanding shares and the Trust will assist shareholders
in calling such a meeting as required by the 1940 Act.
PNC Bank, National Association, located at 17th and Chestnut
Streets, Philadelphia, PA 19103, serves as custodian of the
Trust's investments.
First Data, located at Exchange Place, Boston, Massachusetts
02109, serves as the Trust's transfer agent.
The Fund sends its shareholders a semi-annual report and an
audited annual report, each of which includes a list of the
investment securities held by the Fund at the end of the reporting
period. In an effort to reduce the Fund's printing and mailing
costs, the Trust plans to consolidate the mailing of the Fund's
semi-annual and annual reports by household. This consolidation
means that a Household having multiple accounts with the identical
address of record will receive a single copy of each report.
Shareholders who do not want this consolidation to apply to their
accounts should contact their Smith Barney Financial Consultants
or the Transfer Agent.
SMITH BARNEY
A Member of Travelers Group
SMITH BARNEY TOTAL RETURN BOND FUND
388 Greenwich Street
New York, New York 10013
FD ____ [1/98]
34
u:\legal\users\jeh\trbfpro.doc
SMITH BARNEY INCOME FUNDS
PART B
Smith Barney
INCOME FUNDS
388 Greenwich Street
New York, New York 10013
(800) 451-2010
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 eight
nvestment 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"),
Smith Barney Total Return Bond Fund (the "Total Return Bond 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, Total Return Bond 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, Total Return Bond 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
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.
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.
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.
Joseph P. Deane, Vice President and Investment Officer (Age 50).
Managing Director of Smith Barney; prior to July 1993, Managing
Director of Shearson Lehman Advisors. Investment Officer of six
other Smith Barney Mutual Funds. 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.
<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
serves as an investment manager to the Total Return Bond Fund
pursuant to a written agreement approved on November 5, 1997.
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
Fund
Investment Management
Fee As a Percentage of
Average Net Assets
Total Return Bond Fund
0.65%
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,
Tax-Exempt Income and Total Return Bond 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 (Total Return Bond, 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.
Medium-, Low- and Unrated Securities (Convertible,
Diversified Strategic Income, High Income, Premium Total Return,
Tax-Exempt Income and Total Return Bond Funds). The Fund may
invest in medium- or low- rated securities and unrated securities
of comparable quality. Generally, these securities offer a higher
current yield than the yield offered by higher-rated securities
but involve greater volatility of price and risk of loss of income
and principal, including the probability of default by or
bankruptcy of the issuers of such securities. Medium- and low-
rated and comparable unrated securities (a) will likely have some
quality and protective characteristics that, in the judgment of
the rating organization, are outweighed by large uncertainties or
major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of
the obligation. Thus, it is possible that these types of factors
could, in certain instances, reduce the value of securities held
by the Fund with a commensurate effect on the value of the Fund's
shares. Therefore, an investment in the Fund should not be
considered as a complete investment program and may not be
appropriate for all investors.
While the market values of medium- and low-rated and
comparable unrated securities tend to react less to fluctuations
in interest rate levels than do those of higher-rated securities,
the market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in
economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally
present a higher degree of credit risk. Issuers of medium- and
low-rated and comparable unrated securities are often highly
leveraged and may not have more traditional methods of financing
available to them so that their ability to service their debt
obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of loss
due to default by such issuers is significantly greater because
medium- and low-rated and comparable unrated securities generally
are unsecured and frequently are subordinated to the prior payment
of senior indebtedness. The Fund may incur additional expenses to
the extent that it is required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings. In
addition, the markets in which medium- and low-rated or comparable
unrated securities are traded generally are more limited than
those in which higher- rated securities are traded. The existence
of limited markets for these securities may restrict the
availability of securities for the Fund to purchase and also may
have the effect of limiting the ability of the Fund to (a) obtain
accurate market quotations for purposes of valuing securities and
calculating net asset value and (b) sell securities at their fair
value either to meet redemption requests or to respond to changes
in the economy or the financial markets. The market for medium-
and low-rated and comparable unrated securities is relatively new
and has not fully weathered a major economic recession. Any such
recession, however, could likely disrupt severely the market for
such securities and adversely affect the value of such securities.
Any such economic downturn also could adversely affect the ability
of the issuers of such securities to repay principal and pay
interest thereon.
Fixed-income securities, including medium- and low-rated and
comparable unrated securities, frequently have call or buy-back
features that permit their issuers to call or repurchase the
securities from their holders, such as the Fund. If an issuer
exercises these rights during periods of declining interest rates,
the Fund may have to replace the security with a lower yielding
security, resulting in a decreased return to the Fund.
Securities that are rated Ba by Moody's or BB by S&P have
speculative characteristics with respect to capacity to pay
interest and repay principal. Securities that are rated B
generally lack characteristics of a desirable investment and
assurance of interest and principal payments over any long period
of time may be small. Securities that are rated Caa or CCC are of
poor standing. These issues may be in default or present elements
of danger may exist with respect to principal or interest.
In light of the risks described above, SBMFM, in evaluating
the creditworthiness of an issue, whether rated or unrated, will
take various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to
economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters.
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 (Total Return Bond, 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 competition from alternative health care or
conventional housing facilities.
Municipal leases are Municipal Securities that may take the
form of a lease or an installment purchase contract issued by
state and local governmental authorities to obtain funds to
acquire a wide variety of equipment and facilities such as fire
and sanitation vehicles, computer equipment and other capital
assets. These obligations have evolved to make it possible for
state and local government authorities to acquire property and
equipment without meeting constitutional and statutory
requirements for the issuance of debt. Thus, municipal leases have
special risks not normally associated with municipal bonds. These
obligations frequently contain "non-appropriation" clauses
providing that the governmental issuer of the obligation has no
obligation to make future payments under the lease or contract
unless money is appropriated for such purposes by the legislative
body on a yearly or other periodic basis. In addition to the
"non-appropriation" risk, municipal leases represent a type of
financing that has not yet developed the depth of marketability
associated with municipal bonds; moreover, although the
obligations will be secured by the leased equipment, the
disposition of the equipment in the event of foreclosure might
prove to be difficult. In order to limit the risks, Tax-Exempt
Income Fund proposes to purchase either (a) municipal leases rated
in the four highest categories by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's 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 (Total Return Bond, 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 Unites
States and the particular foreign country, all of which are in
turn sensitive to the monetary, fiscal and trade policies pursued
by the governments of the United States and other foreign
countries important to international trade and finance.
Governmental intervention may also play a significant role.
National governments rarely voluntarily allow their currencies to
float freely in response to economic forces. Sovereign governments
use a variety of techniques, such as intervention by a country's
central bank or imposition of regulatory controls or taxes, to
affect the exchange rates of their currencies.
Many of the securities held by the Fund will not be
registered with, nor the issuers thereof be subject to reporting
requirements of, the SEC. Accordingly, there may be less publicly
available information about the securities and about the foreign
company or government issuing them than is available about a
domestic company or government entity. Foreign issuers are
generally not subject to uniform financial reporting standards,
practices and requirements comparable to those applicable to U.S.
issuers. In addition, with respect to some foreign countries,
there is the possibility of expropriation or confiscatory
taxation, limitations on the removal of funds or other assets of
the Fund, political or social instability, or domestic
developments which could affect U.S. investments in those
countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as
growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments
positions. The Fund may invest in securities of foreign
governments (or agencies or instrumentalities thereof), and many,
if not all, of the foregoing considerations apply to such
investments as well.
Securities of some foreign companies are less liquid and
their prices are more volatile than securities of comparable
domestic companies. Certain foreign countries are known to
experience long delays between the trade and settlement dates of
securities purchased or sold. Due to the increased exposure to the
Fund of market and foreign exchange fluctuations brought about by
such delays, and due to the corresponding negative impact on Fund
liquidity, the Fund will avoid investing in countries which are
known to experience settlement delays which may expose the Fund to
unreasonable risk of loss.
The interest payable on the Fund's foreign securities may be
subject to foreign withholding taxes, and while investors may be
able to claim some credit or deductions for such taxes with
respect to their allocated shares of such foreign tax payments,
the general effect of these taxes will be to reduce the Fund's
income. Additionally, the operating expenses of the Fund can be
expected to be higher than 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:
<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.
Yield
Exchange Reserve Fund. The current yield for the Fund is computed
by (a) determining the net change in the value of a hypothetical
pre-existing account in the Fund having a balance of one share at
the beginning of a seven-calendar-day period for which yield is to
be quoted, (b) dividing the net change by the value of the account
at the beginning of 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 11/96
* Effective December 8, 1996; prior to that date, Morgan Guaranty Bank of
New York served as custodian
to the Diversified Strategic Income Fund.
SMITH BARNEY INCOME FUNDS
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Not Applicable.
(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)(a) Registrant's form of stock certificates for
Class A, Class B, Class C and Class Y shares of
beneficial interest of Smith Barney Convertible Fund,
Smith Barney Diversified Strategic Income Fund, Smith
Barney Exchange Reserve Fund, Smith Barney High Income
Fund, Smith Barney Premium Total Return Fund, Smith
Barney Tax-Exempt Income Fund and Smith Barney
Utilities Fund are incorporated by reference to Post-
Effective Amendment No. 34 to the Registration
Statement.
(b) Registrant's form of stock certificates for Class A,
Class B, Class C and Class Y shares of beneficial
interest of Smith Barney Total Return Bond Fund to be
filed by amendment.
(5)(a) Transfer of Investment Advisory Agreements
between the Registrant and Smith Barney Mutual Funds
Management with respect to Smith Barney Diversified
Strategic Income Fund, Smith Barney Utilities Fund,
Smith Barney Convertible Securities Fund, Smith Barney
High Income Fund, Smith Barney Tax-Exempt Income Fund
and Smith Barney Exchange Reserve Fund are
incorporated by reference to Post-Effective Amendment
No. 40.
(b) Investment Advisory Agreement between Registrant and
Smith Barney Strategy Advisers Inc. with respect to
Smith Barney Premium Total Return Fund is incorporated
by reference to Post-Effective Amendment No. 41 to the
Registration Statement.
(c) Sub-Investment Advisory Agreement among the
Registrant, Smith Barney Strategy Advisers, Inc. and
Boston Partners Asset Management, L.P with respect to
Smith Barney Premium Total Return Fund is incorporated
by reference to Post-Effective Amendment No. 41 to the
Registration Statement.
(d) Sub-Investment Advisory Agreement between the
Registrant and Smith Barney Global Capital Management
Inc. with respect to Smith Barney Diversified
Strategic Income Fund is incorporated by reference to
Post-Effective Amendment No. 40.
(e) Investment Management Agreement betweent the
Registrant and Smith Barney Mutual Funds Management
with respect to Smith Barney Total Return Bond Fund to
be filed by amendment.
(6)(a) Distribution Agreement between the Registrant on
behalf of Smith Barney Convertible Fund, Smith Barney
Diversified Strategic Income Fund, Smith Barney
Exchange Reserve Fund, Smith Barney High Income Fund,
Smith Barney Premium Total Return Fund, Smith Barney
Tax-Exempt Income Fund and Smith Barney Utilities Fund
and Smith Barney Inc. is incorporated by reference to
the Post-Effective Amendment No. 40.
(b) Distribution Agreement between the Registrant on
behalf of Smith Barney Exchange Reserve Fund and PFS
Distributors, Inc. is incorporated by reference to
Post-Effective Amendment No. 43 to the Registration
Statement.
(c) Distribution Agreement between the Registrant on
behalf of Smith Barney Total Return Bond Fund and
Smith Barney Inc. to be filed by amendment.
(7) Not Applicable.
(8)(a) Custodian Agreement between the Registrant on
behalf of Smith Barney Convertible Fund, Smith Barney
Exchange Reserve Fund, Smith Barney High Income Fund,
Smith Barney Premium Total Return Fund, Smith Barney
Tax-Exempt Income Fund and Smith Barney Utilities Fund
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.
(c) Custodian Agreement between the Registrant on behalf
of Smith Barney Total Return Bond Fund and PNC Bank to
be filed by amendment.
(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
0000091155-97-000095.
(11) Not applicable.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15)(a) Services and Distribution Plans pursuant to Rule
12b-1 between the Registrant on behalf of Smith Barney
Diversified Strategic Income Fund, Smith Barney
Utilities Fund, Smith Barney Convertible Securities
Fund, Smith Barney High Income Fund, Smith Barney
Premium Total Return Fund, Smith Barney Tax-Exempt
Income Fund and Smith Barney Exchange Reserve Fund are
incorporated by reference to Post-Effective Amendment
No. 40.
(b) Services and Distribution Plans pursuant to Rule 12b-1
between the Registrant on behalf of Smith Barney Total
Return Bond Fund to be filed by amendment.
(16) Performance Data for Registrant is incorporated by
reference to Post-Effective Amendments No. 14, 15 and
30 to the Registration Statement filed on September
30, 1988, December 30, 1988 and January 29, 1992,
respectively.
(17) Not applicable.
(18) Plan pursuant to Rule 18f-3 is 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
Not applicable.
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).
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).
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).
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
Consulting Group Capital Markets Funds; Global Horizons Investment
Series (Cayman Islands); Greenwich Street California Municipal
Fund Inc.; Greenwich Street Municipal Fund Inc.; Greenwich Street
Series Fund; High Income Opportunity Fund Inc.; The Italy Fund
Inc.; Managed High Income Portfolio Inc.; Managed Municipals
Portfolio II Inc.; Managed Municipals Portfolio Inc.; Municipal
High Income Fund Inc.; Puerto Rico Daily Liquidity Fund Inc.;
Smith Barney Adjustable Rate Government Income Fund; Smith Barney
Aggressive Growth Fund Inc.; Smith Barney Appreciation Fund Inc.;
Smith Barney Arizona Municipals Fund Inc.; Smith Barney California
Municipals Fund Inc.; Smith Barney Concert Series Inc.; Smith
Barney Disciplined Small Cap Fund, Inc.; Smith Barney Equity
Funds; Smith Barney Fundamental Value Fund Inc.; Smith Barney
Funds, Inc.; Smith Barney Income Funds; Smith Barney Income Trust;
Smith Barney Institutional Cash Management Fund, Inc.; Smith
Barney Intermediate Municipal Fund, Inc.; Smith Barney Investment
Funds Inc.; Smith Barney Investment Trust; Smith Barney Large
Capitalization Growth Fund; Smith Barney Managed Governments Fund
Inc.; Smith Barney Managed Municipals Fund Inc.; Smith Barney
Massachusetts Municipals Fund; Smith Barney Money Funds, Inc.;
Smith Barney Muni Funds; Smith Barney Municipal Fund, Inc.; Smith
Barney Municipal Money Market Fund, Inc.; Smith Barney Natural
Resources Fund Inc.; Smith Barney New Jersey Municipals Fund Inc.;
Smith Barney Oregon Municipals Fund Inc.; Smith Barney Principal
Return Fund; Smith Barney Telecommunications Trust; Smith Barney
Variable Account Funds; Smith Barney World Funds, Inc.; Smith
Barney Worldwide Special Fund N.V. (Netherlands Antilles);
Travelers Series Fund Inc.; The USA High Yield Fund N.V.;
Worldwide Securities Limited (Bermuda); Zenix Income Fund Inc.
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
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 7th day of November,
1997.
SMITH BARNEY INCOME FUNDS
By: /s/ Heath B. McLendon
Heath B. McLendon, Chairman of
the Board
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Post-Effective Amendment to the Registration
Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Heath B. McLendon Chairman of the Board
11/7/97
Heath B. McLendon (Chief Executive Officer)
/s/ Lewis E. Daidone Senior Vice President and
11/7/97
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
/s/ Lee Abraham* Trustee 11/7/97
Lee Abraham
/s/ Allan J. Bloostein* Trustee
11/7/97
Allan J. Bloostein
/s/ Richard E. Hanson* Trustee
11/7/97
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
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